Left-Libertarian Economics’ Critique of Capitalism: Part Three

In my last look at left-libertarian economics, I argued that Kevin Carson’s resurrection of the Labor Theory of Value adds no new information to standard, neoclassical price theory. Carson wishes to disapprove morally of profits but does not show that capitalists add nothing to the value of production. In particular, Carson acknowledges that capitalists contribute “time preference,” providing saved or borrowed funds to production in exchange for higher consumption at a later date. Carson relabels this investment as a kind of labor.

In this installment in the series, I examine Carson’s argument in Studies in Mutualist Political Economy that “really existing capitalism” depends crucially on exploitation and coercion, and that if coercion were to abolished and markets truly freed, “capitalism” would disappear. Carson’s argument that free markets abolish economic profit is not altogether without support in standard economic theory. In introductory microeconomics classes, the model of “perfect competition” is taught. Under perfect competition, firms in each industry sell an identical product, and entry is costless. Therefore, if firms charge more than the cost of production, including the interest rate on investment, new entrants would undercut their price. The equilibrium price therefore yields zero “economic profit.” “Accounting profit” will be all that remains, representing the natural interest rate on investment, which in turn is determined by the opportunity costs of investment (forgone consumption).

Carson does seem to be relying on the perfect competition model to make the case that economic profit will not exist in a free market (116-7). But of course, really existing markets do not conform to the perfect competition model. Why not? Standard microeconomic theory points to product differentiation, imperfect information, and costs of entry as frictions that generate market power and, accordingly, economic profit. For Carson, however, the explanation of economic profit lies in coercion, the exploitation of workers and enrichment of capitalists by the state:

Without state intervention in the marketplace, the natural wage of labor would be its product. It is statism that is at the root of all the exploitative features of capitalism. Capitalism, indeed, only exists to the extent that the principles of free exchange are violated. “Free market capitalism” is an oxymoron. (129)

How plausible is this claim?

According to Carson, defenses of capitalism depend on a “myth of primitive accumulation,” whereby capital is claimed to have been originally acquired simply through frugality, prudence, and production, rather than coercion. Carson is correct to point to the enclosures, monopoly grants, and state subsidies as conditioning the “initial” distribution of capital in early-capitalist societies such as 18th-century Britain. And I sympathize with moral critiques of these processes.

But the question is whether a morally illegitimate distribution of property necessarily affects the rate of profit. After all, Carson is claiming that profits are inefficiently high under “laissez-faire” capitalism because of state-enforced privilege. But the mere fact that individuals a, b, and c control the means of production rather than morally legitimate owners x, y, and z should not have anything to do with the rate of profit. Economic logic takes no account of the identities of the individuals involved in markets; what matters is the structure of those markets. So Carson needs to claim that coercive primitive accumulation irremediably altered the structure of markets, perhaps in a monopolistic direction. Under some circumstances (e.g., Latin American latifundias), such a claim rings true. But under others (e.g., 19th century American and Canadian economies based on small family farms), it is most definitely false. Even in 19th-century Britain, where the vast majority of value added came from manufacturing and services rather than from land, it is hard to see how land concentration could be held accountable for the existence of profits. Again, we can decry the injustice of ancient expropriations and their long-term consequences for particular individuals without trying to force a narrative in which these expropriations create structural inefficiencies in contemporary markets.

Let us return to the question of economic profit. Is economic profit really inefficient? In Capitalism, Socialism, and Democracy, Joseph Schumpeter brilliantly illustrated the role of “temporary monopoly” in fostering innovation and “creative destruction.” An innovative entrepreneur receives a supra-normal, monopolistic return during the period when she is the only provider of the good or service. As others copy the idea, profits fall back to normal. Carson dismisses this theory in a brief comment about how entrepreneurial profits should “cancel out.” But that does not make sense. Loss-making enterprises go under quickly. Top entrepreneurs stay in business and often innovate again. The distribution of profits among firms in the economy should not look like a normal curve; it will have a long right tail. So the ultimate economic justification of capitalism as a system that makes economic profit possible is that it rewards innovation and entrepreneurship. The capitalist provides value by coming up with ideas for goods and services that the consumer wants, even if the consumer doesn’t know it yet.

I also quibble with Carson’s account of mercantilism and early capitalism. In Carson’s telling, Britain industrialized only because it was able to force colonies to accept its goods. Mercantilism impoverished the colonies and enriched the metropole. This account misunderstands the economics of mercantilism. While mercantilism enriched particular import-competing firms and the state itself, it impoverished the practitioner just as much as the target. It is wildly implausible to claim, as Carson does, citing Chomsky, that the British textile industry owed its existence to controls on Indian textile manufacturing. India represented a tiny proportion of the British export market. Most British textiles were destined for Europe or North America.

Carson’s overplaying of his hand is the more unfortunate because there are instances in which mutualism provides a reasonable alternative to traditional, for-profit capitalism. David Beito’s work on how mutual-aid societies provided unemployment and health insurance before being broken by the New Deal and state regulations comes to mind. There’s no doubt that government has cartelized certain industries to the benefit of large incumbents: banking, finance, insurance, education, transportation, and telecommunications, to name a few. Those represent a large chunk of the economy!

Carson wants to side with the 19th century socialists and anarchists who viewed factory labor as “hell on earth” and early capitalism as an unambiguous negative for economic efficiency and distributive justice. The trouble with this account is that it relies on anecdote to the exclusion of hard data. The hard data show that wages in major industrial countries rose throughout the Second Industrial Revolution. Whether standards of living rose or not is a trickier question; health outcomes rose much more slowly than wages and may even have declined at periods throughout the 19th century – but this is consistent with workers’ trading off nutrition for durable goods by moving to the cities.

The “home-brew industrial revolution” that Carson advocates is possible in certain sectors today only because of the mass-production industrial revolution that came before – and the mass-production industrial revolution required entrepreneurial capitalism and, yes, big business. Look at the great differences in GDP and living standards today between the West and the rest – surely the kind of capitalism we have had has done something right – something very important! It’s wishful thinking that a “truly free market” would have only “mom-‘n’-pop” businesses. Carson has to gin up scraps of anecdotes into a grand narrative to create the impression that we in the West have always lived under more or less constant mercantilist exploitation.

3 thoughts on “Left-Libertarian Economics’ Critique of Capitalism: Part Three

  1. Jason: Actually, in MPE I fully acknowledge entrepreneurial profit as a frictional deviation from perfect competition. I don’t argue that competition would be perfect in a free market, but rather that the *tendency* of profit would always be toward zero when there were no entry barriers to competition. And if I’ve said that entrepreneurial profit will “cancel out,” I simply meant that it would fall to zero over time as new competitors entered the market. I fully acknowledge the value of entrepreneurial profit as an incentive — so long as entry barriers don’t enable entrepreneurs to become rentiers living off one-hit wonders.

    I don’t see the shift toward networked local manufacturing economies as something that piggybacked on the necessary groundwork of mass production, so much as I see mass production as an unnatural deviation from other possible models of integrating electrical power into manufacturing. As Piore and Sabel put it, the Emilia-Romagna model is a rediscovery — after a long interlude — of how to integrate electrical power into industry.

    Thanks again for taking the effort to review my book.

  2. Kevin – Thanks for stopping by and leaving your thoughts. I will try to bundle them together and blog a response soon. Thanks again!

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