SPEAKING FREELY The capitalist myth
By Dafydd Taylor
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As the financial crisis rumbles on we are constantly told that what while there
are a few problems, all the benefits of modernity are the unambiguous results
of the capitalist system.
That the invisible hand famously documented by Adam Smith is what has brought
us industrial progress from the factory system to the telegraph to the
Internet. But in reality, the factory system inspired by Arkwright, more than a
century before Henry Ford, grew up as a response to the effects of the
Vast pools of cheap labor created by the enclosure of common land coupled with
mercantilist economic policies made especially effective by a growing empire
allowed Britain to lead the process of industrialization. It was this
interaction between state and private sector that was necessary for industrial
development. These are lessons which may be lost to the West, but the current
most economically successful country, China, takes heed.
Britain only adopted free trade as a policy in the later 19th century. By this
time a fully industrialized nation seeking to defend an entrenched position,
including limiting the development of competitors. The key driver for the
development of the first electronic communications network, the telegraph, was
the British Empire.
It was a state-driven development, and state intervention, most particularly
from the United States Department of Defense was fundamental to development of
computing networks. Here lies an important truth. The pressure of competition
from the Soviets inspired state-directed development of computer to computer
This state-directed development took place in the "capitalist" West. In short,
the West won the Cold War not so much because it was capitalist and the Soviets
communists, but because the West remained more pragmatic. Economic development
and organization was more mixed.
This is not to say that free-market thinking has nothing to offer regarding
economic policy. Simply put, markets spring up because people, left to their
own devices, will naturally seek to specialize and trade. That is a market.
Smith's genius was as much in documenting and theorizing a natural state of
affairs as in recommending an economic model.
A major insight was the significance of the marginal over the absolute. Water,
far more vital and important than whisky, sells for much less. Why was that?
The answer lay in the marginal benefit. The price people are prepared to pay is
not governed by the absolute value of a commodity, but the value placed on one
more glass of water, or whisky. Scotland, where Smith came from, has no
shortage of water.
And in a perfect market, theory tells us, pricing tends toward the marginal
cost of production. You can only sell something for the extra cost incurred of
producing just one more. In such a system how, can anyone invest?
Key to any technical development are educational institutions. These are not
capitalist. Any educational worthy of the name gives awards not in response to
payment received, but in recognition of some sort of test passed. This is not a
market system. If it was you could simply buy a degree.
Any institution that is seen to sell qualifications is instantly devalued. In
short, the vast majority of major technical developments, if not all, require
state intervention and protection from competition in order to survive. What
the private sector does so well is take the innovative developments replicate
them produce them and distribute them.
Yet current political and economic discourse still assumes the capitalist
system to be vital to the development of new technology. This is a belief that
is based more on faith than on fact. By now, the theory of the rational market
should be as discredited as Soviet communism.
What capitalism does is spread, by means of trade, new and better products or
ways of doing things. Capitalism communicates innovations rapidly. It does not
produce these innovations. It is not innovation that capitalism fosters, but
trade. A market is any forum in which buyers and sellers can agree a price and
complete an exchange.
Markets can vary from eBay to an African village square. If a price can be
found by large number of sellers acting independently yet as part of a whole
much like birds in a flock or bees in a swarm, trade can be said to be free.
This is not innovation. This sort of behavior is as old, if not older than,
So why is it a generally accepted conventional wisdom that capitalism
encourages innovation? Conventional wisdom decrees that the private sector is
good, and the public sector bad. That all regulation of the private,
capitalist, sector stifles innovation. Yet it is unregulated capitalism that
lies at the root of the current economic crisis.
There are direct parallels in the deregulation of the 1980s and 1990s with the
1920s, and in the current crisis with the great depression of the 1930s. Not
least with the collapse of the gold standard and the current eurozone crisis.
In many ways, our current phase of globalization is a second phase, the first
being in the 1920s. This is not the first time. Unregulated capitalism beings
us to this same place, like it did before. The belief in capitalism is indeed a
belief. A faith. Not only are markets not rational, neither are the proponents
of the current system.
Until policymakers and leaders develop a realistic idea of the useful functions
and limitations of capitalism, there seems little chance of a useful framework
for economic policy in the future.
Dafydd Taylor is a United Kingdom-based political analyst.
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