Trickle-Down Economics is Not True Capitalism

The rise of rentiers and the destruction of the middle class

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By Eric Beinhocker 

“Four men sat at a table. Raised sixty floors above the city, they did not speak loudly as one speaks from a height in the freedom of air and space; they kept their voices low, as befitted a cellar.”

The four men in this early scene from Ayn Rand’s Atlas Shrugged are magnates of the steel, mining, and railroad industries who along with their lobbyist meet in “the most expensive bar-room in New York” to foil the book’s entrepreneurial hero, Hank Rearden, and protect their oligopolies. They conspire to use their influence in Washington to stitch up markets, crush competitors, and stifle innovation. They cynically clothe their plot in arguments that they are protecting “the public interest” and promoting a “progressive social policy.”

Ayn Rand would likely be deeply unhappy with the state of American capitalism today. Not just because of an overweening state, large budget deficits, and interventions in the economy such as Obamacare—the issues that so excite her disciples in the Republican Party today—but also because of the morphing of the U.S. economy into a playground of crony capitalism recognizable from the pages of Atlas Shrugged. Rand would have seen the growing reliance of businesses on Washington for corporate welfare, and of politicians on businesses for campaign contributions, as an unhealthy codependency that distorts the free market she so admired.

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The profits of firms in more than 40 percent of the U.S. economy—in sectors such as agriculture, financial services, real estate, oil and gas, health care, education, and defense—are deeply intertwined with and at least partially dependent on policies in Washington. Various studies show enormous returns on investments in lobbying—for example, the pharmaceutical industry reaps a return of 77,500 percent on lobbying versus 8 percent from actually making drugs. While Rand would have had many differences with the Occupy Wall Street protesters, she would have found common cause with their objections to the power of the K Street lobbyist-industrial complex.

The Rise of the Rentiers

Economists use the phrase “economic rents” to describe extraordinary profits that arise from distorted, uncompetitive markets. In a truly free and competitive market, there are no “rents,” only market returns. Rentier capitalism is a system in which the focus is not on creating, making, investing, and building, but on distorting, protecting, skimming, and getting a slice. Rand’s villains were just as often rentier capitalists as welfare “moochers.” The rise and continued support of rentier capitalism is perhaps the final remaining point of bipartisan cooperation in Washington. Democrats and Republicans alike dole out spending, preferential treatment, and regulatory gifts to favored industries and constituents, all oiled by ever-looser campaign finance rules. This creates space for horse-trading—a defense contract for my district in exchange for support of your regulatory break for financial services. Such horse-trading cuts by interest group rather than along party lines.

Fortunately, however, objections to the growing distortions in American capitalism are also increasingly bipartisan. Since the Lehman Brothers crash in 2008, the left has vociferously criticized the cozy relationship between the financial-services industry and Washington—from Matt Taibbi’s memorable Goldman Sachs-vampire squid analogy in Rolling Stone, to the self-immolation of Bush Administration officials in the documentary Inside Job, to the megaphones of Occupy Wall Street.

But perhaps the most extensive argument against rentier capitalism has come from the right. In his 2012 book, A Capitalism for the People, University of Chicago economist Luigi Zingales makes the attention-grabbing argument that the United States is increasingly becoming like his native Italy, where success isn’t based on what you know but who you know. We may not be having bunga-bunga parties in the White House yet, but Zingales leaves one feeling they can’t be far off. Zingales describes himself as a “pro-market populist” and argues for lobbying limits, financial reform, regulatory simplification, tax reform, reinventing antitrust law, greater transparency, and more equality of opportunity. There is much in his agenda for both the center-right and center-left to agree on.

In a similar vein, Charles Koch (as in “the Koch Brothers”) published an op-ed in The Wall Street Journal titled “Corporate Cronyism Harms America.” While his language is not as colorful as Taibbi’s, his overall point is essentially the same—when business and government interests collude in a corrupt system that distorts incentives, bad things happen. The Journal chose to illustrate Koch’s piece with a cartoon of a grinning Uncle Sam and a corporate fat cat carving up a large turkey together. Standing to the side is a lean and hungry-looking man holding out an empty plate. He might well have been labeled “The Middle Class,” for it is the middle class that has lost the most in the great American turkey carve-up.

Failing to Invest in the Middle Class

The facts about the decline of the American middle class are increasingly familiar, though startling nonetheless. After growing almost continuously since World War II, U.S. median income stagnated at the end of the 1980s and then, beginning in 2000, declined 11 percent. Middle-class incomes today are no higher in real terms than they were in 1987.

Much of the debt that caused the crisis was accumulated by the middle class as people tried to compensate for stagnant incomes by mortgaging up their homes and running up their credit cards. Then the debt bubble burst and the median family lost nearly $50,000, or 40 percent of its net wealth, from 2007 to 2010. For the typical middle-class family, the crisis wiped out 18 years of savings and investment. With too much debt before the crisis and their modest savings hammered by the downturn, many middle-class baby boomers are facing a major decline in living standards as they age. On the other side of the generational divide, this will be the first cohort in modern American history whose children will quite possibly be poorer than their parents.

So what do the rise of rentier capitalism and the hollowing out of America’s middle class have to do with each other? It is too simple to say that one directly caused the other. But they are more tightly linked than might be expected. The usual explanations for the woes of the American middle class point to big tectonic forces—namely globalization and technological change. At a superficial level this argument is correct—competition from low-wage countries has depressed wage growth in certain sectors, and technology has eliminated some manufacturing and middle-management jobs. But what this analysis leaves out is what we didn’t do—we didn’t make the long-term investments that would have helped us better adapt to these tectonic shifts.

One of the great historical strengths of both American capitalism and the American political system has been their adaptability. When the Industrial Revolution threatened America’s largely agricultural economy, America adapted and went one better, leapfrogging European industrial production by the early twentieth century. When industrialization then unbalanced America’s political system and strained its social fabric, Teddy Roosevelt unleashed a wave of political and social innovation, busting up trusts and introducing protections for consumers and workers. In the depths of the Depression, another Roosevelt responded with rural electrification, the creation of Social Security, and financial regulation that kept the system stable for 70 years. When the Soviet Union challenged America in the Cold War, we made massive investments in technology, education, and the National Highway System. The benefits of these innovations and investments flowed broadly in American society, not least to the middle class.

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Where are the innovations and investments that will enable today’s middle class to meet the challenges of our own era? While government spending has risen relentlessly over the past decades, what we have not been spending on is our future. The Economist Intelligence Unit, the research arm of The Economist, recently ranked U.S. education performance seventeenth out of 50 developed economies. If one takes out spending on the War on Terror, government investment in R&D as a percentage of GDP has declined over the past two decades, while Chinese investment has more than tripled and will pass ours in the next decade. And according to the OECD, the United States now ranks sixteenth in broadband penetration, speed, and price. Flying from run-down John F. Kennedy Airport in New York to Beijing’s gleaming new airport terminal, one wonders which is the developing economy.

One should not see this short-termism as only a problem of government. The private sector has also lost much of its ability to think and invest for the long term. Starting in the 1980s, elite business schools began teaching future managers and investors that the only metric that matters is shareholder value. This was a dramatic change, as throughout most of its history American capitalism had operated on a stakeholder model in which managers sought to balance the interests of multiple stakeholders, including investors, customers, employees, and local communities. The shareholder-value revolution created a short-term quarterly earnings culture, a bias toward sweating assets versus building them, a view that employees are a cost to be managed rather than human capital to be invested in, and a love of debt. It also made CEOs and their top managers immensely rich by showering them with stock options. While CEO compensation shot upwards, corporate debt levels climbed, R&D spending dropped, and employee churn and temporary work rose.

Some might reply, what about Apple, Google, and Facebook? Don’t we still have plenty of innovative companies? Yes, we still have Silicon Valley and other pockets of entrepreneurship that are the envy of the world. But it is important to note that Silicon Valley was built by and continues to live off of the long-term investments of an earlier era—whether it was the government contracts that enabled Fairchild Semiconductor to launch the microchip revolution and spawn companies such as Intel, or DARPA’s invention of the Internet that made Google and Facebook possible, or Bell Labs’ early investments in cellular communications that lurk beneath every Apple iPhone. And yet Silicon Valley does not an economy make. Facebook, the most successful startup of recent times with a market value $60 billion, employs fewer than 5,000 people. Most of Apple’s job creation has been in China.

So it is true that America’s middle class has been under pressure from global competition and technological changes. But it is also true that America has not been investing enough in education, infrastructure, and technology to equip our middle class to compete in a more challenging world. Short-term rent-seeking and political gain have been driving out long-term investment.

Middle-Out Economics—True American Capitalism

Ayn Rand would have deplored this mutation of American capitalism. It is the opposite of the entrepreneurial, risk-taking, meritocratic capitalism she celebrated. In a twist of historical irony, the narrative that justifies this mutation is one of free-market conservatism. Just as Rand’s villains in Atlas Shrugged justified their market carve-up with cynical arguments about “social progress” and “public service,” today’s rentiers justify their actions by citing Rand, Hayek, and Friedman, claiming it is “the free market at work.” So when a bank threatens to trade against its own client unless the client steers it new business with fat fees—something Tony Soprano might have called “protection”—bankers call it “the efficient market at work.” Or when the clubby board pays its CEO handsomely despite mediocre performance, it claims it just reflects the “global market for talent.” Or when a lumbering corporate giant gets a tax break, it calls it “promoting entrepreneurship.”

Perhaps the most insidious narrative has been that of “trickle-down economics.” It has created the myth that helping powerful plutocrats is somehow the same as encouraging the free market. Orwell would have admired the doublespeak. But the true history of American capitalism has not been “trickle down,” it has been “middle out.” More than a century of private- and public-sector investments made American workers the most productive in the world. As labor productivity rose, so too did wages, creating the largest and most prosperous middle class the world has ever seen.

Middle-out economics is a principle that Henry Ford understood when he decided to pay his workers enough so they could afford to buy his cars. Entrepreneurs start companies not because of tax breaks, but because there are consumers out there who want and can afford what the entrepreneurs make. And most entrepreneurs don’t start rich; most start in the middle class or below. Steve Jobs’s father, Paul, was high-school educated and his mother was a payroll clerk—they struggled to send Steve to college. Sam Walton’s father was a farmer, and Walton started his business with $5,000 saved from his Army pay and a loan from his in-laws. Neither of these entrepreneurs would have benefited from tax breaks for the rich. Think of all the potential Steve Jobses and Sam Waltons who didn’t make it because their parents couldn’t afford to send them to college or because they couldn’t get a small-business loan. Government doesn’t make entrepreneurs, but it can help them help themselves.

Trickle-down economics may work in textbook economic theory with ivory-tower assumptions about perfectly rational people and perfectly efficient markets. But in the real world of politics and interests, it simply provides a cover story for rentier economics. It dresses up anti-market behavior in free-market rhetoric.

Other have presented Middle-out economics as a progressive argument—but it can just as easily be presented as a conservative argument. It is a call for a return to a truer form of American capitalism. It is an argument for going back to the values that have described American capitalism since de Tocqueville—competition, meritocracy, equality of opportunity, innovation, risk taking, and reward for hard work, self-improvement, and fair play. Both Randians and modern conservatives such as Koch claim to disdain rentier capitalism and celebrate these values. But what Rand’s acolytes, Koch, and the Tea Party fail to see is the constructive role government must play if these conservative values are to be made real. This is not the heavy-handed interventionism or disdain for markets by socialists or the far left. This is the enabling and investing role of government supported by generations of both centrist Republicans and Democrats.

Rand argued that the masses need elites. But elites also need the masses. In Atlas Shrugged, a grasping state causes the elite to go on strike, with dire consequences for the world. In America’s current case, a grasping elite is in danger of strangling the middle class, with consequences potentially as dire as Rand’s dystopian vision. It will take deep reform and a reassertion of the political center, but America can move away from rentier capitalism and return to the middle-out capitalist model that has served it so well. If not, there are a billion middle-class Chinese, Indians, Brazilians, and others who will only be too glad to take over America’s lead.

Originally published at here.

10 August 2015

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  • Swami Cat

    First, let me start with the praise, Eric. Your book The Origin of Wealth is one of my all time favorites. I read it three times. Second, I broadly agree with the concerns of rentier capitalism.

    Now the nits which must be picked…

    First, trickle down economics isn’t a thing. It is a condescending straw man created by the left to demonize market promoting activities in general, not just cronyism and corporate rent seeking. You are just jabbing at the scarecrow and playing into the propaganda.

    Second, I am pretty sure you are well aware that Ford didn’t raise wages so people could buy his cars. He raised them to reduce turnover. In other words, his move was a rational market move. Competition for semi skilled workers led to rising wages. Similarly, rising wages also allowed us to afford shorter work weeks, better working conditions and standards against child labor. Let’s get the causation right.

    Third, money spent on education is higher in the US and rising steadily (you didn’t source your statement so I won’t source mine). The issue isn’t lack of investment it is in lack of prudent investment (more spent, but widely absorbed by rent-seeking bureaucracies and unionized labor cartels.) As for subsidizing R&D, read the Venturesome Economy by Amar Bhide for an alternative view. I think international competition, as theory predicts (Stolper/Samuelson)

    In summary, I think you have misdiagnosed half the problem.

    • Brian J. Gladish

      I think your criticisms are hardly nits, and I second them. Beinhocker also fails to realize that government “investment” is the source of a great deal of rent-seeking.

    • John M Legge

      Get your history correct. Ford’s first big raise was part of his bargain with Frederick Taylor whom Ford relied on in designing the production line. When he raised the wage to $5/day the ruling wage was $2/day: Ford’s increase was far more than needed the reduce turnover.
      Your belief that “unionized labor cartels” can distort the US economy with less than 8% of private sector workers in unions says more about you that the facts. The US grew more rapidly and with much less inequality when unionization was much higher.
      Money spent on higher education in the US may be rising, but money spent on teaching and research is not. The money is going to build ever larger bureaucracies stuffed with overpaid deans and vice presidents.

      • Swami

        Here is a quote from Krugman explaining the terms of the higher wage. It was paid based upon the economic justification of attracting and retaining a better worker with demanding stipulations:

        “The $5-a-day rate was about half pay and half bonus. The bonus came with character requirements and was enforced by the Socialization Organization. This was a committee that would visit the employees’ homes to ensure that they were doing things the “American way.” They were supposed to avoid social ills such as gambling and drinking. They were to learn English, and many (primarily the recent immigrants) had to attend classes to become “Americanized.” Women were not eligible for the bonus unless they were single and supporting the family. Also, men were not eligible if their wives worked outside the home.”

        As for your comment on union labor cartels, my reference to them was their effect on rent seeking within the education industry, where public service unions dominate. I agree with your comment on bureaucracy, but if you read my original remark more carefully, you will see that you are just repeating my initial point.

        If you want a discussion on the contribution between unions and economic growth and inequality I will have it with you. The economic illiteracy of people who believe that unions played a significant role in the several order of magnitude increases in lifetime living standards never fails to amuse me (emphasis on significant).

        • John M Legge

          Unions played a number of critical roles in the rise in living standards from the 1850s to the present.
          They endured that some part of the value created by higher productivity was paid as wages ensuring that demand for consumer products grew and so justifying further investment leading to further growth. Even anti-union shops such as Ford before the Wagner Act paid wages that were competitive with those paid at unionised enterprises.
          Unions formed the organising and financing base of the labour and social democratic parties and used their political power to build the education, health and research systems that constitute the social infrastructure needed for the continued development of entrepreneurial capitalism.
          I note that you share the American right wing’s contempt for teachers. Whatever the problems in the US school education system, blaming unions represents bias overtaking evidence. There is no evidence that the educational and social outcomes for students in non-union charter schools taken as a whole are better than those for students in unionised public education.

          • Swami

            “Unions played a number of critical roles in the rise in living standards from the 1850s to the present. They ensured that some part of the value created by higher productivity was paid as wages ensuring that demand for consumer products grew and so justifying further investment leading to further growth.”

            The key words are “higher productivity”. Higher average or median incomes is basically a factor of higher productivity adjusted slightly up or down a bit for supply and demand of the relative factors of production. With reasonably free competition between thousands of employers, the dynamic attractor is toward labor getting higher wages commensurate with higher productivity. Productivity has gone up two percent or more per year for two centuries and wages, as expected have gone up similarly.*

            Let us put this in perspective. At two percent per year, productivity and standards of living are easily twenty to forty times higher today than before the industrial revolution. Estimates of unions are that they raise wages relative to non union shops by 15%. Fifteen percent is less than one one hundredth of the increase in living standards we are attempting to explain. Hence my comment that unions did not have a significant impact on improving living standards.

            Unions do negotiate collectively for workers, and I fully support this freedom. However, it is just one form of negotiation. Another form is individual negotiation, something which productive, harder working people often prefer. Unions are just one means to the process of negotiations. It does get higher wages (again about 15% higher) for workers than non unions, but it does this by forming a coercive cartel which unfairly privileges existing and senior employees over prospective, junior and harder working employees. The key point is that it excludes prospective workers by artificially raising wages for privileged existing employees. The cartel may also demand higher wages be paid via higher prices for consumers (again harming non union workers via higher prices) or by lower profit margins. This agains harms consumers and non union workers because it limits investment and thus future employment and production opportunities.

            Unions are — to slightly exaggerate the case– a form of coercive cartel who use their cartel power to artificially raise wages by beggaring non union workers and future workers. They promote featherbedding, reduce investment, lead to misallocation and inefficiencies in labor markets, and distortions in investments and prices. In addition, many unions in the US are anti productivity and change, thus restricting technological progress, research, development and market responsiveness.

            Looking at union industries, companies and states compared to non union industries, companies and states shows that unions effectively choke themselves out of existence based upon economics. Wage growth is HIGHER in non Union states. Employment opportunities and growth are higher in non union industries, companies and geographies.

            Stating unions had a significant long term effect on wages is bad economics and ahistorical. Note the emphasis on the word significant. I am not trying to make the case that they had no positive effect, though I do strongly suspect the net result would be negative. Honestly I am not sure.

            I think the best thing that unions really did was counteract cartels and coalitions of exploitative companies which abused their role. In other words, abuses on the labor sides checked abuses on the management side. I think this MAY have been significant. The better solution isn’t two wrongs to make a right though, it would be to not allow either side to form exploitative cartels.

            “Even anti-union shops such as Ford before the Wagner Act paid wages that were competitive with those paid at unionised enterprises.”

            I always paid competitive wages to attract and retain the most productive workers. I never worked in a union dominated industry. Unions just gum up the process. Competition for workers along with rising productivity is sufficient to explain rising wages. Unions are superfluous, unless employers are abusing their power as above.

            “Unions formed the organising and financing base of the labour and social democratic parties and used their political power to build the education, health and research systems that constitute the social infrastructure needed for the continued development of entrepreneurial capitalism.”

            So you are suggesting education or research were promoted by private industry unions on net? I find that doubtful. I suppose they could have done some good there. I am sure they did some harm too. I am not sure on net what the benefit was.

            To argue that unions helped the social democratic parties is likes a conservative arguing that the Kochs helped the Conservative parties, thus were a force of good. The argument begs the question in a way which others may not agree with at all (I assume you don’t believe the Kochs were a major force of good even though some conservatives might). Let us just say this line of reasoning is preaching to the choir.

            “I note that you share the American right wing’s contempt for teachers. ”

            Then you need to work on your reading comprehension. I have contempt for public service unions. They are effectively cartels within monopolies. I certainly don’t only blame unions for the inefficiencies of our schooling and said as much above.

            “Whatever the problems in the US school education system, blaming unions represents bias overtaking evidence. There is no evidence that the educational and social outcomes for students in non-union charter schools taken as a whole are better than those for students in unionised public education.”

            I was not arguing for charters, though I would argue for substantially more consumer choice (including the choice of whether teachers are unionized) in schooling. But since you brought it up, here is an article on the effectiveness and cost effectiveness of school choice.


            And here is one I just happened to be reading today on the damages of public service unions.


            * in last generation wages have started to deviate from productivity due to increasing share of non wage benefits and due to unprecedented increase in supplies of workers with a billion plus added to global markets, temporarily holding down returns to labor and temporarily increasing returns to capital and entrepreneurial activity and to relatively scarce skilled labor. The dynamic of markets (in form of returns to the factors of production) is the market dynamic adjusting to this.

  • Swami Cat

    Sorry, the edit function stopped working. The Stolper Samuelson sentence meant to read that globalism has led, as theory predicts to three things:
    1) substantial and awesome rises in worldwide wages to lower skilled labor. This is the most significant event in the history of economics since the industrial revolution as a billion people have risen out of poverty. It is the story some try to bury.
    2) higher returns and profits to capital and “superstars”
    3) stagnant incomes for lower skilled labor in the relatively overpriced developed world.

    I am sure better education would help things (indeed spending half as much wisely would lead to better results). But I think economics explains inequality quite well, and it is in total a great thing.

  • Derryl Hermanutz

    It’s worth rereading John K Galbraith about the 20th century evolution from small-medium entrepreneurial firms personally managed by owner-operators, to large publicly traded corporations that are collectively managed by a technocracy of deeply but narrowly informed specialists. There is no need to design incentives to align the interests of the human entrepreneur with those of his firm, because the firm’s income is his income. He will not bleed his own company to maximize his short term persoanl income, because his long term interest is tied to the fortunes of his firm.

    Compare large corporations, owned by absentee shareholders, managed by executives who extract opulent salaries and obscene bonuses by using company profits to buyback shares to increase the share price and justify executive bonuses. Executives who took annual pay packages in the 10s and 100s of millions during the years they were bankrupting the banks that they managed. And were not fired but were retained to take, take some more, not just from their clients and shareholders but from taxpayers and the central bank national money systems as a whole.

    There is no question who is legally and financially liable when an entrepreneur’s firm does civil damage or suffers losses. The damages and losses come directly out of the owner’s pocket. Corporate CEOs are not held personally liable for the damages they do and the losses their firm suffers. Their employer — the corporation — pays those costs our of company profits. Corporate executives get obscene bonuses for “reducing the damages payout”, and the costs come straight out of retained earnings and shareholder dividends. There is no downside, for corporate managers who pursue short term personal gain at the expense of their employer.

    John K Galbraith saw clearly that an economy populated by large richly capitalized corporations is a fundamentally different kind of thing than an economy populated by independent small and medium businesses whose owner-operators have their own capital and their family’s livelihood on the line. The corporate economy is an oligopoly with few players who do not compete with each other on price but rather compete for market share. The financial sector of the corporate economy profits from lending money to consumers who want to buy corporate baubles, but who lack income because their wages were cut and their jobs were offshored.

    The entrepreneur economy is more like Adam Smith’s free market village where there is more than one butcher competing for the villagers’ limited ability to pay for meat. In a soft market the butchers will cut their prices because they need sales to buy their daily bread. They don’t need sales to pad the quarterly earnings report to justify their rich salaries and bonuses.

    The corporate economy, which captures the State legislative and regulatory branches, together comprise what Galbraith called The Planning System. Today it is called the Corporate State. Unlike entrepreneurs who are price-takers, corporations exercise market power to dictate prices to suppliers, trades, and other contributors to corporate operations; and to set the sale price of corporate outputs. Corporations do not meekly serve consumer preferences. Corporations actively manage consumer preferences with advertising and corporate owned entertainment and news media. Corporations create a “culture” in which consumption of corporate-produced goods demonstrates your worth as a human being.

    In the early 1970s Galbraith estimated about 1/2 of the US economy was corporate, and the other half was entrepreneurial. I would estimate the economy has become significantly more corporatized and less entrepreneurial over the subsequent 40+ years.

    Corporations exercise the powers of economic “government”. At the same scale as nation-states. In 2008, Exxon Mobil reported earnings of $408 billion. In 2008, the GDP of Venezuela was $405 billion. The 9 member Board of Exxon exercises governing power over a corporate economy larger than does the government of Venezuela. And the Venezuelan government does not directly manage the nation’s entire $405 billion economy, only the public sector (taxation) part that is less than half of the total.

    Corporate managements are more like technocratic governments of large private economies, than they are “free market competitors” like Adam Smith’s struggling butchers. Yet the economics profession insists on treating these behemoths as if they do something other than private economic government of the lion’s share of the global economy. The TPP and TTIP formally transfer governing power from nation-states to global corporations.

    In, The New Industrial State, Galbraith recognized that large well-capitalized corporations are the only entities capable of marshaling the wherewithal to exploit science to produce commercial technologies. Adam Smith’s villagers could not have built an electrial generator and power grid, or lightbulbs. The 1951 story, “I, Pencil”, illustrates how even the apparently simplest manufactured product is made with materials that are sourced globally. Free market villagers can’t afford to scour the world searching for rubber and tin to make pencil erasers. Without corporations, the physical wealth, comforts and luxuries of industrial civilization would not exist.

    I do not object to corporate industry per se. What I object to is global corporations who practice economic government masquerading as meek little competitors as they take over the government of the world. All values are not material values. There is more to life than economics. But you’d never know that from the reductively materialist consumer culture that corporate capitalism has built, and that finance capitalism has mired in debt serfdom.

    • Rob Lewis

      The Wal-Martization of the economy has many negative knock-on effects. When commerce and small-scale manufacturing were conducted by locally-owned small businesses, these owners tended to be pillars of the community who took care that citizens were supported and treated decently. Since they lived where they did business, they would have to endure public scorn for rapacious conduct. The distant executives and stockholders of Wal-Mart don’t have this check on their behavior.

  • LeeHazelwood

    Good article, Rand came close to real capitalism but missed the most fundamental point of economic rent. By far the biggest and most damaging, is the value that accrues to government granted monopoly in land titles. And indeed as Rognlie and Stiglitz have tried to point out to Piketty
    his own data shows land value has only risen as a % of GDP since 1945, the IMF measures crashes following peaks in land value as twice as damaging to GDP growth. Land values probably constitute about 1/3 of GDP of most developed countries, whereas copyrights/patents that Rand did understand, only 1 or 2%.
    The most pro capitalist system would be simply to tax economic rents as fully as possible and leave capital, labour and consumption untaxed just as the Physiocrats suggested, and Adam Smith, Ricardo, Mill and George all built upon this Laissez faire doctrine before it was confused and corrupted by land blind Libertarians and Socialists/Marxists alike.

    Henry Ford
    “We ought to tax all idle land the way Henry George said – tax it heavily, so that its
    owners would have to make it productive.”

  • From the standpoint of Evonomics, I think it would be easy to re-title this post as Capitalism in
    not what EITHER conservatives or liberals think it is. All of the comments would equally apply. And, while I agree with the conclusions of the article, I think there is another dimension that academics need to address to fully understand a much deeper tragedy underlying this problem.

    For reasons beyond the scope of my comments here, I believe that all of human society is suffering from a loss of a universal approach to finding TRUTH. Because of this loss, to avoid
    conflict, our founding fathers and others have offered up the “noble copout” concept that “everyone should be ‘entitled’ to their own opinion.” Sounds pretty democratic. But holding this concept up as noble in its imprecise raw form, opened the gate for a universal breakdown of communication throughout modern society.

    Consider the culture of colonial America 1787. The population was a small simple agrarian society. If one person wanted to believe in Anglican theology, another in Quaker, a third Calvinist, and a fourth in none, these people would be able to grow food and produce simple goods for the community without their beliefs interfering with the lives of others. Most people of the time were able to understand almost all the technology they used. In the market place, their trades were simple – a bushel of corn for some shoes, or to get a rake fixed. The fact that the shoes were made with one set of tools by a Quaker, or another set by an atheist did not affect the state of the product which the buyer could determine from physical inspection.

    This is no longer the case in the modern world. If a person is taken by ambulance to a hospital, treated in an emergency room, operated on, and prescribed drugs for recovery, not ONE of those services can rely on individual providers making their own unqualified decisions about how they are going to perform. Even in the routine of daily life, no person gets in an auto believing they can drive any type of machine they want in anyway they choose. Each person must pass a standardized driving course and tests, hold standardized licenses, present standardized documentation, carry standardized insurance, drive approved and inspected machines, position themselves in specific locations of the machine and even restrain themselves in specified ways, follow standardized pathways at specified speeds, park in authorized spots, and even comply with tightly constrained rules on how the machines face, how they are positioned, and the time restrictions on how long they can be there. We wake up from beds where the materials are tightly controlled for fire prevention, turn on lights that use electricity standardized world wide, wash with regulated water dispensed by temperature controlled machines regulated by books of building and fire codes. This world, and the world of 1787 are NOT the same world! The cultures that define them are very different. YET, the people of the planet, somehow, still believe, “everyone should be ‘entitled’ to their
    own opinion” in the same way that was meant for the colonists of 1787.

    This belief introduces a huge FLAW into every institution in modern society. If this is not brought to the attention of every citizen on the planet, and they are not provided with adequate bases to understand the problem, a new paradigm to replace it with, and tools to help them make the change, I believe this flaw alone is sufficient to cause the collapse of our culture.

    To the point of this article, assume that we could actually make this transformation in human thinking. Then, people who carelessly throw around self defined terms they label “capitalism”, conscripting them for their own interests, would quickly be brought to account. And that is what is missing in the whole political conversation about capitalism; and democracy, socialism,
    communism etc. Even in the community that this article will circulate in, in our current society, there will be as many different definitions of capitalism to criticize as there are readers!
    And unless each reader understands the detail of their own belief of the term, and every writer and commenter specifies their specific belief, a seminar of presentation and comment will devolve into a quagmire of misunderstanding, whether live or online. The participants, in the better cases, will leave with professional decorum, sincere respect for the efforts of the others, but without substantive gain in either their own understanding or the joint improvement of the world’s understanding of the presented issue. Looking at only my last seven years of university level interactions, I have never seen one event that did not, tragically, live up to this description.

    So, again, I agree with the points presented in this paper. I learned a few things from it and from the comments. But the flawed structures underlying how modern society and modern academia operate will insure that we can publish (and I’m sure already have) ten thousand such discussions of capitalism without bringing our understanding of the full mechanics of the
    “essence” of any of the specific renditions of capitalism to a functionally useful conclusion.

    I joined the Evonomics effort to share discoveries I’ve made related to the structures underlying our culture and communication failures that are seriously hurting us. The discoveries go beyond just insights for criticism; suggesting many solutions. Anyone interested in exploring these
    paths further, please contact me. bnappi (*at*) A3society ((dot)) org

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  • Kelborn Sinclair

    All Capitalists are rent seekers, they can only exist as individuals who leverage their property rights to force the labor market into giving away rights to the profit of their labor and all self-determination involving that labor.

    This ongoing attempt by Capitalist apologists to redeem Capitalism, by creating ever more fantastical images of the True Capitalist economy, is so much wasted effort in the face of all 600 years of history of actually existing Capitalism. Bitcoin, maybe the latest and greatest hope of free market ideologues to prove that capitalism could be different, followed the same path of accumulation and centralization that every capitalist ecosystem has been demonstrated to follow. At first it was a truly free market where individuals could and did make good business with the small level of resources available to them. But the inevitable result of true competition in a free market lead to the current state of bitcoin mining: the infrastructure has been accumulated by ten or so large firms who won that competition. Now it is impossible for individuals to mine bitcoin, as the winners of the market have created conditions in which it is impossible to compete against them, as any rational actor would be expected to do.

    Cronyism, protectionism, rent seeking, whatever you want to call it, it’s all the same and it always happens. Because whether you’re comfortable with it or not, it’s a natural part of Capitalism that cannot be isolated and rooted out; doing so would require a change in social organization that would completely destroy Capitalism.

    Marx originally wrote Capital as an analysis of Capitalism as it was idealized by its greatest contemporary proponents. Times have changed, apologetics have evolved. But no matter how many times the apologists shift the goal posts further into the realm of the idealized and idolized, they can’t outrun the truth of it. Capitalism IS cronyism.

  • stevebreeze

    As I remember (old guy here) one of the precepts of “trickle down economics” was that the wealthy did not have sufficient funds to invest in new opportunities. Remember this was 1979 when the share of income going to working people was still very close to it’s high point. Of course this was not true at the time, but it is far far less true today as the income share of the wealthy, not hidden in overseas accounts is near it’s high water mark.

  • pelham

    So we should free ourselves from the rentiers only to fall into the clutches of the Randians. Big whoop.

    Also, while it’s true the US middle class was growing and prospering in the somewhat more competitive years after WWII up till the 1970s, that was a very brief and peculiar period in the history of capitalism following the unprecedented devastation wrought by two heavily industrialized global wars and the ascendance of what for a time appeared to be a viable alternative system (communism). The century and a half before then was riddled with recessions, depressions, banking panics and other associated horrors while the vast majority of people who lacked the means of self-sufficiency lived brutal, hopelessly indebted, precarious lives in a much more natural state of capitalism — a state to which we have slowly been returning over the past 3 or 4 decades.