The responses to my article The Death of Capitalism made something clear:
Most people don’t know what Capitalism is.
We’ll need two definitions.
Market: An economic arrangement in which price signals direct people’s actions.
Markets are old. There were markets in Sumeria thousands of years ago. Nonetheless, Sumerian society was not Capitalist. Most people were farmers, living on the land. They produced their own housing, their own food, and their own clothes. They bought some goods on the market, sold grain on the market (there was a very active market in loans denominated in grain or silver), but most of their needs were met through non-market methods.
Some people in that society (arguably) had their lives regulated by markets. There were money-lenders, urban inhabitants, merchants and traders, specialists, and so on who used money to buy what they needed. There were other such people who were essentially feudal lackeys; you might be a market scribe working for money, or you might be a palace or temple scribe.
The primary financial markets, by the way, were run out of temples.
But the rule is this: Most people in most agricultural and pre-agricultural societies produced what they needed, generally as part of an extended family, a tribe or some other arrangement. Sumeria was more mercantile than most agricultural societies.
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Capitalism: An economic system in which people are directed towards particular actions by price signals from markets AND in which they obtain the necessities (and luxuries) of life from markets.
You may measure HOW capitalist a society is by how many people cannot create their own necessities as part of a relatively small group.
Now, let us return to markets. A market says:
- Do more of what makes more money
- Do less of what makes less money
- Stop doing that which is losing money
This is an oversimplification, but it’s less of an oversimplification than it seems. Take Amazon, for example: Amazon did not make a profit for many years. However, the decision makers at Amazon (Bezos, senior exectives, etc.) made plenty of money from Amazon.
What matters is not whether fictional entities are making money, or even if all human beings are making money, but whether decision makers are making money.
Prices are not set solely by markets, they never have been and they never will be. Governments lean on prices through direct and indirect subsidies, taxes, and so on. Roads are a subsidy for trucking, auto-manufacturing and a host of other businesses, for example. The US interstate highway system was the death-knell for the hugely powerful railroads that preceded it.
This is true despite the FACT that, if you include all costs, shipping people and (especially) freight by rail is cheaper. The final price, as it effects the individual decision makers responsible for those individual, economic decisions, is what matters.
Markets are a way of telling people what to do and what not to do and how much of either.
The more money a person makes doing something, the more they try to do of that something (including hiring workers to do it for them).
If a decision maker’s profits are not aligned with social utility, well then, capitalism does not produce results with social utility. Bankers make a lot of money. Their businesses lost so much money the entire world economy could barely contain the damage and trillions of dollars were required to bail them out. So why do bankers keep doing what they were doing? Because they are still, personally, making money.
So what if a few brokerages and banks went out of business? Their executives are still rich.
Capitalism is dis-empowering. Serfs and peasants, for all we sneer at them, could support themselves, because they had access to the land they needed to do so. They spun their own clothes. They raised their own houses.
Peasants and serfs were better off than the industrial workers who replaced them. There is a reason land clearances had to be done by law and force: The peasants and serfs didn’t want to leave. They weren’t stupid, they weren’t fools–they knew they lived better than the people working six and a half days a week, ten to 12 hours a day, in the new factories amidst cities and towns, choking in their own filth before modern sewage was put in place.
Capitalism forces most people to base their decisions on price (salary, comissions, hourly wage vs. goods they buy) levels. It takes away their ability to support themselves without working for someone else.
Capitalism is the concentration of the means of production in the hands of a few people.
This is why it is called Capitalism. Capital is what allows you to make other things. Land can be capital. Machines that make things, even machines as simple as a spinning wheel, are capital. You add labor to capital and you have products.
(It may be, with the rise of the sophisticated automation we call robots, that capital will be able to make capital soon, with little to no human intervention.)
Capitalism removes productive capacity from most people so they can’t support themselves. It orders the behavior of almost everyone through price signals.
Capitalism is a way of making decisions about what people should do, what products should be created, how they should spend their time and so on.
Because Capitalism is one of two major decision making methods in our society, and has been for the most important societies (starting with Britain) for hundreds of years (in varying forms; there are different types of capitalism), it is fair to judge capitalism by the results produced by those societies, especially the economic results.
Capitalism is NOT synonymous with industrialization, but most industrialization (outside the USSR) occurred under capitalism. Capitalism made the decisions about how to industrialize which were not driven by the internal logic of industrialization itself (too big a topic to go into in this article) or by government.
Capitalism fed back into government, however, because pricing matters. That coal was cheaper than solar for most of history (until about last year) mattered. In theory, we could have overridden that decision and said, “At X times the price is worth it and the sooner we make more the sooner the price will drop,” but in practice we did not.
We went with the flow.
Social choices, including those made by government, modify market signals. But when you live in a Capitalist society, you think first about VALUE as PRICE, even though the two are very different. The price of your life can be determined very accurately by life insurance charts (future expected earnings, discounted).
I doubt you consider the insurance market’s valuation of your life as the actual value of your life. If you do? Congratulations! You have splendidly adapted to the mandates of capitalism and markets.
Having read this far, and considered what you have read, next time someone yammers on about capitalism, you will know what they should be talking about. Because most people don’t know what capitalism is, despite living in it, you will also know, perhaps, what they are not talking about.
Capitalism uses markets as the main method to determine human economic behaviour and removes humans’ ability to support themselves without engaging in the market.
Note the second characteristic listed: Removing humans’ independent means of support. In many cases, this had to be done by force. In others, it was done through blandishments. In both cases, the end result was a reduction in effective power for individuals who do not CONTROL capital–who are not capitalists (ownership is not always control).
To a remarkable extent, people are Skinnerian behavioural machines. Markets are one of the main methods used to condition people, to create their personality, to create them.
To control them.
To control you.
Under Capitalism, virtually everyone is subject to that control and conditioning, on penalty of living a miserable life, or, indeed, of death.
(This is part 2 of a semi-series. Read part one on “The Death of Capitalism” and part 3 on “Did the Industrial Revolution Require Clearances, Genocide and Imperialism.” and part 4 “How The Rational Irrationality of Capitalism Is Destroying the World”.)
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Peter
Peasants and serfs were better off than the industrial workers who replaced them. There is a reason land clearances had to be done by law and force: the peasants and serfs didn’t want to leave.
Many arguably didn’t, but many of their children jumped at the chance. Historically, there has been a huge global one-way migration from rural to urban that can’t be explained just by land clearances. If you want to halt or reverse it, you are going to have to address the coercive measures necessary.
V. Arnold
Another good post, IMHO.
I have used the term neo-serf(dom) strictly as a symbol of an owned human. They were after all, attached to the land; but led far freer lives than the majority of the U.S.’s indebted middle and lower classes.
David Graeber’s book; Debt; the First 5,000 Years is, IMO, a must read for any interested in day to day economic’s of their lives. Not understanding debt is fatal to a free existence. Here’s a link to a free audio book of Graeber’s book;
http://www.unwelcomeguests.net/Category:Audiobooks
No DL is required; it can be listened to one chapter at a time or DL’d in its entirety.
Ian Welsh
No. Their next generation didn’t, mostly, voluntarily leave the land. There were, always, exceptions, of course.
The grandchildren, and in most cases their great grand children, of those who weren’t forced off the land left voluntarily
The great migration you are referring to in recent years is mostly a result of 3rd worlders being forced off their farms because they were either taken from their or not viable. There are no jobs for them to go to in the vast slums surrounding 3rd world cities.
I guess I’ll have to do an article on that at some point. It is always useful to me for people to point out what they don’t know, or the propaganda they have imbibed.
People in 3rd world countries head to the slums around cities, in general, because their rural lifestyle is no longer viable. That is usually a result of
1) market forces;
2) force.
And very often, of both.
There are some exceptions, for example, a vast voluntary migration in the US after WWII, some stuff in Europe, SOME of what has been going on in China (but not as much as people think. The government party has had to FORCE people off the land.) Very little of what happened in the USSR – the government their FORCED people off the land.
Peter
I don’t question that there are plenty of examples of rural folks forced off the land by economic or political factors. My point is simply that, given the near-universality of the trend, it can’t all be explained by material loss or gain, or force. Western Europe, especially France, offered significant political and economic protection of agriculture and rural areas in the postwar years, but still the countryside emptied. North America offered less protection, but it did offer some and the same thing happened. Bright city lights and all that.
V. Arnold
@ Peter
Read Joe Bageant’s “Rain Bow Pie”; he lays it all out.
Tzimisce
You touched briefly on robots being a potential new capital. What happens when automation can replace the majority of human labor? The conventional wisdom is that machines create more human jobs in the aggregate, but I am skeptical. Machines have historically replaced physical labor, jobs that require muscle. Now through coding, we have machines that can replace the mental part of human labor. As an additional barrier, machines have logistic limits such as requiring large amounts of power or performing very specific tasks in a factory setting.
However, combine drones, 3d printing, advances in energy (storage and production), and AI, and machines will no longer be limited logistically and will be better able to replace a solid chunk of human labor. While there will still be jobs as coders, inventors, artists, and mechanics, I am pessimistic that there will be enough jobs.
I can see a lot of benefit to not having to work; however, the transition from near full employment to no employment is terrifying. As you stated, people have to interact with the market because they can’t produce the basic things that sustain life. What happens when your labor is unnecessary and you can no longer purchase those basic items?
As always, areas other than the West will struggle the worst. Forced (one way or another) off subsistence living to making things in a factories, only to be replaced a few decades later. A huge supply of unskilled labor, without any ability to support itself.
Danielle
Raised as a left Democrat in USA I had learned to sneer at the Luddites- haters of technology and progress. Now I understand and admire. I think there is often a similar movement as industry moves into peasant areas- I believe China had a period of industrial sabotage a few years back.
Tzimisce
Keep in mind the mass migration in the US can be attributed to many factors. First, after WWII migration ramped up considerably, and many basic protections and reforms had already occurred in the factory setting. Second, wages and income were greater in cities. Third, farming is hard. Not only is there a lot of physical labor required, there is a degree of luck. It’s much easier to plan a life when you don’t have to rely on favorable weather. Finally, the logistics of city living were made better: cars, suburbs, and refrigeration. The sprawl of cities is terrible in the aggregate, on a personal level it’s pretty favorable.
Matt
Hello Ian. I am longtime reader, first time commenter (your common sense approach has coerced me – ha!). Fantastic posts on capitalism. Thank you and bravo! — Matt
Bruce Wilder
“markets” belong to the myth of capitalism.
money used in extended forms as capital is the defining element of capitalism.
The distinction is important. Economics provides us an elaborate and facile theory of how a self-regulating market economy, coordinating everything thru market price, works. But, that theory has few referents in the world, and ignores many features of the actual economic system. It is designed to make it impossible to reason effectively about the design of our own society. In that sense, the myth of the market is a feature of capitalism, but it is still not an analysis of capitalism — more of a disguise.
Much of what you have written would make better sense if you simply substituted “money” for “market” and left aside the doctrinaire reference to market price. In actual capitalism, money does not act thru price, per se (price in most cases is administered) but thru insurance and contingent contracts: the critical and operative element is the distribution of risk. It is the distribution of risk that motivates and determines outcomes. The capitalist is constantly scheming to put risks off on other people and other people’s money and to profit from using wealth to provide insurance in usurious or otherwise predatory forms. Privatize the profit; socialize the losses, as they say.
One of the most important features of modern governance left out when you go down the well-trodden path of the myth of the market involves the importance of hierarchy in modern capitalism. You are left trying to address the giant corporation as a species of market “monopoly” which is a weak analytic frame at best and the modern regulatory state is out of sight.
Hierarchies work by how they distribute risk: “we pay a fixed wage; do as I say, or you are fired” is the archetypal employment contract. The boss does none of the work, and bears none of the inherent costs of doing the work, making the effort, suffering the fatigue, but puts everything the workers’ life depends upon at risk, should he be disobeyed. Viewed ethically, it sounds hazardous at best, which it is. It also seems to work remarkably well, in getting people to do what must be done. Ethically, it results in issues of workplace safety, but it is also the means by which societies achieve a modicum of consumer safety in a productions system of deep specialization and enormous scale. But such systems are both problematic and fragile.
Hierarchy is how we make sure the water in a vast municipal water system is safe. It is also how we fail to do that. Money has a role in that failure. “Markets” are no where to be seen.
The characteristic failures of hierarchy are the acute problem of our civilization. Its how the Catholic Church ends up promoting child molestation. It is at the heart of the problems of our vast systems of, say, industrial food production. It is at the core of what went wrong in finance and banking that drove the housing bubble and the creation of toxic mortgage-backed securities.
I cannot offer more than a sketch in a comment, but I think you know all of this and much more already. My point is not to instruct you, and certainly not to contradict any of your broad themes. Rather, it is to call attention to a deficiency in your rhetorical framework. Too much “market economy” is getting in the way.
highrpm
like they do in power ball, the masses bet that continued growth will payoff in the future, while the elite owners pocket the ticket sales:
”
Take Amazon, for example. Amazon does not make a profit. However, the decision makers at Amazon (Bezos, senior exectives) make plenty of money from Amazon.
“
highrpm
like the “rule breakers” always do, they find away to break the game to their advantage: soros did so to the boe in 1992. g-s did so to derivatives market in 2008. now bezos & co. are using “growth” instead of “profit” to fleece the little mass stock owners. f*in joos.
V. Arnold
Does Amazon not make money? Or profit?
There is a huge difference!
Amazon obviously makes money; how else to explain the obscene wealth of Bezos?
If there are shareholders, they are being cheated and robbed by an other scheme somewhere between a ponzi and outright theft.
This is why I’ll not do (and have never done) business with a crooked scheme like Amazon…
nihil obstet
So far all the post and commenting has assumed that workers are pretty independent outside their relationship or potential relationship with an employer. One way of getting people off the land was somewhat more gradual. Make available, or even necessary, to the farmer things that require money.
The farmer can get benefit for himself by sending off members of the family whose work on the farm can be spared to work in factories and send substantial parts of their wages home. These are frequently the daughters of the household, who may find that however constricting factory work is, it still provides more freedom than being subject 24 hours a day to the demands of the farming household. It’s not accidental that Lowell, Mass., had large numbers of women factory workers, or that factories in developing countries frequently use lots of women workers.
Eventually, the farm family develops a dependence on getting money, and the growing dependence on wage income makes driving them off the land easier.
I don’t know that this advances a discussion of capitalism, but if we’re talking about people’s decisions, it seems important to notice how everyone’s decisions get shaped or forced.
Hugh
Wikipedia defines capitalism as follows: Capitalism is an economic system based on private ownership of the means of production and the creation of goods and services for profit. Central characteristics of capitalism include private property, capital accumulation, wage labour and competitive markets. In a capitalist market economy, investments are determined by private decision and the parties to a transaction typically determine the prices at which they exchange assets, goods, and services. https://en.wikipedia.org/wiki/Capitalism
My dictionary (New World) defined it thus: the economic system in which all or most of the means of production and distribution, as land, factories, railroads, etc., are privately owned and operated for profit, originally under fully competitive conditions: it has been generally characterized by a tendency toward concentration of wealth, and, in its later phase, by the growth of great corporations, increased governmental control, etc.
The “exchange” referred to in the Wikipedia definition is essentially a market. In my dictionary definition, I think it is mostly myth that these markets were ever “fully competitive”. My adage is “There is no such thing as a free market. The only questions worth asking are who controls it and for whose benefit.” In other words, the driving force is not competition but who gets the profit. Still I found it interesting that my dictionary went on to say that capitalism is characterized by “concentration of wealth”, an echo perhaps of the Great Depression just as “increased governmental control” reflects the New Deal. While we have seen the return of wealth inequality with a vengeance, governmental controls, although not governmental aid (the TARP, the Fed programs, the TPP, etc.), have generally been dismantled and trashed. It says a lot about the corruption of our punditocracy and political classes that they act like they have made some vast new discovery that wealth inequality and capitalism are somehow related, although still not as in cause and effect. I might note as well that while profit is a central tenet of capitalism, maximization of profit is not.
By the way, re forcing farmers from the land, this is from the wiki on “enclosure”: Enclosure could be accomplished by buying the ground rights and all common rights to accomplish exclusive rights of use, which increased the value of the land. The other method was by passing laws causing or forcing enclosure, such as Parliamentary enclosure. The latter process of enclosure was sometimes accompanied by force, resistance, and bloodshed, and remains among the most controversial areas of agricultural and economic history in England. Marxist and neo-Marxist historians argue that rich landowners used their control of state processes to appropriate public land for their private benefit.
The process of enclosure created a landless working class that provided the labour required in the new industries developing in the north of England. For example: “In agriculture the years between 1760 and 1820 are the years of wholesale enclosure in which, in village after village, common rights are lost”. [E.P.] Thompson [The Making of the English Working Class] argues that “Enclosure (when all the sophistications are allowed for) was a plain enough case of class robbery.”
W. A. Armstrong, among others, argued that this is perhaps an oversimplification, that the better-off members of the European peasantry encouraged and participated actively in enclosure, seeking to end the perpetual poverty of subsistence farming. “We should be careful not to ascribe to [enclosure] developments that were the consequence of a much broader and more complex process of historical change.” “[T]he impact of eighteenth and nineteenth century enclosure has been grossly exaggerated …”
Enclosure is considered one of the causes of the British Agricultural Revolution. Enclosed land was under control of the farmer who was free to adopt better farming practices. There was widespread agreement in contemporary accounts that profit making opportunities were better with enclosed land. Following enclosure, crop yields increased while at the same time labor productivity increased enough to create a surplus of labor. The increased labor supply is considered one of the causes of the Industrial Revolution. Marx argued in Capital that enclosure played a constitutive role in the revolutionary transformation of feudalism into capitalism, both by transforming land from a means of subsistence into a means to realize profit on commodity markets (primarily wool in the English case), and by creating the conditions for the modern labor market by transforming small peasant proprietors and serfs into agricultural wage-laborers, whose opportunities to exit the market declined as the common lands were enclosed. https://en.wikipedia.org/wiki/Enclosure
Personally, I think Armstrong is full of shit. If small farmers living on the land produced what they needed, even if they had little or no money, can they be said to be poor? Moreover, after they had produced what they needed, their time was their own. Contrast that with the living conditions of the wage workers of the Industrial Revolution.
Ian Welsh
A scholar recently went thru the field records. Commons fields improved almost as fast as enclosed fields in terms of yields, and with a few crop types actually did better (nitrogen fixers). The agricultural revolution would still have occurred without enclosure.
The writing on enclosure as “necessary”, is thus myth.
As for the rest of industrialization, the question is whether it was profitable without cheap workers. My guess is it would have occurred more slowly, but still would have happened, and would have been attended with vastly less misery.
I put little stock in Wikipedia or dictionary definitions of contentious sociopolitical terms.
I think, at some point, I will have to see whether the argument that enclosure was NOT necessary holds up. I strongly suspect it is the case. Enclosure is required for explosive growth of industrialization, not for industrialization.
The same question rears its head with respect to imperialism. Is it /necessary/ to force other countries into negative mercantile arrangements, destroy their industry, and create slave plantations for cheap cotton?
Maybe it is, I’m not sure. There is an argument for not impoverishing much of the rest of the world, and them being much better trade partners that way.
Everybody (with a very few exceptions) industrialized with mercantalism, to be sure. Did it have to be imperialist mercantalism with slavery?
EmilianoZ
The definition of capitalism in this post acknowledges that the market is essentially rigged. I quote:
Prices are not set solely by markets, they never have been and they never will be. Governments lean on prices thru direct and indirect subsidies, taxes, and so on.
The problem is that the definition then becomes too elastic. Capitalist societies will be very different depending on: 1) to what extent the market is rigged. 2) for whom the market is rigged.
I’m not even sure the Soviet Union can be distinguished from the US using the present definition. I doubt most soviet citizens were farmers capable of producing their own goods. They had to go to the shops (that were famously not very varied or plentiful) just like us.
Maybe it could be argued that by the present definition the US is a market massively rigged for the bankers and other asset holders, while the Soviet Union was a market massively rigged for the people.
Maybe a good capitalist society can be found by the right amount of tweaking. Maybe it could even solve global warming if it’s tweaked towards the younger generations.
tatere
Because Capitalism is one of two major decision making methods in our society
What’s the other? Religion?
Cpl. Cam
Elections.