Chapter II: If it Ain't Broke...

Note: This chapter hasn't been through the editor as yet, so it is likely to be full of typos and whatnot. Do your best to ignore them.

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 America is a powerful country; what is not so clear is that it is a capitalist country, or has been one, for some time now.

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.[1] Consider the following chart,[2] 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 Margaret Thatcher in 1979 and Ronald Reagan in 1980, the political rhetoric has been about “free markets,” “lower taxes,” “less government interference,” etc. Both Reagan and Thatcher took Fredrick von Hayek as their economic mentor. But the more “Hayekian” the economic rhetoric became, the more Keynesian the economy has actually become; the unintended consequence of Hayek’s policies have always been the opposite of what Hayek wanted: larger governments, greater debts, more centralized economic power, and so forth. Keynes’s policies may indeed be, as Hayek claimed, a “road to serfdom,” but Hayek’s policies have turned out to be a super-highway to that same dismal destination. Nor is this true just for the United States and Britain. Since the Reagan administration, the World Bank has forced Hayek’s economic policies on all the developing economies, and the results have been uniformly dismal.[3] Indeed, the theories of Hayek have been tested just as much as have the theories of Karl Marx, and with about the same results: more government power, less economic freedom; under neither did the state whither away, but became an all-encompassing behemoth. Both men wished for a “withering away of the state”; both delivered great leaps in government power.

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 GDP are about the same as they were before the conservative ascendency, but the cost of government has far exceeded its tax base. The result has been an increased dependence on borrowing. At the start of the Reagan administration, the National Debt was about $700 Billion; at the close of the Reagan-Bush era, it had tripled to $2.1 Trillion. It doubled again and then doubled again, and now stands at about $9.4 Trillion. This increased debt represents an effective tax increase, since borrowing is taxing too, but a tax shifted on to the next generations.

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 Belloc made in The Servile State. The capitalist state, Belloc believed, would grow increasingly unstable, and could only stabilize itself by enlisting the power of government.[4] Belloc wrote before the rise of Keynes, but Keynes' methods were no surprise to readers of Belloc. Keynes indeed found a “solution,” but Belloc had already predicted the solution, and the solution is servility. It was Keynes’ intention to make the citizen freer by freeing him from economic insecurity. But in Keynesian states, people become less free; they cease to be citizens and become mere clients of the state, where even their most ordinary needs are the subject of one or more governmental bureaucracies, and where even ordinary local problems are pushed up to be the responsibility of the most distant levels of government.

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 Keynes nor Hayek intended the kind of government we have nor the kind of servility we see, yet this is what we have. What went wrong? Both theories ran smack-dab into the “law of unintended consequences.” This law states that the unintended consequences of our actions are always greater than the intended ones. This law is a natural outcome of the fact that we are finite creatures, with incomplete knowledge of the present and no knowledge of the future. The consequences of any action are potentially infinite; our intentions always limited. Therefore consequences must always outstrip intentions.

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 Keynes and Hayek, I believe that the difference is the different position that distributive justice has in each theory.

In the case of Hayek, justice simply isn’t an issue; his major concern is with freedom. It is noteworthy that he uses the term “justice” just three times, but “freedom” 87 times.[5] Hayek is the carrier of the neoclassical tradition in economics, a tradition which had eliminated justice as an economic consideration. It was not that they were in anyway opposed to justice; they just didn’t regard it as an economic question. The neoclassicals triumphed in economic theory around the turn of the 20th century. Henceforth, economics would no longer be a moral endeavor, but a “scientific” one. However, the system became increasingly unstable, and teetered on the verge of collapse beginning in 1929. Keynes does his theorizing in the midst of this collapse. Freedom is less of an issue; saving the situation is of primary importance. Keynes’s recipe for saving the system is the (re)distribution of wealth and income. Keynes uses the term “freedom” only four times, but the term “distribution” 57 times.

The theories of Keynes and Hayek are often presented as opposing theories, but in fact the opposition is more apparent than real. Hayek was not opposed to at least some re-distribution:

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.[6]

For his own part, Keynes praised The Road to Serfdom:

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.[7]

Keynes accepted the neoclassical dictum of a value-free economics; he merely denied that such an economic system could maintain itself in equilibrium for very long, if at all. Such a system led inevitably to great disparities in wealth and income, and no economy could balance itself in the face of these manifest imbalances, “The outstanding faults of the economic society in which we live,” he said, “are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”[8]

What Keynes actually proposed was not so much an overturning of the capitalist system, as a neat division of labor: the capitalist system would create wealth, and the political system would redistribute it in sufficient amounts to maintain aggregate demand and keep the economy from collapse. In other words, Keynes bowed to the abandonment of justice as an economic principle, and made it into a purely political concern; Distributive justice became re-distributive, not so much a matter for economists as for bureaucrats. Insofar as he had some consideration of distributive justice, economies built on his principles have been able to function. But insofar as they depend on an ever-growing bureaucracy, they are always in danger of consuming themselves.

Hayek opposed Keynes because he believed that the theory inevitably led to state control of the economy and the attendant loss of freedom. The problem in looking at both of these thinkers is not so much that either of them is wrong, but rather that both of them are right. With Hayek, we oppose the expansion of state power as a threat to freedom; with Keynes we assert the necessity of justice, and not merely on moral grounds, but on the practical grounds that it is the only way to make an economy work. The problem is that when you merely combine the two, as has been the case since the 1980’s, you get not merely a road to serfdom, but a super-highway to that same dismal end. Pure capitalism disappeared in the 1940’s, caught in its own contradictions and Keynesian capitalism now appears mired in unrepayable debts and ever-greater intrusions into the economic and personal lives of its citizens. The Keynesian system is definitely broke, or at least in the process of breaking itself apart, just as the previous system broke itself apart in the 30’s. If this interpretation of economic history is correct, then the time has come to consider some alternatives.

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.

[1] NBER Website, Business Cycle Expansions and Contractions (National Bureau of Economic Research, 2006 [cited May 17 2006]); available from

[2] Eric Tymoigne, "Business Cycles," (Fresno, CA: Economic Policy Institute, 2007).

[3] Ireland may be an exception, but then Ireland is a very special case indeed, the exception that proves the rule.

[4] Hilaire Belloc, The Servile State (Indianapolis, Indiana: Liberty Classics, 1977; reprint, 1913), 107-21.

[5] F. A. Hayek, The Road to Serfdom with the Intellectuals and Socialism (London: The Institute of Economic Affairs, 2005).

[6] Ibid., 65.

[7] Quoted in Rafe Champion, The Road to Serfdom: Fifty Years On (1985 [cited 6/7/2008); available from

[8] John Maynard Keynes, The General Theory of Employment, Interest, and Money (San Diego, New York, London: Harcourt, Inc., 1964), 372.


Anonymous,  Monday, June 9, 2008 at 3:07:00 AM CDT  

"...the only grounds that would have validity for a capitalist is the grounds he establishes for himself".

Well, there's a typo for you. "grounds" is plural, so either that or "is" is wrong.

A. L. Brackett Monday, June 9, 2008 at 6:24:00 PM CDT  

Yes well, getting down to content, you use the phrase “Distributive justice” but you have not really defined it yet. If I had to free-associate that phrase, it would probably be “Marxism”. I don’t know if that is really what you want.

John Médaille Monday, June 9, 2008 at 9:12:00 PM CDT  

@tpolg, I think you're right; I may be outsmarting myself here. I don't want to go into the discussion of the distinctions between corrective and distributive justice until after I've addressed the "scientific" questions, and shown that the science is itself dependent on questions of equity. However, if I don't at least give some hint of what "justice" means here, I will likely only cause confusion in the reader's mind.

Abe Tuesday, June 10, 2008 at 9:45:00 AM CDT  

Since this chapter is a critique of Keynes and Hayek, and your audience is distributists who need to be educated in economic theory, it would do well to define Keynesianism and Hayekism at the very beginning of the chapter. As it is, you introduce them like this:
"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... Both Reagan and Thatcher took Fredrick von Hayek as their economic mentor. But the more “Hayekian” the economic rhetoric became, the more Keynesian the economy has actually become"

For people who are just beginning to learn history, those names are meaningless. By the end of the chapter, I finally figured out that the factor that distinguished those two economists was their support of government intervention, but then I had to go back and re-read the first part of the chapter now that I understood what you were talking about.

John Médaille Tuesday, June 10, 2008 at 4:13:00 PM CDT  

@Abe, good points. I must say that I am enjoying this way of writing. It allows me to see the work from the reader's point of view before publication.

Thanks to all.

Anonymous,  Friday, November 21, 2008 at 3:50:00 PM CST  

John, your quote of Keynes on Hayek got me researching Champion (very much an interested party it seems) and rereading Hayek's "Road to Serfdom". The quote apparently came from a letter written by Keynes after reading RTS on the way to Bretton Woods, where what Hayek says about world government was very relevant. Keynes however was not a socialist but a liberal in, as Hayek thought of himself, the Classical tradition of J S Mill and Gladstone. His macro-economics was not arguing for a planned economy, even though it might seem like that to those used to the micro-economic tradition where everything is particular and the whole is no different than the sum of the parts.

In an economy as a whole the parts are arranged as a control system (Smith's invisible hand), and Keynes was not concerned with the individual parts but effectively moved from a 1st order to a 2nd order control system, in which a standing error necessary to show how much short-term (trade) correction is needed is off-set by a long-term (infra-structure) correction. What the respective money flows are to be used for is no more necessarily predetermined in the infra-structure than the trade channel: governments or powerful businesses may either plan/impose their own priorities or simply respond to known needs.

The example from aeronautics that I gave in my comment on chapter 1 is relevant to characterisation of control system orders (0 thru 3). These correspond mathematically to Chesterton's "four winds", plotted on the Cartesian axes of a compass. When you insist that economics is properly "political economics" you are in effect insisting on these "horizontal" and "vertical dimensions"; your distinctions between money and land, labour and capital map onto the four cardinal directions.

I understand that you don't want to make this book overly technical, but unless you can advance the mathematical concepts of your readers beyond simple quantities to the complex numbers necessary for directed (here circular) flows, they will be left seeing oppositions between right and wrong or supply and demand, rather than economic life cycles (product development, production, maintenance and recycling) in which priorities change and in teams different types of talent take the lead as the cycles progress.

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