Newt Gingrich’s recent “attack” on the free-market has revealed that Americans are almost universally clueless about the nature of capitalism.
The response from just about everyone, including expert economists, indicates they believe that capitalism is an essentially ethical system that can be perverted by people of bad will. The truth is almost the opposite. Capitalism is an essentially unethical system that can be ameliorated by people of good will.
Explanation below the fold...
Here’s why: the so-called labor market is a tilted playing field. The worker is selling his labor in order to survive. He wouldn’t be doing this if he had any other resources. The capitalist, on the other hand, is buying labor. This means that he must have some extra cash he doesn’t need for survival.
This fact gives the capitalist the upper hand. He can live off some of his extra cash for a while, and so he can outlast the worker in their negotiations. When the worker becomes desperate enough, the capitalist will be able to hire him at a cut rate. The capitalist clearly has an unequal advantage over the worker.
This advantage is an essential feature of capitalism. It cannot be removed without undermining the system. Give the worker an equal amount of extra cash, and negotiations cease. Take away the capitalist’s extra cash, and no one can hire anyone. Either way, the system shudders to a halt.
So the capitalist’s power over the worker makes capitalism essentially unethical. But this unfairness can be ameliorated, if the capitalist is willing to forego pressing his advantage. The decent capitalist negotiates frankly both about the worker’s wages and about his own profits, arranging a deal in which both can agree about the benefits that will accrue to the other. Because of the capitalist’s restraint, the resulting deal has something of the character of a free agreement, even though it is never entirely free on the worker’s part. (This is not some feel-good liberal fantasy. The high-wage theory of growth fueled America’s rise to economic power in the 1800s. See America’s Protectionist Takeoff, 1815-1915 by Michael Hudson.)
When, however, the capitalist cannot resist the temptation to maximize his profits, the inherent unfairness of the system will automatically emerge, since the only thing that can check it in a completely free market is the capitalist’s restraint.
For this reason, the quality of capitalism depends entirely on the capitalist’s restraint. When the temptation to maximize profits is restrained, the underlying unjust element in the system is checked. The system then takes on the appearance of “good” capitalism, which benefits the capitalist, the worker, and society as a whole. When the temptation is unrestrained, the unjust element emerges spontaneously. The system then appears as “bad” capitalism, which benefits the capitalist at the expense of the worker and of society as a whole.
Capitalism, therefore, can indeed provide benefits to all members of society, but only if the unjust element in it is restrained. Now if the capitalist cannot or will not restrain himself, he must be restrained by an external power that can compel him to be as fair as the unjust element in the system allows. Government is that power. (As Madison insisted in The Federalist, No. 51, “Justice is the end of Government.” We institute government in part to compel justice from those who cannot or will not be just.)
The description just given of the basic capitalist transaction is abstract and simple, in order to bring out the essential traits of the system. In practice, there are many more players, and many transactions occurring simultaneously. Because of the complexity, it can sometimes seem that the playing field is not tilted, but level. This is never actually the case.
For instance, free market apologists often claim that the system exerts no force on anyone. Capitalist and worker are completely free to negotiate the best terms they can strike. If either dislikes the terms offered by the other, he can simply find another person to negotiate with. Nothing could be fairer. Everyone chooses according to his own judgment, and there is not the slightest trace of an unequal advantage on either side.
This is utter nonsense. Everyone who has ever been in the position of actually having nothing to sell but his own labor knows full well the intense compulsion exerted by the need to survive. And, to be fair, even many capitalists never break free from that compulsion. They may have some extra cash, but if it’s not enough to support them and their dependents indefinitely, they know that they will eventually find themselves in the labor market as a worker rather than as a capitalist. Indeed, capitalism may work best when the capitalist has only this sort of modest advantage, because the capitalist can still identify with the condition of the worker. This ground of sympathy may prompt him not to press his advantage—that is, to practice “good” capitalism.
Some capitalists, however, amass so much extra cash that they break free from the compulsion of survival. Once they have enough to survive indefinitely, once they become secure capitalists, they live in a different universe. As long as they are not foolish enough to gamble away their nest egg, they experience no risk any more. They can lose any amount of money without consequence to their survival. Money means something completely different to them than it does to those who face the specter of penury. To call these people “risk-takers,” as free-marketeers do, is a falsehood. There is no risk in staking cash you don’t need. The real risk-takers are the workers and the insecure capitalists. The workers risk their survival in the very short term; the insecure capitalist, in the medium term. But the secure capitalist never risks anything that matters.
There is another special circumstance in which it may appear that the worker rather than the capitalist has the upper hand: the labor shortage. This is the only situation in which the worker has a card to play against the capitalist, because the capitalist has to choose between two undesirable options: (1) to pay more and make less profit; (2) to leave the business and let his competitors reap the benefit of the enlarged work force when he releases his workers.
Not surprisingly, unrestrained capitalists have successfully eliminated this dilemma. On the one hand, they have had their surrogates in government remove legal sanctions against pressing their advantage; on the other hand, they have globalized the workforce. Without effective government sanctions, they can press their advantage energetically, forcing the workers closer and closer to survival level. And if this limit on profits is still not sufficient for them, then they can simply pull up stakes and go elsewhere in the world, where there are more people who already live with continual survival issues, and press their advantage with those unfortunates. This is unrestraint on steroids, and it shows an advanced understanding of how to increase the unevenness of the playing field.
In the nineteenth century, workers figured out that they could create artificial labor shortages by striking. This worked in certain times and places, but capitalists have always combatted this tactic fiercely. Among the most effective, and least violent, methods of attack is to divide worker from worker by convincing some of them that others are trying to diminish their ability to survive by demanding restraint on the part of capitalists. This again shows perfect understanding of the uneven field on the part of the capitalists, whose very argument makes crystal clear their alliance with the duress imposed by survival on the worker.
The superficial appearance, then, of “free markets” is just that—an appearance. All such appearances, when investigated, will turn out to be built on the underlying foundation of the uneven playing field. And it cannot be otherwise, because leveling the field would instantly halt the game of capitalism.
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There are four attitudes that can be taken toward capitalism.
First, the extreme conservative view: Capitalism is irreproachable, and to utter even a word of criticism—let alone attempt to restrain it—is apostasy. A great many people hold this view. Nonetheless, it is the most wrongheaded possible position, because it is the most at odds with the truth. Capitalism is essentially unethical, and therefore continuing criticism and restraint of it is both necessary and salutary.
Second, the extreme liberal view: Capitalism is pure evil that must be replaced with something else. There are actually only a few Americans who believe this, and they have nothing like the cultural power that people in the first group impute to them. Even those who call themselves socialists are really advocating a restrained form of capitalism that tries to redistribute part of the capitalist’s profits to the workers, and this approach is not nearly as effective as restraining capitalism before the profits are made. The manifest energy and productivity of capitalism make it impossible for many people to maintain this extreme position.
Third, the moderate conservative view: Capitalism is essentially ethical, but it can become unethical and even abusive in the hands of people of bad faith, so that it needs restraint under those aberrant circumstances. This view too is held by many Americans, and in fact by many who also believe the extreme conservative view—even though to hold both of them is self-contradictory. This conservative position is less wrongheaded than the extreme one. At least it recognizes the possibility that capitalism needs some restraint. But because it does not admit the truth that capitalism is essentially unjust, it is much too inclined to let capitalism barrel ahead without restraint—only to be surprised time after time when the consequences of its essential injustice come home to roost.
Fourth and last, the moderate liberal position: Capitalism is an indisputable engine of economic strength and prosperity that requires ongoing government regulation to restrain its inherent injustice. Of the four views, this is the only one that reflects the truth about capitalism. But because hardly any Americans understand that capitalism is essentially unjust, there are few who actually hold this position. Those who ought to be so inclined—namely, those who recognize that lifting government restraints always leads to impoverished workers and vast economic inequality—fall instead into a position that differs only in degree from the moderate conservative view. They agree with moderate conservatives that capitalism is essentially just, but corruptible. They disagree in seeing much more frequent and more dangerous aberrant behavior than moderate conservatives will admit.
Taking this position, however, exposes them to charges of misanthropy for believing that so many capitalists are people of bad faith. To blunt the force of this attack, they move increasingly toward the moderate conservative position. The result is that the truest of the four attitudes toward capitalism does not have as numerous or as forceful adherents as the untrue alternatives.
There is no need for those who understand the destructive results of unrestrained capitalism to accept the moderate conservative position. They just need to understand that capitalism is essentially unjust, and that it can only be made to approximate justice by restraint on the part of capitalists. Since it is not to be expected that all, or even most, capitalists will be able to restrain themselves, the only way to ameliorate the ever-present injustice is for government to monitor capitalism continually, and to enforce minimally decent treatment for workers. Capitalism must be corrected as soon as it starts to go off the rails, not later, after a train wreck has occurred.
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Americans need to smarten up about capitalism. They need to know that the two conservative positions are fundamentally false, and that any government policies flowing from those mistaken positions will fail to produce the benefits of restrained capitalism. They need to stop handing over power to the wrong people.
Recent history shows how economically disastrous it is to put government into the hands of those who hold the conservative views of capitalism. The Reagan Revolution brought us trickle-down economics, a version of the extreme conservative position. The consequence was the serious downturn of the early 1990s. This was righted by a return to government restraints during part of the Clinton administration. Then the resurgence of conservative attitudes, beginning with the repeal of Glass-Steagall in 1999 and continuing with the Bush administration’s unprecedented annulment of government restraints, yielded the catastrophic crash of 2008-2009. This was only prevented from becoming a depression by a Keynesian government intervention, which has been hobbled by the conservatives remaining in government. And on top of that, we now face the perilously unstable and entirely predictable political aftereffect of unrestrained capitalism—staggering economic inequity between the top 1% and the bottom 99%.
That’s two strikes. Don’t give these people another turn at bat: their next strike-out may very well end the game.
Get a clue, America.