Pedro Schwartz, "Capitalism and its Names.". Library of Economics and Liberty, Nov. 7, 2016.
Those of us who have seen The Bridge on the River Kwai will never forget the upright character of Colonel Nicholson, blindly intent on building a railway bridge for the Japanese to the best specifications. He wants to do a superior job, so as to restore the morale of the prisoners he commands and to show the Japanese what the British are capable of. It is only at the last minute that he sees the larger picture wherein his work fits. The broad frame is the war that the Allies are waging against the Axis nations in the Far East. He blows the bridge up unwittingly when falling dead with the words "What have I done?" A man intent on doing a good job to the best of his capacity may be causing much greater harm, which he cannot see for his blinkers.
The danger of eclecticism
"A man intent on doing a good job to the best of his capacity may be causing much greater harm, which he cannot see for his blinkers."
During the 20th century and the early years of the 21st the positive effects of the free market and globalisation on the welfare and equality of the poor of the world have been spectacular, as I mentioned in my previous column.1
Such a fall in the number of the poor must by itself have meant a drastic reduction of inequality (unless you know no arithmetic). However, nothing is more fashionable than to run capitalism down. Capitalism is said to have been based on the exploitation of the weak. It divides society into warring classes. At heart, it is deeply immoral, as it fosters anti-social greed and war-like competition, thus undermining the more fraternal and collaborative inclinations of humankind.
I shall have much to say to rebut those accusations and praise capitalism in future columns, but my kind readers will have to wait to see me shift this heavy load of accusations. Today however I want to grapple with a different problem. First, I do not see the history of capitalism as a tale of unalloyed progress untainted by cruelty. And secondly, there are indeed occasions when the market could be supplemented by administrative and legal intervention.
Does this mean that we are right to shut out from our vision the negative side of capitalism? Or does this mean that we ought to take a middle stand and wade in the bogs of Franklin D. Roosevelt-style liberalism instead of moving up to the clear waters of alpine freedom? I remember Karl Popper once saying to me about a middle-of-the-road speaker: "Pedro, this man is an eclectic. What can we do with an eclectic?" With Popper looking over my shoulder, let me explain how I understand the limits of the market and of administrative intervention, while steering clear of eclecticism.
Health and the free market
Angus Deaton (2013) has posed a fundamental difficulty for us defenders of market capitalism. In a most challenging book he respectfully criticizes Robert Fogel (2004) for putting excessive weight on nutrition and human growth for the explanation of economic progress in the 18th and 19th centuries in the Western World, and too little on those measures of public health that were taken even before improvements in medical knowledge and technology entered the scene. They both agree that "the great escape in human history is the escape from poverty and death". (Deaton, page 23) But for his part, Fogel thinks that the greatest cause of the increase in the life-expectancy of populations, and of the height and weight of individuals in those centuries, is explained by food, the production and consumption of food. Deaton does accept that poor nutrition was the trap that kept populations in ill-health, but he holds that the great increase of life expectancy from the middle of the 19th century, and more clearly in the 20th century, are not the exclusive effect of increased productivity. Since the progress and the application of medical technology are largely due to publicly subsidized research and administrative intervention, this means that a great part of the progress in the well-being of humanity in the West and now in underdeveloped countries happens outside of or beside the operation of the free market.
In defence of Deaton, one can adduce an observation of Samuel Preston's (1980), who in the upward march of human health sees not only a correlation between income per capita and life expectancy, but an unexplained upward shift, which indicates that "some systematic factor other than income must be responsible". That cause must surely have been changes in hygiene and public policy in the 18th and 19th centuries, and in the 20th advances in medical knowledge—only partially connected with capitalist productivity per head. To the health factor Deaton gives the whole of Part I of his book. He there recounts the huge extension of life-expectancy, especially after 1945, due to steep falls in child mortality and maternity deaths, by the conquest of infectious diseases; and to the prolongation of life in middle and old age. The question for us arrant pro-capitalists is that the advances in epidemiology and public health that have had such a large effect on the length of life were not launched and delivered wholly through the market and by the private sector. This demands a recasting of the argument for free markets. Such is the question I want to face, and if possible solve, in this column. To solve this whodunit I want to explore whether we can find a value to which both the market and public administration are beholden.
Foreign aid as a counter-example for interventionists
A spotlight can be shone on that awkward question by recalling the disappointing results of most forms of international aid to developing nations. William Easterly is a widely-known critic of foreign aid to developing countries. He has lately summed up his lifelong experience in the 2015 Hayek Memorial Lecture at the IEA.2
First, according to Easterly, the dispensers of aid mostly lack the local knowledge needed to reach their humane goals. Their aid-and-advice kits are as useless as the Five Year Plans of Real Socialism before 1989 and for the same reason. Secondly and from hard experience, Easterly laments how experts who manage aid programs despise poor people and dictate to them, as if they had no rights. He reminded us in his lecture of the inhumane campaign of coerced sterilization imposed by Indira Gandhi and carried out by her son Sanjai in 1975-76 on thousands of men and women, with the World Bank and other International Aid Agencies turning a blind eye. The need to control word population (in any case misplaced) seemed to excuse impositions on 'poor, ignorant people' who did not know what was good for them. Easterly gives other examples of overbearing behavior by authorities aided and abetted by aid donors, when private landholdings were consolidated at gun point with total disrespect for individual rights in the name of efficient agriculture.
Of course, the 'rights' Easterly has in mind are the fundamental freedom-rights or 'negative liberties' that Isiah Berlin defined. He does not mean the 'positive liberties' or capabilities and functionings of Amartya Sen and other social-liberals of the aid community, to be fostered by means of entitlements, subsidies, free health, free education, and public pensions. As Easterly well says, the first condition for international aid to attain the hoped for results is respect for the personal, legal, and political liberty-rights of the inhabitants of less developed (and indeed well-developed) countries. He concluded that the problem "is not a shortage of experts but of rights".
Indeed, Angus Deaton would, I think, fully agree with Easterly when passing judgement on international development aid. The third part of his book deals with the unexpectedly negative consequences of foreign aid on the countries that receive it: the funds do not reach those in need, foster political corruption in recipient countries, displace local humanitarian efforts, result in the satisfaction of the donors rather than the progress of the poor... He chastises the "aid illusion", that increasing the amounts given would solve the problem of poverty; he decries the "hydraulic view of aid", whereby the aid process consists only of letting. He warns against the misuse of funds because "aid is fungible" in that it can be used to substitute for existing investment and so wrongly appropriated. Especially mischievous, he adds, is the poor record of foreign aid to undemocratic regimes. Even medical and health aid, so much easier to evaluate for its results, can misfire. Deaton concludes that much of what Peter Bauer said in his (1972) Dissent on Development was right when he traduced government aid and pointed at the counterproductive effects of well-meant development plans.
So, in the matter of foreign aid it is rather counterproductive to underline the political and expert side as an example of what can be done in correcting market defects. The market would say 'Trade, not Aid'. And in any case political and expert intervention clearly does not help absent a framework of freedom-rights. Deaton should ask himself why it is that expert aid programs that are successful in advanced democratic and a few developing countries, such as Botswana, can fail dismally in needy societies that need them most. My answer in this column is that experts are short-sighted when they ignore the matrix that makes both capitalism and public administration work best, to wit, the respect for individual and political freedom.
Historical blemishes and by-ways
It would not do if I left the inhumane parts of the story of capitalism out of this chapter. I have made an allusion to the domination of extractive rather than productive government in Iberian America. First was the contagion of the natives with smallpox, diphtheria, varicella, and other illnesses unknown in the Americas, then the harsh serfdom imposed by the Castilians took a cruel toll among the indigenous workers and imported Negroes. From the point of view of economic growth it caused in Castile what could be called 'the silver curse', since the precious metals extracted from such mines as Potos' in today's Peru and Zacatecas in today's Mexico allowed the Spanish King to engage in fruitless religious and political wars in Europe. I do not need to say that this was not the first nor the last 'extractive' conquest in the history of humanity
The Portuguese and Castilian feats of discovery in the Far East and Americas did contribute signally to the development of capitalism in Europe. Spices and silk came round the Cape or from the Philippines to slake the thirst of white men for luxuries. Goods from Flanders and Italy were purchased with American silver to be transported across the Atlantic. The monopoly of the trade with the 'Indies', as Latin America was called then, imposed by the Castilians, was an incentive for the violent exactions of pirates and privateers, whose silver booty went into the monetary bloodstream of the world. So did legal smuggling, since foreign powers were variously allowed one trading ship a year and additionally profited from the slave trade. Still, the language, the religion, the laws, the architecture of the Iberian Peninsula left their mark on large expanses of the world. One must not forget the 'Columbian exchange' of plants and animals, from horses, vines, and corn one way, to tobacco, maize, and tomatoes, the other. All in all, the 'discovery' of America had large commercial, financial, and inflationary effects on the world economy, from Europe to China.
More generally speaking, the drive of capitalist states to establish or impose colonies on parts of the world unable to defend themselves against the military might of the West was often seen as a necessary ingredient of the accumulation of capital for the growth of capitalist economies or their survival. Vladimir Lenin published a pamphlet titled Imperialism, the Highest State of Capitalism in 1916, as an attempt to explain why the great powers were immersed in "the first world imperialist war" and why the capitalist system needed to conquer colonies to suspend the necessary law of its demise. For Lenin, capitalism had reached the 'monopoly stage' when the exploitation of national markets had reached a limit and surplus capital was forced to be invested in colonies, with the indirect effect of buying the subservience of the domestic working class by granting it a share in the colonial booty.
Lenin was wrong on both counts. Industrialisation need not start with the primitive accumulation of capital invested in heavy industry. And the capital needed for industry was not dependent on the exploitation of colonies. Indeed, the capital needed for the Industrial Revolution in Britain was principally domestic; and the largest part of its capital exports went to non-colonised regions. Often the opening of markets at gun point was followed by the opening of markets to free trade. Another reason for rejecting Leninist theories of colonization was that the exploitation of subservient regions did not turn out to be for the benefit of the metropolis, though it may have profited individual politicians, civil servants, and interest groups. A final reason is that in most colonising countries, the moving cause was nationalistic assertion, especially after the Congress of Berlin and the 'Scramble for Africa' and the Far East. By 'scrambling for power' capitalist nations were taking the path that led to World War I.
Marxist critics especially have often insisted on a tendency of the capitalist system to engage in war as a solution for its internal contradictions, just as they said that exploiting colonies were a necessary late phase of the system. Mark Harrison (2014) has written a balanced essay on this hobby-horse of the anti-capitalist left. The main evidence proffered in favour of this thesis is the reduction in unemployment in Germany under a rearming Hitler, and the reduction in United States unemployment due to the World War II effort. Budget deficits and military expenditures in Nazi Germany were too small to explain a trend that had begun before Hitler became Chancellor. (Harrison, page 358). In the U.S. case, the government of course reduced unemployment by pulling "the equivalent of 22% of the pre-war working population into the armed forces". More importantly, the evolution of employment in both Germany and the United States in the aftermath of WWII goes against those assumptions. The 'economic miracle' in the Federal Republic starting in 1947 and its attendant new employment happened with the total demobilisation of its military. And the cut in military expenditures in the US from 1944 to 1947 by over 37% did not stand in the way of the creation of 3.9 million civilian jobs in those years. Harrison's conclusion is that compared with other systems "liberal capitalism seems to have least in common with war". (page 376)
The end of slavery as a counterexample for materialists
Slavery is 'natural', in the sense that it has been widely imposed and practiced in most human societies in history. The idea that men are equal, that labour should be free to move from one employment to another, and that persons could not be owned by others is very recent and still not recognised in some societies.
Aristotle is often invoked as evidence of the acceptance in history of this 'natural' practice. He did discuss the conditions under which slavery would be ethical. But the aspersion is not quite deserved. True, he explained the existence of slavery in Greek poleis so that they could perform their social and political activities. True again, he did speak of 'natural slaves' and 'natural freemen'. He was, however, much nearer to today's view of things than that of many politicians and slave owners in the antebellum society of the American South. For him a slavish nature was social in character, not genetic. The slave could progress and be redeemed by cultivating the ability to reason and deliberate. Only foreign or barbarian slaves, unaccustomed to the ways of a civilised polis, were better kept in servitude.
The ideology and practice of slavery under capitalism became much harsher than Aristotle accepted. Slaves were taken in war. The victors, after the sacking of an overrun city, often slayed all males and kept women and children in servitude. In more modern times, the crew, troops, and passengers were taken back by pirates to Barbary and enslaved or freed for a ransom. A new practice was that instituted by the Portuguese, Spanish, and then French and English traders, who bought slaves from African kings who in their turn took them by force.
The basis for the supply of Negro hands to the New World by the cruel slave trade was called forth by the demand in Europe for sugar principally, and then cotton and tobacco. That trade and the use of forced labour was typical capitalist business in search of profit, only in this case based on the forcible seizing of indigenous people in denial of the property of their persons, Without Consent or Contract as Fogel has branded it. In all, from 1500 to the 1860s when the trade came to an end, "some 9,900,000 Africans were transported across the Atlantic"—this without counting those that perished in the crossing. (Fogel, 1989, page 18) Surprisingly for us today the largest single importer was Brazil with 41 per cent, the next the English, French, and Spanish colonies taken together with 47 per cent, and the present-day US last with 7 per cent.
The first step on the road to the abolition of slavery was the prohibition of the slave trade by Britain in 1807, a triumph of non-conformist Protestants led by William Wilberforce and other radical humanists. It was then enforced by the Royal Navy. The prohibition did not fundamentally weaken the 'peculiar institution'. The reason was a technological innovation in agriculture, namely the spread of 'the gang system'. This consisted in applying the division of labour within slave gangs in the production of sugar, cotton and tobacco. Families worked as teams, the strong men forging ahead with the heaviest duties, the women following to pick up the product laid by the men, and the children following up with ancillary tasks. This resulted in a large increase in productivity, directly through specialisation, and indirectly through ease of control of the slaves; farms were consolidated, the labour force disciplined, and production streamlined. Not only did that transform the states south of the Mason-Dixon Line, but it also revived the sugar and tobacco industries in the Spanish possessions of Cuba and Puerto Rico.
Now comes a most important point made by Fogel. The peculiar institution, far from decaying and imploding, was increasingly profitable. The demands of the slave-owners to extend slavery to the new territories and states was not due to the need to stave bankruptcy but to a desire for more profit. Capitalist production and profits multiplied the economic viability of slavery. The slave system was not on the wane through loss of productivity.
Fogel, with the help of Stanley Engerman, and other 'cliometricians' (or historians compiling and modelling economic statistics) found however that "slave plantations were more efficient than free farms"; that the "food, clothing, and shelter provided to slaves were far better" than they had imagined; that whipping, though widespread but combined with was meant to help with productivity; that "slave breeding [...] was neither general policy nor a major source of profit"; and that there was "more scope for the development of slave family life, occupational skills, and a more distinct culture than convention dictated" (Fogel, 1989, pages 390-392). Fogel concluded with the following unconventional thought:
Suppose [...] every claim of the planters regarding the benevolent treatment of their slaves was confirmed; suppose slaves were better clothed, fed, and housed than proletarians. Would that be enough to quash the moral indictment, to relieve masters from the charge of profound injustice? [...] While physical abuse compounded the immorality of slaveholders, good treatment is insufficient to free them from condemnation. (Fogel, 1989, page 392)
In the Afterword to Without Consent or Contract titled "The Moral Problem of Slavery", Fogel listed four counts against the slaveholders of the South, which I proceed to summarise. The first was the unlimited personal domination of one group of people over another, including the abuse of physical, sexual, and spiritual power. The second was the denial of economic opportunity, especially galling at a time of rapid technological progress. The third was the exclusion from citizenship. And the fourth, the almost impassable obstacles to cultural self-identification (pages 394-400). There were some derogations of these abuses, especially those obtained by the slaves themselves in their defence of family values, in their cultivation of religion, in their acquisition of artisan skills, in their musical achievement. But the general panorama was abysmal, unredeemed by the fact that capitalist productivity was so much better than in free farms and activities.
The story of the demise of slavery I take to have great significance for our evaluation of capitalism. The system is not to be judged purely by its material consequences. Relative or temporary happiness brought about by productive efficiency or growth cannot be the last word. Absent liberty and self-government, the situation would be inexcusable. We now can see that capitalism has as its essence individual freedom-rights. Without respect for these rights the system is in danger of turning into a monstrosity, as it would have in an unchecked antebellum South. It did so in Wilhelmine Germany and could do so still in crypto-communist China. Again, as in the case of the developing regions of today, liberty-rights are of the essence of capitalism as an improving force for humanity. If we do not see this we run the danger of suffering from the same tunnel vision of colonel Nicholson at the River Kwai.
Austin, Gareth (2014): "Capitalism and the Colonies", in Neal and Williamson (2014), vol. II, pgs. 301-347.
Bauer, Peter (1972): Dissent on Development. Harvard University Press.
Berlin, Isiah (1958): "Two Concepts of Liberty", in Four Essays on Liberty. Oxford University Press, 1969.
Cairnes, John E. (1862): The Slave Power: its Character, Career, and Probable Designs: Being an Attempt to Explain the Real Issues involved in the American Contest. Parker and Son, London
Deaton, Angus (2013): The Great Escape. Health, Wealth and the Origins of Inequality. Princeton University Press.
Easterly, William (2016): The Tyranny of Experts. 2016 Hayek Memorial Lecture. Institute of Economic Affairs, London.
Fogel, Robert William (1989): Without Consent or Contract. The Rise and Fall of American Slavery. Norton and Co. New York.
Fogel, Robert William, and Engerman, Stanley L. (1969): Time on the Cross. The Economics of American Negro Slavery. 2 vols. Little Brown, Boston.
Harrison, Mark (2014): "Capitalism at War", in in Larry Neal and Jeffrey G. Williamson, eds.: The Cambridge History of Capitalism, vol. II, pgs. 348-383. Cambridge University Press.
Lenin, Vladimir Yllich (1916): "Imperialism, the Highest Stage of Capitalism. A Popular Outline". Available online at Marxists.org: https://www.marxists.org/archive/lenin/works/1916/imp-hsc/ch06.htm
King, John E. (2012): "The Future of Neo-Liberalism". In Damien Cahill, Lindy Edwards, and Frank Stilwell, eds.: Liberalism. Beyond the Free Market. Edward Elgar.
Preston, Samuel H. (1980): "Causes and Consequences of Mortality Declines in Less Developed Countries During the twentieth Century", in Population and Economic Change in Developing Countries, pgs. 289-360. University of Chicago Press.
Sen, Amartya K, (1970): Collective Choice and Social Welfare. Holden Day.
*Pedro Schwartz is "Rafael del Pino" Research Professor of economics at Universidad Camilo José in Madrid. A member of the Royal Academy of Moral and Political Sciences in Madrid, he is a frequent contributor to the European media on the current financial and social scene. He currently serves as President of the Mont Pelerin Society.
For more articles by Pedro Schwartz, see the Archive.