Philosophy without Philosophy

All this while CynicusEconomicus has been writing about the financial crisis and the response of various governments to the same, and I have to say that the posts have been very informative. This time, however, he has tackled the question of the morality of capitalism and the so-called “mindless consumption.” Though he defends it, the defense seems to be a half-hearted one. And too many times, the post goes into issues without referring to the subject involved.

I will tackle some of the questions one by one. He writes-

An interesting question on the subject was added to my last post by Lemming, a regular commentator. I will quote his question, as others are asking similar questions, such as whether there is enough resource for endless growth:

Can you design a system of capitalism which doesn’t rely on economic growth to function? (Or is this simply a contradiction in terms?)

Capitalism is not a building designed by Frank Lloyd Wright, nor is it an operating system designed by Dave Cutler. It is an economic system based on free trade that “evolved” from the transactions people did with each other – transactions that have their roots in the barter system. Hence it cannot be designed, or imposed, or reconfigured by “someone” to meet nebulous ends. Mises writes about Capitalism in his “Human Action”

The system of market economy has never been fully and purely tried. But there prevailed in the orbit of Western civilization since the Middle Ages by and large a general tendency toward the abolition of institutions hindering the operation of the market economy. With the successive progress of this tendency, population figures multiplied [p. 265] and the masses’ standard of living was raised to an unprecedented and hitherto undreamed of level. The average American worker enjoys amenities for which Croesus, Crassus, the Medici, and Louis XIV would have envied him.

The problems raised by the socialist and interventionist critique of the market economy are purely economic and can be dealt with only in the way in which this book tries to deal with them: by a thorough analysis of human action and all thinkable systems of social cooperation. The psychological problem of why people scorn and disparage capitalism and call everything they dislike “capitalistic” and everything they praise “socialistic” concerns history and must be left to the historians. But there are several other issues which we must stress at this point.

The advocates of totalitarianism consider “capitalism” a ghastly evil, an awful illness that came upon mankind. In the eyes of Marx it was an inevitable stage of mankind’s evolution, but for all that the worst of evils; fortunately salvation is imminent and will free man forever from this disaster. In the opinion of other people it would have been possible to avoid capitalism if only men had been more moral or more skillful in the choice of economic policies. All such lucubrations have one feature in common. They look upon capitalism as if it were an accidental phenomenon which could be eliminated without altering conditions that are essential in civilized man’s acting and thinking. As they neglect to bother about the problem of economic calculation, they are not aware of the consequences which the abolition of the monetary calculus is bound to bring about. They do not realize that socialist men for whom arithmetic will be of no use in planning action, will differ entirely in their mentality and in their mode of thinking from our contemporaries. In dealing with socialism, we must not overlook this mental transformation, even if we were ready to pass over in silence the disastrous consequences which would result for man’s material well-being.

The market economy is a man-made mode of acting under the division of labor. But this does not imply that it is something accidental or artificial and could be replaced by another mode. The market economy is the product of a long evolutionary process. It is the outcome of man’s endeavors to adjust his action in the best possible way to the given conditions of his environment that he cannot alter. It is the strategy, as it were, by the application of which man has triumphantly progressed from savagery to civilization.

[…]

It would be correct to describe this state of affairs in this way: Today many or some groups of business are no longer liberal; they do not advocate a pure market economy and free enterprise, but, on the contrary, are asking for various measures of government interference with business. But it is entirely misleading to say that the meaning of the concept of capitalism has changed and that “mature capitalism”–as the American Institutionalists call it–or “late capitalism”–as the Marxians call it–is characterized by restrictive policies to protect the vested interests of wage earners, farmers, shopkeepers, artisans, and sometimes also of capitalists and entrepreneurs. The concept of capitalism is as an economic concept immutable; if it means anything, it means the market economy. One deprives oneself of the semantic tools to deal adequately with the problems of contemporary history and economic policies if one acquiesces in a different terminology. This faulty nomenclature becomes understandable only if we realize that the pseudo-economists and the politicians who apply it want to prevent people from knowing what the market economy really is. They want to make people believe that all the repulsive manifestations of restrictive government policies are produced by “capitalism.”

The idea of laissez-faire capitalism is a very simple one – people trade with each other without “any” government intervention – no regulations, no taxes, no import duties, anti-dumping duties, Universal Service Obligation Funds, Central Banks, Securities and Exchange Commissions etc etc. One group of people demand something, another group meets the demand. That is all there is to it. The only thing government intervention, or any “redesign” will successfully end up doing is make capitalism more inefficient. And then what you have is an economy that can at best be called a “mixed economy” and at worst – an unmitigated disaster.

Next, CE writes-

On the other hand Lemming’s question does raise a more fundamental question. If endless economic growth is a problem it would imply that, at some point, economic growth should be frozen. This is a difficult idea, as it raises the question as to when exactly, or at what stage of development, growth should be stopped.

If (limited) resources are the bottle-neck as far as economic growth is concerned, then isn’t it obvious that the growth will automatically stop when we use up all the resources? Why does “someone” have to stop it from “outside” the system? Further, such speculation disregards history because I sincerely don’t remember any “resource” which we have run out of over ten thousand years of recorded civilization and have suffered critically as a result. If history teaches us anything at all (and we are ready to learn the lessons) it is that we often underestimate mankind’s capacity for progress and inventiveness. I am not talking about teleportation and space travel (I am no scientist but hopefully even these will happen in a few hundred years) here but about simple things like “food security.”

CE does defend capitalism against his own argument, but as I said at the beginning of the post, who is the subject here? Meaning, the question “If endless economic growth is a problem…” should be reframed as “If endless economic growth is a problem [for xyz]…” and then concrete reasons have to be offered as to who is xyz and why is economic growth a problem for xyz.

Then he writes-

It is very easy to sympathise with a view that relentless economic growth driven by consumption is somehow unacceptable. However, there appears to be a curious ‘moralism’ that frames the arguments about consumption.

Astute readers may, at this point, see that in some respects I may be setting up a straw man. I am starting to try to link consumption with a notion of worthiness. However, in linking the examples of consumption here to worthiness, I am hopefully illustrating a point. The point is that it is actually very difficult to regulate/control what is acceptable consumption. For example, a person may travel to far away places and offer the justification that they are learning about other cultures and people. That such an activity consumes massive resources might be considered acceptable by the person who undertakes such travel. On the other hand, another person might claim that this is an unacceptable use of resource.

He is right about the “curious ‘moralism'” part. And he’s right about the difficulty of “regulating acceptable consumption” because all human actions particularly in the economic sphere are subjective in nature – my spending pattern and my neighbor’s pattern will not match – our interests are different. And such “subjectivity” MUST be respected. NO ONE has the right to “regulate” the same, whatever argument they proffer, particularly a Mill-like “‘positive’ liberty” argument.

Next up-

However, there is a problem in the modern system of credit. One of the first points is that there is a system in which it is very complicated to work out how much debt we are really taking on. For example, cost of credit is often presented in terms of monthly repayments, rather than absolute cost. ‘Interest free’ credit is promoted to such an extent that it becomes irrational not to accept the credit. However, it is not interest free, as the interest is loaded on the goods upfront, thereby disadvantaging the cash buyers. This then encourages the use of credit.

These problems can be addressed through legislation. For example, information can be better presented, with an emphasis on the actual real cost of the credit. Consumer credit law might be devised such that retailers can not charge less for credit than they themselves are paying for the cost of the money that they are lending (though this might be complicated to administer). Teaser rates, variable interest rates, and a whole host of other methods for potentially leading consumers into debts that they can not repay are also amongst the subjects that should be addressed. For example, how can a consumer know what their debt obligations might be on a variable rate of interest, when even an economist is unable to make that prediction? All of these solutions would likely see a shrinkage in consumer credit, but would not restrict the freedom of an individual to access credit. The central point is that the system should be transparent and allow people to make well informed decisions.

[…]

I therefore accept a role of government, but only in making the role and nature of credit transparent.

I disagree that this is a problem that can be addressed through legislation. I would actually say that legislation is the problem here – government control over banks and their fiddling with the interest rates through their central banks. But that’s going away from the specific point under discussion. Is it the fault of the bank that the customer, even if he is an economist, is unable to understand the “real” cost of credit? The important part here is consent. As long as either party to a contract is entering into it voluntarily, NO ONE has the right to tell them that they cannot. If the consumer is unwilling to hire an expert who will then tell him what the rates mean, or is unwilling to spend the time to learn how to calculate it himself, he has no right to tell the government to force bankers and shopkeepers to make it easier for him. As for the uncertainty of a debt obligation under a variable interest rate, isn’t every thing uncertain in the sense that we aren’t omniscient? I don’t know if I will wake up tomorrow morning, or if a car will hit me on Sunday night, or if my business will pickup in a couple of months, or if my investments will have the same value in thirty years time as they do today. The reason people go for variable rate mortgages/ loans is because they are cheaper than fixed rate ones and they are willing to risk an increase in the interest rate in the future. Those who are risk-averse can surely pay a percentage point or two over and above the variable rate and lock themselves into a fixed rate loan. Why demand that the government enter the picture?

CE says – “All of these solutions would likely see a shrinkage in consumer credit, but would not restrict the freedom of an individual to access credit.” Yes, it probably won’t restrict the freedom of the individual to access credit, but that is because the legislation is not / will not be targeted at the individual – but at the “credit provider.” Bastiat’s Broken Window Fallacy, remember?

Every government intervention has a cost. Someone always pays.

Then-

Whilst the government is not holding a gun to the heads of consumers to make them borrow, they have sought to structure their economies to encourage such borrowing.

I agree. Since interventionism is no longer a dirty word thanks to Keynes, I think this needs to be considered-

By also severing interest returns from the price of time or from the real economy and by making it only a monetary phenomenon, Keynes was able to advocate, as a linchpin of his basic political program, the “euthanasia of the rentier” class: that is, the state’s expanding the quantity of money enough so as to drive down the rate of interest to zero, thereby at last wiping out the hated creditors.

He concludes-

In other words, the underlying system works. There are broader questions about how we might sustain such economic growth in the face of finite resources, and how the marketing of goods and services might ignite a desire to consume more than we would otherwise do. However, the problem arises as to how we might restrict consumption without making moralistic judgements, and how such consumption might be restricted in a way that is fair or just. If I wish to use money for all of the consumption necessary to use the Internet, then I would feel aggrieved if someone told me that this was unacceptable. Twenty years ago, the majority of us would not have even owned a computer, but we now all accept them as items we want, and which are useful to us.

This is the reality of economic growth. We are all tied into it and, as much as we may protest otherwise, we all reap the benefits.

I said that it is a half-hearted defense of capitalism and this is why – “the problem arises as to how we might restrict consumption without making moralistic judgements, and how such consumption might be restricted in a way that is fair or just.” There is no “problem.” Leave individuals to make their own judgments on all issues both in the political/personal and economic spheres. You can have an “opinion” on consumerism and “materialism” and so can I. We make not “like” it but we have no right to demand that it be “restricted.” Otherwise freedom – liberty – is put at risk.

I think Mises’ brief monograph – The Anti-Capitalistic Mentality – should be a sufficient answer to all the context-less grumbling about capitalism.

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