Newt Gingrich's recent "attack" on the free-market has revealed that Americans are almost universally clueless about the nature of capitalism.
The responses from just about everyone, including expert economists, indicate they believe that capitalism is an essentially ethical system that can be perverted by people of bad will. The truth is almost the opposite. Capitalism is an essentially unethical system that can be ameliorated by people of good will.
Here's why: the so-called labor market is a tilted playing field. The worker is selling his labor in order to survive. He wouldn't be doing this if he had any other resources. The capitalist, on the other hand, is buying labor. This means that he must have some extra cash he doesn't need for survival.
This fact gives the capitalist the upper hand. He can live off some of his extra cash for a while, and so he can outlast the worker in their negotiations. When the worker becomes desperate enough, the capitalist will be able to hire him at a cut rate. The capitalist clearly has an unequal advantage over the worker.
This advantage is an essential feature of capitalism. It cannot be removed with undermining the system. Give the worker an equal amount of extra cash, and negotiations cease. Take away the capitalist's extra cash, and no one can hire anyone. Either way, the system shudders to a halt.
So the capitalist's power over the worker makes capitalism essentially unethical. But this unfairness can be ameliorated, if the capitalist is willing to forego pressing his advantage. The decent capitalist negotiates frankly both about the worker's wages and about his own profits, arranging a deal in which both can agree about the benefits that will accrue to the other. Because of the capitalist's restraint, the resulting deal has something of the character of a free agreement, even though it is never entirely free on the worker's part. (This is not some feel-good liberal fantasy. The high-wage theory of growth fueled America's rise to economic power in the 1800s. See America's Protectionist Takeoff, 1815-1915 by Michael Hudson.)
When, however, the capitalist cannot resist the temptation to maximize his profits, the inherent unfairness of the system will automatically emerge, since the only thing that can check it in a completely free market is the capitalist's restraint.
For this reason, the quality of capitalism depends entirely on the capitalist's restraint. When the temptation to maximize profits is restrained, the underlying unjust element in the system is checked. The system then takes on the appearance of "good" capitalism, which benefits the capitalist, the worker, and society as a whole. When the temptation is unrestrained, the unjust element emerges spontaneously. The system then appears as "bad" capitalism, which benefits the capitalist at the expense of the worker and of society as a whole.
Capitalism, therefore, can indeed provide benefits to all members of society, but only if the unjust element in it is restrained. Now if the capitalist cannot or will not restrain himself, he must be restrained by an external power that can compel him to be as fair as the unjust element in the system allows. Government is that power. (As Madison insisted in The Federalist, No. 51, "Justice is the end of Government." We institute government in part to compel justice from those who cannot or will not be just.)
The description just given of the basic capitalist transaction is abstract and simple, in order to bring out the essential traits of the system. In practice, there are many more players, and many transactions occurring simultaneously. Because of the complexity, it can sometimes seem that the playing field is not tilted, but level. This is never actually the case.
For instance, free market apologists often claim that the system exerts no force on anyone. Both the capitalist and worker are completely free to negotiate the best terms they can strike. If either dislikes the terms offered by the other, he can simply find another person to negotiate with. Nothing could be fairer. Everyone chooses according to his own judgment, and there is not the slightest trace of an unequal advantage on either side.
This is utter nonsense. Everyone who has ever been in the position of actually having nothing to sell but his own labor knows full well the intense compulsion exerted by the need to survive. And, to be fair, even many capitalists never break free from that compulsion. They may have some extra cash, but if it's not enough to support them and their dependents indefinitely, they know that they will eventually find themselves in the labor market as a worker rather than as a capitalist. Indeed, capitalism may work best when the capitalist has only this sort of modest advantage, because the capitalist can still identify with the condition of the worker. This ground of sympathy may prompt him not to press his advantage -- that is, to practice "good" capitalism.
Some capitalists, however, amass so much extra cash that they break free from the compulsion of survival. Once they have enough to survive indefinitely, once they become secure capitalists, they live in a different universe. As long as they are not foolish enough to gamble away their nest egg, they experience no risk any more. They can lose any amount of money without consequence to their survival. Money means something completely different to them than it does to those who face the specter of penury. To call these people "risk-takers," as free-marketeers do, is a falsehood. There is no risk in staking cash you don't need. The real risk-takers are the workers and the insecure capitalists. The workers risk their survival in the very short term; the insecure capitalist, in the medium term. But the secure capitalist never risks anything that matters.
There is another special circumstance in which it may appear that the worker rather than the capitalist has the upper hand: the labor shortage. This is the only situation in which the worker has a card to play against the capitalist, because the capitalist has to choose between two undesirable options: (1) to pay more and make less profit; (2) to leave the business and let his competitors reap the benefit of the enlarged work force when he releases his workers.
Not surprisingly, unrestrained capitalists have successfully eliminated this dilemma. On the one hand, they have had their surrogates in government remove legal sanctions against pressing their advantage; on the other hand, they have globalized the workforce. Without effective government sanctions, they can press their advantage energetically, forcing the workers closer and closer to survival level. And if this limit on profits is still not sufficient for them, then they can simply pull up stakes and go elsewhere in the world, where there are more people who already live with continual survival issues, and press their advantage with those unfortunates. This is unrestraint on steroids, and it shows an advanced understanding of how to increase the unevenness of the playing field.
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