Yesterday, I commented on a take by Randall Wray about the fragility of capitalism. I posited that Wrays conclusions are off base mainly because of his conflation of ‘capitalism’ and ‘state capitalism,’ ‘crony capitalism,’ ‘corporatism,’ or whatever term you personally prefer. I prefer to use ‘fascism,’ or more accurately ‘economic fascism,’ but in any event I think that it’s imperative to briefly flesh out what I mean by both ideas and how it pertains to the environment in which we live.
Capitalism for me is an economic system in which the means of production are privately owned and resources are allocated based on exchange in a marketplace, with prices being set within that marketplace. State capitalism/modern capitalism/fascism retains the privately owned means of production aspect. However, through government intervention in the form of taxation, regulation, inflation, etc., the way that resources are allocated changes compared to how they would be allocated otherwise. This is because this outside influence of government changes individual incentives. For example, if inflationary monetary policy were to be the order of the day, with interest rates fixed at an artificially low level, one might not opt to save money in a savings account, going for a higher return in, say equities. The end result is that resources are allocated differently to how they would be if the market had set a higher interest rate.
It is that second, ‘modern capitalism’/fascism mold that opens the door for trouble to creep into the economy. It is from there that boom and bust cycles, stagnating living standards and low growth develop. And the US is undoubtedly deeply entrenched in that mold. If you doubt this, consider the fact that one of, if not the most important prices in a market economy, the interest rate, is controlled and fixed by a handful of scholars on a board at the Federal Reserve. I could go on for a long time about the implications of that arrangement, but in the interest of brevity I will say that it is a less than favorable arrangement for the majority of people. More generally, the complicated tax code and regulatory conditions create distortions in all areas of the economy, from campaign finance to agribusiness, that favor large institutions and corporations. This is because they are the only actors large enough to absorb the increased costs that the interventions impose upon the market. Smaller players are forced to close up shop or merge with larger competitors. The losers are the consumers, who are not only robbed of the higher quality of goods that free competition would have ensured, but must now be burdened by supporting a bureaucracy that is ostensibly meant to help or protect the consumer.
A final point I’d like to make is to do with the use of the word ‘modern’ as it pertains to capitalism. I’m speaking mainly about this entry from Thomas Friedman in the NYT. In it he suggests how capitalism can ‘evolve’ to fit the 21st century. I take issue with the idea that capitalism can evolve. It can’t. It is what it is; it has a pretty clear definition that doesn’t change. In the same way, the measurement of a foot does not ‘evolve,’ it will always be 12 inches. What can change is the receptiveness of the population to the idea of capitalism. When the likes of Friedman (and Wray) suggest XYZ policies to be implemented by government to influence the market, they are not strengthening, or molding capitalism to fit the contemporary economy. They are simply moving away from capitalism completely, and accepting another form of allocating resources. To call that new form ‘capitalism,’ or to try and redefine the word is just incorrect and obfuscates the discussion. The constant engaging in that practice has ultimately led to the term ‘capitalism’ undertaking a negative connotation in the mainstream. The reality is that the negativity one now generally ascribes to the term (think greedy, evil, power hungry monsters with no empathy) is the result of a system that is actually not capitalist. Rather, it is a system that has moved away from capitalism and towards something else, while falsely retaining the label. It’s important that we start to recognize this point if we are to truly understand what ails us.