An evaluation of capitalism vs statism

The 20th century has seen the degradation of the classical liberal model of government into various kinds of statism. Some of the more proeminent were, of course, fascism and communism. However, milder kinds of centrism have also become proeminent in virtually all countries.

Statism – the idea that a centralized government could somehow be better than private initiative – is a surprisingly popular idea despite its absurdity. While few people would deny that a few public functions such as some form of limited law enforcment and judiciary system are necessary, it seems unlikely that the inherent inefficiency, corruption, waste and public motivation inherent in public control of entire markets or regulation of whole fields of activity could ever be beneficial.

I must mention in passing that this article is quite long. Also, while the first section of this article does not refer to any URL, I refer to many articles, mostly written by me, in the other sections. Due to the ponderous length of this article and its enormous scope, I find it more convenient to refer rather than get into more or less peripherial questions.

Capitalism as the most prosperous system

It is often claimed that statist systems, especially communism, are good in theory. What are we supposed to understand of this ? Theory and practice designate the same facts, the facts of reality. Something cannot be good “in theory” and be undesirable “in practice”, since both theory and practice pertain to the same facts. If one’s “theory” excludes the facts of human nature or basic economical principles then it is a bad “theory”. Either statism is good, or it isn’t.

Some people try to sidestep this question by dissociating economical freedom (capitalism) from social freedom (civil libertarianism), and claiming that while the latter is desirable, the former is disastrous. Yet this is a hopeless dichotomy : economical freedom cannot exist without social freedom, and vice-versa.

The Communist Manifesto furnishes us a good example of this. Few people who propose Marxism have ever read the Manifesto and what it proposes, such as the abolition of land property, a heavy income tax, obligation of all to work, the abolition of inheritance ! All of the Manifesto’s points require a heavy stunting of social freedom.

For example, the right of free speech means nothing if the state owns all means of communication. The right to work for your own happiness is meaningless if the state controls how and where you are to work. The right to one’s privacy is ridiculous if the state owns the land you live on. Freedom of thought is in jeopardy if the state owns the children and controls all the schools. And so on.

Now, let’s get to the important question. What does it mean for a political hypothesis to be true, as opposed to false ? How should we evaluate such a claim ? Obviously we must start from some kind of premise. As an Objectivist, I start from the premises of reason and egoism, and while most people would perhaps find fault with it, I’m sure their consequences in terms of freedom, harmony of interests, prosperity, longevity, and general well-being would find agreement with most people. Starting from this, we should expect that a true political system would maximize these factors, because they are the consequences of the concepts that lie behind political theory.

Our two options are to promote private initiative, or state ownership, in various aspects of life. First, I must make clear what I mean by “capitalism” and “private initiative”. I do not mean any kind of system where laws are made in favour of one group over another, that is, some variant of corporatism, syndicalism, anarchy, right-wing or left-wing, which are all manifestations of statist ideas. Economical freedom can only exist if all parties are free to act and are only prevented from using force against each other.

The first obvious question is, which system is most efficient in terms of economical progress, that is, which system permits to extend the pie of resources the fastest, and therefore give us the best level of life ? The answer to this is given to us by economical freedom vs GDP per capita studies. The three biggest studies in that regard are those made by Cato Institute, Heritage Foundation, and Fraser Foundation. All three report a positive correlation between economical freedom and GDP per capita.

Cato Institute : Study done on 123 countries. “The economic freedom index is shown to correlate positively with measures of income per capita, economic growth, the United Nations Human Development Index, and longevity. It correlates negatively with indexes of corruption and poverty” (Economic Freedom of the World : Annual Report 2001). The report gives, amongst others, the following data :
Economic freedom and income, by quintile : top – 19 846 $, 2nd – 9 607$, 3rd – 7 286$, 4th – 3 984 $, bottom – 2 210$
Economic freedom and Human Poverty Index, by quintile : top – 14.6, 2nd – 17.17, 3rd – 21.79, 4th – 31.82, bottom – 36.62
Economic freedom and life expectancy, by quintile : top – 76.18, 2nd – 69.19, 3rd – 68.01, 4th – 63.51, bottom – 52.18

Heritage Foundation : Study done on 156 countries. “This is particularly significant for citizens of those countries that are classified as “mostly unfree” or “repressed”�more than 50 percent of the world’s countries. These people earn 30 percent as much as citizens of “mostly free” countries. In addition, the citizens of “free” countries enjoy a per capita income that is twice as high as their counterparts in these “mostly free” countries” (The 2002 Index of Economical Freedom).

Fraser Foundation : “Economic Freedom of North America”, done on all states and provinces of North America. This study found that the jurisdictions at the bottom quintile of economical freedom had a GDP per capita of 21 056$US, compared to 37 268$US for the top quintile.

Recent data also shows that poverty is on the decline, thanks to the rise in economic freedom :

“Broad new studies suggest that the world has made extraordinary progress in slashing poverty in recent decades. The magnitude of the change is the subject of strong debate. But the research suggests that the pace of economic progress has been rapid and sustained for decades, built on the foundations of relative political stability, rising trade, and economic liberalization in the postwar era.

One new study, published Thursday by the Institute for International Economics in Washington, finds that the proportion of the 6.1 billion people in the world who live on $1 a day or less shrank from 63 percent in 1950 to 35 percent in 1980 and 12 percent in 1999 (adjusted for inflation). By some other measures, the progress has been more modest. Still, economists agree that poverty has plunged in key nations such as India and especially China, thanks to slowing population growth as well as economic freedom.”
(Global Progress in Slashing Poverty, Global Policy and Christian Science Monitor, 26/09//2002)

It is therefore not uncontroversial to say that, because of the freedom and efficiency inherent to a decentralized economy, countries that experience statism also effect lower living conditions. However, some statists would argue that poverty is more acute in capitalist countries. This is trivially true in one sense – the higher-level incomes rise more quickly as the pie of resources grows. But perhaps one might argue that lower-level incomes do not in fact rise at all.

The idea that the poor do not benefit from prosperity is odd, since, barring state intervention, it is difficult to imagine what kind of production pattern would benefit only a minority. Indeed, it seems the data confirms this impression. Michael Roemer and Mary Kay Gugerty (of the Harvard Institute for International Development), in “Does Economic Growth Reduce Poverty ?”, conclude from statistically studying underdeveloped countries that “an increase in the rate of per capita GDP growth translates into a one-for-one increase in growth of average income of the poorest 40%” and that “For the poorest 20% the elasticity of response is 0.921”. This is precisely what we would expect, and it is stunning that it applies even to heavily statist situations.

United States data also confirms this – in “Conquest of Poverty” by Hazlitt, historical data about wages from the US Department of Commerce is discussed. Between 1939 and 1969, wages in constant prices rose by 108%. As productivity rose, corporate revenues went more and more to the workers, as we should expect : between 1955 and 1970, wages went from 85% to 91% of corporate profits.

Mechanisms of political principles and motivations

The basic examination of economical prosperity seems, therefore, to validate the capitalist view. It is a very powerful argument, but not sufficient to declare a winner. Indeed, it may be that while capitalism effects prosperity and longevity, it is also undesirable from a social or temporal aspect. We must therefore examine more closely what distinguishes capitalism from statism in that regard – the principles at work and how they apply in real life.

The difference here that is important to us is state control of the economy as opposed to private initiative. What does the use of resources by a government entail ?

1. Public waste.
The lack of competition inherent to public monopolies entails waste of resources and inefficiency.

2. Private Interest Theory and political motivations.
Private Interest Theory is the analysis of political decision from the point of view of political motivations. It has shown that politicians naturally take decisions in their own political interest. This is perfectly natural, but also has the consequence that political actions do not serve the interest of the individuals who have to suffer those decisions – while politicians themselves often escape the consequences of those decisions.

3. Tragedy of the Commons situations.
State ownership of natural resources necessarily creates Tragedy of the Commons situations, where it is in the best interest of the state, or to individuals given access to them freely, to consume the resource first. This is especially detrimental from an environmental point of view, and can only be solved by private ownership or laws emulating private ownership (such as systems of flexible quotas).

4. Power grabs and moral deterioration of society.
The concentration of political and economical power inherent in a statist system pushes society in a situation detrimental to the natural harmony of interests. It becomes more and more in the interest of each actor to seek and use this power to their own gain, instead of using volutary ways such as beneficial trade.

5. Imposition of individual decisions on the collectivity.
The nature of peaceful cooperation is that individual decisions stay within the sphere of action of the individuals involved. When a powerful state imposes a new law or a new institution, it overrides the freedom of action of the individual, and magnifies political motivation to the entirety of society.

6. Black market dynamics.
When peaceful cooperation is prevented, we obtain un-optimal patterns. These patterns are compensated in various ways, including corruption, criminality and black markets.

What is the consequence of these inefficiencies ? Milton Friedman’s Law, which states that services cost approximately half as much to provide under a free market than they do under government. This is, of course, not a precise measure : however it seems to be supported by observation. I have discussed Friedman’s Law as applied to education (in “Regulated Education”), health care (see the Daily Telegraph article “NHS is left trailing by the Americans”), and charity (a 1$ output costs 10$ or more in the US government as opposed to 2$ in private systems).

More examples can be seen when the government privatizes or opens to competition new markets (thanks to the Non-Non-Libertarian FAQ by Glen Raphael for these examples) : allowing multiple competing electric networks drives down utility prices and increases consumer satisfaction without noticable additional environmental impact (Lubbock, Texas), allowing multiple competing cable companies can drastically reduce consumer costs, increase channel availability and increase consumer satisfaction (dozens of cities), big cities can exist and thrive without any zoning laws at all, using free-market mechanisms to anticipate and resolve disputes – in such a situation, housing costs are reduced, homelessness is reduced… (Houston, Texas), fire service can be provided through voluntary means, either with a nonprofit volunteer department or a for-profit subscription service (hundreds of cities), private libraries are cheap and can provide high-quality service even to people who can’t afford to pay for it (in dozens of cities), security services can be provided either via contract or volunteer patrols (hundreds of cities), private services can deliver stuff faster and cheaper to more places with higher reliability than public services can (UPS, New Zealand). Statist systems are soundly defeated whenever they are put to the test alongside the private sector.

Complicating the issue is the diversity of options between private and public – for example, charter schools are a more efficient midway solution which retains a form state control. Deregulation can be complete or partial. As was seen in the case of the California power crisis, partial deregulation done badly can be worse than public systems.

Details on the mechanisms

Let me come back and explain each of the points I mentioned, because they are crucial tools in understanding state dynamics.

* The problem of lack of competition is obvious. While natural monopolies do exist in situations where resources or demand are scarce, the resulting high prices are a normal signal to the market that the access to the resource must be restricted, lest a situation of penury exist. However, artificial monopolies serve no such role and only make waste. The superiority of monopolies in reducing costs (such as laying down one ground line instead of many, or needing only one building instead of many) is illusory because it restricts competition and consumer choice, and in the end benefits no one.

* Private Interest Theory explains many of the idiosyncracies that seem obvious to us, as private consumers of state services. The chronic shortages of beds in statist health care, the strange laws that tip the scales for corporations or for consumers seemingly without reason, the bad management of public forests are all manifestations of PIT. The prime motivator of political action is the private interest of the political agents, as influenced by pressure groups, corporate money, and all the other characteristics of centrist democracies.

For a nice demonstration of PIT, see the example of “The Motivations Behind Banking Reform” in Regulation Magazine vol. 24 no.2 – when there is a lot of small lenders, for example, the insurance lobby opposes itself to the opening of the insurance domain to banks, and PIT predicts correctly that delays will be present, despite the obvious benefit of such opening to the consumers.

State-belief is a plague so great that it occupies the whole spectrum : the right-wing corporatist/fascist state opposes the left-wing syndicalist/socialist state, and we are supposed to find this meaningful. The capitalist rejects both options and upholds the principle of free action as the prime motivator of progress.

* The Tragedy of the Commons is an established principle in economics based on the interest of agents towards a collectively-owned resource. Given a situation where no one in particular owns a given resource, and some agents are free to access the resource (regardless of any costs or penalties given for accessing the resource), it is in the best interest of those agents to get as much of the resource as possible before others do, instead of conserving it preciously as an owner would.

A good example of this is the depletion of fish reserves in the coasts and in public lakes. I have already discussed the disastrous effects of the ToC in an environment-related article (see “The true environmentalists”). The ToC, however, applies to political and social situations as well.

* The moral deterioration of society, as explained, is fairly simple and can be seen as an indirect political variant of the ToC, in terms of freedom of action. Given a certain extent of political power, this opens us a certain amount of freedom to be legislated. If it could be legislated in an agent’s favour, it is in the interest of that agent to lobby for such benefits, even though it is detrimental to others. For example, Microsoft benefits from the illegality of reverse-engineering of its operating system under the Millenium Digital Copyright Act, even though this is detrimental for the consumer’s freedom of choice.

Given that everyone desires the benefits of immoral legislation, society begins to align itself not towards the harmony of interests that is proper to a free society, but rather as a wrestling contest centered over politics. A good example of this is the conflict between parents as to how better legislate the education of all children, even though it would not be part of their sphere of influence if not for political power. Another, more insidious and scandalous, example is the politician who implements strong laws against drug use and then saves his children from getting prosecuted. Such things would be unconscionable in a free society.

* The imposition of individual decisions on the collectivity is the counterpart of the moral deterioration of society. While it is the prospect of political power that makes society align itself around power grabs, the consequence of those power grabs is the imposition of the results on everyone. While in a free system mistakes are constrained and general mistakes only occur when the state is fiddling with the monetary supply, a statist law made by officials of the state has far-reaching consequences in the entirety of society.

* The black market dynamics are a necessary consequence of suboptimal trade patterns imposed by the state. There are three consequences to these dynamics : as long as there is a demand for a given product, whenever legal or not, people will exchange it – if something is illegal, then by necessity, only outlaws will have it – what is hidden, and therefore unregulated, is more likely to be damageable.

An economy cannot reasonably be said to be controlled, and we observe that the more state control there is, the bigger a black market we find. In that regard, the only functional alternative to total freedom is total slavery – either we accept total freedom of action, or we justify more and more controls, which in return only create more control problems.

In addition to this, Austrian economists have pointed out for a long time, first predicted by Von Mises about the future fall of the USSR, that the calculation problem alone was a virtually unsurmountable barrier to any kind of extreme statism. This is a complex and technical subject – for an academic explanation, see Von Mises’ “Economic Calculation In The Socialist Commonwealth”.

This examination of principles closes the case as regards to the direct issue. It is obvious that capitalism is a superior system to statism in all important respects.

To close the question of justification, I have already discussed how we deduce the validity of capitalism in philosophy (see “Natural rights”). However, that is a more theoretical subject and would require another article of this length to discuss properly – suffice it to say that the “theory” agrees strikingly with the “practice”.

State slavery, wage freedom

However, numerous indirect arguments can and have been proposed against capitalism. We must examine them carefully in order to see what conclusion we can draw from them. However, an examination of all the possible indirect arguments proposed in economy would be impossible. I have already discussed some points, such as the degradation of the social fabric, or environmental Tragedy of the Commons, which are sometimes used as indirect arguments. I have discussed many of them in other places, and I would invite the interested to consult them (for example, see the last section of “Happiness in slavery”).

Nevertheless, I do want to discuss two of them in particular here, including the most popular one, which is represented by the expression “wage slavery”. It is a general discontentment with the authority systems present in capitalism, which are a staple of our economy.

First, one must address the obvious : the term “wage slavery” cannot be taken in any way but as a metaphor. People who think that working is literally slavery do not understand what being a slave means. Well, what is slavery ? When we say someone is a slave, we mean that someone else owns and controls him. We can politically define slavery as “a state of effective loss of self-ownership”. Self-ownership is an inherently circular right – it is the fact that one owns and controls one’s body (and mind). Different degrees of slavery are possible depending on the level of control one has on another person.

A slave cannot trade with other people – he has to obey and do what he is told. He cannot choose what to do, or own. In short, he has no control over his own body. This is basically the situation we find ourselves in a purely socialistic country. Rights are not recognized and the individual is merely a sacrifice for the “good of the state”. The individual can be more adequately described as a “slave of the state”. However, the capitalist system is a system where all rights are respected. “Wage slavery” is merely the derogatory way for people do describe the process by which we freely trade our time and work to someone else, in exchange for monetary value. No coercion or control is possible in a state of free trade.

However, it is true that the hierarchical systems of which we are part of, are an annoying feature of work. Indeed, but if there was a more efficient alternative it would have won out on the market a long time ago. As technology improves and we find ourselves in an information economy, we become more and more able to gravitate around hierarchical systems rather than integrate oneself to it. The growing ranks of freelancers and work-at-homes is a testimony to this.

The more fundamental issue is that of work, and it is a very aberrated one in statist thinking. Working is a necessity – without any kind of work, any society would quickly perish. The only alternative that the statist can present to capitalist prosperity and progress is planned inefficiency and stagnation.

The “wage slavery” argument is not very subtle. However, there is a more subtle arguments that revolve around the idea that capitalism can only be optimal in limit cases. I discuss this arguments briefly in my article “Capitalism’s limit cases ?”. It revolves around the idea that universal rationality (or sometimes, universal acceptance, or a similar attribute) is necessary for capitalism to be advantageous. Since people are not universally rational, all the advantages of capitalism cannot be realized, and we must choose statism.

Yet this argument only stands when we posit it non-dialectically. Governments and institutions are fundamentally made and led by people. If the people involved become irrational, or desire that the system fail, then it will eventually fail regardless of any distant safeguard one tries to put on it. This is not particular to capitalism. If most people were incapable of thought or work, then society would be run into the ground, because a certain degree of work is necessary for our survival.

Capitalism is not a complete political ideology and does not inherently imply any mode of functioning as opposed to another. Indeed, it can exist in any of them, in a limited fashion – democracy, as in Great Britain, authoritarianism, as in Singapore, constitutionalism, as in pre-WW2 US. Of course, none of these examples are “pure capitalism”, but then again few things are pure.

However, in economical terms, all other systems are more vulnerable to this flaw than capitalism, because capitalism limits political power, i.e. the leverage that can be used to cripple the vitality of society. The less power there is to grab, the less interest there is for agents to divert resources into trying to break the harmony of interests to their advantage.

In passing, I must mention one possible retort which may be raised against this. One may argue that anarcho-capitalistic systems may also provide such a lack of political power, and therefore would be imprevious to such problems. But in an anarcho-capitalist system, the political power normally vested in the government is informally transferred into corporative entities, which have no inherent safeguards against abuses of legislative power. Anarcho-capitalism is interesting but ultimately provides no advantage over capitalism, and many corporatist inconvenients : it should rather properly be called anarcho-corporatism.

The slippery slope of statism

The inevitable question, when confronted by a popular but false ideology, is to ask why so many people believe wrongly. I like to say in those kinds of questions that we must first accept that there is some kind of motivation for people to believe, be it genetic, environmental, education, and so on. At a primal level, some forms of statism do fulfill spiritual instincts. Fascist and communist systems promote a sense of moral duty to the state, unity with the state, and faith in the state, and rightly see religion as a competitor.

I do not intend to say that this is the source of all state-belief. At a more pragmatic, environmental level, there is a phenomenon of erosion of freedom and erosion of ideas. Starting from a given problem, real or imagined, the state proposes a “solution” by which it can gain control and seem to solve it. But this “solution” only creates more problems, which then permit the state to gain support for more controls, claiming that only its intervention is preventing the problem from getting worse.

The example of the War against Drugs is eloquent. Instead of regulating possible fraudulent aspects of private drug selling, the state outlawed most drugs. This had the consequences of creating a gigantic black market, boosting criminality and lowering the level of life for everyone. The proposed solution : laws against our privacy and security… in the name of the War against Drugs.

Finally, there is definitively an educational aspect to state-belief. From the youngest age, the child is taught collectivist values – first, that he must “share” with others (which really means to surrender what he wants, not real honest sharing), that the greatest wish possible is subjection to one’s fellows, then he is taught that morality is altruistic, that people are soulless automatons that must be directed by the state, and that statism is good “in theory”. If he is in a public system, he is caught in a rigid, freedom-less system, is not taught critical thinking or anything relevant to the subject of politics, and becomes alienated to the subject of learning.

State-belief is a plague so great that it occupies the whole spectrum : the right-wing corporatist/fascist state opposes the left-wing syndicalist/socialist state, and we are supposed to find this meaningful. The capitalist rejects both options and upholds the principle of free action as the prime motivator of progress. As long as people can act in their self-interest, the whole of exchanges in a society is as optimal as it can be, and state intervention only brings about suboptimal situations. Only capitalism has brought, and can bring, lasting prosperity to the people of the Earth.