Re: MD the ideology of capitalism - what is capitalism?

From: Sam Norton (
Date: Sun May 08 2005 - 09:55:46 BST

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    Hi Mark,

    Below my signature is my last post about de Soto (originally posted December
    12 last year) which explains why I think de Soto is important and, more
    importantly, why we disagree about the nature of capitalism. I must confess
    that I was disappointed that nobody took up the conversation, especially my
    assertion that capitalism is a fourth level activity in the eyes of the MoQ.
    I would have thought that might be a touch controversial in some quarters

    This was what I was wanting to pursue with you before, in that until we
    agree on what 'capitalism' is, some of the other elements in this
    conversation aren't going to proceed. So what I'll do is split this thread
    into the three components:

    1. whether Ayn Rand is 'selfish' in her ideology, or whether objectivism is
    in fact closely related to Gewirth etc;

    2. this one, which is about what capitalism is; and

    3. the notion of a fully-realised human being (FRH) and how that functions
    within an understanding of the world.

    More later



    A few book references first; if you read these you'll get most of the
    background to my understanding. Most important: Hernando de Soto's "The
    Mystery of Capital", which I think is simply essential to any informed
    debate on this topic, and which I'll be drawing on explicitly below. Second,
    David Landes' "The Wealth and Poverty of Nations". Thirdly, Bjorn Lomborg's
    'The Skeptical Environmentalist", especially Part 2 on Human Welfare. There
    are others, but they are the ones I rely on most.

    I'd like to use De Soto to sketch out a framework for looking at the Quality
    of Capitalism. De Soto employs an analogy early on in his book: think of a
    lake. It could be looked at by a naturalist, and the beauty appreciated. It
    could be looked at by a sportsman, and the possibilities for recreation
    considered. If it is looked at by an engineer or a physicist, however, then
    the potential for installing a dam might be examined. That is, in the body
    of water that is the lake there is a _potential_ for energy which is
    currently being ignored. By the application of certain technology and
    machinery (e.g. a dam with turbines etc) that potential energy can be turned
    into something usable, and various possibilities flow from that. The
    potential energy is 'fixed' into a certain form, e.g. electric current, and
    then activities can be developed which derive from that fixed form. De
    Soto's point is that capitalism is the equivalent of the dam. In other
    words, capitalism is that application of human ingenuity which releases the
    potential that would otherwise be locked up, and which generates new fixed
    forms of energy which can be used in other ways.

    So what is 'capital'? De Soto argues that although it is often confused with
    money (cash), this is a mistake. He writes, "What I take from [Adam Smith]
    is that capital is not the accumulated stock of assets but the potential it
    holds to deploy new production". In other words, to refer to the earlier
    image, capital is not the water, it is the possibility of electricity. Money
    is the facilitator of transactions, but "is not itself the progenitor of
    additional production". So money, or, more widely, any form of wealth or
    asset (land, housing, machinery, whatever), none of these are 'capital' in
    the sense which De Soto is describing.

    The essential point is that for any of these assets to become capital, they
    must be 'fixed' by a legal process of property rights, and it is this legal
    process which is the heart of capitalism. It is this legal process which is
    the equivalent of the dam on the lake, which allows for the potential energy
    locked up in that body of water to be accessed and deployed in various
    creative ways. So, whatever assets there may be, unless there is a
    conversion process, it is not possible to speak of 'capital', nor is it
    possible to speak of capitalism.

    Now the key step in the argument, and the natural link in with the MoQ,
    comes when De Soto is describing 'the codes of conduct that govern the use
    and transfer of assets', in other words, the formal property systems that
    have developed in the West. He writes, "Formal property records and titles
    thus represent our shared concept of what is economically meaningful about
    any asset. They capture and organise all the relevant information required
    to conceptualize the potential value of an asset and so allow us to control
    it. Property is the realm where we identify and explore assets, combine them
    and link them to other assets. The formal property system is capital's
    hydroelectric plant. This is the place where capital is born."

    De Soto goes on to identify six ways in which this legal process enables
    capitalism to function:

    1. The economic potential of any asset is 'fixed' by the abstraction
    involved (as described above);

    2. Various elements of dispersed information are integrated into a
    single, formal, representational system;

    3. It makes individual people accountable to an impersonal process of
    adjudication, rather than local and customary relationships;

    4. Crucially, the abstractions are fungible, that is, "unlike physical
    assets, representations are easily combined, divided, mobilised and used to
    stimulate business deals". The process of abstraction allows all sorts of
    creativity to apply;

    5. It enabled a network of individual actors to relate within a
    reliable and transparent framework, which "radically improved the flow of
    communications about assets and their potential [and] enhanced the status of
    their owners, who became economic agents able to transform assets within a
    broader network";

    6. Finally, and crucially, it gave a strong and clear protection to the
    transactions carried out within the system, thereby enabling trust and the
    proliferation of business.

    We can discuss the above in more detail over time, but what I want to
    emphasise is the way in which De Soto's characterisation of capitalism
    parallels Pirsig's description of different levels. That is, what De Soto is
    describing is an intellectual level phenomenon, i.e. the abstraction
    (symbolic representation) of physical, biological or social assets, and the
    way in which they have 'gone off on purposes of their own', generating vast
    new static patterns of Quality. (Note that this analysis disagrees with
    Pirsig's own account of capitalism.)

    De Soto's main point, in fact, is that the problem in Third World countries
    is not the presence of capitalism, but the absence, in other words, that
    those countries are still operating at the social level, and it is the
    absence of the intellectual level phenomenon of capitalism (i.e. the
    abstract representations of economic assets) which is hindering their
    economic development. De Soto's book is an extended argument as to how and
    why this is the case.

    Now, the foregoing is the conceptual analysis of 'capitalism', and to
    summarise, it is my view that capitalism is the intellectual level
    representation and organisation of economic assets in such a way that new
    forms of Quality can come into existence. The question might then be - is
    this the best or the only intellectual level organisation of economic

    Leaving aside the question of open-ness to DQ, and associated questions of
    human rights and liberty etc, (on which Pirsig is reasonably clear IMHO) it
    seems to be the case that the existence of capitalism has benefited the
    residents of those nations depending upon it, and it can also be shown to
    have benefited the population of the world as a whole. The following
    thoughts (from Lomborg) seem pertinent:

    - global GDP per capita, from a base of approximately $400 in
    pre-history to 1800 is presently around $6000;

    - global poverty has diminished: "In the past 50 years poverty has
    fallen more than in the previous 500" (UN report of 1997) - still much to
    do, but the situation in developing countries is much better than it was;

    - inequality "peaked in the 1960's [due to historical factors], has
    been decreasing since then, and is likely to continue to decrease
    dramatically for the coming century";

    - the proportion of people starving in the world has fallen from 35
    percent in 1970 to 18 percent today, and is expected to fall to 12 percent
    by 2010.

    Lomborg's conclusion is that 'Things are not everywhere good [he's mainly
    concerned with Africa] but they are better than they used to be". As he puts
    it, "All in all, pretty incredible progress."

    I've wanted, with the above, to provide more of a conceptual background for
    our discussion, rather than dive immediately into comparative statistics and
    moral debates about globalisation etc. I'm sure we can come on to those in
    our forthcoming posts. But I'll give the last word here to De Soto again,
    because I agree with it completely:

    "I am not a diehard capitalist. I do not view capitalism as a credo. Much
    more important to me are freedom, compassion for the poor, respect for the
    social contract and equal opportunity. But for the moment, to achieve those
    goals, capitalism is the only game in town. It is the only system we know
    that provides us with the tools required to create massive surplus value.
    When capital is a success story not only in the West but everywhere, we can
    move beyond the limits of the physical world and use our minds to soar into
    the future."



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