By Chet Yarbrough
The Great Courses: Thinking about Capitalism
Lectures by Jerry Z. Muller
Narrated by Jerry Z. Muller
Jerry Z. Muller (Author, professor of history at the Catholic University of America)
Professor Muller offers an interesting and insightful defense of capitalism. Jerry Muller’s “Thinking about Capitalism” is an historical account of economic theory.
Muller explores three economic systems:
1) market, 2) command, and 3) mixed. In his journey through the history of economic systems, market (aka capitalism) shines brightest.
Muller notes that capitalism is pummeled by many anecdotes of history. Muller does not deny the excesses of market economies, but Muller suggests capitalism’s benefits far exceed its detriments.
There is nothing new in Joe Manchin’s self-interest in coal investment or representation of a state dependent on the coal industry. The question is whether he is representing his personal interest in wealth and re-election or the common good of the nation.
Adam Smith (1723-1790, Scottish economist)
Muller argues capitalism’s storied failures distort its multifaceted values. In the “Wealth of Nations”, a seminal work on capitalism, Adam Smith clearly explains the value of a capitalist (market) economic system based on self-interest. Muller notes Smith’s term “self-interest” is often misinterpreted by the public as greed.
Smith’s definition of self-interest is founded on virtue, i.e., behavior based on high moral values. However,
Self-interest comes in many forms.
One person’s self-interest may be altruistic in helping others to feel better about themselves. Another person’s self-interest may be to increase personal wealth to improve their family’s standard of living. And, self-interest may be associated with greed. The fundamental point is that everyone’s self-interest is a motivation that is ungoverned by an outside force. Self-interest is a part of human nature.
In a broader sense, there is some truth in the economic cliché of “a rising tide lifts all boats”. It reflects Adam Smith’s belief in the “invisible hand” that guides one’s life in a market driven economy. Every individual strives for their own self-interest which offers charity to some, employment to others, and individuated incentive to all.
Thomas Hobbes (1588-1679)
Thomas Hobbes notes that human nature is both good and bad. He tempers Smith’s argument for capitalism by suggesting government is necessary to mitigate self-interest that is harmful to the public.
Smith and Thomas Hobbes (author of “The Leviathan) believe self-interest is a universal human characteristic. Smith addresses self-interest as an enlightened Socratic understanding of virtue. Hobbes is less doctrinaire and implies Socratic virtue is not common in the general population.
Smith argues that capitalism takes the essence of human nature’s natural self-interest to advance civilization. This advance is not a smooth upward curve but an improving trend. Bad things do happen in a capitalist society. Hobbes might agree with Smith but only in the context of “rule of law” that mitigates non-virtuous self-interest.
Edmund Burke (1729-1797, Irish statesman)
Muller does not ignore critics of Adam Smith’s “Wealth of Nations”. Edmund Burke is a noted critic who argues that too many social conventions are sacrificed by disparate self-interests. He argues that the French revolution is a potential consequence of an economy driven by self-interest.
The social structure of France is decimated in the 1789 revolution. History shows “the terror” of the French revolution murdered innocents. On the other hand, it reformed an economy that left many behind. Prior to 1789, only the rich owned land, never went hungry, and inherited wealth. In the 18th century, France’s poor are mired in poverty, often hungry, with little chance for advancement.
Justus Möser (1720-1794, German social theorist)
Muller also cites criticism from Justus Möser , a contemporary of Burke, who believed the rise of capitalism (mercantilism) destroys craftsmanship in local economies. With trade from other parts of the country and world, Möser argues insular communities are harmed by prices of similar products replacing local artisan’s goods.
Möser argues mercantilism destroys the fabric of local communities; foments insecurity and social unrest. Muller, in part, agrees with Möser’s argument. However, Muller notes Möser’s argument is right and wrong.
With less money being spent for one thing, more money is available to buy or invest in other things. What Möser ignores is mercantilism’s benefit to consumers and the local economy. Consumers who buy a product for less money have more money to spend or invest in the local economy.
An amendment to criticism of Möser is that the consumers must have enough money to buy product being produced, whether in America or somewhere else.
Much of Möser’s argument is the same concern raised by those who support today’s trade war. Trump ignorantly pursues a trade war that weakens Adam Smith’s view of capitalist competition. America needs to adapt to a world economy that is increasingly intertwined.
Möser is right in suggesting free trade creates insecurity in local markets. It also demands adjustments in labor that harm local artisans, but Muller argues there is a net gain in public good and general welfare with free trade.
Max Weber (1864-1920, German sociologist, philosopher, and political economist)
Muller goes on to explain how a confluence of religion and capitalism benefits society with Max Weber’s melding of Protestant Ethic with the Spirit of Capitalism. Weber makes the idea of living aesthetically and putting aside savings as a prudent way of living life in an uncertain environment. Creating wealth became a religious calling to some.
Joseph Schumpeter (1883-1950, Austrian political economist)
Muller reviews Joseph Schumpeter’s contribution to the theory of capitalism. As a 20th century Harvard Business School professor, Schumpeter lectures on the value of “the invisible hand”. Schumpeter advances the idea of “creative destruction” as a characteristic of capitalism.
Schumpeter outlines the value of entrepreneurs who pursue new ideas, new products, and innovation that replaces dying industries. He trumpets the growth of capitalism as an engine that perpetuates societal benefit. Some argue that today’s American governance discourages new ideas by dwelling on manufacturing at the expense of technological innovation and change.
Muller examines the other two economic systems, i.e., 2) command, and 3) mixed systems. Muller implies they fail to meet the historical successes of market capitalism. A command economic system is autocratic with primary economic decisions made by one ruling agency—like Mao’s communist party, Hitler’s Third Reich, and Stalin’s Great Turn.
Short term economic benefit of a command system economy hugely disrupts society. Economic improvement is evident in the short term, but momentum is lost as the gap between haves and have-nots grows.
In a command economy, the cult of personality takes over and image becomes more important than substance; i.e. who you know becomes more important than productivity.
Muller implies mixed economic systems are a work in progress. They are represented by leaders like President Xi in China, and President Putin in Russia.
Xi and Putin retain the concept of communist control of the economy but combine command economics with “Smithian” capitalist ideals.
China’s mixed economic policy began with Deng Xiaoping, but Xi expands its reach.
Both China and Russia have shown economic improvement in the late 20th and early 21st century. Xi’s “Road and Belt” plan is part of a command economy, but it relies on the capitalist market principle of influencing trade between nation-states. China’s long-term success remains to be seen. Whether it will be a more effective form of economic improvement than Adam Smith’s market-based formula is left to history.
Russia, like Xi, uses capitalist influence to grow its economy. Russia, in contrast to China, uses its natural resources (oil distribution), rather than a “Road and Belt” policy to expand its influence.
Fundamentally, Muller infers no modern economic system is better than capitalism. One draws that inference by Muller’s cogent explanation of the value of capitalist self-interest. Because Adam Smith’s concept of self-interest is an inborn characteristic of human nature, it will prevail over any economic system that requires command control.
America has been a successful capitalist country in great part because of checks and balances that mitigate command control qualities of mixed economies. Hobbes assessment of human nature demands some level of command control, even in a capitalist economy.
One might argue that America’s avoidance of near economic collapse in 2008 is evidence of the importance of a mixed economic theory. (Interestingly, a December 18, 2018 “…Economist” article, published under the Schumpeter byline, notes that China’s communist party control of businesses during Trump’s trade war have fared better than private businesses.)
American history shows lower taxes encourage higher production and job creation. What is missed by tax reduction is that it exacerbates income inequality. Tax reduction incentivizes corporate leaders to devalue worker wages to increase profitability. Human self-interest leads to higher income for corporate owners and executives. The consequence magnifies the wealth gap between have and have-nots.