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Everything is coming up Capitalism

At the tail-end of the Cold War, as the Berlin Wall fell, as Glasnost gave way to the crumbling of the USSR, Capitalists celebrated.

As the wall fell, as the unhealthy, drably dressed, survivors of the Soviet States emerged, driving clunky Communist-designed vehicles, in their lumpy Communist-designed shoes what could be a better advert for the joys of Capitalism?

Except, people forget. And, as in George Orwell’s cerebral 1984, there are Ministries of Information inventing new versions of Newspeak to obscure meaning and disguise intentions.

“Communism” has been entirely discredited. The word, that is, not the ideology. That has re-emerged. Now it is known as “new economics” or “anti-globalisation” or “people’s economies”.

The prevention of Newspeak

A new book by William J. Baumol, et al, “Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity“, is a healthy attempt to contextualise the different forms of market economics. It extends the theories espoused by Francis Fukuyama in his controversial “The end of history and the last man“.

Capitalism, in many ways, is simply the ecology of markets. We can argue about different types of capitalism, and which is better than others, much as we do with ecologies. It, as with everything, depends on the context. Baumol identifies four types of Capitalism:

1) State-guided – government “guides” the market; so France and Germany with their state “champions”

2) Oligarchic – where the bulk of the power and wealth is held by a small number of individuals and families; Russia

3) Big-firm – most of the economy exists in a few large corporations; South Africa

4) Entrepreneurial – most of the economy is controlled by small firms; er, no-one actually, maybe the UK

Countries have some blend of two. Russian moving from oligarchic to state-led. The US moving from entrepreneurial to big-firm. Oligarchic tends to be the worst performer and possibly the one you do’t like. It really does act to concentrate wealth in the hands of the few. To keep it brief, the best performer is a balanced big-firm entrepreneurial economy. It allows for easy market access for new firms and new ideas, as well as rapidly removing dead-wood large firms cluttering up the place.

The reason the US has done so well and dominates the world economy is because they’re in this category (although, Baumol suggests that they do themselves no favours by moving towards an unbalanced big-firm economy). China is using a mix of State-guided and entrepreneurial and is rapidly catching up.

The language of markets

Language changes and so I present a graphic guide to decide on the type of economy you may be interested in:

The Ecology of Capitalism

Note that the text refers to situations as you head to the extreme of each quadrant. Yes, it is a simplification. Note the relationship, though: a low distribution of power with a wide distribution of wealth does run the risk of fuelling corruption; while a concentration of wealth with a wide distribution of power can lead to simple opinion purchasing. Both reduce the ability of those without to influence those who have.

Clearly a centralisation of both wealth and power (such as a Soviet state) will lead to the least benefit for the majority. But too widely distributed power and wealth can make a state ineffectual.

Clearly it depends on circumstances. China is a state-led economy recovering from years of Communism and dictatorship. As Iraq has proven to any doubters, simply handing responsibility to people unused to it can result in chaos. This is something that gives the Chinese politburo the quivers. They have decided on state-led entrepreneurship. Wealth and power are being decentralised but in tiny parcels. They are sitting in the bottom-left corner and attempting to shepherd their way rightwards but, as they’re discovering, wealth has a habit of allowing the purchase of a small amount of power as well and so they’re being dragged – ever-so-slightly – upwards.

The US has long been in the top-right quadrant. However, protectionist measures, bad policies and tax-breaks to specific industries has resulted in a concentration of wealth and power and the US is shifting towards the left. Note that, as with China, as you hand more wealth to some you also hand them more power.

Something to keep in mind.

Wealth and Power guided by Neutrality

The best system would be mixed. Having a large number of wealthy and powerful entities kept in check by a massive and wide spread of less-wealthy, less-powerful entities all tugging in different directions.

Not present here is also the idea of an impartial system; net neutrality, if you like. The system should not favour incumbents. It must not seek to protect those with wealth and / or power any differently than it should protect those without.

The third axis of the graph (which would make the whole a lot more difficult to represent) is that of the level of systemic neutrality.

A system that favours the elite over the rest is going to endanger the whole.


15 replies »

  1. I fear for our wonderful country. I think we are heading towards the bottom left of this graph (is that Quadrant I…I can’t remember from my math classes)

    Anyway, It is becoming trite to say it, but too much power is in the hands of too few people here in this country. As our public spaces being to be eaten by private entitites, it may get to a point where the US is some kind of neo-oligarchy, where the power is not really in the hands of a flesh and blood person, but in the hads of a corporation.

    Indeed, the way corporations are able to bend economic and social policy to their needs, we are well on out way to this neo-oligarchy.

    This was a great post, by the way. The underpinnings of our society — the economy –rarely gets discussed like this in our media. We only hear stock prices are up, and more people are on the millionaire list.

  2. Thanks for this review of the ideas in that book. I’d been trying to decide whether to add it to my crowded reading list or not, now I will.

    I wonder if the US has actually been in the upper right corner of this graph or if the guiding mythologies of our society have led most Americans to BELIEVE we were there, and hence react accordingly. The “American Dream” has been a powerful cultural force.

  3. The problem I see is that while I think your ideas on the best distribution of power and wealth make sense, there’s such a powerful centralizing motive for both. In the US we have such an intense and corrupt drive right now by the power elites to just take ALL the money and power. That’s Dick Cheney in a nutshell – how do we get from here to complete oligarchy by January of 2009?

    From the African perspective Cheney and his band of merry thugs probably seem like a Saturday morning cartoon, but if you don’t take care of them at this level it can get out of control in a hurry…

  4. Everything is a balance, of course, and a stable system will stray to the centre of the graph. There’s no judgement in this, it is just a measure of stability.

    Much of the outrage I hear from US commentators seems to come down to that sucking-up of power towards big-firm elites. Clearly that is anti-democratic and should be opposed. When Martin complains about “net neutrality” he needs to take his demands further. It’s not only about the Internet. It’s about the whole economy.

    If you want to start an energy company, you should be allowed to. If you want to open a school, you should be allowed to. Just because there are existing players doesn’t mean that gives them the right to stop you. All government must ensure is that there is no force or fraud and that all comers obey the same rules.

    What those rules should be is another debate.

  5. The UK is a mixed economy, mainly services based as we do not seem to make much of anything anymore. We do have a lot of independents and entrepeneurs. Richard Branson and Peter Jones types do exist.

    Every time Mr Blair used to speak (when not tarting around abroad) he thrust India and China in our faces. All those graduates will mean our kids will lose out…to the skills and competitiveness being turned out in these countries.

    Every time Mr Brown spoke he banged on about our Universities being a source of national income…

    …and then set us ALL on the course that will lead to what was once free costing people an arm or leg or kidney to attend (Universities).

    Everytime Mr Brown does not speak he raids a pension fund, tinkers with our schools and does nothing to raise the inheritance tax levels.

    Everytime Brown preens and talks about the low levels of inflation under his care I burst out laughing…when did he last look at our gas bills? Why do people have to live a life in debt to survive?

    Are we happy?

    Perhaps not!

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  7. “Clearly a centralisation of both wealth and power (such as a Soviet state) will lead to the least benefit for the majority. But too widely distributed power and wealth can make a state ineffectual.”

    In my opinion the more ineffectual the state, the better off everyone is.

    I would like to toss out a radical idea, though. How about we drop the assumption that there has to be system at all and let the market allow people to interact as they see fit without the overbearing hand of even a minimal government?

    Anyway, I’ve been reading the posts on this here blog and think I’ll add it to my bookmarks on wordpress. It is refreshing to read well-written, intelligent posts on a blog (even if I can’t agree 100% with content). Hope to read you around.!

  8. PintofStout, welcome to the family 😉

    I think I’m the most Libertarian of the gang and I agree entirely with your views about having an ineffectual state … up to a point. And that point has to do with long-term technical development. There are few companies that can choose to invest vast amounts of cash into blue-sky research in the hopes that it turns into something interesting. Shareholders wouldn’t allow it and rightly so. However, without it much of what is technically possible would not be realised.

    Computers, software, the internet … all come from publicly funded projects. Genetics, gene and disease research, the same. The UK is planning a response to gradual subsidence and ocean rises.

    These sorts of things do require a central state run by educated representatives capable of putting the good of the whole over the short-term benefits of the individual. I’d be first to agree that, on the whole, politicians are venal, corrupt and imbecilic. But, sometimes, even by accident, they wind up putting money into the right things.

    Elaine, you raise on of those classic debates about definitions. When macro-economic analysts talk about “entrepreneurs” they usually mean small to medium-sized companies. While Richard Branson is certainly entrepreneurial he is firmly in the world of big-firm business.

    What the ideal economy has is a fractal matrix of small firms up to medium and to large. Large firms concentrate on scale and cheap products, small firms concentrate on innovation and bespoke solutions.

    It is natural, in this third age of business, that developed economies deal with services. It may sound nice to say “we ‘make’ things” but consider what that means: blue-collar work that is mundane and repetitive, and now poorly paid. Services work is the design and innovation component of manufacturing (amongst other things) and most of us would rather be performing indoor work with no heavy lifting.

  9. I see capitalism, all capitalism, as a pissing contest between a few men, mostly white men, but some other races have forced their way into the fray and are working hard to show that they are capable of pissing with the best. It is like the third grade playground, but these kiddies are big, rich, and mean, and have no parameters within which they must operate… is whatever you can get by with.

    The collateral damage is the majority of the people on the planet.

  10. Mariam, you say it like it was a bad thing. Consider all the other ways that states have attempted to represent wealth: bartering, shells, private money, gold standard, fiet money …

    Money isn’t wealth on its own, you really cannot do anything with the stuff. To cut a long history short, money must be easily recognisable (i.e. you don’t accidentally use it for something else), it must be portable, it must be easily exchangeable, it must maintain its value relative to everything else, it must be possible to create new money to represent new opportunities in the economy, and it must be possible to price the cost of creating that opportunity.

    Having independent central banks that are tasked with these things is infinitely better than having politicians (like Robert Mugabe) thinking they can print their own cash every time they get into trouble.

    Mariam, you see some sort of disastrous debt crunch coming to ruin us all. I see the longest period of stable (ish) economic growth, development and wealth creation in human history.

    The Economist recently said that the discovery of three things turned Europe from being a basket-case to being a dynamo: free markets, the rule of law, and technology-based innovation. Look at the astonishing growth that nations following these ideals have experienced.

    The parts of the world that are truly sick and degrading are those states that haven’t made this transition. Yet.

  11. What Mr Cook is saying is that the money you describe so eloquently must represent something other that smoke and mirrors.

    When the “growth” you are talking about is growth that represents nothing but a con, someone has to pay the bill.

    You might want to read some of Mr Cook’s articles. He was with the US Treasury for lots of years and just might know a few things.

    By the way, independent central bank? Independent from whom? Us, the citizenry? Answers only to “god”?

  12. I’m still not disagreeing with you Mariam, you just seem outraged by these notions. Of course money must represent the underlying economy and, of course, if someone borrows “future” money in the belief that they can create something to underpin that borrowed cash then they must pay it back. Whether or not they ever realise that value.

    Independent central banks are answerable to their targets. If, as is common at present, they keep inflation stable, then they are doing their jobs. They are answerable to the citizenry in respect to that. They certainly are not answerable when said citizenry borrow more they can afford and have to pay it back.

    If you don’t like debt then don’t borrow. If that means you cannot afford the things you want then, I’m afraid, lower your expectations.

    Introducing money through loans is a very sound way of doing things. How would you like to introduce money?

    When the world was on the gold standard South Africa used to dig it up. It led to astonishing levels of local inflation, a low productivity base (since we could just ‘print’ our own money and import everything) and paid for the sins of Apartheid. Oil is doing something similar for the Arab states right now.

    The US going off the gold standard was the best thing possible for your economy.

  13. Should we return to the time of a banker-controlled gold standard? Probably not. What should really control the monetary supply is the sovereign power of representative government which must be equipped with the knowledge and authority to balance purchasing power with economic production.

    This could be done by a National Dividend system combined with reduced taxation and direct government spending of money into the economy. The system would be overseen by a Monetary Control Board as advocated by the American Monetary Institute in its draft monetary reform legislation. The author describes such a system in his recent article,

  14. And if you are disinclined to listen to Mr Cook…..

    Economist Henry C K Liu sums it up like this: