Capitalism 3.0

http://economistsview.typepad.com/economistsview/2009/02/capitalism-30.html

Over on the Economist’s View there are a whole series of comments that negatively reflect on capitalism. This is my response.

All,

I am amazed reading these comments. What is it about this blog that attracts the sort of participants who don’t show up on other economic blogs? Is there some left-leaning network that promotes it or something? Is it a populist forum? It’s just odd.

ON CAPITALISM

Capitalism is a set of institutions that allow humans to calculate the use of resources, a calculation that they cannot accomplish by other means. This includes property, numbers, counting, money, trade, contract, courts, accounting, banks, financial markets, and insurance.

That is capitalism. That’s it. Capitalism doesn’t have a policy, any more than a calculator has a policy. It has nothing to do with government at all, and it doesn’t need government at all, at least in theory.

If you want to understand the problem we face, really, it has little to do with capitalism, and everything to do with politics. That is, unless you are really one of those people who doesn’t understand why we have to have money and prices and trade. And if that’s the case we’re back to angels on heads of a pin and that conversation is very hard to have.

Assuming we’ve made it this far, there are several problematic layers on top of capitalism:

First we add private associations, such as trade associations and unions. The purpose of these organizations is to capture wealth for group members by creating artificial scarcity. That is not a judgment of right or wrong. That is the function.

Then we add the political economy. The purpose of the political economy is to alter the activity of the institutions to capture wealth for the benefit of groups within a geographic monopoly. That’s what governments do.

  • Governmental means of regulating trade: law, borders, transportation regulation, arms, and violence.
  • Governmental means of regulating economic calculation: taxation, fiat money, banking regulation, finance regulation, insurance regulation.

Finally, we have the social services economy, which was once the province of the church or charity, but has been taken over by the state.

  • Secular means of delivering social services: redistribution, unemployment insurance, public transportation, hospitals and healthcare, retirement insurance, education, and whatever else can be thrown in the soup.

That is the set of things governments (or groups) use to capture wealth generated by capitalism. Politics is the use of groups to capture wealth generated by trade, for the purpose of the groups that constitute the government.

So there are only three questions.

1) The first question is the extent to which interference in the productive economy can be tolerated without reducing the group’s (or set of groups’) competitiveness against other organizations (states). Especially in real time.

2) The second question is, assuming one solution or the other, whether or not the political economy can calculate better than the institutions of capitalism. This appears to be impossible on a number of levels. I won’t get into it here but people simply cannot comprehend economies bigger than that of their families. Accounting is still very primitive and oriented in the 19th century. Probability and statistics seem to fail us in economic analysis. Economics as a method is far too young and understands too little, and until we solve “induction” or the problem of prediction – if it is solvable – our quantitative methods decline in value outside of very simple equilibria and fail just at the point where we need them. If you don’t understand that this is the fundamental problem underlying quantitative economic theory, then that’s the problem, and now you know.

3) The third question is the means of distributing those captured resources into multiple uses within the political and social service economies. Currently this is a political calculation rather than an economic calculation. I suspect that future advancements in government will come largely from the application of market principles to the allocation of such resources, because as currently structured they are incalculable and rely on ever-expanding productivity.

These three questions are not questions of capitalism. They are questions of the political economy that exists because of capitalism. Capitalism isn’t part of the problem. It doesn’t have opinions or policy. The means whereby humans make complex political decisions about the allocation of captured resources is the problem.

ISSUES FACING US

A) The fact is that some nations will actively use their economies to prosecute trade strategies against other nations, and now that “capitalism” or “economic calculation” is the dominant method of social organization, what will we do in a world no longer dominated by northern European ethics? Whether you think that is good or bad, it is a constant that is changing. All of our known economic history and models are effectively Anglo in origin. The future will not be determined by the past. The west has had a technical and organizational monopoly for a long time. In a different world, our standard of living appears to be threatened, or at least the rate of our relative productivity and prices may be.

B) Now that consumer culture is fully adopted, and citizenship is attained by debt participation rather than ideology or service to the state, the question is whether we will change from a legislative political structure to a banking political structure, effectively reducing government’s use of legislation and instead emphasizing liquidity and interest rates while eliminating the concept of general liquidity. This is a superior means of redistribution, especially since loans and notes expire and laws do not, and such models preserve calculability.

C) Will we move toward more (human) political decision-making or more calculative decision-making? In most of history, when a civilization enters its skeptical phase, it becomes increasingly political and necessarily develops tyranny as a means of resolving conflict. But the calculative institutions of capitalism didn’t exist for previous civilizations. We actually have a choice.

D) Outside of Euro-empire capitalism, can large states (like the US) with diverse economies and peoples be governed at all, or was Federalist Papers 10 right in arguing that governments should be constituted only of people with similar economic and cultural interests and that we should exist in smaller states? I think the latter is unlikely but it is a natural question to consider.

E) The last issue has to do with breeding, immigration, and emigration, since that’s the primary cost beneath it all. This is how groups gain or lose members.

What failed over the past century is our ability to calculate. We wrote checks on faith – checks that we couldn’t cash, primarily because we live in a democracy. All that wealth that was supposedly being concentrated is vanishing because it wasn’t wealth, it was promises. These promises couldn’t be kept, but we thought they were real because they had numbers attached to them.

So to answer the complaints people here are making about capitalism, the issue is actually how to preserve the ability of people to calculate the use of resources competitively against other groups who have their own self-interest at heart. The issue is  how to allocate captured resources and how much of those resources to capture for public use, when currently we are using incalculable methods – political methods – of doing so. Human history is replete with examples of how political methods fail and institutions recover them, but the public’s desire within a democracy for political solutions to calculative problems is something that is hard to measure.

 

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