How Natural is Capitalism, Exactly?

The standard libertarian narrative of capitalism goes something like this: once various feudal restrictions were lifted and property rights were fully defined, people indulged in their ‘natural propensity to truck, barter and exchange’ and economic freedom fuelled growth. Conditions were poor for workers, but were better than the alternative. To tamper with capitalism and the free market is to tamper with the nature of man.

It is first worth considering the existence of an entity called the ‘free market’. But the fact is that people simply see the ‘free market’ where they want to, ignoring certain rules and regulations. To start, the workings of an economy are massively affected by the definition of property; what types of property are deemed private, as well as the definition of fraud and the workings of the criminal justice system. Secondly, laws like limited liability, immigration restrictions and laws that protect shareholders are often swept under the rug.

I feel the idea of a ‘free market’ greatly skews the views of its proponents, as they see something as complicated as the transition in China as simply them ‘unleashing’ the free market, and also write catch-all sentences like this:

It is worth remembering that the epicentre of the 2008 disaster was American property, hardly a free market undistorted by government.

Which, to me, simply makes no sense. I mean, the crisis was undeniably focused on private institutions, and if you’re going to start blaming government laws then you’ll logically have to end up blaming ones like limited liability laws, laws that define corporations, and possibly even private property itself.

I believe some have tried to argue that the black market represents a type of free market, but I’m not sure how possible that is given the amount of customs and arbitrary rules you often find there, not to mention the considerable amount of force.

Furthermore, the idea that trade springs up wherever man is and money initially arose as a solution to the ‘spot trade’ problem created by mankind’s natural propensity to ‘barter, truck and exchange’  has been falsified spectacularly by the anthropologist David Graeber, who revealed that there are 0 examples of barter arising spontaneously; money first arose primarily as a form of debt, and ultimately was a social relation.

On top of this, the historical origins of capitalism, at least in places, are hardly as magical as its defenders would have you believe. The industrial revolution involved large amounts of collusion between landlords and capitalists, and produced a surge in game laws, designed to limit peasant’s ability to subsist and hence create a workforce dependent on wages. The emergence of capitalism and the wage system was also closely intertwined with slavery and colonialism, and the facilitation of trade has required strong political institutions, rather than simple property rights and contracts.

Not only this, but almost every developed country had to use protectionist policies to get rich. This has been extensively documented by many scholars – the only potential examples of countries that got rich without much protectionism are the Netherlands and Hong Kong (which is effectively the London of a country currently using highly protectionist policies, anyway). I have attempted to offer a theoretical grounding for this here, but whether or not my argument convinces you does not change the historical facts.

My inclination towards capitalism is still ‘the worst system except all others that have been tried’, but the fact is that capitalism is a highly planned system with a questionable history – there is nothing ‘natural’ about it. Now this doesn’t tell us much about whether we should accept it here and now, but it makes statements such as “Capitalism is what people do if you leave them alone” rather questionable.

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  1. #1 by gregorylent on February 14, 2012 - 2:40 pm

    i don’t know what “capitalism” is anymore .. a word that has lost any meaning

    in america it cannot be separated from government

    • #2 by Unlearningecon on February 14, 2012 - 2:42 pm

      Capitalism is a creation of the state from the ground up, it has never been separable from government.

    • #3 by n8chz on February 15, 2012 - 4:12 am

      Capitalim is to capital as monarchism is to monarch.

  2. #4 by steve from virginia (@econundertow) on February 14, 2012 - 3:06 pm

    Of fish and fowl … or is it foul?

    – Graeber’s book has changed the way people look at economic politics.

    – ‘Dawn of Mankind’ economics WAS different from industrial debtonomics. Never fear, most economists and policy makers have no clue about anything taking place right now … why should libertarians or Keynesians be any different?

    – Capitalism idea orbits around dissatisfaction. One is dissatisfied with one’s own goods therefor he requires the goods of others. Capitalism is the offered as a means — less bloody than outright thievery — to the end of gaining more goods.

    What is really under question in 2012 is whether the basic ideas are correct: are more goods desirable to anyone other than goods’ providers? (No) What is gained by the goods? (More dissatisfaction) Are the costs accurately rendered? (No, planet-wide devastation leading to human extinction, not good accounting. :)

    All the economists need to scale up their attention and become more serious. Our problems are existential and have little to do with the cost of credit. If we ‘fuck this up’ there is no Mulligan.

  3. #5 by JMRJ on February 14, 2012 - 3:12 pm

    I prefer to stay away from the word “capitalism” at this point, too. “Free market economy” would be a better term, but of course not without its qualifications and problems.

    Bringing the law into it is one place you and I agree. It’s an old idea: you can’t have freedom, as in free markets, without the law. Yet the law is also rightly regarded as a restriction on freedom of action. Another paradox.

    Property and contracts are two different subjects in the law. In US constitutional terms, property would be the more important inasmuch as there is a recognized right to “…life, liberty and property”, but there is no right, as such, to contracts, although the states were prohibited from “impairing the obligations of contracts” in the constitution. I think the idea is that property is a natural right, and contractual rights are more positivist, for want of a better word.

    Debt is all based on contract.

    We have pretty much lost sight of these concepts and distinctions, the legal profession no less than the economics profession. It may be one of the keys to properly diagnosing and addressing the current difficulties. In fact I think it is.

    • #6 by Guillermo on February 17, 2012 - 1:53 pm

      Capitalism is not synonymous with “markets”, hence the existence of various “market socialist” schemes.

    • #7 by human mathematics on February 21, 2012 - 12:01 am

      Who has lost sight of these concepts and distinctions?

  4. #8 by Isaac "Izzy" Marmolejo on February 14, 2012 - 5:45 pm

    The problem with the term ‘free market’ is that it can only be used relative to someone/something else because there is no objective definition of ‘free market’. I think such a term can be used but should be taken lightly.

    • #9 by Unlearningecon on February 17, 2012 - 1:16 pm

      Michael Hudson contends that the ‘free market’ was originally an active political creation that meant a market free of monopoly power and land rents.

      • #10 by human mathematics on February 21, 2012 - 12:03 am

        ul, I think I learn more from your (and your readers’) comments than from the original post! Awesome audience (yourself included).

    • #11 by human mathematics on February 21, 2012 - 12:02 am

      It basically means “a place where Marshallian S&D happens”.

      • #12 by Unlearningecon on February 22, 2012 - 3:50 am

        So nowhere!

      • #13 by human mathematics on February 22, 2012 - 3:59 am

        Pretty much.

        Then again that formalism does extremely well in lab experiments. So maybe we should say, nowhere and everywhere.

  5. #14 by Blue Aurora on February 14, 2012 - 10:46 pm

    As someone who comes from the so-called “special case of laissez faire”, Hong Kong, I believe the reason it is so successful not just because of the institutions that were established by the British Empire, but also because of its unique location. At least economics does recognize the role of geography and demography to an extent…

    The British wanted Hong Kong because it had the facilities for a natural harbor. It’s location in the Pacific also makes it a good place to conduct commerce, and because it developed that reputation over time, it became incredibly successful.

    P.S. Unlearningecon, could you please respond to my last e-mail? I’ve been looking forward to your response. I understand that reality must take precedence, however.

    • #15 by Unlearningecon on February 17, 2012 - 1:20 pm

      I believe the government actually owns most of the land in HK and they have extensive subsidies in the property market, as well as a minimum wage and state education/health.

      Re: email, yes, sorry I’ve been really busy recently. But I’m freer now and will reply later today.

      • #16 by Guillermo on February 17, 2012 - 1:56 pm

        Furthermore, isn’t it the case that city-states can’t really be compared other sorts of countries when assessing effectiveness of development policies? Cities within countries often have much higher human development indicators than the average accross the entire country (e.g. London vs the whole of the UK).

      • #17 by Unlearningecon on February 21, 2012 - 12:44 am

        Yes, well I like to refer to HK as the London of China, China being an obvious example of state directed capitalism.

  6. #18 by Robert on February 15, 2012 - 7:49 am

    Are you aware that Karl Marx makes basically the same point in the Poverty of Philosophy? I have an apposite quote in an old post.

    “Free market” is a term of propaganda.

    • #19 by Unlearningecon on February 17, 2012 - 1:22 pm

      Thanks, that is very interesting.

      • #20 by human mathematics on February 21, 2012 - 12:06 am

        All of these interesting links in the comments remind me of a book called Economic Fables and Fallacies or something like that, I believe by Spurber.

        The gist of it is that the fables of the lighthouse, the beekeeper, I Pencil, and so on each does not in reality work like the theory says it does.

        (I Pencil being the phunniest example because it was Phrench government subsidy, I think through crayola, that led to its invention)

  7. #21 by human mathematics on February 20, 2012 - 11:47 am

    UL, I think your arguments would be stronger if you quoted opponents directly.

    • #22 by Unlearningecon on February 20, 2012 - 3:05 pm

      Fair point, I just consider it well established that libertarians think capitalism arose spontaneously. To be fair I do have two quotes in here (One from Adam Smith and one from Kenneth Minogue).

      • #23 by human mathematics on February 20, 2012 - 11:59 pm

        Not just for clarity’s sake.

        But also if you directly quote e.g. someone from Mises.org then you will get trackbacks / the Mises person might rush to defend themself. Their readers might then notice and respond to your point.

        More inclusive debate / less preaching to the choir.

      • #24 by Unlearningecon on February 21, 2012 - 12:45 am

        Ah fair point. Will bear this in mind in the future (the Mises.org forums has a post on me but when I responded I was called a prick, I don’t really rate the standard of debate at that place).

  8. #25 by human mathematics on February 20, 2012 - 11:50 am

    You’re obviously right, “the free market” is an abstraction that doesn’t exist.

    * institutions
    * space / location
    * social networks

    I think i mentioned to you already to check out neoinstitutional econ. To me the optim / equ paradigm works well as determining a direction for (constrained / holonomic) evolution.

    Bearing in mind of course that the body only achieves homeostasis upon death in a hyperbaric chamber.

  9. #26 by human mathematics on February 20, 2012 - 12:15 pm

    ul, I think 1 strong argument goes like this: a true free market has never been tried, so we know nothing about it empirically. It’s all theory. You can’t line up societies from bigger to smaller government and see a positive correlation to income, either. Gauls vs Romans. Lastly the dynamic case of post-Soviet transition economies nails the coffin shut. Institute property rights, hit go, crash.

    • #27 by human mathematics on February 22, 2012 - 12:00 am

      • Sure, I was just suggesting an argument that UL has not yet made.

      • I’m suspicious of “We need to try a whole new system” type views. This is all just theory after all.

      • You should take away that government is not the “opposite” of private industry but rather the two are usually intertwined. Instead of focussing on how to shrink / get rid of government (an overly simplistic plan), societies should focus on what governments can do right and what they can do wrong (a much more complicated question, less integrable with slogans).

    • #28 by human mathematics on February 22, 2012 - 12:02 am

      I.e., stepping outside the “government = bad” versus “government = good” frame.

    • #29 by n8chz on February 23, 2012 - 9:31 am

      Agree, also X the rather elementary notion of “big government” vs. “small government”

      What does that mean anyway? Do the people who use those terms even know the issue is about defining the boundary between central and local power?

      They have redefined the issue as being about defining the boundary between the public and private sectors. This is a reactionary development—If Communism (as implemented) is supposed to be abolition of the private sector, then the 180° opposite must be the abolition of the public sector, or at least the civilian public sector. At best this ideology leads to an overcorrection of past wrongs. As with any ideology, the more dogmatically applied, the worse the side effects.

  10. #30 by human mathematics on February 22, 2012 - 12:04 am

    Moira, I don’t think this laissez-faire world actually exists anywhere. There are consumer protection laws and trade agreements everywhere.

  11. #31 by human mathematics on February 22, 2012 - 3:57 am

    people should be free to pursue their own happiness, apparently the accumulation of wealth

    Unduly pessimistic.

    US capitalism at least includes the freedom to go start a farm, to work 10 hours/week, to pay more for free-range eggs, to wage a smear campaign against KFC (which I believe raised enough attention to change the corporation’s oversight of suppliers), and much more.

    If one chooses to pursue great wealth in the US, it’s certainly contrasted against many other choices.

    • #32 by human mathematics on February 27, 2012 - 9:49 am

      I didn’t think that was your point. I thought you were saying that the only freedom one has in the US is to pursue wealth.

      My guess is that the privileged groups are freer to pursue wealth, art, and whatever else, than are the less privileged groups.

  12. #33 by Unlearningecon on February 22, 2012 - 3:59 pm

    steve from virginia,

    Yes, funnily enough I’ve just been reading The Affluent Society by Galbraith, which makes the same point about creating wants through the production process. Jonathan Aldred’s ‘The Skeptical Economist’ also explores how consumption doesn’t increase happiness due to adaptation (adjusting to things you have) and rivalry (wanting what people around you have). He calls it ‘the happiness treadmill’.

    JMRJ, I object to the use of the term free market except for pejorative purposes. It completely glosses of capitalism’s inherently hierarchical nature.

    Moira, good post. Have you read a recent post by the excellent Chris Dillow, capitalism against freedom?

    human mathematics,

    I’m not sure your points about freedom are true. To start a farm you need capital, which you have to earn or prove you can pay back. In one case you will become indebted, in the other you will have to work for wages. Neither is the epitome of freedom. And I disagree that workers have much control over their hours. Could the average office worker ask his boss if they could work 10 hours? No, they work a working week.

    • #34 by Unlearningecon on February 24, 2012 - 5:59 pm

      Chris is quoting something by Cohen if you read. And yes there’s a typo, there, over*

  13. #35 by Gene Callahan on March 9, 2012 - 6:01 pm

    ” has been falsified spectacularly by the anthropologist David Graeber, who revealed that there are 0 examples of barter arising spontaneously”

    This claim is spectacularly falsified by Graeber’s own work! He quite freeley admits that inter-tribal barter has a very ancient history.

    • #36 by Unlearningecon on March 9, 2012 - 6:25 pm

      Perhaps I should have been more specific. I meant money initially arising as a solution to the spot exchange problem created by barter, rather than as a form of credit/unit of account/store of value.

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