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"Democracy
is the worst form of government, except for all the others that have been
tried."
--Winston
Churchill
I
think you would have to be rather self-deluded to imagine that capitalism --
even in its idealized state, and certainly the government/plutocrat
scam-a-thon that we euphemistically call "capitalism" today -- is
not a highly problematic system. Democracy is not exactly sweetness and light
either. Both founder upon the fundamental insufficiency of humans in general.
Although there are many fine characters in every generation, the fact of the
matter is that they are offset by an equal or larger number of very talented
people unfortunately motivated by power and greed, and a great mass of
insensitive dolts who are uninspired by the fine sentiments of the better
characters, appallingly easy to manipulate by the greedy power-grabbers
(without any real complaint), and who give the overall impression of
domesticated meat animals.
Probably
the main reason that capitalism is described as "successful" is
that it is highly productive. To put it bluntly, this productive capacity
allows the rulers of capitalist countries to invade and assimilate other
areas. This was particularly true in the example of the English (primarily)
conquest of North America, but you could also say it is true of the expansion
of the Russian empire throughout central Asia, and colonization of Africa.
(The Spanish conquest of Central and South America was a bit of an oddity, as
the existing complex societies collapsed and succumbed a little too easily to
be attributed to force of arms. Disease helped.) The countries that have
avoided outright colonization (Japan historically, arguably China today) are
those that have voluntarily adopted the capitalist system, as a conscious
strategy to avoid conquest.
Thus,
although one could argue that a more traditional society, such as the Native
Americans or the Tibetans, or the Hawaiians and other Pacific islanders, or
the Indians of South America, had many attractive attributes, and maybe were
more successful overall in producing positive outcomes for the society's
members, the unfortunate fact is that they were an easy kill. Thus, we are
stuck with capitalism more-or-less whether we like it or not.
So, we
might as well like it.
Another
funny attribute of capitalism is that when it gets bad, it gets really,
really bad. The normal life cycle of humans is as something like a
hunter/gatherer, or an agriculturalist. Many people today feel an incessant
insecurity. But what did members of the simpler economic systems have to
worry about? There was no real debt or obligation. They owned their house,
their land (effectively, if not necessarily formally), and their clothes. All
there was to worry about really was getting enough to eat, and any
half-decent hunter or farmer should be able to manage that. Of course there
were tyrannical governments even at the tribal level, and warfare and all
that, but we are trying to speak of general conditions here.
The
idea of "homelessness" would have been bewildering to a Native
American. Just build a house! A simple shelter could be crafted in three or
four hours, and a long-term residence could be built in two weeks. Today,
anyone who misses a mortgage payment any
time during thirty years faces potential homelessness, not easily
resolved either.
Even
the feudal period in Europe was more similar to a non-European tribesperson
than to today's capitalism. We imagine feudalism to be something like
slavery, with serfs "tied to the land," but you could also say it
was something like lifetime employment. Peasants were part of a
"corporation," the self-sufficient manor, and they could expect that
their basic needs (food, shelter, clothing) would be assured as long as they
maintained their end of the bargain. Some landowners were tyrants, but
peasants also pushed back in a way similar to the big labor movements of the
1880s-1950s, until a rough balance was struck. In any case, one didn't have
to worry about "security" beyond those factors which affected the
society as a whole, such as poor harvests or plague. This fundamental
stablity is also illustrated by the stability of the manors themselves, which
remained intact for centuries on end. Today, many great fortunes do not last
more than a hundred years, and even successful corporations can have a life
span much shorter than that.
Thus,
many of the features of capitalism that we assume are almost physical laws --
unemployment, bankruptcy -- really don't exist in non-capitalist societies.
The
foundations of capitalism are pleasingly simple: free action and private
property. These seem noble enough, although they can also serve as the
justification for the worst acts imaginable. In the old days, kings or lords
(or, more precisely, emperors) considered their domains to be their private
property. The emperor literally owned the empire, just like you own your
house and yard. When the emperor attacked and subdued the neighboring
country, this was simply acting freely to acquire more private property.
Pretty much any act of conquest and acquisition, at any time in history, can
be justified as "free action and private property" (or perhaps
"public property" in the case of certain communist situations).
People who have knowledge of esoteric or occult subjects already know that
"free action and private property" are also the core justifications
of the Luciferian
Rebellion. Just take a look at the Illuminati Manifesto
(available for $22.95 at Amazon.com) or perhaps the writings of Anton LaVey.
In recent years, the United States military has killed upwards of a million
Iraqis (approaching 4 million by some counts) and destroyed their country --
even poisoning it for thousands of years with depleted uranium -- for no
other reason than to steal oil for profit. Free action and private property.
Nevertheless,
on a smaller scale, the ideals of capitalism are also intertwined with the
ideals of individual liberty, and it is no coincidence that modern industrial
capitalism (1780-) coincides exactly with the rise of Enlightenment ideals of
the "Rights of Man" etc. etc. The Declaration of Independence
(1776) lists "life, liberty and the pursuit of happiness" as the
inalienable rights of man, following decades of similar philosophizing by the
likes of Rousseau etc. However, this formulation was a last-minute personal
tweak by Thomas Jefferson. The actual motto of the Revolution, as popularly
conceived, were "life, liberty and property," which is straight
from John Locke. Locke named "Life, Liberty, and Estate."
"Estate" means property, but it also means "estate," as
in: "my house and land," and if you were a rich landowner -- as you
would be if you were reading Locke in the 17th century -- it meant the
entirety of your manor, or domain, and everything and everyone on it.
Jefferson
considered this focus on "property" to be just a little too
money-grubbing for his taste, so we get "the pursuit of happiness,"
which means:
A
differing analysis on the origin of this phrase was provided in his (award
winning) book “INVENTING AMERICA Jefferson’s Declaration of
Independence”, where historian Garry Wills argues [final paragraph,
part two]:
When
Jefferson spoke of pursuing happiness, he had nothing vague or private in
mind. He meant a public happiness which is measurable; which is, indeed, the
test and justification of any government. But to understand why he considered
the pursuit of that happiness an unalienable right, we must look to another
aspect of Enlightenment thought - to the science of morality.
Wills
addresses the “the science of morality” in part three (regarding
“the pursuit of happiness”, eminently in chapters 16-18).
Wills states, “If he [Jefferson] meant to signal dependence on Locke in
his Declaration, he chose an odd way of doing it when he omitted the central
concept of Locke in its most expected place.” – by substituting
“the pursuit of happiness” for “property”. Wills
further suggests, “… we should turn to the principal delineator
of unalienable rights in Jefferson’s intellectual milieu – to
Francis Hutcheson.”
Of
Hutcheson, Wills states, “No one did more in the eighteenth century to
encourage the measuring of public happiness than did Francis Hutcheson, with
his 1725 formula for ‘the greatest happiness of the greatest
number.’” But Wills also points out that Locke himself used the
phrase “pursuit of happiness” conspicuously, and that there was
significant agreement by these two men: both saw it as a “constant
determination”.
Wills
here suggests this contribution from Adam Ferguson:
If, in
reality, courage and a heart devoted to the good of mankind are the
constituents of human felicity, the kindness which is done infers a happiness
in the person from whom it proceeds, not in him on whom it is bestowed; and
the greatest good which men possessed of fortitude and generosity can procure
to their fellow creatures is a participation of this happy character. If this
be the good of the individual, it is likewise that of mankind; and virtue no
longer imposes a task by which we are obliged to bestow upon others that good
from which we ourselves refrain; but supposes, in the highest degree, as possessed
by ourselves, that state of felicity which we are required to promote in the
world (Civil Society, 99-100).
Even
then -- before the Industrial Capitalist project even began -- Jefferson
sensed that a simple reliance on Adam Smith's "invisible hand" of
self-interest (The
Wealth of Nations, published 1776) wasn't going to be sufficient
in itself.
Still,
we can at least appreciate that free action and private property have some
positive attributes. They can be contrasted with coercion and the appropriation
of property, common to all tyrannical governments.
This
is all a roundabout way of talking about the virtues of low taxes, one half
of our Magic Formula:
Low
Taxes
Stable Money
What
I'm trying to say is, that Low Taxes are not only a virtue because they lead
to "more growth," but also because they represent less coercion and
appropriation ("theft") by government. Taxation is the primary
avenue of both coercion and appropriation. Both the American Revolution and
the French Revolution were, in essence, tax revolts.
For
some years, there has been a debate within the sliver of the Republican Party
that is interested in lower taxes. The debate is basically between the
"flat tax" types, who would keep something like today's income tax
but with lower rates, and the "national sales tax" types, who would
do away with the income tax altogether.
The
short answer is that we do not know which would be better, because we haven't
tried either. Both would be better than what we have. Many Eastern European
goverments have adopted flat-tax systems, with considerable success although
they are quite new. I wish we had a few Eastern European governments adopt a
national sales tax (or value-added tax) system, just to see if things would
turn out differently.
The
VAT is something to consider. It is a relatively new idea, first implemented
in 1954. It is easy to administer, and highly effective in generating income.
Wikipedia
on VAT
The
debate on flat-tax or sales-tax (VAT) systems revolves around certain points.
The
flax-tax group believes in the fundamental value of a "progressive"
tax system, to counter the tendency of capitalist systems to bifurcate into
rich and poor. Actually, a "flat tax" is no different than the
present income tax system, except that the top tax rate should be relatively
low by today's standards, certainly below 25% and better yet below 20%. If,
instead of one tax bracket at 20% for incomes above $50,000, you had two tax
brackets at 10% and 20%, it would hardly be any different. The flat taxers
would like to give the lower incomes every advantage, by exempting them from
taxation altogether. Indeed, this is really no different at all from the
earliest (pre-WWI) versions of the income tax, which had single-digit rates
and exempted the majority of earners. Also, the flat-taxers are perhaps less
politically ambitious, and see a system not too much different than the
existing one as being more politically feasible.
People
don't realize today the degree to which the income tax was considered an
incursion on basic human liberties. It was considered unconstitutional in the
United States until the (alleged) passage of the 16th Amendment in 1913. A 2%
income tax was actually enacted by Congess in 1894, but it was struck down by
the U.S. Supreme Court in 1895. The 1913 income tax had a 1% levy on incomes
above $3,000 per year, which is equivalent to about $65,000 today, and a top
rate of 7%.
The
sales tax/VAT group focuses more on the elimination of direct taxation --
with all of its complexities and paperwork -- altogether. They are less
motivated by an urge to assist the lower earners, although the sales tax/VAT
group is usually happy to provide some sort of adjustment for lower incomes
such as an exemption on food or a fixed "tax rebate." This system
is sometimes called a "fair tax," which I think is a horrible term
because "fairness" can mean anything under the sun when it comes to
taxation. A 100% capital gains tax could be called "fair" because
it is "unfair to make income without working."
Thus,
we come to the question of the "progressive income tax." Does it
help?
The
"progressive income tax" was never really just a way to get
government revenue. It was also a way to mitigate what was perceived as the
problems of 19th century capitalism. I have talked about those problems
elsewhere -- you need only read the books of Charles Dickens for a more
detailed account. Many people today would like to imagine that these problems
didn't exist, as if the primary topic of economic discussion from about
1840-1950 was a delusional fantasy.
In the
late 19th century, the "progressive income tax" as revenue
generator and social policy was just an idea. Now we have a hundred years of
experience with it. What have we learned? I think we can conclude:
1) The
whole idea of "income" is problematic. Is capital gains
"income"? Is it sensible to tax corporate "income"? How
about double-taxing dividends? Should interest payments be considered an
"expense"? (The tax distortion between debt capitalization and
equity capitalization of entities today is intense.) Should interest payments
be tax-free on the individual level? (Credit card interest used to be
deductible.) Is inheritance "income"? Gifts?
2) The
idea of "redistribution of income" has never existed in real life.
The closest we come to "redistribution" is Social Security, which
is a redistribution from middle- and lower-class working people to middle-
and lower-class retired people. Social Security is funded through the payroll
tax, which is a type of income tax but which is actually
"regressive." The fact of the matter is that all personal income
tax revenue falls into the great maw of government, never to be seen again.
It mostly funds the military, kickbacks, pork and waste. In short, "the
people" see no benefit from it whatsoever.
3)
Progressive income tax systems can have enormously bad effects on economies,
especially when tax rates rise above 25% or so. This is completely lost on
most income tax proponents.
4) The
system leads to immense complexity.
5) As
rates rise above 20%, political pressure is put to bear on making exemptions
and loopholes for all sorts of activity. Often, these exemptions and
loopholes are the only way that a society can function under the high
official tax rates. The result is all sorts of economic distortion.
6) The
system is ripe for abuse by governments, who will inch rates higher whenever
they want more money (always).
7) The
system creates criminalization of tax evasion -- a crime with no
"victim" -- while at the same time introducing an intense
motivation to evade taxes.
8)
Among its negative economic effects, high income taxes (on corporations too)
prevent capital accumulation, which is the primary means by which "good,
high-paying jobs" are created.
I
could probably think of a few more, but I would like to go hiking this
afternoon.
While
there have been some periods with high official tax rates, such as the 1950s,
which have had both a healthy economy and high apparent tax rates, closer inspection
usually reveals that these high rates were avoided through a mass of
exemptions, accelerated depreciation, etc. Actually, in the United States,
the income tax was voluntary
in the 1950s. Nobody was subject to an IRS audit or investigation. So, even
if you couldn't find a legal means of avoidance, you could just sort of
quietly step aside.
If we
take the entire 1840-1950 "progressive" effort -- the attempt to
amend mid-19th century capitalism -- in totality, I tend to conclude that the
most important advances have been in the provision of government services.
This includes welfare programs like food (food stamps), unemployment
insurance, and so forth. The principle of a publicly-provided primary and
secondary education is one that receives almost no complaint from the most
"libertarian" people, although it is quite expensive. All sorts of
public services like police, fire, water, street sanitation, public urban
parks, state parks and national parks, libraries, sports fields and the like can
fall in this category. It also includes state medical care, which has been
about as much of a success in other developed countries as one could expect
from any government-run program.
We can
also add government regulation, such as minimum standards for food and water,
environmental regulation, workplace health and safety, the elimination of
child labor, and the principle of the five-day workweek. Let's add the
principle of personal bankruptcy, eliminating the debtors' prisons of the
past.
I
don't think anybody would complain too much about these new developments,
although they may suggest some tweaks to the existing system.
However,
I don't think the progressive tax system accomplishes much of anything at
all. Thus, while the flat-tax approach might be more politically comfortable,
the sales-tax approach is probably better.
In
actuality, both would be fine. The real purpose of this thought exercise is
to look back on both the 19th century experiment in Industrial Capitalism,
and the 20th century "progressive" effort to fix the problems that
emerged, and come to some conclusion about what works for the future. Most of
the fixes worked. So, let's keep those, but drop those things that really
serve no purpose, such as today's income tax system.
We
will follow up on the State of the Art in the future.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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