Thursday, December 31, 2015

George Orwell and Karl Marx don't want your iPhone: communism, capital, and private possessions

Image: Street art inspired by George Orwell's Animal Farm (source)

Animal Farm
The novel Animal Farm by George Orwell is remembered as a cautionary tale against the inevitable problems of leftism. In Animal Farm, the farm animals--led by the pigs Snowball and Napoleon--rebel against their drunk and incompetent farmer, eventually prevailing and setting up a farm where all the animals are better off. The animals all learn to read and write, and plans are in the works for all the animals' stalls to have electricity and running water. In order to realize these admirable goals, the animals agree to give up all their possessions so they can be used to benefit the entire farm, and the animals all work hard to contribute to the common good. But Napoleon is able to drive away Snowball, and rather than continuing with the egalitarian projects, Napoleon starts using the community's wealth to improve the condition of the pigs. As a result, the quality of life of the rest of the animals declines until they are far worse off than before the revolution, and--unbeknownst to the animals other than the pigs--some of the animals are even assassinated in order to improve the power and wealth of the pigs. The pigs eventually obtain so many special privileges at the expense of the other animals that they become indistinguishable from the oppressive farmers, and the golden rule of the revolution: "All animals are equal" becomes "All animals are equal, but some animals are more equal than others."

It is impossible to argue that the scenario in Animal Farm isn't more or less what happened in the Soviet Union, Cuba, and Ethiopia. In the name of the common good, a privileged few were able to exploit the rest of society. And this scenario was certainly played out to a horrific level in Cambodia. Yet Orwell could not possibly have intended his work to be a cautionary against leftism generally. Ironically, Orwell considered himself a socialist--and not one of those Scandinavian social democrats who call themselves socialists but actually seek to create a more humane form of capitalism--Orwell was a true socialist who believed that private ownership of capital should be abolished. He traveled to Spain to fight alongside the socialists in the Spanish Civil War, where he was wounded, nearly fatally.

The book's resemblance to the actual history of Soviet-style communism is no coincidence. Orwell wrote Animal Farm as a critique of Soviet-style communism generally and Joseph Stalin in particular. Ironically--given the way the novel is remembered today--Orwell felt compelled to write Animal Farm to counteract the fact that Joseph Stalin was held in very high regard in capitalist Great Britain in the early- to mid-1940's. Orwell believed that Stalinism should be spurned due to its Reign of Terror and dictatorship, even if the Soviet Union was an ally against the Nazis.

Many often assume that communism necessarily demands an Animal Farm-style collectivization of wealth, and the inevitable seizing of society's wealth by the powerful--as if that's even different from our capitalist world where 1% of people own half of all world wealth and half the world lives in abject deprivation, or the United States where the richest 1% controls over a third of all wealth, the richest 10% control over three quarters of all wealth, and the richest 0.1% are about as wealthy as the poorest 90%. Yet Orwell is not alone on the left in his views on collectivization. Karl Marx himself was careful to make the distinction between productive capital and personal possessions, since personal possessions cannot be used to exploit people, but capital can. Your house, mementos from a deceased loved one, family heirlooms, books, pets, smartphone, etc--all of these things are not capital because they cannot be used to exploit people. I'm with Karl and George on this one. If your iPhone makes you happy, keep it, because you can't use it to exploit people.

Abolishing private ownership...but only of capital
In the previous post in this series, we established that communism and capitalism have nothing to do with free markets, central planning, or any other type of economy--communism and capitalism can fit easily into any type of economic system--and everything to do with ownership. In brief, in all versions of communism, ownership of companies by shareholders is forbidden or at least strictly limited. We will consider in later posts why this is a desirable outcome. For now, we need to firmly establish definitions.

It's not easy to write "ownership of companies by shareholders" over and over, and "private ownership" usually stands in as abbreviation. This is a very unfortunate choice of abbreviation, as forbidding private ownership sounds like a recipe for an Animal Farm-style dystopia. This post explores this terrifying-sounding issue further; a later post will take on the lurid history of collectivization in the Soviet Union and Cambodia.

As we shall see in future posts, capitalism is so destructive to people, communities, countries, and ecosystems because people can privately own capital. Ownership of personal possessions is not destructive.

What is capital?
The difference between capital and personal possessions can be abstract. Thus, the most clear way to explain this concept is through an imaginary example we can then apply to the real world.

Imagine a river that is used extensively by boats moving passengers and goods. It's an important route for local commerce.

A knight named Sir Arthur--who lives on the other side of the country--hears about this river. He travels a great distance with a long chain, which he puts across the river to prevent boats from passing. He charges a toll to lower the chain and let boats pass. He's got a sword, so no one can tell him otherwise. Because so many boats are forced to pay this toll, Sir Arthur becomes fabulously wealthy.

In this situation, Sir Arthur is collecting a rent. A rent is any revenue gained from unproductive activities; Sir Arthur may be working very hard raising and lowering his chain all day, but he's not being productive. Sir Arthur isn't producing any goods or services; he's impeding the local economy's utilization of goods and services, and getting very rich in the process.

By contrast, what are some examples of productive activities Sir Arthur could engage in? Sir Arthur could offer his services repairing boats; he could build a pier and use his section of the river as dock to load and unload goods; he could open a store to sell the items the boats are carrying; he could open a restaurant to feed hungry boaters; if there was an uneven point of the river he could build a lock and charge people a toll to use the lock, thereby making river travel safer. But he's doing none of these productive things. His profit comes from unproductive activities.

Very few people would defend Sir Arthur in this situation. He doesn't own the river, and he doesn't own the land around the river. Nothing about what he's doing is in any way legitimate; he's using the threat of violence to extort money from the local community. People who contribute positively to society should be able to profit from those contributions, but Sir Arthur is not adding to the common good, he's subtracting.

In this scenario, most people would agree that Sir Arthur is a horrible person.

Let's change the situation a little. Let's say a different knight, Sir Beauford, owns some land that the river goes through, and in sir Beauford's country, ownership of both banks gives him ownership of that section of the river. When Sir Beauford strings up that exact same chain and demands the same toll of the same commerce using the river for trade, he's not some foreign invader. He owns the land, he owns the rights to the river, and he has every right to put a chain up across the river and only let boats pass if they pay a toll.

How do we feel about Sir Beauford in this scenario? What he's doing is legally permissible, but does that make it ok? Unlike Sir Arthur, Sir Beauford has the law on his side; he's not using extralegal threats of violence. But like Sir Arthur, Sir Beauford isn't adding to the common good, he's subtracting. Should he be allowed to do this? Should he be allowed to use the land he owns any way he likes, even if he chooses a use that is harmful to everyone but him? Do we have a right to dictate to Sir Beauford how he can and can't use something he owns?

Let's complicate things a little further. Sir Beauford's great-great-great-great grandfather--the original Sir Beauford--was given this land by a king several hundred years ago. The current Sir Beauford has managed to be the first born male to the previous Sir Beauford, and inherited the land.

In this scenario--an idle aristocrat who inherited his land and is using these unearned privileges to extract rents from others' hard work--most people would probably agree that Sir Beauford is a terrible person.

But upriver from Sir Beauford is Sir Chenoweth. Sir Chenoweth has done the same thing as Sir Arthur and Sir Beauford with a chain over his section of the river. Like Sir Beauford, he is the rightful owner of the land and that section of the river. Unlike Sir Beauford, Sir Chenoweth did not inherit his land. Rather, he keenly noticed the business opportunity of stringing a chain across the river, and purchased this section of land from Sir Dragoon; since he was such an astute businessman, Sir Chenoweth has made tremendous profits with this business.

Does it make it any more right for Sir Chenoweth to profiteer in this way? He saw a great business opportunity and struck, but he is still subtracting from the common good, not adding to it.

Finally, we have Sir Erewon. Sir Erewon was orphaned as a young boy and grew up penniless in an orphanage. He left the orphanage as a teenager and found a knight to squire for. Through hard work and determination, he worked his way to the top of the knighting world, eventually earning enough money to purchase some land straddling the banks of the river. Like Sir Chenoweth, Sir Erewon keenly recognized the business opportunity of stringing a chain across the river and has since become very wealthy; his is a true rags to riches story. True to form, he gives generously to local charities, including the orphanage he grew up in.

Capital extracts rents; possessions do not
Again, a rent is some money obtained through unproductive activities. The knights in the hypothetical examples are all getting rich to the rest of society's detriment. This illustrates the definition of capital: if ownership allows someone to extract a rent from the economy, it is capital. Sir Arthur's chess set, Sir Beauford's pet dog, Sir Chenoweth's silver chalice, Sir Erewon's iPhone--none of these items are capital because they cannot be used to extract rents from the economy.

Communists recognize the unproductive and unfair nature of rents and want to make private ownership of capital illegal (or at least limited) because private ownership of capital leads to the extraction of wealth from hard-working people by unproductive capital owners. Rags to riches stories do not move communists where exploitation is involved; Sir Erewon should have used his hard work and determination to benefit society, not encumber it, and orphans should not grow up in destitution anyway. His donations to charity do not outweigh the amount he exploits society to satisfy his greed. You shouldn't be moved by rags to riches stories, either. The infamous Pharma Bro, Martin Shkreli, who raised the price of a life-saving anti-parasite drug from $13 to $750 per pill in order to boost his company's profits, was a true rags to riches story: he grew up the son of two immigrant janitors who largely taught himself finance and biology. As an adult, Pharma Bro got rich through the ownership of capital. Pharma Bro gained notoriety as he sought to extract rents from very sick people through his ownership of the production of a life-saving drug--a drug that someone else invented.

How do knights and chains tie in to capitalism? Let's revive the example from the previous post, that of Widget Co.

For a quick refresher, Widget Co. is a company that produces doo-dads, and its sole owner is Mr. Widget. I wrote of Mr. Widget and Widget Co.:
Widget Co.'s labor are the workers who operate the machine and use the tools to create doo-dads. Mr. Widget is not a part of Widget Co.'s labor, since he doesn't work the machine or the tools.

For the sake of discussion, let's push this example further. Let's assume that Mr. Widget doesn't even manage Widget Co. Let's assume that he has hired Jerry Rig to manage production and to market/sell the completed doo-dads; all Mr. Widget does all day is play golf.

Actually, since this is a hypothetical anyway, let's push this example further still. Not only does Mr. Widget play golf all day, but he inherited the widget machine and Widget Co. from his father. He didn't invent the widget machine; he didn't build the widget machine; he didn't start Widget Co. He simply owns the company and its capital.
In this example, Mr. Widget is rich because he owns the capital of Widget Co., and this entitles him to all of Widget Co.'s profits. He is entitled to these profits even though he doesn't do any work for Widget Co., he didn't build or invent the widget machine, and he inherited the entire business from his father. Despite adding nothing of value to Widget Co., Mr. Widget is nonetheless entitled to 100% of Widget Co.'s profits--simply because he is the sole owner of Widget Co.

Mr. Widget is actually quite similar to Sir Beauford: both men inherited their capital, and neither actually adds anything of value to the economy. Sir Beauford's capital is the land he owns; Mr. Widget's capital is the doo-dad machine and tools used in the production of doo-dads. Sir Beauford extracts rents from others' hard work by using a chain strung across the river; Mr. Widget's chain is his rights to the profit derived from using the doo-dad machine. Mr. Widget is extracting a rent from the economy, and even though he wears a suit, it's no different than what Sir Beauford does (or for that matter, what Sir Arthur or Pharma Bro do).

In future posts, we will see how Mr. Widget's rights to profit can be exploitative of his workers and society generally. But it's clear that Mr. Widget is not adding to society; he is subtracting. To communists, extracting rents from the economy is not right, even if it's legal as in the case of Mr. Widget or some of the knights considered above.

For a real world example, it's hard to do better than the Walton heirs. None of the Walton heirs had anything to do with Walmart's success as a business--they simply inherited it from their father--and to this day, none of them work. They're not even managers of Walmart; they simply sit on Walmart's board of directors and threaten to fire Walmart's managers if profits aren't high enough. Yet from their ownership of Walmart's capital--in other words, their entitlement to the profits derived from using Walmart's capital (the stores, shelves, cash registers, shipping fleet, logistics software, etc)--their annual income is $3.16 billion each year, which has added up to a truly staggering $145 billion in wealth, or more combined wealth than the poorest 42.9% of Americans. And they can't even be bothered to pretend to benefit society. The Walton heirs have done nothing to deserve their wealth, never do any work (let alone productive work), and yet because they own the capital of Walmart, they are wealthier than nearly half the country combined.

The communist revolution
To conclude our discussion on the difference between capital and personal possessions, let's assume Mr. Widget is very unlucky and his country has just experienced a communist revolution. Fortunately for Mr. Widget, the leaders have decided only to prevent future injustices, but not mete out punishment for past wrongs. It's well known that Mr. Widget has been paying his workers poverty wages, and everyone is rightly offended by this. What will the communists do?

Since the revolutionaries are interested only in preventing future injustice, they will force Mr. Widget to give up ownership of things that he can use to exploit people and extract rents from the economy, but let him keep the things that he cannot use to exploit people and extract rents from the economy. Obviously, his ownership of Widget Co. will be taken from him and given to his employees. But his iPhone, his deceased grandfather's pocket watch, his home, his stamp collection, etc--all of these possessions cannot be used to exploit people or extract rents from the economy, so the revolutionaries will let him keep them them.

Capital can be used to extract rents from the economy. Personal possessions cannot.

The communist non-revolution
By now, you're relieved to hear that our socialist future won't involve you giving up all your possessions. But it's probably difficult to imagine how a world without the private ownership of capital could exist. What incentive would people have to come up with new inventions, for example? If someone comes up with a great new invention, shouldn't she be rewarded for her ingenuity and hard work? How could an inventor be rewarded if she cannot privately own capital--the idea she had in the form of a patent--and use that capital to (temporarily) extract rents from the economy?

This is the challenge of leftism. Many would agree that it is unjust for the Waltons to possess more wealth than nearly half the country simply because they are descendants of Sam Walton. But what to do about it? How do we design a world where people can be rewarded for their contributions to the common good, but at the same time, prevent people from using those same means to reward themselves for the contributions of others? This is by no means an easy task, but--by the time you finish this series on leftism--I hope you will agree it is a necessary one.

Like Orwell, I believe that leftist goals should be achieved peacefully and legally, so instead of talking revolution, let's talk Meidner Plan, which I mentioned briefly in the previous post. Rather than a communist revolution stripping all individuals of their ownership of capital overnight, the Meidner plan envisioned a gradual process, and was very nearly implemented in Sweden. According to the Meidner Plan, once a company grew to employ 50 workers, a process would begin wherein the company would transition gradually from shareholder to employee ownership over the next several decades. Obviously, any of the genius inventors or investors responsible for starting a company will be long dead several decades after their initial start-up company grows to employ 50 or more workers. Because the transition from private to worker ownership takes place over several decades--roughly the lifespan of a person--anyone who uses a bright new idea to start a new company will certainly have ample time to be rewarded for their ideas before losing ownership. Likely, they will be dead before fully losing ownership.

Under the Meidner Plan, an inventor's children can't exploit workers because of the achievements of their parents, and purchasers of equity who had nothing to do with the initial investment can't use their riches to exploit workers simply because they're rich. I'm only outlining the basics here, but it's clear that there is a way forward. In later posts, we'll consider in greater detail the many issues mentioned here: the Meidner Plan, the violence of Soviet and other forms of communism, the exploitation inherent in capitalism, and how a post-capitalist world could be created, fairly for everyone.