Monday, June 22, 2009

To Know Capitalism Is to Love Capitalism

The premise behind virtually every government intervention into the economy is that "capitalism" or the free market has failed and government must step in to "fix" the alleged problem. Such a notion has wide ranging political implications. If it is true that capitalism has failed or can not "work" in principle, then isn't the government justified in intervening into every aspect of the economy? After all, what is the justification for the public education system, public roads, publicly regulated utilities, the Federal Reserves printing of public money, public transportation, public housing, public parks and waterways, public mail, public garbage dumps, and our latest government wonders: public automobile companies and soon to be public health care? For some reason we are told, in these particular areas of the economy, the free market just does not "work" and we need the helping hand of the state to "provide" these services which somehow is able to provide them.

The argument that capitalism is to blame for various crises is rampant and seems to appear in every possible context today. I have blogged about it quoting other excellent essays and video's on the topic demonstrating that it is not capitalism but socialism which is to blame for the current crisis and explaining why the modern Right is incapable of defending capitalism. Of course, that capitalism would take the blame for the consequences of governmental policies based on socialism is a monumental injustice. Yet, the argument that capitalism has somehow failed is, as C. August wrote in this post at Titanic Deck Chairs, "seemingly impossible to kill". I do not want to rehash the economic argument for capitalism vs. socialism which has been made countless times by brilliant scholars more lucidly and in more detail than I ever could. Also, my linked post already touched on the ethical argument for capitalism. Instead, I want to focus on another important reason why I think this argument seems "impossible to kill" so that we can work towards killing it.

A primary reason why this argument is difficult to "kill" is that the meaning of capitalism has become completely blurred by modern academics who do not think in principles or essentials. For example, I would say that most intellectuals implicitly define capitalism as "anything America does or has done". So, for example, if the United States had slavery, then that is an example of "capitalism". If the United States authorizes a Federal Reserve Bank to print money endlessly causing credit expansion, malinvestment predicated on the illusion of profits, and a boom-bust economic cycle then that is an example of "capitalism." If the federal government encourages employer sponsored health insurance through its manipulation of the tax code and then offers health care entitlements to a third of the of the population thus exploding health care costs it is an example of "capitalism". Another popular definition of capitalism seems to be "government favors to business". In other words, any time the government offers some preferential treatment to business owners it is regarded as an example of "capitalism".

Consider for example, the most recent Newsweek whose cover is titled "The Capitalist Manifesto" referring to an essay by Fareed Zakaria. To have a clue as to the nature of this piece you only have to know that the sub-title is "Greed is Good (To a Point)". Nowhere in this piece does the author ever define capitalism. It is obvious from context, however, that his definition of capitalism is of the "anything America does" variety. He therefore regards anything America has done in the last 20 years to be examples of capitalism and ends up blaming the "ethics" of businessmen rather than the statist economic polices of the government for the current crisis.

In all of these instances, the concept of capitalism is implicitly being defined in terms of non-essentials. Such definitions blur the essential distinguishing characteristics of capitalism and have the effect of packaging the concept of capitalism together with concepts that represent its antithesis. In these cases, because capitalism is defined improperly, it is literally regarded as its opposite and held accountable for the deleterious effects of its opposite. Therefore, before arguing over capitalism versus socialism one should understand and clarify what exactly capitalism is.

I personally have had the experience of arguing with someone over capitalism when the term is not properly defined. These kinds of opponents of "capitalism" are usually all over the place blaming it for slavery, pollution, Indian genocide, price increases due to monopolies which hurts consumers, price decreases due to competition which hurts labor, etc. Again, it is because they associate capitalism with "anything America has done" or some other non-essential definition that they can not even make a coherent argument and it is virtually impossible to answer them.

The first step is to define capitalism by means of essentials. Ayn Rand defined capitalism as "a social system based on the recognition of individual rights, including property rights, in which all property is privately owned." This is a definition by essentials and rests on a prior definition of individual rights. A proper argument for Individual rights rests on rational principles of morality all of which rest on rational epistemological and metaphysical principles. When capitalism is defined properly and put into the larger context of individual rights, freedom, and an egoistic ethics, it is apparent that to know capitalism, i.e., to define capitalism by essentials, is to love capitalism. It is also apparent that defenders of capitalism are fighting for something that has never existed.

As we can see from the Newsweek piece which is evidently supposed to be an argument for capitalism, it is obvious that we are not fighting the Left - we are fighting the Right. We know what the Left stands for. The problem has been that the alleged defenders of capitalism have not provided a solid intellectual foundation for a proper defense of capitalism. That is why we are losing. We must fight for a proper conception of capitalism and make it clear that we are fighting for something that has never truly existed - a complete separation of economics and state. I think an efficient approach is to constantly argue for more general fundamental principles like individual rights, property rights, and to cast political issues into arguments over these principles. This approach necessitates translating the political issue into a more general context. Arguing over the minutia of various policies can be useful in certain contexts but translating the political into a more philosophical, ethical framework has the power of appealing to people morally at the same time more clearly defining the real issues.

Properly defining capitalism and refuting the "capitalism is to blame" argument should be a high priority for those who value freedom. We can never overestimate the value of refuting this argument (or in the positive sense, making the argument for freedom) no matter how obvious it seems.


seine said...

Doug, once again, a very thought-provoking post.

Why are the supporters of capitalism so few and fragmented while the opponents so numerous and organized? Is the widespread misrepresentation of capitalism based on misunderstanding or conscious antagonism?

As you say, Ayn Rand started with an acceptance of equality of individuals, whereas the rejection of capitalism must separate people into at least three groups; the wealthy exploiters, the naive exploited, and the halo-encrowned saviors in order to justify the inevitable meddling.

Something I believe Edith Packer wrote, to support free enterprise required a self-sufficient ego. Regarding oneself as better than others or worse, inevitable leads to a rejection of capitalism.

Most of the people I've asked regard capitalism to be a monetary system that rewards a few and penalizes many. They take for granted the vast enrichment of life we have and fail to consider how we got here. They see development as accidental, not a product of focused thought by individuals.

Change will happen when more people see reason has a value.

gary seinen

Doug Reich said...


Thanks for the comment.

I think you raise a very important and interesting point which I think I can summarize as: why does capitalism seem so difficult to defend and/or why are there so few supporters while the opponents seem numerous?

I think there is a philosophical, historical, psychological and maybe even an "evolutionary biology" component to this. In other words, the answer is complicated.

I think we should keep in mind that the concept of individualism is actually relatively new in human history whereas the concept of the group, tribe, family, king, priest, etc. dates back thousands of years and forms the basis of much of human evolution. Not only is the concept new, but the idea of forming a government around these ideas is very new and the full implications of rational egoism, individual rights, capitalism, have only been thought about relatively recently.

The "true" and proper conception of capitalism as a system that follows from a proper conception of individual rights and egoism has only been around since Ayn Rand. So even to the extent that someone is sympathetic to capitalism or "free markets", etc. finding a valid and rational justification has been hard while the opponents are a large motley mixture of "everyone else." Most important in slowing down the evolution towards individualism and freedom based on the efficacy of human reason is the drag from modern philosophy attacking human reason, the ethics of altruism handed down from hundreds if not thousands of years, plus the power of Marxism as a global academic force.

This is not meant to be a full answer in the least but a sketch of how I would begin to think about it and again I think it is a very interesting and vital area to study.

Subcommandante Mike said...

Funny how opposition to capitalism finds its roots ultimately in epistemology.

I was wondering where you stand regarding fractional reserve banking, as I know of some Objectivists (not personally) who oppose it and some who claim it is not immoral per se. I have come to believe it is fraudulent if by fractional reserve banking one means, as wikipedia states,

"the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand."

Jason B said...

Great post Doug. I've been in the same boat before in regards to the Capitalism vs. Socialism debate, and as you stated the debate usually turns into one of Capitalism vs. Itself. As you also stated the reason the debate moves in that direction is because I find that most individuals completely lack knowledge of the particulars of what Capitalism truely is. I think a decent reason for that is because Americans are not taught about Capitalism. Our economic system, though heavily intervened by the State, remains somewhat free, and the economic growth this country has experienced over the centuries seems taken for granted. I never once learned anything about Capitalism throughout my academic years, even in a macro economics course. And therefore the statist lefties are able to propagandize capitalism as a system for the benefit of only "rich greedy extortionists". And usually the statist Right sacrafices their modicum of economic knowledge for other ideological priorities, thus rendering them fiscal hypocrits with no serious economic policy credibility.

Its easy to debate a progressive liberal on capitalism as they are usually intellectually bankrupt on all things economics, but the situation is compounded when the Right's actions add fuel to the Left's fire. Unfortunately the economic witchcraft of the Keynesians at the Fed, in the White House, and in Congress will crush capital formation and any level of economic correction that is needed after the bust, partly because the Right's policies were practically identical before the power switch.

In the end it seems most Americans are purely concerned with economic growth, yet the politics in this country prohibit any meaningful discussion about how economic growth really occurs.

Doug Reich said...


I wrote a post on the topic of fractional reserve banking in which I argued that it is inherently fraudulent and rests on a misconception of property rights. In other words, it's not an issue of "freedom of contract" in the same way that we can not contract to commit a murder. You should not be able to contract with someone to store your property and make it available to you at all times and enable them to loan it out at the same time (and issue a ticket/money which is tradable redeemable). I explained the difference between how I think a loan should be regarded under common law (transfer of rights) and how a deposit should be regarded (retain right). I need to write a follow up post on this but haven't got around to it.

Doug Reich said...


Follow up

So, when you go to a bank I think you should make a choice whether you are going to deposit or loan and the contract you sign and how it is regarded under the law is fundamentally different.

There were some important common law cases in the 19th century that set some terrible precedents in this regard, i.e., they granted banks the power to treat deposits as if it is their property whereas in any other business like storage of grain the storage facility does not have "title" to your property once it is stored in their facility.

Again, I need to follow up on this with some more of the history to better justify my position.

Hope that helps.

Jason B.,

Well put. I think the fact that economics is virtually a dead science as far as mainstream economists go (and therefore not even taught in most schools) is a symptom of the larger epistemological issue. Economics has suffered severely from the modern philosophic attack on reason and knowledge. The physical sciences have been corrupted to some extent, but the social sciences have been devastated.

For a variety of reasons, most of economics today is based on pure empiricism which I have written about in other posts and comments. (Quick: I think one of the reasons is that economists fail to recognize the distinction between free will and determinism and implicitly or explicitly treat human beings as atoms which can be modeled mathematically - partly because doing math makes them feel scientific.)

One of the implications of my current post is that a lot of the battle is really just defining or integrating the concept of capitalism by which I mean understanding it in the context of rights, ethics, etc. which is an approach completely at odds with modern economists and intellectuals. It is not a surprise that even those on the right can not defend capitalism properly because you can not just defend it with "modern" economics alone or maybe at all.

RKW said...

This is a great post, thank you. I've been thinking for a while that the "capitalism is to blame" argument is a particular type of the "Frozen Abstraction" fallacy. Your post nicely articulates how failing to properly define, capitalism allows an opponent to continuously *freeze* the abstraction with any non-essential concrete that they choose.

It is also worth noting how effective your suggestion of maintaining principled arguments to steer clear of policy minutia is in the real world, as evidenced by Yaron Brook's success. I believe that technique can be (and is) used wisely in a lot of other contexts as well.