Capitalism, Socialism and other terms to be avoided

Capitalism is a term coined, or at least popularised, by the enemies of the system they labelled capitalism. It was understood from the start to have a pejorative connotation and the term’s use is still dominated by that pejorative connotation. Despite the efforts of supporters of capitalism-so-labelled to reclaim capitalism as a positive, or at least neutral, label; particularly based on historical experience.

One should always be wary of any term where the pejorative element built in. Even if you somehow do not let the pejorative element infect your own thought, it is going to be there in the mind of many, often most, readers.

Socialism is a term coined, or at least popularised, by the proponents of the system they labelled socialism. It was understood from the start to have a positive, indeed overwhelmingly positive, connotation and its use is still dominated in many quarters by that positive connotation. This despite the efforts of the opponents of “socialism” to give it thoroughly negative connotations, particularly based on historical experience.

Capitalism has at least has some vague consensus on what the term means. Socialism does not even have that, as recent American politics has demonstrated, thanks to the attempts of Sen. Bernie Sanders, self-proclaimed socialist, to win the Democratic Party nomination for President of the United States.

Capitalism has some vague consensus regarding what the term means because almost everyone agrees that there is currently, and has been, a lot of it. Apart from some labelling of command economies as state capitalism, there is a general consensus that we more or less know capitalism when we see it.

There is no such consensus around socialism, mainly because socialists typically want to dissociate the term from every command economy that has ever operated, or patent embarrassments such as Venezuela. Conversely, the enemies of socialism what to hang every command economy that has ever operated, and embarrassments such as Venezuela, on any use of socialism.

If socialism has never been “really” tried, then it can never have failed. Or if there is this new form or conception of socialism that has never been tried, then clearly it has nothing to do with any command economy that has ever operated, or any embarrassment such as Venezuela.

Of course, one might suspect that this attempt to constantly separate socialism from history might be a bit of a warning sign. Especially if folk want to play the game of comparing the ideal of socialism (carefully separated from history) with the practice of capitalism (often using carefully edited, selected or re-construed bits of history).

For me, there is a simple solution. Avoid, as much as possible, using either term. Then you can at least aspire to some analytical rigour.

Other possibilities

That does not remotely foreclose considering new social possibilities. It just means trying to do so with some analytical precision without dragging along the deadweight of fraught ideological conflicts.

Moreover, contemplating the social possibilities that do not seem to be much explored can be a very useful exercise. To consider the dogs that don’t bark in the night.

If not separating workers from the product of their labour, or simply having the workers in charge, is such a fine thing, one might think that would be entirely possible to set up worker-controlled companies. Then the non-alienated, self-controlled workers might be expected to produce so well that they can outcompete capital-owned firms in the market place.

Of course, if your notion of alienation covers any attempt to produce for exchange, then even in a worker-controlled firm workers will be alienated from their labour. Of course, not producing for exchange then reduces Homo sapiens to the economic level of every other species on the planet. One might consider the possibility that producing for exchange permits the scaling up of production and consumption far more extensively or efficiently than any other way of dealing with the issues of subsistence and surplus. So, perhaps giving up an advantage that may predate our emergence as a species is not a good move.

Let’s assume that something we have been doing for maybe 320,000 years or so (and certainly for 200,000 years), exchanging things we have produced, is not some alienating disaster, and go with worker control is good. Worker-controlled firms is still an entirely possible option. So, why don’t we see far more of such?

What is a firm? A firm is a mechanism for lowering transaction costs and dealing with risk. Do we want to dump risk on to labour or on to capital? Surely, on to capital. So, a labour-controlled firm is going to make the decisions, and is going to need capital, but will also want to dump the risk onto the holders of capital.

So, which firms are going to operate better? Those where control ultimately rests with those who have to deal with the risks or those where control ultimately rests with those who get to systematically dump risk on to others?

Clearly the former. The owners of a capital-owned firm get the residual income from the firm because they also cover the residual losses from the firms.

Moreover, when we say “worker controlled”, which workers? The original workers presumably. But what if you want to hire new staff, do they get the same control rights? Suppose the firm has too many workers, it needs to lay off staff, how do you decide that? What are the dynamics of a group of workers who every so often may have to vote on who gets to be ejected from the firm?

Capital-owned firms solve these problems by essentially having a market in control. The more you are willing to buy in, the more control you have. If you want to leave, you sell your control rights. Decisions about hiring and firing are left with those who are managing the firm. (And firms with mechanisms for workers to become shareholders are still capital-owned firms.)

What about coordination issues as a worker-controlled firm gets bigger?

At this point, we can see why the somewhat Darwinian selection processes of markets select for capital-owned firms and not worker-controlled ones. It is not that worker-controlled firms are illegal, it is that they represent a risk-and-decision profile that no one (including workers) are likely to invest in. The closest we get are partnerships, and they represent human-capital firms, not worker-control.

And about the state

Consider again the question: which firms are going to operate better? Those where control ultimately rests with those who have to deal with the risks or those where control ultimately rests with those who get to dump the risk on to others? Here’s something to conjure with. Is not: a structure where control ultimately rests with those who get to dump the risk on to others, a pretty good description of the state?

People (often with good reason) complain about the socialisation of losses and the privatisation of profits. But that is precisely what an awful lot of state politics is about. Shifting benefits to one group and costs, including risks, to another because the coercive power of the state makes that a game that can be played (and is obviously one with significant potential pay-offs). When one sees risks being shifted from capital to labour, there is generally some state action underlying it.

This is why the term state capitalism has a little bit of purchase behind it. If you squint just right.

In a command economy, the state owns all (or almost all) the capital. So, in a command economy, risk regularly gets dumped by the capital-owning state on to labour. Including risks of mass starvation or environmental degradation. But that is not because capital owns the state, but because the state owns the capital.

Lenin, Stalin, Mao, etc. did not control the state due to their ownership of capital, they controlled the creation and use of capital due to their control of the state. To call such capitalist or capitalism is to get the causal drivers entirely the wrong way around.

So, yes, it is significant that state owns the capital in a command economy. It affects its patterns of behaviour and means there is no significant non-state control of surplus, so no significant basis of institutional resistance to the power of (those who control) the state. But the capital is entirely subordinate to the state. So, the society is not capitalist.

And we are back with avoiding the use of terms so weighed down with emotionally-laden connotations. Because, without those connotations, there would be no incentive to so badly mis-characterise the relevant social, political and economic dynamics.

Debt and Boom

The slogan for this post is: don't think debt, think safe assets.

(This post is partly provoked by this post by Paul Krugman responded to by Scott Sumner and by Marcus Nunes.)

In my Debt, Doom and Despair post I noted that a hugely debt-burdened post-Napoleonic Wars UK (where the national public debt was probably about 250% of GDP or about 25 times the revenue of the British government) went on to an amazing surge in population and mass prosperity.  (In fact, by far the most remarkable in all of human history up to that time.)

What if it was not a coincidence? What if the debt burden actually encouraged said surge?  After all, WWII left the British, Australian and US governments all highly indebted (at about 240%, 150% and 120% of GDP respectively) yet all experienced amazing postwar surges in population and prosperity. All surges marked by high rates of productivity increases from expanding technology and global trade.

One's persons debt is another person's asset.What were the British, US and Australian governments doing in running up such huge debts? They were creating a huge level of safe assets, given that none of these three governments have defaulted on their bonds, ever.  One reason why Britain went back on gold in 1925 at the pre-war (over-valued) parity was to "keep faith" with its bondholders.

So, those high levels of public debt were also creating high levels of income from safe assets. If you are, for example, 1815 Britain, and debt is 250% of GDP, then a significant amount of income, compared to total production, is flowing from said safe assets.

Expropriating risk managers
There are two basic things states do: they expropriate and they manage risk. The latter is necessary for the former and goes back to the origins of rulership--dead farmers cannot pay taxes.  In ibn Kaldun's definition, cited and admired by Ernest Gellner, government is:

an institution which prevents injustice other than such as it commits itself.

This the paradox of politics or the paradox of rulership--we need the state to protect us from social predators but the state itself is the most potentially dangerous of social predators. It is a paradox that can never be fixed, only managed more or less well.

One of the tricks of rulership, refined by medieval rulers such as Alfonso IX of Leon, and Edward I of England, is that, if you get consent for your taxation, you can do a higher level of taxation because it lowers the "resistance cost". Democratic welfare states have taken the consent-benefit trade-off up to record levels (for any non-patrimonial or totalitarian polities; i.e. for societies with any free element). Welfarism is the domestic aggrandisement of the expropriating state as imperialism is its external aggrandisement. (One of the ways we can tell that welfarism is, at least in part, an excuse for state aggrandisement is how weakly expenditure is tested against effectiveness in improving social outcomes; conversely if there is less inherent nobility in welfarism than appears, there were also positives in imperialism, albeit at wildly varying levels.)

But the public goods, and latterly welfare, provided by the state in return for implicit or explicit consent for its expropriations are overwhelmingly about risk-management. And risk management is a genuine service. Consider protection of life, person and property; or mitigating the risks of unemployment, sickness, disability, old age.

Balancing risks
For any given level of risk aversion by potential investors, creating a safe income stream raises the risk threshold for further investment. People will be more willing to tolerate higher levels of risk in their other investments.

Such as in highly uncertain investment in new technology. True, that leaves one open to asset booms and busts (pdf). Nevertheless, net economic outcome is likely to be a long term acceleration in productivity (pdf). And the surge in population and prosperity such involves.



[Read the rest at Skepticlawyer or at Critical Thinking Applied.]

Uncertainty, bubbles and business cycles

This is based on a comments I made here and here.

I don't believe the "Greenspan caused the housing bubble" argument, as it depended where you were in the US whether there was a housing (land) bubble and the US economy was not seriously hitting capacity limits prior to the Fed-caused NGDP crash.  But that asset prices will tend to be strong if people have strong income expectations, that I believe.  (Why this is regarded as a bad thing is a bit of a mystery.)  That technological innovation causes asset-price volatility (pdf) makes perfect sense too.

If folk are so worried about housing (land) bubbles, perhaps they should look at the supply constraints that are clearly a necessary element. But too many folk want the supply constraints, because it keeps the price of their housing land up.

But we cannot abolish uncertainty (see above about technological innovation to start with), or that how people frame uncertainty (what Keynes called "animal spirits") will be unstable because it will be vulnerable to new information. What we can do is work on reducing supply-side constraints (Eurozone, I am looking at you also) and anchor people's income expectations so that uncertainty becoming negatively framed is less likely to occur across all markets--expectations being how we deal with lack of information (and there is no information from the future).

Of course, if one takes uncertainty seriously, the Austrian theory of the business cycle becomes much less plausible (but so does not thinking markets are stupid on the "fool me once, shame on you; fool me twice, shame on me; fool me again and again in the same way, I must be a real idiot" principle).

Also, surely the reason folk cannot find a definitive relationship between uncertainty and economic activity (beyond the effects of poor income expectations), is that uncertainty can be framed positively or negatively.  (Implicitly) assuming that uncertainty is always framed negatively seems an unwarranted assumption to me. For, if you do so, technological innovation is always bad, since it must raise uncertainty.  I prefer the view that technological innovation generates asset-price volatility, since it raises uncertainty.

If you frame uncertainty positively, you rate the risk of loss as being much less than the risk of gain.  The loss asymmetry (firms care more about avoiding losses than getting profits) lacks "bite".   If you frame uncertainty negatively, things are in reverse, and loss asymmetry has lots of "bite".

In a world without uncertainty, growth is at potential.  But there are also no profits.  We never live in a world without uncertainty. We do live in a world where uncertainty generates volatility because how it is framed shifts due to being vulnerable to new information (uncertainty being the area where information is insufficient to calculate risks). So, bubbles will happen, at least to some degree.