Is There a “Capitalist System”? Part I…

According to the Richmond Times-Dispatch’s creedal statement, there is no such thing as a “capitalist system.” Instead, “capitalism” is merely the sum of voluntary exchanges undertaken by different actors in the market.

That contention will strike many economic sociologists, political economists, and just regular folks as wildly implausible, and an essentially false description of the world. The critical issue is that of power.

In the RTD’s version of reality, markets are simply the realm of fair and consensual exchange, in which no one exercises any power or effective coercion over anyone else. Moreover, markets on this view arise naturally, and spontaneously generate an efficient and fair social order.

Critics of that view—people who would claim that there is a “capitalist system”—might make (at least) four general points in response. We’ll cover points one and two in this post and get to points three and four tomorrow.

First, markets do not arise spontaneously, but are socially and politically constructed. Modern markets require, for instance, a complex legal apparatus to define and enforce the meaning of contracts. They also require rules and regulations aimed at preventing fraud and deceit and at securing a culture of trust.  And they require a system of property rights and a police system to enforce those rights.

Last but certainly not least, market societies need states that can provide basic security from internal and external threats. (The free market ideologues that thought by now Iraq would be bursting with foreign investment vastly underestimated the importance of that point.)

None of these requirements of modern markets appear spontaneously in the nature of things. They require a well-ordered government, and hence capitalist economics emerged hand-in-hand with, not in opposition to, the development of the modern state. Indeed, states have gone well beyond these basic requirements in impacting the growth of capitalist economies—in many cases, state actions have literally created new markets, as in the case of infrastructure projects which make new links between far-flung places possible or in the public development of new technologies (it wasn’t capitalist risk-takers but the United States government that played the lead role in the creation and development of the computer in the 20th century).

Second, different persons within market society have unequal power. Most importantly, some people need to work to eat, and others do not. Those who do not have to work to eat have an inherent bargaining advantage over those who do, in the absence of intervening rules. A worker who needs to feed his or her family will be forced to agree to “contracts” that involve permitting the buyer of labor (the employer) to control the surplus (profit) generated by that labor.

“Contracts” are placed in parentheses here because contracts to hire labor are in fact incomplete contracts. Warren Buffett likes to say that “price is what you pay; value is what you get.” Nothing could better describe the essence of the labor exchange process. The employer and the worker agree on a wage, but the output that is produced during the working day is variable. So employers will seek to structure work in ways to get the most possible out of each of their workers. Whether gentle or much harsher methods are used, the goal is the same: to convince or compel workers to create as much value as possible in exchange for the wages being paid.

When this works well, the employer gets to accumulate a hefty surplus; but whether it works well or doesn’t, workers in the course of their everyday life are subject to the authority of their managers/employers. Yes, employees do have the right to quit their jobs, and this is extremely important, but quitting is not costless for most employees, most of the time. Consequently, employees often must accept less-than-ideal—sometimes downright barbaric—working conditions, because they can’t afford to assume the risk that comes with quitting to search for something else.

This set of points is important for the following reason: despite the widespread tendency of both supporters and critics of “capitalism” and “markets” to conflate the two words, they are in fact quite different concepts. Specifically, capitalism (as actually practiced) is a specific variety of a market system that assigns ownership and control of capital to a relatively small class of people while leaving most people primarily dependent on what they can get for their own labor to earn a living.

But it’s perfectly possible to have an economic system that uses markets and prices, but distributes ownership and control over the means of production in a different way. One characteristically American alternative to contemporary industrial and post-industrial capitalism is the Jeffersonian notion of a nation of individual farmer-entrepreneurs, with every citizen having the independence that comes with your own piece of land or business, and control of capital dispersed very widely. It’s an attractive vision, and one that some partisans of the “free market” still appeal to.

But we don’t live in Jefferson’s imagined world. Taking that fact seriously leads us directly into point three, which we’ll take up in our next post . . .

Published in: on January 5, 2007 at 4:16 pm  Leave a Comment  

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