Sunday, December 22, 2019

Market Forces

Cooking the Meat

Cooking the Meat,
from the Bayeux Tapestry

I believe the views of the economy, as expressed in the politics of the left and the right, suffer from a fundamental philosophical difference—and it may not be what you think.

Basic economics is descriptive, not prescriptive. It tries to define and say what people actually do, not what the economist thinks they do or what they should do. In this, economics is a science like biology or physics: it is trying to describe the real world. In this sense, it is neutral about outcomes and concerned only with accurate observation and reporting.

Socialist, communist, or Marxist economics may start with description—after all, Karl Marx’s book was Das Kapital, which started out describing a system that was developing in a newly industrialized 19th-century society. But then he, along with all these “-ism” and “-ist” studies, launched into theory and prescriptions about how people should act in order to reach a desirable state, a utopia of fairness, equality, and happiness. In this sense, Marxist and socialist economics try to direct and, in some cases, manipulate outcomes, because their intention is aspirational rather than observational.

The reason for this difference is that market forces—the natural rules governing how people in large, anonymous groups exchange products, services, and units of value—are part of the human condition. Whether you like the human condition or wish to change it will guide your choice of economic theory.

What do I mean by “natural rules”? Here is a simple thought experiment.

Put two strangers on a desert island and let one come ashore with candy bars in his pockets, which can immediately be consumed for nutritional needs, while the other comes with gold bars in his pockets, which can have far greater value once the holder is rescued and leaves the island. And right there—barring a quick, premeditated homicide—the two survivors have established a market. How much gold will one give up for a candy bar? How much candy will the other give up for gold? And bearing on that question are sensations of hunger, expectations of rescue and its timing, and even the life expectancy of either or both parties before that putative rescue happens.

Where one person possesses something of value—either a tangible good or a useful skill—and the other person must have it, or may need it, or might have no interest in it but still possesses the means to acquire it, there will exist a market. And from that market will grow in the human mind all sorts of calculations: of cost and benefit, of current and future needs and wants, of available resources, and sometimes of pure, irrational desire. Along with these calculations will come a whole range of future projections. These mental gymnastics and their playing out in real-life action can be traced, plotted, and described. They are not a theory, although theories about motive and calculation can certainly be derived from human actions. Instead, they are facts to be analyzed and formulated into rules or laws—not the legislative laws of human societies but descriptive and projective laws, like those of physics and chemistry.

Adam Smith, in The Wealth of Nations published in 1776, described how each individual in a society and economy works for his own benefit, maximizing his satisfactions, advantages, and security. But through the collective action of all these individuals—that is, the “invisible hand,” as Smith described it—they achieve positive economic and social ends—that is, the national wealth of which he wrote—without the conscious intention of doing so. Smith was defining a phenomenon, a hidden force, that was already at work. People did not need to read his book and follow his precepts in order to achieve that “wealth of nations.” It just happened and he observed and described it.

Karl Marx, on the other hand—writing The Communist Manifesto in 1848 and Das Kapital twenty years later, almost a century after Adam Smith—started with a description of what was becoming the capitalist system in an industrialized setting, noted the instances in which a machine culture failed to lift everybody out of poverty, and thought to come up with something grander. Unfortunately, although he is regarded as a philosopher, Marx was no real visionary, and his “something” was the communal life of the medieval village.

The economics of the village did not depend on the exchange of money and the investment of capital in factories, but instead existed through the simple exchange of goods and services among individuals known to one another. The farmer raises wheat; the miller grinds it for a share of the crop; the baker makes it into bread for another share; and the cobbler and blacksmith get their daily bread in exchange for making shoes according to the needs of everyone else’s children and horses. That communal system—the isolated feudal castle without the authority of the feudal lord—works well enough on a local scale, where everyone knows and trusts everyone else, as in the Israeli kibbutz or those idealistic communes of the American transcendentalist movement. The feudal system even had an element of future planning and provision: if the miller’s children don’t happen to need shoes this year, the cobbler will still get his bread, because everyone knows that children will need shoes soon enough.

Marx’s error, in my opinion, was in ignoring human nature and believing that what had worked on a local level could be expanded to the national—and eventually the global—economic level. His prescription was not simply that local villages and towns should go back to their feudal roots in isolation, but instead that whole nations could exist on the trust and charity—“from each according to his ability, to each according to his needs”—of the local peasant. That cobblers and factory workers in Kiev would make shoes, not for personal benefit in terms of money wages or a share in the enterprise, but so that everyone in the country who wants shoes will have them. And everyone else in the economy will selflessly make their products—wheat, flour, and bread, along with tractors, milling machines, and bakery ovens—and provide their services—carpentry, plumbing, medical assistance, and legal advocacy—free of charge and in the expectation that everyone else will provide selflessly for their needs. This is the antithesis of Smith’s individual maximizing his own satisfactions, advantages, and security. It is the individual sacrificing for the greater good.

Karl Marx believed that once his system had gotten under way, the state, the governing force, would no longer be needed and would wither away. And people would just go on forever, sharing joyously. Marx was no student of human nature but instead a visionary who dreamed of his own utopia. Wherever his ideas have been tried, they required the state to grow stronger and force individuals into line, usually with actual punishments and threats of death. The alternative, was to try to create, through psychology and breeding, a perfectly selfless man, Homo sovieticus, which is to say the perfect slave.

Adam Smith’s capitalism, on the other hand, required no state intervention to operate. People will try to maximize their satisfactions and advantages naturally, and they will only sacrifice for those they hold near and dear, their families and closest friends and associates. But we—that is, later economists—have discovered since Smith that unbridled economic action does need some agreed-upon rules. For example, how is society to treat and dispose of the wastes of a large industrial factory or mechanized, monocrop farm, undreamed of in Smith’s time? And those situations, along with the multiplication of advantage enabled by developing science and technology, do require a government to monitor them and enforce the rules. We have also learned that contracts between individuals do not always operate smoothly, and some system of courts and judges is needed to arbitrate disputes. But the underlying economic system Smith described does not require a magical change in human nature, nor does it need an overbearing state to keep turning the crank of command-and-control decisions, endlessly directing what to make and how and where to deliver it, in order for the system to function.

If you believe that human beings can best decide where their own happiness, benefit, and advantage lie, for themselves and their families, then you subscribe to the natural economics that market forces will bring about—although with some social adjustments, rules of exchange, and the courts for enforcement. If you believe that human beings are flawed creatures, unable to decide where their own interest and that of the greater society lie, then you subscribe to the aspirational economics that only a strong state, the dictatorship of one group—the proletariat, the elite, the “best people,” or Animal Farm’s pigs—over all the others, and an eventual rewriting of human nature itself, can create.

I believe the difference is that simple.

1 comment:

  1. I've lived in a planned economy for a long time. Russia's economy was built on its own raw materials. On its industrial and energy base. It has existed for decades. And we had no beggars. And there were no very rich people.