Doing the blog rounds has led me to this interesting post from Randall Wray of MMT fame. In it, he states that capitalism is, in fact a robust system, but that view is undermined by the anti-interventionist camp. The reasoning is that because free marketers believe that the slightest intervention will distort the free market, they must believe the system itself to be ‘fragile.’ Wray believes that the robust nature of capitalism lends itself to being able to adapt to interventions from central authorities, and concludes that
…government guidance makes capitalism stronger and can direct it to better serve the public purpose.
He has a lot of this wrong, in my opinion.
He starts his argument by establishing the positions that conservatives have little trust in the markets (emphasis mine).
I am continually amazed at how little trust Austrians (and conservatives more generally) have in our capitalist system. In their view it is a very fragile system, easy to disturb and perhaps even to destroy. A little regulation by government overcomes entrepreneurial initiative. A bit of a tax on the rich and the profit motive is suddenly thwarted. Give a handout to someone is starving and the whole damned workforce will just stop working to stand in breadlines. It is such a weak system that we have to be extremely careful to stand aside to let the poor little invisible hand operate. Even the slightest obstruction would be catastrophic.
The operative word here is the word ‘our,’ which while seemingly insignificant is extremely important in dissecting where Wray goes wrong. It’s important here to distinguish between capitalism and ‘our’ version of capitalism which isn’t really capitalism at all. Austrians don’t believe capitalism (as in a free and fair market) is fragile, but when it is transformed to ‘our capitalist system’ via the introduction of the taxes, regulation, bailouts and endless inflation that Wray hyperbolically goes on about, you do get a system that is fragile. That is the system that Austrians rightly have little trust in. He continues:
Now, why is it the conventional wisdom that capitalism is fragile?
First, it is obvious that at the level of the firm, each is struggling to get advantage. Government subsidies and tax exemptions help to provide a competitive advantage. It is really handy if local government will cover a portion of capital and labor costs. It is nice when Congress passes out the “pork” to favor local industries. And it is great if regulators will look the other way.
It is true that at the level of the firm, each is struggling to get an advantage. This is what competition is all about. The winners are the firms that provide the public with the best combination of quality and cost with respect to whatever product or service it is they are producing. Government subsidies and tax exemptions help to provide a competitive advantage, sure, but it is NOT the advantage we want. Instead of gaining an advantage through producing a superior product, firms gain an advantage over others through government assistance, regardless of the quality of the product they produce. The end result is that larger firms (it’s the large firms that generally have the means with which to lobby and attain government favors) persist at the expense of the smaller firms. Firms that can potentially introduce superior products or can produce them at a lower cost may be stifled by the increased costs of dealing with regulations or taxes that bigger firms are exempt from. The fact that some firms need the governmental assistance in order to produce suggests that on their own they are not providing what the public wants in an efficient manner. Thus, assisting them to be inefficient is a waste of resources and ultimately detrimental to the consumer.
Second, also at the level of individuals, many entrepreneurs are of course cruel. They like to see their workers suffer, and they are willing to take lower profits if necessary to obtain the enjoyment. I can recall when the California employers of farm workers forbade the use of long-handled hoes—forcing laborers to bend over to work with short hoes. Much research showed that productivity was higher with the long hoes, but employers were indifferent. They justified the short hoes on the argument that migrant workers enjoy being close to the ground.
And so they protest mightily if government tries to regulate the size of the rod they use to beat their slaves and workers.
Never underestimate cruelty as a motivating factor for resistance to sensible regulation. Indeed, Keynes referred to the advantages of directing such cruelty to tyranny over balance sheets rather than over people.
That quote is so laughable it really isn’t worthy of a response, I include it so the reader can also have a mid-post chuckle.
And finally, as Keynes also argued, the problem is that modern capitalism suffers from chronic insufficient aggregate demand, compounded by excessive inequality and unemployment. This is why, he said, policy is unnecessarily devoted to trying to encourage the entrepreneurial spirit—through pro-business legislation, subsidies, tax incentives, and deregulation. This is why, he said, the supposed solution to capitalism’s ills are always said to be found in promoting private investment and other supply side measures. And take a look at the typical presidential campaign where “business experience” is said to be an important quality for a candidate. It is not enough to design every policy with the businessperson in mind, you’ve also got to put one in the White House.
Again, Wray unintentionally makes a distinction between capitalism and what we have now, this time by using the word ‘modern’ as a qualifier. This qualifier is again important, because, again, ‘modern’ or ‘our’ capitalism really isn’t capitalism. The excessive inequality and unemployment it suffers from in Wrays’ view is a direct result of the inadequacies inherent in a system that distorts free/fair markets the way our system does. That government actions serve to favor certain firms at the expense of others creates the incentive for big firms to lobby for favorable policy as opposed to concentrating their efforts on producing better products. The elimination of competition through political means slowly but surely creates a class of big business that can control the market to their ends, in conjunction with a government that gets paid for doing its bidding.
With respect to ‘insufficient aggregate demand’ – these bouts only appear after boom periods, which are the results of pro inflationary policies – easy money and large deficits. The easy money leads to rising prices, which rise before wages do, working against the average earner in real terms. This leads to increased debt undertaking by the average to maintain living standards at these higher price levels. This cannot sustain, and at some point there will be no appetite to consume at the higher price level. Prices then fall, and firms and projects caught out sustain losses, so on and so forth. The key is to understand that the problem was the easy money and inflationary policies. That is where the inequality and unemployment emanates from, not the inherent nature of capitalism. The fact that continued government intervention and easy fiscal/monetary policy is inherent in the nature of ‘modern’ capitalism is the reason why it has a problem.
In truth, unguided capitalism cycles between explosive speculative frenzies and the following inevitable collapses. And without government bail-outs in the crash, the capitalist economy can enter a dangerous debt-deflation process that not only is devastating in its economic impact, but also unleashes dangerous, fascistic politics. But with such bail-outs, the incentive is to bubble-up the economy to new highs, fueled by ever more scandalous behavior operating against the public purpose.
In truth, government guidance makes capitalism stronger and can direct it to better serve the public purpose.
Again, the cycles are driven by the easy policies of central banks and governments. No inflationary policies, no bubbles, no crash, no bailouts. Having embarked on the easing and thus the start of the cycle, once it comes to conclusion, allowing the debt deflation is the only solution. Wray fails to understand that the governmental pushing, prodding, subsidizing, and bailing out IS the ‘fascistic’ policy he claims will surface in the event that the business cycle resolves itself by deflating. The fascistic nature of government working in league with big business is exactly why ‘our’ capitalism is: A. not capitalism, but fascism, and B. fragile.
Wray is exactly right that bailouts provide the incentive to bubble the economy further. They do so because inherent in government bailouts is inflationary policies which, as I stated before, are the start of these business cycles. In other words, governments look to paper over burst bubbles with new bubbles, in the process incentivizing destructive behavior. So his conclusion is the exact opposite. Government guidance does not make capitalism stronger. It may make ‘our’ capitalism stronger, but it must be stated that ‘our’ capitalism is really fascism. Making fascism stronger does nothing but to make our economy weak.