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The Difference Between a Free Market and Modern Capitalism

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From http://quarterly.politicsslashletters.org/

Capitalism seems to be under debate these days, for the first time in decades. “Socialists” of one stripe or another have won elections all over the world. “Democratic socialism” — the idea that much property should be held commonly, but under some form of meaningful democratic control — is among several alternatives proposed.

The response from capitalists has been swift and powerful. Capitalism, they argue, has lifted millions of people out of poverty when Communism and religious empires failed to do so. Capitalism is the only economic system compatible with our fundamentally selfish human nature. After all, Adam Smith wrote in the 1700s that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Capitalism breeds freedom, they note, wherever it is adopted.

This reflexive rhetoric about “capitalism,” I believe, was adopted during and after the Cold War. Because the Communists attacked our economic system as “capitalism,” we had to defend it. But I often feel that it leads to a defense of the excesses of many modern capitalists. The owners of Walmart, Amazon, McDonald’s and Pizza Hut are becoming millionaires without lifting a finger while millions of their employees work for minimum wage. Something in this system is surely broken. Karl Marx was obviously wrong about communism (a “dictatorship of the people”) being the solution. But that does not invalidate his critique of capitalism.

That is why I think it is important we differentiate between modern capitalism and the free market that Adam Smith had in mind when he defended it. It can genuinely be said that a free market, of some sort, is the only economic system compatible with true human freedom. For a woman or a man to be able to sell the fruits of their labor, freely chosen, is a joy. We may fix computers, write poetry, drive a tractor, balance accounting books, or remodel airports, and we may change employment if we wish. No one wishes these freedoms removed.

But modern capitalism is no such Eden for much of the population. The world Adam Smith envisioned was one of small business owner-operators, where Linda the mechanic ensured good service because every loyal customer meant another square foot on her new house. When I find those operations, I stick with them — I find owner-operated stores to be consistently above average in every city I live in. Most stores, however, are not. I would guess that well over half of the world’s commerce is now conducted by “chain” stores where the owner is not present or by huge corporations like Alibaba and Amazon.

These enormous corporations are the beating heart of modern capitalism, and they bear no resemblance to Smith’s butchers, brewers, and bakers. Not only is there no owner present in any physical store, and their employees receive few incentives to give good service, but for many transactions the only human interaction is the delivery person at the door or the customer service representative on the phone. Those people are usually paid minimum wage and are given no upward path in the company, hardly incentivizing good service.

Also, in all but the most singular companies, owners don’t even have much involvement in the day-to-day operations of the business. Walmart is an excellent example, having long ago been handed over to professional managers, bankers, and consultants to operate at a healthy profit. The same is true of all but a handful of the largest companies in the world. And this separation of ownership from operation, usually accomplished by a corporation, has allowed our once-free market to become something grotesque, because it declares no one responsible for bad actions.

Think about it. Imagine if a young woman told you one day that her work at the local grocery store didn’t cover enough to pay the rent and bills for her and her two children. Now what if the store were locally owned and you were a personal friend of the grocery store owner? Wouldn’t you tell them next time you sat down for lunch, “Don’t you think Sara should be making a little more? She works so hard.” She might well raise her wage.

But then your friend sells the store, to Safeway perhaps. And the young woman’s wages go back down to their un-supportable rate. You call on the store manager, sit down in his office, and he explains he doesn’t set the wage. Only the CFO can do that. And of course the CFO doesn’t have time for one neighbor’s complaint. But you write to the New York Times, and they investigate, and they find Safeway pays less than a living wage at 70% of its locations.

What happens next? Congress calls in the CEO, who explains that the company has to pay those rates in order to stay competitive — “everybody is doing it,” in effect. If the pressure is high enough, the CEO might be fired. But the replacement will be no different, because the owners don’t care — the owners, in fact, are largely unconscious of the whole thing, because they are a mixture of banks, wealthy individuals, trust funds, and investment funds which care much more about the movement of individual stock prices and the stock market as a whole than the scandals which might beset Safeway.

In other words, owners can legitimately claim they are not responsible for the bad actions of a corporation because they have handed over the operation to professional managers. And managers can legitimately claim they are not responsible for the bad actions of a corporation because they are not the owners. That, for the rest of society, spells Catch-22.

Even worse, many of these corporations have further fragmented responsibility (and lowered costs) by handing over repetitive tasks to “client corporations.” These are sub-contracting companies whose only client is the huge corporation, and therefore they actually do not operate in a free market at all. If Apple tells its suppliers in China to use a toxic chemical, they must or they will lose all their business. If Uber tells its drivers it will pay them less, there are few alternatives — they must accept it or stop driving altogether. Even Amazon — this is a new one for me — actually does very few of its own deliveries, instead employing hundreds of small businesses to hire drivers and making them compete on cost in order to efficiently deliver packages. This fragmentation of responsibility has lowered costs, but it has also lowered wages. I’m not sure the tradeoff was worth it.

I’m not calling for a revolution here, or for the end of the big corporations. But I want to be perfectly clear when I say that modern capitalism is a mockery of the free market. When vast swathes of the population in every country can only find minimum-wage jobs at soulless chains, run by responsibility-free corporations, they are not free. That is not a free market.

A free market, on the other hand, might have spaces reserved for entrepreneurs who want to start making or marketing something and need a little space to work. It might split up some of those big corporations. It might have jobs programs constantly rotating jobless people into positions helping to build infrastructure and tend national wildlands. It might have advanced technical education preparing willing young people to be the world’s best mechanics, firefighters, plumbers and coders. It might have monthly stipends for every citizen, drawn from a higher tax rate. It might have proactive healthcare which would prevent debilitating sicknesses preventing millions from going to work.

What it would not look like, I am sure, is our world today. Modern capitalism is no free market. It is not a bad place to live, by the standards of much of world history. But this is not, cannot be, “the end of history.” If this is the best we can do, as humankind, we have failed. Only the rich are free under modern capitalism. We the people have never been given a true free market. Let us dream it, then let us build it. I hope it will be part of the fight against racism, sexism, homophobia, and all forms of oppression. And I hope it is my generation which begins the process.

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“I do not understand one thing in this world. Not one.” — Marilynne Robinson, ‘Gilead’

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