Wednesday, September 22, 2010

Important distinction of the day...

... comes from Tim Worstall who points out, for the umpteenth time, that markets are not the same as capitalism—and vice versa.
As we’ve pointed out around here many times, capitalism is a description of a method of ownership, markets of a method of exchange.

And between the two markets are vastly more important than capitalism or capitalists. For it’s the markets which encourage the competition, not the capitalism.

Here it’s mostly a semantic argument: but in the larger world it’s a very important distinction to make. Capitalism and capitalists will, where they can, shut down competition to the detriment of the consumer. Which is why we’re so enamoured of markets which create and maintain the competition to keep the capitalists in line.

This is why your humble Devil doesn't like state-owned monopolies: because they try to remove the really beneficial part of the equation—the markets.

This goes equally, of course, for governments artificially shutting down private markets—usually after lots of lobbying by big businesses—through massive amounts of regulation or through the granting of effective monopolies over such things as infrastructure. Or currency.

That companies attempt to get governments to do this is hardly unsurprising—as Tim points out. But the best way to stop them doing so is to ensure that politicians do not have the means to do it. To paraphrase P J O'Rourke, when legislators decide what can be bought and sold the first thing to be bought and sold will be the legislators.

As such, ensuring that the legislators can do no such thing is the sensible thing to do—but this is, alas, also something that we have not yet worked out how to do effectively...


David Chiverton said...

It is very irritating when people start to slag-off the horrors of Capitalism when you talk to them about the virtues of free-market economics. I've started calling myself an advocate of 'economic pluralism' -it usually gets people asking what I mean. I can then make the distinction between the system we have now (crony/cartel capitalism), and the ideal of a truly free-market.

Anonymous said...

I often get worried when people talk about markets like this, not all markets are good, especially when markets get created just so a middleman can take a cut, if it gets out of hand in terms of allowing the market to buy too far into the future so that traders can cornor the market it can result in the producer getting their price squeezed to uneconomic levels and the consumer getting charged much more.

There are a number of areas where this is actually happening, so in my view these markets have become just as bad as cartels.

Capitalism for me is the efficient use of capital to produce a profit, a market is a free market without monopolies and cartels. Efficient capitalism is where value is added to the production chain, not an unnecessary middleman taking a cut and I think some markets are just that now.

Anonymous said...

A pleasantly honest observation from Worstall; he is normally happy to conflate the two.

The question for all proponents of genuinely free markets is that of what needs to be done to bring them about?

Simply removing 'the state' from the picture will not result in free markets. Why? Because you are not removing the power inherent in capital from the picture. Whilst investment capital remains in a few hands, those folks will be able to exercise dominance over all our consumption choices.

If you think about it, it's pretty obvious that a major stumbling block to free markets is the fact that money is both a medium of exchange and a source of capital. These are two quite different activities, with differing needs. Indeed, free markets are possible without money/capital (barter), whereas capitalism isn't.

That 'money' should act as a medium of exchange and a store of wealth is rarely questioned; it's just one of those facts of life that people take for granted (as most people accept a big state!) That's a shame, as unquestioning acceptance of this does, IMHO, ever preclude the existence of genuinely free markets.

Note: I'm not proposing a return to barter, before anyone jumps down my throat. Just pointing out that there are other ways to produce 'a money' such that it is an effective medium of exchange, but not an effective store of capital wealth (e.g. see this short article in the Telegraph about the Chiemgauer).

Mr Civil Libertarian said...

Myself, I've stopped using the term capitalism altogether; when I do use it, it's usually in a negative sense to denote our modern day mixed economy. Infuriating to many libertarians, yes, but you've gotta consider the fact that it's usually aimed at people who whom "capitalism" means "the status quo".

"leftists" often advocate state ownership and command economies; they're wrong in this sense. But very often, the critiques they offer of modern State Capitalism are spot on.

If you find yourself with a bit of spare time, here's a fun little essay by Gary Chartier called "Advocates of Freed Markets should embrace anti-capitalism".

Blue Eyes said...

What do libertarians think about the competition regime?

Rob said...

As Milton Friedman once said (paraphrased):

"What is Capitalism but production based upon capital".

"When you think about it Communism is just another form of Capitalism. It is still production based on Capital it's just that instead of the capital being spread across many people there is essentially one person in control of it."

"Which system of Capitalism would you prefer?"

The problem with the communists is their insistence on an impossible utopia rather than a least worst scenario.

Phil Dickens said...

Exactly right, DK. This goes back to the point I was making with the Kevin Carson articles - free markets and capitalism are simply incompatible with one another.

Capitalism is an entire social order which has existed for over 150 years, with the power of the state behind the concentration of capital ownership in private hands. You can only have genuinely free markets where capitalism doesn't exist.

John Ward said...

Is this related to the ongoing Cable car tightrope scenario?
Just wondered...all spot-on and correct etc etc.

We used to have a thing called the Common Market that was free-market trade. Now we have the EU which is banker-run capitalist.

We used to have a Tory Party which was genuinely eurosceptic. Now we have a Cameroon Party which is UKIPphobic. Hence all the lies during the election.
But now the truth is out....

MatGB said...

"I've started calling myself an advocate of 'economic pluralism' -it usually gets people asking what I mean"

David, that's an excellent idea and a nice little term, might start doing that myself. And yes, Timmy, as usual, right on this one. 12.41 Anon, you say "usually conflates", if he does, I've not noticed him doing so oftern, and this little Market socialist tries to read every post he puts out.

Nice to have a Business Secretary that gets the distinction between the two things, and suspect that, while he's closer to me than to DK, he's going to do some interesting things in Govt, when he gets the chance.

blingmun said...

There are no markets without capitalism. In a world without capital I may sell you a nice pretty shell I found in exchange for some of that kill you and your tribesmen just made but there'll never be markets in the modern sense. In order for markets to exist, I must be prepared to sell you valuable resources in the confidence that I have enough food and fuel to get by without them. But I also need to know that the money I earn from the sale will be good in the future, and that in turn other people will be sufficiently confident in their own reserves of food and fuel to sell valuable resources to me.

Vince Cable was playing to the hall, but he's made fools of many so-called "libertarians". If you'll admit the distinction between capitalism and markets (an academic one, never a practical reality) then you're one step away from admitting the need for to regulate one in order to free up the other. The Vince Cable/socialist position misses the bigger point: confident, productive capitalism and healthy competitive markets are each a natural consequence of individual freedom. The only time problems arise is when the mafia or the government get involved in trying to control ownership of assets or the price of goods and services. If the government simply protects people from aggression and upholds simple law and order then capitalism and markets will work together - inextricably linked - to promote human health and prosperity.

Mark Wadsworth said...

Yes of course, this all goes without saying. Now how about applying the same logic to the biggest state-protected quasi monopoly of all, to wit land ownership?

To pre-empt the inevitable comment 'There are millions of land owners so it's not a monopoly' I reply 'There are millions of shareholders in e.g. a water utility company, that does not stop it being a monopoly'.

Roger Thornhill said...

I am one who smells a rat when listening to Vince Cable.

Capitalism is amoral. It will try and grab advantage. However, it should be the State's Constitutional constraint and obligation to not put itself into a position where it can be bought. This means, in effect, it keeps out of regulation and focuses on supervision.

Corporatism is the real threat. I am open to, but not yet convinced about ending limited liability.

john in cheshire said...

This may be a stupid comment/question, so apologies in advance :

If the problem is that bonuses are too large and are biased in one direction; i.e. paid if you win and paid if you lose; then could this be due to lack of competition? If so, then could one solution, rather than increased taxation, be more competition in all aspects of banking. And if so, would this mean more and smaller banks? And therefore, wouldn't this be a 'good thing' for the consumer of their services?

MatGB said...

John, in short, yes, yes, yes and yes.

However,t here are three motivations for the bonuses. One is excessive profits due to lack of effective competition (banking has always been over regulated but in the wrong, bad, way).

Two is a shortage of very good mathematical brains, so those that can handle the high end fast calculations the investment banks need are in short supply (so we need to substantially improve maths teaching in school, and perhaps could look at innovative ways of tempting some of those high end maths brains in the banks to take secondments); I have two friends that've gone into investment banking, both are incredibly able mathematicians, one turned down a PhD at, IIRC, Oxford, fully funded, in order to go take a bank job.

Third is fraud. There was some research published on this a few years back (DK, can't be arsed to google, I think it was either you ro Chris Dillow posted about it?), saying that those high end bankers are moving so much money around and it's very difficult to track it all properly, they could easily take a few slices off the top and not get noticed for a few months or years. But if they get good performance related bonuses, they can make as much money legitimately as they could through fraud, and that's by far the easiest way of stopping fraud from happening, or at least significantly reducing it.

As it happens, on the 'lots of smaller banks, more competition front', Nick Clegg made an excellent speech on the subject in early 2008 (ie, befor ethe main crisis hit but after Northern Rock) talking about banking licences, how difficult it is to set up a small bank, etc etc. Didn't get reported much, even in the trade press, who needs to pay attention to the Lib Dem leader talking about banking, no one cares about either...

It's pretty much impossible, today, tos et up a small local bank serving just, say, your town. But most of the major clearing banks started as exactly that, my local Barclays still has a plaque outside saying "this was the first branch of Martin's Bank opened outside of Halifax". I'd never heard of them either, eventually got merged in.

Anonymous said...

Markets are irrelevant without a strong system of privet ownership and property rights. If the state owns everything then even a total free market will have no effect.

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