Sunday, March 13, 2011

Social & Political Philosophy: Capitalism & Adam Smith

Next week is the review for the midterm on Monday and then the midterm on Wednesday. I will be posting and handing out a study guide that gives a broad overview of what we have studied in the class so far. The midterm will consist of multiple choice questions, short answer questions about key concepts and a short essay that displays your own thinking. Email me or come to office hours with questions.

Today we are studying capitalism, a political form practiced extensively in America (possibly more than anywhere else in history so far). Much of the political movements of the last century, the topics we will study for the second half of the semester, are reactions to capitalism and industrialization (socialism, communism, anarchism, post-colonialism, etc).

Before money, people of course possessed many things and traded them between individuals and groups. This trade was always barter, swapping one sort of thing for another sort of thing without the device of money as swapping medium. As people settled into city states, practices of borrowing and lending became stabilized. The first money was likely tokens indicating amounts of stuff borrowed from the ruler or other wealthy individuals.

The culture which includes the device of money has advantages over the culture of mere barter. Money as a device is very simple, simple the ways that numbers are simple for much the same purpose. Money is good (and bad) because it is very easy to gather/amass and divide/distribute, much more than any other object or substance.

Consider the salmon fisher in a village. She goes down to the water, and scores 20 large salmon. This is far more than she can eat, but she can trade salmon for other things that she needs in the barter culture. However, salmon does not keep for long, even if one knows how to salt and preserve it. What happens if she goes to the market and not many people want or need salmon that day? What if she has enough salmon to get what she wants, but there are not enough people who need salmon to trade with her for what she wants? In a culture where the salmon can be sold for money, you can keep the money for thirty years (even with inflation and other problems, deterioration of coins, etc) but no one can keep salmon for thirty years, even with freezers! In this way, money is much easier to amass and to keep than salmon.

In the same way, money is easier to divide than salmon. Let us say our fisher comes to market with 20 large salmon, and wants to trade for a basket. I, the basket maker, tell her that one third of a salmon is worth one basket, but I want the front half of the salmon. What happens if she wants to leave the salmon uncut, or if she needs four fifths of a salmon later for someone else? What if she wants to keep all the fish heads for herself? Money has no features to it other than quantity, even though the pictures are often very pretty. Fifty dollars is just fifty things, nothing less, so there is no problem with changing it to two twenties and a ten. You cannot make a whole salmon again from twenty salmon heads! In this way, money is much easier to divide and distribute than salmon. If we consider the bustle of a crowded market, it becomes clear why money would be such a useful (and thus abusive) device, and how its invention allowed for the modern merchants and bankers of today. Consider the trillion dollar bailout today, how this is very abstract yet very real for many people. Luck for us we do not need to bail out banks with truckloads of salmon!

Ancient city states carried out extensive long distance trade since the earliest recorded history, long before the rise of Europe. Ancient Assyria had all the siege weapons used in medieval Europe, but gained and controlled empire primarily through trade and taxes. We have seen in this class that much of political theory and events revolves around property and collecting taxes. Capitalism is, of course, very much a continuation of this ancient political arrangement. While there is no universally accepted definition of what capitalism is, it is widely accepted that capitalism is the culture of property, trade and taxation that rose with the industrialization of the 1800s and 1900s. Thus, the movements we will study in the second half of the class are as much reactions to industrialization (think Thoreau and the state as an evil machine) as they are to capitalism.

Remember that Aristotle argued, against Plato, that society should be a balance of public and private property. Locke argued that property is one of the basic rights that should be protected by the state along with life itself. In Capitalism, property is largely owned privately. As many experts argue, there are no perfectly capitalist nor communist countries, but rather most are mixed economies that lean very much toward capitalism and private ownership or toward socialism and public welfare/planned economy. American economics for the last two centuries, with the exception of the New Deal following the Great Depression, leans more toward private ownership than anyone has so far. This has created success as well as problems that define political debates today. While capitalism does dominate the world, especially since the fall of the Soviet Union in the 1980s, many advanced and wealthy nations practice mixed economics that is not as pro-business and laissez faire.

The word “capitalism” was used far less frequently than “capitalist” in the 1700s and 1800s. Marx and Engels talk about the “capitalistic system”, “capitalists” and “capitalist mode of production” over two and a half thousand times in Das Kapital, their major work on Marxist economics, but only use the word “capitalism” twice. They were centrally concerned with industrialization and exploitation of labor by capitalists, arguing (as we will expand upon in a few weeks) that just as the French Revolution and other movements had removed the nobility a new revolution was required to remove the neo-nobility, the capitalists.

Capitalist theory revolves around the production of goods and services out of materials and labor. The capitalists (owners, share holders, board members) own the business, materials and land. The workers add/sell their labor to the business/owners, which then produces a product and profit from the sale of the product. The workers are paid wages for their labor, and the remaining profit is taken by the capitalists or reinvested in the business.

Just as Mill argued that there should be voting by the workers for managers and control of the business or there will be economic tyranny, some businesses like Cheeseboard pizza in Berkeley and the bread factory in California we discussed run as co-ops with profit sharing and collective management to counter-act the tyranny Mill argued against and many are upset about concerning corporations today.

It has only been recently in Britain and America that capitalism has been given wider freedom. As we have been studying, the opening of international trade and the Americas meant new opportunities for economic expansion. Remember that Mill’s family was involved with the East India Company. Companies such as this were controlled by the crown/British government, but merchants and the wealthy found it increasingly profitable to invest in these firms. Britain began relaxing restrictions on trade and taxation to encourage business in the 1800s.

Eventually, America took over this role and outdid Britain in leaning far towards privatization and lack of government control to encourage business, growing fantastically wealthy in the process particularly after WWII. Consider that Britain and Australia have 6 or so government TV channels (BBC 1, BBC2, etc), wary of trusting broadcasting to private companies, while America has licensed the airwaves to private companies and has more TV channels than most of the rest of the world combined. In the 80s, under Reagan in America and Thatcher in Britain, business received more relaxation of laws and taxes than ever before. This was increased again in America with George W. Bush. The fall of the Soviet Union encouraged the view that capitalism was and is the triumphant single system of economics, though there has been great backlash against this on the left in America, Britain and across the world.

One of the celebrated voices for the liberation of business from government control was Adam Smith (1723-1790). I gave you a selection from his classic The Wealth of Nations, one of the most influential works on economics in history, published in 1776 (appropriate given America’s role in the history of capitalism). I made sure to give you the passage where he refers to the “invisible hand” of the market, a central guiding concept for pro-capitalist thought. Essentially, Adams argues (as do conservatives today) that government control of markets and market forces is inefficient and clumsy compared to allowing the free exchange of capitalism to take its course, and thus a planned economy (such as that of socialism or communism) is not capable of the same growth and expansion. Just as Gordon Gekko argues “greed is good” in the movie Wall Street, Adam Smith argues that we can rely on everyone following their self interest to improve society much more than we can rely on efforts to help everyone collectively. Socialism and communism are diametrically opposed to this view. It must be said that Smith was afraid of monopolies and the power of business interests, and believed in government checks to this power.

Capitalism ranges in state control, with many if not all places practicing at least some small degree of state control of economics. Social market capitalism has the state run socialist welfare programs and controls such as price control, unemployment pay, social security, prevention of monopolies/cartels, and labor bargaining rights (like those just recently cut in Wisconsin). Anarcho/Free Market Capitalism has the state take as minimal a role as possible, with the extreme of currency, law enforcement and social services competing in the open market. Imagine if there were several currencies available backed not by the government but by the largest banks, and if the cops were private security for those who could afford it. Some (especially on the right) have argued that greater capitalism and democracy go hand in hand, providing class mobility and increased quality of life. Others (particularly on the left) have argued that greater capitalism results in greater exploitation that can be ignored if enough enjoy class mobility and higher quality of life. While the more democratic nations today do practice (in mixed form) capitalism, many dictatorships have been quite open to capitalism and corporations, such as Nazi Germany and Chile under Pinochet.