Myths of Capitalism

Return to The Wondrous Free Market

Part 2: Hand-in-hand with the state for the disciples

The formation of capitalism and the attitudes of various governments towards it were heavily influenced by economists of the time, such as Adam Smith, Ricardo and the Physiocrats1. Politicians and business leaders found in their doctrines a source of inspiration to disentangle industrial life from political interference. The notion was widespread that any disadvantages to uncontrolled competition in the production of goods would somehow be eliminated by natural operations of economic forces, such as laws of supply and demand. While Smith and others often proselytised that any interferences from the state, such as import duty, was detrimental to the natural order of capital; landlords and manufacturers focused on the themes of a natural prices for wages being fixed and beyond human control2.

As with other faith-based schools of thought, these ideas permeated throughout society via propaganda, indoctrination and coercion. The classical political economists were unwilling to trust market forces to determine the social division of labour because they found the tenacity of traditional rural producers to be distasteful. Rather than contending that market forces should determine the fate of these small-scale producers, classical political economy called for state interventions of one sort or another to hobble these people’s ability to produce for their own needs. These policy recommendations amounted to a blatant manipulation of the social division of labour.

Economic thinkers, like Arthur Young, wrote in 1771: “everyone but an idiot knows that the lower classes must be kept poor, or they will never be industrious.”

Sir William Temple, a politician, agreed, and suggested that food be taxed as much as possible to prevent the working class from a life of “sloth and debauchery.”.

William Temple also advocated putting four-year-old kids to work in the factories, writing:- ‘‘for by these means, we hope that the rising generation will be so habituated to constant employment that it would at length prove agreeable and entertaining to them.’’ Some thought that four was already too old. According to Perelmen, “John Locke, often seen as a philosopher of liberty, called for the commencement of work at the ripe age of three.”3

James Steuart4,5 (who published An Inquiry into the Principles of Political Economy in 1767 – 9 years before the Wealth of Nations) believed the poor to be incapable of self-government, tracing the “principle cause of decay in modern states [to] . . . liberty”. He asserted that the Spartan republic of Lycurgus (a slave society) offered “the most perfect plan of political economy”. As traditional organised religion had lost its appeal in some circles, many writers used Sparta as a convenient image for community. Praise of Sparta became a common characteristic of the tradition of civic humanism, which held that property was important because it allowed the possessor the independence to exercise civic virtue.

While Steuart taught that slavery was a “violent method (for) making men laborous in raising food,” he understood that the market, properly arranged, could accomplish the same objectives that Spartan slavery promised. In the past, he argued, “men were. . . forced to labour because they were slaves to others,- men are now forced to labour because they are slaves to their own wants”. Also, he wrote, “Those who become servants for the sake of food, will soon become slaves”. Thus although wage earners, unlike slaves, are formally free, Steuart understood that workers could be subjected to increasingly lower living standards and less freedom of choice.

This perspective led him to focus his attention on how wants could be structured so that they would effectively enslave people. Steuart pinpointed the statesman as integral to developing the social division of labour of the economy. He frequently returned to the theme of ensuring a proper structuring of reciprocal wants:

But I think… that the more soberly our lowest classes are made to live at all times, the cheaper may our manufactures be sold”. In this spirit, he recommended: “If the luxurious taste and wealth of the country prevent any one who can do better, from betaking himself to a species of industry lucrative to the nation, but ungrateful to those who exercise it, the statesman must collect the children of the wretched into workhouses, and breed them to this employment, under the best regulations possible for saving every article of unnecessary expence [sic]”. In short, he supported enslavement without slavery. Steuart ultimately wanted to restrict the masses’ access to their traditional means of subsistence in order to ensure their “voluntary subordination,”.

His sophisticated application of the classical theory of primitive accumulation made his work an embarrassment to the mainstream political economists who pretended that capitalist development was a voluntary affair. Society preferred to pretend that economic progress was a neutral affair, guided by market forces. In this respect, he was far more truthful than the rest of the classical political economists combined. The East India Company even sought Steuart’s advice and later gave him a diamond ring as a token of gratitude for his efforts.

Jeremy Bentham6 understood that the struggles to subdue the poor would spill over into every aspect of life. He hoped to turn these struggles into profit for himself and, to a lesser extent, others of his class. Given labour’s natural resistance to creating wealth for those who exploited them, unfree labour held an obvious attraction for Bentham. He designed detailed plans for his fabled Panopticon, a prison engineered for maximum control of inmates in order to profit from their labour. In a 1798 companion piece to his design for the Panopticon, Pauper Management Improved, Bentham proposed a National Charity Company modelled after the East India Company. It was to have absolute authority over the “whole body of the burdensome poor,” starting with 250 industry houses accommodating a half million people and expanding to 500 houses for one million people.7

Bentham planned to profit handsomely from these inmates, especially those born in the houses, since they would then have to work as apprentices within the company. He enthused, “So many industry-houses, so many crucibles, in which dross of this kind [the poor] is converted into sterling” A strict regimen, unremitting supervision and discipline, and economies of diet, dress, and lodging would make profits possible. Jeremy Bentham, vigorous advocate of freedom of commerce that he was, dreamed of the profits that would accrue from the use of inmate labour. Bentham never succeeded in his personal goals but his ideas on how punishment could be used to control and maintain law-abiding behaviour endured8. Capitalism often found more subtle methods for harnessing labour.

With these champions of economics, it’s unsurprising that subjugation of people, including chattel slavery was paramount to the formation of early corporate life. Chiefly among these, were chartered companies given monopoly rights to trade in various parts of the world. These mega-corporations often acted as the state within exploited regions.

One such company, the Royal Adventurers of England, was formed during the Cromwell years (1640-1660), Sugar was one of the main commodities traded at the time and was this made possible by the slave trade. Slaves were brought to the Caribbean to harvest sugar cane, then it was turned into other commodities, such as rum. After Cromwell’s death, the monarchy was restored and fully committed to the mercantile capitalist agenda of the politicians it had once considered mortal enemies.

In a partnership with the Royal Adventurers, King Charles II promised thirty acres to any aspiring colonist to help “settle” Barbados and Jamaica—a promise that was never kept to freed slaves in the South two hundred years later. New Englanders flocked to Barbados and Jamaica to take advantage of the offer9. The Royal Adventurers of England had been transformed into the Royal African Company10. It was led by the Duke of York and among the chief investors in this trade monopoly was John Locke. Even with monopoly rights granted, the British Government intervened on several occasions to grant new charters, pass acts to improve trade, subsidise the company and eventually took over the settlements11.

The aforementioned East India Company12 had monopoly rights granted over the trading routes in the East Indies since 1600 – trading in commodities such as tea, cotton, salt, spices & opium. After taking over Bengal and large swathes of the Indian sub-continent, it effectively became a state13. While they did not use or transport as many slaves as the Royal African Company, they made full use of slaves to work and protect their interests, particularly in Sumatra14.

Many other countries likewise gave companies monopoly rights to trade. Companies such as Portuguese India, Dutch East/West India Companies and the French East India Company all jumped aboard the mercantile train15-18. The Hudson Bay company19, after incorporation by English royal charter in 1670, functioned as the de facto government in parts of North America for nearly 200 years until the land was sold (known as Rupert’s Land) to Canada in 1869 as part of The Deed of Surrender. During its peak, the company controlled the fur trade throughout much of the English- and later British-controlled North America.

These companies became so powerful that wars were waged between them and their rights to trade, such as the many Anglo-Dutch wars20. The British East India Company’s trade in opium even instigated the Opium Wars21 with China (First in 1839–1842). Again, showing how the capitalist practices of merchants overseas directed the foreign policy of governments back home.

In 1833, the last monopoly (for tea in China) that the East India Company had was abolished, as its charter was up for renewal. The Charter Act/Saint Helena Act22,23,24 gave control of the company over to the British Government, with the company just retaining an administrative role. India was to pay the company’s debts and the share-holders were to receive 10.5% dividend per annum till 1874 as compensation for the abolition of the company’s commercial privileges. Addressing the House of Commons during the debates for the Act25, Thomas Macaulay gave a long speech on the connectedness of the commercial and state functions of the company which led to the bailout terms:

It is a mistake to suppose that the Company was a merely commercial body till the middle of the last century. Commerce was its chief object; but in order to enable it to pursue that object, it had been, like the other Companies which were its rivals, like the Dutch India Company, like the French India Company, invested from a very early period with political functions. More than a hundred and twenty years ago, the Company was in miniature precisely what it now is. It was entrusted with the very highest prerogatives of sovereignty. It had its forts, and its white captains, and its black sepoys; it had its civil and criminal tribunals; it was authorised to proclaim martial law; it sent ambassadors to the native governments, and concluded treaties with them; it was Zemindar of several districts, and within those districts, like other Zemindars of the first class, it exercised the powers of a sovereign, even to the infliction of capital punishment on the Hindoos within its jurisdiction. It is incorrect, therefore, to say, that the Company was at first a mere trader, and has since become a sovereign. It was at first a great trader and a petty prince…..

It is not strange, therefore, that the mercantile and political transactions of this great corporation should be entangled together in inextricable complication. The commercial investments have been purchased out of the revenues of the empire. The expenses of war and government have been defrayed out of the profits of the trade. Commerce and territory have contributed to the improvement of the same spot of land, to the repairs of the same building. Securities have been given in precisely the same form for money which has been borrowed for purposes of State, and for money which has been borrowed for purposes of traffic. It is easy, indeed,–and this is a circumstance which has, I think, misled some gentlemen,-it is easy to see what part of the assets of the Company appears in a commercial form, and what part appears in a political or territorial form…

The dividend which we give to the proprietors is precisely the same dividend which they have been receiving during forty years, and which they have expected to receive permanently. The price of their stock bears at present the same proportion to the price of other stock which it bore four or five years ago, before the anxiety and excitement which the late negotiations naturally produced had begun to operate. As to the territory, on the other hand, it is true that, if the assets which are now in a commercial form should not produce a fund sufficient to pay the debts and dividend of the Company, the territory must stand to the loss and pay the difference. But in return for taking this risk, the territory obtains an immediate release from claims to the amount of many millions. I certainly do not believe that all those claims could have been substantiated; but I know that very able men think differently. And, if only one-fourth of the sum demanded had been awarded to the Company, India would have lost more than the largest sum which, as it seems to me, she can possibly lose under the proposed arrangement.

[3b] In a pecuniary point of view, therefore, I conceive that we can defend the measure as it affects the territory. But to the territory the pecuniary question is of secondary importance. If we have made a good pecuniary bargain for India, but a bad political bargain, if we have saved three or four millions to the finances of that country, and given to it, at the same time, pernicious institutions, we shall indeed have been practising a most ruinous parsimony. If, on the other hand, it shall be found that we have added fifty or a hundred thousand pounds a-year to the expenditure of an empire which yields a revenue of twenty millions, but that we have at the same time secured to that empire, as far as in us lies, the blessings of good government, we shall have no reason to be ashamed of our profusion. I hope and believe that India will have to pay nothing. But on the most unfavourable supposition that can be made, she will not have to pay so much to the Company as she now pays annually to a single state pageant, to the titular Nabob of Bengal, for example, or the titular King of Delhi. What she pays to these nominal princes, who, while they did anything, did mischief, and who now do nothing, she may well consent to pay to her real rulers, if she receives from them, in return, efficient protection and good legislation.

The system of chartered companies26 being incorporated as trading entities with rights granted by the sovereign – again highlights the direct link between capitalism and the state. People could only trade in certain commodities or in particular places with the approval of the state. This is the case even today; though it is now more of a bureaucratic process rather than a considered direction to give advantages to members of the ruler’s social circle in a lot of cases (there are undoubtedly many exceptions). At a whim, entire companies can be abolished or created – in principle.

The mindset of the British government can be demonstrated when the Slavery Abolition Act27 was introduced in 1834. Viewing the slaves as property that should be compensated for, around 400,000 former slave owners were remunerated to the tune of ‘twenty million pounds’28,29, while the ex-slaves got nothing. Even then, governments were not adverse to a good bailout to keep capitalists happy.

Eventually, the USA also emancipated the slaves30 (except for punishment for a crime31) . Their economy benefited greatly from the slave trade, so this was the primary reason for the secession attempts that led to the American Civil War32. After the emancipation, the USA built a strong and effective economy, in part due to its policy of isolationism within a stable balance of international power. Then in 1898 it became a colonial power after the Spanish-American War33,34, which ended with the Philippines, Guam and Puerto Rico ending up being owned by the USA.

Smedley Butler in War is a Racket35 gave an in-depth account of his career providing state-backing to capitalists within the USA:

I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.”

The USA’s foreign policy, mainly protecting its home-grown companies interests in overseas lands, gave rise to Banana Republics36. One of the main beneficiaries of the American armed forces, was the United Fruit Company37, who had virtual monopolies on the banana trade in Honduras, Costa Rica and Guatemala. As recently as 195438, they lobbied the US Central Intelligence Agency (CIA) to overthrow the democratically elected Guatemalan president Jacabo Árbenz.

It was not only fruit companies that benefited from the US involvement in regime change. Hawaii’s monarchy was overthrown for sugar planters and other businessmen in 189339. Along with Britain, their forces toppled the democratically elected Iranian leader Mosaddeq in 1953; after the British Anglo-Iranian Oil Company was nationalised40,41. These are one of many examples of US involvement in foreign countries to do the bidding of private capitalist companies42.

Obviously, this was just a blip in capitalist history and the triumphant return of laissez-faire principles would soon envelop the world. The cry of ‘Hallelujah – behold the free market’ would soon be heard from the masses; welcoming neoliberalism43 as the true saviour of mankind. Bringing privatisation, austerity, deregulation, free trade; liberating people to trade as nature intended, subject to the omnipotent laws of the market and no outside interference from the state.