art murphey odyssey

8/2/2019 Art Murphey Odyssey

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A Classical Liberal Rethinks the Market System:Invitation to an Intellectual Odyssey

Dwight D. Murphey

Wichita State University, retired

The significance of this article lies in its invitation to all supporters of afree-market economic system to join the author in an intellectual odysseythat will involve rethinking many of the conceptual premises that underliecapitalism. It is especially significant because the author himself approachesthe subject not as an opponent of a market economy, but as a long-timesupporter of it. As the article shows, he believes that capitalism has changedits nature under the impact of globalization and, further, that advances in non-labor-intensive technology will require adding a broad-based system of incomedistribution to the market system. If a profound rethinking of the classicalliberal underlay of capitalism does not occur, he warns, the market economy,which has served as the economic foundation for a free society as classical

liberals envision it, will cease to serve the great bulk of the population, and willthus lose its legitimacy.

Key Words: Capitalism, Market Economy, Shared Market Economy,deindustrialization, non-labor-intensive technology, technological revolution,market ideology, intellectual odyssey.

Not long ago in the mid-1990s Americans were deeply concerned aboutthe outsourcing of jobs, the hollowing-out of their countrys industrial base,and the growing inequalities of income and wealth. These phenomena had, ofcourse, deeply rooted causes that deserved much consideration. The concern

over those causes has, however, ebbed and flowed with events that havespread new issues before the American public, making a clear understandingdifficult.

The original concern abated with the economic boom that followed inthe late 1990s. Then the Great Credit Crisis of 2007-2009 tore away therose-colored glasses although this time with an understandable focus not onthe long-term, fundamental causes of economic displacement so much as onthe complex destructive policies and social values that precipitated thatparticular crisis.

The Great Credit Crisis of 2007-2009

The causes of the financial meltdown in late 2008 have been muchcommented upon, and it will not be my concern to deal with them here, sincemy intention is to examine factors that are at work concurrently with andbeyond them. They were, however, far-reaching in themselves, and by nomeans mere incidentals. As is well known, the causes included (1) the FederalReserves long sponsorship of monetarily expansionist bubbles first in the

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stock market and then in housing (signifying a profound failure in themonetary policy upon which American society had come to rely); (2) socialpolicies that encouraged, indeed insisted upon, mortgage loans to a greatmany borrowers (particularly minority borrowers) who could not afford them;(3) the relaxation of margin requirements and other regulations that had

placed crucial limits on financial speculation; (4) the packaging of loans intosecurities (without meaningful Securities and Exchange Commission oversight,critical evaluation by the pivotal credit rating agencies, or truly independentaccounting reporting) that were sold to investors worldwide who did not orcould not exercise due diligence about their soundness; and (5) problems ofethics and character, especially as shown by banks and other financialinstitutions, that make us recall Emersons phrase abuses in which allconnive.

The fact that the economic crisis in the United States spread quickly tohit countries throughout the world highlights yet another problem that isinherent in the 2008 meltdown. This is that the gigantic world capital flows

and the scale of trans-national competition have taken the control of economicevents out of the hands of national and local governments and of centralbanks. In his 2008 book The World Is Curved: Hidden Dangers to the GlobalEconomy, economic adviser and commentator David Smick says that thewhole thing is unbelievably fragile. It is a house of cards that could cometumbling down for any number of reasons.

A Problem at a Deeper Level: Deindustrialization andLow-Wage Global CompetitionWith the focus on these more obvious flaws, the deeper problem of

overall deindustrialization was again lost sight of. Even the assistance that

was given to keep the American automobile companies alive in 2008 and 2009was discussed only in the context of those companies, and not of the industrialsystem as a whole. Little attention is given to what is inevitably the inability ofworkers in an advanced society to compete with incredibly low-cost foreignlabor (so long as labor remains a major factor of production).

The acceleration of communications, transport and migration, and thedevelopment of a worldwide financial market, have gone far toward makingeach country's economy a mere subset of a worldwide competitive market.Only in recent years have the percentages of imports and exports in relationto the total American economy increased rapidly. As this worldwide marketcontinues to mature, virtually everyone will be in close competition with

everyone else.The globalization has produced a relentless drive to reduce costs. As so

many business management books have said, anyone who does not cut costsagain and again, while at the same time increasing quality and addinginnovative new products, will be undersold and forced out of business.

The economic systems of the present, as of the past, are centeredaround scarcity, the need for production and work. To live, everyone who isnot supported by relatives, friends or government must find a place in that


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productive system to obtain income from it. That is, entrepreneurship or workin some form is a necessity not just for production but for peoples'participation and consumption. Indeed, our cultures and moralities arecentered on it. We judge each other by performance in these terms; andeveryones livelihood depends upon it. Nothing is more fundamental to each

countrys economy and culture.Now, however, the global economy puts workers in the advancednations into direct competition with hundreds of millions of workers by nomeans all low-skilled, since many of them are increasingly highly trained from among the poorly-paid peoples of the Third World. Profits for firms andinvestors who stay ahead of the competitive curve shoot up, but theinexorable process of supply and demand, given the immense source of low-cost labor, trends the wages downward in the developed countries potentiallyto depths unimaginable to Americans. Many authors see this as an impendingcrisis for workers in the advanced economies as they come under increasingpressure about how to find a place in the economy. Patrick Buchanan is a

conservative who in his 1998 book The Great Betrayal showed that he is fullyaware of this. Likewise, global financial adviser David Smick recognizes it inhis book The World is Curved (2008): Mere wage earners, relative to thosewith a global stock portfolio, cant participate in this wealth creation.

It is commonplace to say that this inability would be overcome if onlythere were a level playing field of equal labor legislation and environmentalregulations. But this inability would only in small part be mitigated if all otherpeoples were somehow induced to adopt the same rules that are in force inthe United States and even if all of the many protectionist barriers that othernations impose against imports from America were scuttled. (I dont mean tosuggest that the United States does not also intervene into trade.) Those

disparities between the United States and the rest of the global market arerelevant, to be sure; but the deeper problem is the presence of vastpopulations that create an overhang of labor that must necessarily bid, on apurely supply and demand basis, the price of labor far below what Americanworkers have enjoyed. With the recent revolution in transportation,communication, finance and migration all producing globalization thatoverhang of labor is no longer stationed at a remote distance from the UnitedStates, but is right on the countrys doorstep.

With an iron-clad devotion to global free trade ideology blocking aconsideration of this fundamental inability to compete, there is little chancethat even a correction of the many other factors that most immediately lead to

the crisis of 2008 will make the American economy truly healthy. Newbooms will almost certainly be created, hopefully (but not assuredly) to a lessdestructive extent than the ones that preceded the 2008 meltdown; but thatwill not mean that the hurricane of competitive obliteration will stop its on-going destruction of the American economy.

The unmitigated free trade ideology that became dominate in theUnited States and among the world elite well before the end of the Cold Warcauses most observers to insist that there is no reasonable alternative to


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allowing the competition to force the closure of so many of the mostproductive enterprises in the advanced economies. In fact, such observersinsist that the closures are a good thing (and even cite them as an example ofthe economist Joseph Schumpeters much-lauded concept of creativedestruction). An examination of this ideology (which an examination of the

concepts will show is ill-suited to a free society and a market economy) will beone of the principal undertakings of the book to which this article is anintroduction. Because much of what we say here runs directly counter to whatalmost everybody believes he knows about economics and free-marketprinciple, it is important that readers give serious attention to the booksdiscussion of the conceptual foundations of a free society and marketeconomy.

Even before the book examines the ideology itself to evaluate itssufficiency, it is apparent that capitalism has under the impact ofglobalization and an overall deterioration of values profoundly changed itsnature from what it has been in the United States historically. Instead of

serving the great body of the people a broad middle class --, it has becometransformed into something best described as a crony capitalism thatmarries a global elite to an uncaring ideology and to a politics that primarilyservices interest groups. In effect, such a form of capitalism has left thosewho are loyal to the market economy in the dust. It no longer deservesautomatic loyalty from those who wish to remain true to the free market inthe best sense. In his 2009 book Enough, John C. Bogle, founder of theVanguard Mutual Fund Group, quotes Felix Rohatyn: Only capitalists can killcapitalism, but our system cannot stand much more abuse of the type wehave witnessed recently, nor can it stand much more of the financial andsocial polarization we are seeing today.

Two Distinct Phases, Operating SimultaneouslyIt would help if an examination of all of this could be made simple.

Simplicity is rendered impossible, however, by the fact that the long-termforces (i.e., those distinct from the immediate causes of the 2008 crisis) haveto be understood (and met) in two very distinct parts.

1. The firstof these is the one just mentioned: the hollowing-out of theAmerican and other advanced economies by the competition from low-costlabor in the global market.

The fact that the economic rewards will go to the owners of thetechnology makes it all the more important that the people of a nation such

as the United States that there be no hollowing out that they retain theirownership of productive assets, and not let them slip away to foreign buyerswho hold American dollars because of the massive trade deficits the UnitedStates has been incurring for so long. The need for the ownership ofproductive assets implies a vital link between (1) the need to reindustrializedespite low-cost foreign labor and (2) the need to distribute broadly therewards of capital ownership in a world in which the return will almost entirelygo to the owners of technology. Of course, the advancing adoption of non-


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labor-intensive technology will over time lessen the role of low-cost foreignlabor. The need, however, is to maintain a robust technological base in theUnited States until that day comes so that it will be there to provide therewards of capital.

I have long been an advocate of a market economy. I hope that gives

me some standing with which to urge others who also favor free markets notto close their minds to an essential point that must now be made: that if thoseeconomies are to retain or, more to the point, reestablish a major industrialbase, they will have to be shielded from that competition to the extentnecessary for the purpose. The advantages of intense competition forinnovation will have to come from within their internal markets, which areextensive. International trade can be welcomed, but only to the extent that isconsistent with the heretofore advanced economies regaining andmaintaining their industrial base. Vigorous internal competition can beaccomplished if the trend toward gigantism in business is reversed. This willrequire breathing new life into the anti-trust laws (which in recent years have

been desiccated by well-meaning but ill-advised market ideology arisingespecially out of the Chicago School of Economics) and into establishing aframework of competition within the domestic market.

2. The second part of the analysis pertains to longer-term forces that arerapidly coming upon us, and are in fact already underway, but that manypeople are inclined to downplay as unduly futuristic. This second aspect isthat even if reindustrialization is accomplished, the revolutionary sweeping-away of almost everything we have been accustomed to in business and evenin society will continue. The world is experiencing an exponential growth ofscience and technology, especially of computerization. Even with theimpediments and slowing that economic crises can cause, the possibilities are

staggering.What to this point has been obvious has been the displacement caused

in the United States by cheap labor in the world market. But there is anotherdisplacement beyond that one, and it comes from the new technologys on-going substitution of robotics, computerization, biotechnology, and otherlabor-saving processes (such as computer integrated technology (CIT) andmechanical harvesting) for work as the world has known it. As thisadvances, gainful employment will recede as a source of support for peopleslives (even though until a system that will allow them to share in theproductivity is devised they will no doubt scratch harder and harder to findforms of work that will provide them a living, and this inevitable scratching

will provide the outward appearance of a traditional economy to those whodont see how desperate it will be becoming). As millions scratch for a place,the great bulk of the rewards will go to those who own the technology. It iseasy to see how radical a change this will cause in societies as we have knownthem historically. Hence, I call it a destructive factor even though, at thesame time, it offers the astonishing affluence just mentioned.

The world will find it necessary to adapt to what Jeremy Rifkin has aptlycalled the end of work. Automation will take the place of the labor that has


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formed the basis for economic and social relations throughout history.Displacement from low-cost Third World labor offers to be, relatively speaking,a short-term phenomenon (even though it is very important in that short termand will have to be overcome if a given countrys economy is to maintain orregain its industrial base). The non-labor intensive processes will soon

undercut, cost-wise, even the poorly-paid workers of the Third World. Whensomething can be made at almost no cost in a scientized setting, there is acompetitive undercutting of the ability of people everywhere to fill a role asworkers. The result will be a crisis even more for the low-paid workers of theThird World than for people in the advanced economies. But the latter need torealize that insulation from foreign competition won't be an adequate solution(except temporarily to reinstate the industrial base), since it won't address thetechnological undercutting of the wage system and of much businessenterprise that will be occurring at home.

As the demand for work diminishes, remuneration will spring more andmore not mainly from work, but from capital. This will make it essential

that, to live, people in general will need to be plugged into the vast flow ofwealth that can be created by the technology. They will need to be plugged inespecially if they are no longer able to sustain themselves through jobs. Thissecond phase of reducing the need for work is already long underway, eventhough it is nevertheless accurate of think of it as still in its incipient stages.

Implications of the Diminishing Demand for LaborThe technological revolution that is ushering in the second aspect merits

additional explication. It offers at one and the same time (1) almostunthinkable promise and (2) vast economic and social upheaval. The neweconomic revolution includes three favorable factors, which are accompanied,

however, by a fourth that is potentially destructive of civilization itself unlessmanaged with a wisdom that Americans current ideologies militate against.

The three favorable factors are (a) a flowering of science and technologybeyond anything thought possible by earlier generations; (b) the growth of aglobal market, highly competitive (itself an enormously favorable development if the advanced economies take the necessary steps to maintain theirindustrial base and to keep its elements within a manageable scale); and outof these, (c) the prospect of astonishing affluence. It no longer seemsunrealistic to predict near-utopian possibilities from all of this (mitigatedseriously by the vagaries of human character). Food, goods and services ofkinds that we haven't even thought of yet, health care, entertainment: the

prospect is within sight that all can be produced at low cost and in massivevolume. The potential as we look into the future is present for affluence, not just in the industrialized countries but everywhere. The science andtechnology are here or rapidly advancing.

The destructive factor follows from the first three: the threateneddisplacement of hundreds of millions on a world scale, very likely billions ofpeople in all walks of life by the downsizing that will increasingly be forcedeverywhere by non-labor-intensive technology. This produces a relentless


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drive to reduce costs. As so many business management books have said,anyone who does not cut costs again and again, while at the same timeincreasing quality, will be undersold and forced out of business.

The thought that we are just at the threshold may be startling when weconsider the new innovation that has already come into being (and indeed has

been occurring, albeit at a slower pace, for centuries). Because we are just atthe beginning, and the main potential lies slightly ahead, most people evennow don't grasp the changes or, to the extent they do, don't appreciate thedisplacement they will cause. Those who think seriously about these thingsare in for an intellectually wrenching time. (Those who dont think themthrough will simply be drenched in confusion.)

What is necessary is that the products of the new science andtechnology be fully put to use, that the inertia of existing ways not serve toblock them and that civilized order and humane values be maintained whilesocieties churn their way through revolutionary times. So great are the needsin the world that a full realization of this affluence will occupy humanity, even

under the best of conditions, for a very long time. The means, however, arecoming into our possession. Accordingly, mine is not a "Luddite" perspectivethat opposes the new science and technology. Those are, in fact, the wingsthat can carry the world's billions into a better future. (Environmentalistsrightly see a threat to world ecology, but the new technologies offer to be agreat deal cleaner than those of the past, and many can even lead to a much-improved environment.)

A Radical Reexamination is NeededAlthough large international companies will reap enormous benefit from

the new labor-saving technology, the displacement of many millions of people

will create a crisis of legitimacy for the global market system and for theentire classical liberal theory of a market-centered free society unless asociety becomes structured in a way that will allow everyone to share in theproductivity of the economy.

In itself, the economic crisis of 2008 will have required much rethinkingand many reforms just to address the issues raised by that crisis, includingreestablishing the ability of governments and central banks to control events.Then, second, the issues raised by global competition from low-cost foreignlabor must be resolved, with an eye toward stopping the trade deficits andtoward reindustrializing. And, third, the end of work makes it imperative even though there will be great ideological resistance to doing so to embark

upon a radical reconsideration of everything we have thought about societyand the lives of individuals. This will point toward continuing a vigorousmarket economy while at the same time constructing a mechanism for theentire populations sharing in the economys output: thus, the concept of ashared market economy, by which I mean one in which large sums arepumped into business through index mutual funds, and the income from thefunds is distributed through an independent agency to the public at large,


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