Sunday, May 05, 2013

Bruce Wilder 05.03.13 at 7:59 pm

john c. halasz @ 110

the “imperative” to maintain the value of the invested capital via maintaining or increasing the rate-of-profit. . . . a capitalist system is [not] necessarily optimal or sustainable, in terms of social welfare or environmental sustainability, in any adequate system of social cost or natural resource accounting, especially since the criteria of selection for technical innovation and development will be determined by the need to maintain profits, rather than any optimization of productive surpluses.

The core contradiction of existing capitalism boils down its “need” to perpetuate artificial “scarcity”: over-consumption for the sake of over-production.

I’m not sure Marx’s terms help with this, even when they can be applied to good effect. “Rate of profit” is wrong, or at least fatally confuses economic profit and interest on financial capital with economic rent. Hegelian contradictions are a dubious way to identify the paradoxes that reveal how far, and why and how, a decentralized market economy deviates from an ideal of just and rational organization. And, over-production is, at worst a peripheral symptom of pathological dysfunction — and an easy symptom to treat, by the way, as Keynes and Krugman would instruct us — not the core.

The key contradiction is the tension between public and private, the individual and the whole people and state, between private wealth and common wealth, the good of the dominus and the general good. Capitalism brings this contradiction into high relief, because, in contrast to preceding feudalism, capitalism offers the possibility that the dominating elite might serve a productive purpose, and be something more than the corrosive deadweight of violent drones extracting a paltry surplus to be spun into chainmail and trinkets.

In the Friedman mythos, based on the neoclassical economics of the marginal revolution, the market delivers justice, by paying every resource, its marginal product, delivers to the sovereign consumer, marginal value exactly equal to price, plus consumer surplus. In the more realistic classical economics, most progress tended to flow away into unearned economic rent. In the most optimistic scenario, the rentiers, rather than drones, became Adam Smith’s improving landlords, practicing an enlightened self-interest in augmenting the common wealth of their nation: the Duke of Bridgewater and his eponymous canal triggering the industrial revolution by cutting the price of coal at Manchester or the dissenting gentry of the Lunar Society nurturing Birmingham, or the recusant Duke of Norfolk underwriting Sheffield.

Friedman’s marginal product fairy tale doesn’t really work, because marginal product is conditioned on a sunk cost investment of capital claiming a quasi-rent residual, and it simply isn’t possible for many businesses, absent a considerable infrastructure of public goods — including effective, detailed regulation — to sustain themselves in a competitive marketplace. You cannot build a railroad and expect to make a profit on operating the railroad, selling transportation services. The benefits of the railroad will flow to adjacent business and property owners, so unless the railroad owns a lot of the adjacent land and businesses, it won’t sustain itself; so much for decentralized market capitalism. If you follow the logic out, the only way to capture all the benefits of innovation and use them to finance worthwhile investment rationally is to form a totalitarian state that owns everything and receives all rents, internalizes all externalities, but such a hierarchy of power is a disaster for other reasons, and an informational impossibility. Second-best is a mixed economy state that heavily taxes economic rents, and uses those taxes to finance investment in public goods, and compels capitalists to take risks with their capital.

Capitalism works reasonably well when there’s a balance of Schumpeterian entrepreneurs using creative destruction to steal the old guard’s rents to feed their own ambition, the threat of world war and global communism to motivate public spiritedness in the elite, and some mass-membership organization to oppose and divide the elites. Otherwise, not so much.

In relation to resource limits, preserving rents motivates one part of the rentier elite to champion a past best dead and buried, while finance capitalism seeks rents from parasitism of usury and Ponzi schemes. The key pathology, though, is, paradoxically, the unregulated capitalist impulse to externalize risk and cost, to split economic rents into good and bad tranches, and visit the bad tranches on people with no risk-bearing capacity or power to resist. So, better and cheaper to adapt to global warming than to stop it; if Bangladesh drowns, well, the poor can’t afford to adapt — their bad, the losers. Welcome to neo-feudalism.

The record of capitalism in extinction events and the exhaustion of depletable resources is not encouraging, but the folks, who think reputation effects can save us from frauds and food poisoning will no doubt have rationales. Otherwise, what’s a Tim Worstall for?

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