Posted on LJ in July 2005. Not edited. If I had to leave behind just one political text, it would be this one.
Myth 1: Privatisation makes things efficient
Good management, consolidation, low corruption, and a strong drive to work (whether spontaneous or coercive), make things efficient. These factors may be present in private enterprises or state-managed ones (including science, military, transport, or healthcare). The converse problems may also plague both private and state enterprises.
The only parameters where there is an identifiable difference is corruption. Capitalism institutionalises the self-interest of managers and owners as a controlled (mostly) inefficiency called profit, whereas the same motives in public institutions result in unofficial profiteering called corruption. It’s debatable which kind of inefficiency is worst.
However, efficiency is an academic point or a red herring. The main purpose of privatisation is to increase the value of money, by allowing wealthy individuals to buy high-quality services without having to subsidise similar, or indeed any, services for the majority. Education, transport, and healthcare are the most common examples. Once private services are established, political pressure from the rich to scale down and gradually abandon the public systems is inevitable, and usually results in a two-tier system. Maybe this is “efficient” in the sense that the system only has to provide good services to a few people.
A second purpose of privatisation is to increase the value of capital by replacing nominally efficient (non-profit), in practice somewhat corrupt enterprises with officially exploitative (profit-oriented) ones. This process thus expands the scope of capitalism to the detriment of consumers. In developed countries the rich feel they can tolerate this cost as consumers, and in poor countries it’s not their problem.
Myth 2: Central planning is bunk
Central planning is extremely popular and prevalent in Capitalism, due to its straightforwardly obvious benefits. All corporations are hierarchically organised and centrally planned. So are state economies and the economic strategies of the major blocks (US, EU, Japan). Groups of companies operating in the same industrial sector generally meet to plan things like standardisation or new technology. International institutions of capital, such as the WTO and the IMF, are hierarchical and centrally planned. Planning, not competitive decision-making, is the defining trait of modern economic development.
What is bunk is a particular, hopeless form of planning that attempted to centralise all layers of decision-making and micro-manage the economy remotely. Soviet and Chinese Communism were structured that way, presumably due to a mixture of technical naivety, issues of geographical control, and entrenched corruption. These systems failed their populations in ways more important than poor economic performance, and the latter was due to factors besides poor planning, but somehow central planning is singled out by Capitalists as the defining flaw of Communism.
As far as I can see, the argument against “central planning” emerges whenever anyone proposes a policy of regulating or socialising some economic activity. Central planning of, for example, capital investment, infrastructure, R&D, banking, energy, or a host of other large scale activities in a way that benefits industry does not appear to be a problem.
Myth 3: Market forces allocate resources optimally
A market can, under ideal and stable conditions, allow a small number of participants to reach an optimal allocation of resources. In any realistically complex scenario the market behaves like a complex system with emergent behaviour, and it’s hard (although sometimes practical) to predict the outcome. Observed outcomes are indeed as variegated, including stable efficient, but also stable coercive, stable inefficient, volatile, depressed, and chaotic market behaviours.
Markets include enormous inefficiencies. A whole class of people is employed promoting substantially equivalent products, trading, and selecting between them. Producers strive to create differentiated and proprietary products, while consumers want commodities and transparency. Volatility in the market brings down technical and financial plans, or incurs huge costs to ensure against them. Natural distrust between parties causes under-buying and overpricing.
Taking a market approach might result in overall efficiency and rationality, or it might not. It depends on a lot of things, like the relative economic strength of the participants, their relative need, the relative efficacy of productive versus destructive forms of competition (e.g. secrecy, advertising), opportunities for speculation, economies of scale, the fluid or discrete nature of a resource, scarce resources such as land or radio frequencies, human and technical factors, and a whole set of poorly understood interactions between those. To insist a-priori that a more market-oriented approach would improve economic results is gospel.
However, there are two things that markets reliably do: They favour the economically stronger party (larger, most entrenched, etc.), causing a feedback loop towards consolidation, and they cause resources and production generally to be repurposed towards the needs of the most wealthy consumers. This is optimal if you are a wealthy consumer working in an entrenched corporation.
Myth 4: There’s such a thing as a market price
An associated falsity is that there is some uniform, commodity price for things like electricity, clothing, or industrial products, and that supply and demand are actually the main forces setting it. In fact, prices easily vary by an order of magnitude across the overall market, which suggests that market distortion is the dominant determining factor and market equilibrium the exception – the latter being confined in small subsets.
The price that a heavy industry pays for energy is an order of magnitude lower than household prices because of bargaining power, taxation policy, and transaction efficiency. Conversely, the price that consumers pay for clothing and manufactured goods is an order of magnitude higher than their cost near the manufacture site, and this is due to purchasing and distribution considerations, not transport. In the case of communications, consumers are charged many times the bulk bit transport cost due to effective collusion between carriers. Some of these factors are legitimate causes of the price disparity, while others are just profiteering. But, the main point is that factors other than supply and demand account for the greater portion of the price that weak buyers (consumers) pay.
Thus an argument that the market regulates consumer prices is bogus. To be more precise, the market does regulate consumer prices but not in the technocratically virtuous supply-and-demand way. Only demand has a significant effect, and essentially consumers are charged what they will bear. A bewildering variety of tactics is in place to sustain this, such as lock-in schemes, collusion, tiered providers, product ranges, and advertising, all justified by the insincere claim that the resulting prices are “market driven”.
As an aside, one wonders if supply and demand could, even in principle, regulate the use of commodities such as energy, communications, or water. The needs of industry are so disparate in magnitude from those of consumers that an efficient uniform market would end up charging consumers too little (encouraging waste) or industry too much (blocking productivity). Only taking consumers into account, their income varies so dramatically that any given price for electricity, for example, would cause hardship to some and encourage waste for others.
Myth 5: Free trade is fair trade
Free trade is fair in exactly the same sense as competitive sport is. No outside help, no violence to destroy opponents, and competition according to an arbitrary set of rules. If you feel that competition is some intrinsically good thing to be rewarded, or you feel that it’s fair for the strongest party to reap the greatest benefits, then free trade is fair for you. If you feel that other considerations, such as equitable gains or social policy, should determine outcomes, then free trade is not fair at all. It’s as fair as distributing food according to who can run the fastest and carry the most loaves of bread.
When two parties of vastly unequal power interact, the expected outcome is for the stronger one to abuse the weaker. The orthodox solution is to install barriers blocking interactions along the axis of power imbalance, but permit interactions along other axes where the parties are more equal. Free trade is inconsistent in this respect: It blocks some outside influences, but permits the most free interaction on the economic axis, exactly where parties are most unequal. Economically, it’s survival of the fittest. In that respect it’s hard to see it as anything but a transparent demand from western capitalists to set up the mechanics of a system where they can use established advantage to grab wealth.
Proponents might argue that economic imbalance is not a problem, because a huge corporation and a startup company can, and do, trade to mutual benefit. But economic size is the wrong determinant of equality. The correct one is need to trade. A corporation has a profit need to trade, while a worker has a survival need to sell, and a person buying necessities has a survival need to buy. This profit-survival imbalance is what allows the party with the weaker need (profit) to dominate the one with the acute need (survival). The key point is that, for the latter party, trade is no longer a fair economic game, as they are subject to de-facto coercion based on their circumstances.
A further and much more sinister problem is that free trade has enormous externalities (costs on others than the direct participants). Trade between A and B affects trade between B and C, and essentially places A and C in competition. The power imbalance between A and C may be huge, causing serious harm. For example, if A is a western food buyer, B is a third-world farmer, and C is a third-world labourer, A can buy all of B’s agricultural capacity, leaving C to starve. It’s hard to think of a solution to this problem other than socially motivated barriers to trade.
Myth 6: Ethical consumerism works
So if free trade is so bad, how about engaging in ethical trade, such as buying Fairtrade goods, boycotting sweatshops, and the like. Voting with your money, and it makes you feel good inside too. Well, actually these are the problems. While undoubtedly a worthy effort and a way to make a real (if modest) difference, ethical consumerism is a lousy political concept.
In a market, consumers are in competition with each other to find the cheapest and most valuable goods. Ethical consumerism burdens the most ethical minority with the higher costs of equitable trade, while rewarding the cynical majority with relatively cheaper (non-fair) produce. Worse, it fails to compel the majority to change their ways, and in fact works to absolve the status quo. If you are concerned about the third world, conservatives all too happily say, buy Fairtrade. Your problem, your solution. Discussion closed.
This concept that the class who care about a social problem should unilaterally bear the cost of fixing it is insidious and repugnant. It is aired in many situations where a group calls for the abolition of a privilege: Don’t like it? Go on, abolish your own, conservatives say in a smug tone. Well that is bullshit. What we need is not fashionable opting out of exploitation for the few, but binding rules that prevent exploitation for everyone.
Myth 7: Productivity is good
All other things being equal, productivity is of course good. It creates prosperity and goodness all around, and avoids waste. The trouble is that standard arguments about productivity are rarely about the technical meaning (efficient production) and usually about the political one (a priority on output over labour welfare). Even when technical optimality is involved, it usually comes hand in hand with labour compromises.
Well duh! Productivity is great if you’re a consumer. A plethora of goods and services is available to you at low prices. If you’re the one who has to be “productive” you have to work long hours doing unfulfilling work, with low security and damaging your long term welfare such as your health or personal life. Obviously there is an adversarial relationship here, and declaring that either productivity or labour rights are sacrosanct is a rather unproductive stance. I don’t know what is the correct balance, and the issue is very complex, but simply focusing on one side perpetuates myths.
A major source of complexity is that this is a three-party adversarial relationship, the third one being profit. So we can maximise the availability of goods and services at low prices, or profit, or labour welfare. Arguments abut productivity are often dishonestly posed as goods/labour tradeoffs, while in fact they are profit/labour tradeoffs, the degree to which the consumer is screwed in the process being roughly a constant in each of the large consumer economies.
Since markets favour the more consolidated party, and that is profit, it follows that both labour and consumer standards would function much more effectively (or indeed at all) if they are coercively enforced. The stock argument against this is that such enforcement is impossible, because pro-labour measures would drop productivity and capital would flee, and at the same time unnecessary because westerners are insulated from third-world conditions. Losses of jobs or labour standards are presented as mysterious and freak events, rather than the natural payback for buying sweatshop goods at high prices. Only the crushing scale of the problem keeps westerners’ minds in such comfort thinking.
Myth 8: Migration is export of labour
Migration is, indeed, a way to export labour from exodus to settlement countries, but this is not the essence of migration. Most trading activities export labour, while the most efficient ways to do so are outsourcing and setting up of cheap-labour factories as practised by major corporations. These activities are little more than massive schemes for extracting labour, as a resource, from where it is cheap and transferring it to richer economies. They export labour in the same way that mines export ore.
What is pertinent about migration is that, unlike other methods of exporting labour, it also exports agency and political demands. The workers who settle in the west are sometimes able to save and invest in the local economy, buying some part of it like a house. They’re also able to extract ethical or political sympathy, and so affect small changes to the society to improve their conditions. That is the special thing that gets everyone worked up about migration. Export of labour is commonplace.
Everyone in rich countries loves immigration, including rabid conservatives. This is because immigrants come to offer diligent labour at cut rates, and everyone likes consuming that, especially rabid conservatives. The argument is under what conditions the immigrants arrive and stay. Progressives would like immigrants to enjoy the benefits of natives because they feel the immigrants are just as nice people as themselves and often more interesting. Rabid conservatives want them to arrive but stay subservient and invisible, because they recognise that immigrants are nicer people than themselves and also more interesting.
Myth 9: Investment is good for you
Investment gets some entirely undeserved good press. It’s hailed as an engine of development, a saviour of economies, what the poor world desperately needs, etc. This is only very marginally true. It can happen, but very little investment is like that. The word investment has the quaint, intuitive meaning of “Allowing someone to use your productive resources in exchange for a share of the proceeds” and the accepted business meaning of “Buying the future profit-making capacity of economic resources”.
Present-day investment is almost none of the former and almost all of the latter, also called speculative investment. For reasons that are not entirely clear but include technical ignorance on the part of investors, economic instability caused by speculation itself, over-capacity, and straightforward greed, investment very rarely means spending significant resources to build something productive. When this does happen, it tends to be jealously guarded within the investing entity. So-called outward investment usually means bulk-buying some limited economic good (oil, a logo, airtime, intellectual property, real estate) and then selling it piecemeal at higher prices. Crucially, the price differential, and hence the profit, results purely from the scarcity created by the “investors”, and not from any increase in productive capacity due to them.
It’s thus very disheartening to hear claims that some entity like Africa “needs investment”. To be sure, it needs an infusion of productive capacity, and conditions that foster production. However what it gets is various forms of bulk buying its resources: The typical one is setting up factories, which are simply facilities to extract labour resources at bulk prices, while leaving no residual good in the economy. Investment on oil, mining, and other natural resources is similarly just a bulk buying scheme. Investment in utilities such as communications and power is bulk buying the ability to extract fees for these services.
It’s hard to see anything good about that, and in fact it’s rare to find conditions where investment is good, in the long term, for the party receiving it. The only such cases are where investment has a strategic or ethical character (for example the government investing in a poor region to develop it) or when the receiving party gets a large measure of ownership in exchange for their skills, labour, or resources (as with high-tech venture capital).
Myth 10: It’s how you earn it that matters
While it’s true that earning tends to happen at the sharp edge of wealth, the whole picture is important. How the money is invested and how it is spent are almost as important moral considerations, and currently they seem to escape criticism.
Money is power. Like most powers, having the power is a power, and causes real effects without consuming any of it. Investment blesses certain recipients, while stranding others. It causes inflation of assets such as housing. It causes politicians to listen to the investing class. It creates a mercenary and deeply amoral attitude in corporations, which seek to maximise shareholder returns. It causes a general rise in conservatism as entities compete to appear more stable investment targets. Capital flight destroys the conventional, and therefore the real, value of assets, to the point of bringing down national economies. And the striking thing is that money does all this without a penny being spent, or earned necessarily. Merely the holding and placing of money like casino bets is an act of intense moral content.
Spending money is, of course, even more of a moral activity. Charity and political campaigning are obvious examples but so is consumption in general. Where and on what the money is spent makes the difference between waste and charity. If you spend a thousand dollars buying fuel for your vehicle you are mostly causing waste. If you spend the same amount on performance art or education, you’re probably subsidising worthy activities. But then if you spend it on an army of menial labourers you’re maintaining servility. If you buy luxuries you’re creating an elitist market, but if you buy any old crap you lower consumer standards.
The ethics of spending is an extremely complicated issue, largely hand-waved at by economics. Generally speaking, you should try to make your money go to people who need it, who do some socially useful work, and who will retain a surplus from what you pay them. Figuring this out may be too complex to practice, but the idea that spending is morally a discretionary activity is a myth.
Myth 11: The stock market generates value
Productive investment generates value. To be more precise, productive work does, and productive investment graciously allows it to happen rather than holding the necessary resources hostage. Although productive investment occasionally registers a blip on capital markets, the rule is speculative investment. The latter just buys the future right to extract a levy on productive activity, and generates no value whatsoever.
All this is not fuzzy political talk. Productive and speculative investment are distinct financial actions. When a company raises funds through private investment, floatation, or issuing stock, the money goes to the company and funds its productive resources such as machinery, staff, and the like. When shareholders trade shares with each other, zero money from the transaction goes to fund anything productive, or reaches the company at all. There is some marginal and questionable value in the transaction as a guide to management, but otherwise it’s money changing hands between two unproductive third parties. Nothing in the structure of the stock market favours the productive kind of investment.
Shareholding is a means to impose a levy on productive activity (through dividends), and the stock market is a place to bulk buy and trade the future right to do this. It is in fact just like taxation, but private. Unsurprisingly, shareholding is presented by government as a magical engine of wealth creation that will fund otherwise unsustainable spending, like pensions. It isn’t. It’s like taxation, but private. You buy the right to impose taxes, if you can.
Myth 12: Capital just accumulates
If you despair at the thought that capital simply accumulates, and there is nothing to stop its natural consolidation – or even if you think that that affords a certain natural right to capital – the good news is that too is a myth.
Capital does accumulate and propel itself in a positive feedback loop, but only under ideally stable conditions. In the real world, idle capital shrinks through inflation, while invested capital depreciates abruptly through change. Change, technical, social, political, or behavioural, is the strongest tool of the reformist in fighting the consolidation of capital.
In order to escape slow attrition through inflation, capital has to be invested, however nominally and multiply removed, in productive activities. If capitalists could identify those once and for all, there would be nothing but consolidation and an ever increasing gap between capitalists and workers. Fortunately, old productive activities become obsolete, forcing the capital invested there to evacuate or lose its value, while new activities gain productive value, causing capital to compete for a place there. In this process, Capital has to be understood as some kind of bulky liquid that has to be accommodated in investment vessels lest it evaporate or stagnate.
This constant decanting of capital inevitably causes losses, from the point of view of the entrenched capitalist. Sometimes the losses go to complete waste, in failed projects, conversion costs and the like. More interestingly, capital has to go from the largest holders to those who had less or none, as the former try to acquire new technologies, pay for professional services, etc. This is a reformist effect, ambivalent of course but at least capable of generating hope.
The result that is easy to predict is an erosion of consolidated capital. What happens at the other end, with the portion of capital that has moved, is more subtle. The capital could be diffused to a wider group of workers and small capitalists whose prosperity is modestly raised, and that is a positive, if reformist step towards equality. Alternatively, the capital could go to smaller capitalists who succeed in capturing the new means of production so thoroughly that they become large capitalists – a disaster for equality.
The moral is clear: If you’re a professional, a worker, or a supplier approached by capital that’s on the move, looking for a new place to establish itself, name the highest feasible price. It’s your chance, and your duty.