Friday, January 3, 2014

The Devitation of Modern Capitalism from Its Origin

When you hear a politician blather about preserving our "dynamic free-market" economy, what exactly do you think he is blustering about? Do you imagine that he is talking about eliminating "government regulations" that prevent businesses from growing? Indeed, in today's political discourse, a "free-market" means little more than an unregulated market. In that case, would Somalia and cartel dominated northern Mexico pass for free-market economies?

 Modern American politicians generally shy away from serious discussions of macro-economic topics and when confronted with this question, they'd find a way to provide a well-polished, but an intellectually vacuous answer.  To be sure, Adam Smith's original conception of the free-market sharply differs from anything an average voter understands it to mean. 

It is impossible to provide a full account of Smith's comprehensive definition of the free-market in such a short post, but perfect competition was its essential component. Part of his definition of the free-market held that no merchant should be able to coerce his competitors or customers by withdrawing from the market. That is, in a true free-market economy, when a merchant leaves the market, his customers would be free to purchase goods or services from his competitors.

 By the same token, he would not be in the position to raise prices far beyond what the consumers are willing to pay because they would have the option of buying from his competitors. However, the forces of the  market are disrupted when one enterprise becomes sufficiently powerful to eliminate adversaries and coerce consumers into paying higher prices: it is here where the government must intervene to preserve the free-market economy.

In stark contrast to Adam Smith's prescriptions, far from preserving the freedom of the market, the government colludes with the most powerful industries in this country. Recently, Congress passed a bill at three in the morning that prevented the Federal government from negotiating prices of prescribed medications with the pharmaceutical companies. As evidenced in the report that was originally aired on the 60 Minutes show, this event took place at that hour because the pharmaceutical lobbyists did not want the average viewer to see this odious event on C-Span in broad daylight. Congresspeople who opposed the bill have been coerced into subordination and its leading supporters shortly obtained jobs with the pharmaceutical companies.

Other proponents of the legislation were pharmaceutical lobbyists and those who would shortly join their ranks. For example, Republican Congressman Billy Tauzin was commended by George W. Bush for the "great work" he has done in passing the bill. In the 60 minutes interview, Tauzin asserted that the pharmaceutical lobbyists always get what they want in the political arena because they "stand for the right things". He clarified his point by insisting that the recent bill that dramatically increased the prices of pharmaceutical drugs was good for the patients whom the pharmaceutical companies represented.

The reality of the situation is that pharmaceutical products are already much more expensive than they are in all other developed capitalist economies such as Canada, Denmark, Australia, New Zealand, the United Kingdom and Germany. It is very likely that as the drug prices continue to soar, they'll become even less accessible to the general public and the quality of health-care in this country will decline even further.

 Predictably, Tauzin left his congressional post to become the chief lobbyist for these companies.  He was followed by his cronies who also played an instrumental role in legislating the infamous bill such as John McManus, Linda Fishman, Calving Weldon and at least 12 others. Far from being an act of a free-market economy, this legislation is a clear example of a trend that has been undermining economic freedom in the United States for the last two decades. According to the Index of Economic Freedom, the U.S is only the 10th freest economy in the world and continues to decline.

The analysts of this international agency cited the "trend toward cronyism that erodes the rule of law" as one of the salient reasons why the U.S economy is becoming less free every year. Most Americans tend to think that the United States is a bastion of economic freedom and countries such Canada and Denmark are socialistic by comparison. The reality is that the economies of both countries are freer than that of the United States, most notably, the Index of Economic Freedom places Canada four positions ahead of the United States. Rule of law is an essential component of a free economy and the corporate lobbyists' ability to heavily influence government policies with impunity is one of the greatest threats to economic freedom in this country.


  1. The problem with perfect competition is twofold in my opinion, first of all, the idea of perfectability itself or even approximations of the same, the second and possibly most significant, is class or social struggles. That is struggles which go beyond competition, even transitory conflicts, which may be personal or cultural but are not perrenial in nature.

    I think this has always been the case, its a fixture or structural trait, its maybe even possible that it is impossible to eradicate class conflict, merely manage it. Although I dont believe that any political party is willing to even manage class conflicts, at least not in any balanced fashion, there are winners and losers, as any game of monopoly shows, and this seriously eschews the operation of markets in any abstract theoretical way.

    The biggest development in terms of eschewing market forces, I believe, has been the development of a plutonomy, acknowledged in memos at Citibank and other institutions. So the social structure is no longer a pyramid or diamond but an hourglass. The proliferation of pound stores and bargain basement markets for one class and niche services for the uber-rich neither of which relate to one another much and have little sympathy for one another. I dont know if you would agree but ideological shifts have taken place reflecting this, Ayn Rand and her valorisation of John Gault, the archetypical uber-richy of the plutonomy, has replaced Smith long ago.

  2. Thank you for your comment. I agree that there is no such thing as "perfectability" and therefore, we can only come so far in creating a close approximation of a free-market. I also agree that class struggles are an ineradicable part of capitalism, but to that I'd like to add that they are often more severe in socialist or communist societies. In the latter, the elites either get absorbed into the government or are eliminated from the political arena through exile, incarceration and execution. While it is true that socialist societies tend to be more efficient at rescuing the least privileged from grinding poverty, their elites often undermine the interests of the underclass similarly to how the elites of the capitalist societies do.

    In the capitalist society of the United States, plutonomy is the problem, as you put it. The transnational corporations are able to disrupt the forces of the market by infiltrating the government through lobbying.

    How do you think we could take steps towards resolving that problem?

  3. I tend to think that class struggles are ineradicable from any society, whatever the prevailing political and economic institutions, vision or leitmotifs are. So I'm inclined to believe that management and containment of that conflict is a more realistic goal than seeking their eradication. That's not just because I know well the history of developments in the countries which have experienced totalitarianism with the socialist or communistic taint, although that's pretty important too.

    I tend to support Rawls' rationalisation for inequality, that a society which has no egalitarian objective can be judged superior to one which does if the very least within the unequal society is more prosperous than the very least in an egalitarian one. That is to say that if it is agreed that stratification is inevitable, ie the seperation of individuals, families and communities into different classes, then the wellbeing of the very least in each is comparable and the criteria for judging the success of their political and economic institutions.

    The only possible caveat to that, and its totally hypothetical and theoretical really, is that, I would suppose, that Rawls' is talking about material prosperity. That is fair, up to a point, and I accept Maslow's hierarchising of needs into survival needs etc. etc. However, beyond a certain point I would consider the presumed material "prosperity" of the bottom class in an unequal society to be nothing to be envied. Especially if it involves dependency and the stripping of responsiblity and the egalitarian but all round less prosperous society does confer independence and responsibility.

    Steps towards resolving the problem of the plutonomy are not easy to come by, personally I'm a fan of the thinking of Daniel Schweickart, less so Robin Hahnel and Michael Albert (although they have coherent visions and good responses to the finer points of Hayek and others).

    To be honest I think there needs to be agreement among a large enough population that it is a problem to begin with, then the creation of a consensus that something needs to be done about it beyond simple, and contestable or reversable "redistributions" or "disturbances" of the existing distribution of wealth. The simple, and often mistaken, free market dogmas are too widely accepted and aggressively promoted presently to be assailable by reasonable doubts.