The Unsightly Back of the Invisible Hand
The second of a four-part essay that questions the inevitability of the social costs of unfettered capitalism. By travelling back in time to visit the world as it was before the ancient precursors of Goldman Sachs, it becomes clear that options for the inclusion of social welfare in capitalism existed, but were deliberately externalized by the rapacious tenor of the times. We live needlessly with the result.
Part One: Are There No Prisons - Are There No Workhouses
Part Two: The Unsightly Back of the Invisible Hand
Part Three: The Empty Triumph of False Validation
Part Four: The Brief, Great, Vanished Social Welfare
In our time, we have come to accept that capitalism is the oxygen of our well-being. Good old capitalism. It has evolved without restraint from the inception of Hindu-Arabic numerals, through double entry bookkeeping and the tyranny of medieval accounting. Commerce and trade has always existed, but the failure of Europe's developing commercial finance to account for the social costs of the free-for-all forged a Teflon ideology that was cruel, heartless, and unforgiving.
Embraced enthusiastically by wealth, aristocracy, nations and empires alike, capitalism made no provision for the unvarnished humans underneath. It wasn't until the industrial revolution was fully underway that the voices of the commoner could be heard above the shiftless din. Such was the speed and scope of the spread of capitalism that it did not take long before men of curiosity wondered on the workings of it all. Victims of their time, these early thinkers were more apologists than critics, and simply sought to justify what they saw. Among the first and greatest was a Scot named Adam Smith, his "The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations" of 1776 now recognized as the starting gun of modern economics.
Smith is considered today to be the father of lessais-faire free market capitalism, something that might cause the moral philosopher Smith to toss his haggis. His five volume "Wealth of Nations" was a wide ranging examination, exposition, and catalogue of the game as it was played in the 18th century, and clearly too heavy for those who followed; Smith has been little more than a wealth of selectively cherry picked quotes since. A wealth of notions more than nations. Those that followed used Smith as a starting point for the justification of externalized social cost. They glorified and promoted the "invisible hand" as an indivisible law of nature, regardless of the damage and moral consequences the back of that hand caused. We call that "collateral damage" today - a regrettable shame, but there you go none the less.
The invisible hand was the tonic for what ailed men of conscience. Selectively applied, it cleansed the responsibility for human suffering from the minds of those who struggled to account for the wonder of their wealth, conflicted as it was with its ghastly indignity to humans. They no longer had to adapt accounting to record the costs of externalities, and could claim their righteous profit cleansed of that "inconvenient truth". The entire story of economics since has been the struggle to keep humans within the bounds of theory.
Cost accounting has become ubiquitous. Nowhere has that all too obvious normalcy been greater than in the treatment of human interaction with the process of commerce. We call that labour today. How did it come that humans could be a "cost" of a human enterprise? While the answer to that question may forever be lost in time, it is certain that the concept was refined, packaged, inventoried and profitably sold when accounting went conventional in the teeth of the merciless industrial revolution. In that deliberate instant, people became units and as units, infinitely malleable in the service of profit. Cost of labour, layoffs, downsizing, unemployment, unions, social safety nets and slavery all entered popular colloquial speech as a result.
As late as 1890, labour was the overwhelming cost of any business, and it was viewed as a large unwashed mass to be pared to a minimum if any profit were to be realized. Accounting had made no provision for deducing the intrinsic value of living human beings, and instead adopted the practice of costing humans by the lowest market price at which they could be acquired. In short, humans were best treated for accounting purposes as just another commodity, albeit a massive and consequential one to the bottom line. The economists rejoiced when they realized the price of human labour actually fit their models of supply and demand. The captains of industry rejoiced for all of the above (and since). Labour rejoiced...not so much.
At first, chaos prevailed for fledgling entrepreneurs. People were paid the meanest sum possible to attract a human on a monthly basis. The age of brute, human strength measured against the perpetually tireless machine defined accounting forever more. The search for profit drove the science of cost accounting from that point on, and humans, like other commodities, were parsed and sorted in a gale of bookkeeping entries designed to ferret out waste and improve efficiency. This was the legacy of the unstoppable factory so elegantly displayed by Adam Smith himself in his adorable parable of the "pin", which set forever the standards of human pricing, production and exploitation.
"The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour....
"To take an example, therefore, the trade of the pin-maker; a workman not educated to this business, nor acquainted with the use of the machinery employed in it, could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.
"But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving, the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some factories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them."
Adam Smith," The Wealth of Nations" Book I, Chapter 1. Of the Division of Labour
The wretched squalor of the working man did not go unnoticed. Charles Dickens fought a passionate battle against the growing oppression from the pages of editorials and bestselling books. Accounting however, took its direction from the needs of growing commerce. Growing commerce left the apologies to economics. And economics rejoiced at the confirmation before its eyes that the immutable laws of physics proved it should always be this way. For one heretic however, the prisons and workhouses and treadmill laws were proof enough that something was amiss.
Arthur Cecil Pigou was the most prominent economist in the world at the close of World War I. He held the prestigious chair of Political Economy at Cambridge, considered at the time the centre of universal economic thought. Born in the maw of England's industrial revolution in 1877, Pigou would contribute his life's best work at the sorry close of that age and the brilliant dawn of the next. With the publication of his "Wealth and Welfare" in 1912, Pigou opened the can of worms on the enormous social costs of capitalism. It was Pigou who introduced the concept of economic social welfare to the western world, and it was Pigou who coined the term "externalities" in accounting for their costs.
One supposes that in an environment where unfettered capitalism had laid waste the wealth and human stock of an entire continent, Pigou was able to gain some traction with the folks. By the next war to end all wars however, those same folks would be fighting in defence of capitalism, and Pigou had long left the building in public approbation. People are indeed strange.
Pigou was an odd duck (which one supposes one would have to be to defy and win over the status quo). He hated war and refused to enlist in World War I, and then defied the draft. He believed the human body was the source of all wealth, and took wild and wacky escapades up mountains and through valleys on foot or with his bicycle to tone his equity. His great observation was that there are in fact two kinds of costs to capitalism, private costs and social costs. Odd duck indeed.
Private costs were those costs captured on the financial statements of enterprise; social costs were external to the firm but costs none the less. These were shouldered by society at small or large. Pigou saw it as the role of government to transfer these costs back to the firm through taxation, as they would also transfer benefits where externalities were socially positive.
For reasons no one can explain, it sometimes happens in history that acts of genius and the great deeds of men are often only a bright flash, snuffed out by the indiscriminate wind of really stupid human stuff. Arthur Pigou and social welfare turned out to be one of those flash-in-the-pan things, and for the darndest reasons.
In 1936, the even weirder John Maynard Keynes became a noun, a verb, and a movement with the publication of "The General Theory of Employment, Interest and Money". The book by the famous member of Britain's inner circles, social dancer, and London gadabout was an immense success, changing economics forever. In it, Keynes reserved a special place for Pigou, ravaging him by name and calling out his feeble thinking. Somewhat of a skirmish broke out between the two rational titans of economics. Pigou, shy and a loner by nature, retreated to live out his life with his ideas expunged from the record, a broken and lonely old man.
Keynes became God.
And that was that for accounting, capitalism, and the general welfare of man in the western world, and where it remains today on the books of Goldman Sachs...and the backs of everyone else. Capitalism has taken on and defeated all comers, and for its innumerable sins, has become religion. Tried, tested and true. It is what it is...just because it is. To paraphrase an old saw, it may not be the best system, but it's the only one we've got.
Are we sure about that? There is simply no better way of organizing human affairs than at the mercy of a system that remains unchanged in its fundamentals for nearly a thousand years? If we had the chance to go back in time, back to the Renaissance free city of Urbino, back to Luca Pacioli and his world of Humanism and enlightenment, would there be a way to alter history in a more equitable fashion? Or was it simply preordained that Pacioli's "Summa" and Fibonacci's "Hindu Art of Reckoning" should by some divine, natural law have ended up at Chevron, Goldman Sachs, and Wall Street?
Well, recall that Islam had the technology first. What, one might wonder, did the Muslim world do with the knowledge when they first got it? This fine question is seldom wondered. It's seldom wondered for many reasons and one may be because the Muslim world appears so much poorer and bereft of freedoms than our own. Also, in our own time, Islam and its history have slipped behind the fiery veil of a senseless and damaging "war". Regardless, given the same tools at approximately the same time, the western world has grown to govern the planet and radiate its omnipotence over all and sundry. Hollywood homes, swimming pools and movie stars. It appears to us who write the history, that the "Musulman" has indeed blown it.
But...did he?
Part One: Are There No Prisons - Are There No Workhouses
Part Two: The Unsightly Back of the Invisible Hand
Part Three: The Empty Triumph of False Validation
Part Four: The Brief, Great, Vanished Social Welfare
Aetius Romulous
Historian, Economist, Accountant, Writer, and blood sucking CEO.
Born at the wrong end of the Baby Boom Generation - too late to enjoy the ride, too early to have missed it, and stuck in the middle with the mess.
Aetius writes and blogs from his frozen perch atop the earth in Canada, spending the useful capital of a life not finished making sandwiches and fomenting revolution.
It's a living.
aetiusromulous (at) rogers.com
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