Ducking questions about capitalism

Theresa May’s speech this morning was trailed as a defence of free market capitalism. If that’s what it was, it failed because she failed to answer the big questions.

May said:

A free market economy, operating under the right rules and regulations, is the greatest agent of collective human progress ever created.

This is true. The excellent economics course devised by Wendy Carlin and Sam Bowles begins from this very fact. But it is a fact upon which Marxists agree. Marx and Engels wrote that

[Capitalism] has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals…The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. 

The question is: can this continue? Marx – following classical economists’ forecasts of a stationary state - predicted that it wouldn’t, and that capitalist property relations would turn into “fetters” which constrained growth. The fact that we’ve had a decade of falling real wages and stagnant productivity is consistent with the possibility that Marx was right. Maybe a falling rate of profit, fear of competition, capitalist hierarchy and state-backed monopolies are constraining growth. If so, we might need something close to the overthrow of capitalism to restore growth.

Do we? May doesn’t even consider the question.

Nor does she ask its correlate: why exactly have wages and productivity flatlined for so long? If it’s not because of structural capitalist stagnation nor presumably because of fiscal austerity then why? And if there are policy changes that can remedy these, why have they not been implemented since 2010? Yes, Ms May speaks of progress in financial regulation. But does she seriously think this is sufficient to end financial crises – that we’ve finally achieved an end of history in which crises are abolished?

Yet another question is: do we really have a free market economy? In many sectors, the answer is: no. Banks and utilities are far more like rent-seeking state-aided oligopolies than the textbook perfectly competitive markets. There’s a reason why Labour wants to renationalize railways and utilities and not your local greengrocer: it’s because some are monopolistic and others aren’t. Labour’s nationalization plans are not an attack upon markets – at least not on well-functioning ones.

Which raises a further question: what is the relationship between capitalism and markets? Yes, historically the two have been correlated. But this is not a logical necessity. Capitalism is about who owns productive assets; markets are about how goods are allocated. Capitalism can actually undermine free markets, as bosses seek monopoly profits and as crises and stagnation undermine public support for markets.

It is theoretically possible to have markets without capitalism; see, for example, Gary Chartier and Charles Johnson’s book, Markets Not Capitalism (pdf). In fact, in my not wholly idiosyncratic notion of socialism, markets would be healthier than they are under today’s capitalism.  

Which leads to another question: are the Tories really able to defend free markets any more? The problem is that, as Phil says, they are the allies of the most “socially useless section of capital”: rentiers, low-wage bosses, tax-dodgers and a few financiers. This is not the group we should look to for an advancement of healthy markets.  

I like to think that there should be a case for free markets. This requires that they operate in frameworks that constrain rent-seeking and exploitation. It’s not at all clear that the Tories can make such a case.  

* To his credit, Tim Worstall has always been clear about this.

Comments

[Mark]

Tories should quit defending capitalism, capitalists and capital and instead defend and promote genuinely free, mass-participatory and contestable markets.

This could be called populism or red Toryism but in some respects is a return to the party's roots and a rejection of the neoliberalism of New Labour, which toadied to the banks that stole from SMEs (owners of which used once to be viewed as natural Conservatives) and placed the state in the invidious position of having to bail them out, resulting in huge public debt.

[Luis Enrique]

"do we really have a free market economy? In many sectors, the answer is: no. Banks and utilities are far more like rent-seeking state-aided oligopolies than the textbook perfectly competitive markets."

this makes it sound like free markets = competitive markets. I think what you are really saying is that 'free' is a defensible system when markets are competitive, but in presence of e.g. natural monopolies, regulated (or perhaps nationalised) is.

The big economic question of our time is what to do about new natural monopolies Google, Amazon etc.

[n.b. retail has never been thought of as a natural monopoly but then we've never had the technology for one online shop to sell everything]

[Luis Enrique]

I should have been clear above: 'freedom' (the extent of regulation) is a difference concept to competitiveness (the extent of market power).

one further thought on Amazon - the natural monopoly need not arise on the production side. Suppose there are constant returns to scale, but one retailer establishes itself as the place to buy everything. Consumers have no need to go elsewhere because having a single place to buy everything is easiest, and no new entrant can instantly supply everything (even though their prices for what they do sell could match amazon).

But I think there are increasing returns to scale, both in terms of production technology and in terms of shareholder tolerance for lower margins if the top line is titanic (i.e. huge return on equity).

[northshore]

Indeed.

Michael Sandel once addressed the capitalism-history defence by agreeing but noting the shift from having market economies to becoming market societies.

And highlighted the need to resist the tendency to extend market thinking and values into the area of personal life, family life, social life, civic life, health, education, law etc.

I tend to agree with that too.

[mpc]

Hi Chris.
I have read recently that maybe productivity is not being measured correctly and it could be we are in fact increasing productivity.
My guess is that the definition of productivity can confuse the arguements and analysis.
What are your views? Is it enough to talk about productivity or should it be better defined.
MPC.

[Nick Drew]

A capitalist writes ...

Sure enough, "Capitalism is about who owns productive assets" or rather - who is permitted to own productive assets.

But it turns out (as a contingent matter, if you like) that you get the best and most productive markets when those with the really great ideas for good business are allowed to Capitalise on them, (i.e. create and own and have property-rights on the capital gains of a successful company) - rather than just making a turn.

It's a bit like democracy. Personally I consider the rule of law to be the primary political desideratum, hotly followed in second place by a system that allows sensible changes to the law without bloodshed. What have those to do with democracy?

Well, the only reliable guarantors of the rule of law are either (a) a priesthood - like the European Commission (on a good day) - or (b) the lousy system that's just better (it turns out) than every other system that's been tried, our old friend democracy. Why is it better than a priesthood? Because it allows for peaceful change to the law - which (it turns out) you can never rely on priests for.

Likewise with markets. You want the fabulous benefits of free markets? Well by all means regulate them well: but also, allow successful entrepreneurs to Capitalise. It turns out to work best that way - as the Chinese have realised. No amount of being rewarded by the Party with gongs and honours stimulates good ideas like the thought of being allowed to Capitalise.

(And, yes, I'm hostile to rentiers, too)

[David]

"Free" suggests choice.
The Railways (travel to work mainly) the roads (same same), fuel, heat, health, communications and water (survival) are not.
They are a cost of work... getting there, and being alive when you get there.
And they are for most people a fixed cost much like taxation.
None of those cash cows should be in the hands of rent seekers.

Food is highly regulated and competition is strong. We are not, until Brexit, living with a shortage.... it is just very badly distributed according to wealth.
The concept of competition in railways was broken at the start of privatisation, as was water and energy, and as will be health if the Tory plan succeeds.
Housing and other necessities exist in many shapes, sizes and locations. Choices (within reason) could be made if the stock was adequate. Competition would then be fierce.
Holidays, toys, beer and sex are free choices along with everything else that people might "want".

"Free markets".... fine.... the rest.. not!

[cjcjc]

How should one think about global rather than parochial developments wrt to the success or otherwise of "capitalism"?

Incomes in the UK may have stagnated for a decade but even if that was long enough to establish the "possibility that Marx was right", in a global context is that not the equivalent of merely observing that incomes in (e.g.) Newcastle have stagnated for a decade without reference to the rest of the country?

After all GLOBAL incomes have risen strongly - very strongly indeed in some countries - over the past decade.

[TickyW]

"A free market economy, operating under the right rules and regulations, is the greatest agent of collective human progress ever created."

Really? And science and industrialisation has nothing to do with human progress?

Free markets exist everywhere. Go to Indonesia and see very poor people selling fruit in the market place. Go to Africa and see poor people participating in markets.

It is probably true that starvation and absolute destitution arises where there are no markets; but the proposition that free markets are the greatest agent of human progress does not stand up against evidence.

Free markets have existed from day 1 of human existence. Industrialisation and science has existed for the last 300 years. It is the period of science and industrialisation that has seen the explosive growth in living standards and human progress.

One could equally argue that the greatest agent of human progress is good government, or even democracy. I know of no country that has prospered in the absence of government. Indeed, the absence of markets is likely to be more prevalent in places with no government.

So please don't be sucked up in by the self-serving ideoology of the Institute of Economic Affairs which, predictably enough, has become very vocal since Corbyn's promise of an increased role for government in the event of a Labour victory

[gastro george]

Nice post TickyW.

On a parallel theme, wrt intelligence/education, just go into the back of any workshop in Africa and see the amount of ingenuity that goes into recycling almost anything.

[Blissex]

«May said: "A free market economy, [ ... ] agent of collective human progress ever created." This is true.»
«Marx and Engels wrote that "[Capitalism] has accomplished wonders"»
«what is the relationship between capitalism and markets? Yes, historically the two have been correlated.»

Oh somebody is wrong again and again on the intertubes! Fortunately I am here belatedly to point out again that "capitalism", "competitive markets", "free markets", "markets", are all different concepts and it is very important indeed to distinguish them.

But the most important thing is that none of them have delivered those "wonders" of "human", but those have been delivered by:

* In small part by the industrial mode of production, which is compatible with many political systems and markets systems, but seems to particularly flourish in mixed economies with regulated and competitive markets and diffused political power.

* In most part by the windfall rent from mining ready-made extremely cheap "food" in the form of coal and oil to power the industrial mode of production.

If the industrial mode of production were powered by the muscle power of hay-fed oxen or bread-fed people it would not have produced such "wonders" of "human progress", but far more modest ones. The standard of living of a country depends mostly on how much coal and oil it consumes and how efficiently they are consumed.

In the time of K Marx the coal powered industrial mode production was a bit too recent to see it in perspective, and he did not yet have the experience of the colossal boost that switching to even cheaper and easier to use oil would give, but still he did write of the overriding importance of coal in powering the industrial mode of production, perhaps because the pre-coal era was still around in many places and the contrast could be seen commonly.

[Blissex]

As to "capitalism" and "markets" they may have been enablers along with historical path-dependency of the coal/oil powered industrial mode of production, but using them generically is not helpful because more properly:

* Capitalism is a political system, not an economic one, in which owners of productive capital have paramount political power. It stopped existing soon after Karl wrote about it, and morphed into a rather different system, and then morphed again. Today the bourgeoisie do not have paramount political power, it is a class of largely hereditary managers of financial conglomerates ("the City").

* The markets have always existed, and were vast and fairly fluid in the roman empire or various chinese imperial dynasties.

* The supposed benefits of markets are from *competitive* markets, which means strongly regulated ones, not from *free* markets, which end up being dominated by big players.

[Blissex]

«Free markets have existed from day 1 of human existence. Industrialisation and science has existed for the last 300 years.»

While obviously I agree that more or less widespread and competitive markets have always been there, it seems to me that it is a bit excessive to ascribe merely to "Industrialisation and science" the "wonders" of "human progress".

The industrial mode of production surely has been a big deal, and science has constantly improved it, but again the determinant factor have been very cheap "mineral food" for "mechanical oxen" in the form of coal and oil.

Consider a rather important industry and science, chemistry: a large part of it is "organic", that is the chemistry of carbon compounds.
For various intrinsic reasons carbon is really nice to work with, our "flexible friend", but the prominence of carbon chemistry in industry and science is also very much related to the availability of ample and very cheap feedstock from coal and oil, feedstock that can simply be mined.

[Blissex]

«Consider a rather important industry and science, chemistry: a large part of it is "organic", that is the chemistry of carbon compounds.»

Consider alternatively and perhaps even more critically what would be the average standard of living in Great Britain with 1/10th of the current consumption of coal and oil: I suspect that it would be less than 1/10th of the current one.
On one hand we could find replacements, but more expensive ones, on the other some critical activities would decline by far more than 10 times as scarce coal and oil were used for even more critical ones, like food production.