by Gary Griffin
If the endeavor of all human beings is the economic well-being and self-betterment of each, then why do some have so much more? It didn’t take long for the self-awakened eyes of liberty and equality of all men to see a strange inconsistency of economic inequality among men. With this, questions arose as to why. Why are some individuals poor and some rich? The economic distribution of wealth that should’ve benefited all of society only seemed to benefit a few. With such questions, other economists such as Karl Marx tried to explain this economic inequality.
Marx uses his labor theory of value to derive his theory of exploitation under capitalism. Unlike Ricardo, Marx distinguishes between labor power and labor.102Labor power is the potential or ability of workers to work, given their muscles, brains, skills, and capacities. It is the promise of creating value possessed by human labor that has not yet been expended. Labor is the actual activity of producing value. The profit or surplus-value arises when workers do more labor than is necessary to pay the cost of hiring their labor-power. To explain the normality of exploitation, Marx describes capitalism as having an institutional framework in which a small minority (the capitalists) monopolizes the means of production. The workers cannot survive except by working for capitalists, and the state preserves this inequality of power. In a normal role, force is a structural part of the usual workings of the system. The reserve army of unemployed workers continually threatens employed workers, pushing them to work hard to produce for the capitalists.
Marx’s historical analysis of capitalism as a system of production was scathing. From this perspective, the only people who could better themselves were the capitalists because they controlled all the money. To say that Marx was not a fan of capitalists is putting it mildly, and his strong opinions become obvious in Capital: A Critique of Political Economy where he describes them as “Mr. Moneybags.” Marx’s analysis suggested that all men did not have an equal opportunity to pursue means of self-betterment and improvement. He further maintained that the capitalist’s ability to maintain that power position over the workers was enforced and reinforced by the political structures that were controlled by moneyed and propertied interest that maintained power by controlling government. He concluded that capitalism didn’t work as an economic system and that a form of government that supported that type economic system was very one sided, and therefore, it didn’t work either. His was an outright rejection of both economic liberalism and laissez faire capitalism. “For Marx recognized that the economic difficulties of the system were not insuperable. The Marxist prediction of decay was found on a conception of capitalism in which it was politically impossible for a government to set the system’s wrongs aright; ideologically, even emotionally, impossible. The cure for capitalism’s failings would require that a government would have to rise above the interests of one class alone.”103 His vision of an economic system that worked for the benefit of everyone in society was socialism.104
In economics, laissez-faire means allowing industry to be free of state intervention, especially restrictions in the form of tariffs and government monopolies. Initially, the economic liberalism had to contend with the supporters of feudal privileges for the wealthy, aristocratic traditions and the rights of kings to run national economies in their own personal interests. Economic liberalism is the economic component of classical liberalism.105 It is an economic philosophy that supports and promotes laissez-faire capitalism by opposing government intervention in the free market, and supporting the maximum of free trade and competition. By the end of the nineteenth century and the beginning of the twentieth, these were largely defeated.
“Certainly the signs of prosperity were visible at every hand. America in the late 1920s had found jobs for 45 million of its citizens to whom it paid some $77 billion in wages, rents, profits, and interest—a flood of income comparable to nothing the world had ever seen.” When Herbert Hoover said with earnest simplicity, “We shall soon with the help of God be within sight of the day when poverty will be banished from the nation.”106 It, poverty, was not. It, poverty, still is not.
This idea of noninterference in the market place by government persisted into the earlier part of the twentieth century. In 1929 with the stock market crash and the ensuing Great Depression this idea died. Enter John Maynard Keynes.107 Dr. Keynes was considered the father of macroeconomics;108 until that time the discipline was concerned with microeconomics.109 The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936. Keynesian economics advocates a mixed economy—predominantly private sector but with a large role of government and public sector—and served as the economic model during the latter part of the Great Depression, World War II, and the postwar economic expansion (1945–1973). Realize that the era in which Dr. Keynes wrote his magnum opus on employment was during the heart of the Great Depression in which millions of people were out of work and a great deal of suffering was occurring across the nation. With so much suffering and people out of work, how could we eliminate poverty from planet Earth?
Franklin Delano Roosevelt and his social policies were heavily influenced by these same economic theories. It was a push to put people back to work and the nation on the road to prosperity once again. However, the interference of government into the lives of people and commerce represented a marked departure in the political philosophy of the role of government based on classical liberalism ideology. The interference of government during this time resulted in the adoption of many different social programs through social policies put into place by legislating it into law by the U.S. government of the time. Philosophically, this move by government resembled a move toward socialism and communism.110 President Roosevelt didn’t want to be accused of being a socialist, so he adopted the term liberalism. Confusion has ensued over the terms liberalism and socialism ever since.
Just like political debates, economic debates have ensued over the causes of the Great Depression. These didn’t end with Dr. Keynes and the Keynesian economics school of thought. The Austrian school of economics, and specifically Joseph Schumpeter, also had much to say about the causes of the Great Depression and the role of government in that time period.111 Austrian economics was ill-thought of by most economists after World War II because it rejected mathematical and statistical methods. However, the Austrian school is credited with predicting the Great Depression. Frederick A. Hayek made his prediction of a coming business crisis in February 1929.112 He warned that a financial crisis was an unavoidable consequence of reckless monetary expansion.
The Austrian school and Austrian economists have made significant contributions to mainstream economic thought. For example, they were very influential in the development of the neoclassical theory of value, including the subjective theory of value on which it is based, as well as contributions to the economic calculation debate, which concerns the allocation properties of a centrally planned economy versus a decentralized free market economy. The subjective theory of value, which says that value of a good is not determined by how much labor, was put into it but by its usefulness in satisfying a want and its scarcity. None, however, have been more influential that Joseph Schumpeter.
Joseph Alois Schumpeter was born in Austria in 1883, the same year John Maynard Keynes was born. While both men shared many social views, they came to very different views as to the future of capitalism.113 Dr. Schumpeter was less optimistic about the future of capitalism and its survival. Schumpeter’s view of capitalism was one “whose flow of production is perfectly static and changeless, reproducing itself in a “circular flow” that never alters or expands its creation of wealth.” The system is stationary and because it lacks momentum, inertia sets in. Most importantly, “in this changeless flow competition will have removed all earnings that exceed the value of anyone’s contribution to output.” Here, workers and landowners get rents or whatever value their resources contribute to the circular flow. The capitalist get nothing, except his
wages as management. “That is because any contribution to the value of output that was derived from capital goods they owned would be entirely absorbed by the value of the labor that went into the making of those goods plus the value of the resources they contained.” This thought process led Dr. Schumpeter to the question vexing many other economists before him. Where do profits come from? “Profits, he said, did not arise from the exploitation of labor or from the earnings of capital. They were the result or quite another process. Profits appeared in a static economy when the circular flow failed to follow its routinized course.” The disruptions he was referring to is the result of technological or organizational innovations into the circular flow. “As a result of these innovations a flow of income arises that cannot be traced either to the contribution of labor or of resource owners.” An innovation implies an innovator. He called these individuals entrepreneurs and maintained that their innovations were the source of profit in the capitalist system. These entrepreneurs are responsible for profit because they combine the factors of production in new ways, resulting in economic growth.114
Such ideas have been integral in forming and shaping the modern economic system that is a part of twenty-first century American society. Just like the men who espoused these ideas, this system is not without flaws. Ideas come and ideas go; perhaps, it’s time for new ideas.
THE CONNECTION OF POLITICS TO ECONOMICS
Politics and economics are inextricably linked. The economic system in America supports the political system and vice versa. To change this link would require a major readjustment and realignment of existing social structures that are currently girded by entrenched political and economic interests. When the framers of Americas system of government created the Constitution, they put safeguards into place to control the interplay of the two interests. That line of demarcation has steadily been redrawn and/or ignored by both political parties within the United States. It is absolutely absurd to think that any company would contribute thousands, even millions of dollars, to a politician and his/ her campaign without the expectation of a return on investment in the form of a political favor, new legislation that establishes social policies in their favor, etc. “When both economic and political institutions were small and scattered—as in the simpler models of classical economics and Jeffersonian democracy—no man had it in his power to bestow or to receive great favors. But when political institutions and economic opportunities are at once concentrated and linked, then public office can be used for private gain.”115 Self-interest takes hold and greed ensues; it’s a formula that, put simply, is a part of the age old effort to get rich and then to become richer. When such interests interact, it’s easy to see how corruption becomes a normal part of day-to-day operations in both the political and economic worlds of the twenty-first century.
Although the period before the New Deal was notable for the limited extent of the federal government, the Austrian school suggests that there was a considerable degree of government intervention in the economy—particularly after the 1860s. Notable examples of government intervention in the period before the Civil War include the establishment of the First Bank of the United States and Second Bank of the United States as well as various protectionist measures (e.g., the tariff of 1828). Several of these proposals met with serious opposition and required a great deal of horse trading to be enacted into law. For instance, the First National Bank would not have reached the desk of President George Washington in the absence of an agreement that was reached between Alexander Hamilton and several southern members of Congress to locate the capital in the District of Columbia. In contrast to Hamilton and the Federalists, was the opposing political party the Democratic-Republicans.
Most of the early opponents of laissez-faire capitalism in the United States subscribed to the American school (economics). This school of thought was inspired by the ideas of Alexander Hamilton, who proposed the creation of a government sponsored bank and increased tariffs to favor northern industrial interests. Following Hamilton’s death, the more abiding protectionist influence in the antebellum period came from Henry Clay and his American System.
In the mid-nineteenth century, the United States followed the Whig tradition of economic liberalism, which included increased state control, regulation, and macroeconomic development of infrastructure. Public works such as the provision and regulation transportation such as railroads took effect. The Pacific Railway Acts provided the development of the first transcontinental railroad. In order to help pay for its war effort in the American Civil War, the United States government imposed its first personal income tax, on August 5, 1861, as part of the Revenue Act of 1861 (3 percent of all incomes over US $800; rescinded in 1872).
Following the Civil War, the movement toward a mixed economy accelerated with even more protectionism and government regulation. In the 1880s and 1890s, significant tariff increases were enacted.116 Moreover, with the enactment of the Interstate Commerce Act of 1887, the Sherman Antitrust Act, the federal government began to assume an increasing role in regulating and directing the country’s economy. The Progressive Era saw the enactment of even more controls on the economy, as evidenced by the Wilson Administration’s new freedom program. Following World War I and the Great Depression, Keynesian policies turned the state into a mixed economy.
Government interference in the economy and the economic lives of individuals with the United States has been a constant. It’s not a recent phenomenon. Unfortunately, such interference in today’s fast-paced world has served to tie the hands of the people who need to move with deliberate actions—the American middle class. We cannot, however, underestimate the role of special interests in this process. So long as these interests do not interfere with or constrain the rest of America, it’s generally ignored. I would even suggest that most Americans do not even recognize that such actions by lawmakers even occur. It’s when these interests no longer represent the middle class that such shenanigans become painfully clear to the rest of America. These times and years of the first decade of the twenty-first century serve as a prime example of how Washington and elected officials have effectively tied the hands of the nation by such actions.
As alluded to previously, middle class America is the backbone of the country; it’s where all the work is done. This class of people includes the truck driver, the medical doctor, the restaurant owner, the college professor, and the countless others who work every day to make this country run. These are the workers who build America on a daily basis through the sweat and toil of labor. Without their work, nothing is produced. It is through these means that productivity of the population leads to prosperity for our nation. Liberty is the pathway that leads us toward that prosperity, because it serves as a guarantee to the freedom of choice that is the basis of action. Nowhere is this better stated than by Thomas Jefferson in the Declaration of Independence in the inalienable rights of life, liberty and the pursuit of happiness.
When social policies constrain freedom of choice by limiting liberty and rights guaranteed by the Constitution in order to protect moneyed interests and special interests, then the entire system breaks down; it is effectively rotten to the core and in a state of decay. Structurally speaking, these policies don’t promote productivity and growth, which are vital to a thriving economy and prosperity; they, in fact, constrain them by promoting special interests that are not in the best interests of the masses of the population.
When such events occur through the actions of government, it has the same effect of violating the social contract—the U.S. Constitution. It, in essence, renders the contract null and void. This contract—the U.S. Constitution—is the means by which the two pillars of American society, our political and economic systems, are established and function to meet the needs of the population. Without these, society then begins to break down, lawlessness occurs, economic activity stagnates, and the government moves to maintain social control. We are currently operating without a social contract in the twenty-first cent
ury.