Does Capitalism Work?

Most people will respond by saying, “What an absurd question! Look around you, dummy; of course it works!” And even the most strident critics of capitalism, the distributist, the socialist, the libertarian, is likely to concede that it works. Their critiques are likely to begin, “Yes, but...it could be more 'moral' (or work better, or whatever).” However, I assert that there is a critic whose challenge cannot be successfully answered by the capitalist. This is not the Christian, or the socialist, or even the Marxist challenger. It is a critic that even the most committed capitalist cannot get around. That critic is the capitalist himself. By purely capitalist standards, capitalism does not work and never has.

What, precisely, does a capitalist mean when he says that capitalism works? Simply this: that the capitalist system can provide a relatively stable and prosperous economic order without a lot of government interference in the market. Now, the Marxist critic might point out that the “prosperity” excludes a large number of people, and the Georgist or the Distributist might point out that capitalism depends, contrary to its own theory, on a certain monopolization of land and the other means of production, but the capitalist is likely to reject these critiques. But he cannot fail to notice, if he is intellectually honest, that capitalism has never been a stable economic order without the heavy involvement of the government. We can date the era of massive government intervention in the market from about World War II, with such “Keynesian” practice becoming established government policy in the early 50's. Yet when we look at the economy from 1853 to 1953, we find that it was in recession fully 40% of the time. Hardly a stable order. Further, since 1953, it has been in recession only 15% of the time. Consider the following chart of economic activity in the period 1900-2006 (thanks to John Watkins for generating this chart):

This chart may be difficult to read in such a small format (if you click on the chart, you will get a better view of it). Nevertheless, its message can be gleaned easily enough from its major features. The gray bands represent periods of recession. The red line represents the change in business activity from one quarter to the next. A few things are evident: there is a lot more gray on the left side of the chart than on the right side; the red line (read on the right-hand scale) is far more erratic on the left side of the chart; the blue line (read on the right-hand scale) has a much lower slope on the left side. What the chart shows is that capitalism was extremely unstable in the “pure” capitalist era, that is was prone to near-constant recession, and that it exhibited anemic growth by post-World War II standards.

What is most curious about the capitalist critic of capitalism is that one never meets him. Rather, one notices a curious disconnect between the theory and the practice, a disconnect which doesn't seem to bother practitioners of capitalism. For example, I listen to the business news quite regularly, and I constantly hear statements in the following form: “The government ought to ('lower the interest rate,' 'raise the interest rate' 'expand (or contract) credit,) so that the free market can do its work.”The people who make these statements never seem to realize the disconnect between the first half of their sentences and the second. Or another example: Republican presidential candidates regularly tout the free market, and then propose to give $20 billion to Detroit to save the auto industry, or propose expensive responses to the recession, or the health care crises, or whatever. Or one of my favorite examples comes from Charles Krauthammer, the libertarian columnist. In a column excoriating auto mileage standards, he states that the best way to address the problem is with government controlled prices for gasoline. Now, when a promenent libertarian calls for government price-controls, you know that real capitalism is dead.

Capitalists like to think of themselves as realists. But my minimum requirement for a realist is that he occasionally looks at the real world. I have no objection to those who spend all their time contemplating their ideological navels, but to quality as a realist, one ought to glance up, even if only now and then, at the real world. When the capitalist does this, he will find that nobody really believes in capitalism anymore, or at least no practitioner of capitalism does; they all want government hand-outs, protections, subsidies, and favorable treatment. And maybe that is the right thing to do. But it surely isn't the capitalist thing to do.

15 comments:

Anonymous,  Sunday, February 10, 2008 at 10:13:00 AM CST  

It seems like you don't want to admit something:

That any and all recessions of the market economy are ALWAYS 100% caused by government intervention, not by the market itself.

You are trying to re-write history in order to advance your own particular agenda.

Do you even KNOW how recessions form? I don't think you do. Recessions and depressions are a MONETARY phenomenon. They are not a "production", or market, phenomenon.

To teach you:

Recessions are caused by a drastic decrease in the rate of money supply (quantity of money) expansion. Milton Friedman, F.A. Hayek, these two fellas won Nobels talking about this.

Now, what CAUSES money supply contractions is precisely PREVIOUS monetary EXPANSIONS.

See, recessions occur when prices re-adjust to the lower amount of spending that takes place after the previous expansion caused by government interference into the market.

It is the government that causes recessions because it is government that causes previous expansions in money and spending.

Without the artificial booms created by money supply expansions brought about by the government, there would be no way for there to be a decrease in money supply later on. Now the precise way in which the money supply decreases is simply by business failures. Our monetary system is 90% based on money that doesn't actually exist anywhere. This is because all bank deposits are 90% loaned out.

It is the country's MONETARY system that causes booms and busts.

You have it all backwards. You think the government PREVENTS recessions? That is the dumbest thing anyone could say. If I were you, I would not say this in public, because you will be laughed at.

If the market were free, the money supply would be gold. If the money were gold, then this means there is absolutely no way for the money supply to increase or decrease drastically, meaning there would be no way for the economy to boom and bust.

What would happen is that there will be a nice and slow increase in wealth creation.

If the money supply increases too fast (which is what ALL government will tend to cause if they have control over the money), then a bust is inevitable. This country has staved off waaaaaay too many recessions by the government printing money to avoid the decrease in money supply, but this only makes things worse.

What you HAVE to understand is that the graph you are looking at DOES NOT represent government intervention fixing things.

It shows WHERE government printed too much money (boom periods), and where the natural market reaction is to that (bust periods).

viking,  Sunday, February 10, 2008 at 2:52:00 PM CST  

Hi all,

Anonymous, I have a problem with your espousal of the gold standard. (Also with the tone of your letter, but I'll let John M. handle that, if he so chooses.) One trouble with gold is that it is but a tiny portion of the total economic wealth of a nation, and money must represent all that worth, even if only in a bank ledger somewhere rather than in actual currency. (I would speculate that the currency is considerably less than 10%, btw.) Given this fraction that gold is, the gold standard can only work if very few take the bank or gov't up on its offer to convert currency or deposits into gold. Any significant tendency towards conversion would quickly deplete the supply for others. This could lead to untoward problems.

Another problem I have with the gold standard is that the supply is quite inelastic compared to the economy, or even the population. While theoretically it could keep up, the supply being accumulated over decades, centuries, even millennia makes this unlikely. We are therefore faced with likely deflation. If kept within bounds, this may be satisfactory, but there can come a point when we find it more advantageous to keep our money in a sock than in banks or in stocks and bonds. This process of withdrawing from financial institutions (disintermediation) can be very serious indeed: it can basically stop the economy. Granted, this may end the deflation, as we no longer have growth to race ahead of minor increases in the gold supply, but much misery can be inflicted prior to that.

A third problem: how do we pay interest with a non-expansive money supply?

John Médaille Sunday, February 10, 2008 at 3:24:00 PM CST  

I am greatly afraid that anonymous simply does not understand Monetarism. It is not an argument against government control of the economy; rather it is an argument in favor of gov't control through monetary policy rather than through monetary/fiscal policy as in Keynesianism. Monetarism is Chicago's surrender to Oxford; it is not an argument about ends (the gov't control of the economy) but only about means. Therefore, nothing a Monetarist can say can invalidate anything I've said. So it is completely unnecessary for me to enter the argument as to whether there can be over-production or under-consumption apart from monetary policy. (And, by the way, Hayek was an opponent of monetarism, not a supporter.)

But the real problem with anonymous's statement is that it represents the triumph of ideology over reality. No one disputes that gov't involvement in the economy was much greater after World War II than before. Yet the left side of the chart is uglier than the right side. Ideologues always have a problem with a simple statement of facts (which, by the way, is also a critique of Friedman's methodology; he seemed to select only those facts which fit the theory, twisted those that could be manipulated, and ignored those that contradicted him).

If one insists on an ideology, I would advise them to stay away from reality, a bit of advise they are more than willing to accept. Reality is a bitch. She is always nagging the ideologue to take the blinders off, and just when you think you have her tamed, she ups and kicks you in the groin. Stay away from her. There are plenty of ideological floozies you can date; they will tell you how handsome you are (despite what you see in the mirror)and never question your reasoning; they will grow your ego and shrink your brain. Since an ideologue doesn't use his brain (he let's his ideology do all the thinking for him), this is not a drawback. And if that siren reality ever shows her face, she will chase her away.

Viking's comments on the gold standard are well taken (but is the third really a drawback?) The gold standard works well if there is not much change in economic activity. But if there is change, it is difficult for the supply of gold to change along with it; you have to inflate or deflate the value of gold to adapt to the change.

viking,  Monday, February 11, 2008 at 5:27:00 AM CST  

John, I have a confession to make. I wrote my piece shortly before a luncheon date and hurried myself at the end to complete it and still make a timely arrival. I'll make a fuller explanation of my final point now.

What I was concerned about was, not so much the interest rates paid by consumers, but rather the effects that an expanding economy and a near-static money supply would perpetrate upon the distribution of earnings. That is, what would be the relative shares obtained by labor, land, and capital? My hunch is, given that expansion requires increased investment, that there would be a great blowup in capital's share, necessitating a sharp in labor's portion, and that WOULD be a real drawback. Sorry I stated it so poorly before.

I realize you can inflate the economy with a gold standard, or at least what is called that. Two possibilities come to mind: lowering the amount of gold needed for a dollar or other unit of exchange, or removing gold from circulation and storing it (in the likely US case) at Fort Knox. But my letter addressing anonymous's points had to, I felt, eschew such possibilities as governmental interference with the economy. If he feels the way to a free economy is via the gold standard, then the only way to disprove that contention is by showing what would happen if the principle of non-interference were actually followed. Or so I'm inclined to think at any rate.

Speaking of such forensic strategies, are you sure that Krauthammer really meant what he seemed to say? Couldn't he have been playing Devil's advocate, or doing a thought experiment, or being sardonic/ironic/sarcastic, or just resigned to that as the least bad option? Could you give us some more info on it please?

I agree with you that capitalists, or at least corporate managers can be quite inconsistent regarding the tenets of capitalism. I'd be surprised if they weren't, given an inherent weakness they have regarding their attempts at a truly consistent morality: they're human. That notwithstanding, no doubt they should make a fuller attempt to be true to their position, but so, no doubt, should we all. Besides, John, given our interventionist modern world, can they always afford to stand on principle? If the EU is subsidizing Airbus, for example, should Boeing just meekly accept the loss of business, even bankruptcy? And aren't there many such examples that could be referenced?

But a still more disturbing thought is that such inconsistencies may reach even exemplars of right reason and morality as you and I. Consider our means of communicating these stirring messages. The machines themselves are made by capitalist firms - whether home, library, or internet cafe doesn't matter, IMO -our respective ISPs are most likely the same, the phone lines or broadband cables ditto, the electricity - well, that may be co-op or municipal in your case, tho not in mine. You see my point, don't you? And we're both relatively safe from criticism, as we both (I think) believe in some industrialism. Pity many of our fellow Distributists who are basically "back-to-the-land" types, using a not-exactly-Agrarian technology.

Again to use the "speaking of" segue, while the graph does look quite convincing in demonstrating the benefits of a gov't guided economony, I wonder if the greater frequency of recessions formerly was largely due to our being a more agricultural economy than more recently. Farming, after all, is subject to the natural vicissitudes of weather, to an extent far greater than any non-human factor which can affect city economies; and that occupation has been declining ever since the turn of the 19th into the 20th. There's also a problem I see with the graph, in that there may be an optical illusion at work making the left side look less robust in growth than it really was. This is because the growth rates are logarithmic, while the graph is arithmetic. (Arranged in units of $1.25 trillion on the left.) I used a tape measure and found that the blue line above 1900 was 2/16 (1/8) from the bottom, while 1915 or thereabouts was about 3/16, an increase of 50%. Then, I measured 1930 at about 4.5 sixteenths, another half again as much in a decade-and-a-half. These were quite similar to the last two such periods.

May I close this with a couple of personal questions? How is Medaille pronounced, and of what national origin is it? I'd guess that the latter is either Gaelic or Gallic, to be a bit cute, but I'm not sure. Thanks.

Tom (I was a "Viking" at both my elementary school and my university (Portland State), hence my nickname)

B. Y. Clark Monday, February 11, 2008 at 7:16:00 AM CST  

We have stability in capitalism because of government, not in spite of it. They provide the regulation that allows us to trust the market. If we had no property rights established by and protected by our government, what sort of economy (mr or mrs. anonymous) do you think we'd have? If there were no regulations on product quality we end up with situations like those we saw in the 1800... you could buy a box of Cheerios, but end up with a box of saw dust made Cheerios. You might get sick, but you'd have no recourse. You could stop buying General Mills products, but that wouldn't stop anyone else from doing so.

Government is not always right. They don't even work all the time. Government fails...but what they have done, as the pretty graph shows, is provide stability to the markets. The FDIC and other banking regulations/insurance have helped us keep a stable banking system, even with corruption (read S&L's in the 80s), in the post WWII era. You cannot say that of countries that took a less interventionist approach.

Athanasius Monday, February 11, 2008 at 9:01:00 AM CST  

You have it all backwards. You think the government PREVENTS recessions? That is the dumbest thing anyone could say. If I were you, I would not say this in public, because you will be laughed at.

Then why is nobody laughing at 2/3rds of the branches of our government, which have voted, democrat and republican alike, to use the government to prevent a recession? On the contrary they are being lauded by everyone except a tiny minority within the discipline in economics called free market capitalists.

That is not to say the manner in which the government is going about it is wrong, or will not produce the results they think it will. I think the "stimulus package" is a rotten idea. Yet, it demonstrates that reality is not with you.

John Médaille Monday, February 11, 2008 at 2:24:00 PM CST  

Viking, my own opinion is that interest, insofar as it is a participation in the profit of a firm, can really affect the distribution of income to any great extent. It is only when interest exceeds the rate of profit by a significant amount, or only when it is on non-productive loans (e.g., consumer credit) can skew income towards the top. Both of these conditions are, of course, the conditions of usury.

I think your critique of the gold standard stands, however, whether or not there is usury in the economy. An expanding economy with a static money supply cannot be lead to deflation. Further, the holders of gold will be enriched, will they not, since their holdings will purchase more goods in the economy without them having to do anything whatsoever. Come to think of it, that constitutes a kind of usury.

For B.Y. Clark: exactly. You can't have a game without rules, and if you have rules you need a referee. Capitalism is like a game and hence needs both rules and referees.

Having said that, the most interesting games have the simplest rules. But when an economy (or a game) grows so large and complex that nobody can fully understand the rules, you need a lot of referees. But the real question is when is the game not worth the prize? In the complex game of financial capitalism, there are a few winners and many, many losers. Maybe it is time to re-think the whole game.

John Médaille Monday, February 11, 2008 at 2:28:00 PM CST  

Viking, to answer your questions about my name: it is Gallic rather than Gaelic; to pronounce it, just ignore the ll's; they are only there to confuse the English.

Jeremy Monday, February 11, 2008 at 3:41:00 PM CST  

Great post! I request one clarification: does the chart use the normal "two consecutive quarters" definition of recession?

I'm reading Kolko's "The Triumph of Conservatism" right now so this historical look fits right in with where my head's at. Thanks again!

John Kindley Tuesday, February 12, 2008 at 4:08:00 PM CST  

In defense of ideologues:

First off, "capitalism" is a slippery concept. You seem to conflate it here with libertarianism, and that is what your critique seems really aimed at. After all, aren't distributists really capitalists, in that they recognize the importance of capital and simply would like to see it more widely distributed?

There is, as you know, within the libertarian tradition a prominent strain that's quite critical of "vulgar" capitalism. They recognize the unjust exploitation that high concentrations of capital in the hands of the few lends itself to, though they see government intervention (past and present) as a primary cause of the conditions that make such exploitation possible.

As you know, there are two sorts of arguments that have been used to justify libertarianism: the moral and the economic. I presume that historical justifications of distributism can be roughly divided along the same lines.

I don't think of myself as a dummy, but economics is complicated and uncertain. Viking's observations about your graph just highlights that already obvious truth. You talk about "reality" and "realists," and I respect your obvious familiarity with economic concepts and your qualifications to intelligently debate economics, but I doubt that economic "reality" is as obvious as your post and your graph suggests. Some day perhaps I'll make a concerted effort to educate myself in economics, but in the meantime I note that people who are highly qualified in economics, indeed who have been awarded Nobel prizes in economics, would dispute your interpretation of economic "reality."

The science of moral right and wrong is certainly not devoid of all complication and all uncertainties, but I think it's safe to say that it's more accessible to the intuitive sensibilities of more people than is economics. I think one of the most fundamental and obvious moral principles is the presumption against the use of coercion and violence. What makes government government is coercion and the threat of violence. Despite my Quakerism, I'm not a total pacifist (and despite Quakers' Peace Testimony against war I think the idea that Quakerism historically required pacifism is a misinterpretation), but I certainly think that a presumption in favor of liberty follows naturally from our common Christian moral tradition. What also follows from our Christian moral tradition is the notion that we should not try to achieve good ends through evil means. What I mean is, even if it were proved that a certain amount of government intervention led to a marginally better economic situation, I for one would be willing to sacrifice a significant amount of superfluous wealth for the sake of greater freedom. Now, if it could be demonstrated that eliminating a given government intervention would lead to dire economic consequences and abject poverty for myself and others, that would be a different story, but I don't believe I've seen that demonstration. In the meantime, I'll presume that good things come from good things, and I include less coercion and less violence among the most obviously good things.

As I've made clear in previous comments, I don't have a problem with government laws which merely forbid me and others from doing things we have no right to do anyway. Selling sawdust Cheerios clearly falls within that category. Forbidding people from giving legal advice for money unless they've attended three years of law school, or confiscating through taxes any portion of a middle or lower class income, or putting people in jail or prison for possessing marijuana, clearly doesn't. Some things are less clear (e.g. what about taxing the income of people making tons of money each year? I would much prefer instead relying solely on inheritance taxes and a tax on the unimproved value of land; also, some laws appear to have a merely regulatory function, like traffic laws, and do not appear to burden freedom, though this kind of justification for laws easily slips into abuses that do burden legitimate freedom), but even in these less clear cases, we should maintain culturally and legally a very high presumption in favor of liberty and against coercion and violence.

John Médaille Tuesday, February 12, 2008 at 7:55:00 PM CST  

John Kindley says First off, "capitalism" is a slippery concept. You seem to conflate it here with libertarianism, and that is what your critique seems really aimed at.

Only against the "vulgar Libertarianism" represented by Reason Magazine (stupid name). Of course, as you recognize, there is "libertarianism" and then there is "libertarianism." It is not a monolith. There is a libertarianism of the left and of the right. That of the right became a mere apology for every abuse of capitalism. That of the left (which, by the way, used to be known as "socialism" before Marx took over the term). I must ask Kevin Carson (a "free-market, anti-capitalist libertarian") to write an essay for this blog on the distinctions between left and right libertarianism.

As for the relation between Distributism and Libertarianism, we mainly subscribe to its tenets, IF and ONLY IF property is well-disbursed, a position that puts us on the left-wing of libertarianism. That is, we subscribe (in the main) to the free market, but recognize that the market cannot be free if it is controlled; that is, if property is limited and concentrated in ownership, you cannot expect to see a free market.

As for the relation between distributism and capitalism, we find (as Chesterton said) that the major problem with capitalism is that it produces too few capitalists, too few families with enough capital to support themselves by their own efforts. So I suppose you can say that we are "capitalists" who believe that if capital is good, it is good for everybody and not just a few.

Niccolo Wednesday, February 13, 2008 at 12:04:00 AM CST  

I think you are mistaken... After WWII it seemed as though the government backed off the economy - though still involved and thus destructive.

You're measuring from 1853 to 1953? That seems a bit... convenient, I think. Three major wars - one civil - and the two largest depressions in the history of the United States. Was it also a coincidence that the "progressive" era took place during this period of time as well?

I agree with you about capitalists being incapable of actually defending their systems, but only because I define capitalists as natural hypocrites - spewing free market rhetoric and doing very statist things.


I don't think you can honestly say that the United States was somehow a free market haven in between 1853-1953. I hope I misread you.

John Médaille Wednesday, February 13, 2008 at 4:51:00 PM CST  

Niccolo says I think you are mistaken... After WWII it seemed as though the government backed off the economy...

Not according to any budget numbers I can find.

You're measuring from 1853 to 1953? That seems a bit... convenient, I think.

100 years is "convenient"? What 100 years would you like me to use? Actually,I used 155 years; these are all the numbers that the National Bureau of Economic Research has, and the NBER is the agency responsible for charting recessions.

I don't think you can honestly say that the United States was somehow a free market haven in between 1853-1953.

Sure, but then you have a bigger problem. Either you say that since 1853 we have had a capitalist market in at least some periods, and capitalism didn't work, or you can say that we have never had a capitalist market, and therefore can't say whether it works or not.

Either way, the facile claims of the capitalists go up in smoke.

Econ_Amateur,  Thursday, February 14, 2008 at 6:29:00 PM CST  

"To teach you:

Recessions are caused by a drastic decrease in the rate of money supply (quantity of money) expansion. Milton Friedman, F.A. Hayek, these two fellas won Nobels talking about this."



Laughable.

Its also the fallacy called appeal to authority. The economy is way simpler then all try and make it. People trade with each other because their wants are different. Why their wants are different is irrelevent to that.

Money is only a tool. It is not production, it is not a resource of production, and it is not labor. So here you wave your arms and propose that the mass use of a tool somehow goes bad across the board. But without the actual mechanics of that misuse. "Too much money supply..." You say that like it means something. I would be delighted to hear the ramblings that try and make sense of that.

Recessions occur because trading becomes less profitable. And even the ever so weak phenomena of poor money use points that way. But what if there was a third person to every exchange of labor that had a periodic rise in the amount they take from the two workers trading? Then when that non productive loss rose there would be a retraction in trades, which would not return untill the non productive cut shrank again.

So what is this non-productive sector? It is called land and it includes all the natural resources which are in controlable supply. It is the control which gives them scarcity and price not that they are scarce because someone has to want to make them first. And reguardless of the price land is never produced in greater amounts. Land is never produced it simply is. And foolishly we give ownership privileges to it and allow the unproductive owners to take from the pockets of workers needing it. 40% and more of the economic pie is distributed to this parasite class, and their take is in fact cyclical.

Since the price of a capitalized resource is the present value of all the future, the price of these continuous resources, mostly land, is out of phase with current market conditions. It looks to the growth of the future, and wants that payment now. When the parasite drag is currently low, expansion heats up, and then prices on land rise in proportion not just to the growth, but to the expected future. Which means the parasite drag grows faster and cuts off the very growth it was depending on.

All cycles will have a time shifted negative feedback. If someone tries to explain a cycle and can not identify that aspect, then its simple bunk. Mathmatics does not lie. So please if you want to go on and pretend that a cyclecal misuse of money is causing the utility of trades to decrease then be sure to include the time displaced negative feedback.

And on a deeper level try and explain why all these interest rate setters and users including investments in productivity, are forever fooled into the improper spending. And if you attempt that impossible task, I'll show you where you are absurd, and show how the landlords set their prices according to the prisoners delima and are thus cutoff from being able to rationally arrive at a stable price.

As for your prize "experts" they would both be quick to point out that Keynes was a fraud, but your money supply crapoola is that same dirt after microwaving.

Gravedigger Sunday, March 2, 2008 at 7:36:00 AM CST  

It bothers me that all of the candidates talk about our great capitalist system - even equating it with Democracy - while at the same time recognizing the impoverishment of millions. Then they promise job creation - Mitt's idea of giving $20 billion to the "American" auto industry...Barrack's idea of continuing outsourcing but spending $billions on retraining for nonexistent jobs.

No candidate is interrogated on how they would fully employ - at decent, vauable work, the 37 million or so citizens who are now in poverty (according to the U.S. Catholic Bishops). They all seem to agree that this permanent, and growing underclass, is an acceptable cost of big business and reality.

What if the guvmint did purchase the auto industry and sold it to the auto workers? (By "auto workers" I mean the engineers, design staffers, skilled tradesmen, managers and production workers and THEY operated it with devotion to quality and value?

And then, what if we had Catholic trade agreements that limited production to the market and defined trading partners as those countries that provided comfortable livings to their workers?

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