Several folks have expressed that “they don’t know much economics”. While I’d assert they know a lot more of it than they think, just lack the jargon of Economics to wrap it nicely; I’ve thought I ought to give a little summary of Economics from a fairly broad point of view.
Economics loves complicated jargon. It divides itself into “Political Economy” that looks at high level issues like Democratic Capitalism vs Command Economics (i.e. Communism) and similar things; vs Macro Economics that tends to look at how things work at the national level – often questions of money supply and government actions; and finally Micro Economics that looks inside individual economic actors like companies and asks how they decide and do what they do. Anyone running a business knows a LOT of micro-economics. ( I had a class in “linear programming and optimizing decisions” to learn a formal way to make ‘the best’ decision on product mix. My Dad did that in the family restaurant on the fly every day and without even noticing.) We all see The Fed pumping out cash like crazy and know that is going to destabilize the value of cash in the long term. (Some of us know that in the short term it won’t do much during a recession).
But I’m not going to go through that level of detail. Precisely because there is a lot of understanding already in folks heads, even if they profess otherwise. In this posting, I’m going to give my view of Political Economics. The big over view of Economic Systems (sometimes called Comparative Political Economy as we compare different systems). This is not the way it is taught in formal settings. This is just my distillation of it. Along the way I’ll touch on some smaller issues, like the issue of Monopoly Power. These things often get a few weeks treatment in classes, so I’ll be giving a brief look at best. Even with that, this runs out to about 20 typed pages. (Nobody ever accused Economics of being brief…) Still, I’m hopeful that I’ve kept it interesting enough to be ‘worth it’ while still giving a good conceptual framework for having an “Ah Ha!” moment about economic systems.
Who makes What for Whom?
And who decides that?
This is the foundational question of Economics.
(The “Who decides” wanders into Politics, so sometimes the whole package is called “Political Economy” as the two areas are tightly bound.)
It really is that simple. Built on top of that basic question are a large number of theories and an even larger number of mechanisms. Some mechanisms are market based. Some are political. Some are governmental (i.e. bureaucracies) and some are voluntary non-market (i.e. charities and churches).
In the USA many folks tend to think of Economics as meaning money and trade. That is only part of the field. It includes all forms of trade and all forms of distribution of goods; including systems like Communism (command economies) and voluntary non-market associations.
We’ll take a look at a few different forms of economy to illustrate this. Each will be looked at through the lens of “Who makes What for Whom?” as I think that is the most illustrative light.
In The Beginning
You can think of this as “In the wild” if you like. A bird builds a nest for itself. A rabbit digs a tunnel in the ground because it so chooses. A person lost on a desert island ( if one could still be found today) builds a hut for their own use. Because they choose to do it. There are no third parties involved.
Yet the nest is used for baby birds (and is made by both parents). A person lost on the desert island may be making a hut for their family and friends as well.
The Who is yourself. The What is whatever you choose. The Whom is for yourself, or for your family and friends. The person who decides is you.
Many of us long for this simplicity and clarity in our daily lives today…
Some rabbits live in isolation. But often they are communal. The Rabbit Warren is a large colony of rabbits. It is, if you will, a Rabbit Village. Just as in human villages, the infrastructure is shared. Often several generations of rabbits will build the warren. Each changing and extending it. Sometimes abandoning old tunnels.
I’ve noticed that the women bunnies are the engineers. They do the digging and make the home. The male bunnies tend to be “on guard duty”. It really can be quite remarkable. I’ve seen the buck in my little bunny herd deliberately put himself on display where a predator can see him, then run toward the predator (just before veering off to a preplanned escape route). He is choosing to be employed in the highly risky duty of predator warning and predator distraction so that the rest of the tribe can escape into the warren. The female bunnies are choosing to be in the business of “making a home” while the young bunnies are simply free-riders in the system (though after weaning they feed themselves).
The parallels with the human village are quite surprising.
In the case of some tribal animals, there is conflict between the males. Bunnies are one of these. (Most herd mammals are this way). The ‘boy bunnies’ eventually mature and then they fight. The dominant male stays, and the ones that lose leave the tribe. IMHO, this is the root of The Evil Bastard personality that we will re-visit in various forms of human society and economic systems.
Yet it isn’t just the boys that fight. The female bunnies will also sometimes fight each other. A female not of their tribe will be attacked if suddenly introduced. Within the herd, various cliques and alliances can form. Some times a bunny can be shunned, at other times defended. One of my girl bunnies got injured by a cat and was rejected by the others. After the wound healed and she was again “normal looking” she was accepted again. (Why? I can only speculate. Perhaps because an injured animal attracts predators and further attacks.)
From an economic point of view, the group is starting to decide “for Whom?”. A boy bunny that grew up enjoying the use of the warren is now being told “Not For You!” (as he in turn is trying to tell other boy bunnies “Not For You!”)…. It is the question of “Who is the ‘decider’?” to use the term Baby Bush used.. Similarly, we now have more “free riders”. Sometimes it crosses generations. The newest generation didn’t build the warren, they just inherited it. Everyone in the tribe benefits from the Guard Duty predator distraction even if doing nothing in return.
In my opinion, this is the start of the mindset of The Communist Collective.
As we saw in the article on the genetic proximity of humans and bunnies; we are fairly closely related. Our ways of thinking are shaped by our evolution and that evolution includes the family unit, the tribe, shared resources and unequal distribution of benefits from labor. “It takes a village” is the mantra. ( The original Africa saying is “It takes a village to raise an ORPHAN” and it was made more collectivist in translation to “It takes a village to raise a child” as though all children are communal.) We are also predisposed to The Evil Bastard who dominates the herd (or tribe). Unlike bunnies, we do not eject all non-dominant males from the warren. We are more like meerkats in that regard. (Though they are matriarchal; where primate tribes tend to be patriarchal. But there is some evidence for matriarchal society in early human history)
Meerkats live in a matriarchal society, which means that the dominant female is the leader of the group. She leads the group on foraging trips, to find new burrows and in territory disputes with other meerkat groups. There is a hierarchy within the sexes but it does not cross the genders (i.e., the dominant female tends to discipline the females in the group and the dominant male does the same thing for group males). Status tends to increase with age. Meerkat groups usually consist of extended family members and can range in numbers from 10 to 30.
The Bonobo is most like us in social behaviour ( though our closest genetic primate relative is the standard chimp; but the distance between these two chimps is small) and has “partial female dominance”:
“Abstract: Bonobo (Pan paniscus) social structure is characterized by partial female dominance, in contrast to the male dominated chimpanzee (Pan troglodytes) society.”
Though there are some claims that the Celtic social order was more from that “partial female dominance” pattern.
In any case, for our purposes, we want to look at who is “the Decider”. It isn’t just the Alpha Male in human (or Bonobo) societies. Yet we lean that way ( as do our Pan Troglodytes closest genetic relative). This is, IMHO, reflected in our Political Economic way of ordering things. We want and look for The Evil Bastard who is aggressive enough to take on the predator and effective at his job. We want a competition among candidates and “may the best man win”. So at our core we have this “competitive” feature of Free Market Capitalism mixed with the “collectivist” nature of a village structure where all gain from the work of the few.
This is the core of the pull between Laizze Faire Capitalism and The Communist Collective. Socialism tries to find a stable point somewhere in a compromise between these two poles (though has yet to find it. No Socialism is a truly old and stable government.)
So in a very core way, our choice of economic system is based in how we choose to run our Village. Do we want The Single Evil Bastard in charge? The one very strong leader who tells us all when to run and hide, and when to come out and forage? Or do we want a system where each family has their own choice of “leader” and it may be anyone (including the matriarch)?
The capitalist model is one where the individual family selects its own leader and then engages with the rest of society as an ecology. Where an individual may make their own tunnel and nest (even if connected to the rest of the warren) and make their own decisions about “Who makes What for Whom?” by making their own decisions about when to dig or when to forage.
The communist model is one where The Leadership decides and the rest of the tribe just follows their directions.
Most human societies are somewhere in between those two models. So, for example, in the USA we have a partial Command Economy in that the Federal Government sets a lot of the rules (“regulations”) on what can be made, by whom, and how it reaches the market; yet many decisions are left to the person doing the making. Anyone can decide to become a farmer; but then they must accept FDA and other government agency “oversight” on their actions.
It comes down to how our Village is run.
The Rise of The Evil Bastard
In a small herd, it is pretty easy to see who is The Evil Bastard. The way one rises to dominance is by fighting others for that position. There is one dominant individual who is “in charge” (yet their decisions are validated by the herd in that the herd chooses to follow their ‘leadership’). For some, like cattle, the dominant male is clearly identified. For elephants it is the dominant female. Dominance is not a voluntary thing, it is usually the result of fighting and aggression.
In larger herds, or species with mixed dominance, there can be a much more mixed situation. Who is The Evil Bastard in a penguin colony? So it is not a necessary “feature” of a herd or tribe to have The Evil Bastard who rises to dominance and “calls the shots”. It arises from our cultural and evolutionary history, and then gets enhanced from time to time by some feedback effects of success. (“Nothing succeeds like success.”)
So the individual village can be a collection of individual “nesting pairs” choosing to live in the same place and sharing the mutual benefits that come from that, without The Evil Bastard as leader kicking some folks out, dominating others, and generally “calling the shots”; or it can be a herd that follows the demands of The Evil Bastard. It is at this point that the two poles of the “Who makes What for Whom” first manifests.
In the small village, most of what the individual makes is for their own use. Some shared benefit arises ( Common defense. A predator warning from one helps all. Social interaction and easier selection of mates. The start of specialization of production where one person makes bowls and another makes spoons.) Trade between households starts to develop. Yet no good deed goes unpunished. Some individuals try to rise (via violence or otherwise) to positions of power and authority over others. Eventually they begin to demand various kinds of “tribute” for their position. They demand that some of what folks produce be for THEM, not for the producing individual.
The “who” is still tribe members, but increasingly the “what” and “for whom” tend to be decided by The Evil Bastard Leadership.
It is my opinion that at the level of the Village we see this strain between Laizze Faire and The Collective first starting to manifest. To the extent that the benefits of common defense and closer access to others is greater than the demands of The Evil Bastard, the system grows. To the extent that The Evil Bastard takes more than they provide in benefits, the system decays. When the Leader demands all the meat from the hunt, the hunter has less reason to “bring home the bacon”. (That tends to be when various forms of coercion start to show up…)
In fundamental form and function, the various forms of national government do not substantially vary from how different villages are run. Is the Tribal Chief hereditary? Or do the people pick a Chief? Is he installed by force as a foreigner? (Kings, democracy, empire). Is the Chief just the most wealthy and best trader? (Capitalism). We put a lot of fancy words around it, and we put a lot of complicating machinery around it; but the basic structure is fundamentally found here.
The Evil Bastard King
Early in human society (and Political Economy) some Chief rises to leadership (often by force of arms) and decides they like it. Usually they decide they want their kids to have the same advantaged position. “It’s good to be the King!” This comes directly from our roots in a communal warren where The Leader gets preferential access to the sexual favors of the herd. ( It was even codified in some forms of early law where The Leader gets to pick their preference of concubines or harem maidens. Or sometimes even more:
As we are not quite the same as sheep herds, we do not fully embrace The Evil Bastard Dear Leader as the only adult male in the tribe. Yet we are also not Penguins just forming a voluntary association of equals with “dominance” tending to involve individual ownership of given patches of dirt. We tend to wobble between those poles.
But even a casual view of human history shows long periods of domination by The Evil Bastard who rises to dominance and then forms an inherited right. From The House Of Saud in Arabia to The House of Habsburg in Europe to the House of Windsor that is in the United Kingdom today…
that form of “Leadership” is still with us.
In early forms of Monarchy, the King or Queen tends to “call the shots”. Various supplicants are dubbed to be knights, barons, lords et. al. and told what to do. ( Often “collect more tribute” and sometimes “conquer more land”. ) The “who” that does the actual production tends to be the “lower classes” with merchants and trades often given low rank and low status; despite being the source of all real wealth. Often such duties were hereditary (though sometimes the young would be apprenticed to various trades and could change duties.)
So “who” were the makers? Typically is answered as “those born into it or those assigned to it by the King or the minions of the Monarchy.
The “Makes what?” is typically driven by the needs of the monarchy. Orders are issued to make more swords for a military campaign or to render special metals to The Crown as taxes (so indirectly demanding mining to be done.) Often the day to day decisions are left in the hands of lower levels of this hierarchical system. The King may not care where you get the gold or which smithy produced the swords; that is left for the Lords or even the lower levels to work out. (Punishment for failure being sufficient to get what it ordered…)
The “For Whom?” is more mixed. Some amount of goods must be left in the hands of the lower levels or you don’t get any production. (Even the hod carrier has to eat, or no hod gets carried…) So there tends to be some degree of “market economics” even under an Evil Bastard King, but the market tends to be “regulated” and “taxed” at the order of the Monarchy. From “tax stamps” to “royal standards”, the King calls the shots; even if indirectly. Similarly, the excess of production above what is needed for replacement of the productive stock tends to be taken as the property of The Crown. Depending on how much is left in the hands of the producing class and how much is confiscated by The Crown the society at large has good times and bad times. Basically, as “for whom?” changes at the will of the King we get our history of Good Kings vs Bad Kings.
The population at large will eventually get tired of Evil Bad Kings and tend toward revolutions (or just not fighting all that hard against invasion by a different Less Evil King…) Much of human history comes from that dynamic. From Darius dominating much of the ancient world to Genghis Kahn and on to others, “Might makes right” is often the theme:
Yet eventually folks get tired of this. Various ways were found to limit the power of Kings. Still, it is under Monarchy that we find the start of Free Market economics and the growth of the merchant class that eventually leads to “Free Market Capitalism”.
Coined as a parallel to Pax Romana, the Pax Mongolica (Latin for “Peace of the Mongols”) is a term used to describe the phenomena during the 13th and 14th centuries where trade from China to Europe was not only possible, but common and free from profound interference. Although the word “peace” might not be the best word to describe the Mongol administration and governance during the brief era, the Pax Mongolica was a time of relative peace throughout the Old World which led to an increase of trade, as well as an increase in awareness, between distant nations. In essence, the Mongol Empire administered political order over a very large area of land which enabled relative political and economic stability to follow.
Having conquered a vast land, Genghis Khan and his successors encouraged trade and exchange. Mongols valued goods that came from other lands and peoples because they themselves produced very little of value. A unified Mongol Empire made travel across Asia far easier for Europeans than it had been under a fractured group of minor kings, facilitating greater exposure to the West and travel for Western traders such as Marco Polo. Because of the extent of his empire, Genghis Khan deeply affected the cultures of many Asian countries, most notably Russia.
Here we see The Evil Bastard King allowing for some Lesser Bastards to operate. Both as military governors and as the Merchant Evil Bastard. It is from the merchant class being better at operating the production and distribution of goods that the Free Market Economy rises. First as a small subset of Monarchy (or Empire) and later as a force of Governance in its own right.
Sidebar On Empire:
We regularly have various Empires rise. The difference between a Monarchy and an Empire is, IMHO, mostly semantic. Emperors are not from already established Royal Houses. An Empire often includes what had been distinct countries glued together by force and conquest. So if a Napoleon conquers Europe, that is an Empire while if The House of Habsburg does it that is a Monarchy. Go figure. At times (like the Holy Roman Empire) it is more ambiguous. So I don’t make a big distinction between an Empire collection of nation states dominated by an Evil Bastard who may or may not be a King vs a very large Kingdom lead by a Monarch. Is the United Kingdom of the 1700s really structurally that much different from the British Empire? One dominated Scotland and the Scots, the other dominated India and Indians (among others).
Yes, there are some subtle differences in legal rights and such, but not enough to spend any time on it here. So I don’t care that Napoleon was an Emperor and not a King, or that George was a King and not an Emperor nor that Victoria styled herself Empress of India.
From an economic point of view, it isn’t very important. It all tends to be a form of Authoritarian Command Economy with a little bit of Free Market Capitalism taking care of the details.
Honorary Mention Of Republican Empires
Among the stable forms of government and economics we do not find Democracy. As has been pointed out since the time of Plato (and probably earlier) the people tend to vote to consume all they can right now and not save nor invest for the future. They under spend on self defense as well and eventually either fall to economic collapse internally or conquest from exterior sources. (Often in 50 years or less). Thus history is filled with many Evil Bastard Kings, Queens, Emperors, Pharaohs, Khans, etc. etc. (And all the endless wars of conquest they foster…) Democracies not so much…
Yet we do find another stable form. The Republic. It is a hybrid form where The Evil Bastard leader is appointed by a leadership circle. This may be a leadership counsel that is formed by ‘who has the most money’ or ‘who has the most army’ or even ‘who has the most votes’. (We call the last one a Democratic Republic). The basic notion is that a subset of the country selected by some kind of merit or historical power / wealth (perhaps even the historical tribal chiefs and kings of a region) selects the ultimate leader.
For the Original USA this was the Senate where Senators were the representatives of the individual States. Here we start to see the concept of Countervailing Power coming to the front. The leader of the Republic has authority (often nearly as great as any King or Emperor) but must answer to the Senate (or other leadership council). This use of a council of folks who have a vested interest in not having their wealth squandered tends to prevent military ventures of conquest that have no economic return and it tends to put a limit on the tendency for the government to confiscate private wealth. The “for Whom?” tends to be “for the ruling class who can form the council” and less “for the Evil Bastard Leader”. Unfortunately, those NOT involved in The Council tend to be screwed…
In ancient Rome, the majority were slaves and they were the “Who” who did the “makes What” at the direction of their Lords and Ladies. Roman Citizens decided what was made and for whom. They had representatives who made the Senate and selected The Evil Bastard to be on the top of the heap. Duties were divided between the various levels of government in some very interesting ways, but the Consul was the one who IMHO best illustrated the difference between the older Roman Kings and the subsequent Roman Emperors.
After the last king Tarquin the Proud was expelled the rule of Rome was awarded to two elected Consuls and a pyramid of more or less important support positions under them. By law, Consuls could only be Patricians elected by the Senate.
The very first consuls after Tarquinius Superbus (Tarquin the Proud) was deposed were
Lucius Junius Brutus and
Lucius Tarquinius Collatinus
Due to his obvious family roots Tarquinius Collatinus was forced to abdicate his consulship in favour of Publius Valerius.
The Consuls were elected for a determined period of time (one year). In times of extreme danger they could be replaced by a single Dictator who held power for six months. In order to be eligible the person would have to be at least 42 years of age.
The first dictator in Roman history was nominated in 498BC. Possibly the most famous dictator from the “early days” of Rome was Cincinnatus (consul in 460BC and dictator in 458 and 439BC). He was a farmer-Patrician who worked his land. He was called to become dictator and lead the war against the Aequians, a local Italic people. He did his job, won the war, received great honours, including a crown of gold, and then proceeded to returned to till his land. These myths of early Rome attest to the nostalgia for the austere nature of the Roman forefathers.
So while not a perfect system by a long shot, the Roman Republic was a stable one that did create and accumulate wealth. Where kings and emperors tended to accumulate wealth, they also tended to squander lots of it on mindless wars of conquest. Where democracies tended to squander wealth on self gratification and spend too little on military defense (so often end up conquered…) The Republic tended to a more balanced “middle course”. Unfortunately, over the long term, it tends to decay back into Empire as those involved in running the system work to “rig” it to increase their personal power and rank; eventually leading to a new Empire and a new decay into dominance by The Evil Bastard (but now named Emperor instead of King).
Still, for the duration of the Republic, it tends to maximize the creation and accumulation of wealth (if not the fair distribution of it, as fair amounts may still be concentrated in the hands of the dominant class). Also under The Republic, there is often a thriving merchant class (as the Senators and their families and friends like to make rules that let THEM gain the advantages of a market economy; even if non-Citizens are subjugated and / or “regulated” out of commerce). In the aggregate, The Republic tends to increased wealth creation and accumulation; but it does not solve issues of income inequality. In fact, it tends to a system where Families Of Privilege arise. Those who can manipulate and control the social and governmental system gain. Today we would call this Crony Capitalism. In short, the “For Whom?” tends toward “The politically well connected” and “Families of Favor”. So far from perfect.
Still, the Republic does tend to less total wealth consumption and destruction in mindless acts. (Mindless acts of underinvestment and self indulgence by Democracies and mindless acts of self aggrandizement and conquest by Kings and Emperors).
To this day we see the basic strain between net wealth creation being higher (but distribution being poor) in a Republic vs the imprudence and instability (but popularity) of a Democracy. The decisions about “what” tending toward “makes me rich” in a Republic and “lets me consume” in a Democracy. The decisions about “for whom” tending to be toward “the well connected” in a Republic and toward “the masses” in a Democracy.
A Funny Thing On The Way To The Forum
Then a funny thing happened on the way to the Forum… Between the Magna Carta(s) and The French Revolution we had several variations on governance rise that tried to cut a middle line between these equally sorry outcomes. Just enough Democracy so that “The Average Joe and Jane” got to have a good life too, but just enough Republic that they didn’t consume to excess the whole investment stock of capital goods. Enough King or Emperor to prevent domination by outside forces, yet not so much that they dominate internally as well.
The jury is still out on how well this can work long term.
From the French Republic to the American Revolution to the Industrial Revolution in the United Kingdom; Capitalism was given more of a free hand. And the global growth of wealth was spectacular in the extreme.
This was no accident.
The Founders of the USA (and a number of other countries) came from The Age Of Enlightenment and spent a lot of time looking over the history of mankind. They were quite able to see the flaws and faults in the various systems. It is plainly evident in the choices they made in the US Constitution; (but those who need more evidence can read their papers about the decisions they made too).
The President ought to be a strong leader and ultimate commander of the military (yet with power carefully limited by the constitution and by the Senate). The Senate ought to have great power (and being composed of representatives of the States, not subject to the excesses of Democratic Will Of The People to squander wealth on personal consumption). The House was to express that will of the people and assure that Cronies in the Senate did not have a free hand. A very well balanced set of “Checks and Balances”. (And if all of them got too far out of whack, The Supreme Court standing as ultimate defender of the rule of law.)
This kind of structure arose directly from understanding the benefits of The Evil Bastard Emperor in times of national emergency, but also understanding the “adventures” they were prone to in normal times. It came from understanding the poor stability and the dismally poor investments made by Democracy, but also understanding the need to prevent too much Crony Capitalism and Patronage.
With strong property rights, the growth of Capitalism was nurtured and global wealth burst forth in astounding quantity from the Emergent Behaviour found in all capitalist markets and exchanges. It was a golden age of wealth creation for a couple of hundred years.
The Capitalist Evil Bastard
There is a surprisingly large body of literature from that era bemoaning the rise of these Petty Capitalists to power and prestige of money; but lacking in the true breeding and proper background of the Aristocracy. Families that for generations (sometimes hundreds of years of generations, perhaps even thousands) had honed their skills at gaining “for whom?” out of “working the system” of various Monarchy, Empire, Republican systems found that they were no longer all that important.
In a way it is funny to read these “Men of Letters” deriding the rise of “mere shopkeepers” and “tradesmen” to positions of power and authority via hard work and exploitation of their fellow man (as the Aristocrats preferred to do their exploitation of their fellow man the old fashioned way – by controlling the government and ‘sucking up’ to All The Right People….)
Even today we find a trichotomy between The Aristocrats who want the old levers of power back their hands ( the current European Parliament being a great example) and The Democrats (not just the USA Party) who want to depose The Evil Capitalist Bastards so that they can spend all the accumulated wealth and consume it all, and The Republicans (not just the USA Party) who want that Old Time Crony Capitalism to let them gain more power and wealth. Lost in all these systems is the “petty capitalist”. The small farmer. The tradesman. The shopkeepers and restauranteurs. The artisans and the craftsman. As it has always been.
It doesn’t matter if you have a Monarchy, an Empire, a Republic, a Democracy, or even a Capitalist Paradise. In all these systems they tend to the same basic faults. (The exact “for Whom?” tends to change, but not the basic emphasis on a special “for whom?” of some status who gets most of the goods).
So in a Monarchy it is The Royal Family (and hangers on) who get the “special status” and are a larger part of the “For Whom?”.
In Empire it is The Emperor and their appointees and hangers on who get the “special status” and are a larger part of the “For Whom?”.
In a Republic it is the Friends Of The Senate and their Crony Capitalist Friends who get the “special status” and are a larger part of the “For Whom?”.
In a Democracy it is The People who get the “special status” (and rapidly consume all the wealth, capital stock and every scrap of consumption possible – then collapse into ruin and domination by one of the other systems…)
In a Capitalist Paradise, we get the rise of the Capitalist Evil Bastard who get the “special status” and are a larger part of the “For Whom?”
Yet the Capitalist Robber Barron is different from the others in some important ways. (Realize I have no love lost between me and Robber Barrons. That they exist is undeniable. That they do evil things is also undeniable. Yet they also do some desirable things, and that makes all the difference in the world…)
The fundamental problem with The Evil Capitalist Bastard comes from the nature of investment. A key concept is “The Propensity To Invest”. If you are starving, you want food. NOW! Even to the point of “eating your seed corn”. If you have no saved seed to plant next year, you get no crop and die then; but if you starve now, you die anyway, just sooner… In a Democracy the people choose to eat all the seed corn and the society dies. In Laizze Faire Capitalism, the Rich Evil Bastard has more than enough to eat, and if you die from starvation that isn’t his problem, so he saves a load of seed corn for the future.
In the long run, this results in a much greater quantity of food and a much more wealthy society. In the short run, someone dies. Also, in that future time, the food tends to be owned by The Rich Capitalist Bastard who is still not interested in “sharing the wealth”. Yet he will sell much of that food to gain other wealth. It does him no good to keep most of it in storage and let it eventually rot. There is an “optimum level of sales” to maximize his total wealth…
So we, as a society, need The Evil Capitalist Bastard as they assure we invest at the optimal level for economic growth and as they assure we do not eat all our seed corn and collapse / die. It is the tendency to “forgo present consumption” in favor of longer term investment and growth that is the defining virtue of The Evil Capitalist Bastard.
Yet as wealth grows, it is ever harder to consume. A feature at early / modest stages of wealth accumulation; but at the later stages we have the formation of Dynasties Of Wealth. The inevitable consequence of compound growth rates of accumulation mixed with limits on how much consumption a rich person can actually do; means that Fat Wallets get fatter. And it happens in an accelerating way.
In many markets and many capitalist enterprises, it is a simple yet true rule that “Fattest Wallet Wins”. It takes no special expertise. No skill. No particular brains or insight. Nothing much but the Fattest Wallet. The many ways this manifests are too many to go into here, but just one example: There are “economies of scale” in finance. If I go into a bank with $Billion already on deposit, and ask for a mortgage, I get a Very Special Rate. (Mark Zuckerburg of Facebook just financed his house at 1.05% per the news. That is less than the rate of inflation…) So any mature industry where borrowed money is the major cost of the business can be dominated by The Fattest Wallet just due to the cost of finance capital. Similarly, a Fat Wallet can just buy up any “competition” that threatens their established dominance with a new technology. Watch the financial news for any length of time and you will see both of these actions frequently…
The end point of such as system is hard to distinguish from all the other Evil Empires. We end up with Family Dynasties Of Wealth instead of Family Dynasties Of Aristocracy or Family Dynasties Of Royalty. Not much difference to the average shoemaker, innkeeper, or farmer. Does it really make any difference if you are told “Your land is being taken” by the King, the Emperor, the Barron, or The Rich Bastard?
If General Electric decides to make the same product you are making, you are out of business. (Their cost of capital is now about zero in real terms… ) There is a large literature on the various forms of “unfair competition” that are used by The Evil Capitalist Bastards to maintain that dominance. Again I won’t go into it here. Just realize that this is NOT a hypothetical. From John Davison Rockefeller to J.P. Morgan to Bill Gates to George Soros, the history of Capitalism is littered with folks who gain some significant power of money, then use it with abandon to gain power over others and dominate markets. The popular fantasy is that in a capitalist system we all have that chance. The reality is that the children of the rich have much more opportunity for maintenance of their Dynasty than you have to create one. It is simply not possible for the individual to decide to make a better Jet Engine and “compete” with GE unless GE screws up or chooses to let them.
We have instituted a large body of law to attempt to limit that Fattest Wallet power to monopoly. In some cases we have identified particular parts of the economy where the economies of scale or economies of finance are so dominant that it is nearly inevitable that there will be only one surviving provider (only one “who” doing the making) and so they can extract excessive payments from the “for whom” that are then leveraged to dominate even more segments of the economy. In the early years of the USA it was The Railroads that were such a natural monopoly. Electric Utilities are another one (can you afford your own nuclear reactor?…) Right now Monsanto is trying to build such a monopoly power position on life itself via the gene patent laws (that they “encouraged” through the legal process… can YOU buy political access?…) Again, this “Monopoly Power” is NOT a hypothetical. It is one of the largest factors in the shape of our modern industrial society today.
Our attempts to gain the advantages of increased Propensity To Invest while limiting the tendency to Fattest Wallet Wins leading to Monopoly Power have been at best modest…
Communism and Other Socialisms
It was the growth of “Income Disparity” and the “Unfair Distribution Of Wealth” that is the inevitable result of Unbridled Capitalism that lead to the theory of Communism and Marxism.
Marx said, in a nutshell, that the end game would lead to the tradesman and worker classes revolting against the merchant class. (He used words somewhat alien to some of us “proletariat” for the “average Joe and Jane worker” and “bourgeois” for the merchant class – which is not just the guy selling flour and beans, but intended to mean what I’d tend to call the Industrialist Class)
The basic Marxist Theory is that the income and wealth disparity reaches a point where The Workers Of The World decide to just do in The Evil Capitalist Bastards, take all their stuff, and do all the saving and investing on their own for the good of the collective. “Who” becomes The Workers, does “what” becomes “makes what the workers need” and “for whom” becomes the The Workers.
All well and good… in theory…
But Marx forgot the tendency to The Evil Bastard is literally in our DNA. Reaching all the way back to our tribal roots, and through that to our time as herds of animals looking for which Evil Bastard will be on watch for The Worse Evil Bastard Cat in exchange for status and preferences…
So we got Stalin… and about 20 Million dead.
However Stalin did demonstrate that it does not matter WHO is choosing excess saving and investment over present consumption. The Communist USSR had astounding economic growth under Stalin and similar leaders. This is especially true in a relatively primitive economy in poverty where the question of “quality of investment decision” is less important than just making some investment, darned near ANY investment. Doesn’t take a genius to figure “More steel and cement to build an empire” and “tanks and guns” to build an army.
I once got into trouble with my Dad when I expressed that sentiment to him by saying that it looked like Communism worked OK in the early stages of a poor country trying to rise to modernity. I was about 12 or 14 years old at the time (yes, a natural born political economist ;-) and my statements about how it would need to transition to a market capitalist economy as it matured were not sufficient to prevent a long “talking to”…
Marx, Lenin, and Stalin also didn’t realize the ability of a Government Bureaucracy to ossify, stifle innovation, make bad investment decisions in the long run, and be completely unable to manage economic production and distribution at large scale. It may be good at doing forced investment in the obvious needs of a primitive economy playing “catch up” with the rest of the globe, but it is fairly lousy at long term optimizing, fast adaptation, and innovation. The “Emergent Behaviour” of a modern capitalist economy is just incredibly capable at all of those things. It is simply not possible for a Central Planning government to gather and even start to understand the information involved in making the decisions. A distributed network of processors each doing local optimizing and having an emergent collective behaviour just crushes central planning.
Yet the fundamental driver of The Evil Bastard is to centralize power and authority to themselves. In a competitive system of economics, this eventually leaves them in the dirt.
Over the span of a generation, The Workers start to notice that the “For Whom?” has a lot of commissars and Dear Leaders and not so many hod carriers and electricians… Eventually the combination of low motivation, resentment, and central planning stupidity leads to stagnation at modest levels of production.
The Fascist Flavor of Socialism
One of the defining features of Marxism is the assertion that The Workers Revolution would be global. Thus the anthem is The INTERnationale ..
“The Internationale” (“L’Internationale” in French) is a widely sung left-wing anthem. It has been one of the most recognizable and popular songs of the socialist movement since the late 19th century, when the Second International (now the Socialist International) adopted it as its official anthem. The original French refrain of the song is C’est la lutte finale / Groupons-nous et demain / L’Internationale / Sera le genre humain. (English: “This is the final struggle / Let us group together and tomorrow / The Internationale / Will be the human race.”) “The Internationale” has been translated into many languages. It is often sung with the hand raised in a clenched fist salute and is sometimes followed (in English-speaking places) with a chant of “The workers united will never be defeated”. “The Internationale” has been celebrated by socialists, communists, and anarchists.
An interesting variation came along to try to build a bridge between the efficiency of private enterprise and the central planning of the Communist flavor or socialism. It asserted that using the private corporation of capitalism, but bending it to the will of the people via a Central Planning regulatory body, would get the best of both worlds. It also blended in some Nationalism. This blend of corporatism and nationalism was spectacularly successful. It was called Fascism.
In Italy, the dramatic improvement of the Italian economy was lauded world wide. Mussolini was a darling of the US Progressive movement of the years prior to W.W.II and even was invited to Hollywood for a guest cameo in a movie ( the title of which escapes me at the moment). The Italian Miracle was firmly rooted in Socialism ( Mussolini started off translating the Socialist literature and even at the time of his dying was asserting he was a Socialist) and the name comes from the Italian name for a ‘bundle of sticks’ that was used to mean Labor Union. It was a movement firmly rooted in the notion of The Workers taking over the means of production and government central planning.
Germany saw this model and added to it a peculiar Racist element to create The National Socialist German Workers Party – as a movement firmly rooted in Socialist ideas of the primacy of The Workers and the importance of central planning.
This, too, was embraced in America in the early years as a great leap forward by the American Progressive Movement. In short order, though, Hitler started showing his true colors as an incredibly Evil Bastard, but one with a destructive agenda… and fell from favor.
So WHY did The Progressives endorse Fascist Socialism and National Socialism? For the simple (and valid) reason that it was a good answer to The Evil Bastard Robber Barons. It fixes The Fat Wallet problem. Go ahead and make that Fat Wallet. THEN the Government will tell you what you can do with it “for the good of the Workers”…
Frankly, I think it is a fair innovation in trying to solve The Fat Wallet Problem. The only one I’ve been able to come up with is a confiscatory inheritance tax. But even that has lots of unintended consequences and I’ve not been able to work out how to fix them all. Have I mentioned lately that Economics is called “The Dismal Science” for a reason? There often are no good choices…
Why are Fascism and Naziism called “right wing” if they are Socialist? For the simple reason that Stalin hated them. They were competion for HIS dominance of the world. The USSR was looking forward to a GLOBAL International Communism, with them as Dear Leader… Can’t have that if you have each Nation going for their own National Socialism, now can you? So from a Communist Socialist point of view, National Socialism is “to the right”… Stalin denounced them as “Right Wing” and it has been convenient for modern Socialists to “let that stick”. That attack by Stalin, BTW, is why the Nazi and Fascisti were happy to attack the communists in their nations. NOT from some economic disagreement over the foundation of Socialism, but a simple turf fight over who gets to be The Socialist Evil Bastard running things…
Those National Socialisms didn’t last long. Being prone to Central Planning and Central Authority, they rapidly fall into the desire for dominance shown by all Empires and Emperors. The inevitable result is the same seen in the era of Kings. Fights for dominance and fights for conquest. There is also a limited shelf life to the promise of “better life for the workers”. In the early stages, the displacement of the prior inefficiencies and mal-distribution of wealth under the Aristocrats results in a great gain in standard of living for The Workers. Folks are just all in love with it in the early few years. (Read the articles written during the early years of both Fascist Italy and Nazi Germany and they just glow with praise. Both domestic articles and those written elsewhere such as in the USA). Just like we had ‘a chicken in every pot’, Hitler and his ‘folks car’ or people’s car, was promising a ‘car in every garage’. That was the start of Volkswagen as the Folks Wagon…
While it starts off with the Socialist idea of “Who” being The Workers and the “For Whom?” being “for the people” (or for the folks), the Nationalist element leads to a “and take it from other nations For The Nation” and that isn’t so stable when mixed with military ambitions… The Nazi variation included “and take it from non-Aryan-German populations and kill them” which just destroyed a heck of a lot of their best human capital along with just pissing off the rest of the world.
The Market Socialists
OK, we all know how that whole World War thing ended. USA dominating half the world. The Nationalist Socialisms in the doghouse. The USSR dominating the other half of the world.
Then we got a Cold War for a generation as Central Planning slowly decayed the USSR.
In the ’80s, the USA declared victory and just figured everyone would embrace our form of “Mixed Economy”. What is a “Mixed Economy”? A form of “socialism lite” with the emphasis on lite… Or you could think of it is Laizze Faire Capitalism with Anti-Monopoly and Externality Patches applied.
We instituted a system of Central Regulation where there were basic limits put on what private enterprise could do. Things like not dumping poisons in the common water supply. Not exposing workers to hazards in the workplace. Not shipping cars that spew unlimited smog. Things from a “Thou Shalt Not” point of view rather than prescriptive Thou Shall Make…
Along the way, the idea of Socialism With A Market was floated as the new incarnation of Fascism by the Progressives as the older names had gotten a bit of a bad reputation in World War II. (The Fascist system was often called “The Third Way”. A term Bill Clinton floated to describe his Progressive views, but some folks pointed out that we all had not forgotten where it began and the term was quietly used less…)
In Europe, there is a whole Zoo of “3rd Way Socialisms” They all share the notion that you can have a Market handle the detailed emergent behaviour coordination and planning feedback, yet leave the largest planning and levers of power in the hands of The Government. Corporations continue to exist, but they (and their labor unions) must work with The Government to coordinate ‘for the good of the people’. The premier name associated with this renaming approach is Oskar Lange.
The basic idea being to glue on a market to the central planners and all would be good. The problems with this are fairly nicely handled here:
But most of the world, at this point, is following some kind of Market Socialism or “3rd Way”, even the USA. Frankly, I find the present ranting about China on most of the financial shows a bit funny as they talk about it being a fight between Capitalism (in the USA) and Communism (in China) when in reality is it is two Market Socialism economies but one where China is being more Mercantilist (making laws and regulations that favor their growth at our expense and manipulating / managing their currency value to gain growth of investment at our expense).
I’ve frequently said I can make the best case for Lange Type Socialism and it is precisely because it has come to dominate the world. For whatever reason, Capitalism is unable to solve the Fattest Wallet Evil Bastard problem and attempts at being a “Mixed Economy” have an unstable slide into a Progressive Market Socialism (aka 3rd Way or Fascism depending on your particular political biases and sensitivities… from an economic activities point of view they are identical. The only practical difference being Nationalist wars in later stages. BTW, we have yet to show that is NOT the case in the USA… and we have been rather prone to “foreign adventures” lately…)
But “Reality just is. -E.M.Smith” and looking around the world, there are no surviving Laizze Fair Capitalist economies nor are their any thriving communisms. The globe is dominated by various forms of Mixed Economy shading into Lange Type or Market Socialism Economy. A few communist “stragglers” have not got the memo and there are some token Monarchies hanging around, but most of them are “for entertainment value” only. (Sorry House Of Windsor… but it’s is true. You are a UK Theme Park and not much else these days.)
But is any of this long term stable?
The basic human nature has not changed. We still have a world where The Evil Bastard has a drive to power and lust for control that is beyond the dreams of avarice. It doesn’t matter what “system” we have built, it ends up being dominated by that particular flavor of Sociopath. THE saving grace of the various flavors of Corporatism and Market Economies is that we spread power around to a larger number of Evil Bastards and set them to fighting against each other (in the hope that means they are less able to prey on us).
Yet even here we have persistently sent more power to Central Authority. The Supreme Court has regularly handed down decisions putting ever more power in the hands of Congress and The Executive Branch. The notion of “limited government” died on the Progressive Movement. (As much as The Progressive Movement did good against Capitalist Evil Bastards, it has done grievous harm in handing more power to Government Evil Bastards.)
In the end, we are just repeating the same slide into despotism that has happened to all Political Economic systems over all of time. We’ve just been doing it a bit more slowly than most (though not as slowly as the Roman Republic, it would seem…) The “Why?” is pretty simple: Evil Bastards are an ambitious and crafty lot. Always looking for ways to bend the system to their benefit. We, the normal folks, get a shot at setting up a more “fair” system once every collapse. They work endlessly to corrupt it after that. We are too distracted or just don’t care enough to stop them in between. Especially when they offer to bribe us with our own money via promises of more “Democracy”… “We The People” are just as attracted to the levers of power for our own gain as every other Evil Bastard.
So in the end, economics is just “Who makes What for Whom?” and most of our political ills directly result from our fighting over who gets to be the Whom and who gets to be The Decider. We all want to be The Evil Bastard in charge and we all want to decide who gets the goods. Thus none of us is willing to accept a system where no one gets to make that decision, and are not happy with the results of a system where Fat Wallets make the decision ( Laizze Faire free market Capitalism) nor is the outcome of such a system very good at “fair” distribution in any case. Especially once the Capitalist Evil Bastards realize they can cut a cozy deal with the Government Evil Bastards. Yet even worse results come from having Central Planning Evil Bastards ordering what to do.
In the end, we wobble between the different systems rotating which particular modes of failure we deal with in any given generation. Tyranny. War. Fat Wallet Bastards. Crony Capitalism. Revolution. Tyranny of the Masses. Underinvestment and economic collapse. Repeat…
Much of the rest of Economics is just putting ever more detail into the particulars. Ever more precisely counting and measuring the detailed minutia of how the particular systems work, fail, or don’t address any given detail. Mechanisms that cause the effects; and methods to measure the human actions in them. While interesting and useful, in the end they don’t change the broad scope much. Does it really matter if The Banks are owned by The Evil Capitalist Bastard who takes the money and spends it on his pet projects, or if The Bank is owned by The People and the money is taken by The Peoples Commissar Evil Bastard and spent on what HE wants? Monuments to J.P. Morgan or monuments to Stalin?
Does it really matter if the Fiat Money is backed by The Democratic USA or The Democratic USSR?
So that’s my “Nickel Tour” of economics in broad terms. I’ve yet to figure out how to capture the large economies of scale in things like electric power generation or steel making while making an economy that is friendly to The Average Joe and Jane. A system where the large industries can live side by side with the Village of Artisans and Craftsmen without one Evil Bastard or another coming along.
Heck, in my little farm town home town, some of the worst abuses were done by our tiny little Evil Bastards fighting for who could be on top of our little pile of dirt. A rather wonderful school, built to be indestructible, was knocked down to build a replacement out of “ticky tacky” wall board. The excuse given was that the former was a ‘fire trap’ due to some beautiful hardwood floors and doors with ‘years of polish’ on them. When the wrecking ball swung against the concrete, they found in it so much rebar that it took weeks to knock it down instead of days. Only later did I figure out the adults were not “stupid”, but rather that the contractors had political connections and this was just a vehicle to send them money. The “proper” fix (if any problem really existed) would have been to put in a fire sprinkler system.
So if we can’t even make a town of 3000 people work reasonably and without corruption, what hope is there when the centers of corruption are 2000 miles away from We The People?
In the end, the only system that looks to have any hope is one of extraordinarily limited Government and one where what government there is prevents collusion and monopoly practices and where The Fat Wallets are made to compete against each other; perhaps with a large surrender of that Fat Wallet on their death to prevent Dynastic Evil Bastards… if I can only figure out a way to do that which isn’t as broken as our present inheritance tax system…
Or perhaps all of it is just tilting at windmills. Human nature was formed when the first of us noticed we could have higher status and privilege and greater happiness by stepping on the heads of our herd-mates. It’s been all down hill ever since, and with a few million years of that evolutionary pressure, not likely to change. Perhaps in the end we are all just prisoners of our desire to fight for dominance or run from the fight. Not much room for “I choose not to fight AND I reject your dominance.” For better or worse, real world political economics is more a descriptive art covering WHICH Evil Bastard is chosen and HOW the Evil Bastard operates, macro-economics is about governmental and monetary implementation of the designs of The Evil Bastard, while mico-Economics is the detail manner in which the Evil Bastards decide “Who makes What for Whom?”…