Production, income and welfare under capitalism

When we take a detached long term look at human history, it is impossible not to be impressed by the global economic growth experienced since the rise of capitalism in the early XIX century. This was achieved despite two destructive world wars and the subjugation of half of the world population under communism throughout most of the 20th century.

In his history of economic growth Angus Maddison (2005) shows that: “Over the past millennium, world population rose 23-fold, per capita income 14-fold, and GDP more than 300-fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, with no advance in per-capita income”.

Yet, during the first eight centuries of the last millennium economic growth barely matched population growth, while life expectancy only rose from 24 to 36 years. However, from 1820 onwards, per-capita income rose twenty-four times as fast as in 1000–1820, population grew six times as fast and life expectancy increased to seventy-nine years in the West and sixty-four in the rest of the world.

Nevertheless, this was not an even process and it is interesting to recall the various phases identified by Maddison as:
1. The “golden age,” 1950–73, when world per capita income grew nearly 3 percent a year, by far the best performance.
2. Our age, from 1973 onwards (henceforth characterized as the neo-liberal order), is the second best.
3. The old “liberal order” (1870–1913) was third best, only marginally slower in terms of per capita income growth.
4. In 1913–50, growth was well below potential because of two world wars and the intervening collapse of world trade, capital markets, and migration.
5. The slowest growth was registered in the initial phase of capitalist development (1820–70), when significant growth momentum was largely confined to European countries, Western offshoots, and Latin America.

This historically unprecedented growth, the result of a combination of science and capitalism, was more pronounced in the West during the post-world war II period. However, since the collapse of communism we have more examples to show the power of capitalism as a production machine. In particular, when we compare the recent experiences of China, Russia and India, we note that Russia and India are lagging significantly largely because they have been more reluctant to endorse capitalism.

Nevertheless, the fact that large populations still live in poverty raises the question of whether they have been left behind by capitalism. This is not a failure of capitalism. On the contrary, it was often the result of misguided pursuits of alternative systems and the slow take-off under capitalism. Indeed, given the recent moves in Africa towards capitalism, one expects that this continent will progressively begin to recover and will accelerate its growth in the next decades.

Likewise, for those who expected the liberation of half the humankind from communism and the recent surge in technological developments to automatically create another era of unprecedented growth, the early history of capitalism from 1820 to 1870 is an important reminder that take-off is usually a slow process.

The transition to capitalism from subsistence, feudal or communist economic systems faces many resistances and the economic cycles of capitalism may slow down such transition. Both need to be assessed separately, as well as the risks of political turmoil. Otherwise, we risk letting such setbacks obscure the remarkable efficiency of capitalism to eradicate poverty and promote economic growth.

Managerial Capitalism and Utopian Socialism

A recent visit to the model village of Saltaire in England brought me childhood memories of life in a textile one-company town and the following thoughts: a) what is common between today´s management capitalism and XIX century utopian socialism; and b) will management capitalism fail for the same reasons?

The two types of business organization are different but they share similar ideals and features. Namely, they aim at providing a secluded life-long environment for its workers. Also, such firms engage in fulfilling many of the daily needs of their workers and family in terms of housing, education, culture and vacations. Moreover, in distinct ways, their leaders portray themselves as paternal figures devoted to the well-being of the local community.

Obviously, management capitalism does not goes as far as requiring that all its workers reside in the vicinity of the company because such firms are now multinational companies. Likewise, they reserve the family-like status to just a minority of its workers and managers. Equally, nowadays there are no well-meaning heirs or founders running the business. Instead, directors are co-opted through internal power struggles.

Nevertheless, these differences may not be enough to save managerial capitalism from the fate of utopian socialism. The later failed mainly for the following reasons: a) the collectivization of personal lives around the factory prevented individual freedom and brought psychological misery and apathy; b) seclusion and paternalism killed the entrepreneurial spirit of its members; c) the perpetuation of hereditary elites denied equal opportunities in promotions and professional mobility; and d) big, all-encompassing organizations, demand planning and bureaucracies which are driven by self-perpetuating objectives killing competition and initiative.

In spite of its differences modern managerial capitalism has the same features and problems. The consequences of such features are illustrated in many ways.

For instance, a culture of success through long hours and international mobility pushes people into feeling old and thinking about retirement at 40 or even earlier in their lives. Workers lose their drive for innovation at an age when they could still look forward to enjoy 30 more years of fruitful work. The same applies when at such an early age workers are already overwhelmed by fears about job security. Equally, in terms of job promotions, if one fails to join the right power group or does not seek promotion-for-promotion based on Peter´s Principle he or she will feel excluded from the inner-circle of a self-perpetuating leadership. Likewise, planning and bureaucracy are the mortal enemies of the conglomerates that managers dream about.

Just as utopian socialism could not overcome these problems, it is unlikely that managerial capitalism will do so. Therefore, it seems to me that it is not a matter of if but when will managerial capitalism meet the fate of utopian socialism. However, while the limitations of utopian socialism were immediately visible after one or two generations those of managerial capitalism may last longer. If for no other reason than because managerial capitalism is so intertwined with the political system and state capitalism. Still, its fate will be the same: it is doomed to fail!

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.