“Capitalism” Is a Dirty Word

Dyspepsia Generation points to a piece at reason.com, which explains that capitalism is a Marxist coinage. In fact, capitalism

is what the Dutch call a geuzennaam—a word assigned by one’s sneering enemies, such as Quaker or Tory or Whig, but later adopted proudly by the victims themselves.

I have long viewed it that way. Capitalism conjures the greedy, coupon-clipping, fat-cat of Monopoly:

Thus did a board-game that vaulted to popularity during the Great Depression signify the identification of capitalism with another “bad thing”: monopoly. And, more recently, capitalism has been conjoined with yet another “bad thing”: income inequality.


In fact, capitalism

is a misnomer for the system of free markets that could deliver abundant prosperity and happiness, were markets left free. Free does not mean unfettered; competition for the favor of consumers exerts strong discipline on markets. And laws against theft, deception, and fraud would serve amply to keep markets honest, the worrying classes to the contrary notwithstanding.

What the defenders of capitalism are defending — or should be — is voluntary, market-based exchange. It doesn’t roll off the tongue, but that’s no excuse for continuing to use a Marxist smear-word for the best of all possible economic systems.

Related posts:
More Commandments of Economics (#13 and #19)
Monopoly and the General Welfare
Monopoly: Private Is Better than Public
Some Inconvenient Facts about Income Inequality
Mass (Economic) Hysteria: Income Inequality and Related Themes
Income Inequality and Economic Growth
A Case for Redistribution, Not Made
McCloskey on Piketty
Nature, Nurture, and Inequality
Diminishing Marginal Utility and the Redistributive Urge
Capitalism, Competition, Prosperity, and Happiness
Economic Mobility Is Alive and Well in America
The Essence of Economics
“Rent” Is Indispensable

From Each According to His Ability…

…to each according to his need. So goes Marx’s vision of pure communism — when capitalism is no more. Unfettered labor will then produce economic goods in such great abundance that there is no question of some taking from others. All will feed at an ever-filling and overflowing public trough.

There are many holes in the Marxian argument. Here’s the bottom line: It’s an impossible dream that flouts human nature.

Capital accrues and markets arise spontaneously (where not distorted and suppressed by lawlessness, government, and lawless government) because they foster mutually beneficial exchanges of economic goods (e.g., labor for manufactured items)

Communism has failed to catch on, as a sustained and widespread phenomenon, because it rejects capitalism and assumes the inexorability of economic progress in the absence of incentives (e.g., the possibility of great rewards for taking great risks and the investment of time and resources). It is telling that “to each his own need” (or an approximation of it) has been achieved on a broad scale only by force, and only by penalizing success and slowing economic progress.

If the state were to wither to nightwatchman status, the result would be the greatest outpouring of economic goods in human history. Everyone would be better off — rich and (relatively) poor alike. Only the envious and economic ignoramuses would be miserable, and then only in their own minds.

If Marx and his intellectual predecessors and successors were capable of thinking straight, they would have come up with the winning formula:

From each according to his ability and effort,
to each according to the market value of his output,
plus whatever voluntary contributions may come his way.

Vulgar Keynesianism and Capitalism


Robert Higgs quite rightly disparages “vulgar Keynesianism”:

Most of the people who purport to possess expertise about the economy rely on a common set of presuppositions and modes of thinking. I call this pseudo-intellectual mishmash vulgar Keynesianism. It’s the same claptrap that has passed for economic wisdom in this country for more than fifty years and seems to have originated in the first edition of Paul Samuelson’s Economics (1948), the best-selling economics textbook of all time and the one from which a plurality of several generations of college students acquired whatever they knew about economic analysis. Long ago, this view seeped into educated discourse and writing in the news media and in politics and established itself as an orthodoxy.

Unfortunately, this way of thinking about the economy’s operation, particularly its overall fluctuations, is a tissue of errors of both commission and omission. Most unfortunate have been the policy implications derived from this mode of thinking, above all the notion that the government can and should use fiscal and monetary policies to control the macroeconomy and stabilize its fluctuations. Despite having originated more than half a century ago, this view seems to be as vital in 2009 as it was in 1949.

Higgs then dissects “the six most egregious aspects of this unfortunate approach to understanding and dealing with economic booms and busts.” These are the aggregation of myriad and disparate economic actions, failure to take into account changes in relative prices, misunderstanding of the meaning and economic role of interest rates, disregard for the importance of capital, blind “money pumping” as a “solution” to recessions, and disregard for the disincentivizing effects of government activism on the private sector.

I agree with everything said by Higgs, and I have said many of the same things (in my own way) at this blog and its predecessor.  However, GDP — an aggregate measure of economic activity — is a useful construct, as flawed as it may be. It is an indicator of the general direction and magnitude of economic activity. Other aggregate measures — such as employment, jobs added and lost, unemployment rate — are also useful in that regard. If, for example, constant-dollar GDP per capita was twice as high in 2010 than it was 40 years earlier, in 1970 (computed here), it indicates that most Americans enjoyed a significantly higher standard of living in 2010 than they and their predecessors did in 1970. Further, the difference is so significant that it overshadows the difficulty of aggregating the value of billions of disparate transactions and separating the effects of price inflation from quality improvements.

What is special about 1970? It marks a turning point in the economic history of the U.S., which I discussed in a post that is now two-and-a-half years old:

Can we measure the price of government intervention [in the economy]? I believe that we can do so, and quite easily. The tale can be told in three graphs, all derived from constant-dollar GDP estimates available here. The numbers plotted in each graph exclude GDP estimates for the years in which the U.S. was involved in or demobilizing from major wars, namely, 1861-65, 1918-19, and 1941-46. GDP values for those years — especially for the peak years of World War II — present a distorted picture of economic output….

The trend line in the first graph indicates annual growth of about 3.7 percent over the long run, with obviously large deviations around the trend. The second graph contrasts economic growth through 1907 with economic growth since: 4.2 percent vs. 3.6 percent. But lest you believe that the economy of the U.S. somehow began to “age” in the early 1900s, consider the story implicit in the third graph:

  • 1790-1861 — annual growth of 4.1 percent — a booming young economy, probably at its freest
  • 1866-1907 — annual growth of 4.3 percent — a robust economy, fueled by (mostly) laissez-faire policies and the concomitant rise of technological innovation and entrepreneurship
  • 1908-1929 — annual growth of 2.2 percent — a dispirited economy, shackled by the fruits of “progressivism” (e.g., trust-busting, regulation, the income tax, the Fed) and the government interventions that provoked and prolonged the Great Depression (see links in third paragraph)
  • 1970-2008 — annual growth of 3.1 percent –  [2.8 percent for 1970-2010] an economy sagging under the cumulative weight of “progressivism,” New Deal legislation, LBJ’s “Great Society” (with its legacy of the ever-expanding and oppressive welfare/transfer-payment schemes: Medicare, Medicaid, a more generous package of Social Security benefits), and an ever-growing mountain of regulatory restrictions.

Taking the period 1970-2010 as a distinctive era — that of the full-fledged regulatory-welfare state — it may be possible to discern some aggregate relationships that were stable during that era (and may well continue to hold). The relationship that I want to explore is suggested by Higgs’s discussion of the vulgar Keynesian view of aggregate demand and the role of capital in economic production:

Because the vulgar Keynesian has no conception of the economy’s structure of output, he cannot conceive of how an expansion of demand along certain lines but not along others might be problematic. In his view, one cannot have, say, too many houses and apartments. Increasing the spending for houses and apartments is, he thinks, always good whenever the economy has unemployed resources, regardless of how many houses and apartments now stand vacant and regardless of what specific kinds of resources are unemployed and where they are located in this vast land. Although the unemployed laborers may be skilled silver miners in Idaho, it is supposedly still a good thing if somehow the demand for condos is increased in Palm Beach, because for the vulgar Keynesian, there are no individual classes of laborers or separate labor markets: labor is labor is labor. If someone, whatever his skills, preferences, or location, is unemployed, then, in this framework of thought, we may expect to put him back to work by increasing aggregate demand, regardless of what we happen to spend the money for, whether it be cosmetics or computers.

This stark simplicity exists, you see, because aggregate output is a simple increasing function of aggregate labor employed:

Q = f (L), where dQ/dL > 0.

Note that this “aggregate production function” has only one input, aggregate labor. The workers seemingly produce without the aid of capital! If pressed, the vulgar Keynesian admits that the workers use capital, but he insists that the capital stock may be taken as “given” and fixed in the short run. And ― which is highly important ― his whole apparatus of thought is intended exclusively to help him understand this short run. In the long run, he may insist, we are, as Keynes quipped, “all dead”; or he may simply deny that the long run is what we get when we place a series of short runs back to back. The vulgar Keynesian in effect treats living for the moment, and only for it, as a major virtue. At any given time, the future may safely be left to take care of itself.

In fact, the Keynesian-Marxian view of capital is about 180 degrees from the truth:

1. A broad array of capital goods (e.g., metal presses and railroad cars) will produce the same outputs (e.g., auto body parts of a certain quality and a certain number of passenger-miles) despite wide variations in the intelligence, education, and motor skills of their operators.

2. That is to say, capital leverages labor (especially unskilled labor).

3. Rewards justifiably — if unpredictably — flow to those who invent capital goods, innovate improvements in capital goods, invest in the production of such goods, and take the risk of owning businesses that use such goods in the production of consumer goods and services.

4. The activities of those inventors, innovators, investors, and entrepreneurs constitute a form of labor, but it is a very special form. It is not the brute force kind of labor envisaged by Marx and his intellectual progeny. It is a kind of labor that involves mental acuity, special knowledge, a penchant for risk-taking, and — yes, at times — hard work.

Without capital, labor would produce far less than it does. Capital, by the same token, enables labor of a given quality to produce more than it otherwise would.

(By “invest in the production of capital goods,” I mean to include individuals whose saving — whether or not it goes directly into the purchases of stocks and corporate bonds — helps to fund the purchases of capital goods by businesses.)

With that in mind, look at the aggregate relationship between the stock of private non-residential capital and private-sector GDP (GDP – G) for the period 1970-2010:

GDP - G vs net private capital stock, 1970-2010
Notes:  Current-dollar values for GDP and G are from Bureau of Economic Analysis, Table 1.1.5. Gross Domestic Product (available here). Capital stock estimates are from Bureau of Economic Analysis, Table 4.1. Current-Cost Net Stock of Private Nonresidential Fixed Assets by Industry Group and Legal Form of Organization (available here). Current-dollar values for GDP – G and capital stock were adjusted to 1982-84 dollars by constructing and applying deflators from CPI-U statistics for 1913-present (available here).

Variations around the trend line indicate fluctuations in economic activity. I treat the difference between “actual” GDP and the trend line as a residual to be explained by factors other than the aggregate value of the private, nonresidential capital stock. Measures of employment or unemployment will not do the job; they are simply proxies for aggregate output. The best measure that I have found is the value of new investment in the current year, relative to the value of the capital stock at the end of the prior year:

Residual vs new invest per PY capital stock
Notes: Residual GDP – G derived from Fig. 1, as discussed in text. Estimates of new investment in private capital stock are from Bureau of Economic Analysis, Table 4.7. Investment in Private Nonresidential Fixed Assets by Industry Group and Legal Form of Organization (available here); adjusted for inflation as discussed in notes for Fig. 1.

Using the trendline equation from Fig. 2, I adjusted the estimates derived from the trendline equation of Fig. 1, with this result:

Adjusted GDP - G vs. net private capital stock

There is precious little for labor to do but to show up for work and apply itself to the tools provided by capitalism:

Change in priv emply vs change in real GDP

*   *   *

Knowledgeable readers will understand that I have taken some statistical liberties. And I have done so as a way of satirizing the view that prosperity depends on labor and its correlate, consumption spending. But my point is a serious one: Capital should not be denigrated. Those who denigrate it give aid and comfort to the enemies of economic growth, that is, to the “progressives” who are the real enemies of the poor, of labor, and of liberty.

Competition Shouldn’t Be a Dirty Word

Paul Krugman, a defunct Keynesian, certainly isn’t the first person to decry competition. Krugman’s motive is somewhat different than the motives of others who think of competition as a dirty word, so let’s get Krugman out of the way.

Krugman’s ideal world is one in which the great socialist collective operates under the guidance and tutelage of his omniscience, which extends beyond his former discipline of economics into all aspects of human endeavor and the psychological underpinnings thereof. How else could he know, for example, that Republicans are unremittingly evil and the cause of all evil, not excluding the acts of mad men. Krugman’s problem, of course, is his heavy emotional investment in statism, which leads him to respond like Pavlov’s dog (slobbering and all) whenever anyone says an unkind or even doubtful word about the state’s wisdom or beneficence.

Enough of Krugman, as I once said, prematurely. Onward to competition, that dirty word.

Why is it dirty? First, thanks to “thinkers” of Krugman’s ilk, the word has acquired an adjective, which one hears in one’s mind even when it isn’t attached to the word by the person who uses it. The adjective is cut-throat. Cut-throat competition

refers to situations when competition results in prices that do not chronically or for extended periods of time cover costs of production, particularly fixed costs. This may arise in secularly declining or “sick” industries with high levels of excess capacity or where frequent cyclical or random demand downturns are experienced.

In other words, the term cut-throat competition has nothing to do with rapacious behavior. It is simply a picturesque description of a situation in which some firms are bound to fail, leaving survivors whose behavior should be characterized as persevering, not cut-throat. “Cut-throat” has nevertheless become ineradicably associated with “competition,” which has thereby acquired a strongly negative connotation among “average” persons, defunct Keynesians, the mainstream media, and “liberals” in general.

The other negative connotation of competition is its association with zero-sum games. In the extreme, there is gladiatorial, death-to-the-loser combat. In the somewhat less violent entertainments of the present epoch there are season-ending, winner-takes-trophy events: the Stanley Cup playoffs of ice hockey, the World Series of baseball, the Super Bowl of football, and so on, unto the Little League World Series and who knows what else.

The “average” person (Average Joe) enjoys winner-takes-trophy events and movies that employ death-to-the-loser plot devices, even as he deplores economic competition. That is so because competition as entertainment reinforces the view that competition inevitably generates losers. And yet, the competition of the arena — in its modern, non-lethal incarnations — isn’t really about the winner taking all. The winner takes a trophy and some extra moolah, but the losers — even the members of the teams that finish last and never get to post-season play — don’t lose. In fact, they earn rather nice salaries (often stupendous ones), usually for many years before their declining skills cause them to yield (gracefully or otherwise) to younger players.

Average Joe — unlike the athlete, aspiring performer, or trial lawyer — doesn’t like to think that he is in some kind of competition when he goes to work every day. But he is, even if his work doesn’t involve an explicit contest with, say, a co-worker to see who can throw a football more accurately in the face of charging defensive players, write the best computer program, serve the most customers, turn out the most readable technical manuals, and so on.

The element of competition in the workaday world is unavoidable, not only for the workers on the front lines but also for those in the back room. It is also inevitable for bosses all the way up the chain of command, and for financial backers (whose ownership shares and and loans are on the line).

The element of competition arises because of consumer sovereignty. In the final analysis, it is up to producers (workers, bosses, and business owners) to satisfy consumers — who are also producers. Every instant of every day there are changes in tastes, preferences, technologies, production methods, and other factors that determine the characteristics, quantities, and prices of goods and services that are bought and sold, and thus the rewards to those who are engaged in the production and financing of those goods and services. All of that constant change takes place in an economy that is generally growing, and some sectors of which grow even as others sink into recession or depression. Growth does not eliminate or soften competition because, when the veil of money is stripped away, growth depends heavily on the addition of resources (labor and capital of various kinds), which must be rewarded in accordance with the value of their contributions to economic output. Whether or not the economy is growing, the earnings of producers (and, therefore, their opportunities to consume) depend on their ability to satisfy consumers, who have myriad choices about how to allocate their incomes. In turn, the incomes of every economic actor, from janitor to chairman of the board to multi-billionaire shareholder, are determined by their respective contributions to consumer satisfaction.

The outcome of competition, contrary to the connotations of the word, isn’t a tally of winners and losers. Every “player” is a winner because he is rewarded, to some degree, for his efforts. The notion that there are winners and losers arises, wrongly, from the assumption that everyone is entitled to the same reward, regardless of how valuable his contribution is to others. “From each according to his ability; to each according to his needs” is a long-discredited economic philosophy that leads to less for everyone (politicians, bureaucrats, and their favorites excepted). A low-income wage-earner may envy a Warren Buffet or Bill Gates (though that envy seems not to extend to the wage-earner’s favorite, highly paid athletes), but envy is in such ample supply that it is worthless, except when politicians decide to reward it, in the name of (cheap) compassion.

Which brings me to the political side of the story. It is the inevitability of competition — and the unwonted fear of it — that leads individuals and groups to seek shelter from it. Moreover, the general perception of competition as “bad” makes it easier for government to usurp private functions and set up in their place nearly impregnable bureaucracies. As a result of these impulses and perceptions, almost every product and service is made more costly by regulatory restrictions, licensing laws, import restrictions, tariffs, pro-union legislation, affirmative-action laws (which raise production costs by forcing employers to hire and promote second-best employees), and so on. At the same, the ability of consumers (as voters) to remove the politicians and bureaucrats responsible for such depredations is inhibited by civil-service regulations (which protect incompetent bureaucrats from more than mere changes of administration) and campaign-finance laws (which were designed by incumbents to protect their incumbencies).

All of this comes at a high cost to those Americans who must actually compete in the real economy. Average Joe doesn’t lose because of competition, he loses because so many of his fellow Americans have succeeded in insulating themselves from it. Therein lies true greed.

In summary, competition is a great thing. By rewarding invention, innovation, risk-taking, education and training, hard work, and all of the other things that contribute to economic growth. competition enables us — all of us — to enjoy a higher standard of living. And we would be much better off they we are if there were fewer individuals sitting on the sidelines, watching the competitors and taking an unearned cut of their earnings.

There’s nothing wrong with competition but the connotations it has acquired. It shouldn’t be a dirty word.