Deplorables, lumpenproletariat and the one-person one-vote rule

Brexit and Trump brought back an old debate that marked the origins of democracy – should the right to vote be a universal right or be limited to some classes?

In the beginning the major concern centred on the possibility that the destitute would vote to expropriate the rich, and therefore the right to vote was restricted to those with property. This concern was progressively abandoned and, if anything, Trump’s victory promising huge tax cuts for the rich shows that the risk of voting to take from the poor to give to the rich also exists.

Another concern was in relation to socially marginalized persons.

In The Eighteenth Brumaire of Louis Napoleon (1852), Karl Marx named them as the lumpenproletariat, including: “Alongside decayed roués with dubious means of subsistence and of dubious origin, alongside ruined and adventurous offshoots of the bourgeoisie, were vagabonds, discharged soldiers, discharged jailbirds, escaped galley slaves, swindlers, mountebanks, lazzaroni, pickpockets, tricksters, gamblers, maquereaux [pimps], brothel keepers, porters, literati, organ grinders, ragpickers, knife grinders, tinkers, beggars—in short, the whole indefinite, disintegrated mass, thrown hither and thither, which the French call la bohème”.

This year, in a regretted declaration, Hilary Clinton coined her modern-day equivalent of “deplorables”, by saying: “to just be grossly generalistic, you could put half of Trump’s supporters into what I call the basket of deplorables. Right? The racist, sexist, homophobic, xenophobic, Islamaphobic — you name it. And unfortunately there are people like that”. Her definition enlarges the concept of marginal to those that do not share the values of western democracies.

A third category includes the so-called welfare bums, that is people without work living on benefits. This group has grown significantly in advanced economies and is likely increase further as the pace of robotics increases. Indeed, in the future they may become the majority.

The concern about giving such people the right to vote is that they may be easily manipulated to vote for unscrupulous populist leaders like Trump or Chavez.

This is certainly true, but it is no reason to abandon voting as a universal right.

It is the essence of democracy that, in any highly contested election, the winner may win the majority with the votes of a small group of voters, no matter how outrageous their views are.

Democracy does not guarantee that the electorate always selects the best candidates. What it needs to safeguard is that people remain free to vote out the leaders.

Here resides the safety and supremacy of democracy, and it must be secured in four main domains: a) some decisions, like constitutional amendments, must be approved by a qualified majority; b) direct democracy (referendum or plebiscites) must be limited to local or moral issues; c) those in government must not use the resources of the state to promote themselves or to harass their opponents; and d) last, but not least, the constitution must enshrine the principles of the division of powers and the rule of law.

At the present, the USA applies these principles. So, the election of Trump must be seen as the normal working of democracy. All that his opponents must do is fight any attempts to pervert the principles listed above and to show that his policies are wrong.

If they do it right, he will not be re-elected and the electorate will have learned a lesson. This has nothing to do with restricting the fundamental principle of democracy - “one-person, one-vote”.

We’re all capitalists now

The six pillars of capitalism – private property, profit motive, free markets, rule of law, joint ownership and limited liability – allowed this economic system to be the most productive as well as the most equalitarian system ever tried by humanity. Nevertheless, this result was neither procured nor foreseeable from the outset.

For example, one of the widest off the mark forecasts in history was Marx’s prediction that under capitalism the greater part of the middle-class would constantly sink into the proletariat leaving the population divided into a small bourgeoisie and a large proletariat. Indeed, exactly the opposite has happened. Although the wealthiest one percent has increased its share of total income the number of proletarians (those without any assets other than their labor) dwindled to a small number. So, instead of all becoming proletarians now we are all capitalists.

The explanation for Marx’s failure resides in his erroneous theory of wages and employment and from unforeseen developments in terms of labor organization (unionization), welfare state and compulsory savings through retirement, unemployment and health insurance.

Furthermore, apart from the number of capitalists in society, there were other developments that also changed the perception and the role of capitalists.

In fact, under capitalism the social structure no longer is based on breeding but on work and merit. Social mobility is now achieved mostly through education while the social standing of business people as well as that of wealthy and poor capitalists is now at par with the traditional higher classes of nobility and clergy.

Popular capitalism, a term used to describe the rise in shareholding by individual investors, may occasionally hit the headlines but it should not be confused with the process through which people are now simultaneously workers and capitalists. Whether people choose to own shares in a company directly or indirectly through institutional investors depends simply on their perception about which is the best way to manage their capital.

The role of the capitalists investing in equity has also changed in the sense that most of them do not participate in the life of the company into which they invested or simply monitor its development. Indeed, some do not even want to know much about the company where they invested except its price so that they do not become sentimentally attached to the stock.

Nevertheless, although day trading based in technical analysis is a popular approach among some investors, the majority of investors still follow an investment approach based on event or portfolio investing which require a good knowledge about the company. Thus the signs they transmit through their buy and sell orders cannot be ignored by company managers, even when they are not part of the small group of investors that have or might exercise the control of the company.

So, although trading plays an increasing role in today’s capitalism, we cannot identify the kids gesticulating in a modern trading room with a Rothschild standing at the door of the London Exchange in the XIX century. Mostly because they are just agents, while Rothschild was simultaneously agent and principal. So, traders cannot be used to symbolize modern capitalism. Nor should the wealthy be confused with capitalists whenever they invest only in government debt.

As I said elsewhere, 100% leveraged companies cannot exist in the capitalist sector. In this sector, shareholders are indispensable to preserve the profit motive and profit maximization indispensable to a capitalist system. So, although consumers are the main beneficiaries of capitalism with an unequivocal interest in free markets (another pillar of capitalism) they cannot play the role of capitalists and force managers to pursue profit maximization because they would have an interest in securing lower prices at the expense of profits.

Then, since most people are simultaneously consumers, workers and capitalists, how can they achieve at the same time lower prices, higher wages and more profits? This is a false conundrum easily solved in a capitalist system through competition and profit maximization. To pursue profit maximization firms have to optimize their labor/capital mix while investing more in physical and human capital to increase productivity and wages. Through free and competitive markets corporations are at the same time forced to take good care of their customers and try to offer the best service at a lowest price.

In conclusion, as more people becomes capitalist they improve their wealth and income, and, most importantly, they play a role in keeping the system alive and efficient.

In general, most of us, including those with more than a million invested in securities, cannot live on capital earnings alone. Therefore we do not recognize ourselves in the old stereotype of an idle capitalist with a top hat living on investment income and spending only a few hours a month monitoring or trading his securities. But, generally, now we are all capitalists (whether directly or indirectly) despite not fitting into a stereotype. This is clearly an important civilizational advancement of capitalism.

Marx and Friedman Were Wrong About the Suicidal Nature of Capitalism

The suicidal nature of capitalism has been predicted by several authors, both supporters and enemies of capitalism. By suicidal we mean a process through which capitalism would weave its own destruction.

Among the most influential theories we found Karl Marx’s surplus value theory of capital accumulation, Schumpeter’s claim that the success of capitalism would lead to a form of corporatism fostering values hostile to capitalism, especially among intellectuals, Milton Friedman’s theory on the suicidal nature of capitalists and Solzhenitsyn's attack on the commercialized nature of Western culture. In this post we will examine why Marx’s and Friedman’s predictions are wrong.

Marx’s prediction derives from his theory of capital accumulation presented in Chapter XXV of his book The Capital. In a nutshell Marx breaks down capital into fixed costs (the value of fixed capital) and variable costs (the sum of wages) and assumes that as the accumulation of capital proceeds the ratio between the two would increase resulting in a growing number of unemployed (the so-called industrial army reserve). This system would implode through over-production, over-population and misery.

It is easy to see why his model is wrong. First, not all technical progress is labor saving (on the contrary). Second, his Malthusian assumption of an ever growing population is wrong because fertility rates diminish with increasing incomes. Finally, and most importantly, he failed to see that workers would become capitalist and now hold a large part of a nation’s capital through pension funds and personal holdings. This was his most clamorous failure. Instead of his prediction that we would all become proletarians we all became capitalists. His motto “workers of the world unite” should have been “capitalists of the world unite”.

Friedman’s theory on the doom of capitalism was given in a Lecture at the Cato Institute entitled “The Suicidal Impulse of the Business Community”. His main contention was that when faced with policy issues business people tend to be very short-sighted. This leads them to seek government protection for their own industry, to favor public education which tends to be socialist-oriented, to lobby for the transformation of anti-trust laws into regulatory controls and to give more political contributions to nonprofit left wing organizations (three times more) than to non-profit right wing institutions.

He admits that he has not a good explanation for this suicidal behavior but advances three possible reasons. These include the presumption among business people that everyone is an expert in economics, the Schumpeterian argument that within large organizations people develop essentially bureaucratic-socialist attitudes and that there is a general propensity to look out for government action as an all-purpose cure for every ill. He dismisses the first two and retains the last.

By doing so, Friedman makes four mistakes. First, he ignores that like everybody else, given the chance, business people will be free riders on Government money. Second, payments to left wing organizations are made as insurance or protection against those from where they see more danger. Third, he fails to make a distinction between the different types of capitalism (managerial capitalism, state capitalism and market capitalism). Finally, as Adam Smith noted long ago, capitalists and conservatives are not necessarily the great defenders of capitalism. The true defenders of capitalism are consumers and investors without a controlling stake in their companies.

It is one of the great ironies of history that the capitalistic economic system, the greatest wealth creation machine ever invented, has so many enemies and critics among its beneficiaries (ranging from the church, government, academia to the business community). Yet, the supreme proof of its superiority is the fact that despite so many enemies and without an army of supporters it has nevertheless conquered the world.