Debunking 3 Liberal Myths On Developmental Economics
This article follows where I left off in my last post, Debunking Adam Smith’s Fanfiction, in which I point out flaws in the commodity theory of money, mainly its foundation in the myth of the barter economy. In this article, I will address three different myths perpetuated by Liberal/Free-Market economists. First, I will prove that a market economy is not necessarily synonymous with a Capitalist economy. Second, I will debunk that markets are spontaneous and organic growth. Third, I will challenge the claim that free Trade is a net positive for developing countries.
A trick utilized most notoriously by Libertarians, especially those of the Foundation for Economic Freedom, or FEE, is to equate any voluntary or market interaction to Capitalism. This is applied ad nauseam to the point that clear-cut examples of decentralized forms of Communism are attributed to Capitalism because they believe Capitalism is just voluntary interaction and Socialism is the opposite. I will cover this topic and the problem with Libertarian think tanks in more detail in a future article. For now, I will demonstrate that Capitalism is not synonymous with voluntary or market actions. The argument given by most Liberals is that since Capitalism is marked by market trade and Communism is marked by a planned economy, markets must equal Capitalism. However, markets existed way before the Capitalist mode of production. While it’s simple and easy to say, “Market…therefore Capitalism,” the problem is that this tells us nothing about historical development. According to a Liberal economist, we have always been in this state of Capitalism, and deviations didn’t exist until much later. They’ll also do a weird weasel tactic where the elements of society that aren’t Capitalist, like feudal relations, are there and only hinder Capitalism at that moment. So, to a Liberal, Capitalism is good and exists wherever good things are, and wherever bad things are, it’s not. I will concede that Feudalism is not Capitalism, but then if you agree with me on this, you can not claim that any development in this period is a result of Capitalism; it must be a result of the existing mode of production Feudalism as it passes through history. I would argue that to understand the problems of modern Capitalism, we must realize Capitalism in terms of the different elements that make it. So, these elements are Commodity production, wage labor, and surplus value. If these are all taken as existing features, then you can not claim that anything prior to the development of these features is Capitalism.
What’s more is that if your claim is that the market is Capitalism, then you must concede any civilization that didn’t rely solely on markets to be a development in Socialism, not Capitalism, e.g., tribal gift economies. Often, Libertarians will say that free Trade and voluntary exchange are Capitalism even if there isn’t a market, so that’s why in myth 2, I will address the idea that Markets are non-coercive occurrences that arise naturally. However, to address the features of Capitalism, it’s important to note that commodity production is the driving force of Capitalism itself. The commodity, made only to be sold, makes up the entirety of a Capitalist economy. What’s more is that with the abolition of production for use and the transfer of the means of production to absentee owners instead of owner-operators, we end up in a situation where the only thing the working class can do is sell their Wage Labor as a commodity. The result of this is that the capitalist class profits off of the surplus value of the worker, which means that what the worker produces, the Capitalist keeps and then sells back to the worker while buying more wage labor with the worker’s production. I think it’s pretty evident that these elements all make up modern Capitalism and that a civilization where these features are not present does not resemble Capitalism as we feel today. That means that if Markets existed before these relations, then markets existed before Capitalism, and thus Markets are not synonymous with Capitalism. Lastly, before we move on, I’d like to note that the Markets that existed in the past did not resemble modern Markets in the way that Liberals tend to present them. A lot of Trade used to take the form of credit clearing, not sale for profit. In addition, historically, until the Capitalist Mode of Production, most of what was produced was produced by a person who would go on to be its user and the person selling was virtually always the person who made it. That’s to say that one person produced the item, sold it, and profited from it. In the modern world, the people who make, sell, and profit are all three different people.
Before we move on, to clarify, when I say non-coercive, I am not using the Libertarian definition that equates coercion to an explicitly lousy thing. I refer to powerful institutions’ tendency to establish or shape something when I say coercive or non-coercive. More so, I am referring to the natural inclination of something to arise. As it so happens, Markets do not occur naturally. Trade relations between people in one civilization until a certain point were on an as-needed basis. In primitive Communism or tribal society, people would treat resources as communal. The only time that Trade with currency of any kind was made was with low-trust individuals, who were people other than themselves. If you needed something from another tribe, you’d likely have a medium of exchange, but internal Trade as we do now didn’t occur. This is because you can’t anticipate someone you don’t keep close tabs on repaying your favors, hence why they moved to ledger-clearing accounting systems and then realized they could trade favors around with each other. In other words, first, the state existed, then money, and then markets to facilitate Trade between groups. This marks the move out of Primitive Communism into the Ancient Mode of Production. Only then can Trade between members of a single group occur.
As I’ve shown, the state, money, and the market are directly intertwined in how they come into existence. Libertarians will often attempt to distinguish between Capitalism and a form of state-involved Capitalism, which they call crony capitalism. The argument is that the state’s interference in the economy leads to crony capitalism, and much, if not all, the market issues and Capitalism directly result from this Cronyism. The problem is that even if we ignore the development of the market through the state, there is still no reason for the Capitalist class to want a utopian free market, like the one promoted by the Austrian School, to exist. If the state’s involvement in the economy promotes a degraded form of Capitalism by getting favors from the state, why would any capitalist not want this to continue? It would be foolish to throw off the benefits the state lends them, such as subsidies, tax breaks, and outright monopolies like intellectual property. Therefore, to gain the state’s good graces, the capitalists must also be helpful to the state. But, simultaneously, for the capitalists to want to do that, they must also find a use for state favors. So, the two are intertwined in their Cronyism. My analysis differs from a capitalist’s in that I would argue that the market economy is not an inherent virtue that needs to be protected from the state. I would say it is a means of maintaining inequality from which the rich and the government benefit equally. Moving forward, we will tackle the implications arising from this, particularly the idea that the market develops infrastructure in a developing country.
To summarize my point, my argument is that the heavy state direction necessary to build a nation from scratch is more akin to Socialism than it is to Capitalism. In the future, I will also argue why we don’t live under Capitalism anymore, but that’s for another time. We will also dive into the developmental economics of Friedrich List for a bit because it’s the model followed by Post-Dengist China, even if not explicitly. But to do so, I need to define Capitalism and Socialism quickly. Capitalism is a society driven by profit, and I want to clarify nothing I say right now is a value judgment. These are my working definitions. So, Capitalism, driven by profit, necessitates commodity production, wage labor, and the appropriation of surplus value. Profit is taken from surplus value when commodities are produced when a worker sells his wage labor for money. Socialism, on the other hand, is a society in which the profit motive is deferred and replaced with a social end. Now, the reason I say it is not a value judgment when I say this is because there’s nothing that inherently says you must support a social end over the accumulation of profit. I could argue for it, but by presenting the definitions, I mean to give a pretty level, although inherently Marxist, analysis of Capitalism. From whatever perspective you come from, it’s difficult to argue that profit is not the driving force behind Capitalism. However, you might disagree with me boiling it down to commodity production, wage labor, and surplus value. But let’s continue. Capitalism in and of itself, I would argue, is a tendency towards an inevitable end more so than an objective ideology. As a mode of production, its primary drive is to expand and centralize profits.
Meanwhile, Socialism’s predominant drive is, in a sense, ideological. It’s determined to create a society where state, class, and money can be eliminated. The end is Social, not based on the individual.
I’ve grown a soft spot for Friedrich List; he was an economist known for developing the National System of Political Economy in his book of the same name. He advocated protectionism early in the Protectionism versus Free Trade debate. He essentially took a lot of Hamiltonian/Federalist thought and created what he called the National System, which was later realized through the American System developed by Henry Clay. The National System is best realized as a form of developmental economics. Free Trade does not benefit a nation early on because it allows too many people to dip their hands into your economy. This is why the US so thoroughly supports free Trade; we can get your goods for your prices while importing ours at our prices. With manufacturing, it’s not the end of the world; in fact, many economists would agree that overall free Trade benefits the economic circumstances of a developing nation. I would disagree, but we’ll get to that later. Where it becomes a massive issue is with natural resources. We see examples where oil or other resource supplies are discovered in a developing nation, and as a result, we, the United States, decide to grab a handful. What has the potential to be a public good used to benefit a nation’s populace ends up being exported to the US and then sold back to them at a markup. The raw material leaves and benefits a select few and then is sold back to benefit the US as a usable product, essentially circumventing their economy altogether. It is a siphon that brings money to us. I have a few questions for Liberals on this topic. First, if free Trade provides cheaper access to goods, how can a country develop its industry without protectionism? In other words, if it benefits you financially immediately by allowing you to buy things for cheap, according to free trade principles, then what incentive does free Trade give a nation to develop its industry and infrastructure?
Second, name an influential nation in the modern world that developed from free Trade. I want to caveat this: noticeable improvement does not count as a mighty nation; I am talking about power, not relative standard of living. Lastly, what are some benefits to being import-reliant as a nation? Are there any, or will you concede this point to me? Before we move on, I’d like to note my stance on why free Trade does not benefit a nation in manufacturing. Whenever you import goods or allow overseas businesses into your country, you are importing your competitors. As a result, you help another nation’s economy by funneling money out of your own elsewhere. Moreover, the fact that goods become cheaper in your country does not circumvent the fact that you are forcing reliance on foreign industry. A developing country will never do better than a superpower, so importing someone else’s goods prevents your own population from developing its own industry.
In particular, when dealing with superpowers, it’s important to note that the existing superpowers, America, China, Russia, the EU, and maybe India, don’t have a history of Free Trade. Russia wasn’t even industrialized until the Bolsheviks took over, and it had a minimal period as a market-oriented economy. However, whether you look at the Soviet Union, Post-Maoist China, or America, one thing is sure: free Trade is not a feature. After the Bolshevik revolution, the first economic model utilized by Russia was the NEP or New Economic Policy. This developmental model allowed for limited privatization in Russia, with tight oversight of extensive industry and state control over foreign Trade. In other words, while Capitalist policy was implemented in The Soviet Union and foreign interests were allowed to invest in the country, Russia didn’t become Capitalist like America did. For one thing, the Soviet NEP only lasted from 1921 to 1928, which means that Capital couldn’t accumulate as generational wealth does somewhere like America.
What’s more, this was intentionally short; the goal was protectionist Capitalism to make it to Socialism. In America, the goal was protectionist Capitalism to turn it into free trade capitalism. An instance where we have a mix between the two was the Dengist Reforms of China under Deng Xiaoping. Deng essentially opened China to foreign Trade and markets in a way inspired by the NEP that maintained Socialism. In short, while private ownership exists, especially at the lowest level of commerce, all property is still owned by the state. The supposed owners of said enterprises are viewed more as managers of the enterprise than owners because they don’t own raw materials or land. What we saw with both was a turn toward the market that resulted in a higher standard of living for Communist countries, but a few things stayed constant. First, Socialism is the intended mode of production; second, production remained in the respective region for Russia because the time of the NEP was so short and for China because the state still owns materials and land. Third, these policies were tools of development, not ideology itself. In America, on the other hand, we view Capitalism as an end in itself.
In America, the idea of a fervent pro-capitalism did not arise until the Cold War started. We had a massive labor movement with a Communist Party that had a membership of 1,000,000 people at one point. The Cold War and McCarthyism ended that entirely. Early on, American protectionism took the form of high tariffs, selective subsidies, and an emphasis on export over import. This is particularly important in the “Infant Industry” or newly developing industry, especially in a developing country or emerging market. It has been noted by economists such as Ha-Joon Chang, a South Korean Developmental Economist, that many of the policies that a nation like America would decry as anti-free Trade are the same policies that were put in place during our early development. He considers it a ladder-kicking tactic in which we cement our place and prevent others from doing so. The opening of Trade can only benefit a nation if there is already robust infrastructure and industry to welcome the world to participate. Free Trade does not benefit emerging economies; it only benefits established ones. But it would help if you first took a hit by implementing protectionism to benefit from the world economy.
I would argue that this deferral of profit in favor of the common good, paired with the historic development of Russia and China as users of this model, is enough to claim that protectionism is a form of Socialism. The difference is that it does not necessarily result in a Socialist end, that being Communism, especially if the form of common good promoted is the ability to chase profit, not developing a variation of collective ownership or public resources. Marx acknowledged that multiple forms of Socialism exist but claimed that only Scientific Socialism is an adequate solution. Protectionism is a form of Socialism. So, we might say that America was a development of Socialism, not Capitalism.
It’s highly controversial to say that Capitalism harms or even slightly limits development, even for a Socialist. But, we can see some tendencies towards this reality that are hard to ignore. First of all, technological developments are always a result of state research or funding. This is simply because much of the research into things like the development of iPhones, for example, is not profitable and must be done at a loss. That is why the private sector can not do something like develop cellular technology. Often, the state finds that utility trumps taking a monetary loss. After this research is designed, you can utilize it in the private sector.
What’s more, if we allow private industry to control raw materials, we are forced to siphon our resources into the hands of the capitalist class when they could be used to achieve a social end, such as establishing a sovereign wealth fund. What’s more, the competitive nature of Capitalism makes the market prone to crises; this is even acknowledged by mainstream economists, who call it business cycles. Lastly, if you want something empirical, China is already outpacing us in terms of GDP growth rate and average annual wage growth rate.
In conclusion, the state plays a primary role in economic development, while the market plays a secondary role.
