Private Property, Motivation, and Profits
The only possible explanation for success...
The only possible explanation?
So which is it? - Is it motive or is it math?
By Jack Barkstrom
Capitalism, when phrases such as freedom, democracy, free markets, and entrepreneurship, are used, has often cited Adam Smith's discussion of "self-interest," in "The Wealth of Nations." "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." [1] The profit motive - the ability to make a profit - and private property - the freedom to keep profits - emphasize the mental state or motive - as the explanation for the free market's success. The problem with communism, in general, and the Soviet Union, in particular, was that they failed to take human nature into account - people were not rewarded for their efforts. In taking away economic freedoms, and placing such heavy restrictions on profits and private property, there was no incentive to work. The Soviet economy failed because, without the profit motive, there was no reason to try to be productive.
So the answer to the question of what causes economic success was - the profit motive or motivation - the psychological drive to be successful. The explanation for economic failure was the opposite - the lack of motivation. Greed was kept under control, but economic productivity and entire economies suffered as a result. But was the profit motive and private property the only explanation for success? Could the argument be boiled down to free market capitalism, with free markets and free people, allowed to keep profits and property winning out over communism, with its governmental economic controls and dictatorial restrictions.[2]
But was there an overemphasis on the 'motive' aspect of 'profit motive?' Capitalists have long been accused of putting profits before people; in the realm of free market theory, there seems to be a tendency to put 'motive' before 'profits.' This tended to obscure the fact that before the butcher, the baker, or the candlestick maker got to self interest, they actually had to have an expectation of making a profit or had to make a profit. The engine of capitalism may be the motive behind the entrepreneurial spirit, but the foundation of all economic activity is profits - the mathematical calculations which define profits as what is left over after costs have been subtracted from income.
Companies and economies do better, it is claimed, if private property is respected and people are allowed to keep for themselves the profits they earn from a business. Fair enough - but making a profit is, in most cases, a prerequisite or preliminary stage, on which everything else depends. Before people get to the point where they can own private property or get to keep the profits they earn, they actually have to earn a profit.
The Soviet Union - Did the elimination of private property lead to collapse?
It sounded plausible enough. The claim was that the reason the Russian economy during the Soviet era, performed so badly and always seemed to be struggling was that the government wouldn't allow people to own private property, owned all the major businesses, and wouldn't allow businesses, or their owners, to make a profit. Proof of this argument was not hard to find. Central planning didn't lead to more consumer goods, and the "Five Year Plans," for all the publicity, fell short, or at least that was what was claimed in the West. Agricultural production suffered when the peasants were forced to join collective farms in the 1930s, and Russian consumers had to wait in long lines to buy food, which was always in short supply. This was further proved by the fact that all of this occurred after the Bolsheviks came to power. The argument was premised on the assumption that the Russian economy was on the verge of a spectacular improvement, had not the Communists come to power. There may have been some truth to that claim, but it was a very big assumption, considering that economic performance can be difficult to predict.
Much of the criticism of Soviet economic policies has focused on price controls and the shortage of consumer goods. Price controls, it has been argued, don't really work, since they limit the amount which can be charged for goods, leaving manufacturers with no incentive to produce anything or, if they did produce anything, things which are not of very good quality. In addition, people who didn't want to wait in line, simply bought goods on the black market, where they were available, even if they cost more.
Criticisms of price controls are probably valid, although the examples sometimes cited, such as the availability or shortage of apartments in New York City as a result of rent control efforts, may not necessarily serve as the best comparison to market forces in rural Russia or during the Soviet era. Price controls have served as the high-profile target, when it comes to economic explanations for everything that went wrong with the Soviet economy. At the same time, squeezing an explanation of Russian market forces into a tiny box labeled 'price controls,' and dismissing the Soviet economy as nothing more than the consequences of central planning, could hardly be considered rigorous economic analysis. Focusing on consumer products, and the shortages or lack of choice on store shelves, may not tell the entire story, when it comes to analyzing costs.
Market forces were very much at play in Russia, even during the Soviet era, even as Joseph Stalin was pushing his Five-Year Plans and implementing central planning, notwithstanding claims that the Communists had eliminated them when it carried out its plan to eliminate private property. In the rush to condemn price controls as contrary to the rules of economics, Western critics overlooked one important cost component - transportation costs. The theoretical assumption was that the cost of a product as it came off the factory assembly line - whether ten feet or ten meters from the factory building - was the same as when it was shipped thousands of miles to the east or south. While it discounted distance in its equation, it also assumed that there was a well-developed transport network available, with a wide variety of shipping choices and that ground and weather conditions were ideal at all times of the year. For years, the only reliable means of commercial transport of heavy goods was by rail or water, and the rail network was not extensive. No added cost there, according to the theory. The theory also assumed, in terms of consumer availability and choice, that distance made no difference, when it came to cities or regions with proximity to Moscow and that political leverage played no part. Party functionaries, in favor with Stalin, or their immediate superiors, might persuade the economic authorities that their city residents had a more compelling need for available goods than some distant city.
Conventional market forces could have played a greater role in dictating what factories produced and the choices consumers had, if they were strong enough, but they had significant obstacles to overcome. Some regions were simply too poor to create or sustain demand. Potential demand was there, in all regions of the country, but industrial capacity was still in its infancy. Where free market economic analysis could look at the play of market forces in terms of entire countries when it came to the West, in Russia, market forces could realistically be analyzed only in terms of regional activity. The Soviet Union may have been a single country, politically; it was more of a loose confederacy of regional economies. Regions with significant natural resources or agricultural capacity received more attention from Moscow while poorer regions, with fewer resources, were more-or-less on their own economically.
Capitalism brought you this - Should we be grateful or skeptical?
It may be true that private property and the profit motive led to exploration, new inventions, and a drive for efficiency. Yet profits, in the final analysis, are determined by number of factors: whether there is a market for a product, whether raw materials and resources are available at all, or at a price that makes the product affordable, and whether there is a transportation system or means to deliver products to market.
Some of the elements of markets and trading associated with capitalism have benefited consumers. However, capitalism itself has been the beneficiary of, and taken credit for, circumstances in which it found itself, or investments made by society. Governments have been responsible for, and taken the lead in, providing for schools and education. Governments have also played a major role in road construction and maintenance and in the overall success of transportation systems. If industries have risen to the top based on the efforts of individuals, they have also succeeded because of what others have provided them, including the resources provided by nature.
For the efforts of entrepreneurs and individuals we should be grateful. We should be somewhat skeptical of claims that capitalism was the only, or overwhelming, factor involved.
Footnotes
(1) Adam Smith, "The Wealth of Nations, Book I, Chapter 2, (Barnes & Noble: New York), (2004), p.12.
(2) John Mackey and Raj Sisodia, "Conscious Capitalism: Liberating the Heroic Spirit of Business," (Harvard Business Review Press: Boston) (2014) p. 12.