Manifesto of Capitalism

Why is this topic relevant?

This topic is relevant in three respects. First, socialism, communism and other religious ideologies have obviously strong following, organized movement, cadre base, leadership and die-hard supporters and will carry flags and attack views other than their own vigorously enough. Capitalism, despite its proven role and significance in human progress, has been demonized to a worst possible state. Capitalism has many many limitations; any system has limitations. We have to choose the one with the lowest cost-benefit ratio in terms of human dignity and progress.

Second, the level of misunderstanding of meaning, definition and working of the term capitalism or socialism is at such a higher level and scale that even the academic elites are confused. And the misinformation about capitalism and socialism is propagated so intensely that common man has stopped asking any questions to authorities. I want people to keep on asking grave questions and doubt even the most plausible things before they commit their life to it.

Third relevance is due to the lack of historical understanding, both at the level of (1) evidence for or against a system and/or doctrine and at the level of (2) theoretical interpretation of history. Universities are not giving enough attention to both of these in a fair and adequate manner; either due to the extra left tilt of academic and political life in Nepal or due to poor academic environment.

Political Economy: Capitalism, Socialism and Communism

Political and economic systems are like trunk and branches of a tree. One cannot be without other and there are situations when one cannot be separated or distinguished from the other. Political systems like democracy, autocracy, fascism, communism and anarchy have mingled with economic systems such as capitalism (market economy), mixed economy, command economy and welfare state in such a way that almost every combination of the two is available to cite. Communist China, Socialist India before 1990s, Welfare systems in a capitalist economy Canada and even in USA, Communist Cuba, Fascist capitalism in 20th century Europe.

Another way in which economic systems are tightly linked with politics is through the political rights of individuals. History has left no doubt that any of the mix of political economy can strip individuals of their civil and political rights. Human rights have been massively violated in all sorts of systems. Another equally important fact is that capitalist systems are more likely to protect individual rights than socialist or communist systems because individuals cannot innovate capitalism out of crisis without those rights. Without property rights and freedom of occupation, capitalism becomes only a misnomer.

Etymology

What is capitalism, socialism or communism? Do/did they exist in real world? Can we blame them for their “imperfect application”? Or should we take the responsibility of everything that is done in its name and try to minimize their problems. My assertion in this article is that these terms has to be used as they are being used. If USA can be called a communist economy and North Korea essentially a capitalist economy, then I do not see much to discuss on the issue. So USA is a capitalist economy (however imperfectly) and former USSR (however imperfectly again) was a communist economy.

How to judge a doctrine? 

What is a doctrine? A doctrine is a set of assumptions about nature of human behavior based on which a political and economic structure is constructed to run a society. In this sense, communism makes certain assumptions about human behavior and so does capitalism. So a doctrine is like a suit. A suit is stitched by making certain set of assumptions about the shape of a human body. The assumptions do not have to be exact. That is why tailors make only a finite set of measurements of a body. If the suit has to be fitted perfectly with a body, the tailor would need to make infinitely many measurements.

A doctrine can be tested in two ways. First, by testing its assumptions. Second and less importantly by testing its predictions.

If the assumptions made are not valid for what we observe the doctrine has to be thrown out of the window or has to be adapted sufficiently to account for the observations. A doctrine is always under a threat of being proven wrong. The steel suit makes whole lot of assumptions about a body and hence fails against observed shapes of human body.

Doctrines are deemed false also when their predictions turn out to be false.

Is capitalism a doctrine? 

Capitalism makes fewer assumptions (about human behavior) compared to communism, socialism or any theocratic doctrine. Communism is like a suit made of steel that perfectly fits a single body at a particular time. If the body gets fatter or slimmer, if the steel suit is bought/copied by another body, there is almost zero probability that it would fit the second body. So capitalism is a doctrine only in a minimalist sense meaning it makes minimum possible number of assumptions about human behavior.

Unlike communism, capitalism does not have a single manifesto under which its adherents would unite with their flags waving in the air. There is no such political party named “Nepal Capitalist Party” like there is a “Nepal Communist Party.” No one would dare to. Hence capitalism has no single form or bible. Unlike communist manifesto, capitalist manifesto with 10 commandments is nowhere to be found.

Cadres and adherents have whole-hardheartedly fought to establish theocracy and communism. Capitalism has mere professional army to defend itself.

What is the nature of a human being? 

A couple of things. We are apes and have common ancestors with Chimpanzees. Jane Goodall became a star primatologist and anthropologist after studying Chimps of Gombe, Tanzania for more than 20 years. She was shocked by the savage behaviors of the chimps. They were recorded fighting civil wars for years (1974-1978), murdering and kidnapping members of their own race, deceiving and hunting their own kinds and even cannibalism. Chimpanzee Politics by Frans de Waal is another interesting read on psychology of Chimpanzee community and their links to human behavior. Hundred of millions of years of evolutionary history of human being is so immutably written inside our cells that mere a dozen or so thousand years of history of modern civilization cannot erase the scars of our violent past. We used to hunt, run, hide, get scared, be fearful of other tribes. We are just another species, a bit social, with a Dunbar number of 150 (Robin Dunbar). Let us not assume that we were pure at the beginning and systems/ideas/technology/religion messed things up. We are messed up creatures from the very beginning. We will be coping hard to live in a cosmopolitan environment for thousands of years of future.

What do people want?

Our brain does not seem to be made to do physics or philosophy or cosmopolitan rituals and global level of organizations, but instead to survive and to reproduce in the savanna of death, starvation and terror. Side effects turned out to be much bigger than the “intended” effect (Click here for an interesting read).

A living thing is different from a non-living because of its aimed actions (A good read on how life is different from non-life and how life can emerge out of chemistry without invoking final causality: Chance and Necessity by Jacques Monod). Human beings also have aimed their actions towards two things.

1. They want to survive (security and food)
2. They want to reproduce in an environment where the survival probability of their kids and grand kids is maximum

They want more (diversity, quantity and quality) of goods and services to attain the above mentioned objectives. We can call this utilitarianism perspective of looking at human behavior.

As are observed, human beings have always striven for ways to produce more from a given amount of inputs and effort. Accumulation of stuff is intended to smooth out the effects of shocks of famine, war, disease and infertility. Hence the capitalism is borne.

This could be an adequate (not sufficient!!) explanation of the evolution of human civilization from a political economic viewpoint.

What do we need to produce what we want? 

To produce the stuff we want, we need four things: land (space), labor, capital (tools) and entrepreneurship (risk taking).  This is ECON 101. Risk taker might end up being hungry and dead by the time her ideas are materialized. For taking this risk, she earns profit.

Who owns these resources?

This is the most pertinent question of political economy. If individuals can own them, we are in capitalism and if there is a collective ownership, we are in a communist economy. If the state owns them, we are in socialist economy. In practice, we have a mixture of these. Rivers and mountains are owned by states, some forests and schools are owned by communities and a car is owned by individuals. But the extent of the ownership varies drastically from North Korea to USA. An appropriate balance between individuals, communities and state would result into thriving democracy and market economy (The Third Pillar by Raghuram Rajan). Similar accounts of ownership of different kinds of assets and balance of roles to be played by individuals, community and state could be found in the works done by Nirmala Mani Adhikari and Govinda Sharan Upadhyaya in their Rajyarashtra II (Page 63; this is written in Nepali language). They have based their conclusion using Vedic and other ancient Hindu scriptures.

Ownership of resources is dependent on two things. First, the initial endowments. Who owns what things when they are borne. Second, the preference and productivity of individuals and societies. We can hope to change the second though we are very inefficient at social engineering. But changing the first would require a time machine and a technology to win all just wars of past in favor of innocent, true and “first” owners of the resources. We can try to change the distribution of resources back to the original shape if we desire to do so. But if the bloody twentieth century is to give us any hint, the cost of this massive re-adjustment is going to be colossal and unbearable to humanity.

What is market economy?

In this article, I am using market economy and capitalism interchangeably (click Capitalism Definition for more). In a market economy (some people also would like to use the term “free market economy”), there are following basic features:

1. Individuals can own the four resources. Property rights are secured (hopefully by the state if not the community).
2. Consumers and producers willingly and voluntarily decide to (not to) transact with each other. In other words, no single authority (social or political) imposes its price list or forces to consume or produce (or not to) something or of some quantity or quality. See how the same was attempted in a groundbreaking biography Stalin: Waiting for Hitler, 1929-1941 by Stephen Kotkin. And its critical review here. 

Corollary: In a real world made of atoms and people, state produces only few necessary stuff like defense and security, rule of law and maybe basic education and basic health. Yes just basic.

How is wealth created?

Kings and emperors thought that land is wealth as more land would mean more agricultural production. It is estimated that up to 80 per cent of the rural population was agricultural in England and France in 1500 (See this paper by Robert C. Allen for agriculture in Europe from 1300 to 1800). So they conquered alien lands at distance. Warlords thought that human labor was the source of wealth as they could work for free for them and hence the history of slavery was written. Mercantilism thought that exports but not imports makes wealth for a country. Believers of reincarnation thought that it is the saving/donation of past life that you get as wealth in this life. Believers of one god thought that submitting to one true god can make you prosperous and wealthy. And hence temples and churches are borne.

It was not until an enlightenment thinker Adam Smith (1776) came up with the idea that its nothing else but division of labor and free trade combined can create unprecedented amount of wealth (See New Ideas from Dead Economists by Todd G. Buchholz for an interesting read on evolution of economic thinking). In other words, its the knowledge of producing more with less and producing in large quantities (which is not possible without free trade given large markets) that creates wealth of nations, societies and individuals. Self sufficiency is not virtue but vice. Do just whatever you are best at and rely on trade with others for other stuffs you need or want.

Science and technology driven by enlightenment values (Reason, Science and Humanism) of the eighteenth century helped drastically to produce more with given amount of resources (see Enlightenment Now by Steven Pinker for more read on this).

We have been conquering, praying and enslaving people for thousands of years. Distribution of income for the “now developed” countries and the “now developing” countries coincided perfectly with each other until 1800 (See for the at Gapminder Tools). But the real progress came only after the age of enlightenment. Its neither conquering, nor the Karma, nor the slavery that creates real wealth. Its efficiency (producing more with less) that creates wealth. Division of labor, trade and technology are the three catalysts for efficiency.

Why is capitalism not dying?

Capitalism does not have a specific manifesto (steel suit) and this is making it impossible to go extinct. Its a cotton suit not a steel suit. So its going to fit many societies and many people for long. Its adaptability and flexibility has made it invincible till now. If it has to survive longer, it has to keep its flexibility and human behavior friendly character intact.

Is capitalism a perfect system?

Of course not. Nothing is perfect as stated at the beginning paragraph of this article. When it comes to solving problems of wealth and being fit to human behavior, nothing seems to top capitalism. But when it comes to problems related to ownership and use of public goods such as forests, law and order, ecosystem, climate, global pandemics (bad rather), capitalism might have to surrender some of its core characteristics of individualism and property rights. When it comes to the unluckiest ones in our society (such as persons with disability, unfortunate children and elderly, sick and injured), capitalism might not provide the best possible solution that we as a human society desire.

First, problems of ecological disasters and climate change we are facing are not solvable through market mechanism alone. A collective efforts are required to address some of the important issues we face. Some require community level collective efforts, some require state level efforts and some yet global level efforts.  This invites some infringement of individual freedom and property rights. Care must be taken so that we might not end up in a totalitarian future in the name of solving climate change and ecosystem. The solutions to the these global problems are being sought most rigorously in Silicon valleys and Universities of the capitalist world. Moreover, these problems would not have been identified as global threat to humanity if it was not the free minds in the capitalist world devoting decades of their life in answering the most difficult questions of our time. There are plenty of examples where big corporations have shown more efforts to fight such existential issues. One such example where corporations are ahead of states to fight climate change is a recent climate deal by four automakers and state of California in USA.

For the unlucky few, we want state or community to provide social safety net even if it requires some forced redistribution of resources, wealth and income. At the same time, we as a society can always respect and adhere to the values that encourage charity. Such values are present in almost all cultures to some extent. Surprisingly, one of the best social security programs are to be found in capitalist countries like Canada and Denmark. Yes Denmark is a market economy (capitalism)!

Further, capitalism could potentially make us vulnerable by making us dependent on people far across the globe. During the time of crisis and scarcity, this could bring disastrous hardship to local communities. Creating more linkages of infrastructure and people could insure us against such disasters.

Human progress and capitalism

Human progress that began around the late eighteenth century coincides with the rise of capitalism. The enlightenment values like reason brought economic values like division of labor (rather than self sufficiency) and free trade (rather than mercantilism). Almost all the progress we have made since then can be attributed to the rise of capitalism further enhanced by development in science and technology. Look around the stuff we use around us to make our life comfortable. The time we used to spent washing clothes and gathering food is now available for education, art, philosophy and physics.

Threats to capitalism

According to Adam Smith, considered to be the most important figure of capitalist idea, capitalists themselves are the biggest enemy of capitalism (See Adam Smith on Enemies of Capitalism by Michael Emmet Brady). When big corporations align with governments for special favor, try to create and maintain natural monopoly, try to influence policies for their advantage, try to restrict entry of new potential firms, then is the capitalist system at the highest risk of being replaced and despised for every imaginable problem our society goes through. Of course there cannot be a perfect capitalism with all these cronies absent. But by minimizing these cronies, benefits of capitalism becomes the largest and widest.

Inequality, working condition and capitalism

Why is equality (especially of income) so much emphasized by so many as a negative consequence of a capitalist system? Thomas Pikkety, however fallaciously, popularized this idea through his best selling book Capital in the Twenty-First Century. The idea of Kuznet curve has been used as a critique of his work. Enlightenment Now by Steven Pinker provides another set of arguments against Pikkety’s conclusions. Inequality is as inevitable as existence itself. Once two things exist, there will be differences. Nothing in nature are equal and however hard we try nothing will ever be equal. Any attempts to force equality in the society has been proven to have grave and violent consequences as can be seen in command economies.

Let us talk about the two extreme cases of income distribution.

1. Perfect equality: Every one in a society earns exactly the same amount irrespective of their personal effort, characteristics or background. One way to achieve this would be to let people produce anything they can and then divide everything into equal pieces. Gini coefficient for this society will be 0.
2. Perfect inequality: One single individual earns everything and the rest earns nothing. This can be achieved if everyone produces whatever they want, but this single individual gets everything through taxes or force of authority. Gini coefficient for this society will be 1.

Any existing society has the situation in between these two. According to CIA Factbook, South Africa has the highest coefficient value of 0.63 and Kosovo has the lowest value of 0.23. All other countries lie between these two. Poor countries are more likely to have higher inequality than rich countries. See Visualizing Economics for a simple graph plotting inequality against per capita income. And most of these rich economies are known as capitalist economies (and mixed economies).  Though it had hard time fulfilling basic needs for its citizens, USSR, known as communist economy, is supposed to have one of the lowest inequality (See this study by Nintil for some evidence).

According to welfare theorems, distribution of income depends on three things:

1. Initial endowment of resources
2. Distribution of preferences among the members of a society
3. Distribution of productivity among the members of a society.

If we agree to deem inequality as intrinsically bad and have negative net effect in our society, we can try to reduce it through policy addressing any one of these three or a combination of them. Changing the first (I am repeating this for its significance) would require us to have a time machine to go to the past to win all the just wars in favor of fairness and innocence. Then we can redistribute all the wealth and opportunity equally to begin with hoping that people will keep this distribution intact forever. We can try to change the other two but we are very inefficient at those and things easily turn violent when forced changes in preferences and productivity are imposed on a society.

Why are we focusing on inequality so much. If one member of a society is a trillionaire and the rest are millionaires, that is a massive amount of inequality compared to all of them being absolutely poor and unable to produce anything to feed themselves. Which society is better to live in. So, its not the inequality itself that is a problem. The real thing that should concern us as a society are two things

1. What is the situation of the people at the bottom of the income distribution? Are they absolutely poor  in terms of basic income, basic education and health? And are they making progress compared to their own past (not compared to other members of the society). If they are absolutely poor and not making any progress, then that should concern us and we should try to get them out of the stagnant situation.
2. Is the income inequality merit based or is based on powerful people having connection with state apparatus and molding rules in their favor unfairly? If yes, we are preparing a breeding ground for revolutions and violence. We as a society should try to change this situation and try to level the playing field as much as we can.

Inequality, when even the poorest of the poor are making progress (which they are), is not a problem. Inequality when millions of people are dying because of poverty (which they are) and people with power are exercising unfair game with the system (which they are) is a real problem and we need to address them.

Finally!! I have to finish this article now. I want to write more. But enough is enough. almost 3800 words!!

What is not capitalism?

Viewing the picture of New York and London Skyscrapers and NY Stock exchange as the face of capitalism is very very narrow approach. Capitalism can be seen broadly only among the aspiring entrepreneurs who are free to peruse risky adventures. It can be seen better when in the selfishly making of their profit and business empires, they employ hundreds of thousands of people giving them their life some meaning.

Capitalism has raised billions of people out of absolute poverty, provided us with antibiotics and cancer drugs. It took us to the moon and the mars. We can now see closer than ever to the origin of our universe. The world has become significantly peaceful than ever (The Better Angels of Our Nature: Why Violence has Declined? by Steven Pinker again).

We owe capitalism a tiny bit of gratitude!! Thanks to Capitalism.