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New York Times Critiques ‘Free Market’ Capitalism?

February 22, 2012   ·   0 Comments

Source: NYTX

Free Market Capitalism

By Michael McGeehee:

The New York Times ran a surprising critique of free market capitalism by Thomas Edsall this past sunday in a blog piece called "Is This the End of Market Democracy?" While there are plenty of criticisms to be said, and I will get to them, it was nice to read something at the "paper of record" that at least connects our economic system of markets and private enterprise (i.e. capitalism) to the problems of inequality and instability, and warns that something must be done.

Market Democracy?

Of course "market democracy" is an oxymoron since markets are antithetical to democracy.

Market systems are more akin to Social Darwinism where it's every man for himself—or, every buyer and seller—and only the strongest or fittest survive. And by "strongest or fittest," I mean the rich. In markets buyers and sellers seek to maximize their gains with little to no concern for others, or the environment. It suffers from a "fuck you, I gotta get mine" mentality, or what was called the new spirit of the age in the 19th century: "gain wealth forgetting all but self."

Democracy, on the other hand, is about having some meaningful say or control over our lives. Democracy is (or at least it should be) blind to class. How much wealth you have should have about as much influence on political processes as the color of your skin. That wealth does have a major say in our democracy reveals how functional it is.

The context in which Edsall critiques free market capitalism is within the 2012 election cycle. He contrasts the Democrats and Republicans, and then asks:

While Americans are going to be able to choose between two contrasting ideologies, what if both choices are off the mark? What if the legitimacy of free market capitalism in America is facing fundamental challenges that the candidates and their parties are not addressing?

It is interesting that he asks these questions because, not only are they incredibly good questions, but they also remind me of the work Thomas Ferguson does in what he calls "the investment theory of party competition," which offers an answer.

In his book, Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems (1995), Ferguson writes that,

Political organizations are (sometimes very complex) investments; that while they need small amounts of aid and commitment from many people, most of their major endorsements, money, and media attention typically come as direct or indirect results of their ability to attract heavyweight investors. As a consequence not even former presidents with enormous personal popularity like Theodore Roosevelt could run insurgent campaigns without support from investors like U.S. Steel or investment banker George Perkins. [...] If all major investors oppose discussing a particular issue, then neither party is likely to pick the issue up—no matter how many little investors or noninvestors might benefit—not because of any active collusion between parties but because no effective constituency exists to force the issue on the public agenda. (pp. 35-37)

In other words, the "two contrasting ideologies" only contrast in a very narrow spectrum, and it is the matters where "both choices are off the mark"—like that of "the legitimacy of free market capitalism in America"—that warrants closer attention because here are the issues that both "parties are not addressing."

To further illustrate the incompatibility of markets and democracy one only needs to look at the election process itself to see how capital has undue influence over the political process. As long as private campaign contributions are permitted, which allow candidates to finance expensive PR campaigns, we should not be surprised at the results: politicians catering to the intersts of those who fund their careers.

In a poll conducted by Time last year we see how 86% agree with the postition that, "Wall Street and its lobbyists have too much influence in Washington," or how 79% agree that, "The gap between rich and poor in the United States has grown too large," or how 71% agree that, "Executives of financial institutions responsible for the financial meltdown in 2008 should be prosecuted," and that 68% feel that, "The rich should pay more taxes."

According to a poll conducted by WorldPublicOpinion.org in the spring of 2008, which is part of a larger international research project managed by the Program on International Policy Attitudes at the University of Maryland, 81% said government leaders "should pay attention to public opinion polls because this will help them get a sense of the public's views." Many Americans would probably nod in agreement to Thomas Jefferson's comment that, "The basis of our governments being the opinion of the people, the very first object should be to keep that right."

In the marketized election process, those with the most money get the most influence over government. There is nothing democratic about a process where the working poor cannot compete with the rich just to have their voices heard. Rather than being complimentary to democracy, capitalism of any kind is more compatible with a plutocracy.

To constrain or not to constrain: that is the question

In his piece Edsall quotes Nobel prize winner, Michael Spence as saying that capitalist market “incentives are good at efficiency, growth and innovation." For growth and innovation we can qualitatively say that that is simply not true. Not only is all the major innovation being financed by the state (more on that below), but economic growth was higher during the Golden Age of Capitalism when state intervention and protectionism was higher than compared to the last few decades where it is lower largely due to lower taxes on the rich, and financial deregulation.

As for "efficiency" it is difficult to respond because I simply don't know what Spence means. Efficient at what? Allocating resources to meet human needs? Certainly not. In a global economy consisting of seven billion people where there is enough food produced to meet the caloric requirements of ten billion people, yet a billion people starve, it is hard to believe that capitalist markets are efficient.

While capitalist systems exist it is necessary for any decent person to advocate constraining capital and market forces. This is what Bill Gates meant when some years back he told an audience that, "The market does not drive scientists, thinkers, or governments to do the right things." For Gates it is "only by paying attention and making people care can we make as much progress as we need to." Left to market forces people will not "do the right things" because markets donot make people "care" about the consequences of their activities. You care about selling high and buying low. That's it. The environment? The widow down the street? Future generations? Let them eat cake!

Presumably this is also what led Edsall to write that,

[Jeffrey] Sachs, in turn, wrote The Times that in his view, “a social democracy — capitalism plus a hefty dose of state support for families, education, early childhood development, higher education, and active labor market policies — can still do the job. The performance of northern Europe, around 120 million people including Germany, Austria, the Netherlands, Denmark, Sweden and Norway, provides a good illustration of this success.”

Without that "hefty dose of state support" capital will leave a nightmare for society, as Africa can attest to.

And while Edsall can write about the economists he bases his blog on by saying that, "None of these authorities is proposing an alternative to, or radical remaking of, free market capitalism, but they are all concerned by the weakening of the social fabric associated with contemporary economic trends and with the damage that can be inflicted by market forces," my question is: why not provide space to economists or anti-capitalists who are proposing such an alternative? It would seem that Edsall is providing a buffer for capitalism by limiting the critique to advocating "social democracy."

The Myth of Free Markets

Also, Edsall's question above about the "legitimacy of free market capitalism" is itself "off the mark." It assumes there is a "free market capitalism in America [that] is facing fundamental challenges." It is hardly news to many that the war economy of World War Two pulled the U.S. out of the Great Depression, and following the war there was concerns that the economy could slide right back into it. In the spring of 1950 the White House's National Security Council said that "there are grounds for predicting that the United States and other free nations will within a period of a few years at most experience a decline in economic activity of serious proportions unless more positive governmental programs are developed than are now available" (NSC68). In the same document it goes on to talk about the decline in industrial production and increased unemployment, but the kinds of "positive governmental programs" the NSC had in mind was not renewable energy, mass public transportation, free housing, education, healthcare, etc., but "a build-up of the economic and military strength of the United States." I.e., the permanent war economy.

In his farewell address, President Eisenhower reflected on this and told the American public that, “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex."

A year before NSC 68, Business Week ran a piece titled "From Cold War to Cold Peace" where it argued for "military pump-priming": "Military spending doesn't really alter the structure of the economy.  It goes through the regular channels.  As far as business is concerned, a munitions order from the government is much like an order from a private customer." And that's just it, "a munitions order from the government" boosts demand, where as such "an order from a private customer" would likely not exist.

And in January of 1948 Fortune magazine noted that,

[The U.S. aircraft industry] is today producing at a rate that is less than 3 per cent of its wartime peak. . . .  [Its spokesmen] speak frequently of "free enterprise," but they speak just as frequently of "long-range planning." It is crystal clear to them that they cannot live without one kind or another of governmental support -- yet "subsidy" is a shocking word to them. . .Its respected heads . . . freely play the game of nagging and chiding the government, but it then transpires that their reproaches are made because the government has not gone far enough toward stating "clearly and frankly" its "obligation to help develop new and improved air transports and efficient networks of air transportation," as well as fostering new programs for military planes. . . .

Every one of these proposals acknowledges the inability of unaided "private" capital to venture any deeper into the technological terra incognita of the aircraft industry. Every one acknowledges that only the credit resources of the U.S.A. are sufficient to keep the aircraft industry going: to enable it to hire its engineers, buy its materials, pay wages to its labor force, compensate its executives -- and pay dividends to its stockholders.  The fact seems to remain, then, that the aircraft industry today cannot satisfactorily exist in a pure, competitive, unsubsidized, "free-enterprise" economy.  It never has been able to. Its huge customer has always been the United States Government, whether in war or in peace.

This is pretty much the story of any developed economy. As the South Korean economist, Ha-joon Chang puts it: free market capitalism is a "myth." Even today the economy is largely built on state protectionism. From slavery to tariffs to the aircraft industry to agriculture to technology (think GPS and cell phones and internet and computers) to medicine and more, the state has been vital in developing the economy. The solar technology that is being pioneered at MIT? Funded largely by the government. So the idea that capitalist markets "are good at innovation" is a false statement.

A Brief History of Capital in America

It's not "free market capitalism" that "is facing fundamental challenges," as Edsall thinks, but the inherent inequality in any capitalist systyem. And here, Edsall quotes one of Harvard's labor economist, Richard Freedman, as saying that the

economic interests of small groups of “crony capitalists” have come to dominate government responses to the financial crisis and ensuing recession. The danger is not an ever-expanding socialist state, per Hayek’s road to serfdom, but of a move to economic feudalism, in which a small set of wealthy masters dominate markets and the state and subvert or outsmart efforts to regulate their behavior or rein them in.

While it is true that there is a "danger" in the "move to economic feudalism, in which a small set of wealthy masters dominate markets and the state and subvert or outsmart efforts to regulate their behavior or rein them in," it is how they "economic interests of small groups of 'crony capitalists' have come to dominate government" that is not—but should be—elaborated on.

One thing is for certain: it is not a new thing, as Freeman would have us believe. In fact, it traces itself back to the foundations of the U.S. government where the "founding fathers" enshrined private enterprise into the Constitution. Remember, the wealthy and powerful designed, not only the economy, but the political system to suit their interests. This is the fulcrum of Charles Beard's historical work: An Economic Interpretation of the Constitution of the United States.

The economic system of profit-seeking private enterprises utilizing market allocation, coupled with a hierarchical political system whose elected leaders are among the top 1% bears out the comment Adam Smith made in Wealth of Nations: "the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it."

When you have an economy whose sole purpose is for owners to make as much money as possible, by fleecing workers and consumers, and a government whose function is to attend to the interests of the propertied class, then a maldistribution of wealth, or "the weakening of the social fabric associated with contemporary economic trends and with the damage that can be inflicted by market forces," is entirely predictable.

One of the most important figures in framing the U.S. Constitution was James Madison. Like Adam Smith, Madison understood that wealth is power, and that it is the job of the government to protect power from those who are exploited and disenfranchised—that is, the working poor. In fact, Madison was so strongly opposed to the working class that he once said, "If elections were open to all classes of people, the property of the landed proprietors would be insecure." This fear of seeing the rich be "insecure" led him to say that:

Landholders ought to have a share in the government, to support these invaluable interests, and to balance and check the other. They ought to be so constituted as to protect the minority of the opulent against the majority. The senate, therefore, ought to be this body . . .

There is no place for "the majority" to "have a share in the government," or "to balance and check the other." For Madison, the only one who "ought to have a share" in making decisions were "the minority of the opulent." Madison prevailed and the "senate" was created to be the political "body" to see this through. Is it any wonder that the vast majority of US Senators are millionaires (and thus members of the top 1%)?

Though, to his credit, Madison did later note that, "The stock-jobbers will become the pretorian band of the Government, at once its tool and its tyrant; bribed by its largesses, and overawing it by clamours and combinations."

Another American president who felt that "it is to be regretted that the rich and powerful too often bend the acts of government to their own selfish purposes" was Andrew Jackson. In his farewell address, President Jackson warned of powerful interests that "endangered" the nation: "The banks . . . save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here."

Jackson went on to talk about how, "Many powerful interests are continually at work," and have "succeeded" at getting government to shape policies that were "bearing most oppressively on the agricultural and laboring classes of society," which he defined as "the planter, the farmer, the mechanic, and the laborer," who

all know that their success depends upon their own industry and economy and that they must not expect to become suddenly rich by the fruits of their toil. Yet these classes of society form the great body of the people of the United States; they are the bone and sinew of the country; men who love liberty and desire nothing but equal rights and equal laws and who, moreover, hold the great mass of our national wealth, although it is distributed in moderate amounts among the millions of freemen who possess it. But, with overwhelming numbers and wealth on their side, they are in constant danger of losing their fair influence in the government, and with difficulty maintain their just rights against the incessant efforts daily made to encroach upon them.

The mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control; from the multitude of corporations with exclusive privileges which they have succeeded in obtaining in the different states and which are employed altogether for their benefit; and unless you become more watchful in your states and check this spirit of monopoly and thirst for exclusive privileges, you will, in the end, find that the most important powers of government have been given or bartered away, and the control over your dearest interests has passed into the hands of these corporations.

Of course, the working class no longer "hold the great mass of our national wealth," even if, "it is distributed in moderate amounts among the millions of freemen who possess it." The bottom 50% account for 2% of the nations wealth, and the bottom 40% have 0.3%. Whereas the top 20% enjoy 84% of our wealth, the top 1% account for a third.

But, going further still, the former president remarked that, “The men who profit by the abuses and desire to perpetuate them will continue to besiege the halls of legislation in the general government as well as in the states and will seek, by every artifice, to mislead and deceive the public servants,” and that, “So many interests are united to resist all reform on this subject that you must not hope the conflict will be a short one nor success easy.”

President Jackson also said that in his “parting counsels,” he wanted to warn that, “Knowing that the path of freedom is continually beset by enemies who often assume the disguise of friends.” Keep this in mind when being inundated with commercials by corporations talking about "social/corporate responsibility."

According to Jackson, we “have no longer any cause to fear danger from abroad.” Rather, the enemy we face “is from within . . . from cupidity, from corruption, from disappointed ambition and inordinate thirst for power—that factions will be formed and liberty endangered.”

Back to Adam Smith and his insights on property and the role of government. This is important to understand if you want to know how "economic interests of small groups of 'crony capitalists' have come to dominate government responses to the financial crisis and ensuing recession." The following comes from The Wealth of Nations (B.V, Ch.1, Of the Expences of the Sovereign or Commonwealth), and while it is true, as Noam Chomsky likes to point out, that Smith said, "All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind," what you will read below will have you wondering if he was okay with it.

Wherever there is great property there is great inequality . . .

Before moving on I want to point out that Thomas Jefferson also realized that property and inequality are related. In a letter to Madison he wrote that, "Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions or property in geometrical progression as they rise."

Progressive taxation has always been a commonsense approach to wealth inequality. Edsall writes that according to another Harvard economist, Lawrence Katz, "The United States could moderate these trends [of economic inequality and instability] and achieve some broadly shared prosperity with increased job training, granting workers more leverage in wage bargaining, infrastructure spending, progressive taxation and an expansion of the Earned Income Tax Credit for the working poor." [emphasis added]

Even Adam Smith found that, "It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

In fact, the first three items numerically listed in The Communist Manifesto by Karl Marx and Frederich Engels to be implemented upon the success of a working class revolution were: (1) abolish private property; (2) institute a heavy and progressive tax; and (3) abolish the right of inheritance.

Back to Adam Smith:

For one very rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many . . .

This is similar to President Eisenhower's remark that, "Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed." There is a direct link to the top 1% having a third of wealth and the bottom 50% only having two percent.

The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions . . .

Instead of "want" a more appropriate word would have been "need," since as Smith knew, the poor are . . . well, "poor." "Envy"? How about "prompted to right an injustice"? But let's keep moving on because Smith is  getting to the root of economic exploitation and why the economy is what it is.

It is only under the shelter of the civil magistrate that the owner of that valuable property, which is acquired by the labour of many years, or perhaps of many successive generations, can sleep a single night in security . . .

Translation: exploiters need force to protect them from the exploited. "Valuable property" is "acquired by the labour," but not that of the owners, but of the workers. By allowing anyone to have private ownership of productive assets we give them a bargaining power to exploit others in terms of compensation and decision-making. This is what led Proudhon to remark that, "Property is theft!"

A sensible person might argue that people should only be rewarded for what is within their power to control, and that is how hard and long they work at socially valued labor. And everyone should be entitled to a fair say in decisions they are affected by. These two principles, fair say and fair pay, are not compatible with private property, or market allocation (i.e. capitalism).

Smith goes on to write:

He is at all times surrounded by unknown enemies, whom, though he never provoked, he can never appease, and from whose injustice he can be protected only by the powerful arm of the civil magistrate continually held up to chastise it . . .

Unknown? Never provoked? Can't appease? The "injustice" is the permitting of property to be used to create inequalities, not those who seek to remedy it. It's not the indigent who need to be "chastised," but the affluent! It's like what Gustav Flaubert said in a letter to a friend, "I have always tried to live in an ivory tower, but a tide of shit is beating at its walls, threatening to undermine it."

The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government . . .

If we acknowledge that private property produces inequality, and we know that these inequalities produce the "indignation of the poor," and the potential for uprisings to follow, and if we side with the propertied then, yeah, we will need some muscle to keep the rabble in line, and with their heads down.

Where there is no property, or at least none that exceeds the value of two or three days labour, civil government is not so necessary.

There is a marvel idea: no property. With the added benefit of of "civil government [being] not so necessary," this is the kind of discussion the public should be having, and the media should be facilitating.

But what does all of this mean? It means that the core features of any capitalist system—i.e. private enterprise, market allocation and the profit motive—are incompatible with democracy, or even basic human concepts of decency, and that we owe our economic status more to the violation of "free market capitalism" than anything. It's not just a "crony capitalist" or "free market capitalist" system that are incompatible with democracy, but capitalism period. Even "social democracies" are constantly in danger of losing the protections needed to provide basic social goods and services. And that's because capitalism provides the incentive to put greed above need, and will always look to cut corners, save costs, and maximize returns. For the U.S., where there is a political system that accepts private campaign contributions, it is not surprising that we see a government that is attached to the hip with the business community, not addressing the legitimacy of free market capitalism (every good dog knows not to bite the hand that feeds you), and is at odds with the working people, who make up the bulk of the country—who it supposedly represents. It is not surprising that income inequality, CEO salaries, and the poverty rate is higher in the U.S. than the rest of the developed world.

If Americans are to live in a truly functioning democratic society, then the economy, as well as its political system, must be brought under meaningful democratic control, especially if we want to allocate resources based on need, and not greed.

Life, Liberty and the pursuit of Happiness

Just the fact that the New York Times provided some space for the topic of how destructive capitalism is is a good sign. It could reflect a changing wind where the business community might be ready to go back to some Keynesian policies, particularly social Keynesian policies, since Edsall brought up "state support for families, education, early childhood development, higher education, and active labor market policies" as "a hefty dose" of medicine (as opposed to an expansion of the war economy). But in terms of how long we have faced the problems posed by capital and markets, Edsall gets a number of things wrong on, and stops short of providing space to some voices who advocate radical alternatives. Instead he ends by saying that,

The debate over the workings of democracy, the market, technology and globalization remains unresolved. The political system instinctively avoids this debate, despite its salience and centrality, because the political costs of engagement are likely to substantially outweigh any potential gains. At an undetermined point in the not too distant future, however, as the “gale of creative destruction” blows through the heartland, the debate will become inescapable.

I agree that the "debate ... remains unresolved," but Edsall doesn't really give space from the anti-capitalist left (economists like Robin Hahnel, Richard Wolff, Doug Henwood, and David Harvey). The debate, as presented is marginalized and sanitized, and even though Edsall may be right that, "At an undetermined point in the not too distant future, however, as the 'gale of creative destruction' blows through the heartland, the debate will become inescapable," what has been presented is insufficient.

The "unelected dictatorship of money" (as Ed Herman and David Peterson call it) is systemic to our form of government. It has long since been "destructive" to our supposedly "inalienable rights" as penned in the Declaration of Independence: "Life, Liberty and the pursuit of Happiness." In the short term, while an anti-capitalist sentiment grows and becomes more articulate, the social benefits of "social democracy" are acceptable, but we should come to the understanding that it is not enough to encage capital. The more "unfettered" capitalism is the more destructive it is to our social fabric, but ultimately it is as Robert Jensen, a professor of journalism at the University of Texas at Austin College of Communication, put it: "unsustainable systems can't be sustained." Though here I would add that capitalism isn't just unsustainable (including in ecological terms), it is also anti-social, and undemocratic.

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