Written by Ariän Taher via TruthOut on 6/13/18
Capitalism is among the most controversial politico-economic terms to define, in part because myriad variations of “capitalism” have emerged throughout the centuries.
Neat and comprehensive definitions for any political term are either rare or defective. “Capitalism” is no exception.
To understand the theory of capitalism, we must begin with Adam Smith.
In 1776, Smith authored An Inquiry into the Nature and Causes of the Wealth of Nations, simplified as Wealth of Nations, which remains understood as the foundation for the theory of capitalism.
Wealth of Nations came to life in the era of mercantilism, a style of economy over whose every aspect government imposed strict control, both for domestic and foreign trade. Many nations, chiefly the British Empire, were mercantilist.
Previously, trade (business) between nations occurred rarely, with sharp restrictions and deep suspicions towards each other. So, Wealth of Nationssought to resolve this through a systematic approach to international trade for the benefit of all involved.
Core to the theory of capitalism in Wealth of Nations was that trade must occur free of government intervention. This is the basis of “free” within “free markets” and “free trade,” assuring that no business is “cheating” via advantages or disadvantages imposed by government, thereby allowing real competition to occur.
Also core was the philosophy that business enterprise would self-regulate out of concern for the betterment of others, including “consumers,” “landlords,” “manufacturers” and even “labourers.” This was the “natural tendency” of capitalism, which would lead to a society “of perfect justice, of perfect liberty, and of perfect equality.”
But how could Smith be so naive to conceptualize capitalism as a pathway to liberty, justice and equality?
Smith lived in the era of “enlightened self-interest,” in which people pursued their own wants and needs, but tied to the collective welfare of society as a whole. Therefore, he understood capitalism as an economic and moral system aimed to benefit the business class, but who would self-impose “limits” on their practices to support developing the life-quality and intellect of laborers and others. For the father of capitalism, such was prerequisite for a burgeoning economy. To this end, Smith condemned economies in which elites hoarded the “whole surplus” of earnings.
Limits imposed by government are regulations, which restrict or control the actions of a business entity to protect public interests from rapacious elites. In most cases, Smith opposed regulations as impingements on economic success.
Today, however, conservatives dogmatize the anti-regulation elements in Wealth of Nations for their agenda of deregulation to privatize ownership of everything for corporate profits — profits by sustaining archaic industries and subjecting workforces to uncreative, repetitive, tedious tasks with little or no worker-security, pay and hiring equity, or rights for collective-bargaining.
Never, however, does the right wing consult Wealth of Nations where Smith demands regulations against dehumanizing work conditions.
“[H]e whose whole life is spent in performing a few simple operations … generally becomes as … ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment … But in every … society this is the state into which … the great body of the people must necessarily fall, unless government takes some pains to prevent it.” —Book 5. Ch. 1. Line 178.
Wealth of Nations forewarned us that the “principal architects” of the political economy were “not the consumers … whose interest has been entirely neglected,” but the wealthy “merchants and manufacturers” whose interests have “been most peculiarly attended to.”
Smith’s observations still apply. In a landmark 2014 political science study, leading researchers determined that the US is not a democracy, but a nation in which the masses of Americans are effectively disenfranchised, as “economic elites and organized groups representing business interests have substantial independent impacts on US government policy, while mass-based interest groups and average citizens have little or no independent influence.”
In condemning disproportionate power, Smith also warned that free competition can’t exist when any corporation dominates its industry, allowing them unbridled reign to set prices on the public for corporate profits, which never align with public interests.
Smith’s prescience was correct: Corporate mergers today continue toward monopolization of industry, while elites continue shaping policies in their own image, reinforcing plutocracy, since wealth dominance yields political dominance.
So, is today’s US truly an economy of capitalism?
After the final shots of the American Revolutionary War, the US consisted of only a de facto government, but no US Constitution, Bill of Rights, national economy or a common currency.
The US was pre-capitalist, an agrarian society predominated by farmers and plantations relying on chattel slavery, with the manufacturing industry grossly undeveloped. Meanwhile, the world’s superpower, the British Empire, was entering the Industrial Revolution with unprecedented industrial technology. These and other conditions left the US uncompetitive in foreign trade.
Opportunely, virtually all of the framers of the Constitution had read Smith’s Wealth of Nations, providing unprecedented research through which to create an economy of free-market capitalism.
But what course did the framers actually take?
Enter, Alexander Hamilton
To examine the origins of the American economy, we must turn to Alexander Hamilton, widely dubbed “the father of American capitalism” and financial system, and an architect of the US Constitution. What role did he play in today’s disproportionate wealth and power?
In the Constitutional Convention of 1787, Hamilton endorsed a “republican government” — a representative democracy modeled after Great Britain. Yet, he believed democracy was dangerous, viewing the public as injudicious and therefore to be distrusted with wielding political power.
To check the “turbulence” and “imprudence” of the public, Hamilton advocated that first in government must be the “rich and the well born” and second in government must be everyone else.
Hamilton’s style of democracy — plutocracy in all but name — provided the framework for the financial system he was soon to build.
Once the Constitution was ratified, a paramount task was to develop the economy through a new financial design. Hamilton was assigned to that task, which he composed through three reports: “The First Report on Public Credit,” “The Second Report on Public Credit” and the “Report on the Subject of Manufacturers.”
Contrary to common belief, Hamilton had no interest in capitalism, as his plutocratic and mercantilist ideals emerged throughout his reports, which have transferred into our reality today.
Pertinent to the unfolding argument are the second and third reports.
The second report focused on the formation of a “First Bank of the United States” (FBUS) of 1791. The FBUS achieved firmly establishing the power of federal government over states; creating a national legal tender in circulation; creating a management system of Revolutionary War debts; and building the nation’s credit score.
But these achievements were not due to free competition, despite advice to bankers in Wealth of Nations. Instead, the FBUS was a federally chartered monopoly as the only bank allowed to expand nationally.
Hamilton began planning the FBUS in 1779, 12 years before it opened. Its earliest blueprints reveal that he determined it to “link the interests of the state in an intimate connexion with those of the rich individuals belonging to it.” As such, when the FBUS came to fruition, nearly 80 percent of its seed capital derived from private investors, and “two-thirds of the bank stock was held by British interests” and other wealthy investors, soon paving the many roads toward risky speculation, the Panic of 1819 and eventually, the Great Recession.
Almost immediately after the FBUS launched, inflation began, partly from the sudden increase in money supply — skyrocketing “wholesale prices” on “all commodities” from an index of 89.7 in 1791 to an index well-above 110 until the year 1823. Inflation continued beyond the expiration of the FBUS charter in 1811, through the opening of the Second BUS, and up to the Tariff of Abominations.
In the “Report on the Subject of Manufactures,” Hamilton delivered blistering opposition to Smith’s free-market capitalism, arguing that economic success is not built through free markets and mere ownership of private property.
Instead, Hamilton consciously modeled his system on British mercantilism, reasoning that the US economy would only flourish by protecting our agricultural and industrial enterprises, and that this “protecting” mustn’t be left to Smith’s “open and free market,” but must be surgically engineered by government. This was the early economic nationalism of President Trump’s “America First” ideology.
Hamilton formulated this “protection” into government “bounties” (subsidies) for US manufacturers and tariffs on imports to the US, namely from Britain. Yet, it’s widely mythologized that Hamilton’s “Report on the Subject of Manufacturers” was never adopted by Congress. Indeed, his propositions for subsidies failed to pass. However, virtually every protective tariff he proposed was adopted in the Tariff of May 1792, within six months after submitting this report.
This myth perpetuates that agrarian economy defenders Jefferson and Madison opposed “big-government capitalists” Hamilton and Washington. Worshipers of Jefferson hail him as a champion of small government for the sake of ordinary people. Similar myths circulate regarding Madison. Meanwhile, Hamilton remains the sole aristocrat in that mythology.
In rhetoric, Jefferson and Madison despised Hamilton’s protectionism, but not in practice. In 1789, Madison proposed the Tariff of 1789, which was the first protectionist policy passed by the new Congress. Then, in 1793, 1794, 1806, 1807 and 1811, Jefferson and Madison endorsed protectionist policies and even embargoes against British goods, radically expanding Hamilton’s big government ideology.
Hamilton’s system outlived him. With its core ideas intact, it was adopted as “The American System” following the War of 1812 during the Madison administration. Henry Clay named it as such to openly distinguish it from the free-market capitalism of Adam Smith. And this very system has since continued through virtually every single administration.
Today, the US leads the world with the highest volume of protectionist trade measures. This is no capitalism.
From Smith’s Capitalism to Globalization
Smith advocated for government regulations to protect the public, not corporations, yet his warning has drowned in the roaring Republican demands for corporate deregulation, giving rise to a recent phenomenon: “regulatory capture.”
Regulatory capture occurs when regulatory agencies employ members of the very businesses that government is supposed to regulate. The business gains internal control of the agency, then severs its chief purpose of restricting corporate tyranny over the public.
Perfect examples are found in the relationship between big banks and government, wherein banking lobbyists literally write the policies that regulate them, for the benefit of the banks; as also in the recent, appalling Dodd-Frank regulation rollbacks. More are found among the Trump administration. Just examine some recent deregulatory efforts byBetsy DeVos of the Department of Education, Scott Pruitt of the Environmental Protection Agency and Steven Winberg of the Department of Energy. Combined with evidence that corporations have dominant power over our political economy, this does not reveal capitalism, but corporatocracy and plutocracy.
Another vehicle for protectionism is misleadingly called “free-trade agreements” — such as the North America Free Trade Agreement (NAFTA), the Central America Free Trade Agreement (CAFTA) and the Trans-Pacific Partnership (TPP), from which President Trump exited the US, but which he’s now interested in re-entering.
“Free-trade agreements” aren’t “free” at all. Quite the opposite. NAFTA is a generalizable example. It’s a legal agreement between nations for the protection of transnational and multinational corporations to operate in privileged conditions across foreign borders.
For example, Article 301 of Section A in NAFTA entitles corporations to “national treatment” which accords US corporations the legal rights of Mexican corporations, such as protection from taxation as a foreign entity. But corporations — “legal persons” — have far more rights than human beings. Therefore, NAFTA is legal doctrine for strengthening corporate power, not nations or human beings. Furthermore, as Corpwatch.org reports:
NAFTA includes an array of new corporate investment rights and protections that are unprecedented in scope and power. NAFTA allows corporations to sue the national government of a NAFTA country in secret arbitration tribunals if they feel that a regulation or government decision affects their investment in conflict with these new NAFTA rights. If a corporation wins, the taxpayers of the “losing” NAFTA nation must foot the bill.
In other words, “free-trade agreements” protect corporations from capitalism.
Moreover, free-trade agreements aren’t even “trade.” Most of the “trade” is actually transactions across physical borders, but through branches of the same corporation, economically termed “intra-firm transactions.”
A prominent example is the American auto industry, which has turned Mexico into an archipelago of interconnected auto assembly plants, primarily for the lower cost of labor in Mexico due to lower wages, fewer workers’ rights, and a less regulated environment and working conditions.
So, via NAFTA, American automakers manufacture their auto parts in one foreign country, send them to Mexico for assembly, then deliver finished cars to the US to be sold — all while maintaining financial transactions within their own corporation. This is neither “free” nor “trade” at all, yet it retains the label to sustain the illusion of capitalism.
This violates capitalism’s core principle of free competition, which demands a “survival of the fittest” landscape for businesses: Those that can’t compete on their own must die off.
Instead, we have welfare for corporations, in which government uses billions of taxpayer dollars to bail out private industries, as exhibited in massive automaker bailouts and the infamous Wall Street bailouts, which the American public is unknowingly still bailing out.
Old Wine, New Bottle
There’s widespread surprise at the incoherence spewing from President Trump about imposing tariffs on China in order to put “America First.” But today’s version of capitalism — which favors archaic industries, corporate behemoths and big banks — has been the US economic system since its inception.
Yet it remains misunderstood that, under capitalism as Smith intended it, the role of government is to intervene in the economy only to prevent or repair a problem, such as ending the Great Depression in the US — whose recovery was largely due to World War II — by temporarily creating a command economy to meet the sudden demand for wartime munitions. This generated widespread employment of hitherto unemployed populations. Together with multiple other factors, the war effort restored our economy.
WWII taught economists what Hamilton knew intuitively: Capitalism cannot exist; that an open, free-market system (therefore without protectionism) in the US would lead to the destruction of our economy, as US industries simply could not compete on the world stage, largely due to larger workforces with lower labor costs in nations with weaker labor rights, such as China, India and Mexico, whose weak labor rights are, in fact, pushed by US corporations.
Post-war politicians understood that if you can use government intervention for large-scale industry during wartime, then you could use it during peacetime. And the Pentagon — created during WWII — served quite useful for this endeavor.
The Pentagon has maintained two key functions: serving as headquarters for all US armed forces and their intelligence agencies, and serving as a channel for transferring public moneys into funding government research for revolutionizing high-tech industry, pharmaceutical industry, aviation industry, and so forth.
In The Entrepreneurial State, leading economist Mariana Mazzucato traces how government — not corporations or market forces — is the entrepreneur responsible for the most impressive innovations in our economy.
Research and development (R&D) naturally demands among the largest costs for innovating high technology. But instead of corporations funding their own R&D, government does so with taxpayer dollars, often through branches of the Pentagon. Once R&D is complete, corporations cherry-pick that precious information at no cost.
As Mazzucato notes, this convoluted funneling of public funds into corporate profits enables divorcing the public from the title of “investor,” which we are in all but name. We provide the “capital base” for such innovation, but, unlike in capitalism, we “investors” receive no return-on-investment. Those gains are privatized by the corporations that cherry-pick the R&D in order to produce their products.
Although myriad examples are available, just one significant example is found in the iPhone, which Mazzucato explains in depth in her book.
In capitalism, since the public funded the iPhone’s technologies, each of us would get a check from Apple or the US government for our share of the profits. But in our actual economic system, those profits are not returned to the public, and are instead privatized by corporations.
What’s more, the public goes out and purchases the iPhone. Therefore, it’s like we pay for the iPhone twice: once when we “invest” in it, and then again when we purchase it from Apple. Unfortunately, this applies to countless other purchases we make as “consumers.”
When people understand that capitalism doesn’t exist in the US, they’re directed to discern what does, compelling us to unearth our socio-economy’s unjustness, which is vital in the pursuit to end poverty and other oppressions that intersect class oppression.
So, what exactly do we name our economy? Whether neomercantilism, Keynesian capitalism, corporatocracy, fascism, really-existing-capitalism, or otherwise, it’s up to you, the People, who together toil, endure and persevere under the legacies of Hamilton’s system.
Hamilton understood correctly: Capitalism, as Smith intended it, could not sustain the United States in unbridled competition. This understanding diverged the US economy from the path of capitalism, not moral reasoning regarding its inherent subjugation of laborers to the capricious will of amoral “merchants and manufacturers,” nor that its envisioned outcome of “perfect equality” is unfeasibly reliant on conscientiousness from economic elites, whose modus operandi is not altruism, but profit maximization, even turning philanthropy into philanthrocapitalism. Indeed, Hamilton’s system has emerged the US as a world superpower, but it has inextricably given rise to massive unconscionable inequality, inequity and iniquity, both at home and abroad.
As such, neither system has justified existing. “We the People” must, together, move toward an economic system that coexists with democracy, designed by the many and for the many; the system fought for by the Lowell Mill Girls, in which “those who work in the mills ought to own them, not have the status of machines ruled by private despots who are entrenching monarchic principles on democratic soil as they drive downwards freedom and rights, civilization, health, morals and intellectuality in the new commercial feudalism.”
If only we conceptualize ourselves as together beneath this unjust system — with varying complexities and inequities — perhaps then we can move to aptly label it and create anew.