The Great Debate

David Ellerman

The Great Debate between Capitalism and Socialism is at last over. The free market and private property have decisively won. Does that mean the “end of ideology” or the “end of history”? Can we rest assured that there are no fundamental structural flaws in the western-style economy? Our legal system is structured to forbid discrimination on the basis of race, but racism persists. Is that the only type of social problem that remains–where the structure is correct in principle but the implementation is flawed?

We shall argue that the current western-style economic system is fundamentally and structurally flawed. The problems are not just in the implementation of sound principles. Moreover, we shall argue that the system is flawed because it violates the principles of the institutions that are usually associated with capitalism. That is, it violates the basic principles of both private property and democracy. From the conventional point of view, this will seem to be a strange position. Isn’t capitalism usually identified with private property and democracy? That identification has been based on the Great Capitalism-Socialism Debate, on assuming that “the alternative” to capitalism is state ownership of businesses and one-party dictatorships. But that debate is over, and accordingly capitalism can now be evaluated in a new light.

Since “capitalism” is so often definitionally identified with a private property market economy, we must give a more precise definition of “capitalism” so that we are not just arguing about definitions. By “capitalism” we mean production organized on the basis of the employer-employee relationship. We shall also use “the employment system” or “employer-employee system” as more accurate but less known names of the system based on the employer-employee relation. The alternative is a private property market economy where everyone is self-employed (individually or jointly) in their workplace. A firm where the managers and workers are jointly working for themselves will be called a “self-employment firm,” a “worker-owned firm” (where “worker” always includes all who work in the business enterprise), or a “democratic firm” in contrast to the conventional “capitalist firm” or “employment firm.” The basis question is this –the employer-employee relation or universal self-employment in the workplace?

We shall have more that one occasion to use a slavery analogy. Consider a private property market economy where the workers were largely privately owned slaves, like the American economy before the Civil War. Suppose the defenders of such a system managed to restrict consideration of an alternative to a system of state businesses with state or socially owned slaves. The “Great Debate” would be between the “Athenian” model of privately owned slaves and the “Spartian” model of publicly owned slaves. The Athenian model would most likely be more efficient. Over the years, it would demonstrate its superior efficiency while the Spartian model might eventually collapse under its own weight. Would the victory of the Athenian model of private slave ownership signal the “end of history”? Would the victory mean that the Athenian model contained no structural flaws, only problems of implementing otherwise correct principles?

The Great Debate of our day has been similar except that the question has been the voluntary private or public hiring (or renting) of workers instead of the private or public ownership of workers. In spite of its political importance, the public-private debate has been conceptually wrong-headed from the beginning. The real question about slavery is not the public or private ownership of slaves but whether the master-slave relationship should be allowed (involuntarily or voluntarily) or should people always be self-owning (which implies that the right of self-determination should be inalienable even with consent). Today, the real question is not about the public or private employment of workers (as it was in the capitalism-socialism debate). The question is: should the hiring or renting of people be allowed at all or should people always be self-employed in the their place of work?

Some would say that the universal self-employment system should be presented as a variant of capitalism rather than an alternative. That may be; there is no need to argue only about words. But there are conceptual and historical reasons to use the word “capitalism” exclusively to represent the employer-employee system so long as one is clear, precise, and explicit about that usage. When people are self-employed in their firms, then the suppliers of capital are not hiring the workers. Labor (in the sense of all the people, managers and blue-collar workers, who work in the firm) is hiring capital. Since Labor would then be the “residual claimant” (the party receiving the profits left from the revenues after the costs are covered), it would be odd to call that arrangement a variant of “capital-ism.”

In any case, the reader has been forewarned; “capitalism” herein refers to the use of the employer-employee system. The alternative is a private property market economy based on universal self-employment.

Intimations of Structural Flaws

The end of the capitalism/socialism debate also signals the triumph of neo-classical economics over Marxian economics. Neo-classical economics now reigns as a self-contained and virtually unchallenged scientific theory. How could there be any deep-lying structural flaws in the capitalist (employment) system without neo-classical economic theory discovering them? The answer is that basic flaws in the paradigm have always been fairly clear but that neo-classical economics has simply decided not to investigate them.

Take for example the simplest and most fundamental of insights in economics, the mutual gains of voluntary trade between two or more parties. In the absence of externalities that violate the rights of others, economics finds no reason to prohibit a voluntary exchange between knowledgeable and consenting adults. Yet no capitalist economy allows citizens to sell or buy their political votes. Why not? There are certainly willing buyers and willing sellers so there would be mutual gains from a voluntary exchange. It is easy to understand why representatives are not allowed to sell their votes (since it would violate their representative function). But why shouldn’t the ultimate primary citizens be allowed to sell their votes?

The prohibition of vote selling is in direct contradiction with the simplest recommendation of economic theory. Is the prohibition just an arcane practice that should be removed in the interests of greater efficiency, or does it hint at some deeper flaw in economic theory? What is the position of economics on this conflict between received theory and the legal system? Does economics give an uncontrived explanation of this prohibition as an “exception” to the efficiency rule, or does economics recommend that citizens be allowed to sell their votes? The reader is invited to inspect the economics texts of our day to answer the question. We fear the reader will find little or no discussion of vote selling. Economics tends to duck the issue.

Consider the voluntary contract to sell labor by the lifetime. The usual employer-employee contract is a short-term contract to buy and sell labor. The employer is hiring, renting, or employing the employee for some limited time period. But just as one can rent or buy a car or an apartment, why can’t we have the same choice with people? Buying a car is essentially buying all the services the car can provide (like rental for the lifetime of the car) instead of buying only a certain segment of services. Applying the same option to workers, there could be a voluntary contract to “buy” a worker in the sense of buying all the services (within the scope of the contract) the worker could provide over his or her working lifetime. That would be a modern civilized form of the old voluntary self-sale or self-enslavement contract. Yet such a contract between knowledgeable and consenting adults is forbidden in all capitalist economies.

Here again, does economic theory give any coherent account of the drastically different treatment of short-term and long-term rental contracts (applied to people)? Why is the long-term contract strictly forbidden when the short-term contract is the foundation of the system? Do economists recommend consistently with free market principles that lifetime labor contracts be allowed [like Nozick 1974 and Philmore 1982], or do they give a coherent and uncontrived explanation of this “exception”? The reader is again invited to consult the economics books of our day, but we fear that economics again ducks the issue.

Or consider the voluntary collective contract for a people to give up and transfer their right to govern themselves to an emperor or autocrat. In the employment contract, the employees give up and transfer their right to manage their activities within the scope of their employment to the employer or “master” (the original legal name was “masterservant relation”). Why not allow the same sort of collective contract in the political sphere? Indeed the postulation of such a pactum subjectionis (pact of subjugation) was the traditional sophisticated justification offered for nondemocratic governments [e.g., Thomas Hobbes].

In the western political democracies, the right of political self-government is considered to be inalienable (cannot be alienated even with consent) and is vouchsafed in the political constitutions. If the analogous right was considered inalienable in the workplace, then it would imply the adoption of the system of universal self-employment. Collective self-employment in the firm is the economic analogue of political self-government or democracy. Yet the same societies consider it quite routine for the citizen-as-worker to alienate that right in the workplace (the employer is not the representative or delegate of the employees). Does economics give any coherent and uncontrived explanation of how society can be partitioned into “spheres” [e.g., the political sphere and the economic sphere] so the right to self-determination is inalienable in one sphere while being routinely alienated in another sphere? Or does economics consistently advocate that citizens be allowed the same latitude in “collective bargaining” as workers? The reader is again invited to consult the texts of our day to see whether or not economics avoids the issue.

Or consider the position of economics on the distinction between persons and things. Economics recognizes no theoretically relevant distinction between the actions of persons (namely, “labor”) and the services of things such as capital goods and natural resources. Microeconomic models routinely do not even recognize the distinction in their notation [e.g., in a production function notation y = f(x1,…,xn)]; much less in the substance of the models. The services of humans and the services of things are both causally efficacious; both have a “marginal productivity” in the sense that production would decrease if the services were withdrawn. Thus contemporary economics has dismissed as misguided the earlier theoreticans who reserved a special place for the actions of persons [e.g., in “the labor theory “].

Yet it is quite simple to differentiate human actions from the services of things. Look at a court of law. The “tools” used in a crime are of course causally efficacious. They have a “productivity”; otherwise there would be no reason to use them in the commission of crimes. But the responsibility for the crime is traced back through the tools to the human being who used them to commit the crime. Only humans can be eligible for responsibility; not things. The court of law attempts to insure that the legal responsibility for a crime is imputed to the correct people, to the people who were de facto responsible for the crime. No liability attaches to the tools, regardless of their productivity. The people who commit crimes are to be made liable for the negative fruits of their labor. This principle at the root of juridical imputation is also at the root of private property. People should also have the rights to the positive fruits of their labor. In this form, the principle is called the “labor theory of property” and it is associated with John Locke, not Karl Marx.

The “labor theory” is a standard topic in the history of economic thought, and the question of “imputation” is part of the subject matter in the economic theory of the firm. Yet the reader is invited to scan the entire corpus of contemporary economics texts to find one which even mentions the basic legal distinction between the actions of persons and the services of things–which even mentions that only persons, never things, can be responsible for anything. Responsibility seems to be the R-word which cannot be uttered (except perhaps metaphorically). We have considered a number of areas where conventional economics is directly at odds with the legal structure of the western democracies. Modern legal systems

·  prohibit vote-selling by citizens,
·  prohibit voluntary self-sale contracts between adults,
·  take basic political rights of self-determination to be inalienable,
·  would not recognize any political pactum subjectionis, and
·  impute responsibility only to persons (never to things regardless of their “productivity”).

All these practices are in direct conflict with the most fundamental recommendations of conventional economics. On the one hand, economics does not advocate that these practices be changed to be consistent with economic theory and, on the other hand, it does not give a coherent and uncontrived explanation of why these practices should be considered as “exceptions.” In short, economics tends to duck these basic issues. There have always been these intimations of structural shortcomings, lacuna, and flaws in conventional economics. Economics has only seemed to be coherent and complete theory because it chooses to ignore the paradigm-threatening discrepancies between the theory and the legal structure of the modern western democracies.