Capitalism: The Real Thing and the Label

My own view on capitalism owes much to the work of Fernand Braudel, the French economic historian, and to his three-volume work, Civilization and Capitalism, particularly the second volume, titled The Wheels of Commerce. The rest is observation of the here and now.

Braudel’s presentation is overwhelmingly persuasive. Capitalism, as he sees it, is a distinct form of economic activity characterized by monopoly (whether clearly visible or not); alliances with political power to maintain control; detached from community, society, and peoples; and focused entirely on getting high returns on money. Therefore capital enters markets capable of being controlled, low in risk, high in returns—and then leaves such markets abruptly when conditions change. Braudel’s emphasis on monopoly, as a defining trait of the capitalist stance, means that capitalism is not entrepreneurial, does not believe in competition, and never mind free markets or the deification of The Market. Capitalists are never specialists.

The broader, more perennial, “always there,” unavoidable economic activity—of which, these days, “small business” is the supposed flag-bearer—is organically linked to community, society, and peoples. It is a necessity. Capital only deals with selected high-yield opportunities—and only while they last.

This form of detached, indifferent monopolistic exploitation of economic exchange, wherever it will work, became visible early in European economic history (Braudel’s subject) with money lending (“usury”) in the twelfth century. The mediaeval economy did not offer much in the way of opportunities; it was too organically structured, based on the interaction of “estates.” The opportunities arose when the first relatively small urban centers began appearing and therefore trade became more intense. Then capital becomes more visible in the form of the great merchants who traded in certain selected goods that fit their needs. Thus after money lending, call it banking, it appears in merchandising and distribution—but, pointedly, not in transportation. Why not? Transportation, as such, was not profitable and highly risky, especially transportation by water. It required high capital investments that had a short life and could be easily and unpredictably lost in a storm.

Capital briefly entered mining late in the fifteenth century—its first foray into actual production of anything at all. Capital left mining after about a 50-year participation. It wasn’t profitable enough. Sure enough, states took over the mines—because mining had become vital to the economies. Next capital selectively entered agriculture ranging from actual ownership of land and management of estates—but this only in a relatively small number of cases. Involvement with agriculture principally took the form of organizing acquisition and then sale and distribution of particularly profitable crops.

Eventually, as the industrial revolution dawned and as technology improved—not least the durability of what have since come to be known as “capital goods,” such as machines, capital entered the production sector as well and has, since, become almost synonymous with it. Its ways of thought have completely saturated, permeated economic thought and behavior—so much so that, these days, it appears to be a “truth from above” that corporations serve their stockholders—rather than the public. That management need not know the product deeply to manage enterprises; lower levels can handle that. That any legal way to save on taxes, thus to avoid contributing to the collective, is a virtue. Note, in this connection, my point above about “alliances with political power” that help the capitalist shape the laws. Therefore comes news today that Google has avoided paying $2 billion in taxes by moving $9.8 billion into a Bermuda shell company. Questioned about this, Eric Schmidt, Google’s Chairman, said: “I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate.  It’s called capitalism. We are proudly capitalistic. I’m not confused about this.” What we see here is “capitalism” as a label—a label of virtue. But its real meaning is detachment from community, society, and peoples. There is now another layer of people, above the ordinary masses. In that layer different rules apply.

Meanwhile—and Braudel largely concentrated on capitalism in the pre-industrial period—we may now be approaching another change. It may be that, as capital abandoned mining, so now it may be finding physical production less than suitable as a place to put its masses of money. There are clear signs of capital’s withdrawal in various places. Capital is still investing in virtual reality—along with using other people’s money to gamble on derivates—themselves quite virtual. And then, when oil runs out and once more capital goods became less durable, and people have less and less money to engage in consumption, we’ll all sink back into the good old Dark Ages. At last only usury will remain as an opportunity. And here’s hope that some strong church will erase that infamy too. For a while. For a while.

Feudal and Capitalist Economies

Early last year I wrote about “Types of Economies” (here) and contrasted what I called “marketshare economies” and “capitalist economies.” I characterized the first as “feudal” because it tends on the whole to optimize in favor of large “tribal” aggregates, communities—and the other as “detached from the community.” I use the word marketshare because any economy organized to secure and hold share in a market, very often at the cost of foregoing maximal profitability, tends on the whole to benefit its stakeholders—its employees and its suppliers. Marketshare economies aim at control and stability. Capitalist economies aim at maximum profit; they enter and leave markets based on gains to be realized, not to produce values in the long run.

I come back to this subject today thanks to Monique Magee’s nice hat tip. She sent me a link to a chart published initially by Deutsche Bank (here) and republished by Clusterstocks. It shows in striking overlay the performance of two different economies during two different recessions. The first is Japan’s which I’ve always considered to be the “good” kind; and the other one is ours, which I’ve viewed as the “defective” kind. My favorite scholar on this subject, the Frenchman Fernand Braudel, spends three volumes (see reference above) on showing that the word “capitalism,” strictly speaking, should only be applied to the “defective” kind of economic organization of the world. But let’s move on to the chart. A comment then follows.

Ignore, for a moment, Deutsche Bank’s laudatory characterization of the American economy above the chart. This graphic shows the unemployment rate, hence we can also view it through the eyes of the laboring masses—the members of the wider community. The years for Japan extend from 1989 through 1995; the years plotted for the United States are for 2006 through 2010. The recessionary period in both is marked by the grey bars. Now here is a striking snapshot of the two kinds of economies I have in mind. In one the culture powerfully motivates the economic sector to maintain jobs and thus to serve the entire community. In the other the unemployment rate is much higher to begin with, and at the first sign of a turn-down, it sheds jobs without, seemingly, even thinking about alternatives.

It’s the culture, stupid, as I keep repeating monotonously…

Types of Economies

Fernand Braudel (see last post) wrote Civilization and Capitalism, 15th-18th Century. It's a three-volume work (The Structures of Everyday Life, The Wheels of Commerce, and The Perspective of the World). There are people who can write about a boring subject like the world's economy and make it sound exciting like a novel: wild sagas full of heroes and villains.

Braudel's view of capitalism is neither laudatory nor positive; of course he was a Frenchman. You get the idea of a parasitic phenomenon, but the parasites are people. To interpret Braudel's conclusions, you might say that capital is detached from the community. Its masters treat the people as a raw material, an opportunity. There is no more love lost on the population than we normally bestow on a clay quarry. Capital, Braudel says, will engage in sectors and ooze out over them—so long as risks are low, profits high. When conditions change, capital will abscond as quickly to do its oozing somewhere else. Braudel documents this process by many examples drawn from different times and geographies. Mining, for example, had capital's attention in Europe in the sixteenth century; then profits began to thin. Away went the masters of the universe. As always in such cases, the state had to pick up the pieces. Why does that sound familiar today?

When small groups gain autonomous stature in society, disintegration is around the corner. There is a naïve simplicity involved in picking one or another mechanism and proclaiming it to be superior, not to say transcendent. It's idiotic, really, to think that Markets allocate resources with unfailing wisdom—and therefore those who dominate them must be exempt from rules that apply to mere mortals. To mistake the tooling for the workman is a sign of stupidity. Of course it's done to favor a group, not because people really believe it—unless they really are quite limited. Alas, lots of people in Congress are. The preachers of the market are either fools or hypocrites.

Throughout my times in the economy, people talked about three kinds of economies—no make that four. The fourth was soviet-style socialism. The other three were American capitalism, Japanese style market share capitalism (which I think of as feudal), and European regulated markets. The feudal era in Europe was one of high integration, with the mutual duties of the so-called estates always on every person's mind. Attempts in the U.S. to replace the shareholder in corporations with the wider concept of the stakeholder represent well-meaning gestures in that direction. Sounds nice. A few people try it. But the spirit isn't there. You can't fake culture. It rises up from the gut. I'm reminded of the New Testament question: "If the salt of the earth has lost its savor, wherewith shall it be salted?" In the European context, where the shades of kings still hover in the sky, the state has continued to be an integrated element in commercial life. Ditto in Japan. In what begins to look like a tiresome see-saw, Europeans enviously wish to emulate the American market capitalism (e.g. Sarkozy)—only to be brought to their senses by times like these when, symbolically anyway, skyscrapers are crashing and rubble spreads everywhere. I'm really curious how the current turbulence will work itself out. My guess is that order in the traditional sense will return, in a way, only when the artificial wealth oil has bestowed upon humanity actually runs out. Late twenty-first century? Those will be interesting times.

Capital's Slow Suicide

Legend has it that Henry Ford succeeded because he made cars cheap enough so that his workers could afford them. He lifted his product from luxury item to a product for the masses by lowering its price. Notably, earlier, textiles became humanity’s first modern industry when in the eighteenth century cotton became cheap enough so that even the poor could afford them. (This is a genuinely fascinating story best told by Fernand Braudel, The Wheels of Commerce, published in 1979 but still available through Amazon.com.) I could multiply examples at will, industry after industry, product after product, all showing that genuine collective wealth rests upon the seemingly obvious twin facts that producers are consumers and consumers are producers. When we shatter this pairing, the wealth of nations starts to seep into the ground.

The logic of the matter is certainly obvious. People cost a lot of money. If we can do the work without them, we’ll make greater profits. Should we replace an operator by an answering machine? That’s a no-brainer. The near-term benefits are plain, the long-term suicide is not, can be ignored, can be fended off energetically by saying that “If others do it, I must too.” This is the tragedy of the commons all over again. (If the phrase is new, this will explain it.) The fact is that every position eliminated ultimately shrinks demand for what we sell. The logic is inexorable. If every institution, public and private, attempts to reduce its costs—and each and every one is under pressure to do so—the ultimate result must be universal unemployment and a tiny minority of owners surrounded by armies of deadly robots. At that point, to turn shamelessly apocalyptic, the logic of cost control will powerfully suggest mandatory vasectomy. To expand my insane example in science-fiction manner farther, thus to counter the argument that democracy will counteract such a drastic outcome, we might project that by that time intelligent machines (IMs) will have the right to vote as their owners deem they should, and in times of crisis automated machines will produce the necessary millions of IMs so that the owners' views will always prevail. IMs need not be big. In fact whole colonies of them might be placed on the head of a single pin.

Changing hats from sci-fi author to historian, another scenario opens behind my eyes. The inexorable loathing of humans so plainly manifested by modern institutions must inevitably produce a violent reaction. And it will sweep away the capitalist system as if it had never been. Tempted to say “Praise the day!”? Unfortunately it won’t be happy. Such things never are. Those likely to be reading such writings as this are (knowingly or not) members of the very nobility that will be marched to the guillotine (guilty or not).

What’s producing my strident hysterics?

Ah, friends! Simple things. We bought a new refrigerator to be delivered on Monday, February 16. This morning came a call confirming that delivery. Last night I more or less fell asleep as Republicans were agonizing about the so-called stimulus or bailout package.

The phone call was automated. “If you are Darnay Arsen Julius,” it said, “please press 1.” (That, by the way, is my name back to front.) I pressed 1. “Terrific!” said the male voice in phony jollity. And it went on from there. — Now the logical thing is to ask the delivery man to call ahead on the cell-phone before setting out to our address. Why not just do that? Why this phony rigmarole? That early in the morning my rage rises easily. And in that rage rose memories of the politicians ranting and raving about tax cuts.

They’re committing suicide, I thought. It's happening in slow-motion—seen from a human time frame—but it's deliberate self-destruction nonetheless, wrought in the name of survival no less. That must be insanity. Whom the gods would destroy, they first make mad [Euripides].