http://www.atimes.com/atimes/Global_Economy/MK16Dj06.html
Nov 16, 201
The capitalist myth
By Dafydd Taylor
Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.
As the financial crisis rumbles on we are constantly told that what while there are a few problems, all the benefits of modernity are the unambiguous results of the capitalist system.
That the invisible hand famously documented by Adam Smith is what has brought us industrial progress from the factory system to the telegraph to the Internet. But in reality, the factory system inspired by Arkwright, more than a century before Henry Ford, grew up as a response to the effects of the Agricultural Revolution.
Vast pools of cheap labor created by the enclosure of common land coupled with mercantilist economic policies made especially effective by a growing empire allowed Britain to lead the process of industrialization. It was this interaction between state and private sector that was necessary for industrial development. These are lessons which may be lost to the West, but the current most economically successful country, China, takes heed.
Britain only adopted free trade as a policy in the later 19th century. By this time a fully industrialized nation seeking to defend an entrenched position, including limiting the development of competitors. The key driver for the development of the first electronic communications network, the telegraph, was the British Empire.
It was a state-driven development, and state intervention, most particularly from the United States Department of Defense was fundamental to development of computing networks. Here lies an important truth. The pressure of competition from the Soviets inspired state-directed development of computer to computer communications.
This state-directed development took place in the "capitalist" West. In short, the West won the Cold War not so much because it was capitalist and the Soviets communists, but because the West remained more pragmatic. Economic development and organization was more mixed.
This is not to say that free-market thinking has nothing to offer regarding economic policy. Simply put, markets spring up because people, left to their own devices, will naturally seek to specialize and trade. That is a market. Smith's genius was as much in documenting and theorizing a natural state of affairs as in recommending an economic model.
A major insight was the significance of the marginal over the absolute. Water, far more vital and important than whisky, sells for much less. Why was that? The answer lay in the marginal benefit. The price people are prepared to pay is not governed by the absolute value of a commodity, but the value placed on one more glass of water, or whisky. Scotland, where Smith came from, has no shortage of water.
And in a perfect market, theory tells us, pricing tends toward the marginal cost of production. You can only sell something for the extra cost incurred of producing just one more. In such a system how, can anyone invest?
Key to any technical development are educational institutions. These are not capitalist. Any educational worthy of the name gives awards not in response to payment received, but in recognition of some sort of test passed. This is not a market system. If it was you could simply buy a degree.
Any institution that is seen to sell qualifications is instantly devalued. In short, the vast majority of major technical developments, if not all, require state intervention and protection from competition in order to survive. What the private sector does so well is take the innovative developments replicate them produce them and distribute them.
Yet current political and economic discourse still assumes the capitalist system to be vital to the development of new technology. This is a belief that is based more on faith than on fact. By now, the theory of the rational market should be as discredited as Soviet communism.
What capitalism does is spread, by means of trade, new and better products or ways of doing things. Capitalism communicates innovations rapidly. It does not produce these innovations. It is not innovation that capitalism fosters, but trade. A market is any forum in which buyers and sellers can agree a price and complete an exchange.
Markets can vary from eBay to an African village square. If a price can be found by large number of sellers acting independently yet as part of a whole much like birds in a flock or bees in a swarm, trade can be said to be free. This is not innovation. This sort of behavior is as old, if not older than, civilization.
So why is it a generally accepted conventional wisdom that capitalism encourages innovation? Conventional wisdom decrees that the private sector is good, and the public sector bad. That all regulation of the private, capitalist, sector stifles innovation. Yet it is unregulated capitalism that lies at the root of the current economic crisis.
There are direct parallels in the deregulation of the 1980s and 1990s with the 1920s, and in the current crisis with the great depression of the 1930s. Not least with the collapse of the gold standard and the current eurozone crisis.
In many ways, our current phase of globalization is a second phase, the first being in the 1920s. This is not the first time. Unregulated capitalism beings us to this same place, like it did before. The belief in capitalism is indeed a belief. A faith. Not only are markets not rational, neither are the proponents of the current system.
Until policymakers and leaders develop a realistic idea of the useful functions and limitations of capitalism, there seems little chance of a useful framework for economic policy in the future.
Dafydd Taylor is a United Kingdom-based political analyst.
Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing. Articles submitted for this section allow our readers to express their opinions and do not necessarily meet the same editorial standards of Asia Times Online's regular contributors
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