The Headless Chickens of History

Supposedly, we live in a capitalist economic system. Most people would not know, however, because it has been conveniently airbrushed out of modern scholarship, that the origins of capitalism were indistinguishable from politics more generally. Indeed, there was no real discipline called economics. It was called political economy and it was more about politics and morality than about solving mathematical problems. The desire to reduce economics to mathematics is a recent one and coincides with the ascendency of a group who don’t want their power questioned on political grounds: the technocracy.

If you go back and read the original capitalist theories, such as those of Adam Smith, you find that economics is talked about in its political dimension. One of the cornerstones of that was that the consumer should have the power. Through their purchasing decisions, consumers guide the economy towards the production of things that people actually want and away from things that people don’t want. This latter fact is the more subtle, but no less important, point. In capitalism, you can punish producers by not buying what they are selling.  

The reason this idea arose in the first place was because, way back in Adam Smith’s day (18th century), the guild system was still in place, and that system gave producers a monopoly, meaning that consumers could not withhold demand since there was nobody else to buy from. As a result, there was no way for the market to punish producers for inferior quality, and the guilds were able to abuse their power by charging higher prices than they otherwise could get away with.

Thus, capitalism had a built-in political angle to it. Consumers must have the power to choose how to spend their money, and they must have the option to withhold it. Only then do producers have to pay attention to what people want, and only then does capitalism work the way it’s supposed to. One of the main jobs of government is to stop the formation of monopolies since these shift the power away from the consumer.

Now, it has to be said that this system is not without its problems. One of the main ones is that positive feedback loops were created during times of recession. People would respond to adverse conditions by tightening their belts, which reduced demand, causing producers to lay people off, causing unemployment, causing further reduced demand, and so on.

This problem was eventually solved through government intervention to smooth out the cycle of boom and bust. In practice, this meant that the government took people’s money through taxation and used it to stabilise the economy. One of the main ways this was done was to create massive bureaucracies in health, education, etc., which had the effect of providing permanent demand since these roles were outside of the business cycle. Since “education” and “health” are assumed to be universal goods, it was hard to argue against these moves.

But there was another factor at play at the time which played a much larger role in getting the public to acquiesce to these measures. It’s hard to believe nowadays, but once upon a time the government had to ask the public for money directly in order to fund things it wanted to do. For example, at the start of WW1, war bonds were sold to raise money for the war effort. Once again, the concept of political power through purchasing decisions is relevant here. You could silently oppose the war through the simple act of not buying war bonds and choosing to spend your money elsewhere.  

More generally, this is how democratic politics operated in the pre-war era. If the government wanted to do something, it had to get money from the public specifically for that purpose. Of course, the money was concentrated in the hands of the rich. But, at least in theory, the power was vested in the public in the same way that economic power was. If you didn’t want something, you just refused to pay for it.

That all changed during WW1 because, once it became clear that the war was not going to be over quickly, governments forced the public to pay through income tax and other measures. When the war was over, those taxes didn’t go away. The exact same dynamic repeated during WW2. The public had been conditioned to a new state of affairs where permanent taxation was considered normal. Nobody in our time even remembers anything different and nobody in a position of power is going to remind us that it did used to be different.

But the biggest innovation was not in the permanence of the taxation but in its frictionlessness and invisibility. The increased sophistication of the accounting and banking systems meant that tax was removed before the taxpayer even saw it. From a psychological perspective, it is a very different thing to have money in your hand and then to be forced to pay some of it in tax than it is to never have the money in the first place. The reason why the job of tax collector has been a dangerous one throughout all of history is because his job was to take away what you already had. The modern taxation system takes the money before you even possess it. It has replaced the tax collector with a system that runs silently and invisibly in the background.

If we come back to the politics of this, what has happened is that a significant chunk of a normal person’s earnings and therefore their purchasing power has been removed and handed over to the government. If you don’t like what the government is spending it on, there is nothing you can do in the short term. Your only option is to wait until election time and vote for a different political party. In practice, however, the decision has become not whether to take the tax but only how to spend it, so, again, the spending decision and the power that comes with it has been taken over by government.

Now, there was a lot of debate at the time all this first started over whether the massive increase in state power was justified and what problems it might cause. Opponents claimed that the state’s monopoly position would lead it to become coercive and unresponsive to citizens’ desires in exactly the same way that an economic monopolist does. Looking around the Western world right now, I think it’s very clear that this criticism has been borne out. Western governments barely even pretend to care what the public thinks anymore. They don’t have to. The tax money will continue to flow anyway.

All that would be bad enough, but there’s another angle to this, and it relates to the aforementioned banking and finance system. It is these systems that allow the government to collect tax in a completely frictionless way, and so it is no surprise to find that the government is all in favour of them. But the banking and finance systems have also morphed into something very different from what they once were.

Once upon a time, you put your money in the bank because hiding it under your mattress came with the risk that somebody might break in to your house and steal it. Nevertheless, the mattress idea was viable because the value of the currency as a whole was stable and you could trust that the purchasing power of the money wouldn’t depreciate significantly. Your decision to save money was the equivalent of withholding spending from the economy because there were strict rules on banks over lending out depositors’ savings. The act of saving was synonymous with the act of not spending. It took money out of circulation.

Fast forward to today, and there is almost no way to take money out of circulation. If you save money, it becomes immediately available to some other group to spend on your behalf. Banks have almost total freedom to loan out your deposit as they see fit. If you put the money in government bonds, the government spends it. If you put it in stocks, companies can leverage that for their own spending and operations. You could, of course, take the money out in cash and hide it under your mattress, but the rate of inflation is such that it will lose purchasing power rapidly.

What has been removed is the ability for any of us to withhold our money from being spent, which was a cornerstone of the political philosophy of capitalism. Now, if you save money, you are inadvertently funding some other economic activity which you may not support and may, in fact, actively oppose. You’ll never know what it is, of course, because the financial system is itself completely frictionless, automatic, and untraceable. All money is funnelled into a giant bucket from where it flows in whatever direction the system wants it to. Power has been taken out of the hands of individuals and handed over to “the system”. The same problem holds for the mandatory retirement plans that most people are forced into nowadays.

We can see that all of this is the exact same problem that Adam Smith described more than two hundred years ago; only the situation is infinitely worse than the medieval guilds. At least the medieval guilds produced goods that people wanted to buy and sold them directly to the customer. We have created a system where the political, corporate, and financial institutions of society have no accountability to anybody. They may do as they please knowing that the money is going to continue to flow in any case.

That leads to the final point to be made. The political philosophy of capitalism said that consumers must be free to make purchasing decisions. Your decision to buy something or not to buy something forced the market to produce something you actually wanted. The fact that you had to sacrifice your money to get a good or service meant that you had skin in the game too.

The incredible thing about the modern system is that it often produces things that are “free”. How many times have you heard a politician say that such-and-such a program will be offered “free” to the public? This is only possible because taxation is automatic and invisible. Only people who have forgotten that they even pay tax can be convinced that they get things for “free”.

But this pattern has also spilled over into the private sector where the industries that run on the invisible money flows of the financial system also now offer products for “free”. That’s why most of the internet is “free”.

All of this is the inversion of the political philosophy of capitalism. Modern consumers don’t just not have the power to withhold their spending on what they don’t want; they are not even asked to buy the things they might want. The system offers for “free” that which was paid for by taking money that should have been yours in the first place.

It’s no coincidence that all of this went in hyperdrive with the collapse of the USSR and the neoliberal agenda of the 90s. That’s also why Western societies have become increasingly delusional over the last few decades. Nothing makes sense because this invisible system produces results that nobody asked for and nobody is responsible for. Money just flows all over the place and produces whatever results it produces.

One of the side effects is that our “elites” of our time have become almost comically detached from reality. In fact, the main job of politicians and the media is increasingly to just make up stories for why things happen which nobody seems to want to happen. The stories change rapidly, and they often contradict each other. This year’s story is the exact opposite of last year’s. There is no story that makes sense because the lower levels of the system have removed responsibility from and accountability at the transactional level.

We have created a society where people are no longer able to exercise the option of doing nothing. To withhold your purchase is a core feature of capitalism because it means you don’t fund that which you do not support. That option has now been almost completely removed. We have created a system which is incapable of doing nothing. Among other things, that’s why technologies that nobody had even heard of five minutes ago like mRNA “vaccines” or LLMs suddenly become world-changing events, at least until the next world-changing event. You almost feel sorry for our elites who are forced to be forever running around chasing the next big thing. They are the headless chickens of history.