Thursday, May 01, 2008

A Critique of Capitalism

The fundamental idea of Capitalism is simple, direct, and sounds eminently sensible: Those people who have demonstrated an ability to create wealth should have a privileged economic position to create more wealth.

It's also completely wrong. It's not just that it doesn't always work out well, often leading to a small privileged elite and large numbers of people who live at the edge of starvation. It's fundamentally flawed.

As I'm trying to show in my series on economics, an individual does not receive a disproportionate reward in a free market from creating the most value. An individual receives a disproportionate reward from exploiting a bottleneck.

By itself, rewarding the exploitation of a bottleneck is a Good Idea. One good sense of efficiency is a system without bottlenecks. In first-order economics, rewarding the exploitation of a bottleneck widens it, either by throwing more labor at it or by discovering technological alternatives. It's a good negative feedback loop. It even makes sense to base a certain degree of privilege on bottlenecks: We want people who are good at finding and widening bottlenecks to have a privileged position to find and widen more bottlenecks.

However, human beings are capable of thinking about economics in more than just first-order terms. A clever human being, knowing that a free market rewards exploiting a bottleneck, will seek to find (or create) a bottleneck that can be exploited without widening it, a self-perpetuating bottleneck.

And that's precisely what Capitalism is. There's an inherent bottleneck in almost all human activity, the start-up costs: equipment, training and the like. Otherwise known as capital. If an individual can make capital a bottleneck, then because he faces less competition, control of the capital allows him raise the price of a commodity to the inherent value (thus capturing the excess value). He is no longer forced to decrease the price to the true (or opportunity-adjusted) cost (thus distributing the excess value to the consumer). Which gives that individual more capital, thus concentrating the ownership of capital and narrowing the bottleneck, establishing a (bad) positive feedback loop.

The above is just a restatement of Marx' brilliant critique of Capitalism1. Marx himself, writing in the 19th century, can be forgiven for stopping there. But that's not the end of the story. Capitalism has not gone completely off the rails... at least not yet. There's still a (good) negative feedback loop in Capitalism2.

The capitalist2, to be effective, has to be use his capital to produce commodities. In order to charge a higher price for a commodity, people have to be able to pay that price. So some of the excess value has to be distributed to some of the general population so they can pay that higher price. Capital cannot simply accumulate excess value; it has to permit some of that excess value to move back to the population so that the capital itself has value. Thus we have a partial, second-order negative feedback loop in Capitalism2.

But there's still a big problem with Capitalism2... at least from the Capitalist's perspective. If we have to distribute some excess wealth to some of the general population to give value to capital, some of those people will perversely and immorally accumulate the excess value and create their own capital, instead of using it to pay for more commodities. The individual capitalist thus faces more competition, which forces him to distribute more of the excess value to more of the population, until he's barely being paid for anything more than the time he has to actually work, i.e. his own labor.

The really clever Capitalist will employ third-order reasoning. He's found and exploited a first-order bottleneck (he's made a better widget), and he's used the partial second-order positive feedback loop to accumulate more capital. Now he's faced with the immoral and ridiculous demand that he be altruistic, that he distribute some of the excess value he's honestly accumulated by the sweat of his brow to people who by definition haven't earned it, because they themselves did not find and exploit a bottleneck. This demand really is intolerable.

The really clever Capitalist will use third-order reasoning to shut the door behind him, to make absolutely sure that he does not face competition from the general population. Instead of using his capital to create more value, he has both the incentive and power to use his capital to create less value. Indeed, the successful Capitalist has every reason to undermine Capitalism2, and no inherent reason not to do so.

Marx glimpsed this analysis — it's the fundamental contradiction of Capitalism — but he failed to nail it. There's nothing particularly magical about capital as a bottleneck: any self-perpetuating bottleneck will have the same effect, and any self-perpetuating bottleneck which purports to widen bottlenecks will suffer from the same contradiction.

As an exercise for the reader, look for self-perpetuating bottlenecks in history and modern societies. They're all over the place. For example, the self-perpetuating bottleneck of feudalism is ownership of land.


  1. When you think about conglomerates, it becomes apparent that the Soviet Union was just General Electric with tanks.

  2. Who says General Electric doesn't have tanks?

  3. "The US Army has selected Honeywell International Engines and Systems and General Electric to develop a new LV100-5 gas turbine engine for the M1A2. The new engine is lighter and smaller with rapid acceleration, quieter running and no visible exhaust."

    "GE, we bring good things to life!"

    I suppose I ought to smash my thermostat and CD player to celebrate Mission Accomplished Day.

  4. Interesting analysis...

    I know this is a gross over-simplification of things, but the fact is, no economic model is perfect, but history has shown that capitalism is the best of many flawed systems.

  5. PC: "Science may be described as the art of systematic over-simplification." - Karl Popper

    The claim is not that Capitalism is "imperfect", but fundamentally flawed.

    James: No, it's an excellent choice. All conglomerates have tanks, at least metaphorically.

  6. Something I do wonder about with all of your post on economics is what economic system you think would actually be the best choice and how it would work.

    After reading this post, it got me thinking about patents - in theory, patents are temporary bottelnecks given as a reward for innovation (though they have been abused lately, partly because the patent office is so underfunded and understaffed). I think the idea behind them is good - you want to reward innovation.

    Getting back to my first question - I can't think of any economic system that has done better than capitalism in actual practice - not that I've done an exhaustive search on the subject.

  7. Bum:

    Do you see any way to remove the element of exploitation from the concept of capitalism? Do you think capitalism as a system would work more efficiently without exploitation? And by exploitation, I don't mean exploiting opportunities, so not "good" exploitation (for lack of a better term), but rather that of exploiting people. In other words, if capitalism could contain within it transparency in business, would that not make capitalism a slightly more efficient system?

    It looks like exploitation of people may be the flaw of the system, but I have no economics background of which to speak, so I may be missing something crucial here.

  8. First, my series on economics is an effort to really understand how economics works. I know I don't understand something until I try to explain it; I'm explaining economics as much to myself as my readers.

    I don't think there's a "best" economic system, but I think there are a lot of bad choices, specifically those systems that rely on lies and bullshit. (The similarity to my feelings on religion should be obvious.)

    On the other hand, I must admit that of all the fictional Utopian societies I've encountered, the one I'd most like to emigrate to is the Radical Libertarian society depicted in Eric Frank Russell's novella, And Then There Were None.

  9. Also, I don't think Capitalism is all that bad. It doesn't really go off the rails until we get to third-order analysis, by giving individuals the power and incentive to undermine Capitalism itself. Many other political-economic systems and sub-systems (cough Law School) go off the rails at second-order analysis, by setting up self-perpetuating bottlenecks with little to no negative feedback at all.

  10. Great story - Too bad I couldn't help but think the final end would be all of the planet's population being exterminated. Some people are afraid of freedom that much and they do have guns.

    That plus coercion works if you find the right leverage. Most people actually would rather live as slaves than be executed. That will to live is strong. And people with children - well, just threaten to kill their children and people will do anything.

    But I still like the concept. Too bad it could never actually work. The last reason being the love of authoritarianism found in at least 20-30% of the population, and found to a certain degree in everyone.

  11. To some extent, the presence of lies and bullshit in our social constructions is reason for hope, not despair. After all, the lies and bullshit prove that simple naked aggression is not by itself tenable.

  12. DBB:

    Great story - Too bad I couldn't help but think the final end would be all of the planet's population being exterminated.

    Indeed. One is unpleasantly reminded of the Albigensian Crusade.


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