Myths of Capitalism

Return to The Wondrous Free Market

Part 4 : The Invisible Hand

The classical economic liberals put forth the idea that capitalism could provide for the wants and needs of individual people and that these would amalgamate to create a desirable situation that would benefit society as a whole. Adam Smith and others postulated that by producing goods and services for sale on markets for profit and self-interest, that subconsciously people would frequently also provide for the wants of other people in general1,2. This ‘market’ of wants and desires would generate a synthesis of society’s ideas and yield an equilibrium solution that provides material goods and services where they are needed. This has a utopian feel and indeed it is noted that the classical economists developed their economic theories to reform the world, away from feudalist relations. Even later economic theorists like Hayek3, had a view of reforming the world using competitive markets to bring prosperity and avoid tyrants and too much state control over managing goods and services provided.

This market has become a God to capitalism, another phantasm of the mind and probably an extension of the Christian faith4-6. I’ll explore the difficulties in which a competitive, self-regulating market could emerge through interactions between humans (via price mechanisms) and how it could be anything other than just people buying and selling things – which is never entirely the spontaneous and organic organisation that some people believe. I’ll explore fundamental reasons why the utopian declarations of most liberal thinkers could never be realised within a capitalist system.

Considering that humans are irrational agents, with unequal and varying wants, goals, wishes and desires, could this lead to a system where most people’s lives are bettered by a completely market-led society? Let’s recap on what capitalism is – it’s a system whereby the main organisational role of society is to produce goods and services for that society to sell on a ‘market’, via exploiting resources, people’s labour and time; while capital is used to denote ownership and control of assets. From it’s inception and throughout it’s history the market place has been conjoined with government in various ways. The markets have expanded beyond just being perhaps a weekly spot where people buy and sell wares on the edge of town, to now include all online market spaces and dealing with an amazing abundance of goods, including the fictitious commodities – land, labour and money.

A feature of many neoclassical and subsequent economic ideas centres around economic equilibrium – the idea that the economy will reach equilibrium points in an idealised perfectly competitive market7,8. [What these equilibrium points represent is not often elaborated on. Could it be the most resources given to the most worthy people? Or a utilitarian equilibrium, where everyone has a minimum standard of living and some people more? Or just another variant of the best of all possible worlds idea?9] As we have seen previously this relies on agents within the economic system to be rational and there needs to be some causative models that are present relating to this mechanism, which are missing. Many people have noted, that this idealisation relies on agents knowing the equilibrium price vector10. It appears that any description of the economy would have to incorporate the fact that the economy is more like an endogenously generated nonequilibrium11, or an ongoing computation — a vast, distributed, massively parallel, stochastic one, with no determinate outcome.

In Marxist terminology, there are apparent internal contradictions of capitalism which lead to many of the problems faced within the system12-15. Karl Marx’s volumes of economic work are devoted to exploring the reality beneath the appearance. The determining factor of capitalism is not simply the existence of commodities but rather the commodification of labour. This defines the system’s specific mode of exploitation, the way the ruling class appropriates the surplus product created by the producers. The fact that capitalist economy inevitably diverges from its rational pretences reflects what Marx called the contradictions of the form of value. These are tensions between two inherent aspects of value – concrete and abstract labour, for example, or use value and exchange value – that propel capitalism to change and develop. They also drive the system to the periodic crises as well as long-term decay which have shaped its turbulent history. The primary contradiction of capitalist society is between social production and private appropriation. Closely related is the contradiction between use value and exchange value. Capitalist competition – expand or die – inevitably leads to crisis. These contradictions cannot be done away with within the bounds of the capitalist system. They occur independently, outside the will and control of the capitalists themselves.

A regular talking point among pro-capitalist adherents is that in a market system, money can be viewed as a voting tool16-20. Vote with your dollars is something you will hear well-meaning sustainability-leaning people say a lot. Obviously with this mindset, people with more money have more say in the organisation of societies and what constitutes ‘the market’. The role that money plays in politics is a strong one, with companies lobbying for more favourable laws to be enacted. So the whole market mechanism will change for the whims of the preferred few, whose money has influenced the right people21,22.

These accumulative effects, ensure that the wealth distribution of the world follow the power law of the Pareto distribution23,24 (this may also be a feature of all economic systems). In the United States wealth is highly concentrated and very unequally distributed: the richest 1% of the households owns one third of the total wealth in the economy25. This distribution arises in general due to the income gained by individuals in the power tail comes primarily from income gained from capital such as interest payments, dividends, rent or ownership of small businesses. Meanwhile the income for the 90% of people in the main body of the distribution is primarily derived from wages. At the very top end, regulatory capture, bailouts, subsidies, differences in tax rates for capital and wages and other mechanisms (inter-generational transfers may account for about 30% of total wealth accumulation) ensure that money always ‘trickles up’26-28. Mathematically it can be shown that a group of absolutely identical agents, acting in absolutely identical manners, when operating under the standard capitalist system, of interest paid on wealth owned, end up owning dramatically different amounts of wealth. The amount of wealth owned is a simple result of statistical mechanics – the fundamental driver forming this distribution of wealth is not related to ability or utility in any way whatsoever.

It can also be shown that the power-law of capitalist income can be accounted for due to a power-law in the network structure of the wage-capital relation29. The social architecture, in particular the wage-capital social relation, dominates individuals, who, although free to make local economic decisions, do so in a social environment neither of their own choosing or control. Moreover, some of the features of economic reality that cause political conflict, such as extreme income inequality and recessions, are necessary consequences of the social relations of production and hence enduring and essential properties of capitalism, rather than accidental, exogenous or transitory.

The accumulation of capital and the tendency towards monopolization in this way leads to an illusion of choice within the marketplace30,31. Mass consumer goods come in a host of different brands and products, all distributed far and wide on shelves and in warehouses. These are often products produced via subsidiaries of well-known large conglomerates, eroding any benefit of competition espoused by economic liberals. Via buyouts, cartel32,33 activity or entering markets when competitors fail, a small number of companies can monopolise various sectors. This includes the media34,35, where by 2012, just 6 companies controlled 90% of the USA media – whereas in 1983, this proportion was controlled by 50 companies.

This control of the media, which encompasses advertising and mass media also ensures that one of the fundamental premises of capitalism is skewed: wants and desires are largely manufactured. Digital Marketing experts estimate that most Americans are exposed to around 4,000 to 10,000 advertisements each day36-38. While most adverts are not consciously acted upon or noticed, the advertising industry is an extension of the propaganda model – trying to actively influence people’s opinions and actions. Corporations employ propaganda outside of advertising, as Edward Bernays outlined nearly 100 years ago39:

‘THE conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society….

In theory, every citizen makes up his mind on public questions and matters of private conduct. In practice, if all men had to study for themselves the abstruse economic, political, and ethical data involved in every question, they would find it impossible to come to a conclusion about anything. We have voluntarily agreed to let an invisible government sift the data and high-spot the outstanding issues so that our field of choice shall be narrowed to practical proportions. From our leaders and the media they use to reach the public, we accept the evidence and the demarcation of issues bearing upon public questions; from some ethical teacher, be it a minister, a favorite essayist, or merely prevailing opinion, we accept a standardized code of social conduct to which we conform most of the time.

In theory, everybody buys the best and cheapest commodities offered him on the market. In practice, if every one went around pricing, and chemically testing before purchasing, the dozens of soaps or fabrics or brands of bread which are for sale, economic life would become hopelessly jammed. To avoid such confusion, society consents to have its choice narrowed to ideas and objects brought to its attention through propaganda of all kinds. There is consequently a vast and continuous effort going on to capture our minds in the interest of some policy or commodity or idea…

Some of the phenomena of this process are criticized — the manipulation of news, the inflation of personality, and the general ballyhoo by which politicians and commercial products and social ideas are brought to the consciousness of the masses. The instruments by which public opinion is organized and focused may be misused. But such organization and focusing are necessary to orderly life.’

While Bernays and Walter Lippmann40, among others, would generally approve of aggregation of sources and computations to help the public decide on selecting choices at their disposal, they may be hesitant at the way the mass media has emerged to manufacture consent. Herman and Chomsky41,42 elaborate:

‘The media serve, and propagandize on behalf of, the powerful societal interests that control and finance them. The representatives of these interests have important agendas and principles that they want to advance, and they are well positioned to shape and constrain media policy. This is normally not accomplished by crude intervention, but by the selection of right-thinking personnel and by the editors’ and working journalists’ internalization of priorities and definitions of newsworthiness that conform to the institution’s policy. ‘

Governments and corporate sponsors/collaborators have continually used disinformation and propagated bogus claims to divert or engage public attention for their benefit, during both peace times and wartime. As Arthur Ponsonby43 noted:

‘The public can be worked up emotionally by sham ideals. A sort of collective hysteria spreads and rises until finally it gets the better of sober people and reputable newspapers. With a warning before them, the common people may be more on their guard when the war cloud next appears on the horizon and less disposed to accept as truth the rumours, explanations, and pronouncements issued for their consumption. They should realize that a Government which has decided on embarking on the hazardous and terrible enterprise of war must at the outset present a one-sided case in justification of its action, and cannot afford to admit in any particular whatever the smallest degree of right or reason on the part of the people it has made up its mind to fight. Facts must be distorted, relevant circumstances concealed and a picture presented which by its crude colouring will persuade the ignorant people that their Government is blameless, their cause is righteous, and that the indisputable wickedness of the enemy has been proved beyond question.’

Currently there a vast resources engineering public opinion4450, from government and industry sources and increasingly on social media via paid bloggers and bots. Often companies like PSY Group51 and Cambridge Analytica52 emerge to provide data services to state and non-state actors. This can be greatly successful with the way in which ideas can spread, sometimes with a minority of people holding these ideas53,54 and often the methods used make it seem that the advocacy comes from a grass-roots origin55. Ideas such as what political party to vote for56,57, the safety and desirability of smoking58, whether a diamond ring is a symbol of love59-61, a drug is safe to take62-69 or even what is considered a healthy diet70-73 are all influenced by lobbyists, think tanks and consultants. Even supposedly user generated reviews are known to be manipulated74-76.

This bombardment from cradle to grave of consumer pressures, one could argue that there is no longer any distinction between reality and its representation; there is only the simulacrum77. According to Baudrillard, what has happened in postmodern culture is that our society has become so reliant on models and maps that we have lost all contact with the real world that preceded the map. Reality itself has begun merely to imitate the model, which now precedes and determines the real world: “The territory no longer precedes the map, nor does it survive it. It is nevertheless the map that precedes the territory — precession of simulacra — that engenders the territory”. Media culture, precedence of exchange-value, multinational capitalism, urbanization and the appropriation of language and ideology to further the capitalist management of society has rendered the initial aims of economic liberal ideology moot.

With this one-sided tendency of capitalism, the self-regulation of any markets hits a snag with asymptotic information78. For a system of beings to self-correct you would assume you need either an omnipotent and omniscient being to direct the system, or for the agents within the system to know enough about the overall mechanics to amend their actions to lead to desired outcomes. The current structure of the capitalist economy relies heavily on patents79, copyrights, trade secrets80 and compartmentalisation of tasks to ensure that competition is blunted and information is guarded.

Patents suppress innovation as much as they encourage it81. Even right-wing libertarian Murray Rothbard82 considered patents a fundamental violation of free market principles. Chakravarthi Raghavan83 pointed out that research scientists who actually do the work of inventing are required to sign over patent rights as a condition of employment, while patents and industrial security programs prevent sharing of information, and suppress competition in further improvement of patented inventions. The Government Patent Policy Act of 1980, with 1984 and 1986 amendments, allowed private industry to keep patents on products developed with government R & D money — and then to charge ten, twenty, or forty times the cost of production. For example, AZT was developed with government money and in the public domain since 1964; the patent was given away to Burroughs Wellcome Corp84.

In capitalist society, the state maintains and governs what constitutes market relations and enforces contracts. The contract is a peculiar article of law that has a long history85 and can be seen as a primary tool in the formation and continuation of capitalism86,87. Contract law – produced by states or a special body of armed men that could apply physical coercion – proclaims what is private and public property, including people (as in slaves) and designates the social relations of people regarding the property. Property may appear to be a relation between a person and a thing, but it’s really a relation between people. The bourgeoisie contract relations emerged interdependently with royal authority and the rules that govern commerce largely come from these contractual laws. The property rights that appeared were based on the bourgeoisie notion that members of their class were equal legally and that they could dispose of their property as they wished, including selling it on the market. As noted previously the enclosure period ended the feudal relations and gave rise to capitalism.

The notion of the contract then comes about from being legally equal and for a voluntary meeting of minds88-91 to take place. It is rare that contracts arise from equal bargaining power, are completely voluntary or an equal amount of information is shared between the parties. Whenever a contract is breached92 and the issue is taken to a state authority to resolve the issue, it is often the side with the most financial clout that can hire the best legal representation and get an advantage in the proceedings, regardless of who may be in the wrong. Rarely is the state neutral, as their members regularly are representation of the owning or ruling class, so side with these on a regular basis. Also, whenever a legal dispute is declared and a party is seen as being guilty, parties with a larger wealth may readily pay punitive damages if they are a minuscule amount compared to income they receive from breaking the rules93-100.

Whenever you click ‘Agree’ on a website101, you are entering into a contract with whatever terms and conditions supplied. Obviously, most people don’t have the time and resources to review these terms, especially when they are written in legalese. So the notion that a complex self-regulating society can be attained by following contract law is misguided, when there are many examples of powerful entities bending or disregarding rules for their own benefit and even lobbying to amend the laws102. It can also be shown that government regulation serves not the ‘public interest’ professed by reformers, but the narrower interests of the regulated businesses themselves — in effect pricing out smaller operations that cannot comply with regulation103. This undermines the whole system and places strain on the faith of the devotees of capitalism.

Within the framework of capitalism, the relation between the real industrial production of commodities and interest-yielding money capital ensures structural limits of the accumulation process104. As companies and sectors grow, they tend to outsource processes and services to the tertiary sectors, outside of the commodity-producing capital cycle that serve capital’s valorisation. In terms of the theory of circulation, only that labour whose products (as well as its reproduction costs) return to the capital accumulation process is productive; that is, labour whose consumption is recovered again in expanded reproduction. A large part of the labour in small-scale trade and all the labour of the banking system, credit and insurance, as well as that of the ‘juridical superstructure’, is in-itself unproductive, because it does nothing but mediate commodity-money relations, without itself being a substantial production of commodities. The structural limit of capital might consist in the very fact that its dynamic creates an increasing number of unproductive sectors and ‘third persons’, whose revenues and consumption become a growing burden which the reproduction of capital will ultimately be unable to support. Hence bailouts and subsidies are increasingly needed to ensure capitalism survives.

Karl Polanyi questioned whether a spontaneously ordered market can exist105, completely free of ‘distortions’ of political policy; claiming that even the ostensibly freest markets require a state to exercise coercive power in some areas – to enforce contracts, to govern the formation of labour unions, to spell out the rights and obligations of corporations, to shape who has standing to bring legal actions, to define what constitutes an unacceptable conflict of interest, etc… Polanyi pointed out that the attempt to commodify the fictitious commodities106,107 (land, labour & money), which he said was necessary for a market economy, would demolish people, business and nature if some mitigating steps were not taken. The basic dilemma is that the free market cannot self-regulate itself. A laissez-faire economy is, in fact, planned. It necessarily needs government management and social control. In addition, because markets treat nature as essentially limitless and human beings as commodities, they are always pushing human societies and nature to the breaking point. Invariably, crises erupt that require societal interventions. The relentless imperatives of markets cannot prevail indefinitely against the irreducible needs of human beings and nature.

Which leads us on to the physical limits of capitalism108 — being a system that requires constant growth to assure profits. In the summer of 1970, an international team of researchers at the Massachusetts Institute of Technology began a study of the implications of continued worldwide growth109. The earth’s interlocking resources – the global system of nature in which we all live – probably cannot support present rates of economic and population growth much beyond the year 2100, if that long, even with advanced technology. More than half of all the greenhouse gases (GHGs) emitted since 1750 have been emitted since 1989 – that is, when we knew what we were doing110. You would have to be a complete imbecile to think that this is not problematic. Australian National University emeritus professor Will Steffen111, notes:

‘This problem was the “neoliberal economic system” that spread across the world through globalisation, underpinning “high production high consumption lifestyles” and a “religion built not around eternal life but around eternal growth”.

It is becoming abundantly clear that (i) this system is incompatible with a well-functioning Earth System at the planetary level; (ii) this system is eroding human- and societal-well being, even in the wealthiest countries, and (iii) collapse is the most likely outcome of the present trajectory of the current system, as prophetically modelled in 1972 in the Limits to Growth work,”’

Humans thoroughly dominate the land biosphere making up 32% of all terrestrial biomass followed by around 65% in domesticated animals, leaving less than 3% of vertebrate wildlife112,113. This is due to continuous expansion into natural habitats by humans to farm and extract resources, without care for the environment. There is a correlation between megafaunal extinction and the arrival of humans, and human population growth and per-capita consumption growth, prominently in the past two centuries, are regarded as the underlying causes of extinction114. The ultimate drivers of those immediate causes of biotic destruction, namely, human overpopulation and continued population growth, and overconsumption, especially by the rich. These drivers, all of which trace to the fiction that perpetual growth can occur on a finite planet, are themselves increasing rapidly115. As Stephen M. Meyer points out in The End of the Wild, extinction rates — long before significant climate change kicks in — are already in the order of 3,000 species a year and rapidly accelerating116.

People with a large religious feeling toward capitalism, often espouse some sort of ‘Green capitalism’ to replace the non-green kind we have today. It is an attempt to make capitalism appear socially and environmentally responsible when it is not117. Green capitalism functions as a way to deflect questions over the role of capitalism in creating the problems in the first place, or its capacity to deal with them. It takes the same capitalist ideas and values that create environmental crises — i.e. continual economic growth, private property, profit and ‘free’ markets — and applies them to the natural world as a way to solve those crises. It serves to maintain capitalism’s dominance, both through finding new ways to generate profit, and as a way of protecting it from ecological critique.

Alternatives to capitalist economy are hardly ever discussed in the media or within public debate. Circular, participatory, environmental, subsistence and moral118 economies are never brought to the surface of discussions due, in large part, to the capitalist media and propaganda model, as discussed earlier. This has exasperated the climate and ecological harm that corporations have inflicted on the world. Most notably, ExxonMobil119,120 and other fossil fuel industry companies have violated, variously, racketeering, consumer protection, or investor protection statutes through their communications regarding anthropogenic global warming. In April 1998, American Petroleum Institute’s secret plan was leaked – the Global Climate Science Communications Plan121. The plan includes a multimillion dollar, multi-year budget and detailed strategies to install “uncertainty” in the public policy arena. This is on top of over 40 years of propaganda122-125, to muddy the perceptions of the public and to discard any legal implications of knowingly destroying the environment for profit126.

Capitalism has changed the world irrevocably over the last 200 years, in some ways arguably for the better but it’s growth model and innate contradictions has led the world down the path of civilisation collapse. Complex society will struggle to survive pursuing ‘free market’ ideology but its followers will struggle to find a replacement for their faith, being so immersed in the relentless propaganda to ensure the system survives.