Twenty-first Century Capitalism (Heilbronner)

     Robert Heilbronner Twenty-first Century Capitalism (1992) Text for 1992 Massey Lectures. Heilbronner gives a good overview of capitalism: what it isn’t, what it is, and how it might develop. His contrast with traditional and command economies is excellent, and clarifies his thesis admirably. But he doesn’t explain what money is, an odd omission since capital is of course an accumulation of money. Or so it seems. His explanation of wealth is unclear, for he says that capital both is and isn’t wealth. He notes the self-destructive character of capitalism, but merely hints at the political and ecological consequences of this. His posits government as the counter-balance to capital, but doesn’t foresee the corruption of democratic institutions by capital. He claims there is a link between the economic liberty of capitalism and a democratic polity, but doesn’t note that the tyrannies of South America and South East Asia were and are extremely hospitable to capital. His analysis of the trans-national corporation is incomplete. Like many economists, he doesn’t fully understand the dependence of “the economy” on the ecological systems that sustain all life. All in all the book is superficial and misleading.
    His best contribution to the debate about the nature and future of capitalism is his contrasting traditional, command, and capitalistic economies. But because of his confusion about the relationship between capital and wealth, he doesn’t see that money is merely a measure of capital, and not its essence. Neither does he see that markets don’t need money: barter markets work exactly as monetised markets do. Because of his unstated and inconsistent assumptions about the nature of money, he doesn’t see that the Soviet Union was in fact a capitalistic economy. It merely measured capital in terms of product, not in terms of money.
     Underlying his confusion is a set of implicit assumptions about money, which as far as I can make out are inconsistent (his claim that capital both is and is not wealth, depending on circumstance makes this confusion clear.) He doesn’t consider money as information, yet he claims that the market works by the “signals” given by price fluctuations -- ie, by the function of money as information. He doesn’t distinguish between money and what it measures, and so doesn’t see that other ways of measuring inputs and outputs are possible. He does note that the Soviet system collapsed because the bureaucrats couldn’t measure the supply-demand relationship properly, but he doesn’t see that that has nothing to do with what measures are used and everything to do with the complexity of a market economy. The Soviet Union was also a market economy, it’s just that the market operated at the level of managers and bureaucrats, not consumers. The market operated perfectly rationally at that level: goods were measured in terms of performance (ie, compliance with quota directives), and people tried to accumulate wealth as measured by this standard. The fact that this is a stupid system if you want to produce goods and services doesn’t matter. The transition to a monetised goods and services market is of course a problem when you are used to measure wealth in terms of bureaucratic power and influence.
     I think Heilbronner suffers from not having chaos theory in his armamentarium. He comes close: he is very good on explaining how the “invisible hand” works. He also notes that the market can become unstable, and that inflation can cause a reduction of supply while there is an increase in demand, IOW  that the market can flip to a new attractor, in chaos theory terms.
     He may also be trying to mollify his audience: in his earlier work, he has been a profound critic of the ecological and social corrosives of a capitalistic economy. Here he tries to have it both ways. He notes the negative social and political effects, he notes that there is a market imbalance between labour and owner, he notes the distorting effect of externalities on the market (because they cause a misstatement of the cost of goods), and so on. But he also praises the wealth-creating power of capitalism, and thinks the expansion of human consumption is a Good Thing.
     Heilbronner is most interesting in my opinion in his observation that there is no necessary connection between a market economy and capitalism. I think this is an acute observation. After reading this book, I conclude that capitalism requires a market economy, but not vice versa. In fact, capitalism is a pathology of the market: it comes about by making one’s economic goal the accumulation of money rather than the creation of wealth. Or better: the monetisation of capital has more negative than positive effects.
     BTW, Heilbronner’s claim that pre-capitalistic societies don’t have economies is a neat semantic trick. He claims that you have to have an understanding of economics to understand a market economy and capitalism. I beg to differ. You have to have an understanding of costs and prices as measures of value, which isn’t quite the same. Primitive economies used other measures of value to allocate economic effort and resources, but like all societies, they had to have a value system to determine production and distribution. In my opinion, modern economic theory’s greatest failure is its ignorance of how primitive economies actually work. The consequence is that economists have an appallingly limited notion of value, and therefore have a great deal of trouble explaining the observed fact that most people use values in addition to and often in place of those measured by money in the economic decisions.
     Nevertheless, a useful book. Heilbronner writes clearly: he has the knack of stating complex ideas simply. He could use a few more concrete examples, though. *** (2001)
     Update 2013: Kahneman and his colleagues have studied the non-monetary values that operate in economic decisions, and added to that the effects of limited reasoning skills.