Capitalism, Socialism & Corporatism

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Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man or order of men. Adam Smith (1723-1790) in Wealth of Nations (1776) What kind of society isn't structured on greed? The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of system. Milton Friedman (1912-2006) in Capitalism and Freedom (1962) 1 I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs. Thomas Jefferson (1743 - 1826) in Letter to the Secretary of the Treasury Albert Gallatin (1802)

CAPITALISM : W H AT I S I T ? Capitalism is an economic theory. It has absolutely nothing to do with the tenets of Christianity, nor of democracy. The tenets of Christianity are based on Judeo-Christian expressions of communal love and consideration for one’s fellow man within the context of community. Capitalism is primarily predicated on the idea that individuals, acting alone in their ‘enlightened’ selfinterest, can collectively generate economic progress. Capitalism, in its original incarnation from Adam Smith in his Wealth of Nations assumed common Judeo-Christian values for this theory of economic behavior to work in practice. However, the economics of capitalism, as it is played out in economies of the world today, no longer assumes a common Judeo-Christian heritage or shared values. Neither is democracy required for capitalism to work. There are many non-democratic authoritarian, totalitarian, and fascist regimes in the world today that have embraced capitalism. CHRISTIANI T Y A N D C A P I TA L I S M Capitalism today, no matter where it is practiced or under what form of political system whether it be democratic, authoritarian, totalitarian or fascist is based on the accumulation and allocation of capital based on the principles of technological positivism and utilitarianism. Technological positivism claims that human ingenuity, not God’s will, determines what is possible. Utilitari-

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anism declares that what is good is determined by an activity’s utility. This utility is typically determined often from the perspective of the elite of a society and measured in monetized terms.2 Christianity, on the other hand, believes that newness is not only possible, but is promised by God. 3 That God is present in human history on the side of the weak and the vulnerable, the blind and the lame, those with child and those in labour.4 The future is hidden deeply in God’s heart. Human community must walk by faith where it may not yet see.5 It is our relationality with God as our sovereign6 and love for our neighbor that is what defines us as Christian. 7 Many aspects of capitalism, especially its underlying technological positivism and utilitarianism are incompatible with the tenets and values of Christianity. 8 DEMOCRACY A N D C A P I TA L I S M The ability of people to vote in a public election and to elect their representatives to government is not what defines a democracy. It is often forgotten that Adolf Hitler, for example was ‘elected’ by the German people to his first post in the German government. The philosophical basis of liberal democracy is the presumption of equality of citizenship as the foundation and guarantee of the individual’s freedom. Thus, what defines whether a particular government is a democracy or not is whether its elected or appointed officials have all the people’s will and best interests as their guiding light in how the government governs. Maybe in a true democracy, government, at its best, reinforces the dictum with whatever means at its disposal, “There is no free lunch.” But that is where the problem often arises. Instead of government of the people, by the people, for the people, government gets turned towards a government by an elite who do not have the people’s interests at heart, of the special interests, for the existing institutions and how they operated today.9 At least in a democracy, the task of having a government of, by and for The People, is ultimately, the people’s responsibility.

CAPITALISM R E Q U I R E S F R E E M A R K E T S TO F U N C T I O N In place of common Judeo-Christian values as the substrate for capitalism in a society, government regulations have been substituted. This is true for capi-

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talism under both democratic and non-democratic governments. This is entirely keeping with Adam Smith’s vision of capitalism that relies on free markets to function. For Adam Smith, as for most modern economists, free markets must be ‘regulated’ for the common good. Otherwise, unscrupulous individuals operating from the premise of avarice and utility as defined by them personally as opposed to the common good, will destroy the value market transactions to efficiently allocate capital to the most productive uses in the society. 10 Either the intrinsic values of market participants provide the regulation of these markets, or extrinsic means are employed, usually requiring government intervention in markets. This is universally true. There are few legitimate, lawful, free markets operating anywhere in the world today that are not regulated. (Whether the regulations imposed on markets are useful to improve the efficiency of markets or they harm market transactions is a another matter). THE PURPOS E O F F R E E M A R K E T S I S T H E E F F I C I E N T A L L OCATION OF C A P I TA L In standard economic parlance, markets connect buyers and sellers of goods and services to enable them to complete transactions. Market participants consist of all parties that influence the price at which these goods and services are exchanged. In free markets, all the information that influences the prices of goods and services is accounted for. Ideally, there are no externalities or contingent liabilities created by a market trade. This enables capital to be allocated efficiently. 11 Without free markets where appropriate in an economy, it may be difficult or impossible to produce the innovation and reallocation of labor and capital to productive uses that establishes sustainable economic growth. Free markets may exist in democratic capitalistic, corporistic capitalist, and socialistic (state capitalism) economies. UNREGULAT E D M A R K E T S A R E N O T ‘ F R E E M A R K E T S ’ Free markets require structure (rules of the game) to function efficiently. Regulations help to define this structure as fair and equitable for all parties who wish to transact business in this market. Unregulated markets tend to develop unfair practices that are driven by avarice. This leads to the inefficient allocation of capital by markets that are not adequately regulated. Over time, if capital is not efficiently allocated to activities that are productive and

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that produce a real economic return on invested capital, the market tends towards collapse. Thus, the primary purpose of regulations is to prevent the collapse of markets due to the inefficient allocation of capital within those markets. By definition, collapsing markets have not been properly regulated. Markets that are not prone to collapse are sustainable. It takes sustainable markets to produce recovery and sustainable economic growth. All markets are dynamical systems. These systems are either tending toward collapse or towards sustainability. Sound regulations enable markets to move toward sustainability. ‘COERCED M A R K E T S ’ A R E N O T F R E E M A R K E T S Coerced markets are markets where market exchange prices do not reflect the full value of externalities and/or contingent liabilities created by the trade. In other words, market participants are coerced to engage in the dis-economic allocation of capital to projects, purchases of products and services, and expenditures of human resources and time that may not actually produce a real economic return. Coerced markets may occur in capitalist or socialist economic structures, and within both private and public sector activities. Coerced markets are the result of inadequate information, bad accounting rules, and/or lack of meaningful regulations. One common feature of coerced markets is the socialization of private sector risk in order to boost profits. MARKETS AR E N O T A P P R O P R I AT E F O R A L L A C T I V I T I E S I N AN ECON OM Y Free Markets are a relatively new way of ‘doing business.’ During much of human history, markets (at least the way markets are conceived of today), did not constitute the dominant mode of business. Tribalism, the divine right of rulers, patronage, feudalism, manifest destiny, etc. drove the majority of transactions, not free market exchange. There are some economic activities in any economy where markets are an inappropriate mechanism for efficiently allocating capital to that activity. 12 For example, uncertainty of what one is buying (purchasing health care is not like buying a loaf of bread, a car, or a home) and lack of consumer information (and even basic understanding of the service being purchased) for comparison shopping may forever doom health care as an economic activity that responds to free market forces. Thus,

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there are always economic activities in any economy where markets are an inappropriate mechanism for managing transactions.13 CAPITALISM C O M E S I N D I F F E R E N T F L AV O R S Today, there are many flavors of capitalism in the world. There are also many flavors of capitalism operant in the United States. Thus, to speak of ‘capitalism’ as a monolithic ‘way of doing business’ in opposition to ‘government’ is nonsense. All capitalist systems rely on government regulations of markets to enable profits to be made by an enterprise, whether those governments are democratic, authoritarian, totalitarian, or fascist. The different flavors of capitalism that exist in the world today are primarily differentiated by the degree of hybridization that exists in the economy incorporating capitalism and socialization of those activities, as well as the efficacy of the regulations in place to assure that markets are fair and do a good job of allocating capital to the most productive uses in the economy. The most pernicious form of capitalism in the world today is called ‘disaster capitalism.’ Disaster capitalism refers to making a huge fortune from natural and planned disasters exacerbated by poverty, social tensions, environmental degradation, ineffectual leadership, and weak political institutions. Disaster capitalism’s raison d'être may be the promotion and generation of market inefficiencies – pricing signals that distort real prices for goods and services and their real cost to the environment, public health, and social justice.14 The checkered history and deleterious results of disaster capitalism, an outcome of the Friedman or Chicago School of economics that promotes among other things, tax cuts for the wealthy, industry consolidation and concentration, and deregulation of markets to achieve market efficiency has proven to be a wrong set of economic assumptions for how markets work in the real world in every country so far in which these principles have been applied. SOCIALISM: W H AT I S I T ? Socialism denotes the government ownership of the means of production. 15 Instead of being in private hands, capital is best left under the purview of the collective - which, under a democratic form of government is the government duly elected by the people. Thus, capital is allocated not for the purposes of

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personal gain (or the gain of the shareholders of an enterprise) as under capitalism but for the benefit of the people governed. Almost all ‘capitalist economies’ in the world today include some activities that have been socialized and operate under the tenets of socialism. Why? Because these economic activities have demonstrated that they run more efficiently, i.e. capital is allocated more productively, when these activities are operated under a socialist economic model than under a capitalist model. Examples in the United States include the U.S. military, the national intelligence services, the postal service, public schools, police departments, fire departments, the military and Veterans Administration health services, etc. These are all socialist enterprises, although they are rarely thought of in this manner. There are also in most capitalist societies in the world today, economic activities that are socialized, but do not follow strictly economic models of either socialism or capitalism. A good example of this hybrid economic activity in the U.S. is Medicare. Medicare is a government-funded, single payer health insurance service that relies on private hospitals and private health care providers for service. Economic activities that are socialized may also operate with some degree of free market enterprise for a portion of the socialized activity. There are few ‘pure’ socialist economies in the world today. Cuba may be the purest and longest running socialist economy that most people are knowledgeable about. Likewise, there are no ‘pure’ capitalist economies in the world today that I am aware of. Almost all capitalist economies include varying degrees of socialism or socialized economic activities. Usually, activities are socialized when a particular market system under a capitalist model breaks down or collapses. Socialism as an economic system is seen today in democratic, authoritarian, totalitarian and fascist political systems.16 Just as disaster capitalism is a particularly pernicious form of capitalism, communism has demonstrated itself as a particularly pernicious form of socialism. Instead of economic activities determined through democratic processes as under liberal socialist political

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systems, communism was an economic system that was run by an elite primarily for the benefit of the elite. CORPORATIS M : W H AT I S I T ? Today, corporatism, the resistance to economically productive change and preservation of dis-economic activities is more a threat to capitalism than socialism. The economist, Joseph Schumpeter (1883-1950, Austria/Hungary), in his book, "Capitalism, Socialism and Democracy," discussed capitalism’s greatest strength as creative destruction - old ways of doing things are destroyed and replaced by new ways through entrepreneurship. For Schumpeter, socialism was no match for capitalism. However, he predicted that corporatism would threaten and would finally undermine capitalism. Where today some see government bringing socialism, Schumpeter would see government fighting corporatism, providing the necessary energy to reform and replace market structures that are dis-economic and destructive of wealth. Today, in the U.S. many if not most industries either receive direct or hidden subsidies from the federal, state, or local governments (corporate welfarism); receive special tax breaks for their industry; and/or are regulated in ways that create an unfair advantage for entrenched businesses over new competitors. When corporate welfarism becomes the primary function of government, oftentimes regulations are promulgated where the people’s needs are not uppermost, but the welfare of corporations predominates. CAPITALISM , S O C I A L I S M , C O R P O R AT I S M & P R O F I T S Economic profits represent the creation of new, real wealth for the community. The world is better off for the economic activities that generated these profits. However, sometimes firms report accounting profits even as no real, new economic wealth was created. Instead, the accounting profits are merely figments of imaginative managements as these reported profits fail to account for externalities and contingent liabilities, or are ginned-up based on creative or fraudulent accounting schemes. Likewise, individuals may report that they personally ‘profited’ from a business activity (i.e. they made ‘a lot of money’) even in situations where no

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economic or even accounting profits were generated by the business itself. The individually ‘profitable’ activity did not contribute in any fashion to net, real wealth creation for the community. In essence, in situations like these, from an economic perspective, it may be more proper to think of these payments to individuals where no real profits were generated as merely thefts of someone else’s money. Albeit, these thefts, in many cases, are still considered ‘legal’ from a criminal justice system perspective, although they may be subject to shareholder derivative suits and civil penalties if pursued by interested parties. It is also a falsehood that “without business profits, government could not exist.” What is more accurate is that without government setting the rules of market exchange (this includes what market exchanges will be protected e.g the market for illegal drugs will not be protected but prosecuted. etc.), businesses could not make profits. ROLE OF GO V E R N M E N T U N D E R C A P I TA L I S M , S O C I A L I S M & CORPORATIS M Capitalism does not mean, and has never meant, a bright-line separation between business and government. One might argue that the primary and essential function of a nation’s government under economic systems of capitalism, socialism or corporatism is to “supply the institutions that create and sustain trust in financial promises.” 17 The foundation of such trust is built on a “government accountable to the large mass of property owners” and the maintenance of “the most important of all financial markets – that in government debt.” 18 Thus, protecting one’s country through military means is only effective if such military defense achieves “trust in financial promises.” For a country without a viable economy is one where no amount of military budget can rescue. “{I}t is only when governments are solvent that money – the unit of account, the ultimate means of payment and, in the absence of inflation, the safest store of value – will remain trustworthy.”19 “Good government is then the foundation of any…financial system” that relies on trust that promises future return of capital with interest in exchange for the provision of capital to fund productive activities today.20

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While this on first blush appears that government should solely be involved in the affairs of Wall Street, upon reflection, what becomes clear is that creating and sustaining trust in financial promises involves structuring markets so that transactions incorporate the best information as to the productive allocation of capital. Otherwise, over time, transactions would otherwise tend to allocate capital to those agents who have an unfair competitive advantage, cheat, or use coercive force (bribes, lobbying, implied threats, etc.) to achieve a greater share of the market pie. The result of this situation, should it persist, would be the negligence of basic needs of the citizenry and collapse of support systems for the economy. For example, this is the entire rationale behind environmental regulations in advanced economies. Businesses act rationally by externalizing costs as this enables greater profits for the firm. However, if such externalized costs are borne entirely by the public, the costs may exceed any profits generated by the firm. Overall, the society and economy are worse off in this situation. Thus, a market tax is imposed in the form of a monetary price adjustment, penalty, or assertive requirement that market transactions include this previously externalized cost.

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ENDNOTES It may be argued that may societies throughout history have been structured on principles other than human avarice (greed). Scripture is, of course, replete with stories of a society that attempted to structure their communal activities and economy based on God as their sovereign not personal greed. In fact, throughout history one might make an argument that avarice, at least as it is conceived today e.g. ‘Greed is good’ was unknown as personal identity was established only through relationality with one’s community, God, and environment. 1

So, on first take, Friedman’s statement is nonsensical, cynical, and wrong. However, Friedman himself did not believe what the statement portends today, out of context. For Friedman has said regarding self interest: Self-interest is not myopic selfishness. It is whatever it is that interests the participants, whatever they value, whatever goals they pursue. The scientist seeking to advance the frontiers of his discipline, the missionary seeking to convert infidels to the true faith, the philanthropist seeking to bring comfort to the needy -- all are pursuing their interests, as they see them, as they judge them by their own values. From a letter introducing the Milton and Rose D. Friedman Foundation for Education Choice (May 1996). Of course these values have some grounding in human community. The presumption here is that these values are not destructive of human society nor capital. Thus, this hardly refers to unbounded greed that calculates personal accumulation of capital to the detriment of all others. For example, of what value to the capitalist would it be to gain the entire world, if that world was polluted with PCBs, radioactivity from nuclear weapons from conflict engendered from self-serving policies, and all shunned by all humanity, including the capitalist’s family. That is a result of unbounded greed. It is unlikely that is what Friedman is referring to, or at least we may hope so. Utilitarianism (‘the more human desires that can be met, the more moral good that has been created’ or ‘the greatest good for the greatest number’) presently serves as the “primary moral framework for decision making in modern societies.” Utilitarianism is legitimized and sustained due to two factors: (a) a central myth of modernity that equates the telos of history as human progress brought about by goods resulting from economic development and technological innovation; and (b) the goods of human progress can be justified as moral exclusively through self-reflective interiority and determined by human happiness measured in economic terms. “God is superfluous to the order of the material world.” See Michael S. Northcott, The Environment and Christian Ethics (Cambridge: Cambridge University Press, 2001), 57, 70 2

This promise is made to all people, regardless of race, ethnicity, nationality, wealth, position, level of education or any other attribute, and to all of creation. 3

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Jeremiah 31:8; cf. Exod. 22:25; 23:11; Lev. 19:10; 23:22; Deut. 15:11; 24:17; 26:12, 13; 1 Sam. 2:8; Job 22:9, 19; 24:3, 14; 29:12; Ps. 9:9, 18; 10:2; 12:5; 14:6; 22:26; 41:1; 68:5; 72:4, 12; 74:21; Isa. 1:17, 23; 9:17; 10:2; 51:14; 58:6; 61:1; Amos 8:4; Matt. 5:3; 11:5; 19:21; Luke 4:18; John 13:29; Rom. 15:26; 2 Cor. 9:9; Gal. 2:10; James 2:5,6. 4

“The God of Israel is a God who makes and keeps promises....The promises of God are not theoretical or spiritual, but concern real-life in a reordered, political-economic situation’ (Jer. 32:42-44). See Walter Brueggemann, A Commentary on Jeremiah: Exile & Homecoming (Grand Rapids & Cambridge: Eerdmans, 1998), 265 (#3), 281, 284, 311. 5

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Exod. 6:7; Lev. 26:12; Jer. 7:23; Jer 11:4; Jer. 30:22; Ezek. 36:28.

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Lev. 19:18; Matt. 5:43; 19:19; Mark 12:31; Rom. 13:9; Gal. 5:14; James 2:8.

For example, “reforming health care is a moral obligation, and that the responsibility to heal the sick is at the heart of every faith tradition and is required for a civilized society.” These imperatives are not typically what drive markets. See Marshall Gantz, “We Have the Hope. Now Where’s the Audacity,” Harvard Kennedy School (August 30, 2009) at http://www.hks.harvard.edu/ news-events/news/commentary/wehave-the-hope. 8

From Lincoln’s Gettysburg Address on November 19, 1863: that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth (http://showcase.netins.net/web/creative/lincoln/speeches/gettysburg.htm) that was exegeted from the Preamble of United States Constitution adopted September 17, 1787: We the People of the United States, in Order to form a more perfect Union, establish Justice, ensure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America. 9

The intent of the U.S. Constitution was to establish a government of, by and for The People. This was at the time, and still is, an innovation of governance. What is clear is that governance in America was never intended to be limited to providing favors to the elite of the land or the wealthy. It was also clear that people was envisioned as those ‘naturally borne’ and does not include corporations and the legal fiction that corporations are ‘individuals.’

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Max Weber and others have argued persuasively that greed and the unrestrained pursuit of profit are not foundational to the tenets of capitalism and never were so. For without the restraint of rational calculation and support of government to make legal the economic activity in question, economic progress would grind quickly to a halt. In fact, the progress attributed to capitalism and its use of free markets might be better attributed to this-worldly asceticism that emphasized hard work, education, and deferred gratification as the noblest of virtues for the amassing of capital and investing this capital to good effect. See Zygmunt Bauman, “Building a Capitalist Society in a Postmodern World,” in Peter Beilharz, ed., The Bauman Reader (Malden, MA & Oxford: Blackwell, 2001), 65. 10

Fundamental and structural inefficiencies in some markets propel these markets to misprice inputs and outputs from productive and consumptive activities in the economy by either deferring known economic costs to the future or failing to account for known economic costs and pushing these private costs to public taxpayers. These inefficiencies not only often leave the United States government as the lender and borrower of last resort, but also result in an economic system built on a castle of sand. This untenable position may not only be a source for waves of financial crises, but also of an increasing propensity for local resource wars and privatized, transnational terrorism as preferred methods for sorting out temporary winners and losers in an unstable global Ponzi scheme where real, economic costs are reallocated to the losers, sometimes taxpayers in the United States. 11

Even today, free markets are not a panacea. Markets are not always applicable for all transactions. Instead of encouraging the proper allocation of capital to economic activities, the use of markets for some economic activities can be destructive of capital and harmful to the economy even when ‘properly’ regulated. Health care may be an economic activity where markets are inappropriate for very good reasons. See link to Kenneth Arrow’s Uncertainty and the welfare economics of health care in Paul Krugman, “Why Markets can’t cure healthcare,” NY Times (July 25, 2009) at http://krugman.blogs.nytimes.com/2009/07/25/why-markets-cant-cure-healthcare /?pagemode=print. 12

There have been claims that 3rd party reimbursal for health care expenses ‘distort’ the true market for health care in the U.S. However, actual experience in other industrialized countries, ones where insurance pays ~100% of billed services, is that health costs as % of GDP is <10%. In U.S., where insurance pays <65% of billed services, health care is 18% of GDP, soon to be 20% (CBO #s). The problem is not 3rd party payers. Turns out markets don't work very efficiently for delivering health care (at least no one has figured out to have them work efficiently in practice). In the U.S., we have moved from not-for-profit community-based care to an industrial, for-profit care model. Insurance companies are part of the problem as they have moved to a for profit model themselves. This is one factor that is driving up the cost of health care in America, not the 3rd party payer model. 13

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See Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism (New York: Henry Holt and Company, 2007). 14

The military and Veterans Administration ( VA) run socialized health care in the U.S., similar to NHS in UK, Spain, most Scandinavian countries, New Zealand, Hong Kong, Cuba have for all their citizens (Beveridge model). 15

Federal employees, Congress, and their staff have a single payer, similar to what the Swiss, Germans, France, Switzerland, Belgium, the Netherlands, Japan have for all citizens (Bismark social insurance Model). Medicare is a single payer system similar to what Canada, Taiwan, South Korea have for all their citizens (National Health Insurance Model). In U.S. health insurance is linked to employment for those under 65 yrs. of age. Those working for certain private and public employers get insurance. Those working for other employers, changing jobs, or out of the workforce for any reason don't get it and may even be denied coverage from the individual market at the discretion of the insurer and get nothing. - that's 'free market' health care, U.S. style. “Socialism may be seen ... as a radical but logical extension of capitalist liberalism.... [Where] liberalism saw the equality of citizenship as the foundation and guarantee of the individual’s freedom.... Socialism, on the contrary, considered the establishment of political equality as a means and a first step to the incorporation of the totality of individual life into a community of equal men.” In this respect, capitalism wishes to improve the community through the self-interested actions of individuals whereas socialism wishes to improve the community through communal actions where individuals are acting in concert for the good of the community. See Zygmunt Bauman, “The Historical Location of Socialism,” in The Bauman Reader, 35. 16

Martin Wolf, Fixing Global Finance (Baltimore: The Johns Hopkins University Press, 2008), 16. 17

18

Wolf, 17, 18.

19

Wolf, 17.

20

Wolf, 12, 19.

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