Capitalism for the Intelligent but Ignorant – Part One: the Constraints

First, the obvious that hardly anyone talks about: If you have not taken at least two good courses in economics, it’s not likely that you understand even the basics of capitalism. If you have, when you were 19 and suffering from severe testosterone poisoning (male or female) it’s still likely that you don’t understand much. There are exceptions: It’s possible to teach oneself through assiduous reading of a good newspaper such as the Wall Street Journal. I don’t know how many people do this although I did, to a large extent. It took me about ten years.

Don’t blame yourself at all. Capitalism is a topic that should be taught every year throughout junior and senior high school. It never is. Also teachers of introductory economics often do a very bad job of it for reasons we need not go into here. A few do more harm than good out of their own ideological blindness. We all know such cases, even outside of the People’s Green Socialist Republic of Santa Cruz where I live. So, below is a handy intro to the subject. If you wish for a more scholarly but still basic approach, please go to my entry “Capitalism” in the 2006 Edition of the Blackwell Encyclopedia of Sociology. Make sure you consult the hard copy edition. The paperback entry that followed is pure trash done by a simplistic 1930s-style pseudo-Marxist.

Capital is money that’s put to work. The $500 in banknotes under your mattress is not capital although it’s potential capital. The valuable tract of wilderness you inherited from your grandfather and that you preserve carefully is not normally considered capital. It’s also potential capital. The millions of dollars worth of gold dangling from the ears of Indian women today are not capital. In all these example, something of value is sleeping, not producing except by happenstance.

Capital has no size. The $200 I put into my brother- in- law’s restaurant truck in return for a small share of ownership in his business is capital. The $100,000 currently in your savings account (2014) is not really capital, at least, it’s not your capital.

Capital does not belong to “capitalists.” Curiously, the word “capitalist” has no fixed meaning today. I believe we have capitalism of some sort but no capitalists. More on the actual actors of capitalism in Part Two of this essay.

Every economic system is also a social system. The way a society or a group makes its living has many implications for how it lives. (Manufacturing Germany is sociologically different from oil-mining Saudi Arabia in several important ways.) One implication, but not the only one, is the degree of poverty of that group. Where capitalism of some sort does not flourish, the poor remain poor.

The Unites States is currently a capitalist society but only in a severely limited sense. We must distinguish between theoretical market capitalism and the real capitalism prevailing in this country, the US, which I will describe presently.

In a theoretical free market (that exists nowhere today) sellers and buyers complete their transactions and that’s it. unless strong bonds of trust exists between the ones and the others. Such a bond of trust allows for the planning of future exchanges. This trust is difficult to achieve with large numbers who know little or nothing about one another. It may be increasingly easy to achieve such bonds, however, because of the Internet. When trust exists buyers and sellers can agree on some future transaction. The purchase of a crop still in the ground is a classical example.

To compensate for the shortage of such trust conditions, the contract came about. A contract is a promise to deliver something in the future at an agreed upon price. The value of a contract is multiplied if it’s enforceable in courts of law. A court is an institution that forces people to do what they don’t want to do at the moment. A classical example is the delivery for an agreed-upon in December price of $19 a bushel for a crop that’s worth $20/bushel in the open market in August.

Courts thus limit the free play of the market; they are a constraint on free market capitalism, but a virtuous one if you ask me.

Next, as hard as it may be to believe, some products in this country are subsidized directly by governments. Every year, Congress gives wheat, corn, soybeans and rice growers billions of dollars in direct payments. There are also thousands of indirect subsidies. Two come to mind: The American sugar industry is allowed to practice higher prices than otherwise would be the case because of a more than century-old custom barrier on sugar imports. Foreign sugar, has to pay customs duties, a fine really, to be allowed into the US. The American consumer pays more for his sugar than he would otherwise

The second form of indirect subsidies, of course, is tax exemptions for government favorites- of-the-moment projects, most notably today so-called renewable energy endeavors (but not nuclear energy for some reason although there are infinite reserves of nuclear material available).

All subsidies distort the allocation of resources, the main moral justification for market freedom. Thus, I may put my money into windmills I think little of because of the clear unearned head start the windmill industry enjoys entirely through tax advantages. Note that I am not speaking here of recent scandals where renewable industry ventures received government support they squandered or stole. I am talking only about ventures that actually proved viable. The corruption frequently following government subsidies is a separate topic.

Beyond courts and government subsidies, taxation itself, limits the free play of the market. All monies take by the government are withdrawn from the free choice of citizens and other economic actors. Historically, it used to be a small thing. Today, at any given time, in developed countries, around 50% of all the income (Gross Domestic Product is a good enough approximation) available is in the hands of government. It’s a low of about 40% in the US, a high of 57% in France. It’s as if developed countries had two economies a capitalist, market-based economy and a state socialist economy, of more or less equal size. Within each country, the latter always has low productivity. Thus, calling such countries “capitalist” is a significant abuse of language. In addition, the costs of simply complying with tax laws is deemed no negligible by various reasonable estimates.

If I wanted to stem the rise of health costs and that of health insurance premiums while lowering the number of uninsured, the first thing I would do would be to spur competition sharply within the health insurance industry. I would accomplish this miracle by doing my very best to void all regulations limiting insurance companies’ activity to one state. You got that right, there are such regulations. If an insurance company in Maine offered me, a private person, better terms than does my current insurer today, I would not be allowed to accept its offer.

Many government regulations act, in particular, as barriers to entry in addition to fulfilling (or not) whatever their other roles (such as promoting safety) might be. This explains why industry associations often ask to be regulated. Business decision makers like competition but mostly for the other guy. ( In a related mode, see Peter Thiel’s Op-Ed, “Competition is for Losers” in the Review section of the Sept. 13-14th Wall Street Journal.)

The biggest, most significant way in which modern capitalism in most countries differs from market capitalism is that the supply of money, of currency available in the economy is tightly managed by a government entity. In democracies, that entity is independent from the executive branch of government. That is the case in the US, with the Federal Reserve Board, in the UK, in France and in addition, in the European Union, for example. Yet the enormous power to release and restrict money – the main medium of exchange – is taken away from the market. The results often differ sharply from what we think the market would do of its own accord.

In the US, the Federal Reserve Bank, ( “the Fed”) only has the formal power to change the rates at which to federal government lends and borrows money. Its formal mission is narrowly defined to fighting both inflation and unemployment through these instruments. In practice, however, at any one time, so much of the potential capital is in the hands of the federal government that the Federal Reserve Bank pretty much determines under what conditions other economic actors operate. A current example: If interest rates are high, investors flock to government bonds and to other bonds because their interests rate follow those of the Fed. (A bond is a loan to a government entity or to a private entity.) If interest rates are low – as they are now, by design – (2014) many investors will move their money to stocks or “equity.” More on this in Part Two of this essay

It would not be far from the truth to state that the US has four rather than three branches of government: legislative, executive, judicial , and financial.

Note that I am mostly only describing until now. Now, I will opine: It seems to me that this constitutionally flawed system has served us fairly well in practice. I don’t know what an alternative would look like. Many people of libertarian bent seem to say that if the US would only return to the gold standard there would be no need for the Fed. This means that a US dollar would be exchangeable at all times from the federal government for a fixed quantity of gold. I don’t think their argument is credible. It’s possible I don’t understand it well.

If any of this is not clear, just ask in a Comment. There are no dumb questions, just dumb answers, and dumb silence.

You might be interested in a historical digression about one of the most popular false beliefs about capitalism, its alleged relationship to Protestantism. If you are, read on-line my co-authored article:

Delacroix, Jacques and François Nielsen. “The beloved myth: Protestantism and the rise of industrial capitalism in 19th century Europe.Social Forces 80-2:509-553. 2001.

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About Jacques Delacroix

I write short stories, current events comments, and sociopolitical essays, mostly in English, some in French. There are other people with the same first name and same last name on the Internet. I am the one who put up on Amazon in 2014: "I Used to Be French: an Immature Autobiography" and also: "Les pumas de grande-banlieue." To my knowledge, I am the only Jacques Delacroix with American and English scholarly publications. In a previous life, I was a teacher and a scholar in Organizational Theory and in the Sociology of Economic Development. (Go ahead, Google me!) I live in the People’s Green Socialist Republic of Santa Cruz, California.
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13 Responses to Capitalism for the Intelligent but Ignorant – Part One: the Constraints

  1. Jim N says:

    Excellent, as usual. I’d like to pick a couple of small nits, however:
    “To compensate for the shortage of such trust conditions, the contract came about. A contract is a promise to deliver something in the future at an agreed upon price. The value of a contract is multiplied if it’s enforceable in courts of law. A court is an institution that forces people to do what they don’t want to do at the moment. A classical example is the delivery for an agreed-upon in December price of $19 a bushel for a crop that’s worth $20/bushel in the open market in August.
    Courts thus limit the free play of the market; they are a constraint on free market capitalism, but a virtuous one if you ask me.”

    – forces people to do what they don’t want to do at the moment- is somewhat misleading; this is not really a constraint on the free market; it’s the enforcement of a contractual arrangement previously agreed upon. There may be buyer’s [seller’s?] remorse involved, but the arrangement was voluntary – there’s no coersion involved.

    “Thus, I may put my money into windmills I think little of because of the clear unearned head start the windmill industry enjoys entirely through tax advantages. I am not speaking here of recent scandals where renewable industry ventures received government support they squandered or stole. I am talking only about ventures that actually proved viable.”

    I’m wracking my brain trying to recall a ‘green’ venture that has actually proved viable, even with tax advantages.

    “Many people of libertarian bent seem to say that if the US would only return to the gold standard there would be no need for the Fed. This means that a US dollar would be exchangeable at all times from the federal government for a fixed quantity of gold. I don’t think their argument is credible. It’s possible I don’t understand it well.”

    ‘Return to the gold standard’ is shorthand for intrinsic-value currency, rather than the present fiat dollar backed only by the ‘faith and credit of the United States’ – which presently seems to be sorely lacking in value. Simply consider the value of a dollar in terms of goods purchased prior to and over the 100+ years of Fed paper (especially after decoupling from intrinsic value). Fiat money is simply another form of taxation – diluting the value of money is a great way for governments to hide the true cost of expenditures.

    regards,
    Jim Noble
    Boulder Creek

  2. Thanks for your continued interest, Jim. Here is what I do about your nits!

    I am involved in the gigantic task of explaining this very complex artifact from scratch. I hope my simplifications are not plain wrong. I think they are not. In order of appearance:

    A court, any court is really an institution that forces people to do what they don’t want to do at the moment. That includes fulfilling contracts that have been freely entered into. An example would be paying rent on a particular month where there is a shortage of rent money, for example. A court that is not able to do this is just not a court. There are arbitration organizations that do the same work as courts without the threat of force. Remarkably, they are little used.

    Windmills: I am trying to separate the crude fact of corruption from the intrinsic constraint on capitalism that are tax subsidies. I wanted to impress on the reader the fact that even when there is zero, no corruption, subsidies limit the scope of capitalism. Perhaps, a better example should have been a case where corruption is not widely involved as has been the case with green industries recently.

    Gold standard. Alas, alas, I was hoping to put off this discussion. You are morally forcing me to write a small aside about money. Of course, you are invited to comment on it when I get around to it.

    Thank you.

    • Tate says:

      I don’t think it’s true at all that arbitration associations are seldom used. http://encyclo.findlaw.com/7500book.pdf

      Your definition of capital is not shared by the vast majority of economists. I think the most agreed upon definition of capital is goods, such as machinery, that are used to produce other goods.

      • Tate: I did not find where the article of reference contradicts anything I said about contracts. Arbitration is common in some kind of disputes and becoming more common, maybe. Good! That was not my topic.

        I don’t know what the “vast majority of economists” think. I doubt you do; I doubt they do. (I also don’t t know what the majority of climate scientists think.) According to what you say though, money invested in the Transcontinental Railroad is no (Not) capital. It’s difficult to believe that this is what you mean.

        The assertions in my simplified narrative remain intact for their limited purpose of introduction, an introduction that is hard to find in the real world.

      • Tate says:

        My point about arbitration associations was simply that I thought you were mischaracterizing reality by saying they are “little used.” I’m not sure why you thought what I wrote was somehow supposed to contradict anything you said about contracts (though I think your ideas about contract enforcement being a “constraint” on free markets and that courts that don’t exercise coercive powers simply aren’t courts are not accurate or helpful, but that was not the point I was trying to make).

        What you suggest about my definition of capital is exactly what I mean. “Capital” is not the money itself; it is the actual railroad and the tools used to build it, in your example. By creating more monetary specie, one is not creating more capital. By your definition, capital cannot exist in a non-monetary economy.

        I’m not claiming to know exactly what “the vast majority of economists think” in some sort of overarching general theory type of way, only that they do not define capital as you have. Making such a claim doesn’t imply I have some sort of omniscience about what economists think; if I say the vast majority of economists don’t believe that, all else equal, a higher price will result in a higher quantitiy demanded, it’s not like I’m reading their minds. We can, in fact, make claims about general agreements in disciplines.

        I suppose I should ask, What exactly are you trying to introduce?

    • Correction: Arbitration is widely used. I did not mean to imply that it was not. If I did, I was wrong but it’s a mall mistake in the context of my limited purpose. (See again the title of this essay.)

      I will stay with my definition of a court. If something is used to resolve disputes and it does not have means of enforcement backed by a state ‘s (or states’) capacity of violence, it’s not a court, it’s an arbitration mechanism.

      Tate: You impute to me sins I am too ignorant to commit.

      For the time being and for my limited purpose, which is to begin the job that economists have so badly failed to do, money invested in the Transcontinental Railroad is capital. It’s even a good example of capital. The railroad tracks are capital also in the sense that they are the physical manifestation of money at work.

      My credentials are all over. Go ahead, Google me and wince or sob!

      I am showing some irritation because Tate is trying as best he can to resist my efforts at simplification. Apparently, he wants me to respect the complexities that are largely responsible for the massive failure of economists to reach many intelligent people. Contrary to his statements, I am not violating anything in orthodox economics theory, I am simplifying for a virtuous purpose. I am only trying to help a few people who would not dream of it today to begin to read the Wall Street Journal, for example.

  3. Pingback: Part Two of Capitalism for the Intelligent Ignorant: the Actors | FACTS MATTER

  4. Pingback: Capitalism for the Intelligent Ignorant – Just a Detour Through Money | FACTS MATTER

  5. John Love says:

    Ok, I have read part one, read your detour, I have no degree in economics, although I have read and studied Keynesian and Austrian economics on my own. I also rarely read the Wall Street Journal, but will start. I will read part two maybe later today. So, according to you there is no way I can understand capitalism, or how business is conducted in all its various forms because I have no degree. Needing more than one according to you! You are probably right. You want to talk early man, maybe a little about how we got to be who we got to be over the millennia, I am maybe slightly more capable of an intelligent conversation. But I seem to be able to understand what it is you are saying. I least I hope so, because I intend to keep on reading and learning from you. I commented on you detour article, remember this comment when you see it. I read the detour first.

  6. John: You misread me. I did not (NOT) said you needed any degree to understand capitalism. I was just commenting on my wide but unsystematic observation that extremely few people have even a vague understanding of capitalism. Nor did I say anything to the effect that a degree would help. I had had a PhD from Stanford for several years before I had the topic pretty much under control.

    I did suggest that one could learn by reading the Wall Street Journal. There are probably other valuable sources. I just don’t know them but it seems to me that if there is one, there must be two or three, or four. I state that it took me ten years of reading the WSJ. I am not the fastest gun in the West. Others may achieve the same result faster. That’s especially true if they are not afflicted by testosterone poisoning.

    Reading your mind again: As someone who taught in universities for thirty years, I am struck by how inefficient university learning is. Universities take four or five years to teach badly what could be taught well in a year and half (with no summer vacation). If I were younger and as wise as I am now, I would work on a project toward a good college degree in one year- plus.

    My advice: If you are self-taught, you should try to read economics not written by economists for a while. It’s only when you reach a fairly high level that you might lose something.

    • John Love says:

      Thank you for your clarification about the degree. I apologize for misreading or my misunderstanding of what I read. I have been reading a lot of your blogs over the past couple of days. I am impressed. I have no formal credentials as I said, so I try to read several articles on any subject to try and glean what I hope to be a truth somewhere. So I tend to try to read pro and con articles. Your writings, to me at least, do not seem to lean too far in any direction. Most people have some religious, political, or imagined moral axe to grind. Little puddles of muddy information that have been lying around in my mind suddenly seem to find a filter and clear up as I read your blogs on different subjects. So my learning curve is not just what I am reading, but for some inexplicable reason, you make sense to me and allow me to digest other writings whose meaning or lack thereof have just been floating around taking up room. So far I have picked out only things you have written about the economy, terrorism, more specifically ISIS, or IS. I was attracted to one about education however because my daughter has a Masters and teaches English. She also specialized in reading disabilities. So mandated testing of classes made up of students with either reading disabilities, english as a second language, or just plain problem children with no support system is neither accurate or helpful. So I have a few prejudices of my own to worry about in that regard. So I appreciate your blogs and will continue to peruse the older ones as well.

  7. HI, John: I would like to think that you understand me well because I try (“…for the intelligent ignorant.”)

    I do have an ax to grind, or two or three axes. I am anti-authoritarian and I also think that a strong defense is a pre-condition to influencing societies in that direction. I have been trying to engage pure libertarians on his contradiction for a long time without success. I am also disappointed in my old age by the lack of political inventiveness around me. Much of our lives is still dominated by the same tired old themes that prevailed when I was was twenty. I had hoped that world would become obsolete before I kicked off.

    I think you would be interested in my book: “I Used to Be French: an Immature Autobiography.” Plus, I need the $4 I would earn or a cappuccino. Order at: iusedtobefrench@gmail.com

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