Beyond Capitalism

Capital. The rich have it and the poor need it. The poor work for wages while the rich can sit back and collect dividends and interest. Karl Marx declared the arrangement unfair. He had a point. But Marx’s solution was worse than the problem. Take capital out of the hands of the capitalists and put it in the hands of a central bureaucracy and alienation increases. Plus you usually get a capricious god-emperor and a few years of mass starvation. Gulags and slave labor camps make capitalist sweatshops look pretty good.

Of course, many modern Marxists would claim that Marxism has never been tried, that what the Soviet Union and similar states practiced was State Capitalism, not Marxism. Well, the Soviets never got to communism, but Marx thought something akin to what the Soviets tried was the next step to communism. Methinks these modern Marxists are closer to the truth than Marx himself.

Freedom for all requires pushing capital down to the masses. A worker with his own tools is a free agent. The Marxist and the Bible agree on this: freedom of speech, religion, voting, etc. are mere “bourgeois freedoms” – important but incomplete. Freedom includes financial freedom, owning your own farm or business – or at least being able to shop employers so you are not a wage serf. A truly free society is one with an economy dominated by sole proprietorships, family businesses, partnerships and human scale corporations.

Capitalism will always be with us. Where tools are expensive, we must concentrate capital. And capitalism is usually the better way to allocate and manage these capital concentrations. Large scale worker democracy is often inefficient, and government ownership downright dangerous.

But both Marx and defenders of modern capitalism overestimate(d) the inherent power of centralization. Adam Smith wrote at a time when economic centralization was just getting started, when the returns on centralization were enormous. Marx extrapolated from Smith and assumed that the optimal economy was complete centralization – a gigantic error!

The need to centralize waxes and wanes by industry. Consider flour. Once upon a time, people ground grains by hand between stones. Then waterwheels powered the process, so people brought their wheat to central milling facilities to grind it into flour. We generally do so today, but more out of habit than necessity. With electric motors, you could have fresh flour ground on demand by an affordable kitchen appliance, and some hardcore foodies go that route. Most people don’t bother because they are used to bread made in giant automated bakeries. But once again, technology is turning full circle: you can buy an automated bread bakery that fits on your kitchen counter.

Computers were once centralized. Then the technology became cheap and personal computers became the norm. I am writing this chapter on a machine more powerful than the multimillion dollar supercomputer I shared time on in graduate school.

The music industry was centralized until recently because recording studios were expensive, and distribution channels limited. Top musicians put themselves under contract in return for recording facilities and promotion. Nowadays good quality recording equipment is within the range of high school students who flip burgers during the summer break. Distribution is trivial over the Internet. CD burners are standard equipment on even cheap used computers. Music is becoming a freelance business again.

Computerized machine tools and computer aided design tools have plummeted in price. Were it not for cheap labor in China, we might already see human scale manufacturing businesses displacing the industrial behemoths of old. We used to have over a hundred auto manufacturers in this country; we might again. The collapse of GM and Chrysler could be the start of something good.

We could have an economy which is neither capitalist nor socialist. We could have an economy which is dominated by human scale firms: family businesses, partnerships, small corporations, etc. It’s a matter of taking advantage of technological trends which have already happened, and discontinuing government policies which lock in the 20th Century economy. (This is not to say that large scale capitalism can or should be eliminated. Big business has is place. Likewise, some large scale government owned enterprises have their place as well. But both could be relegated to being minor features of the economy.)

To get back to a human scale economy we need to get rid of artificial economies of scale: unnecessary bureaucratic overhead and high transaction costs. We need to rethink our education system to prepare the average person for the possibility of being a free agent; the basics of business should be part of the core academic curriculum. We need to reform the tax code so it doesn’t encourage people to be wage serfs their entire lives; most especially, we need to disconnect health insurance from employment. Finally, we need to get cheap capital down to the smallest businesses. The big corporations succeed in part because they can afford to be less efficient, since they have access to cheap capital. Smaller businesses pay higher interest rates; startup corporations need a huge upside to justify venture capital or an IPO.

And the poor pay high interest rates on just about everything.

(This article was originally the intro to my updated Loans for the Poor. I decided it was a bit too long as an intro for said chapter, but it kind of stands up well on its own. Could even start new series…)

9 Replies to “Beyond Capitalism”

  1. The key feature of capitalism is the ability to mostly dictate terms to employees without their exit because of a scarcity of opportunities. Without this power, the term capitalism does not apply and a free market for labor results.

  2. Personally, I believe in the ideal of the Market as a “democracy of the consumers.” Large-scale production does not necessarily give way to smaller scale higher tech production for a number of possible reasons.

    First off, like the bread makers, there is the issue of actual production costs. Sure, these things make it much cheaper for people to make their own bread than in previous generations. But then you have to consider what the cost would be to build and maintain a large scale facility is, relative to the cost of equipping every household (or at least, every household that wants bread) with an electronic bread maker. And the value to the consumer of the time it takes to make bread in the maker vs. the time it takes to just pull store bread out of wherever they would keep it. Finally, you have to consider the opportunity cost: what must society forgo to make up the difference between a few bread factories and distribution channels and a society of bread makers? That’s the invisible cost non-economists almost always forget.

    Secondly, there is the cost of the transition, relative to the value of the established capital base. Certainly, at some point in time, it may make sense to make that transition, but generally that only happens after the old capital structure is allowed to degenerate, after the value is wrung out without being replaced. A good example of this (one I can only speculate about, but it makes sense to me) is Florida orange juice. As a truck driver, I once learned that a lot of Florida orange juice was actually grown and juiced in California, tanker-trucked to Florida, then packaged. Why? I am guessing it was because the facilities were already there, and it was cheaper at the time to ship the stuff across the continent than to build new facilities in California… but that lasts only until the existing plants become old, get shut down, and the replacement facilities are built closer to the source of the raw materials.

    I do not believe it is effective to envision what a better model of production and distribution would look like unless one is, oneself, an entrepreneur. The entrepreneur must do this, of course, because it is his livelihood, but I do not trust the political activist that does this. When the entrepreneur makes such speculations, he is trying to figure out how best to serve the consumer (and make money only if his speculations are correct). When the political activist does it, I can’t help but suspect he is planning to use the power of the government to substitute his own will for that of the consumers.

    Ultimately, to me, the question of “centralized” and “decentralized” is out of my hands, outside of my own personal choices as to how to live my own life. The political issue is: who owns the means of production, regardless of the size of a given operation? I regard this as a political issue since some of what we call “property” (though most definitely not all) originates in the decree of a ruler, while a sufficiently powerful and ruthless ruler has the ability to alienate people from that property that does not originate in his decree (“he”, in this discussion, representing whatever individual or aggregate decides for what purposes the apparatus of compulsion will be used). So whether we are seeking to promote or prevent government action in this regard, this is the political issue.

    In my opinion, though modern economists does not accept the classical division of the means into Land, Labor (and Entrepreneurship), and Capital (Labor and Capital being essentially the same thing from the entrepreneur’s point of view), I believe it us still useful to use this division, since the three have different origins, and therefore different ethical principles can apply to the three. The questions of who should control them can be different, depending upon which class a given factor falls into.

    Most of the following will follow the traditional line of libertarianism. If you make it to the “Land” section, it is there you will find the deviation.

    Labor/Entrepreneurship: Both of these represent little more or less than the decisions individuals choose to make as to how they spend their lives. Does an individual spend his time and money spending his time and money developing his knowledge and skills or not? Does he engage in activities that degrade his value on the labor market? Does he put his resources toward the creation and maintenance of a specific productive endeavor or not, and if so, what sort? Labor is all decisions, and to deny someone the outcome of his decisions, good or bad, is to remove him from the source of the most natural form of social conditioning.

    Because ultimately, in a market economy, it all boils down to how well one serves one’s fellow man. Those who do so well are rewarded; those who do not are excluded from consumption to the degree of his failure to do so. This is true both with regard to the laborer’s choice as to how to employ his personal abilities, and the entrepreneurs choice as to how to employ those factors under his control. And the only alternative to a market’s information, if one is insulated from it, is the command of a master, whether that master be the individual owner of slaves, or the State directing a command economy. Neither have ever proven to be better at anticipating the needs of the future than a free entrepreneur in an unhampered market.

    With regard to the “ownership” of Labor, I am with the hardcore libertarian: the principle of self-ownership is the best principle, and should be the principle according to which the government operates. Examples of ways in which this is not the current principle include the taxation of wages as such and incomes generally (when those incomes are the result of the payment of wages), and laws that allow monopolistic trade organizations to prosecute people simply for practicing a particular trade without their permission. But with regard to this principle, we have come a long way from the days in which the bulk of the population was either serfs or slaves, and those who weren’t were often bound by the regulation of various trade guilds.

    Capital: Capital is a bit of a confused concept. There are capital goods, which ought to belong to whomever happens to buy them. But Capital is more than just those goods: the word refers to the fact that capital goods cannot come into existence unless people refrain from the immediate consumption of the goods produced in a given production cycle. If the subsistence farm family eats all their crops this year, there cannot be seed for next year. If they eat all their crops this year, they won’t be able to find the time to build new tools, fences, and such next year. If workers spend their entire wage this month, it is a command to the entrepreneurs to focus on providing consumer goods with the existing capital structure in the next cycle. If they save a part of their wages, they indicate a willingness to produce without consuming right away, that they are prepared to leave some of the available resources (including their own time) for the production of goods designed to enhance the next cycle’s level and quality of production.

    Saving by consumers is the ONLY way capital can accumulate. And though there are various ways in which the government “forces” people to spend less than they otherwise would (steady degradation of real wages by way of inflation is an example), it is no substitute to the rewards the market offers to the saver. Much like the wage earner, if the saver and the investor are alienated from the consequences of their decisions (whether good, as in the taxation of capital gains or erosion of savings by inflation; or bad, as in the protective regulation of financial markets and bail-outs) is to alienate them from the information about what the consumer considers the must appropriate use of potential capital. To alienate the capitalist is to encourage the consumption of capital, potentially to the ruination of the division of labor, the very foundation of society as such.

    The Capital principle should, therefore, be regarded as an extension to the labor principle: Capital should belong to those who make the decision to save it and make it available to entrepreneurs, and the government should respect this principle. Examples of policies that go against this ideal are inflationary monetary policy, the taxation of capital as such and incomes generally, and so on.

    To emphasize: to take Capital out of the hands of their current owners and distribute it amongst the people generally is to take it out of the hands who have, thus far, proven their ability to best serve the wishes of the consumers. An example of how this is a bad thing can be seen in land reform policies in various post-colonial nations. When they take land away from white farmers and give it to native farmers, they are alienating these former farmers not only of the proceeds of the land, but also the capital structure they have created. Capital is consumed by the new owners, food production drops, nations starve.

    Up to this point, I have towed the traditional libertarian line. Now I move on to:

    Land: You titled your piece “Beyond Capitalism”. My title, for my description of the sort of reform I prefer, would be “Beyond the Lockean Proviso”. Locke, is it said, said that land properly belongs to those who have brought it into the market… provided there is enough land of similar quality left for others to do the same. Libertarians traditionally drop the proviso in their theories of land ownership. I do not.

    Labor comes into existence when a man makes the decision to make his services available on the market. Capital comes into existence when a man decides to curtail his consumption in favor of the improvement of future productivity. Land exists. It is neither created nor destroyed. Labor and Capital have natural owners in the individuals whose decisions brought them into existence. Land does not, and the ownership of land everywhere has always been the result of government decree, the registration of a title to land, generally in exchange for some service to the State (if only a monetary payment, or the displacement of others regarded as enemies of the State).

    When I say “Land”, I am not referring to agricultural potential, or mineral deposits. I am not referring to farms, or forests, or mountains. I’m not even necessarily referring to dry land as opposed to the space under water. I am referring to the fact of the scarcity of physical space, the fact that people will pay prices to others who can guarantee their exclusive use of this physical space, whether to keep the herdsman from grazing his herd on the farm, or as the footprint for a building in a city. It can even include an exclusive right to transmit on a particular frequency of the electromagnetic spectrum in a particular area, or the right to a particular portion of the available orbital space. In short: it is the fact that a given space cannot be used for more than one purpose at the same time, and that therefore someone must decide for which purpose a particular physical space should be used.

    Land has value for the same reason everything else has value: people will pay a price for access to it. But unlike labor and capital, the government is able to alienate people from land without harming the interests of the consumers. This is proven every time an indigenous people is expropriated and replaced with colonists, or poor people are deprived of their homes for the benefit of developers promising more taxes. I believe this process to be unjust. But the reason it is effective is that nobody is in the business of either creating or destroying physical space. Unlike labor and capital, land is not the result of human action, and thus the supply thereof is not subject to the rewards given or withheld for the appropriate actions.

    In addition, “Land”, being a reference to physical space, is a prerequisite to existence, itself. Henry George once remarked that, at the time of the writing of his book Progress and Poverty, the distribution of land ownership in Great Britain was so concentrated that a minority of the people in Great Britain had a legal right, if they so chose, to drive the rest of the population into the sea. And while more dispersed ownership makes it significantly less likely that this would actually happen, wherever land ownership is a privilege, whether granted by the State, or by the Market, the fact remains that there are those who must, essentially, secure the permission of another for his very existence. I do not see how this end is consistent with any concept of justice, morality, or even liberty.

    I believe that if we believe that every individual has an equal right to life, it follows that every individual also has an equal right to land… to the physical space that makes existence possible. This is the principle the government should respect with regard to its decisions as to who should control the use of the land. How exactly this is implemented depends upon what kind of society it is being implemented in.

    In a hunter/gatherer society, this means that each individual should have equal access to the hunting grounds. Anybody should be allowed to collect food; nobody should be allowed to force someone else to collect it for him. However, if this principle is held to exclusively, the society cannot advance, for justice in farming requires that he who sows should be the same as he who reaps…

    In an agrarian society, the equal division of land between farming families is the traditional implementation of this principle. Every man has the opportunity to grow food; no man has the right to force someone else to do it for him. However, not all farmers are made equal. For an economy to advance, farmland must be allowed to accumulate in the hands of the best farmers, allowing for more food production and the opportunity for the others to specialize in other professions.

    This does not mean that, to have a society of high capitalism (by this I mean the kind of society in which capital is abundant, productivity is high, real wages significantly outstrip what would occur in either a medieval or a socialist society, all as a result of allowing those who develop the capital structure to reap the rewards thereof), one must acquiesce to a world in which land access is a privilege, not a right. If we come to regard the land as the corporate property of the entire community, the use of the land can be parceled out to those who are best able to make use of it, with the proceeds being regarded as the property of the community at large. These proceeds can then be spent in whatever manner the community decides via some sort of democratic process. In other words, the Land is the one place the State can acquire its revenue without violating either the moral rights of its people, or the functioning of the economy upon which the community depends. The laborer gets to keep his entire wage, and the employer is not burdened beyond what the market would require… thus, more jobs are available. The capitalist gets to keep his entire interest; thus, more capital is made available. The entrepreneur gets to keep his entire profit or has to absorb his entire loss; thus, direction of production is entirely in the hands of those historically proven most fit to do so (and quickly stripped from the hands of those that fail to serve the consumers). And the government gets the revenue necessary to protect the revenues of the other three… and IF those revenues exceed what is necessary for the government’s proper role, the remainder can be released to the people as a dividend; this citizen’s dividend can take the place of the existing welfare programs.

    Under such a system, nobody would be exclusively dependent upon their own labor. Everyone would have a share in the value of the land, which to the modern economist is a portion of the available capital. But by distinguishing between land-capital and produced capital goods, we avoid “killing the goose that lays the golden egg”. I don’t like the idea of trying to joystick the economy into a particular shape using the power of the state. I DO like the idea of reconsidering the nature of property, to further both prosperity and justice.

  3. Daryl:

    I consider the issue of centralized vs. decentralized to be a political issue, big time.

    Electricity delivery is something of a natural monopoly. Running multiple wires to my neighborhood would be ugly and expensive. On theother hand, multiple propane companies compete for my business. For the former we have utility commissions and price controls to deal with the natural monopoly. For the latter competition sets the price.

    Growth of government parallels centralization of production. The Russians had a very hard time going back to a market economy because so much of their industry was centralized under the Soviets. Government owned oil companies compete successfully again private oil companies because the economies of scale are so huge.

    The separation of capital from labor spawns labor unions, which are major drivers of the big government welfare state. The National Federation of Independent Businesses is relatively libertarian.

    And yes, we can go back to a less capitalistic society while taking steps in a libertarian direction. Today, the government actively encourages centralized capitalism. A simple example: I get a tax break for tying up my savings in Wall St. instruments. I lose tax breaks if instead I save for retirement by paying off my home. I have to use after tax money to make the equity payments and I lose the mortgage tax break.

    Meanwhile, the government slurps up the savings by running gigantic deficits. When capital is made scarce, it is critical to keep it in use, such as by driving orange juice across the country instead of building a new squeezing plant, to use your example.

    I could come up with more examples, but I’ll save them for future posts.

  4. The government encourages large scale business in some ways (I recall reading a piece on the IRS, I don’t recall who the writer was, that made a good case that income tax bureaucracy created a lower limit on business sizes due to the economies of scale of “proper” accounting). It *attempts* to encourage small businesses in other ways… but I think those who attempt to encourage small businesses don’t realize that the good thing about small business (from the perspective of maximizing standards of living) is not its smallness, but that they can quickly be created, grown or destroyed, and replaced rapidly as the desires of the consumers change… without having to stop and consult a bureaucrat. At any rate, I agree there are many things that need to GO, with regard to government.

    But I also think that rhetorically, we need to avoid encouraging a fear of the legitimately large. A physical infrastructure company would most likely be a large company due to the economies of scale. Breaking up such a company would, I believe, be counterproductive… and that sort of policy can be what this sort of rhetoric can lead to, if one is not careful.

    But another thing about an infrastructure company is that it takes up a LOT of space in rights-of-way. Such a company, in occupying space that therefore cannot be occupied by competitors, would probably end up being one of the largest payers of a geoist land tax. Finally, if such a project were initially financed at least partially by the government, I would favor the government receiving stock in exchange for the assistance (as opposed to a debt or a public utility to mismanage), and then once the initial capital outlay were complete, splitting it among the populace, making it a form of community property, to some degree.

  5. A leftist friend once said “I think private property is great. I think it’s so great, everyone should have some.”

    “a free market for labor results.”

    It might be more accurate to say a free market for employers results. Or rather, a free market in employers, vs. the free market in labor we have now.
    Actually I hate the term ‘free market’, it sounds good while being hard to pin down, and evades a key issue. What’s good about markets from a utilitarian POV is when they’re *competitive* markets (with all externalities internalized, but that’s a tangent), and today the market in labor is clearly more competitive than the market in employment.

    Sawyer: I like the ideas. I’m more of a soc-dem, so my own breakdown of where revenue comes from is the interaction of labor, private capital (tools and factories), public capital (law and order, GPS, USGS, basic research), and environmental capital (including land). I then justify taxes as dividends on public capital and rent for environmental capital, as well as premiums for government’s role as insurer of last resort.

  6. Carl,

    I know you probably get this alot, but based off of everything I am reading on the sites of yours that Google was kind enough not to “iAd” off the top 10 list. I would much like to privately commune with you (email is a fine option) on these topics as I find them extremely interesting. I’ve included my email in this post, I hope to hear back from you…

    -Michael McCormick

  7. Just popped in from Splorkville…

    A very interesting and refreshing read. There are not many people about, or so it seems, that are able to take the step back from conventional ways to see the bigger picture.

    I particularly agree with your point, “possibility of being a free agent” in education. I live in the UK and in school the notion that this could be the case never came up, it was always about “careers” and “careers advisers” and never about “enterprise” or “innovation”. My whole experience of school was that nothing that comes out of my head is of any value and that the only way I can survive in the “real world” is if I do as I am told and follow the channels that are cut out for me. Several years after my generation left school most of my peers are $15,000 under, unskilled and working in average jobs irrelevant to their useless degrees. It is only the drop-outs and no-shows like myself who have been able to eek it out on our own and there is often such a mountain to climb these days that many ducks never swim.

  8. Welcome Squire Lewis. Great to see someone here from Splorkville. I hope more arrive as well, and look forward to the day that the great Splork himself escapes from the conservative echo chambers. He came close, with his post on uniting Tea Party and Occupiers, but then retreated.

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