Why Is Capitalism Under Attack from the Right?

Many conservatives, this one included, have been or are becoming critical of capitalism. Near the end of a recent post, for example, I say that

capitalism is an amoral means to material ends. It is not the servant of society, properly understood. Nor is it the servant of conservative principles, which include (inter alia) the preservation of traditional morality, both as an end and as a binding and civilizing force.

One aspect of capitalism is that it enables the accumulation of great wealth and power. The “robber barons” of the late 19th century and early 20th century accumulated great wealth by making possible the production of things (e.g., oil and steel) that made life materially better for Americans rich and poor.

Though the “robber barons” undoubtedly wielded political power, they did so in an age when mass media consisted of printed periodicals (newspapers and magazines). But newspapers and magazines never dominated the attention of the public in the way that radio, movies, television, and electronically transmitted “social media” do today. Moreover, there were far more printed periodicals then than now, and they offered competing political views (unlike today’s periodicals, which are mainly left of center, when not merely frivolous.)

Which is to say that the “robber barons” may have “bought and sold” politicians, but they weren’t in the business of — or very effective at — shaping public opinion. (f they had been, they wouldn’t have been targets of incessant attacks by populist politicians, and anti-trust legislation wouldn’t have been enacted to great huzzahs from the public.

Today’s “robber barons”, by contrast, have accumulated their wealth by providing products and services that enable them to shape public opinion. Joel Kotkin puts it this way:

In the past, the oligarchy tended to be associated with either Wall Street or industrial corporate executives. But today the predominant and most influential group consists of those atop a handful of mega-technology firms. Six firms—Amazon, Apple, Facebook, Google, Microsoft, and Netflix—have achieved a combined net worth equal to one-quarter of the nasdaq, more than the next 282 firms combined and equal to the GDP of France. Seven of the world’s ten most valuable companies come from this sector. Tech giants have produced eight of the twenty wealthiest people on the planet. Among the na­tion’s billionaires, all those under forty live in the state of California, with twelve in San Francisco alone. In 2017, the tech industry pro­duced eleven new billionaires, mostly in California….

Initially many Americans, even on the left, saw the rise of the tech oligarchy as both transformative and positive. Observing the rise of the technology industry, the futurist Alvin Toffler prophesied “the dawn of a new civilization,”2 with vast opportunities for societal and human growth. But today we confront a reality more reminiscent of the feudal past—with ever greater concentrations of wealth, along with less social mobility and material progress.

Rather than Toffler’s tech paradise, we increasingly confront what the Japanese futurist Taichi Sakaiya, writing three decades ago, saw as the dawn of “a high-tech middle ages.”3 Rather than epitomizing American ingenuity and competition, the tech oligarchy increasingly resembles the feudal lords of the Middle Ages. With the alacrity of the barbarian warriors who took control of territory after the fall of the Roman Empire, they have seized the strategic digital territory, and they ruthlessly defend their stake.

Such concentrations of wealth naturally seek to concentrate power. In the Middle Ages, this involved the control of land and the instruments of violence. In our time, the ascendant tech oligarchy has exploited the “natural monopolies” of web-based business. Their “super-platforms” depress competition, squeeze suppliers, and reduce opportunities for potential rivals, much as the monopolists of the late nineteenth century did. Firms like Google, Facebook, and Microsoft control 80 to 90 percent of their key markets and have served to further widen class divides not only in the United States but around the world.

Once exemplars of entrepreneurial risk-taking, today’s tech elites are now entrenched monopolists. Increasingly, these firms reflect the worst of American capitalism—squashing competitors, using inden­tured servants from abroad for upwards of 40 percent of their Silicon Valley workforce, fixing wages, and avoiding taxes—while creating ever more social anomie and alienation.

The tech oligarchs are forging a post-democratic future, where opportunity is restricted only to themselves and their chosen few. As technology investor Peter Thiel has suggested, democracy—based on the fundamental principles of individual responsibility and agency—does not fit comfortably with a technocratic mindset that believes superior software can address and modulate every problem. [“America’s Drift Toward Feudalism“, American Affairs Journal, Winter 2019]

I can’t deny that rise of the tech oligarchs and their willingness and ability to move public opinion leftward probably influenced my view of capitalism. Not that there’s anything wrong with that. It is evidence that, contra Keynes, I am not the slave of some defunct economist.

Will public opinion shift enough to cause the containment of today’s “robber barons”? I doubt it. Most Republican politicians are trapped by their pro-capitalist rhetoric. Most Democrat politicians are trapped by their ideological alignment with the the “barons” and the affluent classes that are dependent on and allied with them.

Tragic Capitalism

Capitalism, when it isn’t being used as a “dirty word” by “socialist democrats” (the correct rendering, and an oxymoron at that), simply entails three connected things:

  • There is private ownership of the means of production — capital — which consists of the hardware, software, and processes used to produce goods and services.
  • There are private markets in which capital, goods, and services are bought by users, which are (a) firms engaged in the production and sale of capital, goods, and services and (b) consumers of the finished products.
  • The owners of capital, like the owners of labor that is applied to capital (i.e., “workers” ranging from CEOs and high-powered scientists to store clerks and ditch-diggers), are compensated according to the market valuation of the worth of their contributions to the production of goods and services. The market valuation depends ultimately on the valuation of the finished products by the final consumers of those products.

For simplicity, I omitted the messy details of the so-called mixed economy — like that of the U.S. — in which governments are involved in producing some goods and services that could be produced privately, regulating what may be offered in private markets, regulating the specifications of the goods and services that are offered in private markets, regulating the compensation of market participants, and otherwise distorting private markets through myriad taxes and social-welfare schemes — including many that don’t directly involve government spending, except to enforce them (e.g., anti-discrimination laws and environmental regulations).

None of what I have just said is the tragic aspect of capitalism to which the title of this post refers. Yes, government interventions in market are extremely costly, and some of them have tragic consequences (e.g., the mismatch effect of affirmative action, which causes many blacks to fail in college and in the workplace; the withholding of beneficial drugs by the FDA; and the vast waste of resources in the name of environmentalism and climate change). But all of that belongs under the heading of tragic government.

One tragedy of capitalism, which I have touched on before, is that it leads to alienation:

This much of Marx’s theory of alienation bears a resemblance to the truth:

The design of the product and how it is produced are determined, not by the producers who make it (the workers)….

[T]he generation of products (goods and services) is accomplished with an endless sequence of discrete, repetitive, motions that offer the worker little psychological satisfaction for “a job well done.”

These statements are true not only of assembly-line manufacturing. They’re also true of much “white collar” work — certainly routine office work and even a lot of research work that requires advanced degrees in scientific and semi-scientific disciplines (e.g., economics). They are certainly true of “blue collar” work that is rote, and in which the worker has no ownership stake….

The life of the hunter-gatherer, however fraught, is less rationalized than the kind of life that’s represented by intensive agriculture, let alone modern manufacturing, transportation, wholesaling, retailing, and office work.

The hunter-gatherer isn’t a cog in a machine, he is the machine: the shareholder, the co-manager, the co-worker, and the consumer, all in one. His work with others is truly cooperative. It is like the execution of a game-winning touchdown by a football team, and unlike the passing of a product from stage to stage in an assembly line, or the passing of a virtual piece of paper from computer to computer.

The hunter-gatherer’s social milieu was truly societal [and hunter-gatherer bands had an upper limit of 150 persons]….

Nor is the limit of 150 unique to hunter-gatherer bands. [It is also found in communal societies like Hutterite colonies, which spin off new colonies when the limit of 150 is reached.]

What all of this means, of course, is that for the vast majority of people there’s no going back. How many among us are willing — really willing — to trade our creature comforts for the “simple life”? Few would be willing when faced with the reality of what the “simple life” means; for example, catching or growing your own food, dawn-to-post-dusk drudgery, nothing resembling culture as we know it (high or low), and lives that are far closer to nasty, brutish, and short than today’s norms.

There is also an innate tension between capitalism and morality, as I say here:

Conservatives rightly defend free markets because they exemplify the learning from trial and error that underlies the wisdom of voluntarily evolved social norms — norms that bind a people in mutual trust, respect, and forbearance.

Conservatives also rightly condemn free markets — or some of the produce of free markets — because that produce is often destructive of social norms.

Thanks to a pointer from my son, I have since read Edward Feser’s “Hayek’s Tragic Capitalism” (Claremont Review of Books, April 30, 2019), which takes up the tension between capitalism and conservatism:

Precisely because they arise out of an impersonal process, market outcomes are amoral. Hayek thought it unwise to defend capitalism by emphasizing the just rewards of hard work, because there simply is no necessary connection between virtue of any kind, on the one hand, and market success on the other. Moreover, the functioning of the market economy depends on adherence to rules of behavior that abstract from the personal qualities of individuals. In particular, it depends on treating most of one’s fellow citizens not as members of the same tribe, religion, or the like, but as abstract economic actors—property owners, potential customers or clients, employers or employees, etc. It requires allowing these actors to pursue whatever ends they happen to have, rather than imposing some one overarching collective end, after the fashion of the central planner.

Hayek did not deny that all of this entailed an alienating individualism. On the contrary, he emphasized it, and warned that it was the deepest challenge to the stability of capitalism, against which defenders of the market must always be on guard. This brings us to his account of the moral defects inherent in human nature. To take seriously the thesis that human beings are the product of biological evolution is, for Hayek, to recognize that our natural state is to live in small tribal bands of the sort in which our ancestors were shaped by natural selection. Human psychology still reflects this primitive environment. We long for solidarity with a group that shares a common purpose and provides for its members based on their personal needs and merits. The impersonal, amoral, and self-interested nature of capitalist society repels us. We are, according to Hayek, naturally socialist.

The trouble is that socialism is, again, simply impossible in modern societies, with their vast populations and unimaginably complex economic circumstances. Socialism is practical only at the level of the small tribal bands in which our psychology was molded. Moreover, whereas in that primitive sort of context, everyone shares the same tribal identity and moral and religious outlook, in modern society there is no one tribe, religion, or moral code to which all of its members adhere. Socialism in the context of a modern society would therefore also be tyrannical as well as unworkable, since it would require imposing an overall social vision with which at most only some of its members agree. A socialist society cannot be a diverse society, and a diverse society cannot be socialist.

Socialism in large societies requires direction from on high, direction that cannot fail to be inefficient and oppressive.

Returning to Feser:

… Hayek—who had, decades before, penned a famous essay titled “Why I Am Not a Conservative”—went in a strongly Burkean conservative direction [in his last books]. Just as market prices encapsulate economic information that is not available to any single mind, so too, the later Hayek argued, do traditional moral rules that have survived the winnowing process of cultural evolution encapsulate more information about human well-being than the individual can fathom. Those who would overthrow traditional morality wholesale and replace it with some purportedly more rational alternative exhibit the same hubris as the socialist planner who foolishly thinks he can do better than the market.

Unsurprisingly, he took the institution of private property to be a chief example of the benefits of traditional morality. But he also came to emphasize the importance of the family as a stabilizing institution in otherwise coldly individualist market societies, and—despite his personal agnosticism—of religion as a bulwark of the morality of property and the family. He lamented the trend toward “permissive education” and “freeing ourselves from repressions and conventional morals,” condemned the ’60s counter-culture as “non-domesticated savages,” and placed Sigmund Freud alongside Karl Marx as one of the great destroyers of modern civilization.

Hayek was committed, then, to a kind of fusionism—the project of marrying free market economics to social conservatism. Unlike the fusionism associated with modern American conservatism, though, Hayek’s brand had a skeptical and tragic cast to it. He thought religion merely useful rather than true, and defended bourgeois morality as a painful but necessary corrective to human nature rather than an expression of it. In his view, human psychology has been cobbled together by a contingent combination of biological and cultural evolutionary processes. The resulting aggregate of cognitive and affective tendencies does not entirely cohere, and never will.

Feser than summarizes three critiques of Hayek’s fusionism, one by Irving Kristol, one by Roger Scruton, and one by Andrew Gamble, in Hayek: The Iron Cage of Liberty (1996). Gamble’s critique, according to Feser, is that Hayek

never adequately faced up to the dangers posed by corporate power. Most people cannot be entrepreneurs, and even those who can cannot match the tremendous advantages afforded by the deep pockets, legal resources, and other assets of a corporation. Vast numbers of citizens in actually existing capitalist societies simply must work for a corporation if they are going to work at all. But that entails an economic dependency of individuals on centralized authority, of a kind that is in some ways analogous to what Hayek warned of in his critique of central planning. As with socialism, conformity to the values of centralized authority becomes, in effect, a precondition of the very possibility of feeding oneself. By way of example, we may note that the political correctness Hayek would have despised is today more effectively and directly imposed on society by corporate Human Resources departments than by government.

Feser concludes with this:

None of this implies a condemnation of capitalism per se. The problem is one of fetishizing capitalism, of making market imperatives the governing principles to which all other aspects of social order are subordinate. The irony is that this is a variation on the same basic error of which socialism is guilty—what Pope John Paul II called “economism,” the reduction of human life to its economic aspect. Even F.A. Hayek, a far more subtle thinker than other defenders of the free economy, ultimately succumbed to this tendency. Too many modern conservatives have followed his lead. They have been so fixated on socialism and its economic irrationality that they have lost sight of other, ultimately more insidious, threats to Western civilization—including economism itself. To paraphrase G.K. Chesterton, a madman is not someone who has lost his economic reason, but someone who has lost everything but his economic reason.

Alan Jacobs offers an orthogonal view in his essay, “After Technopoly” (The New Atlantis, Spring 2019):

The apparent captain of technopoly [the universal and virtually inescapable rule of our everyday lives by those who make and deploy technology] is what [Michael] Oakeshott calls a “rationalist”…. [T]hat captain can achieve his political ends most readily by creating people who are not rationalists. The rationalists of Silicon Valley don’t care whom you’re calling out or why, as long as you’re calling out someone and doing it on Twitter….

Oakeshott wrote “The Tower of Babel” at roughly the same time as his most famous essay, “Rationalism in Politics” (1947), with which it shares certain themes. At that moment rationalism seemed, and indeed was, ascendant. Rejecting the value of habit and tradition — and of all authority except “reason” — the rationalist is concerned solely with the present as a problem to be solved by technique; politics simply is social engineering….

Oakeshott foresaw the coming of a world — to him a sadly depleted world — in which everyone, or almost everyone, would be a rationalist.

But that isn’t what happened. What happened was the elevation of a technocratic elite into a genuine technopoly, in which transnational powers in command of digital technologies sustain their nearly complete control by using the instruments of rationalism to ensure that the great majority of people acquire their moral life by habituation. This habituation, of course, is not the kind Oakeshott hoped for but a grossly impoverished version of it, one in which we do not adopt our affections and conduct from families, friends, and neighbors, but rather from the celebrity strangers who populate our digital devices.

In sum, capitalism is an amoral means to material ends. It is not the servant of society, properly understood. Nor is it the servant of conservative principles, which include (inter alia) the preservation of traditional morality, both as an end and as a binding and civilizing force.

I therefore repeat this counsel:

It is important (nay, crucial) to cultivate an inner life of intellectual or spiritual satisfaction. Only that inner life — and the love and friendship of a small circle of fellows — can hold alienation at bay. Only that inner life — and love and close friendships — can give us serenity as civilization crumbles around us.

“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

A REISSUE (WITHOUT UPDATES) OF THE ORIGINAL POST DATED DECEMBER 4, 2011

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.