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High Praise & Bitter Resentment for Capitalism

Volume 3, 2017

 By Professor Xu Xiaonian

Capitalism, both as a concept and reality, is full of controversy.

Despite the abundance of scholarship on the topic, people are still vociferously debating its definition, history, and future. Prof. [Jürgen] Kocka’s book, Capitalism: A Short History, has dealt with this very broad topic in less than 100,000 words, and it is an exceptionally arduous challenge he has assigned himself. The consolation is that the modern rival of capitalism—socialism—tethers even more ambiguity around its definitions, manifestations, and  social practices.

Capitalism marks the second big leap in the economic history of the human race. The first  occurred in Mesopotamia about 10,000 years ago, when the domestication of plants ushered in human civilisation. The second happened in England, signalled by the Industrial Revolution in the latter half of the 17th century. Although capitalism was born much earlier than the Industrial Revolution, only after the revolution did it permeate almost every facet of economy and become the prevailing system.

Human civilisation was borne from agriculture. But it soon fell into a lull; stagnation in the development of production and technology, pressures of a burgeoning population, and environmental degradation produced a meagre agricultural surplus. Civilisation and cultural life thus laid low until the Industrial Revolution broke the Malthusian curse. With fast-evolving technology, the economy has been enjoying exponential growth for the past 200 years, and has not shown any signs of slowing down.

Capitalism: A Short History has cited the research of classic authors in an effort to define the first word in the book’s title. Marx perceived the innate greed of humans underneath the unprecedented technological progress and wealth-creation. The capitalist system has unleashed the human desire to make a fortune—a goal towards which they've honed all their efforts and talent. Profit-oriented capitalists oppress and exploit workers, relegating capitalism to the lower moral ranks. German sociologist Max Weber, however, condoned value-neutral methods of analysis, emphasising the religious reform's effect of spiritual liberation on capitalism. He also noted how economic rationality freed the economy from the shackles of feudalism and accelerated the production and accumulation of capital. For Joseph Schumpeter, innovation stands as the most fundamental characteristic of capitalism, while to Lenin and French economic historian Fernand Braudel, its true essence resides in monopoly based on political power. Every classic author has carved his own relief of capitalism, and it is incumbent upon readers to consider the diverse spectrum of interpretations in order to grasp its essence.

In contrast to the arc of opinion regarding the moral dimensions of capitalism, scholars have almost unanimously attributed its drive for innovation to the right to private property—an incentive that has fuelled the efficiency of the free-market economy. Lured by the possibility of excess profit, capitalism has become a perpetual machine of innovation. The meaning of this profit, however, is no longer confined to the indulgence of luxury; it is also used to shoulder the huge capital demand of innovation risk. Only constant innovation allows enterprises, facing fierce market competition, to survive. As stated by Schumpeter, innovation is not optional but a cardinal issue concerning a company’s life and death, its rise and fall.

From the ocean commerce of the early days to the railways and oil of the Industrial Age, excess profit has always been charged with risk for the adventurer. If a storm destroys the ship, if no oil is found, or if markets reject new products, what awaits is not the anticipated colossal profit, but disastrous losses. High risk requires high-return reward. Unlike other economic forms, capitalism is characterised with profit being the only objective of business. Money begets money, and money is not only a means but the purpose. As the Chinese poem says of the pursuit of profit, “it's worthwhile growing haggard for her”, and if necessary, even worth risking one’s life.

Excess profit is rooted in monopoly. Schumpeter spoke highly of “natural” monopoly in the market and saw it as an indispensable driver and incubator for innovation, while Braudel criticised man-made monopoly characterised by collusion between government and businessmen. The history of the developed market economy seems to endorse Schumpeter’s theory of the necessity of monopoly, while the experience of emerging market economies proved Braudel’s concerns to still be relevant.

Capitalism requires the right to private property and a free market, which have existed for millennia. So why did modern industrial and commercial civilisation only bear fruit in England in the latter half of the 18th century? According to Weber, after the religious reform of the 16th century, the essence of capitalism – economic rationality of individualism – gradually became mainstream in Western Europe. The social hierarchy of scholars, peasants, workers and merchants gradually collapsed, with merchants rising from the feudal structure. Nobel Laureate Douglass North looked into the issue from a different angle. To him, the 17th century constitutional revolution catalysed a fundamental change in the business climate. Under the aegis of legalised private property protection, merchants’ operations, conducted by rational means, led to the accumulation of capital and technological and organisational innovation, which American economist Mancur Olson referred to as “wealth-creating capitalism”. Ancient Chinese merchants also based their actions on economic rationality, but the impetus of profit-seeking led them to invest resources in the maintenance and development of their relationship with governments. Whether in creating wealth or sharing benefits, economic rationality always follows the road of fewest barriers and lowest cost. Thus the political system emerged as the traffic light at the crossroads, steering the allocation of resources. From this angle, North’s analysis of the issue is more profound than Weber’s; political reforms are indeed necessary for the massive expansion of capitalism.

In an open market economy, merchants have the capitalist dream of making a fortune, and even grassroots citizens can start from scratch to ascend – with hard work – to the top of the societal pyramid. Although the top affords limited spaces, the passage is always there, and open to everyone. While commercial and financial capitalism have traditionally relied more on family heritage for continuity, familial pedigree has become less and less important in the industrial and technological age. Entrepreneurial human capital, along with good luck, is the key to success. American oil magnate John Rockefeller began his career as an apprentice; technology genius Steve Jobs was abandoned at birth, to be later adopted by blue-collar workers. Children from poor families can get rich, just as capitalists’ offspring aren't guaranteed success.

The popular Chinese proverb “you cannot be rich for more than three generations” is evidence of the failure of capitalists, but the success of capitalism. Products, skills, knowledge, and ideas can all be transformed into capital. The Chinese often say, “Do not say we have nothing”; everyone can be his own master. Regardless of one's family background, race, financial condition and social status, everyone can engage in innovation and entrepreneurship; as long as his/her human capital has the chance to appreciate, he/she can mount the altar of capital. The rule of “money always outweighs relationship” might be too harsh, but given that it negated feudal hereditary privileges and the bureaucracy of Stalinism, isn’t it merely another form of fairness? Although it is inconsistent with the “absolute fairness” humans dream of but can never achieve, capitalism promises the highest social vertical mobility – whether you are moving down or up the ladder. It is not afraid of having different social strata. What is most terrifying is the blending of strata. There is no absolute equal opportunity in any society. As long as the god of fortune favours the wealth creator, it is possible to realise multi-win or win-win for members of society.

The win-win game requires equal access to political power; after all, capitalists and their fat-salary teams only make up a sliver of the population (in which society are the elite not a minority?) The majority of society has the option to participate in the political process – to have the agency to directly affect policy and influence the distribution and re-distribution of income in their own favour. In the US, economic crises in 1873, 1930 and 2008 facilitated legislation in favour of workers, and forced capital to adopt a more tempered approach. The pendulum will not swing forever in one direction; the 1970s stagnation in North America and Western Europe paved a road for new liberalism that espoused tolerance of capital. Classic authors think highly of capitalism’s power of creativity, but tend to underestimate its gift for self-adjustment and self-correction. Social mobility and openness weakened the class struggle that was predicted would destroy capitalism; the expansion of bureaucratic management and the stagnation it incurred – which Weber worried about – have been confined to the public sector, and the exhaustion of creativity that elicited Schumpeter's pessimism about the future has not happened. Like an off-kilter bicycle striving for balance, capitalism continues to write its flawed story, and so far it shows no sign of giving up the pen. 

Autocracy, though, permits or even encourages the development of capitalism, and provides a certain degree of social vertical mobility; its incentive mechanism tends to lead social elites to conduct benefit-sharing activities instead of wealth-creation. People in the power game do their best to scale the ladder of bureaucracy. The higher one gets, the greater the opportunity for rent-seeking. An extreme example is Suharto, in Indonesia, who built a massive business empire backed by the state. When allocating resources, private enterprises – like those in the public sector – give priority to their relationship with the government and monopoly projects that rely on power instead of technological innovation and operational efficiency.

Since its birth, capitalism has contended with poignant and stringent criticism. If the first big leap evolved naturally, the second leap could be characterised as a tempest that took only two generations to upend long-standing human civilisation. Economic rationality overturned values and morals long-cherished by traditional society. The capitalist approach to production took people away from communities in a once-agricultural society; away from their families, village communities and clans. People became the means for economic rationality, directly opposing Kant's original notion – the rejection of treating people as a means to an end. People are now akin to a grain of sand or dust, adrift in a strange reality, facing an unpredictable future, having lost the warmth and sense of security once provided by the original community. Though they have gained unprecedented individual freedom, the price is unprecedented loneliness and a feeling of exclusion. Their plight feeds into resentment against the greed of capital, provoking the angry accusation that values and morals have eroded.

Are capitalists greedier than feudal landlords or dictatorial emperors of the Qing Dynasty? Instinct says the answer should be yes. But when it comes to the internal motive, it is hard to judge. As Marx observed, traditional society wore its “sentimental veil,” because within the small community of a manor, the master’s oppression may result in slaves’ sabotage, escape, or even rioting. The capitalist employment relationship allows an entrepreneur to easily sack unsatisfactory workers and turn to the market for replacements. The degree of exploitation merely depends on the different means of exploitation, rather than the good or evil in human nature. It is better to improve workers’ lot in the market by bargaining through established systems, rather than resorting to an appeal on moral grounds. 

Capitalism has indeed come up with a set of untraditional moral standards – this is similar to what happened when humans transitioned to agricultural civilisation from the hunting era. Morals are diachronic and subject to constant change. The conflict between new and old is not at all surprising. What is hard to deal with is the impact capitalism has had on social value. Is there absolute and eternally immutable value? Is the absolute value of human civilisation and those of capitalism contradictory? Must capitalism be based on common value? Is the progress of material civilisation brought on by capitalism enough to offset spiritual cost? While the academic world is still earnestly contemplating these questions, citizens in contemporary capitalist countries seem to be done with the debate. They hope to improve the system instead of replacing it, especially after its alternative – the planned economy – bowed out at the end of the last century.

In the eyes of some Western intellectual elites, the expansion of state capacity is necessary if we want to reform capitalism and curb its encroachment on freedom.  Prof. Kocka also analysed the relationship between the state and capitalism. The two dominant forces of modern society – capital and coercion – can indeed restrict each other, but they are not equally positioned. Capital is competitive, but the coercive force of the state is a natural monopoly. Although capital is always in pursuit of monopoly in order to earn excess profit, it can only partly or temporarily realise a state of monopoly; the market is open, and “barbarians” can break in at any time. However big the market share is, monopolistic companies nowadays (like Apple) still have to develop new products to maintain excess profit. It is this kind of monopoly-competition mechanism that has given rise to ceaseless innovation. The state does not have – and cannot have – any rival. Its power over individuals is far beyond that of any form of capital.

In Capitalism: A Short History, as in many international academic works, the state is portrayed as a hollow ghost without a biological brain but with the ability to think and act, obtaining at least a certain degree of autonomy. With the help of this ghost, scholars redesigned capitalism and assumed their visionary plans would be gratefully embraced by the mediocre public. Frankly speaking, the view of the state in Marxism is closer to reality than these utopian ideas. The state is by no means an independent actor. Game players who are able to think and make decisions not only strive to impact state machinery, protecting their own interests via laws and policies, but also use that machinery to protect common interests, of which the most important is economic order and social stability.

Capitalism: A Short History, in its highly concise language, gives an introduction to the history of capitalism's development and its contribution to the human race, as well as the suffering by its own hand. This slim book will provide readers with an inspiring perspective and help people think in-depth about the values and moral dilemmas faced in today’s world.

 

This article, written by CEIBS Professor of Economics and Finance Xu Xiaonian, is the preface to the Chinese version of Capitalism: A Short History authored by Tenured Professor of Humboldt University of Berlin Jürgen Kocka.