Posts Tagged History of Capitalism
A short while ago, I tweeted that a show entitled “Economists Say the Funniest Things” – where economists opine on issues outside their domain – would make for good watching by those of us who inhabit the real world. Unfortunately, I can’t afford a show, so I’ll settle for a blog post.
I have previously posted on ‘economic imperialism’, but the examples in this post are, to put it bluntly, less serious, often crossing the line into simply silly. Economists sometimes like to transpose their incentive-driven, utility-maximising agents onto complex social problems, and claim that they have discovered the elegant, underlying mechanics underneath all the noise that the other social sciences study. They will also argue that those who object to their framework do it simply because they don’t like or understand maths, or because they can’t stomach the often unpalatable conclusions of the model. In fact, it is these economists who are seemingly unable to comprehend the phenomena they purport to study, preferring instead to solve equations, which they label ‘models’, but which do not actually ‘model’ the world at all, and which often seem to lead the economist to ridiculous conclusions.
I will put a standard disclaimer out there: I’m not so much attacking the entire economics profession as the ‘pop’ economics that you find in books, on the internet and, sadly, sometimes in policy circles. I hope many economists – those who are able to comprehend history, the complexity of human behaviour and above all the difference between models and reality – will find these examples equally absurd.
Economists do psychology
Naturally, the sometimes infuriating Freakeconomics craze could warrant an entire post, as their ‘antics’ have angered many, including other economists. However, I am going to focus here on one of their less covered arguments: a story about incentives, which is at the beginning of their first book. It provides a nice introduction to wrongheaded economic imperialism, as this wooden insistence on how, underneath everything, people are essentially driven by clear incentives, underlies many of economist’s attempts to try their hand at other disciplines.
The story goes like this: an Israeli day care centre found that parents were picking up their children too late, so they introduced a small charge of $3 to try and disincentivise lateness. However, instead of discouraging this behaviour, the payment served to legitimise it and buy the parents piece of mind. The result was that lateness actually increased. Bizarrely, the Freakonomics duo decided that this story is consistent with economist’s way of thinking, and used it as an introduction to the idea that “incentives matter”. They argue that people actually face three different types of incentives: economic, moral and social. The idea is that the charges “substituted an economic incentive for a moral incentive (the guilt)”, with the implication that the daycare centre simply didn’t get the amount right. However, if this were true, treating guilt would be as simple as paying somebody that you had wronged.
The way people respond to incentives is in fact highly complex and unpredictable. Incentives that are too big or too small can have perverse effects. What’s more, how people will respond to any incentive depends on the perceived motives of the person offering it, and the implied motives of the person receiving it. Studies show that incentives can easily backfire if these motives are questionable, something that has had an impact on the field of organ donation: when people were offered money for donating, donations decreased. People simply no longer felt that they were helping people, only that they were making a bit of money. The Freakonomics guys do not engage with any of these well established psychological tendencies; they simply select three arbitrary and incommensurable concepts and proceed as if their analysis were obviously true. But it’s clear that, contrary to their mantra, claiming to be able to predict people’s response to incentives with certainty is simply a fool’s game.
Economists do history
Historians – at least, those who aren’t Niall Ferguson – try to emphasise context, combat euro-centric (and therefore usually capitalism-centric) narratives, and endlessly struggle against ‘Whig’ history, which suggests that history has naturally culminated in contemporary societies. History is therefore a prime stumbling ground for economists, whose models generally take place in a theoretical ‘vacuum’, take capitalist institutions and social relations as a given, and often model the economy as a deterministic time path or as in equilibrium. It seems that economists tend to see the ‘people respond to incentives’ behaviour outlined above as underlying history, and therefore believe that events naturally culminated in capitalistic behaviour; of course, the corollary is that deviations from this were caused by bad policy, externally imposed by governments.
This type of thinking is clear in Evsey Domar’s serfdom model, which attempted to explain the end of serfdom through notions of its profitability to the landowner. The model argues that if land is too plentiful relative to labour, this results in competition among landlords for workers, which drives wages up, and subsequently it becomes more profitable for landlords to use the institutions of serfdom and slavery to ‘put down’ labourers, rather than employ them for wages. Conversely, if land is scarce relative to labour, wages will remain low enough for wage labour to be profitable, and serfdom and slavery will disappear. Domar suggested that this explained the end of serfdom in Russia in the late 19th Century.
To be fair to Domar, he was more than ready to acknowledge the limitations of this model. One person who was less so, however, was Paul Krugman, who has used it as an illustration of why he considers economics the superior framework for social science. According to Krugman, models like Domar’s are an indication of how economics is “rigorous” and makes “generally correct predictions”. This latter characterisation is especially bizarre, because Krugman goes on to acknowledge that there are large areas of history the Domar model doesn’t explain, such as why serfdom was not reinstituted in Europe after the Black Death wiped out a large amount of the labour force, pushing up wages. According to Krugman, events such as these are “puzzles”. Surely they are just an indication that economist’s framework isn’t so great?
In fact, the Domar model actually doesn’t do a great job of explaining its prime example of 19th century Russia. The serf agreement was not simply forced onto peasants, but was a three way deal between the state, landlords and peasants: peasants had rights and were in many ways ‘free’, as long as they produced enough for the gentry, who were subsequently available for the military. What’s more, the 1861 ‘emancipation’ from serfdom was not instituted by the landlords based on considerations of profitability; the move was centrally directed by the state, based mostly on imperialist/defensive considerations after the Russian defeat in the Crimean War. Many landlords were resistant to the change, and though the legislation was passed a large number of restrictions remained, some effectively extending serfdom.1 Overall, the incentive-based behaviour outlined by Domar is irrelevant to the broader story of social and political change.
The root of the issue is the assumption is one that is not atypical in economics: the idea that the capitalist institution – in this case wage labour – is the ‘natural‘, underlying tendency, upon which artificial institutions like slavery and serfdom are ‘forced’. Indeed, Domar repeatedly refers to the wage labourer as the “free man”. But history shows us there are no natural, underlying institutions: capitalist, feudalist and slave(ist?) institutions are all complex, and their introduction is fragmented. Therefore, at worst, the Domar model is trivial: it suggests that if wage labour, serfdom and slavery are all easily available to landlords, they will choose the one most beneficial to them (in fairness, Domar acknowledges in one place that we might “question the need for [his model]”). However, you don’t need an economist to tell you this, and neither would they be able to tell you how such a situation arose in the first place. A historian would.
The next example continues our journey through Russian history, though perhaps that is stretching the definition of the word ‘history’. This one reminds me of a story – probably an urban myth – about a student at the University of Chicago, who fell asleep in one of Milton Friedman’s lectures. Friedman was furious, and demanded the student answer whichever question he had just asked. The student responded “I don’t know the question Professor Friedman, but the answer is a change in the money supply”. It’s a funny joke, until you realise that economists (in this case Irving Fisher*) actually write things like this:
There you have it, folks: belief in socialism is a monetary phenomenon. This is despite the fact that Russia, the centre of Bolshevism, wasn’t really capitalist at the time of its revolution but mostly feudalist, making Fisher’s discussion of workers and employers bargaining largely irrelevant. It was actually the increasing scarcity of land and food – not the instability of money – which robbed peasants of their lot. Fisher’s account also ignores the undeniable role of World War 1 (elsewhere as well as in Russia), which devastated large areas of the country and created an armed, disenchanted underclass accustomed to conflict. Contrary to what Fisher implies, I’m pretty sure that an oppressive regime drafting you for a largely pointless war, or taking away what little you have, does not only “appear to be social injustice”, but is social injustice, and is peripheral to “changes in the buying power of money”, itself usually symptomatic of broader instability – economic or otherwise.
An economist does sociology (and more)
Perhaps nobody better characterises the term ‘Economic Imperialism’ than University of Chicago economist Gary Becker. Becker has used economist’s toolkit to craft theories for everything from crime to addiction to the family, and in fact he won the Sveridges Riksbank Prize for his efforts (yes, it’s a fake Nobel yada yada). Naturally, Becker’s models were praised because they were rigorous and mathematical (a quick google search will reveal multiple people fawning over him for god knows what reason). While Becker himself is quite modest and seemingly well intentioned, his theories about human behaviour are so far from the truth it’s a wonder they have garnered any respect at all.
The first of these, Becker’s theory of ‘Rational Addiction‘ (amusingly parodied in this video), suggests that those who are addicted to drugs are just following a rational long term utility-maximisation plan. This is the sort of thing that a normal person looks at and goes “erm, no”, as it is completely at odds with the internal and external struggles that addicts commonly face. “I’m just maximising my satisfaction” sounds like something an addict will tell you, but analysis of addiction generally has to go beyond that to be of any use.
It almost goes without saying that do not plan their addiction because they think it will maximise their future satisfaction, and is well established people in general do not behave this way. Some economists have tried to use vague data points – such as the evidence that smokers adjust their habits due to expected tax increases – to ‘show’ people are rational and forward looking. However, it is obviously a leap from this highly stylised behaviour to suggest that smokers are perfectly rational and informed forward looking utility maximisers. In fact, the observed behaviour of addicts suggest that addiction is generally involuntary, and people become addicted because they are unaware of, or underestimate, the risks of addiction. Often it is not clear why people are addicted, even (or especially) to themselves.2
On top of this, the actual mechanics of addiction used in the theory are questionable. ‘Rational addiction’ occurs because past consumption of something builds up a ‘stock’ (with typically undefined units), increasing the pleasure you get from consuming it now. However, in the real world addiction is far more complex than this, and is associated with numerous, sometimes conflicting effects. For example, the theory of rational addiction cannot explain the ‘empty compulsion’ addicts feel once the brain has adapted or become satiated, resulting in a disappearance of the ‘high’, but not of the desire to continue, even if the addict’s conscious brain conflicts with this desire. What’s more, different drugs create different reactions inside the brain (not to mention psychological reactions): opiates like heroin tend to mimic certain neurons, whereas alcohol inhibits the brain’s ability to release (and coordinate the release of) neurons. These are disparate processes that cannot be captured by economist’s utility. Conversely, neurologists, psychologists and social workers have models that can explain such nuances, which are certainly the ones I’d turn to if I wanted to understand and deal with addiction.**
Becker’s second major theory of human behaviour is New Home Economics, or the theory of the family, which started with Becker’s 1965 paper on the allocation of time and culminated in his 1981 Treatise on the Family. As would be expected, the theory models families as a collection of rational agents optimising various preferences and operating according to their respective specialisations, and so it can easily be criticised along previously mentioned lines. However, I will not go over these arguments again.
Instead, the critiques I find of interest here are those by feminist economists, who generally take issue with Becker’s almost hilariously stereotypical depiction of the family. The head of the household – implied to be a man – is modeled as an ‘altruistic’, breadwinning agent who coordinates everything and makes sure it is OK, while the rest of the family accept his judgment as in their best interests (in other words, he is a benevolent dictator). Housework is done by the woman (as women have a ‘comparative advantage’ in housework), and is not counted as a contribution to the family pot, implying that said work is not similarly ‘altruistic’. One is forced to wonder whether the theory would be more suited to the 18th or 19th centuries – clearly, it precludes the study of non-traditional families. A real household that looked like this would probably be classed as abusive.
The theory has many other conceptual and explanatory problems. It could be viewed as an attempt to deal with the troublesome existence of the family unit by arguing it can be represented by a single optimising agent, similar to the way some perfectly competitive models deal with the firm. Economist Barbara Bergmann noted that the theory seems to lead to the “conclusion that the institutions depicted are benign, and that government intervention would be useless at best and probably harmful.” Yet this depiction is completely at odds with the obvious fact that families often exhibit conflicting or self destructive behaviour. Bergmann goes further, arguing that Becker’s theory more generally leads to “preposterous conclusions”, among which is the ‘economic argument’ that women should embrace polygamy, and the idea that the decision to have children is only a function of parent’s ‘altruism’ and of the rate of interest. While the theory may be vaguely consistent with a few stylised facts about how income affects families, these are largely trivial and do not need Becker’s theory to explain them.
The third and final theory is Becker’s theory of crime, which unsurprisingly argues that criminals simply perform crimes because the benefits outweigh the costs. Criminals were said to calculate the ‘expected utility’ of a crime, which multiplies the probability of being caught times the price for being caught. Becker’s cost-saving solution was to increase penalties but reduce enforcement, and also to increase enforcement of more costly crimes (which, in practice, means increasing enforcement in wealthy areas and decreasing it in poor areas).
To be fair, Becker always warned against implementing an extreme version of his view, but as is often the case the caveats were not taken on board and ideas like his seemed to have a substantial (negative) impact on law enforcement (the fact that Becker has a blog with notable judge Richard Posner should be a clue that he has an influence on the legal profession). Over the 1970s and 80s, law enforcement seemed to follow the Chicago-style prescriptions: punishments were increased, with mandatory sentencing introduced and incarceration rates rising. Meanwhile, particularly in cities, the number of police officers was reduced, as was general enforcement and surveillance. The well-documented wave of crime that followed/coincided with this, culminating in the late 1980s, led to the realisation that this approach was flawed, at which point different approaches to law enforcement were taken and crime started to go down. (I’m not going to go over the Freakonomics abortion explanation for this, though this paper has been acknowledged to show that at the very least the effect was smaller than they thought).
Criminologists generally find that combating crime requires the opposite approach to the one Becker had in mind: frequent enforcement, modest penalties (note: commenter ‘TheHobbesian’ helpfully provides a link to ‘situational crime prevention‘, which is apparently gaining followers). It turns out that real criminals are not so bothered by the punishment for a crime, within reason, but by the likelihood of being caught. Most criminals do not even consider the punishment at all when committing a crime, particularly because many of them are under the influence of drugs when they do it. What’s more, punishments that are too severe can backfire, either because they end up being impossible to enforce or because, if a punishment is severe enough, a criminal may as well commit a more heinous crime. I expect an economist like Becker might respond that this just shows that criminals have ‘interesting utility functions’. I would respond that they need to get a grip on reality.
Economists are prone to thinking their framework is neat, useful and even universal, but actually it is just quite a naive and one-dimensional view of human behaviour. When economists take their toolkit to other social sciences, they’d like to believe that they ‘simplify’ in such a manner that they get to the ‘underlying’ mechanics of issues; but they actually ‘simplify’ in such a manner that they often assume everything relevant away. This may make for compelling mathematics and entertaining books, but when we actually venture out into the real world these theories at best only to touch on the surface of the story; at worst, they simply become absurd.
**A part of me says that someone like Becker probably wouldn’t rely on his theory, either. There is a joke about an academic economist who was offered a position at another university, and was conflicted about the choice. One of his students asked him why he didn’t simply choose the rational option. Puzzled, the professor responded “come on, this is serious”.
1. Crime, Cultural Conflict, and Justice in Rural Russia, 1856-1914 by Robert Frank, pp. 6-7
2. The Theory of Addiction by Robert West, pp. 32-36, 75
What is the role of ideology in shaping how businesses go about their everyday operations?
Generally, economic theories of the firm – particularly at undergraduate level – imply that businesses have clear aims and a clear way to go about those aims. This might be the basic profit maximisation; it could be growth; it could be market share. In some models it’s not quite as clear for the firm as a whole – the objectives of managers and shareholders can conflict, for example – but it is at least the case that each agent has clear objectives, subject to some constraints.
However, the real world is rarely so certain. While it is obvious that capitalist firms throughout history have the overarching aim of making money, the way to achieve this is not always clear, particularly if we are talking about long term strategies. For example, could it be that being a “socially responsible” firm will increase business from sympathetic customers? Or that higher wages, better working conditions and so forth, which seem costly, will actually increase employee productivity? The history of how firms have worked seems to suggest that firms as a whole – or capitalism, if you like – is susceptible to waves of ideology about the ‘right’ way to do business.
Consider the American School of Economics, which was the chief ideology and policy of the USA during its industrialisation period. This was a highly protectionist school, which focused around maintaining domestic competitiveness and employment. High wages, good education and healthcare for the workers were encouraged, both for humanitarian reasons and as a way to increase productivity and make business more profitable. It was not only required that government policies were set up in a certain way – tariffs, public services, employment rights – but also that these policies had popular support. Business generally shared in the idea that well paid employees would be more productive, something epitomised by Henry Ford’s famous doubling of his worker’s wages.
The result of this policy was a large, profitable domestic sector and consistent increases in real wages, allowing the USA to outperform the UK. This isn’t to romanticise the period: I’d have plenty to say about anti-labour violence and US foreign policy at the time (that is, if anyone were interested). However, the American School of Thought demonstrates how a certain way of thinking can permeate society and business as a whole, and massively affect how the economy functions. Can you imagine such policies working these days, when the popular mentality is so against them? Surely, firms would lobby against – or find ways around – attempts to reestablish such a system.
Another example is in Japan, where they had different ideas. The Japanese firm is a highly collective organisation, one which is loyal to its employees, and in turn has this loyalty reciprocated. Firms generally offer workers ‘lifetime employment’, coupled with numerous benefits such as insurance, pensions and promises of progression, based mostly on seniority. Achievements are shared collectively, and many companies even require employees to sing a ‘company song’. Getting a job at a major firm requires that one goes through a rigorous army-esque training program, and is a major lifetime achievement, to the extent that it is not uncommon for those who accomplish the feat (or don’t) to be reduced to tears. From a certain perspective, this approach might seem quite rigid and inflexible for both workers and firms, but it has certainly produced results: successful firms like Sony and Nintendo; low unemployment despite macroeconomic weakness, security for a large amount of the population, even with relatively low government spending.
There are numerous – indeed, surely countless – other ways to organise a firm based on a people’s worldview, national identity and so forth. Germany has its stakeholder model, where union leaders sit on board meetings and have a say in how the company is run; in turn, however, they are willing to go against their immediate interests by holding wages down to maintain national competitiveness. In countries such as India, the nature of the workplace is intertwined with religious ritual, something firms must consider in how they run their businesses. The rise in worker owned coops in Argentina and across the western world, with 48,000 in the US alone, indicates a growing number of people who share their own, democracy based ideas about the best way to organise business and treat employees.
One implication of the ideology theory is that, contrary to the Reaganite idea that 1980s ‘neoliberal’ reforms simply unleashed business to its true calling, it could be that the decade just instilled them with a certain mentality, one no more special than any other. This ideology was a more ruthless, ‘profit (shareholders) first’ mantra: firms merged, outsourced and became less tolerant of unions. While it is true that these things were accompanied and enabled by changes in the law and technology, the decade as a whole it also seemed put a lot of things, particularly mergers, in vogue: evidence is quite consistent with the idea that mergers were mostly driven by hubris. Similarly, outsourcing has come under fire after it has emerged that there are many hidden communication, management and transaction costs that were not first realised, and hence it may not be as profitable as first thought. Is this uncertainty the mark of firms which have a clear aim and know how to go about it, or which seem largely motivated by fads and unaware of the exact results of the actions?
One last example of how people’s perceptions can have a large influence on the economy may come from the UK. Here, the government’s recent policy of austerity has meant that public sector workers have faced massive cuts. Naturally, the government and press have justified this by appealing to the idea that there is a lot of excess waste in the public sector: pointless, lazy bureaucrats and so forth. Meanwhile, the private sector has failed to step up and fill the gap in employment. Interestingly, a survey provided some insight into why – aside from general macroeconomic weakness – this may be the case: 57% of private sector employers said they were not interested in former public sector employees because they were “not equipped” for the job, based simply on the fact that they were employed by the public sector. In other words, the general impression, fostered by the political class, that public sector workers are useless – false though it may be – has backfired by changing business’ impression of them, reducing hires.
In sum, it seems how businesses are run is substantially dependent on ideas, and hence can be a political choice. Cries that businesses should be more “socially responsible” may sometimes seem repetitive and empty, but history shows us that it is possible to manoeuvre the way businesses operate as a whole. Business’ ideology is also an interesting area of exploration for economic theory: instead of having businesses driven by maximising some goal, they could be driven by a certain set of principles (I expect there are some papers that deal with this, though perhaps not in the way I’d like). In any case, anyone trying to legitimise whatever way business happens to be behaving right now as ‘natural’ should take another look at the history of the firm.
One of the features libertarianism (propertarianism) shares with neoclassical economics is that it tends to take the existing economic system as a given, and proceeds to analyse from there. The result is that much of what follows could be labelled as question begging: incidence of market failure do not merely beg the question ‘how can we fix this?’ but also ‘why are there so many of these?’ Questions over ‘human nature’ become questions of ‘how humans behave under capitalism.’ Neoclassicism’s failure to address any questions about capitalism as a whole is a major flaw, and libertarianism – sharing, as it does, many intellectual similarities with neoclassicism – carries over this flaw. The result is that libertarian analysis, even when cogent, fails to ask truly difficult questions.
Public Choice Theory
A major area where this is obvious is public choice theory. Libertarians will cry “don’t use government healthcare! It will simply benefit special interests!” Meanwhile, Marxists will scratch their heads and instead argue that the problem is not public healthcare in and of itself, but the fact that under capitalism, asymmetries of wealth create (and reinforce) asymmetries of power, and those with the most money are able to corrupt public programs for their own gain.
Ultimately the question is: who is the source of corruption, the corrupter or corrupted? While no one can deny that hatred for feckless politicians is surely deserved, blaming them strikes me as not really addressing the problem. Why do we see continual corruption, across countries and across time? The ultimate source of the vested interest is, of course, the vested interest! Remove the interest and the problem disappears. Remove the politician and another will take their place (most likely selected by, funded by, or in cahoots with the interest). Remove the state and the already wealthy/powerful interest can simply take care of the problem itself.
I have also commented that libertarian analysis in this area stops short of the revelation that the same arguments can be applied to all aspects of the legal system, including the corruption of ‘force, fraud and theft.’ Once you put capitalism into your frame of reference, the problem becomes why exactly these violations of liberty, rights or what have you would emerge on such a large scale under a particular economic system (it begins with p).
Libertarians – as well as other schools of thought – believe value is inherently subjective, perceived only in the eye of the beholder, and so forth. This is, in fact, what Marx thought of use-value:
A commodity is, in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another. The nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference.
Of course subjective valuation is at the heart of consumption and other decisions. The difference is that Marx extended his analysis: he linked use-value to exchange-value and differentiated the two; he explored the relationship between use-value and the commodity; he defined the “social form” of wealth as separate to its use-value. Libertarians, on the other hand, being lazy, simply stopped at use-value, equated it to exchange-value, and built their entire theory around this single interpretation.
This is a big topic so I’m not going to claim to have explained both human nature and the history of capitalism in subsection of a post. What I will claim is that libertarians are almost certainly wrong.
The problem here is that they reason backwards from our current institutions and define all of history as either a diversion from, or tendency to, our current state. Humans were always greedy and selfish; it wasn’t until the various ‘unnatural’ barriers to trade were removed that this tendency was allowed to flourish. ‘Markets’ can be found throughout history, continually pushing at the barriers created around them; again, once they were unleashed, humanity developed. Here is Marx saying the same:
Economists have a singular method of procedure. There are only two kinds of institutions for them, artificial and natural. The institutions of feudalism are artificial institutions, those of the bourgeoisie are natural institutions. In this they resemble the theologians, who likewise establish two kinds of religion. Every religion which is not theirs is an invention of men, while their own is an emanation from God. When the economists say that present-day relations – the relations of bourgeois production – are natural, they imply that these are the relations in which wealth is created and productive forces developed in conformity with the laws of nature. These relations therefore are themselves natural laws independent of the influence of time. They are eternal laws which must always govern society. Thus, there has been history, but there is no longer any. There has been history, since there were the institutions of feudalism, and in these institutions of feudalism we find quite different relations of production from those of bourgeois society, which the economists try to pass off as natural, and as such, eternal.
Anyone who has taken history will know that they try to pound this tendency (ethnocentrism) out of you in your first classes. The fact is that western capitalism, like all of history, is a result of specific historical circumstances. Why was Britain one of the first to develop? It was surely in large part due to the resources, military and political power it gained from its empire; a similar argument can be made for the U.S. and its ‘treatment’ of the Native American people. As well as empire and slavery, there are other specific historical coincidences that might explain the rise of Europe. For example, there’s an argument to be made that the only reason the large supplies of silver extracted from Latin America did not obliterate Spain and Portugal in a sea of inflation was because China soaked up the demand with its introduction of the silver tax in 1581. Such arguments are, of course, up for debate. What is not up for debate is that historical context is irrelevant in discussing the rise of capitalism.
Similarly, while I do not subscribe to a strong version of historical materialism (personally I think it seems to lead to an infinite regression), there is obviously a lot of truth in the fact that people’s conditions determine how they behave. An English peasant would have had different beliefs and mannerisms to a member of the feudal class. More strikingly, certain sections of the Inuit refuse to say ‘thank you’ because it implies that you have done someone a favour, rather than simply your duty as a human being. Some civilisations used similar terms for ‘ripping someone off’ and ‘profit.’ Would we have the same attitude toward profit if we used the same word for it as ‘ripping off?’ Surely not.*
Expanding the scope of libertarianism to include property and capitalist relations – as well as their history – would start to raise some interesting questions, such as ‘why do we stop a poor person from eating by force?’ (try to take something from a shop without money and you’ll see what I mean). In fact, I expect a really critical look at capitalism from the perspective of individual freedom would simply collapse propertarian libertarianism into either Marxism, or, even more likely, anarchism (the latter being the true origin of the word ‘libertarian‘).
*These claims come from David Graeber’s Debt: The First 5000 Years.
Here are a few historical facts that I consider to be both true and contrary to what most economists (and libertarians) think. All have substantial historical evidence behind them, whereas I find the opposing case generally relies on just so stories. All 3 cast considerable doubt on pro-capitalist stories about trade and development. (I would use bullet points but wordpress seems to be in a mood. You’ll have to imagine them):
Rich countries did not get rich through free trade, but through the use of protectionism and other state interventions such as capital controls and subsidies. This includes but is not limited to: the UK, US, Germany, Japan and Scandinavian countries. Furthermore, more recently developed countries got rich by doing something similar, and in the case of the Southeast Asian ‘Tigers,’ the intervention was even more explicit, with state employees working inside the infant industries. There are a couple of exceptions such as the Netherlands, but even in their case their initial rise was characterised by large state backed monopolies in order to overcome transaction costs. Finally, supposed bastions of free trade such as Singapore and Hong Kong are both characterised by various public provisions, and Singapore has a large GSE sector. The go to accessible source on this is Ha-Joon Chang, though others are also available.
Money did not arise as a solution to the ‘double coincidence of wants,’ a highly improbable concept that begs a lot of questions (such as ‘how exactly does the cow farmer get all his inputs?’) Money primarily arose as a form of credit, and this was intertwined closely with social relations and kept communities bound together. Credit only became ‘exact’ once it was enforced by force rather than social pressure, and evidence suggests the use of coins and notes primarily followed the introduction of taxation. Before this, the overwhelming majority of barter was rare and between different tribes/nations, and often accompanied by feasts, sex and violence (sometimes all at the same time!) The primary source on this is, of course, David Graeber. I have not seen a convincing critic, though not for want of trying (‘it might have happened even if there’s no evidence!’ and ‘but debt is just delayed barter’ respectively).
Peasants did not freely move from their land into 12+ hour days in factories because it was ‘better than the alternative.’ In many cases they had their land taken by foreclosure acts and their hunting severely restricted by game laws. Prior to the industrial revolution they had plenty of problems – they were particularly susceptible to disease and famine – but evidence suggests they had a far greater degree of leisure and control over their working conditions than wage labourers. Michael Perelman’s book gives an in depth treatment of this, and similar arguments can be found throughout marxist writings.
The conclusion is clear, and something I have said before: western capitalism is neither harmonious nor natural. It is a product of specific historical circumstances, some of which were incredibly brutal. Any libertarian who accepts this (and some do) – presuming they adhere to a broadly Nozickean conception of justice – should take a deeply skeptical stance of everything that followed (e.g. the modern world). In fact, most libertarians should probably be revolutionaries.
P.S. This post is partially inspired by Robert Vienneau’s similarly formatted post on economist’s misinterpretation of the history of thought, worth a read.