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Economic systems today exist in a multitude of different shapes, colours and sizes. They all, however, have an indisputable presence of homogeneity in their central objectives. As Henry Simons states in his Economic Policy for a Free Society, “There is in America no important disagreement as to the proper objectives of economic policy � larger real income, greater regularity of production and employment, reduction of inequality, preservation of democratic institutions.” The veering point in the diversity of these systems lies in the way in which they seek to obtain these goals, and the relative success or failure in each arena of the modern economic objective. The focal point of this paper is the examination of equity and efficiency in a host of different economic scenarios.
In 14, during The Great Depression, a man named Henry C. Simons put pen to paper and created one of the most controversial works of his time. An Economic Policy for a Free Society underlined the causes of the failure of the economy, and sought to create a program of positive action by which the Government could implement a system of laissez faire to the betterment of the economy. To take Simons anachronistically out of context is dangerous � this pamphlet was written at a time when so-called capitalism had failed, and people were crying out for a new system of managed economic action. Simons objected vehemently to this call to socialism, saying, “The real enemies of liberty in this country are the naïve advocates of managed economy or national planning… Indeed, it seems clear that none of the precious “freedoms” which our generation has inherited can be extended, or even maintained, apart from an essential freedom of enterprise…”
At the same time, Simons did not propose a system of “doing-nothing.” His intent was to enforce Government-backed policies aimed at sustaining an economic climate suitable for the propagation of both democracy and capitalism, without the necessity of regulating “the heart of the contract.” Keystone points in this positive policy would be the maintenance of competition within the various industries, the intelligent control of currency (both the quantity and value of), the strict definition of property rights, and other non-viable social welfare activities.
Simons lived in an era in which competition was almost extinct. The market-place was heavily polluted with monopoly and monopsony, which he called “the great enemies of democracy.” These large, efficiently organized groups wielded wide-spread and terrible power over the community, exploiting them for profit. At a glimpse, this would appear to be but an instance of equity being sacrificed for efficiency, but on closer scrutiny, the latter was as scarce to be found as the former. An economy’s efficiency is calibrated by it’s ability to utilise scarce resources to achieve innumerable needs, these needs being demonstrated by the corpus of the society as a whole, as a factor of their demonstrated demand. In a monopolistic economy, this “market power” is wielded by a handful of large bodies rather than by the society as a whole, and it results in the absence of productive employment of these scarce resources. As Simons says, “Monopoly thus means the exclusion of available resources for uses which, on the market-value standard, are more important, and, therefore, means diversion of resources to less important uses.”
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To conclude, Simons saw the capitalism of his time as a diseased animal, albeit one that required medicine rather than euthanasia. He called for a increased levels of competition, which could only be achieved by bringing down the monopolies. Monopolies result in less market power in the hands of the people, resulting, in turn, in lowered levels of output, inefficient production of “forced” goods, and higher prices (often called monopoly rent) which amounts to nothing but pure excess profit. Likewise, in a monopsony, wages are depressed, leading to exploitation of labour, lowering of costs of production, and even more excess profit.
Karl Marx wrote the Communist Manifesto in 1848, and Das Kapital in 1867. Of the two works, Kapital is the more vehemently critical of capitalism. Marx begins his voluminous denouncement of capitalism by stating how often basic, universal ethics are laid aside in a capitalistic environment, based on the whims and fancies of upper classes � which would be respected in his “communist utopia.” He then goes on to describe the woes of the proletariat under the evil system of capitalism � stating how humanitarian factors such as justice are re-evaluated under the fossilising system of capitalism. One of the few areas in which I agree with Marx is his condemnation of the despotic traits of monopolies and their anti-trust warfare techniques � though his talk about “emancipation from the yoke of capitalism,” and the birth of a “post-capitalistic, communistic utopia,” sends shivers down my spine.
Marx formulates a pentanumerate critique of capitalism which is central to both of his aforementioned works. Foremost of these is the exploitation of worker by the monopolies. Marx claims that exploitation of workers to create surplus profit is central to the system of capitalism. He accuses capitalism and not monopolisation for the inhuman and unjust conditions of the workers of his day and age. He says, “…the system itself in intrinsically unjust because of the parasitic exploitation of the labour force by direct producers.”
He goes on to talk about “the loss of liberty from alienation, reification, and commodity fetishism,” saying that in the capitalistic system, workers become dominated by their own products. He compares capitalism to a sort of “disenchanted religion” saying, “The more the worker is externalised in his labor, the more the outside, objective world, which he himself creates, becomes powerful, the more he is self-impoverished and the more his internal world becomes poor, the less he possesses that is his own. It is the same with religion. The more man invests in God, the less he is able to retain his own self.” In a sense, he blames capitalism for the ruin of the common labourer, failing to admit that labourers have been oppressed for years, and under many different economic outlines.
Marx then mentions the “quantification of social life,” saying that capitalism promotes a trend away from qualification (things like human sentiment, kindness, virtue etc.) to the cold green quantification of cash. Every aspect of our humanity is placed on the “market balance” and its value is recorded as a function of currency. He goes on to say, “there came a time at last when what all that these men had looked upon as inalienable became an object of exchange, of trade, from which they would be estranged. It is the time when the same things which until then were communicated, exchanged, bartered; supplied but never sold; acquired but never bought�virtue, love, opinion, science, conscience, etc.�where everything will at last pass into commerce. It is the time of general corruption, of universal venality, or, speaking in political economic terms, the time when everything, moral or physical, having become market value, is carried to the market to be appreciated for its fair value.”
Finally, Marx talks about the irrationality and barbarism rampant in the system. Not enough, or too much is the preferred level of production for capitalists, says Marx. “There are too many means of subsistence, even though the majority of the population lacks the necessary means of subsistence.” Citing the historical example of the “Bastilles of the Workers,” Marx tries to convince the public that capitalism is responsible for everything that is worker exploitation. He attributes the inhuman conditions of the workers, the twenty-hour days, the “endangerment of the very heart of civilization” to the system of capitalism present at his time. One can understand and forgive the nature of Marx’s writing when one puts him into context. Like Simons, he lived in an era that glorified mercantilism and the exploitation of the working class. Yet his writing seems a little too forced at trying to convince us that communism is indeed better than at honestly delving into the plusses and minuses of both systems.
Oskar Lange, like Marx, was against the system of capitalism ubiquitous in his time, and proposed a non-market solution of socialism as the cure. Capitalism holds the market as it’s central axiom for the discernment of a commodity’s value. Lange argued that this system, though tempting to use because of its simplicity, was not efficient in determining value. Lange proposed that a central price-setting authority could efficiently replace the market system. He created a trial-and-error algorithm, which he claimed was the capitalistic economy’s measuring balance to compute the relative value of one good to another, or in hard currency. He argued that while the capitalistic economy used this trial-and-error algorithm at the private entrepreneur level, his system of socialism would implement it at a central level, leaving the price-setting authority with greater information retrieval capabilities.
Lange sought to internalise both positive and negative externalities into the value of a given commodity. “By putting leisure, safety, agreeableness of work etc., into the utility scales of the individuals, the disutility of any occupation can be represented as opportunity cost.” Lange claimed that a centralised price-setting authority could incorporate all of these costs and benefits into the ultimate value of the good or service. “A socialist economy would be able to put all the alternatives into it’s economic accounting. Thus it would take into account all the services rendered by production, and take into the cost accounts all the alternatives sacrificed.” Lange also talked a lot about “external economies or diseconomies of scale.” In such cases, the increase in output by one producer, positively or negatively impacts the efficiency of the factors of production employed by the other producers of the same/similar goods. This cost cannot be taken into account by the individual producer, as it is external to and above his level of operation. A central body could, however, internalise these effects. He goes on to say, “In a socialist economy, this situation is taken care of automatically by the rule that each industry produce just enough to equalise the marginal cost incurred by the industry in producing that amount with the price of the product.” As a result, the utopian socialist economy would not be subject to the fluctuations of an erratic business cycle.
Perhaps the largest drawback to socialism is the relative efficiency of public officials to private entrepreneurs. Historically, all attempts at socialism have been squashed by bureaucracy. Lange argues that capitalistic monopolisation also encourages bureaucracy, stating, “Officials subject to democratic control seem preferable to private corporation executives who practically are responsible to nobody.” The real issue, according to Lange, is that capitalism is no longer a viable vehicle of economic progress. The future of the economy lies in the hands of bourgeoisie, the labourers and the workers. Capitalism has exceeded it’s function, and needs to be terminated, replaced with a system of equal ownership and development of all the factors of production. While this might seem like a grand idea, I do not consider it to be very efficient. Economics dictates that the scarce resources of the economy should lie in the hands of those who value it the most, and those who are able to utilise it most efficiently. Who other than the present owners of capital and land know how to utilise these resources to the best of their potential? Doling out land and capital to everyone would mean that no one would need to specialise in their management, and that would result in a considerable loss of value and efficiency.
James Hightower, in his brilliantly written piece entitled, Getting a Leg Up On Corporations denounces the modern day monopoly as the bastard child of capitalism. Corporations, he says, were formed primarily to shield the individual investor from the long arm of the law. Behind the corporate veil, investors can loot, lie, pillage and burn without ever having to be deemed responsible for their actions. He says, “But the corporation is a legal fiction that lets the investors who own the business skate whenever the business behaves badly.” He goes on to compare the social role of the modern day corporation to that of the medieval Church of England, saying, “Corporations have become the dominant institution of our time, occupying the position of the church of the Middle Ages, and the nation-state of the past two centuries.” Hightower denigrates the modern day monolithic empire as one that is in direct altercation with the system of ethics and rights pivotal to any democratic constitution. He charges the corporate structure of stealing power from the people and wielding it to pure selfish intent. Quoting Mary Lease, he says “ Wall Street owns the country. It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street and for Wall Street. …Our laws are the output of a system which clothes rascals in robes and honesty in rags…”
Another brilliant economist, David Gordon, talks about the monopsonistic side of corporate dictatorship in his splendid article entitled, Underpaid Workers, Bloated Corporations. Gordon begins his article by bringing to point the serious decline in workman wages over the past two decades. Speaking out against exploitation, Gordon says, “Wages have been declining alongside enduring top heavy corporate bureaucracies in the United States to a considerable degree because our production, labour, and managerial relations continue to rely on the stick rather than the carrot.” Only those with a higher degree of education were awarded any barrier to this system of despotic monopsony. Gordon also speaks out against the inefficiency of the modern day top heavy corporation. These institutions have too many resources being devoted to the sustenance of the non-productive manager and supervisor. Also, since the resources are inefficiently managed, and since worker productivity is essentially low (due to lack of job security and the effects of worker alienation), the only way to increase profits (assuming the price hike limit has already been reached) is to cut down on wage expense, leaving workers in a no-win situation.
In conclusion, every economist on the face of this planet will agree that capitalism has it’s share of drawbacks, but the question at hand is do we have any empirical evidence that a radical change of economic systems from one of capitalism to a socialist regime will result in greater welfare? While I agree with Simons, Gordon and Hightower that something must be done, I do not propose, like Marx and Lange that a reversal to a socialist, communist regime will be of greater benefit. The present economic system needs a lot of fine tuning � monopolies must be controlled, and corporations must be regulated, but to switch into equal ownership of factors of production does not seem like an intelligent option. Countries have seen revolutions in the past, when overbearing and exploitative landlords have been overthrown by simple peasants, and I believe that we will see a corporate revolution in the future, but to say that we must ring the death knoll on capitalism itself seems a bit extreme, and nonsensical. All of the negatives mentioned by Marx and Lange can be overthrown by a system of competitive development, and that is where I believe that our efforts must lie.
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