- Jon Hellevig
- August 31, 2016
The Scientific Essence of Economy
Capitalism and Socialism versus a Democratic Competitive Market Economy
All economies are competitive market economies
The purpose of this essay is to define what should properly be understood as ‘economy’ in the sense of what is habitually referred to as an ‘economic system’. It is shown, that it is grossly inappropriate and misleading to claim that there would supposedly exist various types of economies or economic systems, such as maintaining that there are either capitalist of socialist economies as distinct entities. It then emerges that fundamentally there exists only one type of economy — as far as one can properly maintain that an economy exists (which point is discussed below). All economic systems are subject to the same basic competitive market conditions or influences, and therefore properly speaking all economies are competitive market economies.
Naturally, it would be legitimate to try to classify economic systems according to given characteristics, and thus to postulate that an economy which comply with a certain set of characteristics would be deemed as a capitalist system and another with other characteristics would be a socialist, or a communist one. However, such typology is acceptable only as long as one recognizes that it represents merely guidelines in how to perceive the economic conditions, and guidelines for assessing the level of distortion from optimal competitive conditions.
Whatever the typology, an economy is always a competitive market economy. This cannot be wished away, whatever ones ideological preferences are. By ‘competitive’, in the previous, I mean something that is ‘subject to competition’ (or subject to competitive influences). In the socialist planned economies, the regimes attempted to remove the element of competition in favor of joint actions that would supposedly benefit the greater whole. However, doing so they did not in fact remove the competitive element, they just pushed it underground to the detriment of the functioning of system.
Thus, an economy is always a market economy in the sense that it is subject to market pressures (conditions, influences) both domestic and global.
A crucial role in the economy is played by the extent to which private ownership is allowed and protected. Private ownership is required to ensure efficiency of the economy and to enable the individual to build up savings.
According to neoliberal capitalist ideology, an economic system functions best when absolutely all assets are privately owned. This is an ideological belief that it is easy to disprove and it seems that today it serves as a mere ideological ruse for motivating the transfer of vital assets to the ownership of oligarchs and the plutocracy class. The neoliberals approve of mass shareholding of corporations with hundreds of thousands and even millions of shareholders, then what could possibly be wrong with state owned corporations, where millions of people would own a corporations through the vehicle of a public agency. The large private corporations are essentially controlled by a few shareholders or mutual trusts or similar entities, whereas the hundreds of thousands or millions of shareholders have no real control or say in the corporate affairs. On the contrary, in the case of a state owned corporation there is democratic control over the corporations.
Management appointed through democratic control does not need to be in any way inferior to that of the private enterprises, as long as the quality of the democratic system itself is up to date, and as long as the economy is a competitive mixed economy, which allows for a healthy general competitive market economy.
The Capitalist idea of Maximizing Shareholder Value
The core doctrine of Neoliberal Capitalist theory is the idea that the main purpose of a corporation is maximizing shareholder value (that is, a constant push to increase, or inflate, share prices). All other economic considerations have been subjugated to this goal in the countries where the powers that be adhere to the neoliberal capitalist theory. Legitimate needs of customers and citizen, the environment and all common good have had to recede to this concern. Naturally, the apologists of this theory claim — albeit wholly unsubstantiatedly — that from maximizing shareholder value all other good effects would follow.
In reality, the whole idea is ideological bilge best compared with a sectarian religious belief. Maximization of shareholder value does not imply general economic efficiency, and may in fact be highly detrimental to that. The only real purpose it serves is to distribute and accumulate wealth in the hands of an elite few.
Any healthy economic system should have other priorities such as, for example, guaranteeing vital goods and services to all groups of people; ensuring countrywide services; investment in domestic high technology; ensuring that goods and services are brought to consumers without exorbitant price margins; safeguarding the environment; ensuring a sustainable economy in times of war and other crises (and to be strong enough as a deterrent not to be drawn in to war). In a mixed economy with proper democratic control these aims can, in general, be satisfied without adhering to the spurious tenet of maximizing shareholder value and instead maximizing the economic value for all citizen.
Spurious benefits of privatization
According to the neoliberal capitalist theory, private ownership of assets supposedly guarantees better economic efficiency in all cases. This contention is obviously wrong, which fact is much in evidence, for example, by studying what has become of several former state owned corporation that have been privatized during the last few decades. Globally, and especially so in the West, during the last three or four decades, the myth of economic superiority of private ownership has been used as ideological propaganda in a (largely successful) effort to transfer public assets into the hands of a small elite plutocracy class. Frequently, the supposed economic superiority has been motivated by comparing the market value of the privatized assets on rigged stock markets — which in theory were supposed to reflect perfect markets — to the value of similar assets in public ownership, perhaps in another country. At the same time, there are both historical evidence (Scandinavia, Germany, France) and contemporary evidence from China and Russia, which shows that state owned corporations can be well run operations for the benefit of the public and have been vital for the development of entire countries. Democratic control (as is the case in China and Russia) can ensure proper governance of large-scale vital operations. Evidence from the United States, on the contrary, show that private capitalist ownership leads to market abuse to the detriment of the whole economy and all people.
Ideological concepts serve as smoke screens for hidden agendas
In reality in the present days, those countries that pride themselves as liberal capitalistic economies are so only by name. The use of ideological concepts have through propaganda smoke and mirrors created an illusion that they would be such. Perhaps they have been so back in time, some countries more, some less, but today there is not much to merit them being so named.
In the Western countries, most notably in the USA and the European Union countries all the fundaments on which a capitalist economy is supposed be grounded have been eroded. Normally private ownership would also mean private liability for the ownership, but in today’s West private ownership of banks and the largest corporations has been converted into forms of entitlement, which the governments uphold on the expense of the citizenry. Unlimited amounts of gratuitous or heavily subsidized capital has in backstage deals been made available for private owners to keep their corporations afloat. The economies are kept barely intact thanks to massive government lending at practically zero-rates, which system has been made possible through rigging the financial markets on the strength of monopoly currencies. Interest-rate parity and pricing of economic risk have been destroyed, but the cheap money flows only to a small plutocrat elite (the 1%). By the effect of the generous subsidized financing by governments, corporations are no more compelled to operate for a profit and do not have to worry about capital accumulation any longer. Through regulation of interest rates, heavy taxation and selective government financing prices do not any more reflect normal conditions of supply and demand. Increased concentration — and outright monopolization — of ownership in key (most) sectors of the economy has rendered the markets uncompetitive.
We may compare the above description of the present day conditions on a neoliberal capitalist market with an idealized definition of what a capitalist system is supposed to be:
“Capitalism is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment is determined by the owners of the factors of production in financial and capital markets, and prices and the distribution of goods are mainly determined by competition in the market. .”
(From the Wikipedia)
We can see, that in this list at least the ones that I have highlighted in bold are not conditions that in the West would largely any longer apply to banks and major corporations. It emerges that the capitalist economies are not capitalist any longer, not even by their own definitions. What are they then? I think it would be fair to denominate them as corrupt neoliberal oligarch plutocracies.
The above list of problems with the so-called capitalist economies yet omitted one of the biggest distortions to the system, namely taxation. Taxes in most Western countries are exorbitant, which in practice render those economies socialist style planned economies in view of the economic decision power having been to a great extent transferred from the citizens to the governments, which through the budgetary system decide how the earnings of citizens are to be allocated. Hereby, we are reminded about one of the cherished believes of the capitalist credo (from above quote): “prices and the distribution of goods are mainly determined by competition in the market”. They are not, not so anymore as they are determined by the government’s plan.
To make matters worse, taxation is, in fact, exorbitant only for the citizens, private individuals, while corporations have mainly been exempted from taxation, the larger the corporations the surer their exempt status. These exemptions are for the most part backhanded as they come in form of lax compliance monitoring, toleration of easy tax evasion schemes through foreign operations (by no means not only so-called offshore jurisdictions but more in general through tactical operations in any third countries), and direct subsidies to corporations. In several of the Western countries the government subsidies, direct and indirect, to corporations annually equal (sometimes exceed) in size the whole intake on corporate tax. Thus it is without any exaggeration that we may say that the Western capitalist countries have exchanged a social welfare system for a system of corporate welfare.
Fundamentally Capitalism and Socialism are no separate economic systems
It is wrong to posit various economic systems as being separate entities, or to claim that, for example, Capitalism and Socialism (or Liberalism, or Marxism) would be alternate systems. All economies are competitive market economies, because they are all subject to market influences whatever the powers that be might wish for or pretend. The correct way to distinguish between economies in separate jurisdictions would be in regards to the level of free democratic competition that they manifest. Hereby, the best way would be to think of the economic systems as being depicted on a continuum on a scale from uncompetitive to competitive. For a yet more profound understanding of the idea, the continuum should be depicted as a circle-continuum as we have done in the graph below.
We see from the graph that Neoliberal Capitalism is closely linked with a Socialist Planned Economy (of the type of the USSR). Both are uncompetitive and highly monopolistic economies. A socialist planned economy can be said to represent the ultimate stage of capitalism, where all production resources and assets have been concentrated under one owner. The neoliberal capitalistic systems of the West are rapidly moving towards similar concentration of property. In this connection, it may be useful to point out that the Soviet state was not brought down by any ideological reasons but purely because of virtual bankruptcy of its economy due to utter lack of (officially sanctioned) competition.
One implication of this is that there is no real choice between a capitalist economy and a socialist economy, rather the only sensible and theoretically sound option is to create a competitive market economy.
One further note to this issue: In the continuum, the level of competition refers to the institutional de facto framework of permissible competition, bearing in mind that according to the paradigm I am advancing here, there is always competition. In neoliberal capitalist and socialist planned economy models, the problem is that competition has been perverted, overt or officially sanctioned competition has been impeded and the residue competition has been pushed underground. However, this suppressed competition has not disappeared and therefore it constantly eats on the foundations of those defective systems.
The delusional theory of perfect market omits the factor of human behavior
The economy represents a reflection of human interaction in infinite variances, the actions and desires of one economic actor (a human being) in relation to the actions and desires of all other economic actors in infinite variances. On a competitive perfect market, all these competing actions and desires would lead to a harmonious and prospering economy (prospering, given that the natural conditions would be adequate and that necessary natural resources would be in sufficient supply).
Capitalism, and especially its financial theory, is based on a postulation of a perfect market. The problem here is that the perfect market is a myth and an unattainable illusion, a sheer impossibility. It represents a religious-like utopia, which omits the most important condition of an economic system, namely human behavior. By postulating the perfect market and ignoring human behavior, Capitalism as a theory is rendered void and nonsensical, as nonsensical as its opposite number, which also omitted human behavior, that is, Socialism.
The very fact that the conditions of a perfect market are unattainable proves that Capitalism as such is a bogus theory. Basically, the apologists of Capitalism maintain that under perfect market conditions the system would work. From this, however, follows the admission that absent the perfect market the system does not work. Ergo, it will never work. There is not, and there can never be a perfect market — human behavior impedes that — and therefore Capitalism can never be workable.
The thingly fallacy — an economy is not a thing
The fundamental problem with all economic theory — indeed with social sciences in general — is that the theories are based on what I call the thingly fallacy. This is the propensity to form theories of social phenomena in analogy with the natural sciences. Natural sciences analyze things and their movements (things having a body and energy). Social sciences, in turn, may properly only study human behavior (and traces left behind by human behavior). Mostly this implies a study of speech and language and the traces of these (in written, or audio, or artifacts). Generally, this may be termed a study of expressions and interpretations. Through the history of social sciences up to this day, we can see that this simple foundation of the social sciences has rarely — if ever — been understood and recognized. And it has not been realized — few, if any, have given it a thought — that words are not things, our expressions in speech are not things. For sure, the traces on a paper or computer screen of our expressions are things, but such traces merely symbolize the words, statements, expressions, which are not things. The relevance of this — the thingly fallacy — for our topic, the nature of economy, is that scholars — almost exclusively — have in order to comply with the only scientific model they know, that of the natural sciences, assigned certain types of words (expressions), namely concepts, the role in their social theories that things carry in natural sciences. Briefly, prevalent economic theory is based on the fallacy of treating concepts as things, and thus defining the key concepts of their theories in reference to other concepts and words (the faulty conceptual method). Instead of following this erroneous approach, they should define economy in terms of human behavior, as it is done in the present essay.
Collectively human behavior accumulates to something we may call social practices, and the economy must be seen as a form of social practices. Present day social practices are anchored in the social practices of past generations in an infinite regression. Thus, what humans do today is to a large extent governed by what humans have done in earlier generations. Therefore, a proper study of economy would entail a study of the social practices, which we perceive as falling within economy.
This all signifies — contrary to the beliefs of academic economists — that there are no scientific or natural laws that would supposedly govern economic activity. Economic outcomes are entirely dependent on human activity in its infinite and unpredictable variances (in addition to natural resource and environmental constraints). No formulae of captured logic can prove anything in the economy.
Economy is a human venture, all too human.
Marxism, Socialism, Capitalism, Liberalism, all the reified –isms in the world, will never do anything or operate in any way. Only human beings do.
The economy is not a thing but merely a concept designating certain perceptions
There is a second fallacy, which in itself is connected with the thingly fallacy of assigning concepts a material role, reifying concepts. This is the fallacy to regard what stands behind our linguistic concepts as something given and scientifically definable in an absolute sense. In that vein, scholars like people at large, are prone to assume that there exists an economy. That is a fallacy of supreme order for there is no economy. It is a thingly fallacy to believe there is one. In reality, the economy is only a concept that we have assigned to cover our perceptions of such activity that we have been led to regard as constituting the economy. We cannot properly decompose the concept economy to any constituent particles of which it would supposedly be consist of.
Moreover, there is no single human action nor a trace of human action that could properly be referred to as being an economic action or to be a part of what is called economy. However, I can assume that somebody would like to assert that this is not true and that there are such actions, for example, the signing of a contract. But then, immediately another person, who looks at the action from point of view of law would claim that that the particular action in fact refers to law, another might argue that the question is about the activity of writing, etc. It is thus our perceptions, our point of view, which determines what concept we assign to one or another social phenomenon. (If we commission a crew to dig a hole as a fundament of a house, we could possibly perceive this, at least, as an economic issue, a legal issue, a technical issue, architecture labor, or abuse of labor).
In my view, there are three major commonly held perceptions, which govern our understanding of social phenomena, at least insofar as they pertain to the economy. These are: economy (economic perceptions), law (perceptions on law), democracy (perceptions on democracy and politics). The actions that may be referred to these perceptions are always interrelated and mutually exchangeable. By actions pertaining to democracy (democracy writ large to cover all public governance), the fundamental behavioral constraints are set for the economy (laws and rules). Then we see that the actions pertaining to democracy at the same time cover both the economy and law. Only by limiting our view of the action to a certain perception do we assign it to one of them. Obviously, the action can be seen through more perceptions than these three. Moreover, we cannot properly identify a certain set of laws governing the economy as being relevant to the economy. All laws and rules govern (restrict) human behavior, therefore all laws and rules must be admitted as belonging to the sphere of economy, but simultaneously they represent aspects of law and democracy, they are the same viewed from different angles.
Human behavior ruins all theories based on implicit altruism
As it has been demonstrated, there is no economy as such that can be studied the same way we study physical or organic elements and their movements. What we refer to as economy are merely linguistic concepts that approximate our perceptions of what we have learned to think as the economy. Therefore, I repeat, we must understand that what really affects the issues we group together as economy is human behavior. And human behavior is precisely what renders capitalism and socialism defunct as theories. Both sets of theories are based on some illusionary ideal conditions that tacitly assume — although they ignore even a discussion of it — human altruism. They implicitly assume that human beings would function within the systems for the greater good and lacking selfishness. In short, they ignore human greed and will to power. These theories do not take into consideration that there will always be people that are willing to manipulate the system in order to satisfy one’s own ambitions and greed. Those who have it within their might will always devise schemes of how to perpetuate the disingenuous advantages they have obtained. Corruption, market abuse, cartels, monopolies, abuse of the banking system, financial rigging, preferential financing and preferential access to resources and their ownership and other wiles and ruses ensue.
In a global context, dominant nations abuse the global market by establishing rules of trade and investment that work in their favor and by rigging the global markets by force of their dominant monopoly currencies. On top of that comes threats of military aggression, threats of war, preparation to wars, information war, hybrid wars, acts of trade war in form of sanctions, and actual military aggression and occupation.
This in itself signifies that there can never be a global system of capitalism, and by implication such systems cannot properly function in different countries either.
When we integrate these facts of human behavior into economic theory — and we must do so — then we will understand that no capitalist or socialist economy can possibly function for the greater good.
We must discard the ideologically biased and faulty theories, notably capitalism and socialism, which fail to consider the most important component of the economy, human behavior. What must take their place is the pragmatic theory, which I have referred to as a democratic competitive market economy. However, whereas competition is the lifeblood of the economy, it is very important to recognize that the question is not about any form of unrestrained competition. On the contrary, the system requires a democratic control to ensure a level playfield for all actors and to ensure that common interests are prioritized. This entails a relentless fight against abuse of dominant market position and monopolies, and real and effective application of antitrust laws. (It is worth noting that classical liberalism was perverted to an apologist theory for monopolies and during the reigning neoliberal doctrine the antitrust laws have been rendered virtually defunct). However, monopolies and market dominance would be acceptable for state (public) owned corporations as long as their operations are subject to effective democratic control. Democratic competition would also, among other things, imply equal access to financing for all economic actors in the sense of denying preferential bailouts and other subsidized financing for privileged banks and large corporations.
A competitive market economy is a mixed economy, this is so especially from point of view of the encouragement of state (public) ownership of banks, raw material extraction, production assets, infrastructure, and other priority fields, as well as government organized free public health care, free schooling, and solid social welfare protection networks.
According to neoliberal capitalist theory, private ownership of assets supposedly guarantees better economic efficiency, the fact of the matter is, though, that economic efficiency is a function of the level of competition on the markets in general and on a particular market, and not as such dependent of the ownership structure (private versus public). In the absence of economic actors as direct competitors, democratic control can guarantee the same effect. In a mixed and open economy state owned corporations, under proper democratic control, do not suffer from less economic efficiency — while they deliver a more valuable service for the citizens. The recent history of Western economies has clearly shown that the oligopolistic and monopolistic privately held companies are especially detrimental to economic efficiency and well-being.
Competition as an organizing principle
Here a word of caution is in order regarding the true notion of competition in this context. I already pointed out that it is not a question of any form of unrestrained competition, but the whole notion of competition as such might be a bit misleading due to its everyday meaning of a duel limited in time where one opponent emerges as the winner and another is conquered. We might therefore have to treat the concept competition in a more metaphoric sense.
We have in mind an open-ended competition without no definite victors or point of victory; the participants are many (an unlimited number); and there is never a winner, rather possibly leaders, i.e. frontrunners, leaders in their given fields of activity. Certainly, there are elements of concentrated competition, but most of all it is just a question of the flux of life.
It is basically a system where everything is dependent on everything; anything may or may not affect anything else and everything, where infinite variances (nuances) affect a manifold of phenomena with endless feedback loops. It is a system (even the concept ‘system’ is here used metaphorically) — a set of an infinite number of systems — which nobody can direct at his will, and where nothing follows necessarily from anything particular.
This social phenomenon, which I call competition, may thus be seen as an organizing principle and the best notion available in our language to explain the complex interactions of the competitive market economy: the interaction of expressions and interpretation in a continuous flow of arguments.
The whole point is that in the economy — as in life at large — what goes on, being a function of human behavior in infinite variances, does not follow any kind of ‘natural laws’ — the less any ‘social law’ — or captured forms of logic, nor are there causes and effects following a set pattern. All in social life is merely governed by the constant interplay between expressions and interpretations in the competitive system, as in a dance of infinite variances. Some phenomena seem to us by force of habit more regular than other phenomena, which illusion from time to time leads scholars to postulate the existence of some immutable laws.
Alas, Competition must be limited for concern of the finite global resources and protection of the environment
Today the realization of how finite our global resources are and how vulnerable the ecology is leads us inevitably to realize that economic competition must be limited for the sake of the very survival of the human race and the whole planet. This poses the greatest challenge that there can possibly be, because competition is the lifeblood of the economy and all human activity, as well as all organic activity. The human race must therefore be able to conceive of a system that at the same time limits competition in concern of the finite resources and the ecology — and for lasting peace — while it at the same time enables competition on a lower level of the system. Competition is a natural and indelible part of human nature and social practices, including the social practices of economy. An economy cannot properly function without competition and if competition is not officially allowed in sufficient degrees, it will go underground causing further distortions of the economy. Humans can never get rid of competition. That is the big challenge.
Considering the premises of the economic theory provided in this essay, it is predicted that the neoliberal capitalist systems will go the way of the socialist planned economies. It is easy to witness that this process is already rapidly underway. In the neoliberal capitalist states, the regimes will attempt to prop up the distortions in the economies by moving further away from democratic governance and resorting to increasingly totalitarian means to keep their failing economic model afloat. In a global context, this implies a greater risk of war, which the Western powers may perceive as their only chance to uphold their hegemony providing their uncompetitive economic systems.
I conclude with admonishing the leaders of all countries to recognize the defects of the leading Western neoliberal capitalistic theory; abandon it and instead develop a democratic competitive market economy in their own sovereign countries.
Finally, I want to point out that the economic paradigm that has been developed in this essay makes frequent and crucial references to democratic control. Therefore, the theory is necessarily not complete without discussing the essence of democratic control and democracy itself. It is my intention to follow up with an essay summarizing my views on that, in the meanwhile I refer to what I have earlier written about it in my book All is Art, On Democratic Competition, referenced below.
I have in this essay deliberately omitted any references to other authors and footnotes in order to keep the text concise and rolling. The ideas presented here, however, have been originally developed in my books and other writings, of which I below present a topical list with links to the source text.
Expressions and Interpretations
- A philosophical book outlining the theory of social practices and competition, economy and law
- Explains the interplay between expressions and interpretations, perceptions and infinite variances
- A theory of justice
- On social practices and interpretation of feelings
- On democratic competition
- A linguistic philosophy as the basis of expressions and interpretations and social practices
How the Dollar and Euro monopolies destroyed the real market economy. And what Hayek told about the need for competing currencies