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The Cult of the Free Market

(Dedicated to the Fraser Institute and their free market mentality)

 

BY: Yuval Noah Harari†† A Short History of the Modern World†† Homo Sapiens2014

Capital and politics influence each other to such an extent that their relations are hotly debated by economists, politicians and the general public alike. Ardent capitalists tend to argue that capital should be free to influence politics, but politics should not be allowed to influence capital. They argue that when governments interfere in the markets, political interests cause them to to make unwise investments that result in slower growth. For example, a government may impose heavy taxation on industrialists and use the money to give lavish unemployment benefits, which are popular with voters. In the view of many business people, it would be far better if the government left the money with them. They would use it, they claim, to open new factories and hire the unemployed.

†††† In this view, the wisest economic policy is to keep politics out of the economy, reduce taxation and government regulation to a minimum, and allow market forces free rein to take their course. Private investors, unencumbered by political considerations, will invest their money where they can get the most profit, so the way to ensure the most economic growth-which will benefit everyone, industrialists and workers - is for government to do as little as possible. This free-market doctrine is today the most common and influential variant of the capitalistic creed. The most enthusiastic advocates of the free market criticize military adventures abroad as much zeal as welfare programs at home. They offer governments the same advice that Zen masters offer initiates: just do nothing.

†††† But in its extreme form, belief in the free market is as naÔve as belief in Santa Claus. There simply is no such thing as a market free of all political bias. The most important economic resource is trust in the future, and this resource is constantly threatened by thieves and charlatans. Markets by themselves offer no protection against fraud, theft and violence. It is the job of political systems to ensure trust by legislating sanctions against cheats and to establish and support police forces, courts and jails which will enforce the law. When kings fail to do their jobs and regulate the markets properly, it leads to loss of trust, dwindling credit and economic depression. That was the lesson taught by the Mississippi Bubble of 1719, and anyone who forgot it was reminded by the US housing bubble of 2007, and the ensuing cerdit crunch and recession.

 

THE CAPITALISTIC HELL

There is even more fundamental reason why it's dangerous to give markets a comletely free rein. Adam Smith taught that the shoemaker would use his surplus to employ more assistants. This implies that egoistic greed is beneficial to all, since profits are utilised to expand production and hire more employees.

†††† Yet what happens if the greedy shoemaker increases his profits by paying employees less and increasing their work hours? The standard answer is that the free market would protect the employees. If our shoemaker pays too little and demands too much, the best employees would naturally abandon him and go to work for his competitiors. The tyrant shoemaker would find himself left with the worst labourers, or with no labourers at all. He would have to mend his ways or go out of business. His own greed would compel him to treat his employees well.

†††† This sounds bulletproof in theory, but in practice the bullets get through all too easily. In a completely free market, unsupervised by kings and priests, avaricious capitalists can establish monopolies or collude against their workforces. If there is a single corporation controlling all shoe factories in a country, or if all factory owners conspire to reduce wages simultaneously, then the labourers are no longer to protect themselves by switching jobs.

†††† Even worse, greedy bosses might curtail the workers' freedom of movement through debt peonage or slavery. At the end of the Middle Ages, slavery was almost unknown in Christian Europe. During the early modern period, the rise of European capitalism went hand in hand with the rise of the Atlantic slave trade. Unrestrained market forces, rather than tyrannical kings or racist ideologues, were responsible for this calamity.

†††† When the Europeans conquered America, they opened gold and silver mines and established sugar, tobacco and cotton plantations. These mines and plantations became the mainstay of American production and export. The sugar plantations were particularly important. In the Middle Ages, sugar was a rare luxury in Europe. The price of sugar dropped and Europe developed an insatiable sweet tooth. Entrepreneurs met this need by producing huge quantities of sweets: cakes, cookies, chocolate, candy, and sweetened beverages such as cocoa, coffee and tea. The annual sugar intake of the average Englishman rose from near zero to around eight kilograms in the early nineteenth century.

†††† However, growing cane and extracting its sugar was a labour-intensive business. Few people wanted to work long hours in malaria-infested sugar fields under a tropical sun. Contract labourers would have produced a commodity too expensive for mass consumption. Sensitive to market forces, and greedy for profits and economic growth, European plantation owners switched to slaves.

†††† From the sixteenth to the nineteenth centuries, about 10 million African slaves were imported to America. About 70% of them worked on the sugar plantations. Labour conditions were abominable. Most slaves lived a short and miserable life, and millions more died during wars waged to capture slaves or during the long voyage from inner Africa to the shores of America. All this so that Europeans could enjoy their sweet tea and candy - and sugar barons could enjoy huge profits.

†††† The slave trade was not controlled by any state or government. It was purely an economic enterprise, organized and financed by the free market according to the laws of supply and demand. Private slave-trading companies sold shares on the Amsterdam, London and Paris stock exchanges. Middle-class Europeans looking for a good investment bought these shares. Relying on this money, the companies bought ships, hired sailors and soldiers, purchased slaves in Africa, and transported them to America. There they sold the slaves to the plantation owners, using the proceeds to purchase plantation products such as sugar, cocoa, coffee, tobacco, cotton and rum. They returned to Europe, sold the sugar and cotton for a good price, and then sailed to Africa to begin another round. The shareholders were very pleased with this arrangement. Throughout the eighteenth century the yield on slave-trade investments was about 6 per cent a year - they were extremely profitable, as any modern consultant would be quick to admit.

†† ††This is the fly in the ointment of free-market capitalism. It cannot ensure that profits are gained in a fair way, or distributed in a fair manner. On the contrary, the craving to increase profits and production blinds people to anything that might stand in the way. When growth becomes a supreme good, unrestricted by any other ethical considerations, it can easily lead to catastrophe. Some religions, such as Christianity and Nazism, have killed millions out of a burning hatred. Capitalism has killed millions out of cold indifference coupled with greed. The Atlantic slave trade did not stem from racist hatred towards Africans. Nor did the owners of the slave-trade companies rarely thought about the Africans. Nor did the owners of the sugar plantations, and the only information they demanded were neat ledgers of profits and losses.

†††† It is important to remember that the Atlantic slave trade was not a single aberration in an otherwise spotless record. The Great Bengal Famine, discussed in the previous chapter, was caused by a similar dynamic - the British East India Company cared more about its profits than about the lives of 10 million Bengalis. VOC's military campaigns in Indonesia were financed by upstanding Dutch burghers who loved their children, gave to charity, and enjoyed good music and fine art, but had no regrd for the suffering of the inhabitants of Java, Sumatra and Malacca. Countless other crimes and misdemeanors accompanied the growth of the modern economy in other parts of the planet.

 

The nineteenth century brought no improvement in the ethics of capitalism. The Industrial Revolution that swept through Europe enriched the bankers and capital-owners, but condemned millions of workers to a life of abject poverty. In the European colonies things were even worse. In 1876, King Leopold II of Belgium set up a non-governmental humanitarian organisation with the declared aim of exploring Central Africa and fighting the slave trade along the Congo River. It was also charged with improving conditions for the inhabitants of the region by building roads, schools and hospitals. In 1885 the European powers agreed to give this organization control of 2.3 million square kilometres in the Congo basin. This territory, seventy-five times the size of Belgium, was henceforth known as the Congo Free State. Nobody asked the opinion of the territory's 20-30 million inhabitants.

†††† Within a short time the humanitarian organization became a business enterprise whose real aim was growth and profit. The schools and hospitals were fgorgotten, and the Congo basin was instead filled with mines and plantations, run by mostly Belgian officials who ruthlessly exploited the local population. The rubber industry was particularly notorious. Rubber was fast becoming an industrial staple, and rubber export was the Congo's most important source of income. The African villagers who collected the rubber were required to provide higher and higher quotas. Those who failed were punished brutally for their 'laziness'. Their arms were chopped off and occasionally entire villages were massacred. According to the most modern estimates, between 1885 and 1908 the pursuit of growth and profits cost the lives of 6 million individuals (at least 20 per cent of the Congo's population). Some estimates reach up to 10 million deaths.

†††† After 1908, and especially after 1945, capitalist greed was somewhat reined in, not least due to the fear of Communism. Yet inequalities are still rampant. The economic pie of 2014 is far larger than the pie of 1500, but it is distributed so unevenly that many African peasants and Indonesian labourersreturn home after a hard day's work with less food than did their ancestors 500 years ago. Much like the Agricultural Revolution, so too the growth of the modern economy might turn out to be a colossal fraud. The human species and the global economy may well keep growing, but many more individuals may live in hunger and want.

†††† Capitalism has two answers to this criticism. First, capitalism has created a world that nobody but a capitalist is capable of running. The only serious attempt to manage the world differently - Communism - was so much worse in almost every conceivable way that nobody has the stomach to try again. In 8500 BC one could cry bitter tears over the Agricultural Revolution, but it was too late to give up agriculture. Similarly, we may not like capitalism, but we cannot live without it.

†††† The second answer is that we justy need more patience - paradise, the capitalists promise, is right around the corner. True, mistakes have been made, such as the Atlantic slave trade and the exploitation of the European working class. But we have learned our lesson, and if we just wait a little longer and allow the pie to grow a little bigger, everybody will receive a fatter slice. The division of spoils will never be equitable, but there will be enough to satisfy every man, woman and child - even in the Congo.

†††† There are, indeed, some positive signs. At least when we use purely material criteria - such as life expectancy, child mortality and calorie intake - the standard of living of the average human in 2014 is significantly higher than it was in 1914, despite the exponential growth in the number of humans.

†††† Yet can the economic pie grow indefinitely? Every pie requires raw materials and energy. Prophets of doom warn that sooner or later Homo Sapiens will exhaust the raw materials and energy of planet Earth. And what will happen then?