Harmony of Interests? Myths of Capitalism (continued)

In this series of blogs I have been trying to clear away some of the myths of capitalism, most of which are myths that capitalists hold. One of the things this indicates is that capitalists don't understand capitalism. For instance, the business person who complains about lazy workers has, of course, every right to free speech under the Charter, but he or she is simply a bad capitalist if this constitutes their plan to deal with a labour shortage. As I pointed out, a labour shortage is a labour shortage. The issue, if one is a capitalist, is using the market to address it. Its cause is irrelevant; its solution is known. Yet, a great number of people I know who would self identify as capitalists don't think this way. They think in terms of lambasting workers for not working more.  In other words, they don't really understand the economic system that they claim to support.

Let's get a bit more analytic. Rather than listing more myths of capitalism, let's think about the idea that what is good for the company is good for workers. You hear this all the time, usually from politicians, but also from business leaders. If my company makes more money … everyone benefits because I will hire more people. There is, as it is presented, a community of interest between workers and their employer. This is just not true and stating that it is just not true is not so much BS marxism. Instead, the market and its operation ensures that employers and employees have antagonistic relations. Said differently, antagonism between the boss and the workers is built into capitalism and to pretend otherwise is to engage in one of those myths.

I have my own ideas where this myth came from (I don't think its just capitalist propaganda that is designed to trick people), but I'll leave that off and focus on the issue at hand. Why are there antagonistic relations between workers and the bosses. In a market situation, an employer (or his or her representative) and workers (employees) are, as I have explained, engaged in a negotiation. Capitalists assume this negotiation involved individual self-interest. I've already written about the complexity and problematic quality of this concept, but that is not the point. Negotiations are structured as antagonistic relations.

I'll give you an example just to demonstrate my point. My union is involved in negotiations with Mount Allison University. I don't know all the issues, but I do know how the negotiations are set up. Each side appoints a negotiating team who draw up lists of demands (things they want from the other side, say wage increases or wage decreases) and then they meet and argue about these. From the beginning, then, negotiations place workers (faculty) and bosses (administrators) on separate sides and put them into situations that get very close to winner take all. There are compromises, to be sure, but you see my point: the processes is antagonistic. Now, I hasten to add that I am not making this up and if you don't like it … well … you don't like capitalism. I did not create this system. I'm just explaining it and, truth be told, I have no fondness for it in part because it creates antagonistic relations.  What is more, as a person who is supposed to be self-interested, the system tells me to look after my own interests (whether I am a boss or an employee). So, I go into negotiations with the goal of getting the most that I can from the other "side." For the boss, this might be the most work at the lowest pay; for the worker … precisely the opposite: the most pay with the lowest work. Moreover, because capitalist theory assumes my self interest, I am not doing anything wrong (regardless of which side I am on).  Bosses are right to treat workers as disposable factors of production; workers are right to treat bosses as cash cows.

The result of this process, then, is not a harmony of interests between the boss and the employee but a conflict of interests: we each have antagonistic designs that are realized by subverting the goals of each other. If I am a worker, I get an increase in pay by cutting into profit. If I am an employer, I increase profit by cutting into pay. And, we are each legitimate in doing so because we are supposed to behave in a self-interested manner.

One final thing: the idea of a harmony of interests is, of course, antithetical to the theory of capitalism in another way in that capitalist theory sees the individual as the basic unit of society. Remember Margaret Thatcher once said that there was no such thing as society. Her point was that there were only individuals. Other political theories work with -- in the sense that they accept -- the idea of collective social units of some sort (socialists think about class; nationalists think about the nation; feminists think about gender). Capitalists do not. They think about individuals. In this sense, the idea that there is some greater social unit that can function harmoniously is something that is denied from the beginning by capitalists. There are individuals with their own self interest. The idea, then, that one might ask a worker to buy into a company as a team or substitute family to which he or she owes allegiance and loyalty is something that is said regularly. But, from a capitalist perspective, it does not create a harmony of interests because it cannot. Because it is predicated on individuals and antagonistic economic relations, capitalism is not about harmony. From the get go … its about conflict.

Myths of Capitalism VI (or, self interest)

Last time, I explained how capitalists use the term efficiency and how it is different from productivity. Indeed, an efficient economy, according to capitalist theory, might not be the most productive. There is, of course, more to say about capitalism, but let's shift gears a bit look at the ethics that underscore capitalism. Capitalism is about economics, but that does not mean that it does not carry with it an ethics. Most people -- including a lot of advocates of capitalism - contend that capitalism is about money. If you've watched the Lang and O'Leary Exchange, you know what I mean. One of the hosts -- who is into money -- also defends capitalism as the way to go. Yet, properly understood capitalist economics is not actually about money. It is about, as I indicated in my last blog, the allocation of goods and services as opposed to just producing more goods and services. And, it is also about individualism.

This is the myth that we we need to explore: capitalists believe that everyone is self interested and that means that everyone is greedy (they want more stuff). Remember the movie Wall Street? I have no doubt that there are a lot of advocates of capitalism out there who think that it is all about self-interest defined as wanting more stuff (or, money). But, does this explanation for human behaviour actually work? Does it make sense?

The answer is no. In fact, there are a number of problems with this way of explaining human behaviour. First, in explaining everything -- all human beings are self-interested -- it explains nothing. Think about it. It tells us that we all react in exactly the same way. If that is the case … why are people so different? Why, when given a choice -- pick your issue, oil sands development, shale gas -- do people react in different ways. If we all supposedly just wanted more, there would be no controversies. Instead, there are controversies because people are different.

But, wait, someone might say, sure people are different but they are all reacting out of self-interest. OK, for the sake of argument, let's allow that to be the case … what explains their different reactions? In other words, even if it is true that people are self-interested (and, I'm pretty darned far from convinced that that is the case), it doesn't help us explain behavioural differences. Hence, its useless as an explanatory framework and, as a capitalist might say, therefore becomes inefficient and should be weeded out of the market.  In other words, material self-interest either explains behaviour, in which case it has problems explaining behavioural differences. Said differently, it is useless because all it tells us this that people are self-interested no matter what they do and so it cannot explain why there are differences between people. It is a weak explanation that does not allow us to grapple with the complexity of human behaviour.

What is more, economists don't actually think that everyone is self interested. Sure … we are all introduced to economic man in our Econ 101 text, but if you stop 100 economists in the street, they will tell you that economic man is a modeling device that, at best, allows economists to very conservatively predict specific economic actions if certain policies are followed. The vast, vast majority of economists accept the fact that there is a lot more to people than material self interest. This proposition (that everyone is self interested) is, in fact, not really scholarly economics. Its more in the way of adolescent philosophy.

That sounds insulting, but I hasten to add what I am insulting is not capitalist economists but pointing out the differences between what they say and what they are often reported as having said. The capitalist economists I know have far more sophisticated ethical propositions and conceptions of human nature. In other words, the idea that everyone is self interested is a myth. If we can clear this myth away, we can start to think about what capitalism actually has to say about human nature. And, what it has to say is actually not much. In other words, human nature is not a question that interests economists as economists very much. They use it for modeling but as a philosophy, capitalism is actually predicated on a neutral position on human nature. (You will recall that I mentioned in an earlier blog that capitalism was a-moral.)

What do I mean by this? I mean that capitalists are more than willing to leave choices up to the individual. Now, they clearly believe in human nature to the extent that they believe in individualism. There are people who reject individualism, but … frankly, not many. Individualism is complicated, to be sure, and I'm no anarchist. What I am saying, however, is that in Canada today, one needs to look pretty long and hard to find someone who does not believe in some form of individualism (say, freedom of expression or conscience or due process of law, etc.). Capitalists don't have a great deal to say about individualism except to say that choices about an individual's life are best left to that individual, provided that they are a legally competent adult.

I noted this point in an earlier blog in my comment on lazy workers.  Why a person is not working is, for a capitalist, not all that important because they have the right to make the decision for themselves. I can attempt to lure them into working by appealing for their help or by offering a bribe (more wages) but exactly why then do not want to work is no business of mine. They might have a sick child; they might be lazy. It is irrelevant because as a legally competent adult, they have the right to be lazy if they want. That is their decision to make and not mine. In effect, this form of individualism becomes a deal: I promise not to mess around with your life and you promise not to mess around with mine. We agree to leave each other to make up our own minds about what is best and most important to us. It might be relaxation (let's call it recreation to make it sound better) for me. It might be work for you. Each of us is making up our own minds.

[As a digression, btw, this is the basis for the argument for same-sex marriage (or, one of them). It is none of my business to tell someone else whom they should or should not marry. As long as the people entering that relationship are legally competent adults and are making their decisions freely … my job is precisely *not* to have a view on it because it is none of my affair, so to speak.]

As this is applied to the economy, this becomes a defense of markets in the following way. The market, we recall, is about matching desires and needs with goods and services. Each individual is their own judge about their own desires (needs, let us assume, are at some level fixed). We let the market make this determination not because it produces more stuff but because I should mind my own business. I have no right to tell another individual that they cannot buy, say, a green shirt because green is an ugly colour (I am wearing green right now). A capitalist supports the market, then, not because it makes more stuff but because it allows individuals great scope to make their own decisions. Again, its not about getting more but about efficient allocation. Since I cannot know what another person actually wants … my best option is to leave it up to them to make that decision, hence markets.

Where does this leave us? It leaves us, again, I hope, some distance from mythology. Capitalism is not about money and everyone being greedy but, in its best form, it is about individuals making up their own minds about what is and is not important for them, what they will and will not pay for. Because I cannot tell what an individual might want or desire, my best course of action is to leave it up to them to make their own decisions, which means making their own purchases or, on an individual level, matching their personal desires with their ability to pay for goods or services.

Myths of Capitalism V (Or, Productivity)

Let me start to draw a few conclusions. These might be more controversial than the points I've so far made regarding the myths of capitalism. If you disagree … feel free to write in and explain where I have erred.

There is an old argument that has become common sense: the market is more efficient than non-market forms of economics. Most people assume that by this we mean productivity. The more capitalist a society is, the more stuff that society will have. And this is often the way that neo-liberal politicians and advocates present the argument and the way it is, therefore, reported in the news. It is this way of thinking that leads to tax cuts. I've made this argument before and so I won't make it again, but there is no necessary reason why cuts in personal income tax will cause increased productivity or increased spending (that is, what economists called aggregate demand). Indeed, modest cuts in personal income tax likely cannot increase aggregate demand and hence have no effect on macroeconomic growth.

In my last blog, I tried to show that the market was not the paragon of productivity that a lot of people think it is. But, this does not mean that the market is inefficient. What we need to understand is that capitalists used the word "efficiency" in a particular way. As Joseph Heath has explained, productivity is not about more stuff, but getting the right stuff to the people who want it. In other words, it is about matching needs and desire with goods and services. The more effectively, these needs and desires are matched with available goods and services, the more efficient is the economy. Get it? For example, if I want to get a haircut and there are five barbers in town but none have available spots (thus, my hair goes uncut) that is inefficiency. It is an indication that desire is not matched with available services. Likewise, if I own a company and I make a lot of stuff (say, coffee cups) but that stuff is sitting in a warehouse because no one wants to buy it, this is inefficiency. The economy has produced stuff (it has been productive) but that stuff has no buyer and so goes unused (inefficiency).

Capitalists believe that the market is efficient because it naturally corrects itself so as to better match desires/needs with goods and services. If I have a warehouse loaded with coffee cups, I will lower the price until I can sell them. For instance, if I sell these cups for $2.00 and no one buys them, I will need to lower the price to $1.00 at which point, buyers might come forward (they were unwilling to pay $2 but are willing to pay $1). The market, the negotiation of prices, creates efficiency, matching buyers with sellers at a price to which both can agree. The market is efficient, then, not because it creates more stuff than some other economic system (which it might or might not) but because it naturally corrects through price negotiation and so matches buyers and sellers (desires/needs and goods/services). Its great virtue, then, is not its ability to generate more stuff but to allocate the stuff it does produce to those people who both want it and are willing to pay for it.

What happens if I need to sell my coffee cups at $2.00 to make a profit? Selling them at $1 will cause me to lose money and my company to go bankrupt. As I pointed out in an earlier blog, this too is efficiency. My company goes bankrupt because of a market decision: it could not produce a good that people both want and for which they are willing to pay at the right price and so I am driven from the market. Here, the market creates efficiency not by creating more stuff but scaling back on the production of a specific product. In other words, efficiency is not the ability to create more stuff but to actually reduce the amount of stuff produced because there was no use or desire for it. To those who own businesses and those employees working for the business, this sounds rather cold. The owner goes bankrupt and loses their investment and the workers lose their jobs. But, as I pointed out earlier, that is how the market works. Its goal is not to be nice to me (as an employer) or my workers but to be efficient. Since my company was inefficient (making stuff for which there is no market), it must go. So, efficiency can actually be about the opposite of productivity. It can be about less productivity, hence less stuff.

You can see that we are moving pretty far from the efficiency = productivity paradigm with which a lot of people work and which forms our common sense of capitalism. Most of us like to think in terms of productivity as the marker of a good economy. There is some environmentally based reason to question this, but the point is that this is not necessarily so. Efficiency, from a capitalist perspective, is about getting stuff to people who will buy it; not about more stuff.

Is this a good thing? On one level, it is. There is no earthly reason to produce stuff that no one wants. Yet, most people also seem to have some sort of moral qualms about this conclusion. We might all agree on the principle, but what happens when it is us who is losing our job? Or, our neighbour whose life savings are going down the tube because their business failed? Are we that easy to state "well this is just efficiency?" Should we be? And, herein, it seems to me, lies the problem for capitalism. Efficiency is good but what of its human costs? Are we willing -- as a society -- to pay that?

Myths of Capitalism (IV)

In this series of blogs I've been trying to address some myths of capitalism. I should start to wind this up and draw out some arguments (or, make some conclusions). But, before doing that I thought I'd repeat a point I've made elsewhere in this blog regarding an important myth of capitalism: that the market is always more efficient. There are, according to capitalists, good reasons to base an economy on market principles. Some of those a reasons are economic, but they require that we think about the economy in and efficiency in a specific way. In other words, what capitalists mean by efficiency might not be what you and I mean by efficiency in common parlance. Before I get to that, however (which I promise to do in my next blog), let me address the question of efficiency and markets. The next blog will be part II of this discussion.

Are markets always more efficient than other forms of economy. The truth is no and, to the best of my knowledge, this point (that markets are always the most efficient form of economic organization) is an argument only made by ideologues. In other words, capitalist economists (and, I work with a number of capitalist economists) don't say this. The first thing they say is that this is an issue to study on a case by case basis. Markets, they believe, have their place. A market organization of the economy provides us with a certain set of choices that we need to make as citizens. These choices involve questions about our aims as a society. But, the market is not written in stone. A society can choose different forms of economic organization if it wishes and depending on its goals. Depending on its goals, for instance, a society might choose to organize its economy on a mixed basis (for instance, some form of state involvement in certain sectors). It might choose a regulated monopoly. It might choose heavy state involvement (say, for military or development purposes). The market is not, then, a deity which must be worshipped and obeyed come what may. It is a choice. There are good reasons, capitalist economists feel, to make this choice most of the time, but to simple default to a market position is to check your brain at the door. It is to avoid the hard work of assessing choices and making decisions and letting democracy work.

The second thing that a capitalist economist will say is that we likely should not talk about the economy as a whole. We likely need to deal with specific sectors of the economy. Thus, for instance, it might be a good idea to have a free market in one sector of the economy (say, consumer electronics) but not a good idea to let an unregulated market go in another sector (say, mass media, where the society might want to preserve a small part of that sector as non-market for national purposes). Thus, generalization is the enemy of thought and choice. There is a need not simply to study the issue but to study into on a sectoral level. What is good in one sector is not necessary the right choice for another.

Third, if there are good reasons to use a market form of economic organization a lot of the time (heck, perhaps even most of the time), there is good reason to not use it at other times. What might this reason be? A couple spring to mind. I might get my wording a bit off here because I am not an economist but focus on the ideas that stand behind my wording.

One good reason to not always use the market is that the market is not always the most efficient way of organizing one's economy. There is the issue of choice. But, there are also historical examples of incredibly efficient non-market economies. I am not arguing for these, btw, just pointing out that we have a fair number of examples of efficient non-market forms of economic organization. The first is slavery. Again, everyone, I am not arguing for slavery. In fact, my goal here is to point out that the argument for a free market in labour rests on ethical grounds and not economic. I am OK with that. In fact, I think arguing that slavery is bad because it is not as efficient as capitalism is a pretty ethically troubling argument. The point, however, is that slavery is really good at producing things. American economic historians in the 1980s -- much to their shock -- when they started seriously studying the efficiency of slavery (by which I mean the GDP produced by slavery) discovered that it was remarkably productive. This went against everything they had assumed and had been taught (on the basis of assumptions). The old argument used to be that the North in the American civil war would destined to win the war because capitalism was much more productive than slavery and so was a superior form of economic organization. As it turned out … not so. Now, this is, of course, not an argument for slavery. It is merely to point out that superior productivity is not inherent element of capitalism.

Other economic systems -- equally immoral -- have also demonstrated amazing levels of productivity. Soviet communism at the end of its days had become a pretty weak economic system. Eric Hobsbawm believed he had discovered why and believed it Soviet communism did not need to be so economically weak at the end of its days as it was. Be that as it may, from the 1920s, when it took full control of Russia, until the late 1960s, Soviet communism accomplished economic wonders. It transformed one of the most backward societies of Europe into an economic powerhouse with an incredibly advanced productive and technological capacity. This is no mean feat.

It is, I sound like a broken record, no reason to argue for Soviet communism. Like slavery, what the Soviet's discovered was that violence works. People really do work hard if you threaten them. In theory, of course, capitalism uses the much looser form of incentive: it tries to bribe people to work harder (wage increases). This works too and in the longer run might win out, but in the short run, the state can accomplish a lot via coercion. Again, our argument against Soviet communism is not economic; it is (rightly) ethical.

But, we don't need to look at Soviet communism to find examples … or slavery. Canada in WW II is a good example that is more ethical. During WW II, the Canadian state regulated everything. It did so for emergency reasons: there was not time  to let the market work and the government not want to take any chances (personally, I don't blame them, but that is a personal view). So, it stepped into the economy in a big thing, regulating everything from consumer goods to labour mobility. It built new industries and created new systems of labour relations. And, it did so to effect. It worked. The Canadian economy emerged from World War II in much better shape than it had been in before the war. What do we conclude: let's not be too quick to assume that economics is a good rationale to oppose unfree systems of labour. And, let's not assume that productivity alone should be our guidepost as to what is efficient and what is not. If we did that … we'd have some pretty shocking and disturbing conclusions. If we assumed that productive alone was what was important … we'd end up in a position where we would have to start looking at slavery and Soviet communism in a different and more favourable light. I'll assume none of us want to go there.

This empirical lense can also be brought to bear on more specific economic problems. Economists tend to argue that there is a legitimate sphere of state intervention in the economy if (a) the state can create a more fair situation by eliminating freeride effects, or (b) empirical study can demonstrate that state intervention is actually more productive than the market. Let's look at (a) then (b).

A freerider effect is when someone gets something for nothing. There could be good cause for this. A friend might make me a meal out of friendship. I'm getting the meal for nothing because my friend wants to be nice. But, there can also be bad reasons for this: someone is taking advantage of the system. Consider fire protection (an example I have used before). I pay taxes and some of those taxes go to fire protection. Why? Imagine a free market in fire protection. Everyone who paid got the protection; everyone who did not, did not. What would happen? Well, if I had neglected to pay, I would have to call the fire department and negotiate a price for their protection should my house catch on fire. This is remarkably inefficient because my burning house is a threat not just to me but to my neighbours, particularly if they paid for fire protection. Fires are indiscriminate. They don't care who paid for protection and how didn't. Thus, my failure to pay is a threat to my neighbours. So, the fire department is going to have to come and put out the fire whether I've paid or not. I become, in this case, a freerider, taking advantage of my neighbours paying for a service for which I did not. The state in this case intervenes. Because they don't want my cheapness to burn the whole town down, the state makes me pay a tax for fire protection so that I can't be a freerider, enjoying a benefit for which I did not pay.

If you pause and think about it, you can think about a range of things from which we derive benefit that would fall into this category. Police protection: I benefit every time the police arrest a criminal because that criminal cannot now rob my house. I benefit, every time the police pull a drunk driver over because I won't be hit by them driving my car in the opposite direction. Health and welfare: I benefit from tests of medicines to make sure they are safe for human consumption or from inspections of chicken production plants (or whathaveyou) that ensure that the product is not diseased. And, we could go on. Some of these might end up being controversial, but I also benefit from schools, whether or not my children are going. In this instance, the state intervenes in the economy, not to ensure productivity, but to ensure fairness.

What about (b)? It amounts to the point I made at the start of this blog. Don't make assumptions. The Canadian medical system is more efficient than the US medical system. (This is not an argument for the status quo but just follow my logic). We know this from various studies that show that Canadians actually pay less for medicine than Americans. They live longer and are in better health overall. By any standard, then, socialized medicine is more productive: it produces a better product (healthier people) at a lower rate (cost).

To sum up: the idea that the market is always more efficient is one of those myths of capitalism that I am trying to point out. The precision of the argument is important. I am not arguing that we should ditch capitalism. I am arguing that we should be informed and think critically about it.