Part 1 Understanding Capitalism
Pages 7 - 11
“Economic Justice” is the ninth chapter in Let’s Get Civil: Healing Our Fractured Body Politic.” By the time the readers got to it, they had already done of ton of work on the historical and intellectual background upon which this chapter is based. That required the readers to exercise a high level of delayed gratification, which asks a lot. This is a blog. It’s on the internet. Maybe I should not ask so much from my readers.
This time, I am going to give my readers what I consider the most intellectually rewarding chapter right up front. To make it work for both of us, I am going to provide the content the book provides and, in addition, I am going to point out how aspects of this chapter grew out of the historical and intellectual background that comes later in this blog.
Axiom: The Purpose of any economic system is to generate wealth and distribute wealth justly.
Notice how important that Axiom is. I makes the generation of wealth and the just distribution of wealth equally important. It is an axiom because it is true “on the face of it.” We don’t have to prove it because there is no argument against it. What we will do is disprove the ridiculous claim made by radical capitalists that the generation of capital is the only purpose of capitalism.
We are dealing with ideas. We are doing intellectual work. Our ideas make our arguments.
Radical capitalists would argue that the sole purpose of capitalism is to generate wealth and stand by the fact that no economic system generates wealth as well as capitalism. They are right about the ability of capitalism to generate wealth. They are flat wrong that that is all there is to it. Any economic system must also be able to distribute wealth justly. Radical capitalist reject this view for two obvious reasons: First, it goes against their self-interest. Second, if they were to accept that goal, they would have to embrace something different or radically change capitalism. They can’t accept it without changing who they are.
It is important to recognize that in the current political environment, radical capitalists have won this argument. Journalists, academics, and much of the public accepts this single view as the goal of our economic system: generate wealth. They have won because no one is mounting a vigorous argument to the contrary. (Until now, of course.)
Radical capitalists support their argument in different ways, but the one that is really interesting to consider at this stage of the conversation is that Capitalism is the American economic system and our democracy depends on it.
This assertion is tricky because there is some truth to it. Our Founding Fathers not only advanced democracy, they also imbedded capitalism in it. However, we need to look behind the curtain and see what they really did. We all know that they rejected the monarchy, the monarchical system of government and replaced it with a democratic republic. It is a democracy because the people elect those who govern. It is a republic because elected representatives govern. A useful way to think personally about the difference between a monarchy and a democracy is that in a monarchy the people are subjects. The monarch decides what should be done and the subjects obey. In democracy, the people are citizens. They decide who will govern, and those who govern must represent the will of the citizens.
Radical capitalists have used their money and power to upset this system of representation. They and their money have more influence on elections than the people can muster, but we will get to that later.
More important right now is to notice what economic system our Founding Fathers rejected when they adopted capitalism. This is important. Mercantilism. Right now, we just need to get that system on the table so that we can talk about it. Mercantilism. That’s what our Founding Fathers rejected. They knew it, they had suffered under it just as they had suffered under monarchical rule.
This is more of a fun fact, a coincident, than really important, but who says we can’t have a little fun while being intellectual. Capitalism was founded by Adam Smith with the publication of his book The Wealth of Nations. The fun part? The Wealth of Nations was published in 1776, the same year as our Declaration of Independence. Our nation and capitalism were founded the same year. Radical capitalists could make a big deal about that, but I suspect that they do not want us looking too closely into our history. We might discover mercantilism. We might notice what happened to capitalism, how much different what it became is from what it was when our Founding Fathers adopted it. So let’s get into that. We’ll study this bit of history by studying the four economic systems that dominate Western economic theory: mercantilism, capitalism, socialism and communism. However, we will not just do history. We will use intellectual tools. Tools make work easier, in many cases, they make work possible. Intellectual tools make intellectual work easier, in many cases, they make intellectual work possible. We will start with a formal conceptual framework which is an intellectual tool, but we will have to construct it to get to use it. All tools are human constructs, including intellectual tools.
A Formal Conceptual Framework for Economics:
There are three obvious economic theories: capitalism, socialism, and communism. And we all know that communism is bad and that we cannot trust socialism because it puts us on the slippery slope to communism. But that just leaves capitalism as our economic theory. Clever how radical capitalists won that argument without waging it. However, we all know that capitalism can be taken to extremes. We saw it with the Robber Barons and we feel it today with the vast inequality in wealth. We don’t even have a name for what I call radical capitalism. Further, radical capitalism is not an economic theory. It has no history or context that helps us understand it as a theory. Notice, I assumed that capitalism is good, but radical capitalism is not. We need a theory. We need a name. Mercantilism is the theory and the name.
Now we have a conceptual framework that will help us think about economic theory. If we use “the golden mean” as a tool to work on this framework, we get a lot done easily and quickly.
The Golden Mean is an intellectual tool that helps us identify the full spectrum of our concept from one extreme to the other. They help us account for all of the hypotheses at play in a concept. When using the golden mean, when it applies, the two extremes are virtually by definition bad. By bad I mean that they work against our goals rather than help us achieve them. The golden mean is not a mathematical mean but rather is found somewhere in the middle.
So we have a way of thinking about and looking at our four economic theories, but we need to put some meat on the bones for these judgements to hold water. What makes mercantilism and communism so bad? How can both capitalism and socialism be good? Let’s get into that.
Mercantilism:
Mercantilism is the oldest of our four theories, but it also exists today. Mercantilism was the economic system that replaced feudalism. It was employed by monarchs in parts of Europe from the 16th to the 18th century. Mercantilism emerged as monarchs realized that they could garner enormous wealth if they took control of their economic systems, controlled them as they did their political systems and foreign policy. It's helpful to recall that European monarchies grew out of feudalism and that monarchs retained the ownership of all their nations' wealth and resources (lands, mines, forests, rivers, lakes, etc.) in the person of the monarch. The monarch distributed such wealth to nobles and reclaimed them as they saw fit, mainly as a means of controlling those with whom they shared wealth and power.
It isn't an accident that mercantilism flourished in authoritarian political systems. Mercantilism was controlled either by a monarch or by the monarch and a group of nobles. The latter system is called an oligarchy: Rule by the very few who are both rich and powerful and use their political power to run their economic and political systems in a way that makes them richer and more powerful. We're not talking ancient history here. The Russia of Vladimir Putin is a political oligarchy with mercantilism as its economic system. It has made Putin (by some estimates) the richest man in the world, his henchmen enormously wealthy, and has impoverished Russia. Donald Trump may be best understood when viewed through the lense of mercantilism. Trump wants to be an oligarch. That also helps explain his weird affection for authoritarian rulers in Russia, Saudi Arabia, Turkey, North Korea, etc. More on Trump and economics later.
Mercantilism's goal was to maximize the nation's wealth as measured in the accumulation of gold and silver by the monarch. Today, wealth includes precious metals but much more. Still the goal of mercantilism is clear, accumulate wealth for the oligarchs.
Mercantilism promotes governmental regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers. With the establishment of overseas colonies in the 17th century, mercantilism became both nationalistic and imperialistic. Americans can quickly acquaint themselves with this system by recalling the economic abuses heaped upon the American colonies by the British crown:
High tariffs imposed in England on goods imported from the colonies.
Forbidding the colonies to trade with any nation but England.
Forbidding goods to be carried in ships that weren't English, the Navigation Acts.
Other mercantilist policies applied in England aided that nation's trade and the monarch's accumulation of wealth included:
Subsidies on exports.
Banning the export of gold and silver, even for payments.
Promoting manufacturing and industry through research or direct subsidies but mainly for the enrichment of the monarch.
Limiting wages.
Maximizing the use of domestic resources as opposed to free trade.
Some of these activities seem to make sense for any nation. It is important to focus on the fact that any good, any profits that resulted from these policies, accrued mostly to the benefit of the monarch or oligarchs. Building wealth was understood as a zero-sum game: if someone gains wealth someone else must lose wealth. As Americans, we can recall the abuses of mercantilism to the colonies. But a quick review of it also allows us to realize that when the major goal of an economic system is the accumulation of wealth in the hands of the monarch or oligarchs, no attention is paid to the distribution of wealth. Putting a premium on low wages actually promotes both of mercantilism's major goals. It accumulates wealth in the hands of a few and increases their power.
Capitalism:
Adam Smith (1723 1790) published The Wealth of Nations in 1776 and with it launched a vigorous attack against mercantilism and for free trade and capitalism. That's a huge point. Capitalism was invented as an argument against mercantilism and as an economic system to replace it. A goal of capitalism is to extinguish and replace mercantilism. And yet, radical capitalists put capitalism on the slippery slope to mercantilism either without noticing or without caring.
Capitalism is a system that's grounded in free trade and private ownership of resources and production with the goal of achieving private profit and private wealth. Capitalism and our liberal democracy grew up together. Together, they rejected and replaced both mercantilism and monarchies with their aristocracy and oligarchs. Capitalism seems to be the American Way.
It's helpful for We the People to step back and look at what has happened to capitalism and our economy since the founding of our nation. The capitalism of our Founding Fathers was different from what our capitalism has grown into. The early United States economy consisted of privately owned farms and privately owned and operated manufacturing and service companies. Natural resources and the means of production were owned by a huge number of private individuals. Farmers owned and worked their land. Manufacturers owned and directly ran and often worked in their factories. Adam Smith taught us that because the owners brought both labor and capital to their ventures, they deserve greater return than those who only labor without any capital investment. That's a critical fundamental assumption of capitalism:
Labor + capital > Labor
Capital has special value when it's combined with labor. Capital without labor did not exist early in our nation and did not factor into Adam Smith’s analysis of the relative value of capital + labor vs. labor.
Capitalism typically includes such economic features as: private property, capital accumulation by private individuals, wage labor, exchange by a willing buyer and willing seller, and competitive national and international markets. The owners of capital and production and financial markets make all the important decisions, not the monarch. Competition in the marketplace determines prices and the distribution of goods. That's the way capitalism works in theory and the way it worked during roughly the first century of operation in the United States.
Of course, capitalism does not operate at the theoretical level. It operates in the real world and has evolved over time. With time, capitalism changed. Capitalists compete against each other for the private accumulation of wealth. And over time, some won and others lost. The winners took control of larger and larger businesses, more and more wealth. As corporations grew, resources and production accumulated in the hands of fewer and fewer capitalists. Turns out that over time, capitalism is great at generating wealth and accumulating wealth, but it's not so good at distributing wealth. And that inefficiency led, in the late 19th century, to a massive gap in wealth between the very few, very rich Robber Barons; and the very many, very poor rest of America. Our Founding Fathers helped create a capitalistic system that made Stage 5 moral reasoning possible. But radical capitalists want an economic system that can only be supported by Stage 3 Tribal moral reasoning. The obvious threat to radical capitalists is We the People operating with mature moral reasoning. They need to control the political system. They need to control We the People so that they can control the economic system. We the People need to understand the major economic theories so that we can win arguments with radical capitalists and radical socialists.
The massive economic injustice that developed during the 19th century inspired new and sometimes revolutionary economic theories. We need to understand them, especially their differences and why their differences have been lost to We the People.