A Biographical preface
Years ago I considered myself a libertarian. I was convinced that free societies depended on individuals having the resources to cooperate with one another on mutually agreeable terms. Networks of such cooperative relationships generated markets. Markets are therefore essential to any free society more complex than one dependent on barter.
As my life experience interacted over time with my theories my basic insight remained valid to me. But it became increasingly moderated by other factors. In time I ceased calling myself a libertarian, and turned to the less rigorously defined term, classical liberal. I still considered markets essential for freedom to flourish, but there was a larger legitimate role for government as well. Markets were not perfect.
Even so, as time went on I was increasingly frustrated by the almost complete lack of interest by most libertarians and classical liberals in addressing the very real problems that in America at least, seemed to be intimately rooted in our market order. I was repeatedly told that once markets were “truly free” such problems would largely disappear, so just “fight the state.” Meanwhile any effort by government to address these problems constituted “tyranny” and “big government” while any efforts to use government to improve people’s lives was the “nanny state” interfering with “freedom.”
I beat my head bloody (figuratively) trying to get ‘free market’ advocates to address many of these issues. A very few were, and I am eternally grateful to them. But most responded with silence. In time about the only invitations I received to market oriented scholarly gatherings were ones I had been instrumental in organizing.
But most of my market oriented colleagues seemed to me good-hearted, humane people. It was frustrating.
In early 2013 the key to the puzzle became clear to me. I had been assembling pieces together for years. Finally the pattern jelled, and the pieces fit together.
Virtually everyone in America today, regardless of whether they call themselves libertarians, classical liberals, conservatives, moderates, liberals, progressives, or socialists, equate markets and capitalism. Usually the terms are used virtually interchangeably. At most, some libertarians distinguish between “capitalism” and a “free market” that has never existed. They are deeply, fatally wrong. Market economies and capitalism are crucially different from one another, but not because the market is a utopian goal. We encounter it every day. So long as the distinction between the two is missed or misunderstood, our efforts to solve many of our most intractable problems will be for naught.
The market described
The beauty of the market is that it vastly increases the scope and depth of cooperation possible between people, particularly among relative strangers. The basic elements of a market are exchangeable private property rights, clear rules for their exchange, and a means for adjudicating disputes that is trusted by both parties. Absent clear rules of contract, property rights and means for resolving disagreements regarded by all as fair, there would be vastly less scope for cooperation, particularly among strangers. And we cooperate with strangers every day.
Economists like to describe the market as arising through competition. This description is misleading. Competition arises only after people have cooperated together sufficiently so that others have to choose between available options as to how to use their resources. It takes cooperation to create a business, or even a market place. Then competition enters the picture.
As the market develops a price system arises, providing a universal system of signals about the relative availability of possible resources people can use to pursue their projects. These signals are provided through money prices. From this perspective a price is a signal providing vital information for best achieving a goal among competing mixes of resources.
But signals are not compulsory. As a consumer I buy a product based in part on its price, but often other factors enter in as well; factors such as whether it was made locally, sold in a locally owned enterprise, made sustainably, offered by a friend, and so on. As a producer I am free to make similar trade-offs. And when I ran a profitable business for many years I often moderated how prices influence in my decisions with other values. Prices aid me in deciding; they do not control me.
My description of the market deeply embeds it within the complex values of human life.
Capitalism is something else again. Capitalism overlaps with markets but cannot be reduced to them or encompassed within them. Consider the dominant organization within a capitalist economy: publicly held corporations, particularly huge banks. As corporations these institutions have a different relation to prices than do people within a market. Prices exist as commands neglected at considerable peril. They are not signals.
To succeed in managing a capitalist institution a person must always try and buy for the lowest price and sell for the highest before any other value enters in. Any corporate CEO allowing other values to trump this principle will see his or her decisions reflected in lower share prices. If these prices are much affected the corporation risks the likelihood of being taken over in an unfriendly acquisition, its management ousted, and financial values once again elevated above all others. In other words, as a system of economic organization capitalism defends itself against richer human values by penalizing and expelling people who to some degree put them ahead of profit when making economic decisions.
This change in dynamics arises because a primary component of traditional markets has disappeared or been reduced to a supportive status. In corporations private property as it exists in the market has disappeared. Share owners have no personal responsibility for the corporation’s actions, yet responsibility is a key element in private ownership. Nor do most share owners have much knowledge of what the company in which they own an infinitesimal part is doing. If they exercise “power” it is by leaving through selling to those who have no disagreements with current practices. In other words, if I think a company in which I own shares is acting unethically, and so refuse to “own” any of it, it can only happen by my selling to someone who has no such qualms. Ironically, my doing so helps perpetuate the behavior I object to. This is the opposite of what it means to have responsibility over one’s property.
Think of owning a slave. If I disapprove of slavery and so sell my slaves to someone who will continue their subjugation, what have I actually done against slavery? I washed my hands of it, but I also weaken my position as its opponent and strengthen the position of slave owners by enabling them to make still more more by having more slaves. Any income that slave made possible shifts from an opponent of slavery to a supporter. This is analogous to the situation with shares I have just described.
But I can also emancipate my slaves and set them free (though in practice many slave states forbade it). There is no equivalent act to emancipation for a shareholder.
Not only is the shareholder powerless to change bad policies unless he or she wants to organize a national boycott (which is no easier for share owners than for non-share owners), they are also powerless to reduce the resources devoted to wrong doing. What we think of as private property does not exist. What does exist is essentially a single private property right- the right to buy and sell a share. But private property consists of a bundle of rights, only one of which is the right to buy and sell.
Often people own their shares through mutual funds and so are even farther removed from the responsibilities and powers of ownership. They often have no idea as to what shares they ‘own.’ Unless they are green funds, managers must by law choose to invest only in companies promising the most return, no matter how acquired. And if they do not, their investment capital will shift to other mutual funds.
Green funds are a new and very small part of a capitalist economy and it is in the interests of fund managers to define “green” as loosely as they can in order to increase their chances of getting a maximum financial performance for their fund. Few shareholders know the details of their decisions. Nor do they want to. After all, that is usually why they invest in funds.
In short, private property is a subordinate partner to the economic order under capitalism. Shareholders have traded ownership for stewarding shares in the interests of maximizing money profit as determined on ‘the market.’ Property owners embedded in a rich context of values where prices are one admittedly important factor among many have been replaced by share stewards serving only the value of maximizing profit. Those that do this best receive more return and those who are poor at it are gradually weeded out of any stewardship responsibility at all.
If a market economy is a contractual system for exchanging private property, capitalism is arguably not a market economy, it is a system that has absorbed and subordinated the market economy to something for which we do not have a clear term, other than “capitalism.”
Ecosystems and the human world
Often markets are compared to ecosystems. In both markets and ecosystems competition, innovation, and adaptation take place within an order designed by no one but emerging instead from countless independent actions which create feedback indicating whether they have been successful in terms of those systems. A successful business in market terms makes money and a successful organism in ecosystemic terms reproduces and increases. These definitions of success are independent of success at the level of the business person or organism’s own interests. I might be miserable and still run a successful business, or I might regard my business as meeting my own desires even if it makes no money at all. A salmon dies after reproducing, and male praying mantises and black widow spiders often end up as food for the females. Their individual interests are injured while as a species they succeed.
But this comparison, valid as far as it goes, misses a vital distinction. As we traditionally think of it the market is a part of the larger complex social order of human society. Therefore we have three levels of “success” to analyze: the success or failure of the person acting, whether or not they also succeed in market systemic terms by making or losing money, and the larger impact of the market itself on the society of which it is a part. Are people healthier, happier, freer, or not? Often the property rights that, once defined, empower market exchange are determined by this third level.
Under capitalism the market has freed itself from human society to become an independent ecosystem of its own to which the rest of the human world must now adapt. Participants must adapt to the market. Property rights are selected not by their impact on human life but by their capacity to be bought and sold. The market has become an independent force rather than a subordinate component of civil society.
One sign of this occurring is that more and more wealth accrues to people who manipulate money exchanges to maximize their income while never producing anything of concrete value for others, rather than to people who produce goods and services valued by human beings..
Those most successful at acquiring this wealth use it to acquire more wealth and manipulate the rules of exchange to further favor capitalism at the expense of human beings. They have not created new products, invented new devices, enabled more jobs, or made new discoveries benefiting the human world. Rather they parasitize it. This is one major reason why the income of most Americans has been stagnant while that of its richest 1 percent has soared. Bail-outs, freedom from the law with respect to fraud and other forms of dishonesty, and the wholesale corruption of public institutions are signature qualities of capitalism in America today.
Steve Jobs of Apple represented the market, and transformed the world. Lloyd Blankfein of Goldman Sachs represents capitalism, and impoverished multitudes while enriching himself and some others like him
Capitalism and freedom
Milton Friedman wrote a book titled Capitalism and Freedom. He got it wrong. There is a powerful correlation between markets and freedom, but not between capitalism and freedom. Friedman wanted capitalism to replace much of what government does. We now have an excellent case study, private prisons. Prisons for profit.
As private prisons have grown so has the number of incarcerated Americans. There is a connection.
A few Senators are key advocates of legislation that would increase the rate at which undocumented immigrants to the US are incarcerated. Immigration detention has more than doubled the profits in private prisons since 1995 and not surprisingly the companies making these profits are major donors to Senators pushing legislation to further increase detentions.
Almost half of federal prison inmates are in for drug offenses and most drug offenses are nonviolent. In Louisiana the rate of nonviolent offenders is almost 2/3. It is a stronghold of private prisons. In an annual report for 2010 the Corrections Corporation of America (CCA) stated: “The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices or through the decriminalization of certain activities that are currently proscribed by our criminal laws,”
An important and growing part of the capitalist economy gains whenever more people are incarcerated for longer periods of time. And these corporations lobby government to increase incarceration. Today the US has more people imprisoned than do despotisms with vastly larger populations, like China. Yet, from the standpoint of society rather than capitalism, people in jail find their lives ruined, they are not productive towards others, and those hired to guard them contribute nothing productive to the world either.
This example illustrates how human beings, supposedly the beneficiaries of markets, are valued only for their utility within capitalism. So long as they are useful they receive good remuneration, but as soon as they are not they are tossed aside. Some are most useful when incarcerated. The decline of social protection legislation is still occurring in America so the full horror of this system has yet to make itself known here, although the private prison industry gives us a clue as to what is ahead if it continues unchecked. But it is quite well known and visible to all in China. Capitalist businesses are moving there because labor is cheaper and unprotected by the laws and institutions of freer societies. Freedom in our sense is a cost of doing business for capitalists, and so is best minimized into being “as little as the market will bear.”
In other words, capitalism is a metastasized market, overrunning and gradually engulfing the human society that nurtured it. It is inhuman to its very core.
A free society is held together by shared customs reflecting a general respect for others as individuals. Of course people are useful for one another, but they are not just useful. As the saying about human friendship puts it so well, friends are useful, but if you say you are someone’s friend only because they are useful, you are no friend at all. If I need to explain that point to you, you will be at home in capitalism.
Market morality is the morality of instrumental exchange; the mortality of evaluating everything and everyone in terms of utility. So long as an exchange follows the rules it is legitimate. As such, market morality is what I call “thin” morality. In itself it is an incomplete ethic because it deals only with instrumental values. In a free society markets exist within a larger and deeper moral framework that values people as possessing worth that is not purely instrumental. And perhaps other beings and places are so recognized as not being just instrumental either, such as our national parks or historical sites as well.
So long as it exists within this deeper ethical context, the market empowers individuals and strengthens their capacity to cooperate over a rich range of human values. It’s system of price signals expands our capacity to manifest deeper and thicker values. In many ways liberal civil society is by far the richest and most complex expression of free men and women pursuing their self-chosen goals within a larger context of respect and voluntary exchange that has ever existed.
Capitalism is different. It is the gradual overwhelming and destruction of all values that are not instrumental. To value something instrumentally is automatically to deny its intrinsic value. The result is nihilism.
This is a rather tricky but important point. But we can easily grasp it if I ask you the money value of your family photographs, and then offer to pay you still more for them. Once I acquire them I tell you I will destroy them, but you will be money ahead.
You will almost certainly be discomfited. If need makes you sell them to me, at best you would feel very mixed emotions. You would not feel the delight that arises from making a profitable sale. You had never thought of those pictures in money terms, and are probably uncomfortable doing so. The question might even seem inappropriate, like equating love with prostitution.
Values like our treasuring family photographs or feeling love are not instrumental and how they intertwine with our needs and wants constitutes a major dimension of the moral tensions we deal with throughout our lives as human beings. This tension can only be managed by a mind able to appreciate and understand both dimensions of who we are. We often error in retrospect, but even recognizing an error requires understanding both kinds of value.
These values are incapable of being addressed within the inhuman system of capitalism. Once capitalism exists non-instrumental values are actively selected against, and receive little opportunity for expression. Human beings become profit centers for corporations, and nothing more. Money is the primary expression of instrumental value, for something’s price is a sign of what it can be exchanged for or turned into something different from itself. A valuable human will be paid as much as needed to acquire their services, less valuable ones will be treated as without much worth, and some people will be profit centers for a corporation, and so most valuable to them, when confined in a private prison for as long as possible.
Yet the human world is primarily a world of values other than the instrumental. As capitalism develops in the human world both it and the natural world on which it depends become valued solely for their ability to turn a profit. Capitalism therefore destroys social and environmental riches that cannot be priced, and does so to bring a money profit.
Capitalism cannot distinguish love from prostitution.
Why the worst tend to get on top
Over time capitalism facilitates the rise of the worst people to positions of leadership. They are those who are most at home with purely instrumental values measured in terms of money. Freedom for them is in not feeling any compulsion in the commands of capitalist prices because money is what they seek above all else. Normal human beings’ ethical complexity renders them at a disadvantage in competing for top slots in corporations. As institutional sociopaths corporations select for human sociopaths or for psychologically and morally damaged people at home in such an environment.
This shift is not instantaneous. Corporations are started by creative and strong individuals who develop their own organizational cultures and institutional values shaped by their way of doing things. These internal cultures push back against the logic of a pure capitalist system. But as founders pass and their corporations shift from civil society into the capitalist ecosystem, environmental pressures shift from adapting to the human world of civil society to the simplified pure market ecosystem of capitalism.
Sociopaths have a hard time taking a long term perspective because their ability to place themselves in others’ shoes is so weak. The long term is not them now. They fit in remarkably well with a system that seeks more and more profits more and more rapidly regardless of its long term impact. Fracking is a perfect example of this logic. Corporations inject fluids into the ground to produce more gas for their wells. These fluids are not just water, although just what they are these firms refuse to divulge. But fracking requires enormous quantities of water. Much of it occurs in regions of low rainfall and already falling water tables. The corporations themselves are not located in these regions and the long term fate of the farms and towns in the area are of no interest to them. Besides, money is portable and they can easily move, as so many moved companies to China and their headquarters to Caribbean islands.
Classical liberals and libertarians
Some classical liberals and libertarians might be tempted to accept much of my critique and try to turn it to their own purposes. They will argue that the problems I have described are not because of markets, they are because of the “state.” The ‘state’ gives out special privileges to corporations, such as limited liability, and so triggers these difficulties. Reduce the ‘state’ and the problems go away.
They are wrong.
The market only exists within a governmental framework able to define and protect property rights. (I discuss this issue in detail in my chapter in a new book coming out in March: Uncivil Liberties: Deconstructing Libertarianism.) You cannot get rid of government without destroying much of the market. Given that, the government can and must be able to play a role in any reasonably imaginable society. I chose my example of private prisons to help make this point.
But if government does play an important role, those with the most resources will be tempted to influence government to give themselves special privileges others do not have. They will try and turn traditionally governmental activities serving the public into sources for private profit, regardless of the damage to public values, as with private prisons. This is standard operating procedure in America today. Libertarians and classical liberals who complain about “big government” and also praise big business do not face up to the fact that large economic organizations have been the single strongest promoters of nation-wide standardization and regulation, because they thereby gain in their ability to overrun local differences. For example, consumers of organic food never demanded compulsory national standards that prohibited more demanding state standards. The food industry did, to facilitate making organic food another profit center for capitalism.
Significantly, the practical impact of libertarian and classical liberal efforts at influencing politics have been to strengthen capitalism and reduce government’s ability to serve anyone else. Capitalism cannot be brought under control by shrinking government because, as we see, the parts of government libertarians and classical liberals have been most successful at discrediting are those serving anyone other than capitalism while making what remains still more subject to capitalist manipulation.
From a human perspective capitalism is a social drug, a collective methamphetamine that produces a marvelous high while it gradually and exorably destroys the social body. Addiction to capitalism is easy. Recovery from it difficult. But it is not impossible.
The solution as I understand it has two dimensions. First, capitalist enterprises must be subordinated to the larger ethical standards of civil society. Second, institutional alternatives to capitalist enterprises should be encouraged to develop whenever possible. There can never be a permanent solution to these problems as long as economic disparities exist, and economic disparities will always exist in market economies. In this respect our situation is like our Founders’ warning about political freedom: there will always be those plotting against it, but those dangers cannot be removed without also ending the freedom we so value. We must learn to live with the problem and address it wisely.
Some classical liberals and libertarians will say my suggestions or similar measures amount to “social engineering.” They are wrong. In the practical outline that will be presented in Part II, brief as it will be, I urge prohibitions, not commands. They do not tell people what to do. If implemented they would simply reduce the scope of capitalist enterprises as well as their practical immunity from the rule of law. Both existing and new institutional forms for serving the same purposes within a market would be no more restricted than they are today.