Does Capitalism Work?
Obviously, distributism calls for a reform of economic systems in general, and Capitalism in particular. And yet, what is the point of calling for reform in a system that works, which is fully functional? Here, the common wisdom must guide us, namely, “If it ain’t broke, don’t fix it!” At this point, many people would interrupt to say, “Just look around you, dummy. Of course it works! We are the richest and most powerful nation in the world, thanks to capitalism and the free market. Further, our system is so successful that it has been adopted by every prosperous nation in the world—even Communist China!” Well, it would be hard to dispute that
And in asking the question of whether or not capitalism is broke, I do not mean that there are certain imperfections in it, or that from time to time it experiences difficulties. It would be unreasonable, indeed churlish, to demand from any great system a standard of perfection that human beings and human systems simply do not have. And since we must allow for imperfections, then we must ask, “How do we judge whether capitalism—or any other system—is working?” Let me suggest that the most unassailable standard of judgment for any system is the standards that adherents of the system establish for themselves. We could criticize capitalists on any number of grounds, but the only grounds that would have validity for a capitalist is the grounds he establishes for himself. Therefore, in judging whether or not capitalism works, I use only the criteria that an intellectually honest capitalist would use for himself. 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. That is to say, capitalism is basically “self-regulating,” and needs no outside force, such as government, to balance supply and demand and ensure prosperity. 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. And if this system that we pronounce “working” is really one that requires the heavy hand of government for its stability, can we really call it “capitalist” without at least adding some modifier?
The Two Economies
The people who argue that “capitalism works” are the same people who argue that we should have less government interference in the market. Now, I am all for less government; however, the plain fact of the matter is that capitalism cannot function without this interference; capitalism relies on an expanded state to balance aggregate supply and demand. Consider this fact: in the period from 1853 to 1953, the economy was in recession or depression fully 40% of the time. Since 1953 the economy has been in recession only 15% of the time. Consider the following chart, which depicts t
he American economy in the period from 1900-2006 (click on the chart to see a better version):
The grey bands represent recessions, the red line (read on the left-hand scale) represents the quarterly growth rate of the Gross National Product (GNP), and the blue line (read on the right-hand scale) represents the total GNP in terms of year 2000 dollars.
The first thing we note is that the left side of the chart and the right side seem to indicate two very different economies. The left-side is dominated by grey areas, that is, by an amount of economic distress that would simply be politically untenable today, while the right side is mostly white. The red line on the left side indicates an economy of wild swings, of alternating economic euphoria and depression, while on the right the changes are gentler. Finally the slope of the blue line is very shallow on the left side, indicating an economy which cannot sustain growth, and very steep on the right side, indicating an economy where steady growth has become the norm. What distinguishes the right and left sides of this chart, and the two different economies they illustrate, is the introduction of Keynesian economic policies during World War II, policies which have become decisive in all advanced economies, no matter what the ideological bent of the regime in power. Republican or Democrat, liberal or conservative, European or American, they have all followed it for the very simple reason that it works, or at least works well enough to provide for political survival in democratic nations; a politician who actually advanced the policies of the left side of the chart simply would not survive to the next election.
Not that they haven’t tried “left-side” policies. Since the rise of
Under the free market rhetoric of “conservative” regimes, the government has not shrunk, but expanded, so much so that we now have a government of nearly imperial power and privilege, headed by an imperial presidency that ignores not only the laws of congress and the Constitution, but even basic human “laws” such as the law against torture as an instrument of state policy. Government expenditures as a share of
This leads us to an unavoidable conclusion: capitalism and the free market are incompatible. History shows, beyond any reasonable doubt, that the growth of capitalism and the growth in government go hand-in-hand. Big capitalism and big government are not, as in the popular imagination and the economic treatises, things opposed; rather, the one grows on the back of the other, and the more you get of one, the more you will need of the other.
Distributists will not be surprised at this result, since it exactly matches the predictions that
But as successful as Keynesianism has been at rescuing capitalism from itself, one wonders if this cycle can continue. Each new business cycle seems to require greater intervention than the last, and this latest crises requires gargantuan efforts. Can this exercise in gigantism continue forever? Most likely not, at least not in a finite world; sooner or later we come to a point where the system can no longer sustain itself. We may now be at that point. Certainly a $9 trillion debt at the Federal level alone is daunting enough by itself, and that debt shows no sign of abating. But even more problematic is the increasingly servile nature of the population, a population easily manipulated by commercial advertising and political “spin.” The servility which Belloc predicted, which Keynes institutionalized, and which Hayek feared on the theoretical level but did so much to advance on the practical level, is now upon us. Thus our problem transcends the merely economic; we must deal with a cultural problem as well. We have saddled our children with crushing debts, just as we have deprived them of the independent spirit which leads a man to pay his debts.
The Law of Unintended Consequences
It is somewhat of a mystery why Keynesianism should succeed, after a fashion, where capitalism fails. Neither
When we come to theorize about human systems, we have another problem. We build theoretical models, but by definition, what a model leaves out is always greater than what it includes. We hope and believe that our models have included the included all that is important and left out all that is inconsequential. We search for principles which lie at the heart of things, but how are we to know that we have located those principles? In the physical sciences, we can often test our theories in a laboratory; we can strictly control the environment and vary only the factor we wish to test. But this procedure simply does not work for human systems. There is no neat “laboratory” for our experiments, at least not on this side of freedom. So how are we to test our theories, how are we to know if we have included all the important elements? Let me suggest that we do have a laboratory, and that laboratory is called “history.” It is an imperfect laboratory, because we can never control all the variables. Further, there are no “raw” facts in this lab, but only a series of interpretations we place on actual events. Hence, the reading of the results will always be a discursive and critical enterprise. Nevertheless, when we look at charts like the one in this chapter, what might be called the “lab” results of economic history, we certainly notice some very consistent features on the right and left sides of the chart. Anyone who reads the chart and offers an interpretation must account for the dramatic change in the middle of the chart and for the consistencies on each side of the chart.
When we see an idea fail consistently, and fail in exactly the same way in every case, we can be sure that something essential has been left out of the theory. The greater the unintended consequences, the more confident we are that something is missing. And when we compare the theory with something that historically works better, we attempt to identify the element that is responsible for the difference. In the case of
In the case of
The theories of
There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.
For his own part,
In my opinion it is a grand book. We all have the greatest reason to be grateful to you for saying so well what needs so much to be said. You will not expect me to accept quite all the economic dicta in it. But morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement, but in a deeply moved agreement.
The distributive alternative involves recasting economics as the science of political economy and re-introducing the question of justice into that science. The next three chapters will take up the crucial question of the status of political economy as a science. In the chapters following the science, we will go into greater detail on the relationship of justice to that science.
 NBER Website, Business Cycle Expansions and Contractions (National Bureau of Economic Research, 2006 [cited May 17 2006]); available from http://www.nber.org/cycles.html.
 Eric Tymoigne, "Business Cycles," (Fresno, CA: Economic Policy Institute, 2007).
 Hilaire Belloc, The Servile State (Indianapolis, Indiana: Liberty Classics, 1977; reprint, 1913), 107-21.
 F. A. Hayek, The Road to Serfdom with the Intellectuals and Socialism (London: The Institute of Economic Affairs, 2005).
 Ibid., 65.
 Quoted in Rafe Champion, The Road to Serfdom: Fifty Years On (1985 [cited 6/7/2008); available from http://www.the-rathouse.com/hayserf.html.
 John Maynard Keynes, The General Theory of Employment, Interest, and Money (San Diego, New York, London: Harcourt, Inc., 1964), 372.