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Why capitalism is unstable
A Concise Summary of Hilaire Belloc's The Servile State (see parts 1 & 3), by Charlie Deist
“. . . If we do not restore the Institution of Property we cannot escape restoring the Institution of Slavery; there is no third course.” — Hilaire Belloc, The Servile State
There is a long-running debate between “anarcho-capitalists” and minimal government libertarians that goes like this: if the state were abolished, would a central authority emerge in the power vacuum left behind?
The point is that we can’t just paint an ideal picture of our preferred society. We have to prove that it would be a stable equilibrium.
In Belloc’s view, capitalism has always been an unstable equilibrium — an inverted pyramid balanced on its apex. Pure capitalism always topples over; the only question is “in which direction?”
Distributism is sometimes represented as a third way between capitalism and socialism. This part of my summary will show why Belloc considered it to be the only alternative to socialism (or its sister, servility) after true capitalism begins to eat away at the source of its own dynamism.
Part I left off with the change from a farming society to an industrial society.
This was preceded by a shake-up in the distribution of land, away from the Catholic Church and into the hands of landlords who then accumulated most of the power in parliament and the courts. What had been a strong central government made up of families was replaced by a plutocracy that used the law to entrench its own wealth and power against their competitors and workers.
Belloc argues that “[t]he Industrial System was a growth proceeding from Capitalism, not its cause.” In an industrial economy you need more upfront resources to reap a future return, but the centralization of capital in the hands of a few was not an inevitable result of “economies of scale.” In the bygone distributive state these resources were secured by the co-operative guild. With its decline, however, capital-intensive operations involving steam engines, blast furnaces, and power looms could only be financed by the wealthy oligopoly and developed in industries that employed the masses of recently dispossessed workers.
Peak Capitalism
Under the industrial capitalism of the late 1700s to early 1900s, the general stamp of society was insecurity for the masses, and a growing moral strain between the traditions of freedom and dignity and the reality of economic dispossession.
Political freedom was universal, but economic freedom and ownership were reserved for a few. Belloc asks whether a man is free if he has no alternative to his job at a subsistence wage. The hardcore libertarian may disagree, but most people would find Belloc’s use of the word coerced here to be fair:
“Most men now fear the loss of employment more than they fear legal punishment, and the discipline under which men are coerced in their modern forms of activity in England is the fear of dismissal.” (p. 89)
In negotiating, there is often a discrepancy between the two parties’ “best alternative to a negotiated agreement” (BATNA). Back then, one who refused to work would starve, whereas a capitalist would only have to pay marginally more to the next disposable worker. Not fair!
If the primary form of exchange consists of contracts between starving workers and wealthy owners then a spiritual conflict arises, along with “ill-ease throughout the commonwealth when the realities of society are divorced from the moral base of its institution.” (p. 90)
Belloc’s Business Cycle Theory
Peak capitalism began to decline once it became clear that competing owners could not pay workers during business downturns, leading to starvation of the unemployed in some cases.
Belloc’s theory of what makes capitalism so unstable is worth quoting at length:
“If full political freedom be allowed to any two such possessors of implements and stores, each will actively watch his market, attempt to undersell the other, tend to overproduce at the end of some season of extra demand for his article, thus glut the market only to suffer a period of depression afterwards and so forth. Again, the Capitalist, free, individual director of production, will miscalculate; sometimes he will fail, and his works will be shut down. …”
We can chart these booms and busts throughout history. Rivalrous competition seems to breed a certain kind of irrationality, such as the Tulip mania of Holland.
Belloc views the market as anarchical and wasteful, since economic rivals will always race each other to the bottom until profits are driven down to zero, goods are overproduced, and the mass of workers end up laid off.
“…Again, a mass of isolated, imperfectly instructed competing units cannot but direct their clashing efforts at an enormous waste, and that waste will fluctuate. Most commissions, most advertisements, most parades, are examples of this waste. If this waste of effort could be made a constant, the parasitical employment it afforded would be a constant too. But of its nature it is a most inconstant thing, and the employment it affords is therefore necessarily precarious.” (p. 93)
This is an oversimplification, and I would add that manipulation of the money supply amplifies whatever errors businessmen might be prone to, which I write about this in The ABCs of Austrian Business Cycle Theory.
But there is more than a grain of truth in the argument that the explosive dynamism of capitalism leads to both rapid discovery of more efficient methods of production, and equally rapid discovery of errors and excesses. In a world of small-scale production this mostly harms the business, but mass production introduces the possibility of mass unemployment.
Belloc does not exaggerate the misery and insecurity of the worker through the peaks and troughs of capitalism in the industrial revolution. It wasn’t even a particularly good time for the capitalists, who often squandered their fortunes trying to outcompete each other.
Eventually the internal contradictions generated demands for reform, which the owner class was happy to accept since it left the overall economic arrangement undisturbed.
There are three states, says Belloc, into which the precarious state of capitalism can collapse: slavery, socialism, and property.
The most natural tendency of this slippage from pure freedom of competition is toward slavery, or servility.
Calls for reform lead to more regulations on free enterprise to staunch the economic bleeding of the masses.
Belloc cites the Poor Laws of 1834 as an example. There are many more modern examples, like redistributive taxation, which limit political freedom to guarantee a measure of economic security for all.
A government captured by vested interests also tends to create cronyistic monopolies to dull the rivalry of competition. This, too, guarantees workers some measure of security at the expense of servitude to their new economic masters, while also insulating the owners from competition.
Apart from this servile state, the remaining two options are to vest property in the hands of the many (i.e., collectivism/socialism), or to increase the number of property owners (distributism).
Recall that Belloc does not hold the injustices observed during the industrial revolution to be inherent to steam engines or factories, but rather to the unjust distribution of land and wealth that preceded them.
Contrary to the popular perception of distributists as luddites or nostalgic agrarians, Belloc wants to say that if you like your industrial revolution, you can keep it.
The third and final part of this summary will break down the motivations behind reforms to re-enfranchise the common man through socialism, and why these may be easier but ultimately unworkable compared to distributism. Unfortunately, Belloc devotes little space to explaining how a more just distribution of property might be maintained against power’s natural tendency to clump in the hands of a few, but I will begin to outline what it means to restraint certain freedom in order to maximize others.