Just some quick musings for a change of pace early in the morning.
1. The original intent of capitalism's inventors, Adam Smith and Jeremy Bentham, was to level the playing field. The goal was that the pleasure of the coal miner counted as much as the pleasure of the king. Capitalism was birthed in ultilitarianism, the greatest pleasure for the greatest number, where everyone's pleasure counted the same, The philosophical background of capitalism is thus egalitarian with the goal of maximizing the happiness of society.
2. To that end, the laissez-faire, free enterprise system built on the premise that people can look out for their own interests. If everyone does, then merchants will not charge more than they can get away with and consumers will buy as cheaply as they can. The ideal result is thus the greatest good for the greatest number.
3. John Stuart Mill already recognized some complications to the theory. For example, people do not always act in their own interest. Also, we can question whether all pleasures should count the same. Our take away is that consumers need to be informed and, in various ways, protected, for the system to work as Adam Smith intended.
4. By the mid-1800s, the Industrial Revolution began to reveal even more complications to the system, captured aptly in some of the European revolutions of 1848 and then later in the Bloody Revolution of 1917 in Russia. While history has soundly rejected Karl Marx's own Hegelian predictions and suggestions, his critiques of capitalism are harder to deny.
Capitalism empowered certain individuals on such a scale that the "little man" could not possibly compete. What average or even above average individual has the capacity to compete with Wal-Mart? Factories ran over the little man and could replace him or her in an instant. If she gets sick, if the management is tyrannical or pays pitifully, most individuals are powerless--the very individuals capitalism was meant to empower. The reality is that people get stuck, don't know where else to go, don't know what to do. The late 1800s and early 1900 (think, The Jungle, The Grapes of Wrath) revealed nothing like Adam Smith or Jeremy Bentham's dream.
5. So unbridled capitalism of the late 1800s simply recreated the divide between haves and have nots in a different way. Protections price gouging laws and anti-trust laws are meant to keep the system in balance so that free market principles can actually work. Consumer protections do the same. The goal of capitalism was not to reward those in a position of advantage or greater know how to be able to get rich. The goal was to create a system where everyone could thrive.
6. History has vindicated Hayek's economic approach over Keynes', one that radically deregulates, does not fix prices or pump money from the government into the system. Perhaps it is true that a Hayek approach after the Great Depression would have ended the Depression sooner, as opposed to F.D.R's more Keynesian approach.
7. However, here is where morality and the underlying philosophy of capitalism comes into play. When Milton Friedman and others went to Chile, yes, their Hayekian principles got the economy under control. But what a painful year to get there! The same for Eastern Europe.
The bottom line is this. Utilitarianism is a macro-system. It does not take the individual into mind. It's goal is for, say, 90/100 people to be as happy as possible. But in the process, it allows for the immense unhappiness of the other 10. This is the brilliance of the Bill of Rights and a "universal ethical egoist" system over a purely utilitarian system. It is simply unacceptable from a moral perspective for 10 people to starve to death while on a fast track to make the world a better place for the other 90.
So we have to take into consideration whether anyone starved to death in that really bad Chilean year. And the situation in Russia after Jeffery Sachs Hayekized it is filled with organized crime who took all the capital for themselves.
Moral Principals going forward
1. Capitalism is far from a divine right. It is a mechanism we affirm because it is the economic system that holds the most potential to maximize happiness. It's philosophical goals were originally not entirely different from those of Marxism or socialism--it is just effective while we can see that socialist economics are a complete failure.
A key point is that we have to get over the labels, as if the label capitalism equals good and the label socialism equals bad. This is ignorant and illogical. Each idea must stand or fall on its own two feet and the overall goal of maximizing societal happiness without running over individual rights must be kept in view.
2. History has vindicated Hayek over Keynes as an economic method. However, history has also shown that unbridled capitalism does not achieve its underlying goals either. When all regulation and control is taken away, capitalism becomes oppressive with a very few gaining immensely and the vast majority suffering. Protections for the consumer and worker are essential to keep such things from happening.
Theory must not be implemented merely with a view to the quickest recovery. The lives of a societies individuals are a moral element in the equation that must be considered. I am neither enough of a historian or an economist to say, but it is possible that FDRs policies were the more moral course of action even if they slowed down recovery from the Great Depression.
3. The implementation of economic theory must always be driven by the impetus to maximize the happiness of society at large without destroying individuals. Again, the "fittest" do not have a divine or evolutionary right to accrue wealth at the expense of the little man. This contradicts the founding goals of capitalism in the first place.
4. We need to make a clear distinction between my property and the system that can facilitate the accumulation of wealth. For Christians, it is important to realize that my "net worth" today is something quite different from any biblical understanding of wage or property. In biblical terms, property is something I inherit and a day's wage is somewhat standard throughout the world.
There is no divine right or innate justice to market wages. They vary according to demand and the state of the system. In philosophical terms, we have no basis to say that the $250,000 salary of one person is more of a "possession" to that person than the $20,000 of someone else. It is the system that has assigned a different value to each person, not necessarily the amount of work he or she has done.
The long and short of it is that the Tea Party person does not have the same claim on every penny of that money as she might think she does. It is not a concrete possession like a car in the driveway. The system gave that amount for work and the system can take it away without either action being either morally right or wrong. The moral significance of money in a capitalist system does not map directly or neatly to the moral significance of property in an agrarian one.
I don't know if I have done these ideas justice, but these are some of my musings at the turn of the twenty-first century.
Showing posts with label Adam Smith. Show all posts
Showing posts with label Adam Smith. Show all posts
Wednesday, November 10, 2010
Thursday, October 30, 2008
13.4 Money, Materials, and Society 1
It is with great pleasure that I jettison part of this section into the first draft stage:
______
For the last two thousand years, Christians have rarely had the opportunity to decide how their goods are produced and distributed. On a small scale, groups like the Shakers (1700-1900's) or the group that settled in Oneida, New York (1800's) formed small communes where their goods were shared in common. Today, the Amish live in close community as well, although they recognize the existence of private property. But for the majority of Christian history, Christians have had little choice but to live within whatever political and economic structure they were born into.
Before the industrial revolutions of the modern age, most economies were agrarian, as in biblical times. People produced goods off the land, consumed some of them, and perhaps traded some of them with others for things they did not produce themselves. However, we should not think that everyone had their own land. In medieval times in the Western world, a king or "lord" owned the land, which was farmed by others who owned no land at all. Those who worked the land might be the slaves of those who owned the land, or they might be "serfs" of one kind or another who worked the land in return for protection, basic sustenance, or some pittance of pay.
The Industrial Revolution of the 1700's and 1800's in the Western world massively transformed the economies of everything in its wake, leading to the industrialization of the East in the twentieth century as well. Industrialization is the process of becoming a society that functions off of manufactured products rather than farm products. When we speak of developing countries in the southern hemisphere today, we are referring to countries that are only now undergoing this process of transformation.
Before the rise of industry, power in Western society lay primarily with landowners and kings, the owners of the farms produced the means of living. The powerful were the long standing aristocracies, the "best" of society who owned land. This "landed gentry" gained increasing power even as the power of kings declined.
But the 1700's and 1800's saw a shift in power to those who possessed and controlled capital, rather than just land. Capital is all the resources a person has at his or her disposal for production and exchange, including things like money, equipment, products and, of course, land. The rise of railroads and steam ships facilitated this exchange over distances previously impractical.
[textbox: capital, industrialization]
It is into this world that Adam Smith (1723-1790), the "father" of capitalism, wrote his most famous piece, The Wealth of Nations. Capitalism is an economic system in which individuals and companies own capital that they use to compete against each other to make a profit off the buying and selling of goods and services. The background of Smith's economic theory was the utilitarian philosophy of Jeremy Bentham that we discussed in the previous chapter.
If you remember, the goal of utilitarianism was to make a more equitable society by basing laws on what would bring about the greatest pleasure for the greatest number. For Bentham, everyone counted the same. The pleasure of a king counted just as much as the pleasure of a child working in a coal mine. The utilitarians thus wanted to build a society where everyone's interests were taken into account.
Adam Smith formulated an economic model based on this general goal and idea. Here is a famous passage from The Wealth of Nations (I paraphrase a little to make the meaning clear). The passage is actually talking about importing goods from other countries, but we can see in it the basics of Adam Smith's economic theory.
"The annual revenue of every society is always the equivalent of what it is able to exchange from what its industry produces. It is exactly the value of its products that it can exchange. Every individual, therefore, tries to use his capital to support domestic industry, so that the amount that is produced adds up to the greatest value possible. Every individual also works so that the annual revenue of the society is as great as he can make it.
"Of course, it is not that this individual was actually intending to promote the public interest, nor does he know how much he is promoting it. When he prefers supporting domestic rather than foreign industry, he is only thinking about his own security. By making his industry produce the greatest value possible, he is only thinking of his own gain. But in this as in many other cases, he is led by an invisible hand to promote an end that was not a part of his intention.
"Nor is society always the worse because it was not his intention to benefit it. By pursuing his own interest he frequently promotes that of the society more effectively than if he really was trying to promote it" (Wealth of Nations 4.2)
Smith's basic theory is that as we each pursue our own economic interests, we will often find that, as if "led by an invisible hand," society as a whole will benefit, including the other individuals in that society. On an individual level, let's say that I have some goods that I want to sell to you, and you are interested in buying them. Let's say further that the government allows you and me to agree on the price, rather than telling me what to charge or you what to pay.
Here's what Smith says will often happen. As a seller looking out for my own interests, I will try to get as high a price for my goods from you as I can. Meanwhile, you are also looking out for your own interests and will try to pay me as little as you can. The result is that you and I will meet in the middle with a price that maximizes the benefit to both of our interests.
This sort of "de-regulated" approach to economics, where the government allows you and I to rankle over prices, is called laissez-faire capitalism, which is French for "to allow to do." Laissez-faire economics favors letting the business markets rankle over prices and rules rather than some government setting the boundaries for such things.
[textbox]
Another name for this school of thought is "classical liberalism." Today, the word liberal is more often associated with opposition to capitalism, but we should remember that the word basically means "free." The free enterprise system and laissez-faire economics were thus termed "liberal" originally because they believed individuals and companies should be free to set prices and the terms of trade without government intervention. Ironically, therefore, the economic "conservatives" of today come closest in philosophy to the classical liberals of the 1700's and 1800's.
Another principle of capitalism we should mention is the law of supply and demand. This is the idea that as the supply of a certain product goes up, the price will generally go down, since people have more venues from which to get it and thus more competition between those selling it. When the price of oil goes down significantly, sometimes oil producing nations agree to decrease the amount of oil they are producing, so the price will go back up. Similarly, the United States government in the late twentieth century actually paid certain farmers not to put their grain on the market so that the price would not bottom out from two much supply.
Similarly, as the demand for something goes up, the price will generally go up. This dynamic is especially apparent in a crisis, such as when a natural disaster interrupts the normal flow of things like gas to a particular area. Sellers of things in such high demand are sometimes accused of "price gouging" or setting a price ridiculously high because there is high demand and no competition around, so that buyers of the product have little choice but to pay the exorbitant price.
These sorts of exceptional situations are where economists begin to debate how free the market should be and whether some government regulation might actually be necessary to keep the overall system functioning the way it is supposed to function. Adam Smith's laissez-faire theory was formulated when firms were small and run by individual owners, not in a global economy with industry on a massive scale.
We saw in the last chapter that, even in the early 1800's, John Stuart Mill (1806-1873) suggested some significant modifications to the utilitarian philosophy of his father and Bentham. The same was no less true of Adam Smith's economic theory. For one thing, Mill recognized that you cannot always count on people either knowing or doing what is in their best interest.
Even in the early 1800's, Mill argued that the "authorized representatives" of society would need to intervene when the interests of the buyer were jeapardized (my "translation"):
"As a general rule, the business of life is better conducted when those who have an immediate interest in it are left to make their own course... Industry is generally the best equipped to choose the path in its best interest. But can we affirm with the same universality that the consumer or person served is? ... Is the buyer always qualified to judge the commodity?
"If not, then letting competition in the market run its own course does not apply. And if it is a very important commodity in which society has much at stake, it may be preferable to have some degree of intervention, by those who are the authorized representatives of the collective interests of the state" (Principles of Political Economy).
When a person does not know what is in his or her own best interest, then certainly the basic principles of free enterprise play into the hands of the other person, who is following the principle of self-interest to get the best deal he or she can. In fact, it is--at least in the short term--in the best economic interest of a person to try to deceive or manipulate the other person if they can get away with it. Of course it may not be in the long term, for if customers come to recognize that you are a shady dealer, they will tell others and then your business will drop sharply.
In a global economy, however, where buyers and sellers do not live together, knowledge of whether you can trust the other party becomes a critical issue. Adam Smith and his compatriots could not have imagined a world where people buy things over the internet or where the seller is so far removed from the buyer. By the late 1800's, the loopholes in a purely laissez-faire approach to economics had become all too apparent to the average U.S. citizen. Government agencies such as the Interstate Commerce Commission and the Food and Drug Administration have evolved over time to ensure that industry is honest in the way it presents its products to consumers who buy them.
A second problem with Smith's economic theory that Mill addressed was the tendency of individuals to follow their habits rather than their self-interest (again, paraphrased):
"When it comes to individual property, the way products end up being distributed is the result of two determining factors: competition and custom...
"Politcal economists generally... are used to putting their entire stress on competition... and to take little account of what people are accustomed to doing...
"Because the habits of people resist competition to such a significant extent, ... even when the competition is the greatest, we can be sure that where people are content will smaller gains and find more pleasure in things other than monetary gain, competition will not allow you to calculate what they will buy... Customers are sometimes used to higher prices and they acquiesce in it" (Principles of Politcal Economy).
The basic thrust is that people don't always operate in their best economic self-interest. What this fact means is that although economics is a science, you cannot predict what the markets will actually do.
What is important to realize about these "founding fathers" of capitalism is that they really had the overall betterment of society in view. The capitalistic system was not an end in itself. It certainly was not a system set up to reward some new aristocracy of the cleverest merchants of industry, while punishing the person who wasn't adept enough to compete. It certainly was not some evolutionary scheme set up for the survival of the fittest.
Indeed, Adam Smith himself had this comment to say about how the wealth of the rich might be used to the betterment of the poor in society (my paraphrase again):
"The survival of the poor costs a society a great deal... Meanwhile, the rich spend most of their money on the luxuries and vanities of life. So it is not ridiculous to suggest that the rich might contribute to the expense that the public spend on the poor, not only in proportion to their income, but even proportionally more than their income" (Wealth of Nations).
______
For the last two thousand years, Christians have rarely had the opportunity to decide how their goods are produced and distributed. On a small scale, groups like the Shakers (1700-1900's) or the group that settled in Oneida, New York (1800's) formed small communes where their goods were shared in common. Today, the Amish live in close community as well, although they recognize the existence of private property. But for the majority of Christian history, Christians have had little choice but to live within whatever political and economic structure they were born into.
Before the industrial revolutions of the modern age, most economies were agrarian, as in biblical times. People produced goods off the land, consumed some of them, and perhaps traded some of them with others for things they did not produce themselves. However, we should not think that everyone had their own land. In medieval times in the Western world, a king or "lord" owned the land, which was farmed by others who owned no land at all. Those who worked the land might be the slaves of those who owned the land, or they might be "serfs" of one kind or another who worked the land in return for protection, basic sustenance, or some pittance of pay.
The Industrial Revolution of the 1700's and 1800's in the Western world massively transformed the economies of everything in its wake, leading to the industrialization of the East in the twentieth century as well. Industrialization is the process of becoming a society that functions off of manufactured products rather than farm products. When we speak of developing countries in the southern hemisphere today, we are referring to countries that are only now undergoing this process of transformation.
Before the rise of industry, power in Western society lay primarily with landowners and kings, the owners of the farms produced the means of living. The powerful were the long standing aristocracies, the "best" of society who owned land. This "landed gentry" gained increasing power even as the power of kings declined.
But the 1700's and 1800's saw a shift in power to those who possessed and controlled capital, rather than just land. Capital is all the resources a person has at his or her disposal for production and exchange, including things like money, equipment, products and, of course, land. The rise of railroads and steam ships facilitated this exchange over distances previously impractical.
[textbox: capital, industrialization]
It is into this world that Adam Smith (1723-1790), the "father" of capitalism, wrote his most famous piece, The Wealth of Nations. Capitalism is an economic system in which individuals and companies own capital that they use to compete against each other to make a profit off the buying and selling of goods and services. The background of Smith's economic theory was the utilitarian philosophy of Jeremy Bentham that we discussed in the previous chapter.
If you remember, the goal of utilitarianism was to make a more equitable society by basing laws on what would bring about the greatest pleasure for the greatest number. For Bentham, everyone counted the same. The pleasure of a king counted just as much as the pleasure of a child working in a coal mine. The utilitarians thus wanted to build a society where everyone's interests were taken into account.
Adam Smith formulated an economic model based on this general goal and idea. Here is a famous passage from The Wealth of Nations (I paraphrase a little to make the meaning clear). The passage is actually talking about importing goods from other countries, but we can see in it the basics of Adam Smith's economic theory.
"The annual revenue of every society is always the equivalent of what it is able to exchange from what its industry produces. It is exactly the value of its products that it can exchange. Every individual, therefore, tries to use his capital to support domestic industry, so that the amount that is produced adds up to the greatest value possible. Every individual also works so that the annual revenue of the society is as great as he can make it.
"Of course, it is not that this individual was actually intending to promote the public interest, nor does he know how much he is promoting it. When he prefers supporting domestic rather than foreign industry, he is only thinking about his own security. By making his industry produce the greatest value possible, he is only thinking of his own gain. But in this as in many other cases, he is led by an invisible hand to promote an end that was not a part of his intention.
"Nor is society always the worse because it was not his intention to benefit it. By pursuing his own interest he frequently promotes that of the society more effectively than if he really was trying to promote it" (Wealth of Nations 4.2)
Smith's basic theory is that as we each pursue our own economic interests, we will often find that, as if "led by an invisible hand," society as a whole will benefit, including the other individuals in that society. On an individual level, let's say that I have some goods that I want to sell to you, and you are interested in buying them. Let's say further that the government allows you and me to agree on the price, rather than telling me what to charge or you what to pay.
Here's what Smith says will often happen. As a seller looking out for my own interests, I will try to get as high a price for my goods from you as I can. Meanwhile, you are also looking out for your own interests and will try to pay me as little as you can. The result is that you and I will meet in the middle with a price that maximizes the benefit to both of our interests.
This sort of "de-regulated" approach to economics, where the government allows you and I to rankle over prices, is called laissez-faire capitalism, which is French for "to allow to do." Laissez-faire economics favors letting the business markets rankle over prices and rules rather than some government setting the boundaries for such things.
[textbox]
Another name for this school of thought is "classical liberalism." Today, the word liberal is more often associated with opposition to capitalism, but we should remember that the word basically means "free." The free enterprise system and laissez-faire economics were thus termed "liberal" originally because they believed individuals and companies should be free to set prices and the terms of trade without government intervention. Ironically, therefore, the economic "conservatives" of today come closest in philosophy to the classical liberals of the 1700's and 1800's.
Another principle of capitalism we should mention is the law of supply and demand. This is the idea that as the supply of a certain product goes up, the price will generally go down, since people have more venues from which to get it and thus more competition between those selling it. When the price of oil goes down significantly, sometimes oil producing nations agree to decrease the amount of oil they are producing, so the price will go back up. Similarly, the United States government in the late twentieth century actually paid certain farmers not to put their grain on the market so that the price would not bottom out from two much supply.
Similarly, as the demand for something goes up, the price will generally go up. This dynamic is especially apparent in a crisis, such as when a natural disaster interrupts the normal flow of things like gas to a particular area. Sellers of things in such high demand are sometimes accused of "price gouging" or setting a price ridiculously high because there is high demand and no competition around, so that buyers of the product have little choice but to pay the exorbitant price.
These sorts of exceptional situations are where economists begin to debate how free the market should be and whether some government regulation might actually be necessary to keep the overall system functioning the way it is supposed to function. Adam Smith's laissez-faire theory was formulated when firms were small and run by individual owners, not in a global economy with industry on a massive scale.
We saw in the last chapter that, even in the early 1800's, John Stuart Mill (1806-1873) suggested some significant modifications to the utilitarian philosophy of his father and Bentham. The same was no less true of Adam Smith's economic theory. For one thing, Mill recognized that you cannot always count on people either knowing or doing what is in their best interest.
Even in the early 1800's, Mill argued that the "authorized representatives" of society would need to intervene when the interests of the buyer were jeapardized (my "translation"):
"As a general rule, the business of life is better conducted when those who have an immediate interest in it are left to make their own course... Industry is generally the best equipped to choose the path in its best interest. But can we affirm with the same universality that the consumer or person served is? ... Is the buyer always qualified to judge the commodity?
"If not, then letting competition in the market run its own course does not apply. And if it is a very important commodity in which society has much at stake, it may be preferable to have some degree of intervention, by those who are the authorized representatives of the collective interests of the state" (Principles of Political Economy).
When a person does not know what is in his or her own best interest, then certainly the basic principles of free enterprise play into the hands of the other person, who is following the principle of self-interest to get the best deal he or she can. In fact, it is--at least in the short term--in the best economic interest of a person to try to deceive or manipulate the other person if they can get away with it. Of course it may not be in the long term, for if customers come to recognize that you are a shady dealer, they will tell others and then your business will drop sharply.
In a global economy, however, where buyers and sellers do not live together, knowledge of whether you can trust the other party becomes a critical issue. Adam Smith and his compatriots could not have imagined a world where people buy things over the internet or where the seller is so far removed from the buyer. By the late 1800's, the loopholes in a purely laissez-faire approach to economics had become all too apparent to the average U.S. citizen. Government agencies such as the Interstate Commerce Commission and the Food and Drug Administration have evolved over time to ensure that industry is honest in the way it presents its products to consumers who buy them.
A second problem with Smith's economic theory that Mill addressed was the tendency of individuals to follow their habits rather than their self-interest (again, paraphrased):
"When it comes to individual property, the way products end up being distributed is the result of two determining factors: competition and custom...
"Politcal economists generally... are used to putting their entire stress on competition... and to take little account of what people are accustomed to doing...
"Because the habits of people resist competition to such a significant extent, ... even when the competition is the greatest, we can be sure that where people are content will smaller gains and find more pleasure in things other than monetary gain, competition will not allow you to calculate what they will buy... Customers are sometimes used to higher prices and they acquiesce in it" (Principles of Politcal Economy).
The basic thrust is that people don't always operate in their best economic self-interest. What this fact means is that although economics is a science, you cannot predict what the markets will actually do.
What is important to realize about these "founding fathers" of capitalism is that they really had the overall betterment of society in view. The capitalistic system was not an end in itself. It certainly was not a system set up to reward some new aristocracy of the cleverest merchants of industry, while punishing the person who wasn't adept enough to compete. It certainly was not some evolutionary scheme set up for the survival of the fittest.
Indeed, Adam Smith himself had this comment to say about how the wealth of the rich might be used to the betterment of the poor in society (my paraphrase again):
"The survival of the poor costs a society a great deal... Meanwhile, the rich spend most of their money on the luxuries and vanities of life. So it is not ridiculous to suggest that the rich might contribute to the expense that the public spend on the poor, not only in proportion to their income, but even proportionally more than their income" (Wealth of Nations).
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