'There's something wrong with this picture'

When I was reading some of the responses to my previous post, I had the distinct impression that people who regularly refer to capitalism’s ostensibly inevitable capacity to enrich everyone, without exception, have in mind a formula which seems to operate in a vacuum, where the generation of income by one automatically leads to the generation of income by others through diversification of production and competition, and as determined by the “laws” of supply and demand.

There is something wrong with this picture. It does not consider that capitalism as an economic system operates in the world of social reality, where power relations are never absent, as already implied by “competition”, and where the model according to which non-interference with the market is the cardinal rule, would, by itself, often result in unconscionable wages for workers (to mention but one thing against it).

It is not difficult to tell what economic theory is behind such comments — when the name of Friedrich Hayek is mentioned in justification of stated views, the Chicago School of economic theory raises its head immediately. Hayek, who was a confidante of Margie Thatcher (but could nevertheless not convince her, before the Falklands War, to implement his recommended brand of “free-market” economic principles, lest they, according to her, violate the democratic practices of the UK), is perhaps not as well-known as Milton Friedman, the chief luminary of the Chicago School, whose belief that everything under the sun (and perhaps the sun itself, too) should be privatised, made him the arch-enemy of Keynesian economics, which encourages regulation, and gave rise to “decent capitalism” in the US during the time of Roosevelt’s New Deal.

Ultimately deriving from Adam Smith’s laissez-faire economics, the economic theory taught by these people (Friedman et al) is a form of capitalist purism, according to which any kind of interference, regulation or interruption of the “natural” process of capitalist production and consumption is tantamount to a kind of economic sin — even the language used by adherents of this theory reflects the quasi-religious, ideological status attributed to it: Frank Knight, one of the school’s founders, described theory in this context as a “sacred feature of the system”.

According to Knight, Hayek, Friedman and others associated with the Chicago School, the “market”, if allowed to be the sole force regulating economies, would ensure the production of exactly the right products, in the right quantities, at the right prices, affordable by workers who — of course — are paid exactly the right wages. It painted a veritable economic paradise of employment for all (under the “right” circumstances), where not even inflation would rock the boat.

Needless to point out, and as noted by sociologist Daniel Bell, this infatuation with an idealised system is characteristic of “radical free-market economics”. In regarding this system as something that could actually exist in pure form, instead of always (unavoidably) being affected by factual, unpredictable conditions in social reality, its adherents remind one of medieval believers in the fanciful astronomical system of crystalline spheres, supposedly existing, one within the other, and on the innermost one of which (the earth) humans lived.

The unfortunate fact of the matter is that Friedman & Co could not find any economy in social reality that confirmed their claims that, if all “distorting” factors (like government interference in economic processes) were removed, the hallowed market could, god-like, create economic heaven on earth. This also meant that these doctrinaire economists were in a position where they could, in a sense, not be disproved: to the extent that they identified the unhindered centrality of the market with “freedom”, whenever there is something wrong with an economy (for example high unemployment), it was (“had to be”) “proof” that the market was not truly free.

Such vaunted “freedom” — that is, the perfect, mathematically modelled free market system — I would argue, could only exist in abstraction, and not in social reality. But if this is arguably the case, why did Friedman’s brand of monetarist, market-oriented economic theory appeal to anyone at all? There is a historical tale to be told here — one that I could not do justice to in a mere blog posting, but worth alluding to anyway.

For a long time after the market-induced catastrophe of the 1929 stock-market crash, followed by the Great Depression, government regulation of the economy, guided by the principles of John M Keynes, was the preferred economic policy. It informed Roosevelt’s New Deal in the US — that tensile agreement between corporations, workers and government that entailed the resurrection of the economy, but at the cost of corporate profits and, through redistribution and corporate taxation, to the benefit of workers’ salaries.

Add to this that the US government faced the political task of giving citizens reason not to turn to communism or fascism in the face of market failure as manifested in the 1929 crash, then the social and public works programmes of the New Deal, which created desperately needed jobs, appear sensible. From here onwards, for a number of decades, governments appeared to accept that they should at least provide the means for maintaining basic human dignity (which capitalism does not provide — if you lose your job during times of economic shrinking, too bad!).

What I am talking about still remains in several broadly capitalist countries (including Canada, France, Britain, Germany and to some extent South Africa) today, namely social security, public health care, workers’ rights and other welfare provisions. However, in the US the Chicago School-led neoliberal economics revolution, led by Friedman, eventually triumphed, so that, until the recently passed Health Care Bill (which still has to be implemented), there was no such thing in the US as universal public health care, covered by tax money (of the kind found in Canada).

The historical route to neoliberal economic victory is a tortuous (pun intended) one that involved sinister meddling in the economies of countries like Guatemala, Chile, Argentina and Brazil (but that’s a part of the story that has to be omitted here). At any rate, Friedman’s programme of economic reform included everything entailed by his magic formula of cutbacks on social spending, privatisation of everything from education, postal services and retirement funds to healthcare and deregulation (that is, withdrawal of all government “interference” in the economy). Moreover, the rich and the poor should be taxed at the same rate, and all prices of goods and services, including the cost of labour, should be determined by the market alone.

What Friedman demanded was nothing less than the scrapping of the New Deal, which meant that whatever worker protection had been achieved, would be lost, and — to add insult to injury — he encouraged government to sell off its assets to corporations so that the latter could run them at a profit (regardless of the fact that these had been acquired by means of public money!).

Nothing about this should be surprising — by its very nature, capitalism always hungers for new grist for its ravenous mills, and unregulated markets provide exactly that. It will be recalled that, during colonial times, new territories were appropriated without any compensation to the indigenous peoples, where, under colonialist protection, companies mined occupied soil to their own colossal enrichment.

It is one of the great ironies of today that, given the ideological opposition to something like a public-works programme (because it smacks of Keynesianism, or worse, “socialism”, supposedly) that could provide jobs for thousands of Americans, the Obama administration is restricted in what it can do under current circumstances of recession, while a one-party state like China is free to do just that. With what is by now a fully capitalist economy, the Communist Party delves into the Chinese treasury whenever it deems necessary to shore up a shaky part of its economy, for all intents and purposes practising Keynesian economic regulation.

But then, unlike the US, Japan and the UK, China has adequate reserves, while these countries are hamstrung by vast deficits, which grow ever larger as they borrow even more from countries like China and those in the Middle East.

With this in mind, I should ask those commentators who insisted that (unregulated) capitalism has created a wealthier world than that which existed before the advent of its neoliberal incarnation: if this is true, why is the US, the UK and Japan burdened by unbearable debt, today (they owe trillions of dollars in foreign debt), while China — a communist country with a regulated capitalist economy — is not? Surely the “wealth” that meets the eye in the US and elsewhere is an illusion — how much of that would remain if the US were to be subjected to a “run on the dollar”?