Beyond Capitalism

Carl Milsted, Jr on May 7 14:00:35

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Originally published January 16, 2011

Capital. The rich have it and the poor need it. The poor work for wages while the rich can sit back and collect dividends and interest. Karl Marx declared the arrangement unfair. He had a point. But Marx’s solution was worse than the problem. Take capital out of the hands of the capitalists and put it in the hands of a central bureaucracy and alienation increases. Plus you usually get a capricious god-emperor and a few years of mass starvation. Gulags and slave labor camps make capitalist sweatshops look pretty good.

Of course, many modern Marxists would claim that Marxism has never been tried, that what the Soviet Union and similar states practiced was State Capitalism, not Marxism. Well, the Soviets never got to communism, but Marx thought something akin to what the Soviets tried was the next step to communism. Methinks these modern Marxists are closer to the truth than Marx himself.

Freedom for all requires pushing capital down to the masses. A worker with his own tools is a free agent. The Marxist and the Bible agree on this: freedom of speech, religion, voting, etc. are mere “bourgeois freedoms” – important but incomplete. Freedom includes financial freedom, owning your own farm or business – or at least being able to shop employers so you are not a wage serf. A truly free society is one with an economy dominated by sole proprietorships, family businesses, partnerships and human scale corporations.

Capitalism will always be with us. Where tools are expensive, we must concentrate capital. And capitalism is usually the better way to allocate and manage these capital concentrations. Large scale worker democracy is often inefficient, and government ownership downright dangerous.

But both Marx and defenders of modern capitalism overestimate(d) the inherent power of centralization. Adam Smith wrote at a time when economic centralization was just getting started, when the returns on centralization were enormous. Marx extrapolated from Smith and assumed that the optimal economy was complete centralization – a gigantic error!

The need to centralize waxes and wanes by industry. Consider flour. Once upon a time, people ground grains by hand between stones. Then waterwheels powered the process, so people brought their wheat to central milling facilities to grind it into flour. We generally do so today, but more out of habit than necessity. With electric motors, you could have fresh flour ground on demand by an affordable kitchen appliance, and some hardcore foodies go that route. Most people don’t bother because they are used to bread made in giant automated bakeries. But once again, technology is turning full circle: you can buy an automated bread bakery that fits on your kitchen counter.

Computers were once centralized. Then the technology became cheap and personal computers became the norm. I am writing this chapter on a machine more powerful than the multimillion dollar supercomputer I shared time on in graduate school.

The music industry was centralized until recently because recording studios were expensive, and distribution channels limited. Top musicians put themselves under contract in return for recording facilities and promotion. Nowadays good quality recording equipment is within the range of high school students who flip burgers during the summer break. Distribution is trivial over the Internet. CD burners are standard equipment on even cheap used computers. Music is becoming a freelance business again.

Computerized machine tools and computer aided design tools have plummeted in price. Were it not for cheap labor in China, we might already see human scale manufacturing businesses displacing the industrial behemoths of old. We used to have over a hundred auto manufacturers in this country; we might again. The collapse of GM and Chrysler could be the start of something good.

We could have an economy which is neither capitalist nor socialist. We could have an economy which is dominated by human scale firms: family businesses, partnerships, small corporations, etc. It’s a matter of taking advantage of technological trends which have already happened, and discontinuing government policies which lock in the 20th Century economy. (This is not to say that large scale capitalism can or should be eliminated. Big business has is place. Likewise, some large scale government owned enterprises have their place as well. But both could be relegated to being minor features of the economy.)

To get back to a human scale economy we need to get rid of artificial economies of scale: unnecessary bureaucratic overhead and high transaction costs. We need to rethink our education system to prepare the average person for the possibility of being a free agent; the basics of business should be part of the core academic curriculum. We need to reform the tax code so it doesn’t encourage people to be wage serfs their entire lives; most especially, we need to disconnect health insurance from employment. Finally, we need to get cheap capital down to the smallest businesses. The big corporations succeed in part because they can afford to be less efficient, since they have access to cheap capital. Smaller businesses pay higher interest rates; startup corporations need a huge upside to justify venture capital or an IPO.

And the poor pay high interest rates on just about everything.

(This article was originally the intro to my updated Loans for the Poor. I decided it was a bit too long as an intro for said chapter, but it kind of stands up well on its own. Could even start new series…)