Capitalism: a brilliantly confused story

What is “capitalism”? It is the free market. It is private enterprise. It is a label for the economies of the world. It is the mixed economy, government plus market. It is the practice and doctrine of governmental interventionism. It is the exploitation of labor by the big owners of capital. It is the source of our economic problems. All of these have been used to describe “capitalism.”

And that’s the problem; the term “capitalism” has no specific meaning, and has had contradictory meanings. Consider the following propositions:

1. The U.S. economic system is capitalism.

2. The U.S. economy has social problems such as poverty and unemployment.

3. Therefore, capitalism causes such social problems.

If “capitalism” in the first proposition means merely a label for the economic system, then the third proposition is meaningless, since a label does not tell us the cause of social problems. These propositions are the heart of the film Capitalism: A Love Story by Michael Moore. What is really going on in this brilliant but confused critique of “capitalism” is a sly shift in meaning. In the first statement, “capitalism” means private enterprise. In the third statement, “capitalism” means the actual economic system, which consists of a mixed economy.

The propaganda message is that private enterprise or the “free market” causes our social problems. It seems like a logical argument, but the logic is invalid, because the term “capitalism” has two quite different meanings in the first and third statements.

In the film Capitalism: A Love Story, Michael Moore provides many examples of governmental abuse and of colossal subsidies to financial interests. There is a judge who sent harmless teenagers to long terms in a private juvenile prison, having received payoffs from the private firm, and he calls this “capitalism.” He brilliantly depicts how Congress was bribed and panicked into giving away hundreds of billions of dollars to bail out the chiefs of finance. That too is “capitalism.” But it is hardly free enterprise.

Moore comically seeks to arrest the chiefs and get our money back, but why not also arrest their benefactors in Congress, who gave them the money? Moore shows how the financial industry handed millions of dollars to legally bribe members of Congress, and how the financiers became the chiefs of the U.S. treasury. We can see more clearly what is going on if we use this definition for “capitalism”: Capitalism is the control of government by the big landed interests and their financial-capitalist partners in order to obtain subsidies and other privileges.

The term “capitalism” has been the most successful propaganda term in human history. First, the word slyly puts the blame for social problems on a non-existent “free market” and not-so-private enterprise by shifting the meaning of “capitalism” as discussed above. But even more importantly, the term “capital” masks the underlying and more fundamental interest that receives governmental privileges: real estate, and more specifically, the big landowners.

If you want to understand the economic policies of governments world-wide, and the main cause of social problems, it becomes clearer if you grasp this proposition: The main purpose of government is to serve the big landed interests.

The U.S. government has subsidized and protected the big landowners from the beginning of its history. Land speculators were chief among the interests who promoted the American revolution, so that they could grab the land beyond the Appalachians. Landowners promoted the adoption of the U.S. Constitution to strengthen the central government so that the native Indians could be more effectively removed. The U.S. government then gave away millions of acres of land to the railroads and to land speculators. Only a small proportion of the land stolen from the Indians was homesteaded by settlers (see my article on “Ground Rent Seeking in U.S. Economic History” at )

Tax advantages given to real estate owners include deductions for property taxes and interest, tax-free capital gains, tax-free trading of property, and the deduction from taxable income of legal-fiction depreciation. But the biggest subsidy to landowners is implicit: it is the enormous increase in land rent and land value due to the public goods provided by government. Streets, parks, security, schooling, transit, etc., all make land more attractive and productive. The rich pay high taxes, but they get it back, and often much more, in higher land value. Taxes fall most heavily on the middle class, as the state tax-confiscates about half the wages of a typical worker, including the taxes the pay when from their remaining wages they buy taxed goods.

Michael Moore depicts the tragedy of folks losing their homes, jobs, and money, but he does not delve into the cause of such problems. The economist Henry George put it well, when he wrote in his book Social Problems, “There is in nature no reason for poverty.”

Land is a creation of nature, not human action, and its value comes from natural features and the population, commerce, and public works of the community. Land rent is a pure surplus that mother nature offers to us as a gift by which to finance the public goods provided by government. But you have rejected mama’s natural offer. Instead, you, by voting for the status quo governmental chiefs, you attack the earnings of labor, and with that loot, you provide public goods that pump up land rent and land value. Yes, you, the voter!

What happens then is that rent absorbs much of the gain from economic expansion and progress. Speculators jump in to leverage profit from the land-value rise. Landowners buy land with borrowed funds, so they engage their partners, the banks and other financiers. To further boost land values, the U.S. government sponsored Fannie Mae and Freddie Mac to buy mortgages and then package them into securities sold to hedge funds and other financiers. Thus the financial sector has created mountains of debt and derivatives ultimately grounded in land value.

But land has no cost of production. Its price can fall to zero, and the land will still sit there. Speculation raises land values to peaks unaffordable for actual use, and then land values plunge, and the leveraged mortgages and derivatives crash. That is the source of panics and depressions.

There is only one remedy for the boom-bust cycle, and that is to stop subsidizing real estate. Tax most of the rent and land value, so that landowners pay back value received, and stop taxing labor and enterprise. Wages would rise and land values would fall, and then houses would become affordable. The mortgage would be only on the building, not on roller-coaster land values. The financial superstructure based on land values would disappear.

None of this explanation appears in the film “Capitalism,” and if it did, we would see clearly how empty, how meaningless, how deceptive, how confusing, and what a tragedy it has been to use the term “capitalism” as if it meant or explained anything. A “love story”? The meaning is ironic, but confusion goes way beyond irony, as policy folly has not only caused human misery but is now catapulting the global economy into yet another boom and bust sequence that, because bailouts will no longer be possible for tapped-out governments, could really end in the collapse of civilization.

Pope says private enterprise should correct government failure

In July 2009 Pope Benedict XVI published “Caritas in Veritate” (Charity in Truth), his first papal encyclical on economic policy. He criticizes the concept that the goal of private companies should be to benefit the owners, such as the shareholders of corporations. The pope notes that the global economy has ruined the environment, generated great inequalities of wealth, and brought about a global depression.

The pope does not advocate state socialism, but rather calls on private enterprise to have as goals also the well being of society. Firms mush pay attention to the moral consequences of their decisions. What’s wrong with that?

Regarding pollution and other environmental destruction, since the atmosphere and oceans have no private owners, they are owned by the people, and governments have assumed the role of agents for the people. Thus governments have the moral obligation to charge polluters for the social cost of dumping waste into these areas. When they do not levy pollution charges, then they give the polluters an implicit subsidy.

If government subsidizes an activity, we get too much of it, more than is optimal. One cannot blame private enterprise for accepting the pollution subsidy. If folks don’t like the pollution, they should tell their agent the government to stop the subsidy.

Now comes the Pope saying that business should not maximize profit, but incur the cost of polluting less, even though government is offering a subsidy to pollute. In effect, the pope is saying, don’t take the subsidy. But that’s not the way the world works. Firms are in competition, and a firm that has a lower cost will have a competitive advantage. So firms will minimize costs by accepting the pollution subsidy from the state. If firms got together and agreed to all pollute less, governments would accuse them of collusion and impose heavy fines.

The pope wants firms to pay their workers more and to help the poor. Some firms indeed do charitable works, but why is there poverty in the first place? Economies with greater economic freedom, such as Hong Kong, have lifted their populations out of poverty, while those with little economic freedom, such as North Korea, have stayed poor or, like Zimbabwe, gotten poorer. Poverty can be extirpated, removed by the roots, with free trade and a free market.

Remove taxes from labor, enterprise, and goods, and shift them to land value. That equalizes the benefits from natural resources, removing the root cause of poverty. But the pope is not advocating this. His policies let government perpetuate poverty, and then he calls on private enterprise to correct this government failure. Maybe this is one of those religious mysteries.

What about the Great Recession, financial crash, and economic gyrations? Governments control the money supply, push interest rates around, and subsidize real estate, thus creating the booms and busts. The pope wants private firms to correct this also.

Why does the pope not call on government to reform itself, to stop subsidizing pollution and land values, and to stop penalizing labor with restrictions and taxes? Why does he not prevent the problems rather than let them happen and get business to mop up?

I don’t know why the pope condones government failure and then blames private enterprise. But I do know that the social reformer Henry George wrote about how we can apply on earth the economy in heaven. In his speech “Thy Kingdom Come,” George asked how land would be allocated in heaven. Would the first resident claim all the land and charge the others rent? Heaven forbid! All angels and other heavenly residents would share equally in God’s creation, and so God’s will on earth as it is in heaven is that the profit of the earth be equally for all.

But the pope did not say anything like that. He lets the profit of the earth go to corporations, and then asks the corporations to give the earthly profits back to the people. Why not let the profit of the earth go directly to the people in the first place?

It may well be church authorities and not God that work in mysterious ways.

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