The global economic crisis has catalysed debates about the merits of capitalism as a system for organizing production, distribution and exchange. Political elites have argued that capitalism is not fundamentally pernicious or crisis-prone and can be successfully reformed with the right set of policies. Conversely, many have argued that a wholesale change of attitude towards the status and creation of wealth in contemporary society is required if crises of this kind are to be prevented in the future.
In Capitalism and Its Alternatives, Chris Rogers provides a critical introduction to theories of capitalism and to the forms of its crises in historical and contemporary contexts, as well as reflecting on the practice of anti-capitalism and the ways that economic and social relations are shaped, reshaped and resisted. Crucially, the book asks two key questions: What alternatives to capitalism exist? And by what processes and through what institutions might they be achieved?
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About the Author
Chris Rogers is Lecturer in Politics at the University of York. His first book, The IMF and European Economies: Crisis and Conditionality, was published in 2012. Chris is currently working on a research project on the political economy of mutual organization.
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Capitalism and Its Alternatives
By Chris Rogers
Zed Books LtdCopyright © 2014 Chris Rogers
All rights reserved.
FOUR FACES OF CAPITALISM
It is widely accepted that the world we live in is capitalist, and although capitalism may only be lurking in the background as we go about our day-to-day lives, it is nonetheless ever-present as we depend on it as an organizing system to meet our daily needs. It is capitalism which produces food, clothes, housing, energy, and so on. It is also the capitalist system which generally provides (or denies) people the income with which they are able to purchase the things that they need to survive. However, while we know that capitalism is there, the way in which capitalism is understood is not uncontested, and this is an issue of fundamental importance for the decisions we make about whether it is a desirable system. This is important because while capitalism is an organizing system that conditions and shapes our everyday lives, it does not exist outside of us – the people whose very lives it shapes. In this sense, capitalism is constantly being remade or resisted in every social, political and economic transaction that people are involved with. This can be a source of hope, because it means that decisions about the kind of world in which we live are ours to make. However, if we do not ask whether the world in which we live is the best world in which we could live, it can also be a source of despair; by failing to ask questions about the nature of capitalism, we fail to ask whether the outcomes it produces are fair or just, and our opportunity to address these issues is missed.
Asking questions of the capitalist system is not about criticism of people going about their lives in the capitalist system. As the Marxist philosopher G. A. Cohen (2000: 3) reflected, he 'was taught, as a child, to concentrate [his] judgement on the unjust structure of society, and away from the individuals who happen to benefit from that injustice'. This book argues that such a non-judgemental position is a sensible one to take; people cannot be considered bad people simply for living their lives according to what they perceive to be the prevailing 'rules of the game'. However, if we do not ask questions about those rules and their implications, we cede control over how we remake or resist them, and it is the purpose of this chapter to demonstrate the importance of asking questions about the capitalist system for making decisions about how we organize economy and society.
This chapter asks three specific questions about the rules of the game in order to come to a judgement about the implications of capitalism, and all of them are related to wealth, its sine qua non. First, it asks, what is the origin of wealth in a capitalist economy? Secondly, what significance is given to the creation of wealth in a capitalist economy? Finally, what are the implications of how wealth is created and the significance it is given for the role of the state in managing our society? This chapter examines the views of four highly significant political economists on these questions – Adam Smith, Karl Marx, John Maynard Keynes and Friedrich Hayek. Smith is regarded as one of the founding fathers of political economy and (interpretations of) his ideas have played a significant role in the promotion of free markets in the nineteenth and early twentieth centuries, while Marx's work represents a direct criticism of Smith and an enduring and powerful critique of capitalism itself. The views of Keynes and his contemporary Hayek have had a similarly significant impact on contemporary society, with the former's views heavily shaping the ideas of policy-makers in the period from 1945 to the mid-1970s, and the views of the latter being similarly influential in the period since. The chapter therefore shows how their differing approaches to these questions have profound implications for the form that they believe social, political and economic organization should take. For instance, it shows how Smith's conception of the creation of wealth presents a view of equality in exchange between equals, whereas Marx viewed it as fundamentally reliant on the exploitation of some people by others. It also shows how Keynes believed that the state could intervene in the economy to facilitate the creation of wealth and prosperity, whereas Hayek believed that only the market could achieve these outcomes. In other words, it shows how our ideas about how society is organized fundamentally inform our views about whether it should be organized differently.
The political economy of Adam Smith
Adam Smith was born in 1723 and was one of the foremost intellectuals of the Scottish Enlightenment. The social, political and economic changes occurring at this time were those that saw social and economic organization begin to take the capitalist form that we recognize today, and Adam Smith was the first to systematically examine it. As Robert Heilbroner (2000: 26–7) has noted, 'Markets have existed as far back as history goes [...] But markets, whether they be exchanges between primitive tribes [...] or the exciting travelling fairs of the Middle Ages, are not the same as the market system.' The market system that emerged in the late seventeenth and early eighteenth centuries was 'a mechanism for sustaining and maintaining an entire society' (ibid.: 27, emphasis in original).
Prior to the formation of markets as organizing systems, states placed a great deal of emphasis on the acquisition of power and wealth, which was seen to rest in reserves of precious metals. Such a system, known as mercantilism, was founded on two core principles. First, precious metals would always provide the state with 'a financial reserve on hand in liquid form immediately in case of an emergency' (Viner 1930: 270), and, second, 'the only, or the most practicable form in which wealth could be accumulated was in an increase in the national stock of precious metals' (ibid.: 274). In terms of state policy, this led to the prioritization of exports over imports because this was the only way that 'a country with no gold or silver mines' could 'increase its stock of precious metals' (ibid.: 255).
This economic doctrine was intrinsically tied to the maximization of power, as the motivation for the acquisition of wealth in the form of precious metals was 'considered as essential in order to procure [...] desired goods, notably weapons' (Fontanel et al. 2008: 332). Because mercantilists viewed the stock of the world's precious metals to be fixed, the gain of one nation could only come at the expense of other nations, which logically led to adversarial economic competition between states as they sought to secure overseas markets and resources through the exercise of military force (ibid.: 333). The practice was typified by the transfer of gold from South America to Spain and Portugal during the fifteenth century, a practice that was encouraged by policies that 'prohibited the exchange of gold, silver, or [bullion] at a different price than the official parity, and bans on exports [which] forbade the exportation of gold or silver without a license' (Nogues-Marco 2011: 2). Before the middle of the eighteenth century, precious metals were treated as immutable stores of value and wealth, despite the fact that the debasement of precious metals had been used as a means of increasing revenue for the British state by Henry VIII (see Challis 1967) and again in response to the need to pay troops during the Nine Years' War between France and the European Grand Alliance in the 1690s (see Larkin 2006). Mercantilists could not see that the monetary value of bullion was neither finite nor immutable, and as such could not see that it could not be the sole source or manifestation of wealth.
Adam Smith, in contrast, was able to see that equating wealth with the stock of precious metals was a misnomer. In The Wealth of Nations, Smith (1776: 293) agreed that 'When [money] is obtained, there is no difficulty in making any subsequent purchase.' However, this was not enough to satisfy him that money was an important end in itself, because precious metals could be 'bought for a certain price like all other commodities' (ibid.: 297–8), and it was plain to Smith that if 'gold and silver should at any time fall short in a country which has wherewithal to purchase them, there are more expedients for supplying their place, than that of almost any other commodity' (ibid.: 299). In other words, precious metals could be purchased with manufactures and natural produce, which could equally be used in order to pay the wages of an army if such a course of action was necessary if a country found itself with a shortage of gold (ibid.: 302). Wealth, then, must be manifest in some other form.
This is the question Smith tackles head-on in Book I of The Wealth of Nations. 'The annual labour of every nation', Smith asserts, 'is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes' (ibid.: loc. 1). Smith then demonstrates how productive capacity, and therefore wealth, is increased many times through the division of labour because specialization allows people to increase their expertise and skills in a given field, saves time because workers do not have to change tools or places of work between tasks, and encourages the introduction of labour-saving machinery (ibid.: 3). Smith's understanding of the origin of the division of labour is naturalistic, as he argues that it is ingrained in people to 'truck, barter, and exchange one thing for another' (ibid.: 6). For Smith, this natural proclivity to exchange things with others stems from people's self-interest: 'It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest' (ibid.: 7).
Money and the precious metals that were so important to the early mercantilists are understood by Smith as nothing more than a reflection of value created by production, which facilitates trade by solving problems associated with the coincidence of wants and the indivisibility of commodities. Money is able to efficiently mediate the exchange relationships required by a market economy, but the value in exchange of a commodity is measured by 'the toil and trouble of acquiring it' (ibid.: 19). In primitive economies, in which people carry out many tasks to provide themselves with the necessities of life, the whole value of the produce belongs to the labourer. However, in more advanced economies benefiting from the division of labour, people are reliant on one another in order to be able to create the commodities that can be traded to meet their needs. Workers need the contributions of entrepreneurs who invest in the buildings and machinery that are required to make things, who, in turn, are reliant on landowners for the physical space on which production facilities can be built. As such, in addition to the wages earned by labourers, value must reflect the contributions that stock and land make to production, and so include profits and rents: Smith (ibid.: 32) asserts that once a system of private property has developed, 'the price of every commodity finally resolves itself into some one or other, or all of those three parts; and in every improved society, all the three enter, more or less, as component parts, into the price of the far greater part of commodities'.
Smith therefore argues that the price of a good produced in a market economy benefiting from the division of labour reflects the contributions of all those who have played a part in its production in proportion to the contribution they have made.
Adam Smith's understanding of wealth therefore has a number of distinguishing features. First, he was able to see that wealth does not lie in the stock of precious metals, but in the productive capacity of the nation, which is enhanced through the division of labour. Secondly, he believed that this stems from a natural proclivity among people to exchange things with one another and which therefore shows trade to be an, a priori, desirable state of affairs. Thirdly, Smith shows how money represents only the nominal value of a good, while the true value is found in the labour entailed in production. Finally, Smith argues that while the whole value of a product might belong to a labourer in a primitive economy, in a market economy with a division of labour, some of this value must be shared with entrepreneurs and landowners because investment in stock and land also contribute to the production of wealth.
These observations of early market capitalism were pioneering, and justify Adam Smith's reputation as the founding father of political economy analysis. However, it is important to analyse not only Smith's observations about how a market economy operated under the division of labour, but also their implications. One of the most significant implications concerns Smith's belief that the propensity for people to barter and exchange goods was something in their nature. Smith thought desirable outcomes would be reached through such exchanges, motivated by self-interest rather than benevolence, even though a person 'neither intends to promote the public interest, nor knows how much he is promoting it'; rather, people are 'led by an invisible hand to promote an end which was no part of [their] intention' (ibid.: 313). In social terms, Smith believed that a person 'frequently promotes [the interest] of society more effectually than when [they] really [intend] to promote it' (ibid.: 313).
Given Smith's emphasis on self-interest, it is clear to see how his work might be used in order to justify a state of affairs in which every individual should act selfishly, because this will promote the general good. This argument is politically conservative because it could be used in order to oppose any redistribution of incomes and wealth on the basis that such actions would distort the optimum outcomes Smith believed would arise by virtue of the interaction between self-interested action and the invisible hand. However, such a reading of Smith fails to appreciate his status not only as one of the eighteenth century's pre-eminent political economists, but also as one of the eighteenth century's pre-eminent moral philosophers.
Matthew Watson (2005) helpfully illustrates this point. He notes that while Smith talks of 'self-interest', the kind of actors that he describes are not 'selfish'; his agents have socially based moral principles that stem from people's ability to sympathize with one another (ibid.: 114). While Smith's theory of existence remains individual and liberal, his conception of 'self-interest' includes a concern for the social whole as people's consciences are learned through interaction with others (ibid.: 117), and come to reflect a desire to treat others as one would wish to be treated. In a later contribution, Watson (2012: 463) has described Smith's approach to sympathy as 'a plausible philosophical mechanism to explain why people would cede the right to distribute their property in whatever way they deemed best in order to privilege the competing claims of the nation's development profile' – to encourage the wealth of the nation.
A second area in which it is necessary to consider the implications of Smith's work relates to the way in which he sees the division of labour as the cause and not an effect of increases in the proficiency of people to produce goods and provide services in a market economy. 'The difference of natural talents in different men', Smith (1776: 8) wrote, 'is, in reality, much less than we are aware of', and the differences in ability that it is possible to identify between people in a market economy are understood 'not upon many occasions so much the cause, as the effect of the division of labour' (ibid.: 8). In arguing that the difference between a philosopher and a street porter 'seems to arise not so much from nature, as from habit' (ibid.: 8), Smith puts forward an argument that strikes a chord with the founding principles of the United States and the opening lines of the Declaration of Independence, published in the same year as Smith's The Wealth of Nations, that it is a 'self-evident truth' that 'all men are created equal'.
The implications of such an argument, once again, are politically conservative; if all people are born the same then it is possible to make a case against political involvement in the creation of equality of opportunity, since this occurs naturally. On the basis of the claim to interpersonal equivalence, the absence of redistribution of incomes and wealth can be justified because all social outcomes are the products only of individual choices. Everybody, under such circumstances, benefits from the division of labour, because it is the division of labour which allows people to enhance their skills and increase their own personal well-being, as well as the well-being of the social group more broadly.
Excerpted from Capitalism and Its Alternatives by Chris Rogers. Copyright © 2014 Chris Rogers. Excerpted by permission of Zed Books Ltd.
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Table of Contents
Introduction: Capitalism and Its Alternatives 1. Four Faces of Capitalism 2. Capitalism and Its Crises 3. Alternatives to Capitalism 4. Anti-Capitalism Conclusions: From Here to There?