Is Capitalism Redundant?

The economist John Kay thinks the concept of capitalism is redundant: "I wish we would stop using the word Capitalism. It is a 19th-century term, derived from 19th-century economic philosophy. But today people who would run a mile from any suggestion that they had Marxist sympathies freely use the terminology of that era". That's the opening of his post, so it conforms to the tradition of a buttonholing plea combined with a dubious assertion (the "Why, oh why!" beloved of tabloid columnists), but he does then present a reasonable argument: "The concept of capitalism is inherently confrontational. Capital and labour were struggling for larger shares of the same cake. But 21st-century business – and I insist on talking about business rather than capitalism – is inclusive by its very nature. That nature necessarily entails partnership – partnership between employees and managers, customers and suppliers. The position of investors in that partnership is inherently peripheral and precarious". This sets up a rhetorical opposition between confrontation and partnership, albeit the former is more of an ongoing tension than a moment of crisis and the latter is often at arms-length. You could just as easily talk of competition and cooperation, but there are ideological reasons to avoid that choice of words.

As Michael Roberts notes in reply, confrontation requires a particular conjunction: "The most intense periods of struggle appear to be when the labour movement is reasonably strong in incomes and organisation but when the profitability of capital has started to fall, according to Marx’s law of profitability. Then the battle over the share of the surplus and wages rises. Historically, in the UK that was from 1910 just before and just after WW1; and in the 1970s. Such objective conditions have so far not arisen again". In other words, the absence of confrontation does not indicate an absence of distinct classes with contrary economic interests and therefore the system that we call capitalism. If the latter has meaning, it isn't in the narrow sense of a surplus of financial wealth but in the social relations that the unequal distribution of that wealth gives rise to. Kay insists that modern business is characterised by partnership, but his definition is so all-encompassing and multivalent (managers, employees, customers, suppliers) as to be functionally meaningless and it obscures real asymmetries of power in economic relationships.

The issue I have with Kay's claim is his emphasis on "archetypal" business forms, which he uses to persuade us that the economic system has changed from one mode to another and can therefore no longer be adequately described as capitalist. As he describes it, the term capitalism has a limited historical life, starting towards the end of the 18th century (some historians have placed its birth as early as the 15th century) and becoming redundant by the time of Marx's death. In this scheme, the true capitalists were owner-proprietors who created family firms, such as Richard Arkwright and Samuel and William Lloyd. This form reached its zenith towards the end of the 19th century, most spectacularly in the "robber barons" of the US, after which it was overtaken by the placid charms of the new business model of joint-stock companies. In the 20th century, the archetypal companies in Kay's scheme were General Motors, Du Pont and ICI, who were characterised by their employment of professional managers reporting to multiple, diverse shareholders. By the end of the century, the private investor, who may have taken an active interest in the company's management, had largely been marginalised by institutional investors, who didn't, a process that Kay refers to as the "outsourcing" of investment management.

The increasing distance between the owners of capital and their investments - now mediated by unit trusts and pension funds for the many, and private equity and wealth management for the few - together with the complexity of long supply chains that span the globe, has created a new mode of business exemplified by companies like Apple. In Kay's view, "Apple is, essentially, a structure of relationships, with assemblers, suppliers, customers, employees – Apple exemplifies the source of competitive advantage, based on architecture, which I described in my book Foundations of Corporate Success". The fact that he is puffing his book does not invalidate this characterisation of Apple. More to the point, the structure of the market for business books requires that your thesis either finds a commonality that simplifies and thus explains the corporate world or isolates some "best practice" that can potentially be emulated by other established companies or market-entrants. A book that suggested business forms were multifarious and that success was unpredictable would not sell, even though that would be an accurate reflection of reality.

What Kay says about leading companies obviously isn't untrue, but it is partial when discussing a general economic system (or even just the system of commodity production). The point about Arkwright's Derwent Valley mill or Ford's Dearborn plant is that they were exceptional as units of production, and this was reflected in the companies' unusual corporate forms as much as in the atypical experience of their workers. Just as the majority of labour across the 19th century was employed in either small-scale manufacture or services (not agriculture, as is often erroneously assumed), so in the 20th century only a fraction would experience the large-scale, corporate environment of an ICI or a General Motors. Today even fewer will work for an Apple or a Google. It should also be stressed that while precarious employment has grown in developed economies, it remains a mode that affects a minority of workers (elsewhere in the world, it is much more common). The humdrum reality is that most people in countries like the UK or US work in the services sector for either SMEs, whose employment and production practices would be fundamentally familiar to Richard Arkwright, or for unsexy corporates that despite decades of outsourcing and "flexibilization" are anything but the "hollow corporations" envisaged in the 80s and 90s.

The gulf between the reality of the economic system as experienced by most people and the characteristics of "new economy" headliners is starkest in Kay's assessment of their financing: "They’re generally strongly cash generative and have no need of external capital at all. The purpose of the listing is to enable early-stage investors to make realisations and to persuade employees, many of whom will be shareholders in the company, that there is value in their holdings". Clearly, many businesses still need external capital, which is why we have capital markets. The IPO is a one-off and the capital gains potential for future workers will be much more modest than that enjoyed by the founders or first-cohort employees, which might suggest that the 21st century corporation will have a much shorter lifespan than that of the 20th century. A more likely outcome is that it will simply transform into something that looks a lot more like the corporation of the late 20th century, a process that is already apparent in the growing regulatory burden being placed on companies like Facebook, in the reshoring committed to by manufacturers like Apple, and in the growing physical footprint of disintermediaries like Amazon.

What Kay identifies as a new form may simply be a juvenile phase. It is worth remembering that when we look back at former "archetypes", what we usually imagine is a mature form: Ford in the 1930s, General Motors in the 1960s, Microsoft in the 1990s. The stereotype of "corporate man" and the expectation of "a job for life" only arose relatively late in the 20th century as a result of decades of socioeconomic stability - les trentes glorieuses. It wasn't baked in from the beginning. This doesn't mean that companies like Apple and Google will end up looking like Du Pont and Toyota, but that the mature form of the new technology businesses won't be as disconnected from society as the current model suggests. Or perhaps I should say, the current aspiration, because the employee and capital-lite corporation epitomised by the likes of Apple (at least in its public image) is clearly idealised, in the same way that Germany's Mittelstand and Japan's quality management focus were long idealised as examples of socially-embedded and technocratic capitalism in the 60s and 70s respectively. If nothing else, those two ideals show how supple supplier relationships and the formalisation of corporate intelligence long predate Silicon Valley.

What I think John Kay is really talking about is not capitalism per se but models of ownership, and his essential claim is that ownership has been effectively socialised ("Businesses are and always have been social organisations") in the transition from the owner-proprietors of Arkwright's day to the multi-faceted relationships of the modern corporation: "Modern business is inclusive or it is nothing. The greatest challenge we face is to stop them being turned into nothing by people who suffer from misconceptions about their nature and who undertake rent-seeking activities either on their own behalf, which damage the internal cohesiveness of the business, or through their misuse of the political process, which ultimately damages the external legitimacy of these businesses". The problem is that "inclusive" here is no more meaningful than "stakeholder" was in the 1990s. Ultimately, some people benefit more from a particular ownership model than others and that inequity gives rise to conflicting interests and thus the class "confrontation" that Kay decries. His characterisation of the threats to the model includes the private rent-seeker, but his emphasis on politics indicates that his real target is state intervention.

Elsewhere, Matt Breunig asks whether Singapore, a socioeconomic model often promoted by free market advocates, is actually more of a poster-boy for socialism: "the state owns a huge amount of the means of production. In fact, depending on how you count it, the Singaporean government probably owns more capital than any other developed country in the world after Norway".  Breunig's aim is to separate the question of ownership from that of market structure: "The case of Singapore is more than just a funny gotcha to use against right-wingers. It actually raises an interesting question about what it is people care about when it comes to 'capitalism' and 'socialism'. Is capitalism primarily about markets or private ownership? Relatedly, is socialism primarily about ending markets or promoting collective ownership? Often these things are bundled together, but they are logically and practically separable." In reply, Scott Sumner says that while Singapore actually owns a lot of businesses (not to mention public housing and infrastructure), it doesn't favour them or otherwise interfere in their running, thereby suggesting that what matters is the structure of the market more than the corporate form: "if a government does not protect its state-owned firm from competition, and does not subsidize the firm, then there's really no problem with government ownership. You still have a free market."

Sumner's underlying concern arises when the wrong people are in charge of the government: "Free market economists like myself tend to be opposed to government ownership. That's not because there's anything inherently wrong with government ownership per se, but rather because governments that own companies tend to also do other bad things, like erect barriers to entry or subsidize production". This is similar to Kay's point about "misuse of the political process". While many right-libertarians would claim that such misuse is inevitable, being an inevitable consequence of government ("all power corrupts" etc), the weaker case that Kay and Sumner put forward implies that the problem is bad actors - i.e. the wrong politicians get elected. Whereas libertarians seek to limit the scope of the state but not necessarily its political colour (though doing the one inescapably affects the other), liberals are more concerned with limiting the range of legitimate political actors while not constraining the potential power of the state (i.e. a pragmatic acceptance of the necessity for intervention, even if it is theorised as "exceptional"). To put it another way, you can either have the nightwatchman state or capitalist government in perpetuity. In answer to John Kay's orignial plea, once an idea becomes hegemonic, you no longer have to name that idea.