The horizon is not so far as we can see, but as far as we can imagine

The Economy: Politics Series VII

Previous: Environment

(Introduction and Table of Contents)

The economy turns the ideology of who should have a good or bad life and what sort of life that is into reality.

An economy is a way of deciding who is allowed to use resources and in what ways they can use them.

In modern capitalism, money is power: It lets you determine what other people do. You can do that directly by hiring them, or you can do it indirectly by buying what they offer. Either way, your money directs their efforts.

Not all economies are like this. In feudalism, money was not the most important thing, land and serfs were. You controlled land and serfs by being part of a web of feudal obligations such that other members of the feudal nobility would send you knights and men-at-arms. Military force and feudal ties determined who had the power to control what the peasant majority did.

There are always limits on what you are allowed to do. In an economy, these are political limits. In the modern developed world, slavery is usually illegal and children don’t work. You may not be allowed to work people more than a certain number of hours a day. Some areas won’t let you own water rights or restrict access to beaches; some separate “above ground” land rights from mineral rights (to the ruin of many farmers).

Children are forced to go to school by government, thus claiming the right to choose what children do away when they’re away from their parents (and the right was taken away from parents who did choose what their children did previously). There may be environmental regulation, there are certainly taxes which change costs, and there are subsidies as well. Railroads are far more efficient in physical terms than roads for transport, for example, but roads are far more subsidized and, thus, often cheaper.

How an economy works: What can be sold or earned. Through regulation and taxation, what the cost structure is, and thus what types of people and businesses make how much profit are political decisions. This is why businesses spend so much time and money lobbying government: Government is the ultimate determinant of their success.

Modern stockholder capitalism would be impossible without a vast array of legal rights and their enforcement. The limited liability corporation is a political creation (and was opposed by many businessmen when it was created). Corporate person-hood is not obvious, and many would argue, it is obviously incorrect (corporations aren’t people) but it is legal reality.

Property itself, is entirely a political creation and requires vast enforcement by the state. Owning ideas is something you couldn’t do for most of history, but so-called “intellectual property” is core to modern capitalism. Indeed, for much of history most societies didn’t even allow the ownership of land, and personal possessions were often freely shared. It takes immense amounts of force and huge institutions to keep our complex property systems going; accountants, bookkeepers, and banks are best viewed as keeping track of complex ownership relationships.

You will remember that, in the legitimacy and ideology chapters, we discussed the idea of the “good life” and of who the “good people” were. Economies are designed to translate that into reality. So, for example, the US has had vast subsidies for suburbs for about a century, because suburbs represent the “good life.”

While governments set the rules of economies, decisions within that rule-set are made by people who control a lot of money, whether personally or through companies. When those people do something bad, even often something which is illegal, we often don’t punish them at all (as in the 2008 financial crisis), or we fine them for less than they made. This is because rich people who make decisions are acting legitimately; they are the people who are supposed to make decisions.

If drug companies make insulin so expensive that many people die, that isn’t murder, even though far more people are killed than even by the most prolific serial killer. As with politicians declaring war, rich people are considered to have the right to kill or harm others, so long as it is done through markets.

Where the line on this is varies by time, with much more permitted before 1933 and after 1980 in the US, but because basic legitimacy, in a capitalist system, resides in markets, those who control markets are “good” and have the legitimate right to hurt people.

Capitalists use the state to obtain the resources they need for business: road and railroads, employees trained by schools and universities, basic and advanced research, the court system and the police. All of these resources are used far more by capitalists than ordinary people; they benefit more than they pay. Likewise they often have the right to pollute, injured workers have only limited ability to sue them, and so on. Direct subsidies of billions to trillions are common.

All of this is so because capitalism is legitimate, so doing what is required to make business profitable is legitimate.

The word profitable is important here: It is usually government which decides which businesses make money and which don’t. The combination of property rights, enforcement, and subsidies, along with letting businesses pollute or not, pay other damages they inflict, determines not just whether money is made, but how much.

The best business to be in is generally the financial business, as banks and most financial institutions can create money literally out of nothing, which is what happens when a bank makes a loan or a brokerage extends credit or leverage. It’s hard not to be profitable when you can just change a computer legerd and, “Voila, money!”

Joseph Schumpeter regarded banks as the command centres of capitalism because of this ability to create money and because lending a business money to do something is deciding if that something should be done. and In general, financial institutions plus the state determine who can do what, and who makes a profit. Because financial institutions are, or can be, regulated by the state, and because just anyone isn’t allowed to create money, this is all, ultimately, a creation of the state or at least allowed by it.

The economy, then, is how the ideology of legitimacy, of what the good life is and who should enjoy it, is brought into being. The right activities are made profitable, the wrong ones are made less profitable or unprofitable, or are made illegal. Taxes are arranged to distribute money from the rich to the rest of society, as from 1932 to 1979 in the US, or they are arranged to distribute money from the majority to the rich, as from 1980 to the present.

Money and power thus move to the chosen and legitimate groups of people, and those people use it that money to create society in the image of their ideologies.

The economy then, is not a result of inevitable economic laws, but of choices made by those in power, who are in power because enough people identify with them and agree with the ideology they claim to champion.

Economies result from power and confer power, and power is what we will discuss next.

Next: Power

Table of Contents



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  1. Trinity

    “Railroads are far more efficient in physical terms than roads for transport, for example, but roads are far more subsidized and thus often cheaper.”

    This doesn’t sound right, especially given the successful public transportation systems in other nations. I would think that maintaining rails is much cheaper than maintaining ever increasing roads, including constant widening, new ramps, new lanes, etc. I would look for research, but have limited time on my lunch half hour.

    JMG at one time talked about this, basically saying all public transportation must be subsidized, and by inference this would be just as valuable for the transport of goods as it is for people. The “last few miles” can be handled by trucks, but long distance could be handled primarily by rail.

    And therein lies the real political problem, borrowed from the previous thread, that our government abhors handouts to the common people, so subsidizing transportation of any mode is verboten.

  2. different clue

    Here is a strangest-possible article I found linked-to in a thread-comment on Naked Capitalism. I can’t tell if it is being literal or sarcastic or satirical or symbolic or what.
    It is allegedly about China “buying topsoil” from the US. Here is the link.

    Is this to be taken symbolically and allegorically? As in . . . . selling corn “is” selling topsoil? Or is this to be taken literally? As in . . . . China has bought land in America and is strip mining the topsoil off the surface and sending actual physical topsoil to China?

    Does anyone know about this?

    ( Someone from Russia once told me about how the Nazi Germans sent fleets of earthmovers and etc. to dig up topsoil from the black soil zone of Ukraine and send whole trainloads of actual physical black soil back to Germany. So it has been done before. There is precedent).

  3. Jeff Wegerson

    Taxation primarily gives money value. I need dollars because that’s what the money creator will accept as a tax payment. Once the money has value the creator can give as much as they want to whomever they want. Hopefully the creators understand the natural consequences of excessive as well as inadequate creation.

    Current western politics prefers to overly enrich the already rich by handing off the money creation details. As you say Ian.

    So taxing the rich is useful to destroy excess accumulation. But it is not needed to be able to distribute it to other parts of the economy. Money creators can just create it to do that.

    Even MMTers say it that way.

    So far I’m with you all the way. Thanks so much for putting it all together and bringing it up to your current levels of thought.

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