Chapter 14
CRITIQUE OF IMPORTANT MARKET CONCEPTS
We are ready to examine critically the market
concepts we have just reviewed.
Those ideas raise issues that classical liberals mostly have not explored, primarily
because they have for so long felt themselves on the defensive against the
world Left. These issues show that the
ideas are not as definitive as the advocates of the axiomatic system have long thought
them to be. It will become apparent that the pure laissez-faire model of
classical liberalism has significant flaws and omissions. This means that erstwhile supporters of
"free trade" should not feel themselves untrue to their own
philosophy if they find it necessary to reformulate it to meet the economic
conditions of the present and the future.
Our critique will see
each flaw both as it applied to the theory of a market system as we have known
that system and as it applies to the new polarized global capitalism. When supporters of a free market carry over
their principles to defend the more recent form of capitalism, they are not
only misapplying them by making them fit something that differs greatly from
their original intention; they are also carrying over ideas that have never
adequately been fully developed.
None of this will be a
reason to abandon classical liberalism.
There is much in it that will continue to help protect the rights of the
individual, limit the power of the state, foster continued innovation, and establish
legitimacy, At the same time, an adapted
classical liberalism will need a central egalitarian feature to make sure that the
bulk of the population participates in the well-being produced by the new
technology.
Objections that have been invalid
It should first be noticed that some long-standing criticisms of the market economy are not
valid. A critique of problems in the
theory is not the same thing as an endorsement of those invalid
criticisms. It will help to include a
discussion of those so that as we go along we can distinguish criticisms that
are sound from those that are not.
The
"exploitation theories." The hugely influential view that
capitalism victimizes millions of people has been prominent among the invalid
objections to a market economy. For two hundred years, a central part of the
Left's outlook has been that many millions of people are systematically and
oppressively taken advantage of under a market system, a consequence of which
in the Left’s thinking is that the state or an ideological movement needs to
take up their cause as a liberating mechanism against the exploiters. (This was the core insight held, for example,
by the German socialist Ferdinand Lassalle.)
If the view is correct that a market economy is inherently exploitive,
classical liberalism is simply a sham, with "individual liberty" a
cover for something insidious (which is precisely the view taken by the various
forms of class, racial and feminist "deconstructionist" theory). The criticism goes to the heart of a "bourgeois
free society." It sees such a
society as something far different from what it purports to be.
Exploitation theory is
examined in detail in Chapter 12 of my book Socialist Thought.[1] Instead of just one theory, there are at
least four distinguishable ideas: the socialist version of the Labor Theory of
Value; class theory; bargaining power theory as it applies to wages; and
bargaining power theory as it applies to other conditions of employment and to
many transactions outside the labor market.
I saw merit only in the last of these (and we will discuss it here in
connection with the theory of the “act of exchange”). This last criticism was not, in my opinion,
fatal to capitalism, since a more sophisticated approach to the legal and
ethical framework of the market could remedy it.
Here are summaries of
the critiques I made of the three exploitation theories I considered unsound:
The Labor Theory of Value, in its
socialist form as propounded by Rodbertus and Marx, says it is unjust for any
of the return from an enterprise not to go to the workers; the profit the owner
makes from the difference between what the product sells for and what he pays
the workers is a form of theft. Thus,
the whole "wage relation," which is involved when one person hires
another, is a form of oppression. The
essential fallacy in this is that it is a moral judgment that presupposes the
very thing it is trying to prove. It
makes sense if one starts with a socialist preference for a non-market system
of production and distribution in which trade and personal benefit play no
part; it is absolute nonsense if one accepts private property and the
centrality of the act of exchange.
Anyone who sees value in the latter will find no merit in a moral
judgment condemning profit as theft.
Instead of being a reason for socialism, the socialist normative
application of the Labor Theory of Value is valid only if someone already
accepts socialism on other grounds. The
theory commits the fallacy of using the conclusion to justify the premises.
Socialist class theory says all
employers are monolithic as members of the same class, so that going to work
for one employer is the same as going to work for any other. If we ask ourselves empirically whether this
is actually descriptive of things in a competitive market (presupposing, also,
that we are talking about a classically liberal society, in which class
structure will not have been permitted to harden), it is impossible to say that
it is. There is just far too much
economic and social mobility for that.
Bargaining power theory as applied to wages
says that an employer can dictate wages, telling workers "here it is, take
it or leave it." But somebody
working for wages will find this only temporarily true. As he talks with others or otherwise comes to
know the alternative employments that exist, he can respond to better
opportunities. Fundamentally, because of
mobility, it is supply-and-demand, not employer fiat, that sets wages.
There is validity to a
"bargaining power" criticism about other matters. This will be discussed later in our critique
of the "act of exchange," which will be part of the discussion of valid
criticisms.
The Berle-and-Means
Thesis. This is the view, commonly attributed to
Adolf Berle and Gardiner Means in their 1932 book The Modern Corporation and
Private Property, that corporate boards of directors aren't meaningfully
accountable to the firm's stockholders where the stockholders are many in
number and are diffuse and unorganized; most often, stockholders will simply
return proxies to existing management, which can reelect itself time after
time. Because management isn't
effectively accountable to stockholders, it has no accountability to
anybody. To Berle and Means, this
"irresponsibility" meant that corporations should be put under the
wing of government.
The first part of this
is descriptive, the latter part normative.
The description is essentially true, but the normative conclusion about
putting corporations under quasi-public control doesn't follow for anyone who
is not otherwise in favor of government direction of business. Free-market theorists point to the fact that
the investing public seems little concerned about this purported
"problem," and that in any case the managers of firms are under considerable
competitive discipline to do well, because if they do not they will be
vulnerable to hostile takeovers. As a matter of fact, a criticism is often made
that runs the opposite direction from the Berle-Means Thesis: that management
is too concerned about quarterly profits and serving the stockholders, and
should have longer-term goals and even "other ‘stakeholders'" in
mind.
The attribution of the
original idea to Berle and Means has long been an act of ideological fraud – an
instance of the long-continuing dissimulation by which American
"liberal" thought has obscured its connection with socialist
ideas. Attributing it to these two men
has made it seem that the idea came from two American
"liberals." In fact, by 1932
the point had already been prominent in socialist literature. British socialist G. D. H. Cole stated it,
and so did Thomas Kirkup in his History of Socialism as far back as
1909.[2] Berle himself argued it in The New
Republic in the 1920s.
For these reasons, the
thesis really wasn’t tenable as originally posed. But there is substantial validity to the
thesis under current conditions. The
excesses in executive compensation that have become a hallmark of the
globalized market economy aren’t adequately explained by what is necessary for
firms to attract excellent talent. The
common explanation that they are the result of “an old-boy network” of conflict-ridden
relationships between corporate boards and the executives is plausible,
especially when we see the compensation granted in the many millions of dollars
as a company fails and its stock falls.
Business enterprises are
under immense pressure to cut costs and to innovate rapidly even to survive,
but the cost-cutting is somehow not applied at the higher levels, where the
people involved “look after their own.”
This sort of cronyism is now common in all sorts of organizations, such
as in universities at the higher administrative levels and even at the college
and department levels, not just in large business enterprises.
There is certainly a
lack of accountability that isn’t prevented by market discipline. Accordingly, free-market theory should itself
call for safeguards put into the incorporation statutes or otherwise. John Bogle, who we recall was the founder of
Vanguard Funds, argues forcefully that capitalism has changed its nature from
“owners’ capitalism” to “managers’ capitalism,” precisely because stockholders,
including most particularly the mutual funds and other large investors, have
assumed an acquiescent posture that allows the managers near-complete
autonomy. He takes the Berle-Means
Thesis seriously, although without joining them in the call for the
socialization of business (or perhaps even noticing it). Bogle calls for major reforms to put the
owners back in charge.
Before we leave the
subject, it is worth reflecting upon important cultural realities. The taking care of each other at the top of
each stratum involves more than just associates scratching each others’
back. It is a visible sign of an elitist
mentality among some that they have great entitlement while they accept it as
normal for the bulk of people to be sinking; and it reflects, too, the effects
of the hyper-mobility that has gone far to destroy the bonds of loyalty that
employees, including executives, have to firms.
Feelings of long-term commitment and a sense of duty are at a low
ebb.
American
culture has also changed in related ways.
Free market ideology is now applied by many to justify any amount of
what used to be called “greed.”
Profit-seeking is properly seen as crucial to the dynamic of a market
economy. But there is a point at which
it is appropriate to speak of it as “greed,” since under the present
circumstances the pursuit of personal self-aggrandizement is little constrained
by a larger value-system. Even the tie
to national loyalty has largely disappeared as one chief executive after
another declares how he no longer wants his firm to be considered, say, “an
American company.” And what are we to think of the mental landscape of an
individual who makes a hundred million dollars a year while those working
around him (and with whom he may deal daily on a personal basis) are seeing
wage stagnation and worrying about lay-offs?
In addition to mobility and ideology, it is likely that the persisting
cultural legacy of the 1960s, with its disdain for “bourgeois values,” has
played a role in the shifting attitudes.
Underconsumption-overproduction
theory.
According to socialist author Maurice Cornforth, Marxist theory says the
trade cycle that periodically disrupts capitalism is due to the employers'
keeping workers' pay as low as possible, which causes the workers not to have
the means "to consume the products of the ever-increasing industrial
machine." Because of this gap,
production outstrips purchasing power, precipitating a crisis.[3]
Ironically, this is precisely the
problem that is now looming for the years ahead from the increasing adoption of
non-labor-intensive technology. There is going to be a vast "purchasing
power problem" (as well as revolutionary turmoil and a general refusal to
countenance a market economy) unless a way is found to include everyone in the
productivity of the new technology as it develops through the market system. At
the same time, a mechanism such as a social market economy will increasingly be
needed to provide the demand that will sustain business enterprise, innovation
and scientific advance.
Why, then, do I include the
Marxist theory among the major erroneous criticisms of capitalism? Because it has been false during all of the
time prior to the present, and even into the future until the displacement of
work becomes pronounced. People went
from agriculture into industry, and from industry into services, with their
standard of living going ever-upward based on increasing real wages and success
in the marketplace. When the production
required large amounts of labor, the payment of wages inherently provided a
system of broad distribution. Under
those conditions, the market economy has worked well, and the trade
cycle has, contrary to socialist analysis, had other explanations rooted
in monetary fluctuations. The fact that
there will be a distribution problem in a near-workless future does not
validate two centuries of misplaced criticism of an institution that has served
humanity so well.
Major problems that do exist in free-market thinking
There is much to be objected to about certain of the pivotal concepts
of free-market theory – even as applied to capitalism as we have known it. As we will see, these conceptual weaknesses
are often compounded in the context of the new capitalism.
Insufficient analysis of the "act of exchange."
As we saw in our review
of free-market thinking, the "act of exchange" (also called "the
transaction") is a key building-block in market theory, something from which
all else grows when voluntary exchanges occur by the millions. Recall the
frequently-made point that voluntary transactions are entered into because all
parties are motivated by the prospect, as they see it, of bettering their
situation. All parties win. An economic system based on vast networks of
such transactions will constitute, in effect, a "positive sum game"
from which people in general benefit immensely.
My criticism of the act
of exchange won't be intended to diminish our understanding of its vital role
in a free society, where voluntary relationships prevail in contrast to a
command system. What we will be noting
is that the analysis of it hasn't been adequate and that the simple "each
person benefits" insight doesn't tell the whole story. A sophisticated analysis is much more
complex. Since "the
transaction" feeds into the "optimum allocation of resources"
concept to provide a value judgment that supports a closed ideology that bars
other considerations, it is valuable to pierce the over-simplified view of it
that allows it to be so easily used in that way.
I mentioned earlier that
in my opinion there is one “bargaining power” criticism that is valid. We see this if we confront the
assertion (presented as a truism) that in a transaction "all parties
benefit." No doubt in terms of immediate
individual judgment they seem to (at least as the parties see it at the time of
the transaction; it is relevant, however, that somebody can easily look back
later and say "I was really taken on that one.") But let us consider the situation in which
there is "unequal bargaining power."
I mean the situation, so common in today's market (and not nearly so
common in Adam Smith's day when individuals largely dealt with other
individuals), where one of the parties is able to spell out all of the
subsidiary terms of the contract on a "take it or leave it"
basis. Quite commonly in the modern
commercial system, the other party doesn't even read the terms, much less
bargain over them. Let us suppose you
find a farm tractor, a computer, a car, or a dishwasher you like, and decide to
buy it. Will you work out with the
seller the terms of the warranty? By no
means. As a lawyer I can tell you that
the warranty will have been written entirely by the seller's legal and
marketing departments working together, often with one eye out for actually
limiting, not increasing, the seller's liability and the other for having
something that sounds good when it can be said "this carries a
warranty."
It is too easy to set up
a mental image of "the transaction" as necessarily being an
"amply-negotiated" one. In an
important transaction between two well-organized and more or less equal parties,
every detail of the contract is worked out, negotiated, and renegotiated, until
each side is satisfied its needs are met in all particulars, at least to the
extent that the compromises inherent in negotiation allow. But such full consideration, amply advised by
counsel, which is really necessary for a contract to attract our admiration,
isn't the model for the typical transaction.
And since it isn't, the result in terms of "mutual
satisfaction" is often far less than the simple view of "the act of
exchange" suggests.
When I graduated from
law school, I rented an apartment in
This has vastly
important application in the employment relationship. Everybody knows before taking a job what wage
is being offered, but much of the subordinate features of the relationship will
just be put in place by the employer and certainly not negotiated with the
employee. A person signs on for
employment, knowing the wage or salary; but, especially as the months and years
go by, the organization sets the "conditions of employment." The employee will choose to stay with the job
as long as the net effect is better than any alternative he sees (including a
consideration of the costs and inconveniences of changing jobs and perhaps even
the community he lives in), but there are many things about the relationship
that lack mutuality in the sense of looking after the interests of both
parties. Will there be a "fair
procedure" for such things as promotion, demotion, transfer, discipline or
discharge? Is the employment structured
in a way that allows dependable planning for retirement? Is there a way to maintain income in case of
disability? What about health
insurance? The idea that "both
parties benefit" just doesn't look far enough to tell all there is to
tell. Most of the time the employment
relationship is far from analogous to the amply-negotiated type of
contract. These are things that are
enormously important to peoples’ most basic needs. Classical liberal thought hasn't been
sensitive to them, and this has allowed a vast opening for its critics and has also
caused the public during much of American history, in keeping with its native
common sense, to see that body of thought as irrelevant to much that counts.
Another weakness in the
simple view of the transaction is that it has for the most part been oblivious
to the legal, institutional and cultural prerequisites of satisfactory
transactions. Most people don't know it,
but the wonderful storyteller Jack London was a revolutionary socialist. In his socialist novel The Iron Heel a
century ago, he made a devastating anti-capitalist point by telling about a man
who, though described as a fine worker, lost his arm in an industrial accident
because of a momentary lapse of care.
Unable to perform the work, he lost his job. There was no insurance, and when the man sued
the company to try to recover something, he ran into highly capable corporate
attorneys who were able successfully to invoke all of the defenses available
under common law negligence theory (the absence of the employer's negligence,
the worker's assumption of risk, and the employee’s contributory
negligence).
Even though the
employment relationship was voluntary and an act of exchange in which both
parties benefited, it was nevertheless profoundly insufficient to see to the
most fundamental needs of one of the parties.
The world cried out for greater affluence and more sophisticated market
development so that insurance could become an auxiliary to the employment
relation to cover industrial accidents.
The "transaction" needed plug-in institutions, something that
the theorists of the "act of exchange" rarely see the need to talk
about.
This is an important
criticism of the theory, which I cite in order to encourage an expansion of the
thinking. But it is valuable to keep
these issues in perspective. Otto von
Bismarck introduced "workman's compensation" (now called
"workers' compensation") into late-nineteenth century
A final criticism of the
theory of the transaction is that it doesn't look beyond the parties themselves
to account for the entire setting. It
sees a broader picture to the extent that it envisions peoples' linking
transactions together to form a dynamic economy, but it has no willingness to
see detrimental effects that the particular circumstances of trade may bring to
a country's well-being. To avoid
acknowledging such effects, it prefers to see the act of exchange atomistically
as exclusively a matter between the parties.
This dropping of context has been especially important in the
long-standing "Free Trade vs. Protection" debate. I will talk about this in detail later in
this chapter when we examine the laissez-faire view that "free
trade [like any act of exchange] is always beneficial."
These things will have
added force in the context of globalization, polarized income and wealth, and
labor displacement. In a number of ways,
it will be clear that everyone is not benefiting, and that most have no
prospect to. Nor will the system as a
whole be working well, unless substantially revamped:
A feature we have hardly
mentioned is that the global market has become hypersensitive to major panics,
threatening a crash of the world economy as a whole, because of the explosive
growth within just a very few years of an ocean of investment capital (estimated
by David Smick in 2008 at above $100 trillion) that speeds around the world at
lightning speed at the click of a computer mouse, not only seeking every profit
opportunity but also cashing in speculatively on every central bank miscue,
national currency weakness, or other perceived failing, with the effect not of
correcting such things but of making them worse even to the point of
collapse. Smick says the vulnerability
is extreme. It offers at any given
moment to make hapless victims out of many millions of people who will have
contributed in no way to the fiasco. The
idea that “everybody benefits” rings hollow in such a context. There is no “invisible hand” guiding the mass
psychology that drives the great pool of investment money. This removes any assurance of continuity to
the world economy and to peoples’ lives.
It hardly needs to be said that this is an intolerable situation.
The opening of the
advanced economies to the competitive forces unleashed by global markets and
low-cost foreign labor and the rapid development of non-labor-intensive
technology have made entrepreneurial effort far riskier but much more
potentially profitable, while at the same time creating a supply-and-demand
situation in the labor market that has for several decades increasingly
undercut the wages and salaries going to the bulk of the population in those
economies. We have seen that the result
is a dramatically new situation in which some people do extremely well but the
broad middle class, long the hallmark of American capitalism, struggles to stay
afloat.
The
concept of a “shared market economy” calls for continuing, energetic business
activity, albeit with a system of distribution through shared ownership. Even if that is adopted, a successful
international economy will depend on returning things to a manageable scale,
including such restraints on financial speculation as are found to be necessary
for the purpose. This in itself will require some radical rethinking, hopefully
contributed to by the world’s top economists (who so far have mostly been
missing-in-action).
A
free-marketer’s objection that to constrain the world financial pool would be
to “intervene in the freedom of the market” would perpetuate a common
error. This is to see a market economy
as a stand-alone entity sufficient in itself, whereas in fact it cannot operate
without a sophisticated framework of law, institutions, ethics and culture that
are intended to make it work better, not impede it.
For
all these reasons, and perhaps others, it isn’t correct to say that “everyone
benefits” from a piling up of millions of “acts of exchange.”
The insistence that wages are tied to productivity
It is a truism that if
there is no output to be sold, there is nothing from which to pay wages. If productivity goes down, the sum of wages
paid out will have to go down, too, unless investors or creditors pump in money
to sustain a firm on what would have to be a temporary basis, contingent upon
things improving.
It is also true under
theoretical model-related conditions in a free market that if productivity goes
up and yet wages stay the same, profits to the business will rise; that this
will attract a flow of other capital, always on the lookout for profit
opportunities, into the industry to compete for the profit; and that that will
create more demand for the pool of workers, bidding wages up (if the size of
the worker-pool remains roughly the same).
This is all standard economic theory, which postulates a constant
tendency toward re-adjustment within a marketplace in response to
opportunities. You will notice that
wages do go up in response to the increase in productivity.
The truisms of the
preceding two paragraphs are what give rise to the economic maxim that we
discussed in Chapter 8 that wages are tied to productivity. It is repeated frequently in economic
literature. Mark Skousen in The
Freeman says that "productivity is the key to rising or falling
wages. Many years ago, F. A. Harper... wrote
a grand little book entitled Why Wages Rise... He demonstrated that... ‘Higher
wages come from increased output per hour of work.' Ludwig von Mises adds, ‘if you increase
capital, you increase the marginal productivity of labor, and the effect will
be that real wages will rise.'"[4] Hans Sennholz writes that "working
conditions and wage rates depend on labor productivity, which is a direct
function of the stock of capital invested per worker."[5] Paul Krugman says in the Harvard Business
Review that "one last assertion that may bother some readers is that
wages automatically rise with productivity.
Is this realistic? Yes. Economic history offers no example of a
country that experienced long-term productivity growth without a roughly equal
rise in real wages."[6]
So here we have it. The theory is presented as
"realistic," suggesting that it describes the situation as it is in
fact. But you will notice that the
theory contains certain factual predicates, assumptions that must be met for
the theory to apply. One of these is
that capital will flow to the increased profit opportunity, expanding the
amount of capital invested per worker and bidding up wages. Another is that the number of people in the
pool of potential workers remains approximately the same as it was before
(i.e., that the supply of labor wasn't changing as the demand for it
increased). Economic theory has to make
such assumptions for its analysis. One
of its key concepts is ceteris paribus, the express assumption that
"everything else [other than the variable that is being changed] remains
the same."
How do these factual
predicates fare in today's world? We
certainly have the first one – the ready mobility of capital to move toward any
profit opportunity. That is one of the
more salient features of the global economy, with its worldwide financial flows
(if we ignore, which seems justified in the context of the general point, the
obstructions to total mobility that exist in many countries).
We just as certainly
don't have the second one. The more that
improvements in communications and transportation make labor markets global,
not local, the more there is a vast expansion in the labor pool in both skilled
and unskilled work. This has already had a major impact on employment and wages
in the advanced economies, but has much further to go. The day has arrived when
an accountant in Goodland, Kansas, is in direct competition with accountants in
New York City, the Philippines and India, because of computers – even if the
accountants all stay where they are and don't migrate. Computers and instantaneous communication
place them in "virtual" proximity to each other. What happens to the conclusion that
"wages will rise" if the labor pool is expanded by a factor of a
hundred or a thousand, bringing in billions of people who have hardly been
receiving any wage at all compared to what workers in the advanced economies
have been getting? The theory will
simply say that ceteris paribus didn't hold, and that the flow of
capital will enhance wages under the new conditions of a vastly increased
supply of labor; but that, of course, those enhanced wages will be much lower
than they were before for those who had been part of the earlier, much smaller
labor pool. In other words, given a
worldwide extension of the labor pool and given a sizeable immigration from the
Moreover, we face a new
phenomenon. As capital flows in, the
theory says, it will create more demand for labor, so that wages will be bid
up. This does not take into account that
much of the emerging technology is precisely non-labor-intensive,
actually decreasing by leaps and bounds the demand for labor. Again, it
is a ceteris paribus delusion.
The fallacy of the "optimum allocation of resources" linchpin
Now we come to perhaps
the most important concept, the one that is the linchpin of the entire closed
system since it provides the sweeping value judgment that validates the
outcomes that arise from the laissez-faire market. This is the claim that the millions of acts
of exchange that constitute the marketplace make an "optimum allocation of
resources." I told of this concept
in the preceding chapter and quoted prominent market theorists to show that
what is meant is not just a technical meaning of "optimum," but a
claim that the allocation of resources (and of everything that follows by way
of incomes, wages, social position, etc.) in a market economy is the
"best" allocation. I said that
this conclusion results from a logical fallacy, which I didn't spell out at
that time but left for discussion now.
Recall that the claim is
a value judgment that is thought to follow from the point that "consumers
are sovereign, since their demand is what entrepreneurs have to respond to to
make a profit." I quoted Mises as
saying, "to assign to everybody his proper place in society is the task of
the consumers." In that earlier
discussion, we did notice by way of criticism that this slips a value-judgment
into a body of thought that claims to be a purely descriptive science. That is serious enough, but we have yet to
come to the logical fallacy that nullifies the entire point.
To avoid
misunderstanding, I should point out that I, too, favor an allocation of
resources and of social position on the basis of consumer choices (although I
don’t believe this precludes a given culture’s finding ways to reward or
diminish social position from what the market bestows). I don’t, however, base this preference on the
ground that that allocation is necessarily best as an allocation. Best or not, I as a classical liberal support
it because it is the allocation that arises out of freedom. I don't favor individual liberty and the act
of voluntary exchange because they produce the best allocation of resources;
rather, I favor the allocation of resources because it is the one produced by a
free process.
When a market theorist
says the sovereignty of the consumers makes the optimum allocation of
resources, he is making what is called "a holistic argument." Ludwig von Mises himself is the one who
argued most persuasively against "holistic" concepts. Chapter VIII of his monumental treatise Human
Action contains a section of several pages with the heading "A
Critique of the Holistic and Metaphysical View of Society." In the following passage Mises is talking
about the imputation of distinct existence to "society" as a collective
whole separate from the individuals who make it up:
The
individual lives and acts within society.
But society is nothing but the combination of individuals for
cooperative effort. It exists nowhere
else than in the actions of individual men.
It is a delusion to search for it outside the actions of individuals. To speak of a society's autonomous and
independent existence, of its life, its soul, and its actions is a metaphor
which can easily lead to crass errors.[7]
The concept of
"society" is useful in many ways, but it contains what we might call
"the fallacy of wrongly-imputed consciousness" if it is used in a way
that attributes consciousness and decision-making to the abstraction as an
aggregate. It is true that a society can
make decisions through individuals who are its selected representatives. But the aggregate itself isn't a conscious
thing. To talk as though it is is to
treat it "holistically." (Interestingly,
human beings are validly holistic
creatures, since people do have consciousness and are in that way more
than simply the cells that make them up.
But it is a metaphor to speak of society as having its own
consciousness.)
What Mises somehow
overlooked was that the concept of "the consumer" is the same. Consumers taken as an aggregate don't have a consciousness; only consumers as individuals
do. It is odd that Mises didn't see
this, since he saw it so powerfully in other connections.
Now, let us ask: from
whence can value judgments come? The
answer is: only from a conscious being.
Inanimate objects such as rocks, water, clouds, and sky don't make value
judgments. Nothing is good or bad,
desirable or undesirable, to a rock. A
God, in most conceptions of God, is a consciousness, and so can decide
what is good and bad, what is to be preferred and what is not. But note this: between the consciousness of a
God and of individual people, there are no consciousnesses. Many thinkers who don't want to base their
value judgments on a God feel very uncomfortable about attributing them to no
stronger a reed than individual minds and the preferences to which they give
rise, and so search for some source of values below God but above
individuals. All efforts of this kind
demand attributing consciousness to some metaphorical entity that doesn't
really possess consciousness. I wrote an
article years ago pointing this out about the philosophies of Victor Frankl,
Abraham Maslow and Nathaniel Branden, who otherwise are three very distinct
thinkers.[8]
Can
"consumers," taken holistically, make a value judgment? Are they
collectively a consciousness that can decide what is "best"? Of course not. The aggregate does not have a mind in itself,
but is the sum of countless individual consumers, each making decisions about
what is best in his own case.
Then let us notice that
from the perspective of each one of these individuals as an individual
the person may or may not think the allocation of resources flowing from the
total economy is the best possible.
Almost certainly he would prefer an allocation that would bestow more
resources on him and the things he cares about.
Actually, in spending his own money, he has not given the slightest
thought to the economy's total allocation; he has only paid attention to his
own little corner of the world.
Next, let us think of
each individual as a philosopher or social observer. Will he then think, as he looks out upon the
sum total of what is resulting from market transactions, that what he sees is
entirely to his liking in light of his philosophy? Probably no one, including Mises himself,
would be completely satisfied from that perspective. There are many things consumed, such as
excessive alcohol, dope, pornography, or what-have-you, that hardly square with
anyone's idea of what is "best," even from the point of view of those
who engage in the consumption (if asked in their sober moments). Indeed, people from competing philosophies
and cultures bring very different preferences to bear on what they would like
to see happen. It is for them more than
just a matter of individual preference or not liking certain features such as
drug consumption.
If "consumers"
as a metaphor can't judge, and individuals as consumers aren't judging, and
individuals as philosophers find aspects to take issue with, and we aren't
premising the whole "optimum allocation" claim on a judgment made by
God, what is there to the claim that a market economy makes the best possible
allocation of resources? Nothing. The most we can justifiably say is, as was
said above, that "I will accept the allocation, with a few exceptions as
provided by the society, because it is what results from a free
process." The seeming deficiency in
this, and the reason the closed system of market theory has so eagerly accepted
the "optimum allocation" argument in its place, is that it has no
metaphysical pretensions, and hence much less polemical power.
Socialists, of course,
have never accepted that the allocation of resources made by a market economy
is ideal. They always urge a different
set of priorities. Given that
difference, you would think they would have raised the criticism made here,
pointing to the conceptual flaw. If any
of them has, I am not aware of it. In so
competitive a world ideologically, it is amazing that even ones opponents'
concepts often go unexamined. Maybe it
is because people don't pay much attention to what people who differ with them
are saying.
Later in this chapter we
will examine Friedrich List's early-nineteenth century criticism of Free Trade
theory. It is worth noting that he
didn't see the sense of the argument that when people strive to further their
own interests, they "always further the interests of the
community." He cited several
counter-examples where it wasn't true.[9]
The idea that a market
economy produces an optimum allocation, although fallacious, had at least a
rough-hewn plausibility when the market resulted in prosperity for a broad
middle class. Even that plausibility is
greatly reduced, if not removed altogether, as the new polarized capitalism
ceases to serve the bulk of the population.
The need to qualify property rights theory
The preceding chapter
talked about "private property" as a major element in classical
liberal philosophy and about the varied theories relating to its origin and
justification. It is a feature that has
great utility to a philosophy that wants some sort of individual autonomy and
significant limits on the power of the state.
A widely diffuse holding of property provides the stuff with which
individuals can act, and the diffusion itself means that the state doesn't have
a centralized grip on one of the main things that is pivotal to peoples'
ability to exist.
One of my good friends
who is strongly pro-market has urged me to "remind people of the
importance of private property."
His admonition means that he is not losing sight of fundamentals. I will be curious, though, to see whether he responds
favorably to the discussion I am about to make of one very important question
about private property. This is:
whether the claim
to property by the owner is properly (i.e., in the context of the philosophy of
a free society as best formulated) to be considered as absolute; or whether, on
the other hand, the ownership shouldn't be seen as often subject to a rightful
claim, for at least part of its value, on behalf of the community.
To ask such a question
is clearly heretical within classical liberal thought. For a century and a half, any admission that
private property is subject to qualifications has been thought to create a
disastrous loophole through which the Left could attack the entire system of
private ownership. During that time,
this defensive posture has almost certainly been necessary for precisely that
reason (although later here we will see why this may simultaneously have been extremely
damaging to classical liberalism). It
has seemed better from a classical liberal point of view to defend the
institution entirely, not giving an inch.
Henry George and his followers disagreed, but they remained a minority
within free-market thinking.
The problem, as the
Georgists point out, is that this total defense hasn't been fully sound. And what is even more important now, it will
become far less so under the onrushing world conditions. If conservatives, libertarians, and classical
liberals are to adapt in a way that will allow their points of view to survive
and that will preserve their primary values in a world of vast economic
displacement, they are going to have to revise their view of property
(including earnings), doing so in a way that is intellectually defensible.
Let us begin with
George's insights a century ago, since they voice much of what I have in
mind. The first thing to notice is that
George was a devout free trader and classical liberal. Most of his writing gave powerful expression to
the various points of market theory. He
was a crusader for Free Trade and against Protectionism (which was the main
issue of political economy in the nineteenth century, just as it is becoming
again). His intellectual method was that
of a moral purist, even though he mixed into this many arguments that were made
on purely empirical, utilitarian grounds.
Any free market theorist who hasn't already done so will enjoy going
back and reading his books. They provide
a vigorous defense of the entire complex of ideas that make up classical
liberalism as we know it.
They do, that is, with
one exception. This has to do with his
perception that certain types of property come to their owners unearned, as
windfalls merely dropping into some peoples' laps from the fact that they live
among other people. Land was, under the
conditions of his day, the principal form of property of this type. No human being has made the land, although
improvements to the land are another matter.
The land per se comes to have value because of the growth of
human population, not because of anybody’s creative act. Since this is so, George saw no reason why
land should not be a resource of the whole population, rented out to
individuals who want to use and improve it.
This rent would then create a fund that could be used for a variety of
projects that would benefit everybody, as well as for placing a floor under all
members of the community to keep them from poverty. In the private property system as it has been
known, the owners of property enjoyed an enormous privilege, especially in a
predominantly agricultural society such as existed until a few decades ago,
while those who owned none of it had to toil for everything they got. Such a thing places a serious stain on the
generally accepted market philosophy, since it isn't fundamentally just.
George quoted Herbert Spencer, whose credentials as a
libertarian philosopher are solid, as agreeing with him; and he said he was
merely picking up from the French thinkers Quesnay and Turgot, whose ideas fed
into Adam Smith's. Rather than include a
number of direct quotes from George here, I am including them in the endnote.[10]
It is significant that
he thought the same applied to minerals: "...the ground values of great
cities and mineral deposits are due to the general growth of the
population" [emphasis added].[11] Natural resources are not created by anyone's
effort. They take on value by virtue of
the presence of people who will find them useful, and the value increases as
population grows and as technology and a way of life come to be centered upon
them. George would have the community
charge a rent equivalent to this value.
In addition, of course, a major portion of resources' value is
attributable to other things traceable to specific effort – i.e., the invention
that discovers their usefulness, and the capital and labor that go into
extracting and applying them. These,
pursuant to George's reasoning, would not be charged a rent, since they are not
a windfall but the product of someone's thought or effort.
These were the insights
held by George and several other major classical liberals. It may be an eye-opener to some that it has
not only been socialists who have believed that these types of property should
belong to the community as a whole.
George felt that the system of private property would actually be
stronger, and certainly much more morally justified (and hence defensible), if
it did not include a privileged position for some.
As just mentioned, most
classical liberals have resisted this, preferring an across-the-board system of
private property, without exceptions that could be expanded to destroy the
system as a whole. That resistance,
though I have thought it was best, has had its costs, probably the major one being
that the market has been left to seem "heartless" to those who
haven't fared well in it. Labor has had
a certain affinity to capitalism because workers in general aspire to be among
the middle class, but the opportunity for alliance and sympathy between those
who have done the drudgery and others has been surrendered. By not following George, classical liberalism
set itself up to allow socialism at least in part to "occupy the moral
high ground" throughout the twentieth century. As I ponder this, I am by no means certain it
has been wise to follow the majority classical liberal position.
Whatever was wisest in
the past, it is rapidly becoming clear that classical liberalism must
immediately move to George's position – and indeed to an expanded view of
it. When work is displaced and either
vast unemployment or marginalized work results, people are going to be desperate
for a place at the table; and they will have been knocked away not because of
any flaw in their character or lack of effort on their part, but because of
omnipresent forces over which they have no control. Their need is, however, only half of it: the
second half is that under the new technology there will be some people reaping
immense wealth, only a certain fraction of which they will have created through
their own contributions.
When, for example,
heavy-weight boxer Mike Tyson made $30 million dollars (before it was reduced
by a fine of $3 million) for his part in the infamous ear-biting fight with
Evander Holyfield, how much of that was "due to his own efforts"? Earnings at that level were the product of a
set of worldwide marketing institutions made possible by advanced
communications. Did Tyson create that? Certainly not. Did anyone in particular? No. It
was a product of the accretion of vast scientific-technical-entrepreneurial-even
governmental effort by countless people.
Because of that accretion, Tyson was in effect walking into a field and
"mixing his labor" with orchards overhanging with fruit, with bushes
loaded with berries, with venison waiting patiently to be taken. To be sure, his own skill as a prizefighter
was essential for its own sake and for the mass-marketing (as the product to be
packaged), but it was just a rather small part of a vast mechanism.
Likewise, those who reap
immense compensation from the new technology will not have earned all of that
return. (In the axiomatic system, they
will be said to have, on the simple ground that it is coming to them through
contract, reflecting acts of exchange.
But it is that way of looking at it that needs to be seriously
qualified.) The answer is: because each
person makes, at best, only a relatively small, incremental addition to a
technology that has been built up, like a coral reef, through the efforts and
intellectual contributions of countless predecessors. Imagine a young person in the year 2050 who
works as a technical specialist in some advanced technology, being so good at
it that the rewards are extremely high.
Everything he does will be standing on the shoulders of people developing
computers, biotechnology, robotics, genetics, etc., today, before he is even
born. What he brings to it will be
valuable, no doubt; but he will be creating only part of the value. Humanity itself will have created by far the
largest part. To some considerable
extent, this has always been true, even though Henry George himself did not
include it in his critique of the market.
It could be overlooked for the sake of individual autonomy so long as
"the system worked" to provide opportunity for everybody. It must not be overlooked at such time as the
system comes no longer to function acceptably in that sense.
Under such circumstances
in which the great vehicle for affluence is more than ever an accumulation of
accomplishments from those who have gone before, if a people begin to divide
into those who are fabulously-rich and a great mass of second-class citizens,
will the classical liberals of the future be true to their own beliefs if they
find it sufficient just to say that "they all earned their place"? If they say that, they will be clinging to
what has largely been true in the past, while at the same time being untrue to
the essential purposes of their own philosophy.
Classical liberalism will have been transformed into what socialists
have so long argued erroneously that it has been, a special-pleading rationale
for the rich. (This is the image of “crony capitalism” that has already become
so powerful in the public mind in recent years.) One of the purposes of this
book is to persuade those who cherish individual liberty that they will be
truer to their own philosophy if they see that there are limits to
polarization. This means that "the
market" and "contracts entered into within the market" cannot
under the coming circumstances be considered the sole criteria for what ought
to be.
We have noted that many societies have
accepted vast inequality as normal. By contrast, in the eighteenth century,
classical liberals didn't accept it when they saw in the aristocratic,
hierarchical societies of the ancien
regime an hereditary inequality that had no market justification. They knew that that inequality was of a kind
that was antithetical to liberty. Later,
however, in the debates between classical liberalism and socialism that for
more than two centuries have followed the French Revolution, classical liberals
had good reason to defend a fair amount of "inequality" as both the
motive-power and by-product of a competitive market system. They have been correct, in my opinion, in
looking upon this market-based "inequality" as a hallmark of freedom
as against the demands for an egalitarian leveling.
But what is essential
now is for the proponents of individual liberty to grasp that the inequalities
of the high-tech future will not all be of this beneficial kind. Not only can major inequalities calcify into
the sort of class system that classical liberals earlier knew to be inimical to
a free society, but the inequality will find little legitimacy based on the
theory of property, earnings and contract that has been fundamental to
classical liberalism.
This is the stuff of
which revolutions are made. Notice, too,
that it would be a rotten version of classical liberalism that would defend
it. This would be a version that by clinging
to the closed ideological system under radically changed circumstances will
have forfeited its tie to the main classical liberal values. If the "act of exchange" and the
resulting allocation of resources remain classical liberalism's central
criteria under the new circumstances, they will be totally inappropriate. The act of exchange ought to remain central
to the productive economy, but the distribution of the product needs to be
qualified by the insight into what has been earned and what has not.
I am one of the many who
have always worked for such attainments as have come their way. I have seen others who haven't applied
themselves so diligently who haven't done as well. So I have a strong moral conviction that what
people get, they earn. This change in
perspective, acknowledging that a significant part of someone's success is
derived from what other people have done or from the whole context of developed
community, isn't one that I naturally find congenial. Nor is the insight that
the desperation of millions of people will not be attributable to their moral
failings. But aren’t these insights true?
And aren’t they essential?
Especially as the displacement creeps in upon us?
The implications of these
insights are extensive. It means that
there will be no moral crime, no violation of private property or of
contractually-earned income, if a community treats a significant amount of the
economic product of the new technology as a common resource to be used or
distributed for the good of all. It
means, too, that there can be, as George wanted, a full return to people for
their own labor, intelligence, or capital.
If we wish to maintain a thriving competitive market economy, the reward
to those contributions will be necessary and rightful. That reward simply won't be the entire
return, but something more commensurate to the person's own input. In A Restatement of Economic Liberalism
(1988), Samuel Brittan, who centers his thinking on Friedrich Hayek's, has
already thought along these lines, although without seeing the coming
displacement of labor as the reason for its necessity.[12]
There is no way that the
proportion between what humanity has contributed and the individual has
contributed can be calculated exactly.
This indeterminacy shouldn't be too great an objection; the division can
be made in keeping with the criteria of the "rule of law” – i.e.,
according to established rules known in advance and applicable to
everybody. Recall how Chapter 11 gave the
figures that in 1980 executive compensation had been 30 to 40 times that of the
firms' average workers, whereas by 2005 this had grown to a difference of 262
to 1? Let us say that tax law in the
United States were to provide that the highest management person in a firm
should be entitled to thirty or even fifty times the average earnings (or some
multiple of the earnings of the lowest-paid employee), but no more; and that
the rest should be taxed away. Would
that be unjust? Would it be something
that "no market economy can live with?" Hardly.
Enormous incentive would still be present for executive leadership. Whether that leadership would abandon the
United States for some other place where a higher ratio were permitted would
depend upon a number of factors, not the least of which might be an
international tax convention setting the same ratio for all countries or at
least for all advanced economies. It is
arguable that the
Executive leadership
aside, what we have said about those who prosper because of the technology can
be said for everybody who makes a vast fortune in today's (and especially
tomorrow's) mass market. If a
professional football player, or a movie actress, or a rock star, makes $50
million dollars in a year, how much of that is due to the person's own ability
and contribution, and how much of it is because technology has evolved to the
point at which communication makes available a worldwide audience? Did the ballplayer, actress or rock star
create that system of worldwide communication, with its fiber optics and
satellites? No. One is tempted to say, only half
tongue-in-cheek, that Bill Gates did; but even that would be an immense
simplification, because Gates was himself standing on the shoulders of
countless ingenious people like himself.
If we may add still
another shocking heresy (and a heresy to no one more than myself), it is to say
that this fully justifies a system of strongly progressive taxation. Once the non-labor-intensive technology has
more fully come in, if some people become enormously wealthy and others have no
or only very meager earnings, there should be no objection from a classical
liberal point of view to taxing away a good portion of the high earnings to
make provision for everyone in the society.
To the objection that "that would run afoul of, maybe even totally
destroy, the sanctity of earned income and private property," it must be
answered that it does no such thing – and further that there is no
alternative. A market economy going
forward to new innovative heights, with free individuals employed within it
through contract, all within a setting in which everyone in the society shares
in the prosperity and has purchasing power with which to buy the products – all
this is much more compatible with classical liberal aspirations than for the
market and individual liberty to drown in a sea of opprobrium and revolution.
Many market theorists will doubt whether the
displacement and polarization will actually occur. They may be strongly inclined to think that
the early chapters of this book overstate what is going to happen and that,
therefore, the premises underlying this book are incorrect. Let us assume, therefore,
even though only for sake of argument, that the new technology does not
radically alter the shape of things, that most people stay employed without
seeming to become severely marginalized.
What then? Won’t much of what I
have just said, building upon Henry George, still be true? Doesn't what we have seen provide a rationale
for making the market society "more just"? Do we have to be socialists to think so? The questions answer themselves.
Market advocates will
want to be alert to, and avoid, a psychological possibility that may explain,
as time goes on, their expectation of continued normalcy: the willingness,
which I discussed briefly in Chapter 4, to accept a growing impoverishment for
the less intelligent or industrious half, or some other fraction, of mankind as
being a "natural condition."
Such insensitivity is altogether possible, since it has historically
been thought normal and appropriate in countless societies. I shouldn't think that any true classical
liberal would build his feeling of normalcy on a lack of empathy. There is reason to fear, though, that some of
those who are strongly loyal to the axiomatic system of market thinking may
easily talk themselves into doing precisely that, since they are in a mental
box that is hard to escape. It is a part
of all classical liberal thinking, of course, to accept the inequalities that
flow from the normal working of the market (though less so in Henry George’s
case). Their ideology may keep them from
seeing the distinction between this and the roots of inequality in a world
beset by economic displacement.
The final chapter will
discuss the source of funds to make the transition to (and thereafter to
maintain) a "shared market economy" in which much of the stock in
business is owned (through two intermediary institutions) by the entire
spectrum of people in the society, while a competitive world market continues
to go forward with the participants in it making personal profit (albeit limited
as I have just indicated). We will see
ways this can be done that will least disturb the current system of income and
property. Progressive taxation to
accomplish that spread of ownership will be justifiable, but may not need to be
central.
The insistence that international Free Trade is always beneficial
As we critique market
concepts, there is much to add to our Chapter 7 discussion of “free trade ideology.”
A leading feature of a
market economy, according to economic theory, is that the act of exchange and
search for profit lead to an elaborate division of labor. The continuing tendency is toward everyone's
doing what he can do at lowest cost, while others gravitate toward what they
can themselves do most cheaply. If firms
in one country are able to make shirts most efficiently, and farmers in another
country are best at growing papayas, both will do the thing for which they are
best suited. And, as David Ricardo
argued with his "law of comparative cost," this will occur even if
one set of producers is better at everything than the others; it will
profit the former more to leave the things they do less efficiently to the
latter, even though they're better even at them than the latter. Everybody will
have something to do, and by the division of labor efficiency will result
compared to a situation in which everyone tries to be a "Jack of all
trades" and do everything.
Adam Smith expressed
this in a famous passage:
It
is the maxim of every prudent master of a family, never to attempt to make at
home what it will cost him more to make than to buy. The
What
is prudence in the conduct of every private family, can scarce be folly in that
of a great kingdom. If a foreign country
can supply us with a commodity cheaper than we ourselves can make it, better
buy it of them with some part of the produce of our industry, employed in a way
in which we have some advantage.[13]
When the efficiencies of
the division of labor are added to the notion of the "optimum allocation
of resources," an abiding conviction seems justified that any governmental
intervention into the process detracts from human well-being rather than adding
to it. This amounts to a powerful
argument for laissez-faire. When
applied in the international arena, it is a compelling argument for Free
Trade. Any attempt by governments to
impede the flow of goods and services will be retrogressive. Likewise, any effort to develop trades or
crafts within a given nation that is not in line with "buying most cheaply"
is thought wasteful.
This view sees important
parts of the truth. The division of
labor is highly beneficial, just as described. But, as with much else in the laissez-faire
ideology, it is not the whole truth.
There are at least three reasons we shouldn't accept the view as part of
an axiomatic system that allows of no (or only minor) departures:
· That
Free Trade looks at the process as a whole, but overlooks the aspirations of
various of the parts, which if developed might eventually benefit the whole
more than if they are not developed.
According to Adam Smith's principle, it is best to acquire something
from the cheapest source, and that will often be from someone other than
yourself. Today, if the Taiwanese
produce VCRs most cheaply, by all means buy from them; one’s own industry can
do something more profitable even if this means losing all knowledge or other
capacity needed for making VCRs.
In Chapter 7 I spoke of
the early nineteenth century German economist Friedrich List. He is almost always treated dismissively in
market theory as the principal apologist for "Protectionism," but he actually
had a much more sophisticated understanding of international trade than did
Smith or Ricardo. It surprised me that
List was no apologist for statism, but was actually quite a thoughtful
classical liberal. Before we go on, it
will be worthwhile to become more acquainted with him. As we did with Henry George's views, we will
provide a summary in the text and leave extensive quotation to the endnotes.
List's classical liberalism
shone through all his work, except that it was a liberalism that saw the
individual, and trade itself, as part of a free community. Far from being a statist, he said that
protection (such as tariffs) is only good if it is in combination with progressive
civilization and free institutions. By
no means did he fully reject the Free Trade idea, although he concerned himself
with how each nation fared in the course of it.
He was strongly favorable to individual liberty, but again qualified one
value by keeping others in mind: individual liberty flowers as part of a
well-ordered free society. List strongly
opposed socialism, such as was then presented in the writings of Saint-Simon
and Fourier, as the annihilation of individual liberty.[14]
A certain J. S.
Nicholson wrote the introduction to the 1904 edition of List's work. Nicholson sums up one of List's central
observations about trade: "To buy at the time in the cheapest market and
to sell in the dearest may not always be the wisest national policy. The distinction between present and future
advantage from the national standpoint is fundamental throughout the whole
work."[15] A key problem with Smith and Ricardo is that
they looked only to what is advantageous at present, which is a
remarkably over-simplified perspective.
People who read them naturally assume that an infinite series of moments
in which a person achieves advantage must add up to long-term advantage. But that isn't necessarily so.
Let us go back to Adam
Smith's example of the tailor and the shoemaker. The tailor, he says, should not himself make
shoes, but buy them from the shoemaker, who can make them for less than he
can. But what if the tailor thinks he
could become a better shoemaker than the shoemaker now is, which if true means that
they should trade places? To accomplish
this development of his newly-aspired-to skill, he has to set out to make some
shoes, even if at first they aren't as cheap as he could buy from the present
shoemaker. Applying this to a whole
country, the given situation of "who's best at something" will remain
static, as though it were set in cement, unless some people break out of the
mold to develop new skills at which they previously haven't been the most
capable.
This is the basis for
the "infant industry" exception to the Free Trade principle. It should, however, be understood as going
far beyond its traditional meaning.
Those who are second-best had better continue and work on their
capability rather than drop out of a market totally if they hope ever to become
the best. To turn markets permanently
over to those who are now the best is to insulate them from competition and to
atrophy the abilities of the others. The
retention and development of capability will also depend upon the societal and cultural
context in which the attempt is made, and is not entirely a matter of
individual effort. The many conditions
bearing on "who can produce something most cheaply" can change over
time, making one source the cheapest now, another the cheapest later. This is especially true in today's world of
hyperspeed-changing technology and world markets. Many competitors need to stay well-prepared
right on the fringe, rather than to surrender their skills and their productive
plant. They even have the potential of
contributing explosively to technological innovation as they strive to leap
over the existing leaders. Seen in light
of these things, the "infant industry" phenomenon takes on a
permanent and widespread significance as suggesting a policy of perpetual
readiness, and need not be limited to just a "one time" development
of a nation's industry.
There has been a growing
recognition in economic theory that this is so.[16] Stephen S. Cohen and John Zysman ask
"why can't the
The dynamic view
of comparative advantage – that competitive standing changes over time if some
of those who are not the cheapest producer retain their capacity to compete –
is a much more sophisticated view of the market than the static
view. That the thinking should have
stayed at that unsophisticated level is typical of the closed-system market
rationale. The static concept actually
works in favor of less innovation, less competition, less ultimate consumer
satisfaction. And it arrives at that
because it looks no further than to a simplistic "truism": that
"what is beneficial to the parties in one transaction, or even a string of
transactions, must be best for long-term benefit."
This realization is not
just important for economics and efficient productivity. It leads to an understanding that given
peoples and nations are not necessarily well-advised to settle for being
an increasingly remote second-best in things that they consider important to
themselves. This is important to culture
and nationality (things that are played down in classical theory in part
because they are thought to run counter to a developed division of labor). If the iron logic of static comparative
advantage loses its grip, people find themselves able to think in terms of their
own preferences about their development as a people or a nation. Cultural preferences can come in
without being tagged as economically harmful.
List was primarily
concerned with how his own people, the Germans, could amount to anything as a
productive, talented people if "buying cheapest" from the British,
who already had a magnificently developed industrial and commercial economy,
was, at every point along the way, the sole criterion.
Many nineteenth-century
Americans felt the same concern. Again,
if "buying cheapest" from
· That
in the new age of unemployment or of marginalized work, it will be essential
that the closed system be departed from enough to allow a solution to the dual
problems of distribution and purchasing power.
I haven't been eager to
become involved in the Free Trade vs. Protection argument, which has raged for
hundreds of years. I raise it now
because it was an eye-opening experience, in terms of my own classical
liberalism, for me to read List; and because his insights add so much to an
intelligent critique of the closed system of market thought. That critique is imperative now that world
changes are bearing down on us in ways that will make a lock-step adherence to
that system disastrous.
The idea of a
"shared market economy" – in which all members of a society receive through
an independent agency income from shares in index mutual funds that represent
market-wide investment in the competitive economy – will scandalize the
closed-system ideology. To its adherents
(who include many of my valued friends), such a thing will be "government
intervention" and "giving people something for nothing." Moreover, the effort by individual nations to
deal with this need, necessarily through political action to create the broad
sharing of ownership, will seem "impermissible economic nationalism,"
especially since no one people such as the American people can conceivably
share ownership with everyone in the world, and each people will have to limit
the sharing to its own members.
Stringent ideological barriers stand in the way of solving the coming
"crisis of the [relatively workerless] market." Those barriers have to be removed if the
solution is to be accomplished. And the
best way to remove them is to see that they really don't make sense anyway –
certainly not to a conclusive extent.
· That
in the coming age of reduced scarcity, in which technology is so incredibly
productive, the fine-honing of degrees of economic efficiency won't be nearly
so important as it has been in the past or as economic theory has described
it. This makes it increasingly
justifiable for local peoples to cultivate their preferences about the
direction of their own activity.
Cultural conservatives of all persuasions, left
or right, have thought all along that market ideology puts too much stress on
economic performance and not enough on "the small platoons to which people
belong" – family, community, a person's own country. It is not just Free Trade ideology that leads
to this deracination: the mobility within a market economy is itself a force
that breaks these local bonds, such as when adult children, say, move
half-a-continent away or even across the world to pursue jobs.
The incoming technology
can, if people choose, shift the balance.
Comparative productivity may become far less important, relative to
other values, in a world in which there is abundant productivity. We can think of this in economic terms as a
matter of "marginal utility": the utility of additional increments of
productivity becomes far less when the increments are on top of an already-vast
productivity; and the relative utility of other things becomes higher. However, to give expression to this
heightened interest in non-economic values, people will have to question the
market view that productivity trumps everything else.
* That the untenable nature of the argument
that “international trade always benefits everyone” is especially apparent in
the context of a world capital market that is out of control. It is
impossible to argue that “everyone benefits” when, as so many well-informed
commentators say, the system of global finance perpetually “totters on the edge
of universal catastrophe.”
Nothing I have said here suggests that a vigorous system of trade and profit-seeking
should be abandoned. The
sharing of ownership within a “shared market economy” will only produce its
best results if the economy remains innovative and highly productive. We have no quarrel with the consensus that has
come into being in recent years that a competitive market system is far more
innovative and productive than any alternative.
ENDNOTES
1. Dwight D. Murphey, Socialist Thought (Washington: University
Press of America,1983); the book is also available on
www.dwightmurphey-collectedwritings.info
[2]. See G.
D. H. Cole, Labour in the Commonwealth (
[3]. Maurice
Cornforth, The Open Philosophy and the Open Society (New York:
International Publishers, 1968), pp. 210, 212.
[4]. Mark
Skousen, "Overworked and Underpaid?," The Freeman, 1996, pp.
734-735.
[5]. Hans Sennholz, "Notes from FEE," The
Freeman, November 1996, unpaginated center feature.
[6]. Paul Krugman, "Does
[7]. Mises, Human
Action, p. 143.
[8]. See
my "Three Contemporary Psychologists and the Meaning of Life" in The
Occasional Review, February 1974 (this is available at no charge on www.dwightmurphey-collectedwritings.info).
It is entirely a postscript to my present discussion to bring it up, but
the treatment given to this article provides a hilarious case-in-point about
the travails an independent thinker goes through. The editor liked my analysis of Frankl,
Maslow and Branden, but when he got to the end and found that I wasn't basing
my critique on a belief in God, but rather on the fact that individual people
are the source of value judgments, he cut out the final three pages. I had to complain to the journal's publisher,
who then insisted that the editor include the conclusion of my article as a
"Postscript" in the next issue.
So to read the entire essay you have to pick up the ending from the Fall
1974 issue (also on the web site just cited).
[9]. Friedrich List, The National System of
Political Economy (Fairfield, NJ:
Augustus M. Kelley, Publishers, 1991 reprinting), p. 166.
[10]. Here are
passages from Henry George's Protection or Free Trade that illustrate
the summary I have made in the text:
P. 273: "Land is not the produce of labor;
it existed before man was...[T]he value of land is a value of appropriation,
based upon the amount that can be appropriated, and therefore tends to increase
as the progress of society increases production."
P. 272: "If infants ceased to be born and
men to grow up in
P. 280-1: "All we have to do is to treat
the land as the joint property of the whole people...In other words, we can
leave land now being used in the secure possession of those using it, and leave
land now unused to be taken possession of by those who wish to make use of it,
on condition that those who thus hold land shall pay to the community a fair
rent for the exclusive privilege they enjoy--that is to say, a rent based on
the value of the privilege the individual receives from the community in being
accorded the exclusive use of this much of the common property, and which
should have no reference to any improvement he had made in or on it, or to any
profit due to the use of his labor or capital."
P. 281: "As Herbert Spencer has said of it:
‘The change required would be simply a change of landlords. Separate ownership would merge into the
joint-stock ownership of the public.'"
P. 284: "A large and constantly increasing
fund would be provided for common uses, without any tax on the earnings of
labor or on the returns of capital."
P. 311-2: "Among the purposes which will
suggest themselves to the reader by which the surplus income of the community
could be used to increase the sum of human knowledge, the diffusion of
elevating tastes, and the gratification of healthy desires, there is none more
worthy than that of making honorable provision for those deprived of their
natural protectors, or through no fault of their own incapacitated for the
struggle of life... Citizenship in a civilized community ought of itself to be
insurance against such a fate." One
possibility: "No taxes at all, and a pension to everybody" [quoting
an English member of parliament].
[11]. George, Protection
or Free Trade, p. 322.
[12]. Samuel Brittan, A Restatement of Economic
Liberalism (Atlantic Highlands, NJ: Humanities Press International, Inc.,
1988), p. 300.
[13]. Quoted
by Irwin M. Stelzer in National Review,
[14]. Friedrich List, The National System of
Political Economy (Fairfield, NJ: Augustus M. Kelley, Publishers, reprinted
in 1991). See the following passages:
P. 112: "A restrictive commercial policy
can be operative for good only so far as it is supported by the progressive
civilisation and free institutions of a nation...."
P. 175: "A nation in its normal
state...must afford to those who belong to it a high degree of security and
liberty, and must promote religion, morality, and prosperity; in a word, must
have the well-being of its citizens as [its] object."
P. 335: "A high degree of economical
development has only been attained in those nations whose form of government
has been such as to secure to them a high degree of freedom and power, of
steadiness of laws and of policy, and efficient institutions."
P. 360: "The Saint-Simonians and
Fourrierists (sic) ...Their annihilation of individual freedom and independence
is their weak side; with them the individual is entirely absorbed in the
community...."
[15]. J. S.
Nicholson in his introduction to List, The National System, no
pagination for the Introduction.
[16]. See
Michael E. Porter, The Competitive Advantage of Nations (New York: The
Free Press, 1990), pp. 12 and 13: "The standard theory assumes that there
are no economies of scale, that technologies everywhere are identical, that
products are undifferentiated, and that the pool of national factors is
fixed. The theory also assumes that
factors, such as skilled labor and capital, do not move among nations. All these assumptions bear little relation,
in most industries, to actual competition... More and more industries do not
resemble those that the theory of comparative advantage was built on."
[17]. Stephen
S. Cohen and John Zysman, Manufacturing Matters: The Myth of the
Post-Industrial Economy (New York: Basic Books, Inc., Publishers, 1987),
pp. 238-9.
[18]. List, The
National System:
P. 80: "How pitiable and unpractical seems
that theory of political economy which would have us refer the material welfare
of nations solely to the production of individuals, wholly losing sight of the
fact that the producing power of all individuals is to a great extent
determined by the social and political circumstances of the nation."
P. 138: "It is (says J. B. Say) that
science which teaches how riches, or exchangeable values, are produced,
distributed, and consumed. This is
undoubtedly not the science which teaches how the productive powers are awakened and developed, and how they
become repressed and destroyed" [List's emphasis].
P. 295: "As in all human institutions so
also in industry, a law of nature lies at the root of important achievements
which has much in common with the natural law of the division of labor... [this
is] the confederation of the productive forces, whose principle, namely,
consists in the circumstance that several generations following one another
have equally united their forces towards the attainment of one and the same
object...."
[19]. Patrick
Low, Trading Free: The
[20].