Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

21 September 2015

Capitalism Made Simple

Why is capitalism the best system our species has yet discovered for organizing productive activity?

The short answer is that it’s supposed to be all voluntary. Anyone can start a business if her or she has money, or if he or she can interest investors in supplying it. Workers can join the business, or not, as they choose. Customers can patronize it, its competitors, or neither, as they choose.

So everyone whom a business touches has a free choice.

Free will may in fact be an illusion. But one thing is certain: people feel better, work harder and are more productive when they think they are exercising their own free will, rather than someone else’s. That’s capitalism’s basic secret. It’s freer and easier than all the other methods of human social organization our species has tried: slavery, monarchy, wage-slavery, tyranny, fascism, and Communism.

As I’ve outlined in another post, some key socio-political-economic advantages follow from this basic point. Among them are decentralization of economic activity (which separates productive activity from politics and ideology), organizational adaptability and flexibility, and the possibility (but never the certainty!) of beneficence.

Corporations marked a huge advance over nation-states in social organization because they are smaller, easier to start and wind up, and therefore far more flexible. They also work much more closely to purpose, in part because they have narrower and better-defined purposes. Finally, in their boards of directors and management structure, corporations mimic the social organization of our biological evolution—namely, small clans of thirty of fewer individuals. Not fighting your own biological evolution is always a way to make things work better.

But if capitalism is so good, why is it struggling now, almost everywhere except perhaps in Germany?

The answer is just as short. In practice, if not in theory, capitalism has strayed from its roots in voluntarism. It’s lost that loving feeling. It has become coercive. There are a number of ways this has happened, but four stand out.

First, capitalistic corporations and their owners and managers have become so powerful that they have begun to supplant government. There’s some irony in this. Corporations like the British East India Company, which explored and exploited much of America, were designed to take risky and productive economic activity outside the nation-state, so that exploration of the “New World” didn’t depend, for example, on the foresight and largesse of Queen Isabella of Spain, who financed Columbus’ voyages.

But now, rather than seeking their own freedom from state control, corporations are beginning to control and supplant the state itself. In different ways, this is so in each of the three major global powers: America (the US), China and Russia.

In America, presidential candidates of one of the two major political parties must kiss the ring of an über-rich capitalist family, the Koch Brothers, and “audition” before them for their financial support, without which a presidential run is deemed impossible under current circumstances. In China, big state-owned enterprises (SOES) and even smaller regional businesses distort economic policy through corruption and the sociopolitical risks of their failure.

In Russia, a tiny kleptocracy has monopolized the oligarchy of almost all heavy and essential industry. At the moment, Vladimir Putin sits at its apex. But what happens when he gets old and dies? It’s not hard to imagine the kleptocracy becoming independent and perhaps the real ruler(s) of Russia.

In America and Europe, big banks and insurance companies have become “too big to fail,” so government must support them even (especially!) when they do stupid things that threaten to destroy whole economies. In China, possible failure of big SOES and regional firms are thought to entail too great sociopolitical risk. In Russia, the state and big business have largely melded together in the hands of a small clique of men under Russia’s latest tsar.

So in every military or economic superpower, major capitalist enterprises have assumed extraordinary political and economic power. They no longer just do their thing and stick to their knitting. They are beginning to rule the roost.

If you doubt this, just complain about a major corporation’s injustice or billing error and see how far you get. You will find the experience akin to going hat in hand to the monarchial administration, augmented by a Kafka-esque combination of mindless software and mindless minions reading from scripts. Sure, you can sue, at least in nations like America with a still-independent judiciary. But suing is expensive, dilatory and unpleasant; it would be much more pleasant to have corporations that dealt with their customers like real people with real people.

The second way in which capitalism has become coercive is through corruption, both hard and soft. Real bribery with suitcases full of cash is not unknown in the annals of international capitalism, even today. But most of it is more subtle than that. Here we Yanks are far in the vanguard, with the bundles of cash needed (or deemed needed) to fund the propaganda machines to run for public office and the massive amounts of money needed to “lobby” government on obscure issues which the public, by and large, neither knows nor cares about. By supplying those bundles of cash, big corporations and their managers and owners now exercise a power over ordinary workers not much less than the power of feudal lords over serfs.

And corruption is far from an exclusive province of America. It’s rife in China, as evidenced by Xi Jingping’s apparently sincere—and apparently endless—efforts to diminish it. In Russia, corruption is not just a feature of government’s relationship to business but the mechanism by which that relationship works.

The third coercive feature of capitalism is deliberate suppression of competition itself, i.e., economic bullying among or by business. When business gets too big and powerful, it tends to oppress and suppress competition, not on the merits but merely for self-preservation, empire building and self-aggrandizement. Big firms acquire little ones and suppress or extinguish them; or they suppress competition from little firms by non-competitive means. One of the most egregious current examples is the coal barons’ massive PR push to discredit the science of global warming and to strangle renewable energy industries in their cradles.

There is nothing new about this phenomenon; it’s part of human nature. No less than Adam Smith made the following comment, in the same year we Yanks were winning our independence from England:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.”
Antitrust laws (in the US) and so-called “competition law” (elsewhere) are designed to suppress bullying and other anticompetitive behavior. But the United States lately has lagged badly in enforcing it. Anyway, without some global enforcement authority, or at least greater coordination among national and regional authorities, multinational business can easily escape the rigors of this law by going offshore, or by playing some jurisdictions off against others.

The essence of the problem is concentration of economic power. The bigger an industrial or financial empire, the greater its chance of becoming “too big to fail” and of subverting, subsuming or corrupting the coercive power of government and therefore effectively coercing other businesses and individuals. That’s why the suggestion of Bernie Sanders and Jon Huntsman, Jr. (but not Hillary, at least not yet!) to break the big banks up makes good sense. It needn’t be done by decree, as in the last century; temporary, market-based nationalization would work much better.

The fourth and final current coercive feature of capitalism is by far the most important, for it’s the most widespread and personal. Today, it has become transnational and almost universal. It’s coercion of workers by owners and managers.

In theory, workers are free to leave their jobs and seek better work at any time. In practice, that just isn’t so.

Work today is highly specialized. The more specialized and therefore more remunerative work is, the more a handful or corporate managers control entry into and success in it. We’ve now reached the point where once fully independent professionals like lawyers and doctors have, for the most part, become mere hired hands, inside such things as great multinational law firms, multinational corporations, and huge medical groups run by business managers with little or no medical training.

With the possible exception of a few “winner take all stars” in each profession, no individual worker has the power to bargain individually over salaries, wages, and working conditions. The vast majority of labor has to take or leave what corporate managers offer.

For most of a century, the answer to this clear and growing imbalance in bargaining power has been collective bargaining. Let powerless workers join together to increase their bargaining power and push for better wages and working conditions. During the last century, strong labor unions and strong laws protecting them let workers bargain with managers and owners and so made real the voluntarism that underlies capitalism in theory.

But in the last few decades, managers have defeated labor unions, and hence collective bargaining, by going global. If work can be outsourced around the globe, managers can always find poorer and hungrier workers who are willing to take a raw deal. And so they have.

During the last century, managers and owners also have refined their philosophical arguments. No longer do they speak of divine rights or the “natural order of things” that allows workers’ “betters” to rule. Instead, they phrase their arguments in the language of economic inevitability.

These arguments fall into two key categories: competition and consumption. Competition, the owners argue, requires them to pay the lowest wages and provide the most miserable working conditions that any people anywhere on the globe will accept. If they don’t do so, other owners will, and the other owners will drive them out of business with lower prices. Then oppressed workers will just lose their jobs.

So workers have no choice to accept what managers and owners give them and be grateful. There is no mention of morality or long-term consequences. (Pope Francis may have something to say about the former this week.)

The consumption argument is similar. If you, the worker, want a good life, the things and services you want must be cheap. But in order to make them cheap for you, managers and owners have to restrain wages and save on working conditions. So be happy you have low prices, even if your pay is lower, too.

But isn’t lower pay continually chasing lower prices just a race to the bottom? We might call this the “Walmart solution.”

Henry Ford had a better idea. He was probably the greatest apostle of capitalism in human history. He got credit for inventing the Model T, with its fully interchangeable machine-made parts, and an assembly line to build it efficiently. But what he really did was engineer an entirely new social order, which today we call a “consumer society.”

Rather than posit lower prices for lower pay—a vicious circle with no end in sight—Ford proposed a virtuous circle of higher pay for stable prices. At the time he engineered our consumer society, automobiles were mostly playthings for the rich and well to do. What, he asked himself, might happen if the workers who made the cars could afford to buy them, too?

Like any good engineer, Ford did an experiment. Unilaterally and without much warning, he raised the wages of workers at his car factories to the then-unheard-of level of five dollars a day.

Two things came quickly out of Ford’s unprecedented experiment. First, turnover at his plants virtually vanished. He had no trouble retaining his workers, and with them all the skills and learning they’d picked up from on-the-job training, not to mention their willing and enthusiastic cooperation.

Second, Ford’s workers, who could now afford them, began to buy the cars they made. Ford didn’t raise the prices of the cars. Instead, he made a bit less profit on each one. Yet his market had expanded from the rich and well to do to Everyman Worker. So he made it up in volume.

Voluntary wage increases made voluntary workers happier and more productive, and more able to buy stuff. So Ford made huge amounts of money, all on a voluntary basis.

In fact, Ford’s plants made so much money that they soon accumulated a cash hoard of historically unprecedented size. The hoard was so great that some of Ford’s shareholders sued to force its distribution as dividends. One of them was a man named Dodge, who wanted the money to start a rival car company.

During the trial, Ford said he wanted to keep the money in the company in order to improve technology, efficiency and the product, so as to lower the prices even more and let even more ordinary people afford cars. Yet the Michigan Supreme Court ruled that Ford Motor Co. was not an “eleemosynary institution” and had a legal obligation to give excess cash to the shareholders. In one of the darkest days of capitalism, the court ruled that corporations don’t exist to make things, but to make money for shareholders.

That decision and its consequences have brought us to today. Corporations now squeeze workers by playing them off against each other globally. Their primary goal is profit, not efficiency or progress. And they justify their relentless push for lower wages and less expensive working conditions by saying these things produce lower prices.

It’s too bad that most of the B-school types who make and repeat these arguments never really learned the basic theory of calculus. Differential and integral calculus both depend on the fundamental concept of a limit—the limit that a series of numbers varying by tinier and tinier increments ultimately approaches, but never reaches.

In the case of lower wages and lower prices, the ultimate limit is obvious. In the end, workers will earn nothing and will buy nothing. Because workers vastly outnumber the managers and owners in their gated communities, there will be little or no economic activity. The end result of current owners’ “consumption” argument will be a society with little or no consumption and a very small GDP.

Ford’s better idea was to increase wages and hold prices steady or nearly so and so increase economic activity steadily. His simple notion of sharing the pie with the working stiff created our consumer society and the most prosperous and productive nation in human history.

Can government-mandated minimum wages achieve something like the same result? Probably not, for two reasons. First, the proper minimum wage changes with time and economic conditions, especially inflation. As central banks tame deflation, and as inflation begins to rear its more familiar head, minimum wages will have to be adjusted. Their adjustment will be like moving the hands on a broken watch (twice a day!) to show the correct time—hardly a solution that any competent engineer would brag about, let alone deem elegant.

More fundamentally, minimum wages are not a capitalist solution. They replace coercion by owners with coercion by government. While that “solution” may provide the greatest good for the greatest number (millions of workers), it abandons the essence of capitalism: true voluntarism in all aspects of economic activity.

In order to restore capitalism to its pristine and most effective form, we have to find some way to restore that voluntarism. In order to do that, we have to give workers more clout. So far, we humans have only found three ways: (1) collective bargaining, (2) genuine worker representation on boards of directors, as in Germany, and (3) enlightened self-interest of owners, as in Henry Ford’s case.

At the moment, each of these solutions is under siege. To begin from the end, very few business owners today are anywhere near as enlightened as Henry Ford. We live in an age of unprecedented selfishness and self-righteousness on the part of the privileged.

Moreover, business and industry are far more complex and various than in Ford’s day. It is doubtful whether, with the best good will in the world, business owners or managers could produce the same effect that Ford produced as quickly or as easily, whether working individually or together. A few managers and owners are trying, but their task is much harder today.

Worker representation on boards may work well in Germany, but it’s far from the custom here in America. More important, to make that solution work we Yanks would have to expand our conception of the purposes of corporations radically. If we and our courts continue to believe that corporations exist only to make money for shareholders, labor representation on boards will make little or no difference.

So it all comes down to collective bargaining, doesn’t it? Unions in America today are on the ropes: the percentage of workers represented by unions has been dropping steadily and is closing on ten percent. The only sphere in which unions have held their own or made a comeback is in the public sphere—principally in government and hotel and restaurant services, which can’t be outsourced.

But all is not lost. Two current trends promise to make union organizing possible again: localization and specialization.

We humans are still going through a phase of unnecessary and often counterproductive centralization. Take cars, for example. Germany and Japan are deemed to have good engineers and hard workers. So a large part of the global production of automobiles takes place in these two countries, with the cars they produce being shipped all over the world.

But does that approach really make sense? Is it efficient? The huge amount of transportation (both of ore and parts to Germany and Japan and finished cars elsewhere), lengthens the supply chain and wastes enormous amounts of energy in transportation, depleting our species’ dwindling supply of fossil fuels. Wouldn’t it be better to send the (much lighter and fewer) engineers and key workers around the world to local factories and make cars close to where they are bought and used?

Not only that. Workers have come to see that they need jobs. Through their governments, they are demanding policies that bring jobs home, not send them abroad. If workers’ needs are not met, can Smoot-Hawley and another global war be far behind? Another war like World War II, this time with nuclear weapons, would probably finish the “job” our pols started in 1962 and extinguish our species.

Here business managers and owners are ahead of the pols and of politics, especially in the US. Japanese and German car makes have built plants in the American South that employ American workers. One consequence was unintended: the non-union American South has turned into a New Detroit for car production, bankrupting the Old Detroit. But Americans now have jobs making Japanese and German cars in America for American use.

The same phenomenon is going global. Major car makers are now building plants all over the world, not just because doing so is more sensible and more efficient, but because local governments are increasingly demanding local plants and local jobs and offering tax incentives to encourage them. As plants localize, unions can organize their workers and push for wages and working conditions appropriate to the locality, including the standard of living and expectations of environmental and worker protections there.

A similar localizing trend is building in agriculture. In fact, this trend, rather than the abomination of “pay for rules,” is what appears to have stopped the TPP dead in its tracks. Negotiating partners have figured out that, rather than encourage remote, foreign production of essential foods, they can promote both food security and national security by demanding local production of at least certain important or essential foods. Local production opens the door to local organization of workers for collective bargaining.

Specialization works similarly. As production of goods and services and the distribution of goods get more complex, the work in these fields becomes more specialized, requiring greater education and training. As specialists become more essential, they can form trade guilds as specialized forms of labor unions. The last century saw this trend develop in fields as abstruse and specialized as screen acting and writing and orchestral music.

The nice thing about specialized trade guilds is their potentially small size. The more specialized the work, the smaller the guild, and the easier it is to organize and maintain it. Today’s cheap air transportation, not to mention the Internet, in theory makes possible global trade guilds representing professionals as diverse as computer programmers, integrated circuit designers, surgeons, long-haul truck drivers, industrial psychologists and robotics engineers. Some day soon, these professions may, like actors and musicians in the last century, discover that only through collective bargaining can they maintain the professional stature and standard of living that motivated their learning these professions in the first place.

So don’t count collective bargaining out yet. The kind of multi-industry, multi-job bargaining that characterized the car industry—with all its gargantuan size, empire building and consequent corruption—may be waning. The future of collective bargaining is probably smaller, more focused, more specialized and (in atomized form) more global.

At very least, this sort of micro-collective bargaining is worth a try. For collective bargaining is the only proven-effective general solution our species has ever found to keeping capitalism voluntary and therefore capitalistic. Far from betraying the owner class, labor unions in the last century save capitalism from itself, i.e., from the worst instincts of owners and managers. It still can.

So we start where we began. Capitalism is the best system for organizing productive activity that our species has ever discovered because, at least in theory, it’s entirely voluntary. But in order to keep it voluntary and therefore really capitalistic, owners and managers can’t coerce government or workers. In the last century, collective bargaining saved capitalism from its own worst instincts, kept it voluntary, and preserved and extended Henry Ford’s consumer society. Today we need to figure out how that elegant and effective solution can be propagated effectively into the twenty-first century.



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