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The Road to Serfdom Runs Both Directions

By November 1, 2013 No Comments
John P. Tiemstra
I like capitalism, I really do. I think it’s a fine economic system, probably the best. It’s way better than socialism or feudalism. It is much better at handling the consequences of economic change and promoting economic growth. Also, by decentralizing the decision-making process, it gives individuals more autonomy and control, more opportunity to exercise stewardship over their economic lives, and that’s a good thing too.

My opinion on this subject has not stopped some people from calling me a socialist. For some folks, it’s not enough to like capitalism. You have to believe in capitalism. For them, it is not an economic system, but rather an ideology. You have to believe that for deeply moral and logical reasons it is the best economic system for all times and places. Anything short of that makes you suspect.

Capitalism is not a perfect economic system. The autonomy and control that capitalism promises is compromised if economic power is concentrated in relatively few individuals. Capital markets can be unstable, leading to financial crises and depressions. Unethical business behavior can lead to the breakdown of markets, especially if the essential level of trust is lost. Lack of attention to environmental issues can lead to catastrophe. There are a lot of ways it can go wrong. Like all human institutions, capitalism reflects the virtues and defects of the people who try to live in it.

More than that, the ideology of capitalism is built on the idea that when people act in self-interested and materialistic ways, everything nevertheless works together for good. That makes it OK to be self-interested and materialistic. A capitalist system does not work particularly well if materialism and self-interest go too far, as it did in the thirty years or so leading up to the 2008 crisis. Beyond that, self-interest and materialism are dangerous to a Christian’s spiritual life and development. This is not how we are supposed to live. “Believing in capitalism” is the acceptance of a false religion.

Some people have said you can find capitalism in the Bible, so it has to be the uniquely Christian system. Certainly when the Bible forbids theft, it suggests that property and markets were part of the landscape of ancient Israel. However, it is a mistake to call this capitalism. The rules of the Bible forbade lending at interest. The major productive asset in this agricultural world was land, and the purchase and sale of land was forbidden. Land was controlled by the clan or tribe, the way it is in most traditional, preindustrial societies. Businesses could not be bought or sold. In other words, there were markets for goods and services, but there was no capital market. Resources could not be moved from one occupation to another in response to signals about profitability or market value. So this was not capitalism.

Nor was capitalism particularly popular among Christians when they had decisive power over economic affairs. During the Middle Ages, when Christianity was the dominant religion in Europe, the economic system was feudalism, not capitalism. In a feudal system, a hereditary elite control both the economy and the polity, in alliance with the church. Government is weak, and the social services and protections that are offered by government in a capitalist society are instead provided by the lord to those who live on his manor and work for the estate, the principle of noblesse oblige. Again, there was no market for land, buildings, or equipment. There were no financial markets, nor was there any real market for labor. The full development of capitalism did not occur until sixteenth-century Christians became convinced that the Bible’s usury rule no longer applied to them, opening the way for the development of a capital market. John Calvin often gets the credit (or blame) for this development.

Seventy years ago, Nobel economics laureate Friedrich Hayek argued that the creeping socialism of the welfare state was sending the Western world down The Road to Serfdom. Hayek’s book was very influential, and many still read it, but a lot has changed since then. I find it amazing that in our current political situation there is a resurgence of fascination with feudalism among people who style themselves political conservatives, who have long “believed in” capitalism, and many of whom have done very well in a capitalist system.

For example, it is commonplace these days for conservatives to advocate full repeal of the estate tax, a tax that is seen as a blow to the freedom of, well, dead rich people, I suppose. You should be able to control what happens to your money, all of it, after you’re gone. It’s yours, right? Not exactly. As Jesus taught, after you’re dead it belongs to somebody else, and you are not in a position to object.

To economists, the estate tax is the almostperfect tax. It is extremely progressive, meaning that it reduces inequality of wealth, a good thing that markets don’t accomplish very effectively. It also has no untoward incentive effects. You don’t pay the tax until after you’re dead, so it doesn’t affect your incentives very much. By reducing the take for the younger generation, it increases their incentive to work and save, instead of just waiting around for Mom and Dad to pass on. The full deductibility of charitable bequests is a powerful incentive to fund arts, education, and social service organizations. If only it had fewer loopholes, and was easier to figure.

The systemic effects are even better. The estate tax reduces the degree to which money lands on people arbitrarily, rather than being a reward for industriousness, ambition, skill, judgment, thrift, foresight, and the other qualities that make a capitalist economy work. It makes it less likely that people will inherit positions of power in the economy, rather than being chosen for those jobs because of their talents. It prevents the allocation of resources in the economy from being unduly influenced by the preferences of dead people. It also helps prevent the concentration of wealth over the generations, which eventually results in the emergence of a hereditary aristocracy. This is why for most of our country’s history, stiff estate taxes were enthusiastically favored by conservatives and liberals alike. It naturally fits with our constitutional prohibition of hereditary titles and offices.

Another obvious attack on capitalism is the campaign to effectively repeal the Rule Against Perpetuities. When you mention the Rule, all the lawyers in attendance will roll their eyes and smile ruefully. That’s because most of them think of the Rule as an obscure, almost irrelevant, law that these days is mostly used for hazing law students. In reality, it is one of the main legal foundations of capitalism, in place in the English-speaking world since the 1500s. Without getting into the obscure details, it effectively prevents families from creating a trust for the purpose of preserving the estate for the indefinite future. Such a trust could prevent assets from being dispersed among numerous descendants as the family grows over the generations. It can shield a family business from capital market discipline. It can prevent the estate tax from claiming part of the family fortune, or divorcing spouses from receiving part of the estate.

The one type of perpetual trust that is permitted is the charitable foundation, which is used by many wealthy families for similar purposes. For example, the Ford Foundation is the main reason that the family still effectively controls the Ford Motor Company, even 110 years after the founding. Charitable foundations can also become the modern version of noblesse oblige, controlling decisions about providing public goods and setting the direction and quality of cultural and social life. More progressive capitalists, like Bill Gates and Warren Buffet, specify that their charitable foundations distribute all their money and go out of business by a fixed date.

More than half the states have repealed the Rule over the last fifteen years, in most cases replacing it with a law that specifies a fixed period of time after which assets must be distributed to heirs. Sometimes this is set at ninety years, which in most cases will not yield a result very different from the traditional Rule. However, some states have extended the period to more than three centuries. Many medieval dynasties did not last that long.

This push to leave the decisions about the economy in the hands of those long dead also applies to questions about wills and charitable foundations. A striking case is the saga of the Barnes Foundation. Alfred Barnes, a chemist who made a fortune in pharmaceuticals, was an avid student and collector of art who developed an idiosyncratic approach to art history. He founded a museum in 1922 that contained his collection and sponsored programs to propagate his philosophy of art, which was also reflected in the arrangement of the museum. His will specified that the museum could never be altered, even to the way paintings and decorative objects were arranged in the galleries.

Deterioration of the museum’s building and finances led to a crisis in the 1990s, long after Barnes’s death. The trustees of the museum found the solution to this crisis in moving the museum to a new building in center city Philadelphia, near the famous Philadelphia Museum of Art, and a few miles from the original building in suburban Lower Merion. The new galleries, opened last year, exactly replicate the original Barnes museum, but the trustees aimed to make the collection more accessible to the public than Barnes apparently wanted. A private group, the Friends of the Barnes Foundation, challenged this move in court as a violation of Barnes’s will, presumably expending significant resources on the effort.

What is remarkable is how the conservative media took up this cause. The Wall Street Journal published a number of articles arguing against moving the museum, even though Barnes’s arrangement of the pictures would be faithfully reproduced. A theatrical movie documentary of the case, The Art of the Steal, was released in 2009 and received favorable reviews from the Journal, Vanity Fair, and other publications. PBS made a documentary about it for its 2012 summer arts festival series, which focused more on Barnes’s life and philosophy and the newly completed building than on the controversy. Over and over again, conservatives opted for the position that however impractical, outdated, odd, or contrary to public benefit Dr. Barnes’s wishes were, they nevertheless should be honored to the letter, decades after his death.

Attacks on labor unions can be seen as part of this pattern as well. In a feudal society there is no functioning labor market. Rather, the lord of the manor dictates the conditions of work. In a capitalist economy, labor is allocated in a market. A functioning market requires that bargaining power be roughly balanced between buyers (employers) and sellers (employees). The presence of a union to represent the sellers is often required to achieve this balance. Without such balance, we’re back in a situation close to the feudal norm. The political momentum behind “right to work” laws and other such anti-union policies is part of the new feudalism.

As the inequality of income and wealth has increased over the last three decades, the wealthy have increasingly used their resources to create a privileged life for themselves, apart from normal society. Nowhere is this more visible than at sports stadiums, where luxury boxes keep their patrons isolated from the ordinary crowd, not only in separate rooms where they are seated, but with food service brought to them, and their own lavatories and parking.

Other types of separation may be less visible but more important. Zoning restrictions, high property taxes, and lack of public transportation enforce wealth-based housing segregation. Along with this come distinct tiers of public services, including parks and recreation, libraries, policing, and most importantly, public education. “Concierge medicine” removes the wealthy from the ordinary hassles of gaining access to health care. All of this comes to resemble the aristocratic privilege that is associated with a class-based social system. We are visibly not “all in this together.”

In many cases, this class-based separation enables the wealthy to buy their way out of the governmentprovided goods and services. In gated communities, the rich do not have to rely on the police, but can buy their own private security. They don’t need to send their children to public schools, but can pay tuition at private schools instead. They don’t need the public recreational facilities, but can join a private athletic club. They clearly don’t need public or mass transportation.

There are political consequences to this. The rich do not have much personal incentive to support public expenditure on goods or amenities that they do not use. This has always been true. But for most of our history, rich people could see the benefit in providing appropriate levels of these goods to everyone. It meant an informed citizenry, a productive labor force, and a rich social life. It meant the opportunity for ordinary folks to improve their lives, especially their economic situations. Voting for government to provide these services replaced noblesse oblige. But as those in the wealthy class lead more and more separate lives, these benefits become less obvious to them. They have learned (from economists, unfortunately) that if they look out for their own material well-being, everything will turn out well for everybody—the famous “trickledown” theory. Lower-class people also begin to look like a threat to upper-class privilege, especially if they get too much opportunity to improve. So the best thing to do is pull up the drawbridge, which in this case means voting to cut public services, especially public education. Government defunding of culture and education also leaves more room for wealthy donors to control the tone and political cast of our common cultural life.

Many in the upper class have become quite pessimistic about the long-term prospects for economic growth in the United States, which in turn feeds their desire to maintain their high positions. This is based on a faulty economic analysis that mistakes the current Great Recession for a long-term decline in our economy’s prospects for growth. The recovery is going very slowly, following the pattern of the Great Depression of the 1930s. But there is no fundamental reason to think that full employment will not eventually return and growth resume at prerecession rates. This would happen sooner with help from fiscal stimulus, which, contrary to conservative rhetoric, has been conclusively demonstrated to work under the kinds of conditions we currently face.

Of course, the rich do more than vote. They also use their wealth to influence the political process by financing political advertising and other kinds of politicking. The gutting of our campaign finance laws, most notably by the Supreme Court’s decision in Citizens United, has given the upper class unprecedented license to dominate our political discourse through personal and corporate contributions, with or without public disclosure. Rupert Murdoch has shown the way toward using ownership of media outlets as a way of broadly disseminating a particular political point of view.

In my home state of Michigan, the campaign contributions of the family that owns the Ambassador Bridge between Detroit and Windsor, Ontario, were enough to persuade the state legislature to stop construction of a second bridge a few miles away, in the face of support for the new bridge from all civic groups, all business and economic interests, and our moderate Republican governor. The governor has finally prevailed by circumventing the legislature and defeating a ballot measure sponsored by the Ambassador Bridge owners.

The wealthy class has disproportionate influence not only over the economy but over politics and public discourse as well. Many of them have an aggressively conservative agenda, one that has the effect of diminishing the role of government and consolidating and enhancing their wealth and power, returning the safety net to a version of noblesse oblige. (The stories of Mitt Romney’s personal concern for his employees and members of his Mormon stake have the air of noblesse about them.) This sort of scenario moves us ever closer to a feudal economic system based on control of economic resources and the levers of political power by a hereditary elite. Evidence suggests that increasing inequality has been accompanied by decline in economic opportunity and mobility.

Though feudalism was the economic system of medieval Europe, capitalism eventually emerged there in response to ideas that arose out of Christian thinking, especially during the Reformation. The idea of the essential dignity and equality of humans that arises from partaking in the image of God, and from being the objects of God’s love, became increasingly hard to reconcile with the hereditary inequality in dignity, wealth, and power that characterizes feudalism. The biblical condemnation of usury, which long prevented the development of a capital market, was held by Calvin to be inapplicable since the coming of Christ, which erased the idea of a “chosen nation” in which such a rule would apply. The usury prohibition was never universal, but the Christian invitation comes to people of all nations.

Christians should not believe in the ideology of capitalism, but they should favor real democratic capitalism over feudalism or socialism. As noted above, it works pretty well. It is more flexible, more open to change and growth than the other systems are. In its modern form it usually strikes a good balance between social protection and personal responsibility. But for it to work properly requires making sure the rules are carefully written and enforced, and that doesn’t mean just protecting property and enforcing contracts. It means the government also has to maintain social insurance and keep the economic playing field level.

The threat to our economy, polity, and society does not come from creeping socialism; it comes from creeping feudalism. We are well along the road to serfdom. Who needs Hayek’s metaphorical serfdom when we can eventually have the real thing?

John P. Tiemstra taught economics at Calvin College for thirty-seven years. His latest book is Stories Economists Tell (Wipf and Stock, 2012).