posted on 28 December 2015
Written by Derryl Hermanutz
Over the nearly two and one half centuries that economics has been a distinct field of human inquiry, the mainstream "popular school" has been modeling a utopian free market barter economy, rather than describing the real world state-corporate money economy that we actually live in.
In Part 1, we saw that the popular school of economics is an idealist conceptual model based on a highly selective reading of Adam Smith's 1776 Wealth of Nations; and an early critic of the popular school was Friedrich List who published his National System of Political Economy in 1841. Where Smith champions individual free enterprise and is a harsh critic of anti-competitive corporate power; List celebrates state-corporate cooperation as the necessary means by which nations develop their economic capacities.
Historically it has been private finance and state-corporate industrial policy, not individual free enterprise, which built up the modern industrial wealth of nations. Financial power and military power are deployed against entire nation-states in service to corporate economic interests in those target nations' resources and markets. Ownership of South, Central and North America; Australia and New Zealand -- entire continents -- was seized by European military force, not acquired by "voluntary exchange". Financial, political and military support for corporate conquest of assets and markets cannot realistically be called "free trade". It is accurately called state-corporate policy.
The Non-existent Free Market
A corporate state is not the scale of economic agent that participates in competitive free markets. If sending a state-funded army to blow up your competitors is "economic competition" -- if nation size corporate entities are the "units" whose behavior "economics" is modeling -- then we are looking at competitions between powers. A fundamental tenet of free market economics is that no participant is large enough and systemically important enough to have and exercise "market power". But economic history and present economic reality are the history and reality of market power.
"The free market" is the foundational myth of a utopian conceptual paradigm, not a description of economic history or present day economic reality.
To see and describe the reality of state-corporate power is not necessarily to condemn it. List didn't. Smith did. Observations of reality and the moral judgment are two separate actions.
From inside free market Utopia, power is judged evil, because it violates the fundamental Utopian value of power-equality among the participants in market economy. In the model, "nobody" has market power. If somebody gains and exercises market power, that is morally rejected out of Utopia as a "market externality". Power doesn't "belong" in Utopia, so it is not accepted as "real" in the conceptual model.
The Free Market Utopia
Free market economics is a moralist Utopia that describes an ideal world without financial, corporate or state power, all of which are rejected out of Utopia as "externalities". Real world economics is the economics of these "externalities". They have no place in the popular models. But they exist and act in the real world.
The popular school describes the economics of Utopia. List begins to describe the economics of the real world. List never caught on in the mainstream mind, which into our day continues to model Utopia while believing it is describing reality.
The world moves forward, but the mainstream cannot see it, because they are looking from inside the opaque walls of a free market conceptual model and are oblivious to the real world actions of power. By standing outside the veiled walls of Utopia we can see reality objectively. We will see a reality that is neither evil nor perfect. By looking at the real world, we can see what it is doing and how it works as it does. By seeing, acknowledging, and understanding reality, we may even be able to make it work a little better for us. That is my hope, at least.
Today's Global Economy
Today, very large scale transnational corporations dominate the global economy. In developed nations, far more than one half of the total economy is corporate owned and managed by teams of technocrats who, together with governments and global finance, operate what John Kenneth Galbraith called "the planning system".
In his 1967 book, The New Industrial State, Galbraith described how large corporations are the only institutions that are large enough and rich enough to marshal the incredibly diverse factors necessary to apply science-based technologies to economic production. A "technocracy" of specialists in each of the requisite fields of knowledge collectively informs the corporate mind and guides the corporate hand. Corporate lobbyists work with government officials to decide government policies that serve "the national interest" in corporate development of the national economy -- ownership of whose financial, commercial and industrial sectors (and more recently, agricultural) has long since been consolidated into the hands of a few very large corporations.
This, unfortunately, leaves broad latitude for corporate predation rather than corporate "governance" of the nation's economy. Especially when economists, governments and the public blindly believe these nation-size corporate enterprises are not essentially different than Ma's Diner and Mo's Eats "competing in a free market" - a morally fair market in which "the government issues the money", and "everybody gets money by earning it". A market that is governed not by men exercising financial or economic or state power, but by a "neutral" invisible hand that "automatically optimizes" outcomes for all.
None of which is true of the real world.
The Economy of Adam Smith
A capital intensive, high technology, financially managed, globally extensive, state-corporate planned economy, is a completely different kind of system than productive individuals who spend their own time and effort working the natural resources of their little locale to produce the simple goods they need, and trade their surplus outputs with each other in a local farmers-crafters market.
Adam Smith did not actually describe the workings of a "productive" economy. He described the workings of a "commercial" economy where producers and merchants trucked, bartered and traded among each other.
In a village free market of many individual producers -- all of who directly produce tradable goods that they personally own; none who has any market power over any other individuals; none who enjoys a monopoly on the supply of any economically essential goods or services; none of who is systemically important enough to "matter" to the functioning of the economy as a whole; and all of whom use commodity money (metal coins) that the economy produces as just another tradable good -- the free exchanges among individuals will naturally build up a market order, "as if by the workings of an invisible hand".
This, we are not dissuaded from inducing, is probably God's invisible hand. Market economy is presented as "the natural order" of man defined as a "commercial animal". If there is a God, then this is "God's" natural order.
Maybe Adam Smith spent too much time in cities of commerce and too little time in farms and mines and workshops and construction sites and factories of production. In a "productive" economy, most people "work" for a living, rather than "truck, barter and trade" for a living.
The New Heavens and New Earth
As a moral philosopher, Adam Smith's utopian free market village might have been patterned after a much earlier ideal that was expressed around 600 BC by the Hebrew prophet Isaiah, describing his vision of life within the righteous order that he called, "the new heavens and new Earth" (Isaiah 65: 21-23):
Isaiah and Adam Smith did not describe a feudal order where the people toiled as serfs under a ruling aristocracy who owned all the land. Smith's village was not populated by wage laborers employed by capitalists who owned all of the productive economic infrastructure. In these utopian visions of self-sufficient pastoral bliss, the people owned their own farms and tools and shops, and built their own houses and grew their own food, with free access to the Earth's land and abundant resources that were available to all.
The blessed citizens of Utopia prospered by their own "free enterprise".
The people directly produced their own necessities of life, and the people "owned" the fruits of their own productive efforts. No "power" interfered with their individual economic pursuits. The operative economic unit was the family, which functioned as a 'tribal' scale social welfare state: From each according to his ability, to each according to their need. Natural family feeling was the moral foundation that motivated productive effort by the capable, and sharing the wealth with the needy.
With no government and no corporation laws, there were no for-profit joint stocks and no limited liability business corporations lobbying governments for favorable mercantile laws.
There were no tax-collecting governments, no rent-collecting landlords, no profit-collecting capitalists, no interest-collecting bankers, in Isaiah's or Smith's utopias. Just people using the world that God provided to get their own economically simple living by their own productive efforts.
Progress through Scale
During the "great leap forward" in 1950s China, Chairman Mao promoted backyard foundries as an industrial policy. The resultant pig iron was completely useless as an industrial metal. Independent, low capitalization, small businesses cannot produce high quality technological materials like iron and steel.
Industrial technology by its nature can be successfully undertaken only by larger scale "corporate" enterprises. Even the sheets of tin that tinsmiths cut and bend and beat into tin pails are products of corporate industrial processes that are entirely beyond the capacity of a village economy. Not to mention the fine steel shears they cut with, the solder they seal with, and the brass or steel hammers they beat with.
To advance beyond the Stone Age where a sharp rock tied to a stick is a hi-tech tool of human industry, requires the "corporate" effort of a "civilization".
Thinking in a Fantasy World
Needless to say, no free market village "trading" economy has ever existed on the face of the Earth.
When their currency collapsed and money for many people was impossible to come by, Argentines developed a substantial barter economy, enhanced by a proto-money system, which the government promptly shut down and ended the Argentine age of barter and free market money creation.
Tribal societies had gift economies, not barter economies.
Empires had slave and plunder economies.
Feudal societies had agrarian command economies with government taxation and re-allocation of the economic outputs.
Nobody had barter economies populated by independent small producers and merchants who trucked, bartered, and traded with each other in a "marketplace". Maybe the closest thing to a marketplace was the public bench the moneylenders sat on, the banco, the bank.
Living in a Real World
"Civilization" has always been organized by "government". Capitalist civilization has always been organized by governments in conjunction (and competition) with bankers and large businesses.
Individualism is the do-it-yourself mentality, which typically produces crude but serviceable goods, and can produce fine works of art and craft on a very limited scale. Corporatism is the "let's work together" mentality, which can produce great wealth -- and great power.
United we stand... Organized mass civilizations historically conquered and dispossessed independent tribal societies of their lives, liberty, land and property. Historical economic "development" has been a collective, not an individualist, process.
Invention and innovation happens in individual minds. But it takes the institutional structures of a civilization to apply genius to mass production and distribution of the "good ideas". An architect can draw a cathedral all by himself. The architect produced a picture on a piece of paper, which perhaps has some value as art. It takes the unified efforts of a technologically advanced civilization to "build" that cathedral: to transform the idea into a physical reality.
Michelangelo could not have produced his frescoes (water-based paint over fresh plaster, so the paint becomes part of the plaster) on the ceiling of the Sistine Chapel without the masons who built the structure, the scaffolders, the plasterers, the brush- and paint-makers, and a host of other contributors to the industrial process that Michelangelo "crowned" with his artistic genius. Software developers today would be scratching economically worthless lines of symbols into soft rocks, were it not for the electrical generation and transmission grid, the global materials and manufacturing industry, and the global electronics industry, that transforms lines of code into computer applications that are useful to a mass market.
Scalable individual innovations are typically bought up by or absorbed into big businesses with access to global supply chains and markets.
Just as productive businesses do not make money "by producing", innovators do not get rich "by innovating". Producers earn money by "selling" their products. Innovators get rich when somebody commercializes their innovation, then an investment bank organizes an IPO and sells shares in the promising new venture.
Innovation produces good ideas. Commercialization incorporates good ideas into new products with mass marketability. Corporation law assigns ownership of the commercialized innovation to shares issued in a new publicly traded corporation. The innovator gets paid in blocks of shares. Investment bankers and stockbrokers sell shares to the public. Innovators can get rich by cashing out (selling) some of their shares. Transnational corporations mass produce and mass market the commercialized innovation. A global logistics network moves all the materials and processed and finished goods around the planet. The global banking network administers money payments for purchases of every factor that contributed to the production and final sale of the new product or service. It takes the collective institutional structure of a "civilization" to "get rich by innovating".
From the beginning of civilization, government officials organized workers and tasks; directed the harvests into centralized granaries; and allocated the fruits of the society's efforts among the people. People with aptitudes for crafts and trades, design and engineering, were put to work in the society's corporate industries -- pottery, metalworking, masonry, building -- "corporate" in the sense of many individuals whose specialized tasks are organized as "a single corporate body" working toward a common purpose.
Labor specialization and organized corporate production did not begin with Adam Smith or the Industrial Revolution. It began with "civilization".
Continued in Part 3, to be published.
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