Economics

The case for capitalism must be made afresh

This is a Reaction long read by Sir Roger Scruton

BY Roger Scruton   /  27 September 2017

In 1989, with the fall of the Berlin Wall, there were many cheerful people in the West who said, ‘Great! The battle between socialism and capitalism is over; and capitalism has won.’ They would have been astonished by anyone who told them that, a quarter of a century later, one of the favourite candidates for US President would describe himself as a ‘democratic socialist’, that the leader of the Opposition in the United Kingdom would be a Marxist, that radical socialist parties would be powerful forces all across the Northern Mediterranean or that Albania, having freed itself from the most cruel and ignorant of all the post-war communist regimes, would be governed by a party calling itself socialist. So how should we understand this surprising turn of events? Is it just a matter of words – that people call themselves socialists, for whatever reason, but act in quite another way? Or has the old disease really broken out again? Or was it not a disease but a cure? And if so, a cure of what?

My first response is to say that, yes, it is in part a matter of words. But no, the words are soaked in emotions, and the emotions are powerful. Take the word ‘capitalism’, introduced by Saint-Simon, to be taken up by Marx. It was supposed to describe an economic system, in which private individuals (the ‘capitalists’) own the ‘means of production’. On Marx’s view, capitalists formed a class, the owners of property, who stand opposed to the working class, the class of those who have nothing to sell except their labour. Out of this picture there grew the epic story of ‘class struggle’, leading to revolution, as the workers seized control of assets that had, in effect, been stolen from them. The epic story was immensely seductive. It gave people a just cause to fight for. It rationalised resentment against the rich and aligned the heroic intellectual with the poor in their fight to possess what is rightly theirs. It both justified revolution and predicted it as inevitable. And it made ‘capital’ into a kind of agent in history. The capitalists acted together as a class; they formed a kind of conspiracy against the rest of us. They controlled not only the means of production but all the institutions that stemmed from it and supported it – the church, the law, the schools and universities, the military. More, they controlled the ideology, the set of ideas and beliefs that represented their control as legitimate. In short, the word ‘capitalism’, introduced to describe an economic system, ended up as a description of an organised enemy of mankind, an invading army in the midst of us, which controlled everything, stole everything and meanwhile neutralised all our attempts at rebellion with the ‘false consciousness’ instilled through its propaganda.

Described in that way ‘capitalism’ ceased to be a word of economic theory. It became a summons to war. And then we need another word, to describe those who are on ‘the other side’ against this enemy. And that word is ‘socialism’. We are to fight for socialism, against the capitalist enemy. That is the message that has been drummed into us relentlessly since the Communist Manifesto. Of course, Marx saw socialism merely as an intermediate stage, on the way to communism. But he did not have the faintest idea as to how communism would come about, once the dictatorship of the proletariat had been established, and – what is more – he did not really care. It is the fight for socialism, and the revolution that would result from this, that interested him. And the same has been true of all socialists in our time. They take their inspiration from the thing that they are against, not from the future that is supposed to replace it.

Much of our confusion today comes from the fact that the situation for which the word ‘capitalism’ was invented has disappeared. Marx’s picture was of an economy devoted to the ‘production’ of material goods, in factories that belonged to representative members of the ‘capitalist’ class. A few such factories and a few such capitalist owners still exist. But the modern economy is a ‘service economy’: it is providing advice, contacts, entertainment, travel, things for hire and rent. The enterprises that provide these things are rarely owned by individuals, but usually by shareholders who do not control them. The managers who control them are also employed by them. Employees enjoy varying degrees of influence over the organisation, from the bare minimum exerted by the office cleaner to the extensive control of the CEO. Power is delegated at every level, and each level of management ‘reports to’ the one above, rather than obeying explicit orders. The whole thing has evolved ‘by an invisible hand’, in accordance with the natural ability of rational beings to cooperate and to compete with each other. Who, in this arrangement, is the capitalist, and who the proletarian? The old story can no longer be told. So what on earth do people now mean by ‘capitalism’, and what is the ‘socialist’ alternative?

The one thing that our modern systems have in common with the system described (and to some extent invented) by Marx is private property, and the freedom to exchange it, to accumulate it, and to give it away. This freedom is not absolute: some exchanges are forbidden by law, most are taxed, and in some countries inheritance taxes and capital taxes penalize accumulations. Nevertheless the freedom to own and deal in private property is at the heart of the modern economy, and in so far as the word ‘capitalism’ means anything today it denotes this freedom, and all that has issued from it. At the same time new forms of ownership have emerged – shares, options, copyright, royalties – which blur the margins between private and public property. In these circumstances it is very hard to know what the alleged conflict between capitalism and socialism really amounts to.

Without private property and the freedom to acquire it, to accumulate it and to exchange it, the economic motive is extinguished, and everything stagnates. Moreover, economic growth is not achieved by individuals acting alone: it is the shared result of a cooperative endeavour, in which strangers collaborate, each contributing to the needs of the others, and each taking advantage of the system of exchange. It is only when people have rights of property, and can freely exchange what they own for what they need, that a society of strangers can achieve economic coordination. Socialists don’t in their hearts accept this. They see society as a mechanism for distributing resources among those with a claim to them, as though resources all exist in advance of the activities that create them, and as though there is a way to determine exactly who has a right to what, without reference to the long history of economic cooperation.

The point was brought home by the Austrian economists – notably by von Mises and Hayek – during the ‘calculation debate’ that surrounded the early proposals for a socialist economy. When production and distribution are fixed by a central authority, the Austrians argued, prices no longer provide an index either of the scarcity of a resource or of the extent of others’ demand for it. The crucial piece of economic knowledge, which exists in the free economy as a social fact, has been destroyed. The economy either breaks down, with queues, gluts and shortages replacing the spontaneous order of distribution, or is replaced by a black economy in which things exchange at their real price – the price that people are prepared to pay for them. This result has been abundantly confirmed by the experience of socialist economies; however, the argument given in support of it is not empirical but a priori. It is based on broad philosophical conceptions concerning socially generated and socially dispersed information.

The important point in the argument is that the price of a commodity conveys reliable economic information only if the economy is free. Economic knowledge is not contained in a plan, but only in the activity of free agents, as they produce, market and exchange their goods according to the laws of supply and demand. The planned economy, which offers a rational distribution in place of the ‘random’ distribution of the market, destroys the information on which the proper functioning of an economy depends. It therefore undermines its own knowledge base. It is a supreme example of a project that is supposedly rational while not being rational at all, since it depends on knowledge that is available only in conditions that it destroys.

It does not follow from this that economic freedom should be absolute and unqualified. On the contrary, precisely because it is a part of cooperation, it must be disciplined in accordance with social and legal norms. There can be freedom of contract only in a legal order in which contracts are upheld, and defectors forced to compensate their victims. The development of legal order over centuries is what made the free economy possible. It is not as Marx said, that economic conditions came first and the law followed in order to endorse them. It has always been the other way round. Laws emerge from the attempt of strangers to get along peacefully together, to be useful to each other despite remaining strangers. And as the law develops, so does the economy expand to fill the space that it creates. It is, as much as anything, the legal vacuum that exists here in Albania, the uncertainty over property rights and the corruption of the courts, that ensures that a free economy cannot grow here.

People who call themselves socialists in our time do not reject free exchange or private ownership – at least in small and controllable doses. Most of them recognize that there is no rational alternative. But almost all of them are persuaded that free markets generate inequalities and that inequalities, at least beyond a certain point, are unacceptable. The market should be subject to regulation, therefore, to prevent such inequalities from arising. This argument has recently been circulated with all the apparatus of theoretical and empirical support by Joseph Stiglitz and Thomas Piketty. What do we make of it?

Conservatives say that by confiscating wealth, socialist and communist systems of government throughout the 20th century raised no one out of poverty, but lowered quite a lot of people into it. Socialists like Piketty retort that wealth-creation always benefits the owners of capital more than it benefits those who live from wages, and therefore the long-term effect of the free economy is to transfer property from the poor to the rich. How, they ask, can this be a benefit to the poor, and in any case how are we to persuade the poor to accept it?

Piketty argues that the free economy and the pursuit of wealth are just as dangerous as socialists say they are. For capitalism is advancing inexorably towards the kind of crisis foretold by Marx, as wealth is drained from the economy and piled up in a useless hoard of gold.  Piketty bases his argument on two premises, one a priori, the other empirical. The first is the well-known law that the rate of return on capital tends to exceed the rate of growth of the economy: for if it did not, there would be no motive for investment. This law, that r > g, is, with certain qualifications, widely accepted, not as the whole truth about a modern economy but as a principle governing the rational disposition of capital. The second of Piketty’s arguments is empirical, and based on a detailed analysis of tax returns and other evidence, to show that the growth in income among wage earners has in recent times been significantly less than the growth of the returns to investors. In other words, r > g is not just an a priori speculation, but an empirical truth.

Of course there are wars and revolutions, which lead to massive redistributions of resources, usually to those who did nothing to earn them. But by and large, and given sufficient global stability, wealth will go on passing in a one-way traffic from poor to rich. Joseph Stiglitz has argued the same point, on slightly different grounds (The Price of Inequality, 2012). And these speculations feed into a zero-sum way of thinking, according to which every benefit achieved by one person must be a cost inflicted on another. If the rich are rich, it is because the poor are poor; and believing this, you can nurture all those old resentments against the people who are better off than you are, on the grounds that they have stolen what was rightfully yours – such indeed was the emotional foundation of the Marxist vision.

Piketty examines the Forbes list of the world’s wealthiest people, in order to establish that the largest fortunes grew much more rapidly than average wealth during the period 1987 to 2010. The data seem to show that the wealth of the Forbes list grew during that period by an inflation-adjusted 7% – even higher than the 4-5% return implied by the r > g argument. So the rich really are getting richer at our expense, and by quite a lot! However, Piketty neglects to mention that the people on the Forbes list today are almost all completely different from those on the list in 1987. In other words, the data show that capital is not accumulating in the hands of those who already possess it, but moving around in just the way that social mobility and growing wealth require.

Moreover, we have to ask why it is that economies grow – i.e. why g is not 0, as it seems to have been for lengthy periods in the ancient world. The answer, roughly, is that economies grow because capital is invested in them, usually in the form of technology and knowledge (themselves the products of investment). But this investment occurs only where there is confidence that the equation r > g holds. That observation applies also to capital in the hands of the state, which will have competing demands for the use of it, and will therefore invest where the return is greatest, for fear of losing what it has.

These somewhat technical arguments return us to the real question, which is, why is inequality so bad? And if it is so, what is the remedy? Piketty suggests that inequalities breed revolutions, and that – as the transfers from poor to rich continue – the situation becomes ever more explosive. This situation is to be overcome by the constant confiscation of capital. He proposes achieving this by a tax on wealth, and by a marginal tax-rate of 80% on the highest incomes – in other words, by the kind of policies that socialist governments have been introducing into France.

We have entered a condition in which it is assumed that it is legitimate to tax those who make money, in order to distribute the takings among the rest. What should be our attitude to this, in the world as we know it now? In so far as there is a real disagreement between those who defend the free economy (and who are called ‘capitalists’ by their opponents) and those who call themselves ‘socialists’, it revolves around this question. However, it is a question that has lost its sting. There is absolutely no need to believe that we are dealing with some absolute and irreconcilable conflict between rival political systems, as the communists wanted us to believe. The conflict is a matter of emphasis: do we emphasise equality or liberty, when it comes to defining our political goals? And what role does the state have to play in securing either? In Western political arrangements all kinds of compromises have emerged, in order to reconcile as best we can the rival priorities of equality and liberty, and almost everywhere the welfare state is accepted as the only available way of redistributing the economic product in order to satisfy the needs of those who do not contribute to it.

On the other hand, we should not accept the socialist view that inequality is a form of injustice. If one person works hard and accumulates property as a result, while his neighbour does nothing but then forces him, at the point of a gun, to yield half of the product, who is committing the injustice? Surely, the one who is claiming a share by force. The old idea of injustice – the true idea – condemns coercion, theft, manipulation and the abolition of freedom. It shows us immediately why slavery is unjust, and why free dealings between rational beings must be upheld by the law. The new idea of ‘social justice’ has the opposite effect. It does not distinguish just from unjust dealings between people, but only just and unjust outcomes. If the outcome is equal, then justice is done. If it is unequal, then social justice requires the state to step in and to forcibly redistribute the rewards.

Furthermore, even if we follow the socialist path in this matter, we have to remember that the state does not merely redistribute assets: it creates a class of dependents, who have come to rely on this redistribution. In France today more than half of the population are net recipients of income from the state – in other words, people who rely on the state to maintain them. The chances of changing this are minimal, since the state dependents will always vote for an extension of state power, and of the taxes needed to sustain it. Taxes paid by others are no problem to me. This too is a source of social conflict, as well as leading to the steady emigration of the real tax-payers to other countries. (There are now half a million Frenchmen resident in London.)

In short, the socialist solution to the alleged problems of inequality is not really a solution, but the foundation of another and deeper problem. The socialist solution creates a class of state dependents, who depend for their support on taxing the entrepreneurs, who in their turn are fleeing the country in order to avoid taxation. This is every bit as dangerous a situation as the one envisaged by Thomas Piketty, in which economic inequality has become so blatant that the poorer classes no longer accept it.

What should be our policy in all this? I am of the view that the state should indeed play a part in a modern economy, providing opportunities to those who would otherwise be deprived of them – but opportunities, rather than assets. Entrepreneurs should be encouraged, not taxed to extinction; poor people should be helped to find employment, not paid for refusing to work. The system of benefits should be conditional on self-help, and private charities for the relief of poverty and the provision of health care should be encouraged. Enver Hoxha’s assault on religion in Albania was also an assault on charity – destroying churches and mosques, he destroyed along with them the networks of support that enabled people to help their neighbours and to cope with adversity. Those networks are much more important in the end than any state controlled health-care system, since they recruit the best of human feelings and heal the wounds of society through the good feelings that bind us to our kind. That is the ideal to which we should be moving, and it is the ideal that, for me, is the heart of the conservative message.