Capitalism: the State of the Art

Capitalism: the State of the Art

November 29, 2009


“Democracy is the worst form of government, except for all the others that have been tried.”

–Winston Churchill


I think you would have to be rather self-deluded to imagine that capitalism — even in its idealized state, and certainly the government/plutocrat scam-a-thon that we euphemistically call “capitalism” today — is not a highly problematic system. Democracy is not exactly sweetness and light either. Both founder upon the fundamental insufficiency of humans in general. Although there are many fine characters in every generation, the fact of the matter is that they are offset by an equal or larger number of very talented people unfortunately motivated by power and greed, and a great mass of insensitive dolts who are uninspired by the fine sentiments of the better characters, appallingly easy to manipulate by the greedy power-grabbers (without any real complaint), and who give the overall impression of domesticated meat animals.

Probably the main reason that capitalism is described as “successful” is that it is highly productive. To put it bluntly, this productive capacity allows the rulers of capitalist countries to invade and assimilate other areas. This was particularly true in the example of the English (primarily) conquest of North America, but you could also say it is true of the expansion of the Russian empire throughout central Asia, and colonization of Africa. (The Spanish conquest of Central and South America was a bit of an oddity, as the existing complex societies collapsed and succumbed a little too easily to be attributed to force of arms. Disease helped.) The countries that have avoided outright colonization (Japan historically, arguably China today) are those that have voluntarily adopted the capitalist system, as a conscious strategy to avoid conquest.

Thus, although one could argue that a more traditional society, such as the Native Americans or the Tibetans, or the Hawaiians and other Pacific islanders, or the Indians of South America, had many attractive attributes, and maybe were more successful overall in producing positive outcomes for the society’s members, the unfortunate fact is that they were an easy kill. Thus, we are stuck with capitalism more-or-less whether we like it or not.

So, we might as well like it.

Another funny attribute of capitalism is that when it gets bad, it gets really, really bad. The normal life cycle of humans is as something like a hunter/gatherer, or an agriculturalist. Many people today feel an incessant insecurity. But what did members of the simpler economic systems have to worry about? There was no real debt or obligation. They owned their house, their land (effectively, if not necessarily formally), and their clothes. All there was to worry about really was getting enough to eat, and any half-decent hunter or farmer should be able to manage that. Of course there were tyrannical governments even at the tribal level, and warfare and all that, but we are trying to speak of general conditions here.

The idea of “homelessness” would have been bewildering to a Native American. Just build a house! A simple shelter could be crafted in three or four hours, and a long-term residence could be built in two weeks. Today, anyone who misses a mortgage payment any time during thirty years faces potential homelessness, not easily resolved either.

Even the feudal period in Europe was more similar to a non-European tribesperson than to today’s capitalism. We imagine feudalism to be something like slavery, with serfs “tied to the land,” but you could also say it was something like lifetime employment. Peasants were part of a “corporation,” the self-sufficient manor, and they could expect that their basic needs (food, shelter, clothing) would be assured as long as they maintained their end of the bargain. Some landowners were tyrants, but peasants also pushed back in a way similar to the big labor movements of the 1880s-1950s, until a rough balance was struck. In any case, one didn’t have to worry about “security” beyond those factors which affected the society as a whole, such as poor harvests or plague. This fundamental stablity is also illustrated by the stability of the manors themselves, which remained intact for centuries on end. Today, many great fortunes do not last more than a hundred years, and even successful corporations can have a life span much shorter than that.

Thus, many of the features of capitalism that we assume are almost physical laws — unemployment, bankruptcy — really don’t exist in non-capitalist societies.

The foundations of capitalism are pleasingly simple: free action and private property. These seem noble enough, although they can also serve as the justification for the worst acts imaginable. In the old days, kings or lords (or, more precisely, emperors) considered their domains to be their private property. The emperor literally owned the empire, just like you own your house and yard. When the emperor attacked and subdued the neighboring country, this was simply acting freely to acquire more private property. Pretty much any act of conquest and acquisition, at any time in history, can be justified as “free action and private property” (or perhaps “public property” in the case of certain communist situations). People who have knowledge of esoteric or occult subjects already know that “free action and private property” are also the core justifications of the Luciferian Rebellion. Just take a look at the Illuminati Manifesto (available for $22.95 at or perhaps the writings of Anton LaVey. In recent years, the United States military has killed upwards of a million Iraqis (approaching 4 million by some counts) and destroyed their country — even poisoning it for thousands of years with depleted uranium — for no other reason than to steal oil for profit. Free action and private property.

Nevertheless, on a smaller scale, the ideals of capitalism are also intertwined with the ideals of individual liberty, and it is no coincidence that modern industrial capitalism (1780-) coincides exactly with the rise of Enlightenment ideals of the “Rights of Man” etc. etc. The Declaration of Independence (1776) lists “life, liberty and the pursuit of happiness” as the inalienable rights of man, following decades of similar philosophizing by the likes of Rousseau etc. However, this formulation was a last-minute personal tweak by Thomas Jefferson. The actual motto of the Revolution, as popularly conceived, were “life, liberty and property,” which is straight from John Locke. Locke named “Life, Liberty, and Estate.” “Estate” means property, but it also means “estate,” as in: “my house and land,” and if you were a rich landowner — as you would be if you were reading Locke in the 17th century — it meant the entirety of your manor, or domain, and everything and everyone on it.

Jefferson considered this focus on “property” to be just a little too money-grubbing for his taste, so we get “the pursuit of happiness,” which means:

A differing analysis on the origin of this phrase was provided in his (award winning) book “INVENTING AMERICA Jefferson’s Declaration of Independence”, where historian Garry Wills argues [final paragraph, part two]:

When Jefferson spoke of pursuing happiness, he had nothing vague or private in mind. He meant a public happiness which is measurable; which is, indeed, the test and justification of any government. But to understand why he considered the pursuit of that happiness an unalienable right, we must look to another aspect of Enlightenment thought – to the science of morality.

Wills addresses the “the science of morality” in part three (regarding “the pursuit of happiness”, eminently in chapters 16-18).
Wills states, “If he [Jefferson] meant to signal dependence on Locke in his Declaration, he chose an odd way of doing it when he omitted the central concept of Locke in its most expected place.” – by substituting “the pursuit of happiness” for “property”. Wills further suggests, “… we should turn to the principal delineator of unalienable rights in Jefferson’s intellectual milieu – to Francis Hutcheson.”

Of Hutcheson, Wills states, “No one did more in the eighteenth century to encourage the measuring of public happiness than did Francis Hutcheson, with his 1725 formula for ‘the greatest happiness of the greatest number.’” But Wills also points out that Locke himself used the phrase “pursuit of happiness” conspicuously, and that there was significant agreement by these two men: both saw it as a “constant determination”.

Wills here suggests this contribution from Adam Ferguson:

If, in reality, courage and a heart devoted to the good of mankind are the constituents of human felicity, the kindness which is done infers a happiness in the person from whom it proceeds, not in him on whom it is bestowed; and the greatest good which men possessed of fortitude and generosity can procure to their fellow creatures is a participation of this happy character. If this be the good of the individual, it is likewise that of mankind; and virtue no longer imposes a task by which we are obliged to bestow upon others that good from which we ourselves refrain; but supposes, in the highest degree, as possessed by ourselves, that state of felicity which we are required to promote in the world (Civil Society, 99-100).

Even then — before the Industrial Capitalist project even began — Jefferson sensed that a simple reliance on Adam Smith’s “invisible hand” of self-interest (The Wealth of Nations, published 1776) wasn’t going to be sufficient in itself.

Still, we can at least appreciate that free action and private property have some positive attributes. They can be contrasted with coercion and the appropriation of property, common to all tyrannical governments.

This is all a roundabout way of talking about the virtues of low taxes, one half of our Magic Formula:

Low Taxes
Stable Money

What I’m trying to say is, that Low Taxes are not only a virtue because they lead to “more growth,” but also because they represent less coercion and appropriation (“theft”) by government. Taxation is the primary avenue of both coercion and appropriation. Both the American Revolution and the French Revolution were, in essence, tax revolts.

For some years, there has been a debate within the sliver of the Republican Party that is interested in lower taxes. The debate is basically between the “flat tax” types, who would keep something like today’s income tax but with lower rates, and the “national sales tax” types, who would do away with the income tax altogether.

The short answer is that we do not know which would be better, because we haven’t tried either. Both would be better than what we have. Many Eastern European goverments have adopted flat-tax systems, with considerable success although they are quite new. I wish we had a few Eastern European governments adopt a national sales tax (or value-added tax) system, just to see if things would turn out differently.

The VAT is something to consider. It is a relatively new idea, first implemented in 1954. It is easy to administer, and highly effective in generating income.

Wikipedia on VAT

The debate on flat-tax or sales-tax (VAT) systems revolves around certain points.

The flax-tax group believes in the fundamental value of a “progressive” tax system, to counter the tendency of capitalist systems to bifurcate into rich and poor. Actually, a “flat tax” is no different than the present income tax system, except that the top tax rate should be relatively low by today’s standards, certainly below 25% and better yet below 20%. If, instead of one tax bracket at 20% for incomes above $50,000, you had two tax brackets at 10% and 20%, it would hardly be any different. The flat taxers would like to give the lower incomes every advantage, by exempting them from taxation altogether. Indeed, this is really no different at all from the earliest (pre-WWI) versions of the income tax, which had single-digit rates and exempted the majority of earners. Also, the flat-taxers are perhaps less politically ambitious, and see a system not too much different than the existing one as being more politically feasible.

People don’t realize today the degree to which the income tax was considered an incursion on basic human liberties. It was considered unconstitutional in the United States until the (alleged) passage of the 16th Amendment in 1913. A 2% income tax was actually enacted by Congess in 1894, but it was struck down by the U.S. Supreme Court in 1895. The 1913 income tax had a 1% levy on incomes above $3,000 per year, which is equivalent to about $65,000 today, and a top rate of 7%.

The sales tax/VAT group focuses more on the elimination of direct taxation — with all of its complexities and paperwork — altogether. They are less motivated by an urge to assist the lower earners, although the sales tax/VAT group is usually happy to provide some sort of adjustment for lower incomes such as an exemption on food or a fixed “tax rebate.” This system is sometimes called a “fair tax,” which I think is a horrible term because “fairness” can mean anything under the sun when it comes to taxation. A 100% capital gains tax could be called “fair” because it is “unfair to make income without working.”

Thus, we come to the question of the “progressive income tax.” Does it help?

The “progressive income tax” was never really just a way to get government revenue. It was also a way to mitigate what was perceived as the problems of 19th century capitalism. I have talked about those problems elsewhere — you need only read the books of Charles Dickens for a more detailed account. Many people today would like to imagine that these problems didn’t exist, as if the primary topic of economic discussion from about 1840-1950 was a delusional fantasy.

In the late 19th century, the “progressive income tax” as revenue generator and social policy was just an idea. Now we have a hundred years of experience with it. What have we learned? I think we can conclude:

1) The whole idea of “income” is problematic. Is capital gains “income”? Is it sensible to tax corporate “income”? How about double-taxing dividends? Should interest payments be considered an “expense”? (The tax distortion between debt capitalization and equity capitalization of entities today is intense.) Should interest payments be tax-free on the individual level? (Credit card interest used to be deductible.) Is inheritance “income”? Gifts?

2) The idea of “redistribution of income” has never existed in real life. The closest we come to “redistribution” is Social Security, which is a redistribution from middle- and lower-class working people to middle- and lower-class retired people. Social Security is funded through the payroll tax, which is a type of income tax but which is actually “regressive.” The fact of the matter is that all personal income tax revenue falls into the great maw of government, never to be seen again. It mostly funds the military, kickbacks, pork and waste. In short, “the people” see no benefit from it whatsoever.

3) Progressive income tax systems can have enormously bad effects on economies, especially when tax rates rise above 25% or so. This is completely lost on most income tax proponents.

4) The system leads to immense complexity.

5) As rates rise above 20%, political pressure is put to bear on making exemptions and loopholes for all sorts of activity. Often, these exemptions and loopholes are the only way that a society can function under the high official tax rates. The result is all sorts of economic distortion.

6) The system is ripe for abuse by governments, who will inch rates higher whenever they want more money (always).

7) The system creates criminalization of tax evasion — a crime with no “victim” — while at the same time introducing an intense motivation to evade taxes.

8) Among its negative economic effects, high income taxes (on corporations too) prevent capital accumulation, which is the primary means by which “good, high-paying jobs” are created.

I could probably think of a few more, but I would like to go hiking this afternoon.

While there have been some periods with high official tax rates, such as the 1950s, which have had both a healthy economy and high apparent tax rates, closer inspection usually reveals that these high rates were avoided through a mass of exemptions, accelerated depreciation, etc. Actually, in the United States, the income tax was voluntary in the 1950s. Nobody was subject to an IRS audit or investigation. So, even if you couldn’t find a legal means of avoidance, you could just sort of quietly step aside.

If we take the entire 1840-1950 “progressive” effort — the attempt to amend mid-19th century capitalism — in totality, I tend to conclude that the most important advances have been in the provision of government services. This includes welfare programs like food (food stamps), unemployment insurance, and so forth. The principle of a publicly-provided primary and secondary education is one that receives almost no complaint from the most “libertarian” people, although it is quite expensive. All sorts of public services like police, fire, water, street sanitation, public urban parks, state parks and national parks, libraries, sports fields and the like can fall in this category. It also includes state medical care, which has been about as much of a success in other developed countries as one could expect from any government-run program.

We can also add government regulation, such as minimum standards for food and water, environmental regulation, workplace health and safety, the elimination of child labor, and the principle of the five-day workweek. Let’s add the principle of personal bankruptcy, eliminating the debtors’ prisons of the past.

I don’t think anybody would complain too much about these new developments, although they may suggest some tweaks to the existing system.

However, I don’t think the progressive tax system accomplishes much of anything at all. Thus, while the flat-tax approach might be more politically comfortable, the sales-tax approach is probably better.

In actuality, both would be fine. The real purpose of this thought exercise is to look back on both the 19th century experiment in Industrial Capitalism, and the 20th century “progressive” effort to fix the problems that emerged, and come to some conclusion about what works for the future. Most of the fixes worked. So, let’s keep those, but drop those things that really serve no purpose, such as today’s income tax system.

We will follow up on the State of the Art in the future.