[This is Chapter
Eighteen of Murphey’s book The Emerging Crisis of Economic Displacement.]
Chapter Eighteen
A CRITIQUE OF SOME IMPORTANT MARKET CONCEPTS
In the preceding two chapters I have provided an
overview of the classical liberal theory of an individualistic free society so
that we can see its immense value, but have pointed to the propensity of many
of its thinkers, and especially of the currently popular laissez-faire
global free trade position, to make the philosophy intellectually insufficient
by formulating it as a closed system.
Now we have the important task of
examining critically several of classical liberalism's core ideas. As we do, we will see that they involve
subtleties that classical liberals for the most part have not explored. Those subtleties show that the ideas are
neither as correct nor as definitive as the closed system considers them to
be. By the time we are through, it will
be apparent that the pure laissez-faire model of classical liberalism is
sufficiently unsound that no one should feel philosophically treasonable if he
chooses not to adhere strictly to it.
Certainly we must chart a different course if that becomes necessary in
light of the coming displacement of workers and polarization of incomes.
As later chapters make clear, this
is not a reason to depart from classical liberalism altogether. There is much about it that will help assure
that the adaptation to the future will protect the rights of the individual,
limit the power of the State, foster continued innovation, and accomplish
legitimacy in the sense that the vast majority of the population will stand
ready to support it. At the same time,
the adaptation will have to have a central egalitarian feature to meet the
necessity that everyone participate in the well-being produced by the new
technology; and this should be very appealing to anyone who has felt all along
that a more egalitarian distribution is called for.
Invalid objections
Before I get into my critique, we should notice
that there have been certain major, long-standing criticisms of
"capitalism" (the market economy) that have not been
valid. I am not joining hands with those
criticisms just because in other areas I find weakness and a need for
amendment.
. The "exploitation theories." These have been prominent among the invalid
objections. A central part of the Left's
outlook for two hundred years has been that many millions of people are
systematically and oppressively taken advantage of under capitalism, so that
the State or an ideological movement needs to take up their cause against the
exploiters. If this view is correct,
classical liberalism is simply a sham, with "individual liberty" a
cover for something insidious. The
criticism goes to the heart of a "bourgeois free society," making it
something far different than it purports to be.
I analyzed the particular forms of
exploitation theory in detail in Chapter 12 of my book Socialist Thought.[1] The chapter also appeared as an article in
the Spring 1996 issue of the Journal of Social, Political and Economic
Studies. Instead of just one theory,
I found at least four distinguishable ideas: the socialist version of the Labor
Theory of Value; class theory; bargaining power theory as it applies to wages;
and bargaining power theory as it applies to other conditions of employment and
to many transactions outside the labor market.
My opinion was that there is merit only in the last of these (and I'll
talk about it here in my discussion of the theory of the act of exchange), but
that it wasn't a criticism that invalidated capitalism, since a more
sophisticated approach to the legal and ethical framework of the market could
address it.
Here are summaries of the critiques
I made of the three exploitation theories I considered unsound:
The
Labor Theory of Value, in its socialist form as propounded by Rodbertus and
Marx, says it is unjust for any of the return not to go to the workers; the
profit the owner makes from the difference between what the product sells for
and what he pays the workers is a type of theft. Thus, the whole "wage relation,"
involved when one person hires another, is a form of oppression. The essential fallacy in this is that it is a
moral judgment that presupposes the very thing it is trying to prove. It makes sense if one starts with a socialist
liking for a non-market system of production and distribution in which trade
and personal benefit play no part; it is absolute nonsense if one accepts
private property and the centrality of the act of exchange. Nobody who sees value in the latter will find
merit in a moral judgment condemning profit as theft. Instead of being a reason for socialism, the
socialist application of the Labor Theory of Value is valid only if someone
already accepts socialism on other grounds.
The theory commits the fallacy of using the conclusion to justify the
premises.
Socialist
class theory says there is no plurality for workers to deal with; all employers
are monolithic as members of the same class, so that going to work for one
employer is the same as going to any other.
If we ask ourselves empirically whether this is really descriptive of
things in a competitive market (presupposing, also, that we are talking about a
classically liberal society, in which class structure will not have been
permitted to harden), it's impossible to say that it is. There is just far too much economic and
social mobility for that.
"Bargaining
power theory" as applied to wages says that an employer can dictate wages,
telling workers "here it is, take it or leave it." But somebody working for wages will only find
this temporarily true. As he talks with
others or otherwise comes to know the opportunities that exist, he can respond
to better opportunities. Fundamentally,
it is supply-and-demand, not employer fiat, that sets wages.
It
seems to me that there can be validity to a "bargaining power"
criticism about other matters. I will
discuss this in my critique of the "act of exchange," which will be
part of the discussion of valid criticisms.
.
The Berle-and-Means Thesis.
This is the view, commonly attributed to Adolf Berle and Gardiner Means
in their 1932 book The Modern Corporation and Private Property, that
corporate boards of directors aren't meaningfully accountable to the firm's
stockholders where the stockholders are many in number and are diffuse and
unorganized; most often, stockholders will simply return proxies to existing
management, which can reelect itself time after time. Because management isn't effectively
accountable to stockholders, it has no "accountability" to
anybody. This
"irresponsibility" means that corporations should be put under the
wing of government.
You will notice that the first part
of this is descriptive, the second part normative. The description is essentially true, but the
normative conclusion doesn't follow for anyone who is not otherwise in favor of
the government direction of business. Free-market
theorists point to the fact that the investing public seems little concerned
about this purported "problem," and that in any case the managers of
firms are under considerable competitive discipline to do well, because if they
do not they will be subject of unfriendly buy-outs. As a matter of fact, a criticism is made that
runs the opposite direction from the Berle-Means Thesis: that management is too
concerned about quarterly profits and serving the stockholders, and should have
longer-term goals and even "other ‘stakeholders'" in mind.
The attribution of these ideas to
Berle and Means is actually fraudulent -- a case of the long-continuing
dissimulation by which American "liberal" thought has obscured its
connection with socialist ideas.
Attributing it to these two men makes it seem that the idea came from
two American "liberals." In
fact, the point had already been prominent in socialist literature. British socialist G. D. H. Cole stated it,
and so did Thomas Kirkup in his History of Socialism as long ago as
1909.[2] Berle himself argued it in The New
Republic in the 1920s.
.
Underconsumption-overproduction theory. According to socialist author Maurice
Cornforth, Marxist theory says the trade cycle that periodically disrupts
capitalism is due to the employers' keeping workers' pay as low as possible,
which causes the workers not to have the means "to consume the products of
the ever-increasing industrial machine."
Because of this gap, production outstrips purchasing power, bringing on
a crisis.[3]
Readers will notice that this is precisely
the problem that I see looming from the incoming non-labor-intensive
technology. There is going to be a vast
"purchasing power problem," as well as revolutionary turmoil and a
general refusal to countenance a market economy unless a way is found to
include everyone in the productivity of the new technology as it develops
through the market system.
Why, then, do I include the Marxist
theory in my enumeration of major erroneous criticisms of
capitalism? Because it has been false
during all of the time prior to the present, and even into the future until the
displacement of work becomes pronounced.
People went from agriculture into industry, and from industry into
services, with their standard of living going ever upward based on increasing
real wages and success in the marketplace.
The market economy has worked well, and the trade cycle has
indeed, contrary to socialist analysis, had other explanations rooted in
monetary fluctuations. The fact that
there will be a distribution problem in the future does not validate two
centuries of carping criticism of an institution that has served humanity so
well.
Major problem areas in classical liberal thinking
My original intent was to examine critically a wide
range of concepts that come up in market theory, but so scattered a review
would be more appropriate to a general treatise on economic and social
thought. What we need to do here is not
to wander afield but to retain our focus on the crisis that will be caused by
the changes taking place in today's world.
This dictates a more limited selection.
The insufficiency
of the analysis of the "act of exchange."
Remember that the "act of
exchange" (also called "the transaction") is a key building
block in market theory, something from which all else grows. An analogy to the cells of the body is
apt. What is being talked about is a
voluntary transaction that is entered into because all parties are motivated by
the prospect, as they see it, of bettering their situation. All parties win.
My criticism of the act of exchange
won't be intended to diminish our understanding of its vital role in a free
society, where voluntary relationships prevail in contrast to a command
system. What I will be saying is that
the analysis of it hasn't been adequate and that the simple "each person
benefits" insight doesn't tell the whole story. A sophisticated analysis is much more
complex. Since "the
transaction" feeds into the "optimum allocation of resources"
concept to form an impenetrable closed system that bars other considerations,
it is valuable to pierce the over-simplified view of it that allows it to be so
easily used in that way.
What about the truism that "all
parties benefit?" No doubt in terms
of "net effect" they do (at least as they see it at the time of the
transaction; it is relevant, however, that somebody can easily look back later
and say "I really got taken on that one.") But let us consider the situation in which
there is "unequal bargaining power."
I mean the situation, so common in today's market (and nowhere nearly so
common in Adam Smith's day when individuals largely dealt with other
individuals), where one of the parties is able to spell out all of the
subsidiary terms of the contract on a "take it or leave it" basis? Often, the other party doesn't even read the
terms, much less bargain over them.
Let's say you find a farm tractor, or a computer, or a car, or a
dishwasher you like, and decide to buy it.
Will you work out with the seller the terms of the warranty? By no means.
As a lawyer I can tell you that it will have been written entirely by
the seller's legal and marketing departments, often with one eye out for
actually limiting, not increasing, the seller's liability and the other for
having something that sounds good when it can be said "this is
warranted."
It's too easy to set up a mental
image of "the transaction" as necessarily being what I will call an
"amply-negotiated" one. In an
important transaction between two well-organized parties, every detail of the
contract is worked out, negotiated, and renegotiated, until each side is
satisfied its needs are met in all particulars.
But such full consideration, amply advised by counsel, which is really
necessary for a contract to attract our admiration, isn't the model for the
typical transaction. And since it isn't,
the result in terms of "mutual satisfaction" is often far less than
the simple view of "the act of exchange" would give us to believe.
When I graduated from law school, I
rented an apartment in
Another weakness in the simple view
of the transaction is that it has for the most part been oblivious to the
legal, institutional and cultural prerequisites of satisfactory
transactions. Most people don't know it,
but the wonderful storyteller Jack London was a revolutionary socialist. In his socialist novel The Iron Heel a
century ago, he made a devastating anti-capitalist point by telling about a man
who, though described as a fine worker, lost his arm in an industrial accident
because of a momentary lapse of care.
Unable to perform the work, he lost his job. There was no insurance, and when the man sued
the company to try to recover something, he ran into highly capable corporate
attorneys who were able to invoke all of the defenses available under common
law negligence theory (the absence of the employer's negligence, the worker's
assumption of risk, and contributory negligence).
The point is that the employment
relationship was voluntary and an act of exchange in which both parties
benefited -- but that it was nevertheless profoundly insufficient to see to the
most fundamental needs of one of the parties.
The world cried out for greater affluence and more sophisticated market
development so that insurance could become an auxiliary to the employment
relation to cover industrial accident.
The "transaction" needed plug-in institutions, something that
the theory of the "act of exchange" never sees the need to talk
about.
This is an important criticism of
the theory, which I cite in order to encourage an expansion of the
thinking. But it is valuable at the same
time to keep these issues in perspective.
Otto von Bismarck introduced "workman's compensation" (now
called "workers' compensation") into late-nineteenth century
A final criticism of the theory of
the transaction is that it doesn't look beyond the parties themselves to
account for the entire setting. It sees
a broader picture to the extent that it envisions peoples' linking transactions
together to form a dynamic economy, but it has no willingness to see
detrimental effects that the particular circumstances of trade may bring to a
country's well-being. To avoid
acknowledging such effects, it prefers to see the act of exchange atomistically
as exclusively a matter between the parties.
This dropping of context has been especially important in the
long-standing "Free Trade vs. Protection" debate. I'll talk about this in detail later in this
chapter when I examine the laissez-faire view that "free trade
[like any act of exchange] is always beneficial."
The insistence that
wages are tied to productivity
It's a truism that if there's no
output to be sold, there is nothing from which to pay wages. If productivity goes down, the sum of wages
paid out will have to go down, too, unless investors or creditors pump in money
to sustain a firm on what would have to be a temporary basis, contingent upon
things turning around.
It is also true under theoretical
model-related conditions in a free market that if productivity goes up and yet wages
stay the same, profits to the business will rise; that this will attract a flow
of other capital, always on the lookout for profit opportunities, into the
industry to compete for the profit; and that that will create more demand for
the pool of workers, bidding wages up (if the size of the worker-pool remains
roughly the same). This is all standard
economic theory, which postulates a constant tendency toward re-adjustment
within a marketplace in response to opportunities. You'll notice that wages do go up in response
to the increase in productivity.
The truisms of the preceding two
paragraphs are what give rise to the economic maxim that wages are tied to
productivity. We see it said frequently
in economic literature. Mark Skousen in The
Freeman says that "productivity is the key to rising or falling
wages. Many years ago, F. A.
Harper...wrote a grand little book entitled Why Wages Rise... He
demonstrated that...‘Higher wages come from increased output per hour of
work.' Ludwig von Mises adds, ‘if you
increase capital, you increase the marginal productivity of labor, and the
effect will be that real wages will rise.'"[4] Hans Sennholz writes that "working
conditions and wage rates depend on labor productivity, which is a direct
function of the stock of capital invested per worker."[5] Paul Krugman says in the Harvard Business
Review that "one last assertion that may bother some readers is that
wages automatically rise with productivity.
Is this realistic? Yes. Economic history offers no example of a
country that experienced long-term productivity growth without a roughly equal
rise in real wages."[6]
So here we have it. The theory is presented as
"realistic," meaning that it describes the actual situation "on
the ground." But you will notice
that the theory contains certain factual predicates, assumptions that must be
met for the theory to apply. One of
these is that capital will flow to the increased profit opportunity, expanding
the amount of capital invested per worker and bidding up wages. Another is that the number of people in the
pool of potential workers remains approximately the same as it was before
(i.e., that the supply of labor wasn't changing as the demand for it increased). Economic theory has to make such assumptions
for its analysis. One of its key
concepts is ceteris paribus, the expressed assumption that
"everything else [other than the variable that is being changed] remains
the same."
How do these factual predicates fare
in today's world? We certainly have the
first one--the ready mobility of capital to move toward any profit
opportunity. That is one of the more
salient features of the global economy, with its worldwide finance (if we
ignore, which seems justified in the context of the general point, the many
obstructions to total mobility that exist in many countries).
We just as certainly don't have the
second one. The more improvements in
communications and transportation make labor markets global, not local, the
more there will be a vast expansion in the labor pool in both skilled and
unskilled areas. Again, I will reiterate
that we are "just at the beginning" of this, and so far have barely
seen the effects. The day is rapidly
approaching, though, when an accountant in
Moreover, we face a new
phenomenon. As capital flows in, the
theory says, it will create more demand for labor, so that wages will be bid
up. Does this take into account that so much
of the emerging technology is precisely non-labor-intensive, actually decreasing
by leaps and bounds the demand for labor?
Obviously not. Again, it's one of
those ceteris paribus things. The
conclusions don't follow if givens don't stay givens. There is nothing wrong with the theory, which
says "here is what will happen if certain conditions are present"; it
is the application of it that blithely assumes the existence of those
conditions that is deficient.
The fallacy of the
"optimum allocation of resources" linchpin
Now we come to perhaps the most
important concept, the one that is the linchpin of the entire closed system
since it provides the sweeping value judgment that validates the outcomes that
arise from the laissez-faire market.
This, as you know, is the claim that the millions of acts of exchange
that constitute the marketplace make an "optimum allocation of
resources." I told of this concept
in the preceding chapter, and quoted from prominent market theorists to show
that what is meant is not just a technical meaning of "optimum," but
a claim that the allocation of resources (and of everything that follows by way
of incomes, wages, social position, etc.) in a market economy is the
"best" allocation. I said that
this conclusion results from a logical fallacy, which I didn't spell out at
that time but left for discussion now.
You will recall that the claim is a
value judgment that is thought to follow from the point that "consumers
are sovereign, since it is their demand that entrepreneurs have to respond to
to make a profit." I quoted Mises
as saying, "to assign to everybody his proper place in society is the task
of the consumers." In that earlier
discussion, we did notice, by way of criticism, that this slips a value
judgment into a body of thought that aspires to be a purely descriptive
science. That is serious enough, but we
have yet to come to the logical fallacy that nullifies the entire point.
To avoid misunderstanding, I should
point out that I, too, have favored an allocation of resources and of social
position on the basis of consumer choices.
I haven't based this conclusion on the ground that that allocation is
necessarily best as an allocation. Whether
it is best or not, I as a classical liberal have supported it because it is the
allocation that arises out of freedom. I
don't favor individual liberty and the act of voluntary exchange because it
produces the best allocation of resources; rather, I favor the allocation of
resources because it is the one produced by a free process.
When a market theorist says the
sovereignty of the consumers makes the optimum allocation of resources, he is
making what is called "a holistic argument." Ludwig von Mises himself is the one who
argued most persuasively, so far as I know, against "holistic"
concepts. In Chapter VIII of his
monumental treatise Human Action, he has a section of several pages with
the heading "A Critique of the Holistic and Metaphysical View of
Society." In the following passage
he is talking about the imputation of distinct existence to "society"
as a collective whole separate from the individuals who make it up:
The
individual lives and acts within society.
But society is nothing but the combination of individuals for
cooperative effort. It exists nowhere
else than in the actions of individual men.
It is a delusion to search for it outside the actions of
individuals. To speak of a society's
autonomous and independent existence, of its life, its soul, and its actions is
a metaphor which can easily lead to crass errors.[7]
A concept like "society"
is useful in many ways, but it contains what we might call "the fallacy of
wrongly imputed consciousness" if it is used in a way that attributes
consciousness and decision-making to the abstraction as an aggregate. It is true that a society can make decisions
through individuals who are its selected representatives. But the aggregate itself isn't a conscious
thing. To talk as though it is is to
treat it "holistically," asserting that the sum is different from the
particles that make it up.
(Interestingly, a human being is a validly holistic creature,
since a person does have consciousness and is in that way more than
simply the cells that make him up. But
it is a metaphor to speak of society as having its own consciousness.)
The concept of "the
consumer" is the same. Consumers
taken as an aggregate don't have a consciousness; only consumers as individuals
do. It is odd that Mises didn't see
this, since he saw it so powerfully in other connections.
Now, let's ask: from whence can
value judgments come? The answer is:
only from a conscious being. Inanimate
objects such as rocks, water, clouds, and sky don't make value judgments. Nothing is good or bad, desirable or
undesirable, to a rock. A God, in most
conceptions of God, is a consciousness, and so can decide what is good
and bad, what is to be preferred and what is not. But note this: between the consciousness of a
God and of individual people, there are no consciousnesses. Many thinkers who don't want to base their
value judgments on a God feel very uncomfortable about attributing them to no
stronger a reed than individual preferences, and so search for some source of
values below God but above individuals.
All efforts of this kind demand attributing consciousness to some
metaphorical entity that doesn't really possess consciousness. I wrote an article years ago pointing this
out about the philosophies of Victor Frankl, Abraham Maslow and Nathaniel
Branden, who otherwise are three very distinct thinkers.[8]
Can "consumers," taken
holistically, make a value judgment? Are they collectively a consciousness that
can decide what is "best"? Of
course not. The aggregate is the sum of
countless individual consumers, each making decisions about what is best in his
own case.
Then let's notice that from the
perspective of each one of these individuals as a consumer, the person
may or may not think the allocation of resources flowing from the total
economy is the best possible. Almost
certainly he would prefer an allocation that would bestow more resources on him
and the things he cares about. Actually,
in spending his own money, he has not given the slightest thought to the
economy's total allocation; he has only paid attention to his own little corner
of the world.
Then let's think of each individual
as a philosopher or social observer.
Will he then think, as he looks out upon the sum total of what is
resulting from economic transactions, that what he sees is entirely to his
liking in light of his philosophy?
Probably no one, including Mises himself, would be completely satisfied
from that perspective. There are many
things consumed, such as excessive alcohol, dope, pornography, or
what-have-you, that hardly square with anyone's idea of what's
"best," even with those who engage in the consumption (if asked in
their sober moments). Indeed, people
from competing philosophies and cultures bring very different preferences to
bear on what they would like to see happen.
It is for them more than just a matter of individual preference or not
liking certain features such as drug consumption.
If "consumers" as a
metaphor can't judge, and individuals as consumers aren't judging, and
individuals as philosophers find aspects to take issue with, and we aren't
premising the whole "optimum allocation" claim on a judgment made by
God, what is there to the claim that a market economy makes the best possible
allocation of resources? Nothing. The most we can justifiably say is, as I said
above, that "I'll accept the allocation, with a few exceptions as provided
by law, since it is what resulted from a free process." The trouble with this, and the reason the
closed system of market theory has so eagerly accepted the "optimum
allocation" argument in its place, is that it has no metaphysical
pretensions, and hence much less rhetorical power.
I pointed all this out in my book Burkean
Conservatism and Classical Liberalism in 1979,[9]
but with considerable regret, since I knew I was being too honest for the good
(in terms of persuasiveness) of the ideology I myself favored. The only reason I did so was that I have
always believed intellectual soundness must have priority, and that social
philosophies are best served intellectually, though perhaps not in the
polemical arena, by adhering to it. I
still feel that way, but I now have an additional reason to bring up the
critique: that we, and most especially those of us who are classical liberals,
have got to see our way past the closed system if we are to address the
problems of the onrushing future.
Socialists, of course, have never
accepted that the allocation of resources effected by a market economy is
ideal. They consistently urge a
different set of priorities. Given that
difference, you would think they would have raised the criticism I have made
here, pointing to the conceptual flaw.
If any of them has, I am not aware of it. In so competitive a world ideologically, it
is amazing that even ones opponents' concepts often go unexamined. Maybe it is because people don't pay all that
much attention to what people who differ with them are saying.
Later in this chapter I will refer
to Friedrich List's early-nineteenth century criticism of Free Trade
theory. It is worth noting that he
didn't see the sense of the argument that when people strive to further their
own interests, they "always further the interests of the
community." He cited several
counter-examples where it just wasn't true.[10]
The need to qualify
property rights theory
In the preceding chapter, I talked
about "private property" as a major element in the classical liberal
philosophy and about the varied theories relating to its origin and
justification. It is a feature that has
great utility to a philosophy that wants some sort of individual autonomy and
significant limits on the power of the State.
A widely diffuse holding of property provides the stuff with which
individuals can act, and the diffusion itself means that the State doesn't have
a centralized grip on one of the main things that is pivotal to peoples' ability
to exist.
One of my good friends who is
strongly pro-market has urged me on several occasions to "remind people of
the importance of private property."
His admonition means that he is not losing sight of fundamentals. I will be curious, though, to see whether he
likes the discussion I am about to make of one very important question about
private property. This is the question:
whether
the claim to it by the owner is properly (i.e., in the context of the
philosophy of a free society as best formulated) to be considered as absolute;
or whether, on the other hand, the ownership shouldn't be seen as often subject
to a rightful claim, for at least part of its value, on behalf of the
community.
Even to ask such a question is heretical
within classical liberal thought. For a
century and a half, any admission of a qualified nature of private property has
been thought to create a disastrous loophole through which the Left could
attack the entire system of private ownership.
I agree that this defensive posture has almost certainly been necessary
for precisely that reason (although later here I will indicate why this may
arguably have been very damaging to classical liberalism). It has seemed better from a classical liberal
point of view to defend the institution entirely, not giving an inch. Henry George and his followers disagreed, but
they have remained in a minority within free-market thinking.
The problem, as the Georgists point
out, is that this total defense hasn't been fully sound. And what is more important now, it will
become far less so under the onrushing world conditions. If conservatives, libertarians, and classical
liberals are to adapt in a way that will allow their point of view to survive
and that will preserve their primary values, they are going to have to revise
their view of property (including earnings), doing so in a way that is
intellectually defensible.
Henry George. Let's begin with George's insights a century
ago, since they voice much of what I have in mind and will get us started. The first thing to notice is that George was
a devout free trader and classical liberal.
Most of his writing gave powerful reiteration to the various points of
market theory. He was a crusader for
Free Trade and against Protectionism (which was the main issue of political
economy in the nineteenth century, just as it is becoming again). His intellectual method was that of a moral
purist, even though I notice that he mixed into this many arguments that were
made on purely empirical, utilitarian grounds.
Any free market theorist who hasn't already done so will enjoy going
back and reading his books. They provide
a vigorous defense of the entire complex of ideas that make up classical
liberalism as we know it.
They do, that is, with one
exception. This has to do with his
perception that certain types of property come to their owners unearned, as
windfalls merely dropping into some peoples' laps from the fact that they live
among other people. Land is the
principal form of property of this type.
No human being has made the land, although improvements to the land are
another matter. The land per se
comes to have value because of the growth of human population, not because of a
creative act by anybody. Since this is
so, George saw no reason why land should not be a resource of the whole
population, rented out to individuals who want to use and improve it. This rent would then create a fund of money
that could be used for a variety of projects that would benefit everybody, as
well as for placing a floor under all members of the community to keep them
from poverty. In the private property
system as it has been known, the owners of property enjoyed an enormous
privilege, especially in a predominantly agricultural society such as existed
until a few years ago, while those who owned none of it had to toil for
everything they got. Such a thing places
a serious stain on the property-market philosophy, since it isn't fundamentally
just.
George quoted Herbert Spencer, whose
credentials as an individualist philosopher are solid, as agreeing with him;
and he said he was merely picking up from the French thinkers Quesnay and
Turgot, whose ideas fed into Adam Smith's.
Rather than include a number of direct quotes from George here, I am
including them in the endnote.[11]
It is significant that he thought
the same applied to minerals: "...the ground values of great cities and
mineral deposits are due to the general growth of the population"
[emphasis added].[12] Natural resources are not created by anyone's
effort. They take on value by virtue of
the presence of people who will find them useful, and the value increases as
population grows and as an industrial system and way of life come to be centered
upon them. George would have the community
charge a rent equivalent to this value.
In addition, of course, a major portion of resources' value is
attributable to other things traceable to specific effort -- i.e., the
invention that discovers their usefulness, and the capital and labor that go
into extracting and applying them.
These, pursuant to George's logic, would not be charged a rent, since
they are not a windfall but the product of someone's thought or effort.
These were the insights held by
George and several other major classical liberals. It may be an eye-opener to some that it has
not only been socialists who have believed that these types of property should
belong to the community as a whole. George
felt that the system of private property would actually be stronger, and certainly
much more morally justified, if it did not include a privileged position for
some.
As I have said, most classical
liberals have resisted this, preferring an across-the-board system of private
property, without any exceptions that could be expanded to destroy the system
as a whole. That resistance, though I've
thought it was best, has had its costs, probably the major one of which is that
the market has been left to seem "heartless" to those who haven't
fared well in it. Labor has had a
certain affinity to capitalism because workers in general aspire to be among
the middle class, but the chance for a bond of alliance and sympathy between
those who have done the drudgery and others has been surrendered. By not following George, classical liberalism
set itself up to allow socialism to "occupy the moral high ground"
throughout the twentieth century. As I
ponder this, I am by no means certain I have been wise in following the
majority classical liberal position.
Whatever was wisest in the past, it
is rapidly becoming clear that classical liberalism must immediately move to
George's position -- and indeed to an expanded view of it. When work is displaced and either vast
unemployment or marginalized work results, people are going to be crying for a
place at the table; and they will have been knocked away not because of any
flaw in their character or lack of effort on their part, but because of vast
forces over which they have no control.
Their need is, however, only half of it: the second half is that under
the new technology there will be some people reaping immense wealth, only a
certain fraction of which they will have created through their own
contributions. This is the stuff of
which revolutions are made. Notice, too,
that it would be a rotten version of classical liberalism that would defend
it. This would be a version that by
clinging to the closed system I have described under radically changed
circumstances will have forfeited its tie to the main classical liberal
values. If the "act of exchange"
and the resulting allocation of resources remain classical liberalism's central
criteria under the new circumstances, it will be totally inappropriate. The act of exchange ought to remain central
to the productive economy, but the distribution of the product needs to be
qualified by the insight into what has been earned and what has not.
Why do I say that those who reap
immense compensation from the new technology will not have earned all of that
return? (In the closed system, they will
be said to have, on the simple ground that it is coming to them through
contract, reflecting acts of exchange.
But it's that way of looking at it that has to be seriously
qualified.) I say it because each person
makes, at best, only a relatively small, incremental addition to a technology
that has been built up, like a coral reef, through the efforts and intellectual
contributions of countless predecessors.
Imagine a young person in the year 2030 who works as a technical specialist
in some advanced technology, being so good at it that the rewards are extremely
high. Everything he does will be
standing on the shoulders of people developing computers, biotechnology,
robotics, genetics, etc., today, before he is even born. What he brings to it will be valuable, no
doubt, but it will be creating only part of the value. Humanity itself will have created by far the
largest part. To some considerable
extent, this has always been true. It
could be overlooked for the sake of individual autonomy so long as "the
system worked" to provide opportunity for everybody. It must not be overlooked at such time as the
system comes no longer to function acceptably in that sense.
I'm a person who has always worked
for such attainments as have come my way.
I've seen others who haven't applied themselves so diligently who
haven't done as well. So I have a strong
moral conviction that what people get, they earn. This change in perspective, acknowledging that
a significant part of someone's success is derived from what other people have
done or from the whole context of developed community, isn't one that I would
naturally find congenial. But isn't it
true? And isn't it essential? Especially as the displacement creeps in upon
us?
The implications of this insight are
extensive. It means that there will be
no moral crime, no violation of private property or of contractually earned
income, if a community treats a significant amount of the economic product of
the new technology as a common resource to be used or distributed for the good
of all. It means, too, that there can
be, as George wanted, a full return to people for their own labor,
intelligence, or capital. If we wish to
maintain a thriving competitive market economy, the reward to those
contributions will be necessary and rightful.
That reward simply won't be the entire return, but something more
commensurate to the person's own input.
In A Restatement of Economic Liberalism (1988), Samuel Brittan,
who centers his thinking on Hayek, has already thought along these lines,
although without seeing the coming displacement of labor as the reason for its
necessity.[13]
There is no way the exact proportion
between what humanity has contributed and the individual has contributed will
be determinable. This fact shouldn't be
too great an objection; the division can be made in keeping with the criteria
of the "rule of law -- i.e., according to established rules known in
advance and applicable to everybody. You
recall how in Chapter 9 I cited figures to the effect that in 1980 executive
compensation had been 30 to 40 times that of the firms' average workers,
whereas by 1990 this had grown to a difference of 130-140 to 1? Let us say that tax law in the United States
were to provide that the highest management person in a firm should be entitled
to thirty or even fifty times the average earnings (or some multiple of the
earnings of the lowest-paid employee), but no more; and that the rest should be
taxed away. Would that be unjust? Would it be something that "no market
economy can live with?"
Hardly. Enormous incentive would
still be there for executive leadership.
Whether that leadership would abandon the
The same can be said for everyone
who makes a vast fortune in today's (and especially tomorrow's) mass
market. If a professional football
player, or a movie actress, or a rock star, makes $20 million dollars in a
year, how much of that is due to the person's own ability and contribution, and
how much of it is because technology has evolved to the point at which
communication makes available a worldwide audience? Did the ballplayer, actress or rock star
create that system of worldwide communication, with its fiber optics and
satellites? No. One is tempted to say, only half
tongue-in-cheek, that Bill Gates did; but even that would be an immense
simplification, because Gates is himself standing on the shoulders of countless
ingenious people like himself.
If I may add still another shocking
heresy (and a heresy to no one more than to myself), it is to say that this
fully justifies a system of strongly progressive taxation. Once the non-labor-intensive technology has
more fully come in, if some people become enormously wealthy and others have no
or only very meager earnings, there should be no objection from a classical
liberal point of view to taxing away a good portion of the high earnings to
make provision for everyone in the society.
To the objection that "that would run afoul of, maybe even totally
destroy, the sanctity of earned income and private property," it must be
answered that there is no alternative. A
market economy going forward to new innovative heights, with free individuals
employed within it through contract, all within a setting in which everyone in
the society shares in the prosperity and has purchasing power with which to buy
the products--all this is much more compatible with classical liberal
aspirations than for the market and individual liberty to drown in a sea of
opprobrium and revolution.
I imagine that many of my friends
will doubt whether the displacement and polarization will actually come
about. They may be strongly inclined to
think that the early chapters of this book overstated what is going to
happen. (I hope this expectation of
continued normalcy won't be because of any willingness to accept a growing
impoverishment for the less intelligent half, or some other fraction, of
mankind; but we know that such an insensitivity is altogether possible, since
it has been taken as normal and appropriate in countless societies already. I shouldn't think that any true classical
liberal would build his feeling of normalcy on a lack of empathy. There is reason to fear, though, that some of
those who are entranced by the closed system of market thinking may easily talk
themselves into doing precisely that, since they are in a mental box that is
hard to escape. It is a part of all
classical liberal thinking, of course, to accept the inequalities that flow
from the normal working of the market.)
Let's assume, then, for sake of argument, that the new technology does
not radically alter the shape of things, that most people stay employed without
seeming to become severely marginalized.
What then? Will not much of what
I have just said, building upon Henry George, still be true? Doesn't it provide a rationale for making the
market society "more just"? Do
we have to be socialists to think so?
The questions pretty much answer themselves.
In a later chapter I will discuss
ways to shift to a "shared market economy" in which much of the stock
in business is owned by the entire spectrum of people in the society, while a
competitive world market continues to go forward with the participants in it
making a fortune (albeit limited as I've just indicated). I will suggest ways this can be done that
will least disturb the current system of income and property. Progressive taxation to accomplish that
spread of ownership will be justifiable, but may not be all that necessary.
Before I conclude, a question
remains about how the "unearned value" of something like land or minerals
can be taxed away in today's society without in effect expropriating the
present owners. Those owners have paid
for the property when they have acquired it, so the unearned value has gone to
the sellers (and actually to their predecessors in a long chain of title). In applying George's point, it would be
enough just to tax the unearned increment that arises in the future. Assume, for example, that someone buys land
for $100,000 and it increases in value to $200,000 as the city grows up around
it, and that none of that increase is due to improvements made on the
land. This increase, as adjusted for the
inflation that will have occurred during the period the increase in value has
occurred, could (and should) be
considered as accruing to the community as a whole. There is no justification for taking the
portion of the value of the land represented by the purchase price.
The insistence that
international Free Trade is always beneficial
One of the great benefits of a
market economy, according to economic theory, is that the act of exchange and
search for profit lead to an elaborate division of labor. The continuing tendency is toward everyone's
doing what he can do at lowest cost, while others gravitate toward what they
can do most cheaply. If firms in one
country are able to make shirts most efficiently, and farmers in another
country are best at growing papayas, both will do the thing for which they are
best suited. And, as David Ricardo
argued with his "law of comparative cost," this will occur even if
one set of producers is better at everything than the others; it will
profit the former more to leave the things they do less efficiently to the
latter, even though they're better even at them than the latter. Everybody will
have something to do, and by the division of labor efficiency will result
compared to a situation in which everyone tries to be a "Jack of all
trades" and do everything.
Adam Smith expressed this in a
famous passage:
It is
the maxim of every prudent master of a family, never to attempt to make at home
what it will cost him more to make than to buy.
The
What is
prudence in the conduct of every private family, can scarce be folly in that of
a great kingdom. If a foreign country can
supply us with a commodity cheaper than we ourselves can make it, better buy it
of them with some part of the produce of our industry, employed in a way in
which we have some advantage.[14]
When the efficiencies of the
division of labor are added to the notion of the "optimum allocation of
resources," what results is an abiding conviction that any governmental
intervention into the process detracts from human well-being rather than adding
to it. This amounts to a powerful
argument for laissez-faire. When
applied in the international arena, it is a powerful argument for Free
Trade. Any attempt for governments to
impede the flow of goods and services will be retrogressive. Likewise, any effort to develop trades or
crafts within a given nation that is not in line with "buying most
cheaply" is thought wasteful.
This view sees important parts of
the truth. The division of labor is
highly beneficial, just as described.
But, as with most else in the laissez-faire ideology, it is not
the whole truth. There are at
least three reasons we shouldn't accept the view as part of a closed system
that allows of no (or only minor) departures:
.
That Free Trade looks at the process as a whole, but overlooks the
aspirations of various of the parts, which if developed might eventually
benefit the whole more than if they are not developed. According to Adam Smith's principle, it is
best to acquire something from the cheapest source, and that will often be from
someone other than yourself. Today, if
the Taiwanese produce VCRs most cheaply, by all means buy from them; ones own
industry can do something more profitable even if this means losing all
knowledge or other capacity needed for making VCRs.
In doing my reading to prepare for
this book, I was amazed to find that the early nineteenth-century German
Friedrich List, who is almost always put down dismissively in market theory as
the principal apologist for "Protectionism," actually had a much more
sophisticated understanding of international trade than did Smith or
Ricardo. It also surprised me that List
was no apologist for statism, but was actually quite a thoughtful classical
liberal. Before we go on, it will be
worthwhile for us to become more acquainted with him. As I did with Henry George's views, I'll provide
a summary in the text and leave extensive quotation to the endnotes.
List's classical liberalism shone
through all his work, except that it was a liberalism that saw the individual,
and trade itself, as part of a free community.
Far from being a statist, he said that protection (such as tariffs) is
only good if it is in combination with progressive civilization and free
institutions. By no means did he fully
reject the Free Trade idea, although he concerned himself with how each nation
fared in the course of it. He was
strongly favorable to individual liberty, but again qualified one value by
keeping others in mind: individual liberty flowers as part of a well-ordered
free society. List strongly opposed
socialism, such as was then presented in the writings of Saint-Simon and
Fourier, as the annihilation of individual liberty.[15]
A certain J. S. Nicholson wrote the
introduction to the 1904 edition of List's work. Nicholson sums up one of List's central
observations about trade: "To buy at the time in the cheapest market and
to sell in the dearest may not always be the wisest national policy. The distinction between present and future
advantage from the national standpoint is fundamental throughout the whole work."[16] A key problem with Smith and Ricardo is that
they looked only to what is advantageous at present, which is a
remarkably over-simplified perspective.
People who read them naturally assume that an infinite series of moments
in which a person achieves advantage must add up to long-term advantage. But that isn't necessarily so.
Let's go back to Adam Smith's
example of the tailor and the shoemaker.
The tailor, he says, should not himself make shoes, but buy them from
the shoemaker, who can make them for less than he can. But what if the tailor thinks he could become
a better shoemaker than the shoemaker now is, which if true means they should
trade places? To accomplish this
development of his newly-aspired-to skill, he has to set out to make some
shoes, even if at first they aren't as cheap as he could buy from the present
shoemaker. Applying this to a whole
country, the given situation of "who's best at something" will remain
static, as though it were set in cement, unless some people break out of the
mold to develop new skills at which they haven't been the most capable
before.
This is the basis for the
"infant industry" exception to the Free Trade principle. It should, however, be understood as going
far beyond its traditional meaning.
Those who are second-best had better continue and work on their
capability rather than drop out of a market altogether if they hope ever to
become the best. To turn markets
permanently over to those who are now the best is to insulate them from
competition and to atrophy the abilities of the others. The retention and development of capability
will also depend upon the societal and cultural context in which the attempt is
made, and is not entirely a matter of individual effort. The many conditions bearing on "who can
produce something most cheaply" can change over time, making one source
the cheapest now, another the cheapest later.
This is especially true in today's world of hyperspeed-changing
technology and world markets. Many competitors
need to stay well-prepared right on the fringe, rather than to surrender their
skills and their productive plant. They
even have the potential of contributing to technological innovation as they
strive to leap over the existing leaders.
Seen in light of these things, the "infant industry"
phenomenon takes on a permanent and widespread significance, and is not just a
"one shot" development of a nation's industry.
There has been a growing recognition
in economic theory that this is so.[17] Stephen S. Cohen and John Zysman ask
"why can't the
The dynamic view of comparative
advantage--that competitive standing changes over time if some of those who are
not the cheapest producer retain their capacity to compete -- is a much more
sophisticated view of the market than the static view. That the thinking should have stayed at that
unsophisticated level is typical of the closed-system market rationale. The static concept actually works in favor of
less innovation, less competition, less ultimate consumer satisfaction. And it arrives at that because it looks no
further than to a simplistic "truism": that "what is beneficial
to the parties in a string of transactions must be best for long-term benefit."
This realization is not just
important for economics and efficient productivity. It leads on to an understanding that given
peoples and nations are not necessarily well-advised to settle for being
an increasingly remote second-best in things that they consider important to
themselves. This is important to culture
and nationality (things that are played down in classical theory in part
because they are thought to run counter to a developed division of labor). If the iron logic of static comparative
advantage loses its grip, people find themselves able to think in terms of
their own preferences about their development as a people or a nation. Cultural preferences can come in
without being tagged as economically harmful.
List was primarily concerned with
how his own people, the Germans, could amount to anything as a productive,
talented people if "buying cheapest" from the British, who already
had a magnificently developed industrial and commercial economy, was, at every
point along the way, the sole criterion.
Many nineteenth-century Americans
felt the same concern. Again, if
"buying cheapest" from