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Capitalism a leech on publicly funded research

23 Aug

Prevailing neo-liberal dogma holds that private capital is responsible for most economic innovation and that governments stand in the way. In The Entrepreneurial State: Debunking Public vs, Private Sector Myths, Mariana Mazzucato points out that most research is funded by governments and that current anti-government policies not only widen disparities but threaten future innovation, especially the mobilization of resources necessary to rapidly shift away from dependence on carbon-spewing fossil fuels.   

Mazzucato—professor of The Economics of Innovation at Sussex University in the UK—argues that capitalists are not the visionary risk-takers that free-market economists, the corporate media and politicians would have us believe.  Their focus on maximizing profits actually makes capitalists risk-averse.

Governments fund and organize research and development precisely because they do not have to answer to shareholders. They can have broader goals—future well being, new employment, reduced disparities, or environmental integrity.  And in fact, even in the U.S. the federal government funds two-thirds of the country’s research and development: private business funds less than twenty percent.

Neo-liberal ideology aside, capital has long depended on governments to fund research. In earlier times, governments funded research on canon fire and ocean shipping. They funded construction of railways, telegraph then telephone lines, and funded research on aerodynamics and jet engines. After government funding has made production profitable private business takes charge.

Today, military-industrial corporations continue to rely on publicly funded research to develop weapons and equipment. They then sell the results to governments at cost plus inflated profits. Pharmaceutical corporations do the same. Most new drugs are developed in publicly funded labs.  These are then modified slightly, patented and sold to government-funded health care systems at hundreds of times the production cost.

Contrary to public opinion, neither Steve Jobs nor Apple had a critical role in the development of the Internet  or iPhones.  Hard disk drives were developed by the U.S. Defense Advanced Research Projects Agency. The Internet was constructed by U.S. federal agencies working with publicly funded universities. The Hypertext Transfer Protocol (HTTP) and the World Wide Web were conceived by U.K. government-funded scientists.

Touch screen technology was developed in government labs in the U.S. and U.K.  GPS was developed by the U.S. military and continues to be funded by the U.S. Air Force. Lithium Ion batteries were developed by U.S. Department of Energy scientists. Liquid Crystal Display (LCD) and Thin Film Transistors (TFT) were developed in government-funded labs. So were SIRI, an artificial intelligence program, and the critical Web Search algorithm.

Steve Jobs and Apple can be credited with stylishly rounded edges on computers and iPhones. Eye-catching design and effective marketing allowed their shareholders to make billions from the socialization of research and the privatization of profits.

Future innovation in the U.S., U.K. and Canada, Mazzucato argues, is threatened by current anti-government policies. A few—wealthy capitalists—have unquestionably benefited from neo-liberal policies. Corporations have been freed to move technical and professional employment as well as jobs in manufacturing and services to places where wages are lower, where enforcement of labor and environmental regulations is lax. Meanwhile, cuts to taxes and government spending have widened disparities, aggravated market stagnation, and by reducing funds available for research are prolonging dependence on fossil fuels.

If carbon-induced global warming is to be reversed, massive sums will have to be invested. Widely coordinated action will be required to rapidly replace dependence on fossil fuels with solar, wind, tidal, wave, and geothermal power. Existing capital is locked into profits from fossil fuels; private capital cannot be expected to take the lead. Only the public can mobilize the resources required.

Where measures have been taken, public authorities have taken the initiatives. Denmark is a leader in the technology of wind power.  China has massively increased its production of wind and solar power.  Germany has installed solar panels that can produce as much electricity as 24 nuclear power plants. Wider action is blocked by corporate lobbying anti-government ideology. Denying carbon-fueled climate change is no longer credible; still so long as governments are denied the means to act, corporations and their shareholders can continue to make massive profits from fossil fuels.

Concerted public action is urgently required to develop low-cost electricity storage, to construct the smart grids and digitized energy distribution systems needed to “optimize the flexibility, performance, and efficiency” of wind and solar power.  Concerted public action is also required to rapidly reduce consumer waste and industrial and agricultural pollution.  National, regional and local governments could gain the resources needed if taxes were raised on corporations and top incomes as well as on financial transactions, wealth, and inheritance. Increasing taxes on capital would socialize some profits. Most of the costs of innovation have already been socialized.

Al Engler


The new Capital — a review

24 Jun

Thomas Piketty’s, Capital in the Twenty-First Century, is a sensation—an economics textbook, translated from the French, that has been on the New York Times best-seller list. It is an important work. If you ignore more than one hundred pages of notes, it is still a long but easy read.

Piketty, a prominent French economist and social scientist, uses rigorous logic and reputable statistics to dismiss the mainstream claim that capitalist markets are based on individual equality, and that great wealth is a fair reward for individual contributions to general wellbeing. He shows that capitalism in its logic and observable practice actually widens disparities between the super rich and everyone else.

The title of the book conjures images of Karl Marx’s Capital. But Piketty says he is not a Marxist; he does not call for the abolition of capitalism. He is a social democrat who explicitly rejects the top-down centralized state ownership of the twentieth century USSR. He looks to a more democratic alternative, arguing that economics, which he prefers to call political economy, should refocus on how best to meet human needs. He looks to cooperatives, community ownership, and more democratic control of workplaces.

The two Capitals have distinct starting points. Marx began with the commodity. He makes the case that exchange value is determined by labor time embodied in commodities, and that the wealth and power of capital come at the expense of labor. Although Marx grumpily dismissed campaigns to abolish market exchange as utopian, his focus on the commodity convinced many of his readers that opposing capitalism meant opposing commodity exchange.

Piketty’s analysis is focused on the distribution of income and wealth. He begins with a logically indisputable proposition: when the rate of return on capital is greater than the rate of economic growth, capital increases its share of total income. He then tests this hypothesis with historical statistics. These show that national growth rates usually range from one to two percent; the return on capital is usually around five percent. Without deliberate public intervention the share of income going to capital must grow.

Piketty’s focus on income distribution is a more direct and convincing critique of capitalism. To be fair, Marx was writing in the 1860s. Credible income statistics did not become available until governments adopted income taxes to pay for World War I. Marx’s critique was necessarily more abstract, more a criticism of capitalist market theory than of capitalist practice.

Piketty, born in 1971, knows that twentieth-century attempts to replace market exchange with top-down state direction required unacceptably heavy and intrusive repression. The USSR’s disadvantages have been well documented, but capitalism is hardly the utopia of equal opportunity its supporters claim. In France, the U.K., and the U.S., the share of total income currently appropriated by capital is thirty percent. The top 0.1 percent of income earners own twenty percent of wealth. The top one percent own 40 percent. The top ten percent own 80 to 90 percent. The bottom 50 percent own a mere five percent of wealth.

Mainstream economics justifies great fortunes in a few hands by claiming these are just rewards for successful work, innovation, and merit. In fact sixty percent of great fortunes are inherited. Piketty shows that capitalism continues to be a system of patrimonial wealth. Even for those few wealthy individuals who are or were innovators, it does not take long before the income earned from their past capital exceeds the income from their work. For countries with reliable statistics, annual income from capital now accounts for thirty percent of total income. Privately-held wealth equals 600 per cent of annual national income.

Nonetheless, governments, electoral parties, and the corporate media insist that the main problem facing economies is public debt. Actually public debt in most countries ranges between thirty and seventy percent of GDP. In the nineteenth and twentieth centuries, the governments of major capitalist countries had debts that reached 200 percent of their GDP. Past governments reduced debt by cutting public spending, by allowing inflation to rise, and by increasing taxes.

Austerity is the most damaging way to reduce public debt. Government cutbacks increase unemployment, reduce working-class income and consumer purchasing power, aggravating market stagnation. Inflation does reduce the real value of debt, but largely at the expense of the investments of middle income pensioners. The most benign way to reduce public debt is to increase taxes on great wealth and on the highest top incomes.

Piketty argues that marginal tax rates on income over $500,000 could reasonably be raised to 80 percent and that progressive inheritance taxes should be instituted or raised. In addition, he calls for an annual tax on all private wealth including real property, stocks, bonds, bank balances, and assets held abroad. This annual wealth tax could be one percent on wealth from $1 to $5million; two percent on wealth over $5 million; and 5 to 10 percent on wealth over $1 billion.

Piketty concedes that such taxes in the present political climate appear utopian and could lead to capital flight, if not coordinated among numerous countries. Still people should begin discussing such taxes. Once widely implemented by the international community, public debt could be quickly eliminated. Public spending to meet human needs and to sustain consumer markets could be increased. The tendency of capitalists to appropriate more and more income would be reversed. Democracy would be strengthened as information on private wealth become more transparent. Such taxes could also provide the public with the means to respond to climate change. Massive investments are required to move away from dependence on fossil fuels: if private capital does not take the initiative, taxes on wealth could provide the public with the revenues needed.

Al Engler

Capital in the Twenty-First Century, Thomas Piketty, The Belknap Press of Harvard University, 2014, 685 pages

Piketty’s book important, but should go one step further

2 Jun

Is Thomas Piketty’s Capital in the 21st Century a left-wing book?

Yes and no. It depends on how you define left wing.

If you believe the litmus test of being “left” is opposition to capitalism then the book may be interesting and important, but it is not left wing. If, on the other hand, you believe capitalism is a dynamic economic system worth preserving, but in need of a tune-up, you would likely have a different answer. In the range of political/economic opinion allowed in the corporate North American media the book is certainly at the left end of the spectrum.

But perhaps there is another more important question to consider. Is the book useful, including to those who think an alternative to capitalism is both desirable and necessary? And the answer is an unequivocal yes.

Strangely, it’s not primarily for the reason you may think, if all you know about the work is what you have read or heard in the mainstream media.

While most of the commentary has been about the book’s take on inequality and the author’s prescription (a tax on capital) for controlling the problem, the really unique and useful aspects of Piketty’s work are his insistence on what might be called “reality-based” economics and his straightforward, easy-to-read language.

Unlike the obscurant writing and “fairy-tale” premises that typify most works of economics, Piketty bases his arguments in actual data and sets out to explain them in a style that is accessible to a broad range of readers.

Imagine that! Economics for everyone, including those of us who insist that theories should be tested in the real world! Refreshing, almost scientific.

If Piketty can do it we should hold all economists to these standards. Imagine no more theories of perfect competition where all buyers know everything about all sellers, but instead explanations of what really happens when individuals suffering from a lifetime of brainwashing come up against the might of multinational corporations. Imagine economics that explained the world as lived by ordinary people in a fashion that most of us can understand.

This threat of a good example explains much of the “emperor does so have clothes” reaction of orthodox academic economists and their fellow travellers in the business press to Piketty’s book. Then you add in the overwhelming evidence presented in Capital that inequality does exist, has grown over the past three decades of neoliberal reform, and is likely to grow much greater  — and yes sir those apostles of greed sure are angry.

So, the book is important and you should read it, but … let’s just say one should be aware of its limitations.

Contrary to what you might assume based on the attacks from certain quarters, the author does not advocate socialism — unless you believe socialism can be defined as simply trying to be nice to everyone and sometimes using the government to override the power that capitalism gives rich people.

Piketty is firmly in the camp of those who would save capitalism from itself. While he does argue too much inequality is bad because it threatens democracy and leads to revolution, or at least economic nationalism, there is no question he supports the system. He frequently and explicitly praises capitalism as the best economic system because it produces the most growth. There is no mention of an environmental crisis and its link to inequality and an economic system that values greed above all else until the very end, almost as an afterthought. He does not deal with environmental limits to growth.

Still, the book provides all sorts of useful information about the last 200 years of actually existing capitalism. Its offers a glimpse of what the study of economics should be. Piketty seems to be on the side of ordinary people and even makes mention of economic democracy.

Go and buy Capital in the 21st Century from your local bookstore, but read it with this thought in mind: Rather than tinkering with capitalism, can’t we come up with a better system? One that democratizes economic decision making while rescuing our environment from the ravages of unchecked greed, also known as the fallacy of unlimited growth?

Gary Engler

What free market? A review

3 Sep

The University of Chicago has long been the center of opposition to government economic intervention and support for the claim that free markets best serve general interests. It is a surprise to find Bernard E. Harcourt—professor of law and political science at the University of Chicago—challenging neo-conservative market extremism.

In The Illusion of Free Markets: Punishment and the Myth of Natural Order, Harcourt holds that markets will be regulated by governments or by the rich on behalf of themselves.  Few markets are actually unregulated. He goes on to make the case that markets directed by dominant players in their private interest result not in greater freedom but in heavier repression.

Harcourt begins by examining the Chicago Board of Trade and the New York Stock Exchange. These exchanges are widely viewed as epitomes of the free market, but they are actually self-regulated private monopolies protected by legislation. Their rules are made by member firms and policed by internal committees that determine the methods and time of trading as well as who may participate. As should be expected, the rules favor those who make them.

The Chicago Board of Trade forbids outsiders from engaging in after-hours trading.  However, the insiders who control the Board, when they agree among themselves, can modify the rules, giving themselves opportunities for exceptionally profitable trades. The Chicago Board of Trade and the New York Stock Exchange allow brokerage firms to restrict retail buyers (outsiders) from reselling for periods of thirty to ninety days. “But the same brokerage firms may allow large institutions to dump their stock in the after-market at any time.”  In New York, “members of the stock exchange may get together and fix the commission rates on stock transactions of less than $500,000,” but they can “freely negotiate commissions for larger stock transactions”—which they dominate.

In Chicago, when parties are in dispute, the Board’s Office of Investigation and Audits may investigate. Where its decisions are challenged, the Commodity Futures Trading Commission may get involved. If disputes are unresolved, the U.S. Attorney’s office can initiate civil or criminal actions. The point is that these “free markets” are minutely regulated, first by the dominant insiders and then by civil and criminal law.

Stock exchanges are not exceptions. Markets from the local to the global are dominated by firms with the largest market share, who typically have privileged access to supplies, technologies, marketing networks, and credit.

It is no revelation to point out that when a few are allowed to make the rules, they will direct markets in their own interests. Nonetheless, in mainstream opinion it is now taken for granted that markets regulated by dominant players are preferable to government regulation. This was not always so.

Before the rise of industrial capitalism, industries were self-regulated—by Guilds that were usually dominated by wealthy merchants. Seeing this, political thinkers from the Scholastics to the Enlightenment generally held that governments had a responsibility to intervene to curb speculation, price gouging, and hoarding, to keep the prices of necessities low, to police the quality of goods and services, and to maintain public hygiene.

Mainstream economists now teach that support for free markets can be traced back to Adam Smith in the late eighteenth century and Jeremy Bentham in the early nineteenth. Harcourt notes that Smith and Bentham did view self-interest in the market as generally beneficial, but he points out both also wrote of circumstances in which government intervention was clearly required to curb the self-interested power of great merchants and masters.

Harcourt also questions the prevailing view that the late nineteenth century was a time of laissez faire policies.  While industrial production did expand dramatically, governments played critical roles in the accumulation of capitalist wealth. To expand their countries’ shares of global trade, governments organized and financed shipyards and railway construction. They spent lavishly on navies and armies and colonial wars. Each empire restricted access to captive markets through imperial preferences and tariff walls.

However, the claim that control of markets should be left to the rich has an historical precedent.  Harcourt draws our attention to France before the 1789 revolution and the Physiocrats—so called because they advocated rule by natural laws. Most economic histories now dismiss Physiocrats  for having insisted that land alone is the source of exchange value. In France in their time, that was not so controversial: land still was the main source of great wealth. In their time, what distinguished the Physiocrats was the claim that private property and unregulated markets were in accord with laws of nature and that the role of government was to vigorously repress criminal acts against this natural order.

Physiocrats held that absolute monarchy, by placing government in the hands of the largest landowners, was the natural form of government. Leading Physiocrats—Francois Quesnay, Samuel Du Pont de Nemours, and Le Mercier de la Riviere—were prominent in the Court of Louis XV. For them it was natural to oppose government restriction on profit-making. They likewise viewed it as natural to advocate repressive policing and onerous penalties for thieves, the idle, the disorderly and anyone else who could interfere with their natural order. Le Mercier, as governor of Martinique—then one of the wealthiest French slave colonies—gained notoriety for his heavy-handed policing which even plantation owners came to believe was provoking disorder among the slave population.

Although slavery, landed aristocracies, and absolute monarchies have largely passed into history, the ideology of natural order, freedom for the rich and powerful, and repression for the dispossessed and disaffected still resonates with the very rich and their supporters. That is at the root of the current neo-conservative reaction.

Beginning in the 1940s, University of Chicago economists Milton Friedman and Friedrich Hayek, began campaigning to replace liberal-social democratic welfare state policies with old ruling class verities. By the 1970s, they had a powerful constituency: the super-rich.  Long hostile to Keynesian policies, and frustrated that domestic profit-making opportunities were decreasing, the wealthy heirs of great family fortunes were smitten by arguments that economic rewards and decisions are best left to the very rich.  By the early 1980s, the policies promoted by Chicago School economists and generously financed by corporations and the foundations of wealthy families were adopted by the newly elected conservative governments of Margaret Thatcher in the U.K., Ronald Reagan in the U.S., and Brian Mulroney in Canada.

By the late 1980s a Washington Consensus called for the deregulation of markets, cuts to the taxes paid by corporations and the wealthy, privatization of public utilities and cuts to social services. Although some of the advocates of unregulated markets call themselves libertarians, the widening disparities that followed anti-Keynesian policies were accompanied by more repressive state power.

Freeing the rich to do as they choose in the markets they dominate, obviously allows them to appropriate more of total income. Among the masses, some may benefit from a trickle down. Of those who are left with less income and employment, some will find comfort in knowing that at least a few have gained more wealth than they can imagine. Others will go on strike, organize boycotts, or participate in unauthorized protests.  A few will engage in petty criminality. In countries that have been impoverished, some may lash out with any weapons available. In response or in anticipation, the privileged will demand more aggressive policing, more onerous criminal sanctions and more punitive military actions abroad.

Neo-conservatives view repressive violence as a required response to domestic and international criminality. Harcourt makes the case that crime rates are actually related to entitlements, employment opportunities, and income disparities. For him, this is not purely academic. Earlier in his career, he had practiced law in Birmingham, Alabama, representing prisoners facing capital punishment. He continues to act pro bono as an attorney for prisoners on death row. In his 2001 book, The Illusion of Order: The False Promise of Broken-windows Policing, Harcourt had made the case that more aggressive policing had no significant impact on crime rates in New York.  These, however, are closely related to changing social conditions.

Al Engler

The Illusion of Free Markets
Punishment and the Myth of Natural Order
By Bernard E. Harcourt
Publisher: Harvard University Press, 2011
Paperback, 328 pages
ISBN-10: 0674057260
ISBN-13: 978-0674057265

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