A Primer on Economics

Chad LupkesChad Lupkes: Economic Theory: The Terms of the Debate

What we need is a better understanding of the terms of the debate. My intention here is to define what those terms are, explain where we are now, and where we want to be. I’ll also describe the directions that we could go that we don’t want to, and why. In this essay, I’m going to talk about the economic spectrum. I’m going to define that spectrum based on what I’ve learned from many places, most especially Thom Hartmann’s radio program and the books that he has written over the last few years.
On the far left end of the spectrum graph is Communism. On the far right is Objectivism. The foundation of both is Capitalism. Let’s start with the foundation of the graph.

What is Capital?

“Capital as such is not evil; it is its wrong use that is evil. Capital in some form or other will always be needed.” – Mahatma Gandhi

In economics, capital, capital goods or real capital refers to already-produced durable goods available for use as a factor of production. Steam shovels (equipment) and office buildings (structures) are examples. Physical Capital is an object or resource that through the labor of people can serve a human need.

Financial capital, measured in money, allows transactions to be valued and traded on the open market. Capital goods may be acquired with money or financial capital, which are really the same thing. In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business.

What is Capitalism?

“Capitalism is this wonderful thing that motivates people, it causes wonderful inventions to be done. But in this area of diseases of the world at large, it’s really let us down.” – Bill Gates

Let’s dig down to basics. Capitalism is too often defined as referring to the ideas of private ownership. But even the Wikipedia article acknowledges the fact that most economies are mixed, somewhere between state ownership and private ownership. So ownership itself can’t really be used to define what Capitalism IS. So what is it?
Capitalism is any economic system that uses capital, both physical or financial. The Market and Capitalism are two sides of the same coin, and you cannot have one without the other unless we go back to a Natural Capital economy, meaning everyone must produce either enough food or enough goods to trade directly for food. We need the market to balance the forces of supply and demand, and we need financial capital to make transactions and reserves of capital possible. The foundation of a successful civilization is two fold; We need production and distribution capable of meeting the needs of people now, and enough physical and financial capital must be held in reserve to be able to maintain supply of goods when production systems fail, and I’m talking about either food production or durable goods production. If we can agree that goods and services are worth money, then we can agree that we need both the physical goods, and the financial capital.

What is the Market?

“The market is not an invention of capitalism. It has existed for centuries. It is an invention of civilization.” – Mikhail Gorbachev

The Market is where supply and demand meet to fulfill a human need. The word conjures up the vision of a place where people line up shopping for food across the table from the farmers who grow that food. Buyers and Sellers agree on a price, and transactions are made. If, over time, one seller consistently charges more than the others and this fact is communicated to the community of buyers, that seller’s share of the transactions goes down. If, again over time, one seller consistently charges less than the others, their share of the transactions goes up. In order to find a balance and prevent one seller from getting all of the business, the other sellers lower their prices. Eventually, sellers cannot lower their prices further without putting themselves out of business, and the balance is reached. When demand goes up, buyers are willing to pay more, and prices go up. That’s also part of the balance.

What is Money?

“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” – Ayn Rand

Money is a convenient fiction that is used to define an abstract numerical value for a good or service. That numerical value changes based on the influences of supply and demand. That’s a basic truth taught in economics, and I don’t dispute it. One of the problems is that people look in their wallets or on their bank statements, and believe that they are looking at money. We’re not. Paper bills and coins represent value, but they are not value. Money doesn’t exist as a physical object. Bank computers hold electronic and magnetic impulses that represent value. When you buy a gold coin for $100, that $100 goes to the dealer, which goes into a bank. When you pull money out of an account, you are borrowing some value that you will use to purchase a good or service elsewhere. You don’t keep value, you keep physical objects representing value.
Money, frankly, is a value based on a promise, and that promise can be kept or broken. In the 1920’s, Germany felt the result of a broken promise. In the 1870’s, the money that was printed for the Confederate States of America became worthless because of a broken promise. The US Savings Bond and Treasury Bonds have their value because the promise of their return value has never been broken. Will it ever be broken? That’s up to the people who make those decisions in the future. My hope is no. But we can’t assume that it won’t be. We have to do something to make sure that our promises are never broken.
Money is the only object that can be “owned” by more than one person at a time, but too many people don’t understand that. Think about it. Money that you earn through employment goes into a checking or savings account. That money is loaned out by the bank to people who pay interest on the loans. If it’s a savings account, you get part of the interest, and the bank gets part of it to pay their expenses. But who owns the money? Both you and the bank have claim to the same money, as does the person who took out the loan. So the more money you have in a bank, the better off you are, the better off the bank is, and the better off the community is because that money is available for loans. One statistic that I saw was that the American people have 11 Trillion dollars in deposit accounts, just in Federally regulated banks. I wonder what will happen when the National Debt exceeds that…
But first, let’s explore the ends of the spectrum that I showed above in the graph.

From the far left: Communism

“Capital is reckless of the health or length of life of the laborer, unless under compulsion from society” – Karl Marx

Karl Marx saw the existence of capital as the source of social ills. Marxists, many of whom took his academic ideas far too literally, define capital as “a social, economic relation” between people (rather than between people and things). Purists actually seek to abolish capital altogether, believing that any private ownership of the means of production enriches capitalists (owners of capital) at the expense of workers (“the rich get richer, and the poor get poorer”). They’re right in a sense, but the alternative is not necessarily to give that ownership to government, to a union, or to any other collection of individuals. The USSR finally proved that such a system doesn’t work over the long term, mostly due to the inability of the economic system to meet the economic needs of the people. For instance, it was not unusual in this type of economy for there to be large surpluses of consumer goods in some areas and extreme scarcity in others, growing a large and thriving black market to relieve the inventory stress of excess goods and provide the missing needs that the production quota’s couldn’t meet. Additionally, this type of planned economy limited the choices for people in terms of their livelihood, forcing them to give up their individual pursuit of a professional goal (for example, being a dentist or artist) in favor of what the State said it needed in terms of workers (for instance, being an engineer or builder). It was this inability of the system to meet the economic, social and spiritual needs of the people that caused its ultimate collapse.
Getting back to the theory of communism, Marx argued that the owners of capital do not work and therefore steal from or exploit the workers. I think we can agree that exploitation is a bad thing. Gradually, according to Marx, the capitalists would accumulate more and more capital and make the workers continually poorer, in the end causing a revolution. The private ownership of the means of production was therefore seen as a restriction on freedom. I want to amend that by saying that the uncontrolled and unregulated private ownership can indeed reach these levels, but when the people have the will and the means to adjust the rules, things come back into balance. The will and the means refers to voice and vote. Which brings us to Socialism.

What is Socialism?

Socialism refers to a broad array of movements which aim to improve society through collective action and sometimes to a socio-economic system in which property and the distribution of wealth are subject to control by the community. This control may be either directly exercised through popular collectives such as workers’ councils, or indirectly exercised on behalf of the people by a government. As an economic system, socialism is often characterized by state or worker ownership of the means of production.
But socialism is not an economic system. It’s also not a system of governance. Socialism is a frame. It’s a way of looking at systems. Fundamentally, it’s any system where the people have a voice, and in democratic systems where people have a vote. The United States has always been, is now, and always will be a socialist experiment, as long as the people have voice and vote.
Socialism is a bogyman. Whenever someone claims that you are pushing a “socialist” view or a “socialist” economic system or a “Socialist” agenda, what they are really saying is that they want to take away your voice and vote from the decision making process.

From the far Right: Objectivism

Strong supporters of capitalism believe that private ownership is essential to preserving personal freedom as well as enriching society. They also argue that the owners of capital indeed do work, since they have to make often complex decisions regarding how to allocate their capital – poor allocation of capital will mean wasted work and resources. (People who have to take a shower after work often listen to these arguments and roll their eyes.)
However, capitalist theory from people like Ayn Rand even goes farther than this. According to the Ayn Rand Institute:

The government acts only as a policeman that protects man’s rights; it uses physical force only in retaliation and only against those who initiate its use, such as criminals or foreign invaders. In a system of full capitalism, there should be (but, historically, has not yet been) a complete separation of state and economics, in the same way and for the same reasons as the separation of state and church.

This may sound good on paper, but it ignores the fundamental roles of government as defined by the Constitution of the United States:

We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.

So, from Rand’s perspective, the ideal United States would abolish the Constitution and institute a new set of roles, eliminating the desire to form a community of mankind, ignoring the need for domestic tranquility, ignoring the general welfare, etc. Capitalism in these terms is of course an economic system, but not a social system, and certainly not a system of governance worthy of discussion.
Ayn Rand’s philosophy goes poetic when talking about the individual, because that’s the basis for the entire structure of the world in their view. The Individual is King. Every man for himself. Capital is best under individual control, and individual rights trump all other considerations. What this ignores, conveniently, is that in an unregulated system capital accumulates in the hands of corporations, not individuals.

What are Corporations?

Corporations are legally organized collections of capital, and by law their only duty is to their shareholders. They are literally and legally not allowed to consider other factors when making business decisions, because the shareholders have the right to sue the board of directors if they make decisions that prevent maximizing profits going into their pockets. Remember why Communism failed as an economic system, because it was unable to meet the economic and spiritual needs of the people? Radical, unregulated capitalism contains similar seeds to its own destruction, as corporations pursue the goals of lowering wages, raising prices and decreasing benefits in order to maximize profit for their shareholders. Unregulated, this formula will eventually not be able to meet the economic and spiritual needs of the people, as witnessed in innumerable popular uprisings throughout history (including the American Revolution). Just as there is no path to peace through a field of war, there is no way to help the people when the objective is maximizing capital. It’s just not the priority.

Regulated Capitalism

The middle of the graph is where I put Regulated Capitalism. Regulations exist to make sure that the needs of people trump the needs of capital. They prevent the discharge of poisons into our air and water, or at least they are supposed to. They prevent a single corporation from owning too much of a market, or at least they are supposed to. They ensure the protection of copyrights and trademarks, usually better than they really need to within the US (see Mickey Mouse), and certainly not enough outside of the US (see Disney DVD’s). It protects private property, but prevents the accumulation of too much property in the hands of too few people, or at least it’s supposed to. And it encourages the government to be fair in dealings with private companies and not own and directly control too much of the infrastructure without feedback mechanisms in place to prevent abuse of power from elected officials.
Remember the graph? Our choices go down at either end of the spectrum, because whether you are a government focused on meeting production quotas, or a corporation focused on meeting profit margins, it makes the most sense to standardize, modernize and reduce complications of multiple production lines until for whatever market you are trying to fill you are pumping out the same thing for everyone. The same food, because it’s easier just to feed everyone the same thing, or the same type of jeans because it means you only need one pattern. Think about the airline industry. Boeing is focused on maybe three lines of airplanes at a time at any given plant. Now think about the motorcycle industry in China, which is growing like gangbusters because the standards come out of innovation in hundreds of shops that work together to solve problems without worrying so much about intellectual property, while recognizing that the end product will be exported all over the world.
The United States was set up with a socially responsible government, giving the people voice and vote every two, four or six years to elect our most important leaders in the House of Representatives, the Oval Office and the United States Senate. These people write and enforce the rules of the game of economics in our country, and arguably for much of the world due to the influence of the US economy. These rules are the laws that control what the fiscal policies are in our country, and what the priorities are for those policies. The laws define what corporations can or cannot do, and although many of the laws that regulate corporations are on a state level, more and more of them are being written at the Federal level, trumping state law and the citizens in local communities. And thanks to the power of international treaties like the WTO and NAFTA, even some of our national laws aren’t enough to protect what is left of local jurisdiction.

So what do we do now?

“The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism – ownership of government by an individual, by a group, or any controlling private power” – Franklin D. Roosevelt

“You shall not crucify mankind upon a cross of gold” – William Jennings Bryan

We have fought this battle before. We have been at the crossroads where we are wondering what the status of our foundation is, and searching for someone, anyone, to shore it up. But the choice of who that is must go through a nightmare electoral process with each state following different rules and helping to limit our choices. The media helps to limit our choices by following the dictates of their own capitalist and corporate heritage and only covering in depth those candidates who don’t threaten their own power. The candidates are tempted by Sirens who reach out with claims of riches and winning if they would only soften their stance on this or that issue. Even our political parties are not immune from this temptation, and one of them has already sold its soul to unregulated and uncontrolled capital. The Democratic Party has been tempted, but is beginning to shake off the influence of this reckless and unaccountable yoke of Iron Pyrite.
We must solidify the position of the Democratic Party as being against the influence of uncontrolled capital, while making sure that our positions are clearly different from accusations of being Communist. We don’t want the government to own too much and control too much any more than we want unelected and unaccountable members of corporate boards of directors to make Billion dollar or Trillion dollar decisions that let them continue their relentless drive towards dominance of all financial capital at the expense and to the destruction of the foundation that we have under our feet, both physical and financial.
We must understand history, and restore our own history as a political party, focusing our attention and resources on engaging, educating and empowering the people to be the change that they wish to see in the world. We must be proud of being progressive, and define our values in terms that people can understand and in terms that cannot be redefined by the far right. We must keep our promises and stand by our friends.
We must win the 2008 election, and use that victory as a stepping stone to local victories in 2009, 2010 and beyond. We must never let down our guard, and we must restore the United States to its rightful place on the balance point between the far left and far right, becoming again the moral leader of the world who puts the needs of people before anything else, and the future of our children and grandchildren on the forefront of our plans.CHAD

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