In a world of propaganda and sound-bites, it is relatively easy to create an ideology blown up out of all proportion to its substance. By far the most pervasive ideology of our times is Capitalism. And while Capitalism has some kernels of truth, its value has been exaggerated and knowledge of its severe limitations suppressed. The purpose of this essay is not to destroy Capitalism, for Capitalism, like all servants is useful in its place. Rather it is to deconstruct Capitalism, to expose its limitations, so that we can use it more effectively.
Capitalism rests on three tenets: (i) the primacy of capital; (ii) free markets; and (iii) free trade. All three have been overblown to the point that the fiction outweighs the facts. Economics is, as a body of knowledge, at best a soft science. It is built largely on armchair logic. Evidence, where it exists, is largely interpretation. The double blind studies of the hard sciences are virtually non-existent. Free markets and free trade are theoretical ideas, built on very simplistic concepts. It is like taking Newton’s laws of motion and building a car without an engine. If the car is always parked on top of a hill, the energy from going down the hill can be used to move around, and then climb back up the hill again to park it. Forgetting that there is friction from the air, and the tyres, and the occasional need to brake and turn corners. Having bought the damn car, and refusing to admit being suckered, we are forced to fudge the results. Like Fred Flintstone’s car. Yabba dabba doo.
Economics is the study of the production and distribution of goods. It seeks to make best use of scarce resources. It has the mindset of man desperately eking out a living scrounging for depleting resources. Of competing in a jungle. The reality is that we live in a world of plenty. But that won’t do, so we create a consumer society. Where one of the bigger problems we face is waste disposal.
Money, Money, Money
Several ingredients that need to come together to produce goods – to build and operate a factory or run a farm. Ingredients such as capital, labour, material, motivation, luck, and know-how. A role of one among equals has been finessed into one where Capital has grabbed all power as Owner and Controller.
We have created laws that allow Capitalists to create Companies. Companies have a life of their own. Though they cannot vote directly in a democracy, they often wield enormous political power. Companies pay relatively less tax than people: People pay GST, they pay on income rather than profit, and their marginal rates are much higher.
The twentieth century saw the development of the stock market, which allowed capital to be sourced from others than a capitalist ruling class. As this happened, we saw the development of a new ruling class, at the top of companies. With even better returns than capitalists - magnified benefits in good times but without losses in bad. We are conned with blaring headlines of 14% pay rises for workers, which in the fine print actually turns out to less than 5% per year. Compare that to the 75% for the CBA’s CEO.
Free Markets
The theory of free markets states that for free markets to work, a number of conditions must exist:
· Free markets are markets in which there are many sellers and many buyers.
· Free markets require a free flow of information.
· Free markets only work where all parties to a transaction make the deal are at the table. For example, free markets don’t work when goods create pollution, since pollution is felt by everybody, not just the parties buying and selling.
· Free markets don’t work where there are high entry and exit costs – where the cost for a new seller is high.
The truth is that these conditions rarely exist, and even where these conditions do exist, businesses work hard to remove them. There is a widespread misconception that Capitalism equates to free markets. The truth is exactly the opposite. Capitalists hate free markets, because in free markets Capitalists cannot make much money. There is too much competition and profits are low.
One of the best examples I can think of is in medical drugs. The modern cost of getting drugs tested and approved is so high that only the very big drug companies can afford to do it. Another is the bundling of services, so that the customer finds it hard to move. Changing your home loan is not only the exit fee, since it means having to forgo a one stop shop. We now spend much more on telecommunications than we used to. The telecom industry loves bundles, and plans. Telstra loves being a monopoly and fights very hard to maintain the status quo.
While free markets aren’t what they are cracked up to be, they do have one major advantage. They allow the introduction of Disruptive Innovation. The problem with radically new ideas is that those who are tied to the old idea suppress the new – even if it is in their interest to accept the new.
Free Trade
Anyone who has been taught economics will remember the lessons, with worked examples to show that free trade is good for both the developed and the underdeveloped country, even where the developed country produces all its goods more cheaply than the under-developed one.
There are definite advantages to free trade. A global market is much bigger than a national market, and thereby increases competition and thereby lowers prices.
There are, however, several important factors that the theory of free trade ignores.
· The theory is built on a static analysis. In practice, as the weaker nation’s industries get eroded, the nation becomes poorer and poorer. It loses its technology capability and ends up exporting low value raw materials.
· One party trades sells consumables and buys wealth producing assets. We buy movies from the USA, and they buy our inventions or mines. In five years, their movies are worthless; the mines are bringing in millions.
· There is an imbalance of power. The US, while preaching free trade, very actively uses its power to give advantages to and protect its industries. That the US dollar is the international currency of trade provides a major subsidy to US companies – they don’t have to pay exchange rate fees or hedge their contracts against currency fluctuations. In the Free Trade Agreement we “negotiated” with the US, they extended the life of their assets by increasing copyright and intellectual property life. What did Australia get? Lower tariffs for agricultural produce above quota implemented over ten years. They get to make more money on things they’ve already sold us; we get a slightly greater right to free trade!
Free Markets are Bad for Capitalists
Capitalism is about making money, and it is very hard to make money in a free market - there is too much competition, and profits are low. That is the very basis on why free markets are considered good for society, by reducing prices to the bare minimum.
When a Capitalist calls for a free market, it is usually they see a big piece of cake that someone else has and want a piece of it. Once they get the cake, they work hard to prevent a free market – to prevent having to give others a slice.
Consider the nature of region coding on entertainment systems. It is something very clearly put into place to prevent free trade. I can’t buy my movies from the US, where they are cheaper. Yet organizations like the ACCC who are paid to ensure free markets blithely ignore it.
Or consider Copyright and intellectual property laws. They stop free trade. And yet, our free trade agreement with the US reduced the freedoms we previously had.
Conclusion
The purpose of this essay is to dethrone the king, not kill him. Man is a tool making animal. Capitalism, money and free markets are tools. They have their strengths and they have their weaknesses. We should not idolize them. We should not let them run our society.
We need two powers. Firstly, we need the power to understand when capitalism is doing us more harm than good. Secondly, we need the power to stop capitalism from continuing to harm us. Our ability to understand when capitalism is harmful is increasing. But we are still quite powerless to curb capitalism. We have a grasp of the Global Financial Crisis. But we are powerless to prevent the next one. We grasp the need for environmental sustainability and the effects of global warming. But are powerless to prevent it.