As it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of…
- Adam Smith, The Wealth of Nations
From The Economic Consequences of the Peace by John Maynard Keynes:
Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand, the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice.
The notion of a single economic cake, or pie for that matter, hides the underlying heterogeneity within the market. Whether it is a red velvet or a hummingbird, cakes are homogenous. Negligible roughness in texture aside, one slice of cake is very much just like any other. Yes, there may be layers or a different distribution of solid ingredients across the cake, but those are, as said, negligible. All that the baker need to do to get a cake is to get the recipe right. It’s mostly just chemistry. The grand market order, though, has no such recipe; instead, the cake metaphor, still all too widely used even by those who should know better, only serves to confuse and obfuscate talk about the real market order.
Simon Newcomb got it right in his Principles of Political Economy when he talked about the market order as a grand ecosystem (though he himself used the metaphor of an organism) spreading across the work:
We readily perceive that the system by which the body of farmers on the prairies of the West exchange goods with various countries in Europe, Asia, and South America is exceedingly intricate in its detail. Its successful operation depends upon the proper co-ordination of the efforts of manufacturers, merchants, ship-owners, and managers of railways. There being little real concert of action among these widely separated individuals, the co-ordination of their work is matter of slowly growing habit.
Rather than a monolithic cake, what a great demigod spectator beholding the entire economic order would see is a massive system of social cooperation in which people synchronize their actions so as to be adapted to actions beyond their spheres of knowledge and perception.
Newcomb’s description of the global economic order is reminiscent of Charles Darwin’s final words when he contemplated how his theory of descent with modification made manifest the grand order of a tangled bank:
It is interesting to contemplate a tangled bank, clothed with many plants of many kinds, with birds singing on the bushes, with various insects flitting about, and with worms crawling through the damp earth, and to reflect that there elaborately constructed forms, so different from each other, and dependent upon each other in so complex a manner, have all been produced by the laws acting around us.
Both are constituted by separate orders, nested within the grander ecosystem, adapting to one another. Just as robins flourish by consuming the worms of the damp earth, so do the workers in a Bangladeshi garment manufactory earn their daily bread thanks to the fashion tastes of consumers across the world. Unlike the monolithic order of the cake, the market’s order is ecological, and comparing it to a cake, or a pie for that matter, is therefore erroneous.
More important, I suspect, is the moral issue. Importantly, the economic-cake narrative lacks dramatis personae. The market is actually made up of named entrepreneurs who are providing the Things would be different if it weren’t for people like Alfred Krupp or Richard Branson. Whether it is Virgin Records or Krupp steel, the economy is made up of the ideas which actual people, rather than dismembered production functions, have brought to life.
Yet, in the description of capitalism which Keynes elucidated there is only an unfeeling production function, an unseen baker mixing this and that to cook together the economy. That the cake view of the economy necessarily has a moral dimension is revealed in Keynes’ article, “The Social Consequences of Changes in the Value of Money,” when he writes about how the moral justification of capitalism is that everyone gets their just deserts:
The economic doctrine of normal profits, vaguely apprehended by every one, is a necessary condition for the justification of capitalism. The business man is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to Society.
As long as someone receives in proportion to what he contributes to society, capitalism is just the doctrine goes. Yet, it implies that all that entrepreneurs do is to contribute to social well being as if they were unthinking inputs into a hegemonic production function. That is wrong, though, entrepreneurs are the dramatis personae of economic change, and economic change is brought about by what they do. To morally speak about the commercial society, we musn't speak about entrepeneurs as if they were machines, but rather human beings who are able to see potential in the world, and who make that potential actuality in their own particular cirumstances.
The “you didn’t build that” hoopla from 2008 well encapsulates the moral issues with the economy-as-cake point of view. The dramatis personae are very real human beings whose aspirations and accomplishments matter. After all, the economic cake does not just exist. Instead, it is the product of an almost uncountable of human beings all seeking to improve their position in life. It’s easy to simplify that instinct for improvement as a money motivation, and more often than not useful to do so; nevertheless, the exact way that people end up improving their lives is depend on the particular circumstances each person finds himself in.
With “you didn’t build that,” we find the basic theme of the market order which the characterization of it as a cake so brusquely rolls over: The drama of the market order, and there certainly is drama, is found is the particular circumstances within the order. Whether it is Branson signing the controversial Sex Pistols or Krupp’s belief in the superiority of breech-loading cannons, the economy is being created over again and again as the plans of different entrepreneurs fructify.
“You didn’t build that” caused such an outcry because many Americans, especially small-business entrepreneurs, saw President Obama as ignoring their own particular drama which resulted in their own business, however small, itself fructifying. Like protagonists out of Atlas Shrugged, they saw themselves as building something which hadn’t existed before and then told that they didn’t create what they saw before them by a force which then proceeds to take credit. Whether the hoopla was deserved - it partially was, but like all good political scandals, President Obama’s words were blown out of proportions - is besides the point, what matters is that someone actually built those businesses. There are actually real entrepreneurs who put their plans into action, and they are very much the efficient cause of the economic order we see before our eyes.
The moral justification for capitalism - if I may speak as if such a justification were necessary - is not to be found in how the economic cake is doled out. When it comes to the market order, we needn’t compare it to either a five-year old’s birthday in the back lawn or to the casino floors in Macau’s Casino Lisboa. Such descriptions only serve to divert out attention from what matters: That the market system is a system of cooperation in which riches are available to those who make other people well off. What matters isn’t that one contributes to Society, as if it were some cake available to all. One man’s wants become another’s road to riches. What matters is that one assist other people in their own positions in life. Capitalism’s fruits aren’t a homogenous cake, but rather a diverse set of goods all of which satisfy particular needs in particular circumstances.
What justifies capitalism is not that’s fair, that some wise baker in the sky gives everyone their just deserts. What justifies capitalism that it puts people’s efforts into serving one another. Profit is not ordained by a social planner nor need to meet the economists’ notion of normal profits; rather, it is earned by someone else being willing to depart with his cash for something the seller is offering. Francis D’Anconia got it right when he pontificated:
Money demands that you sell, not your weakness to men's stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best that your money can find. And when men live by trade--with reason, not force, as their final arbiter--it is the best product that wins, the best performance, the man of best judgment and highest ability--and the degree of a man's productiveness is the degree of his reward. This is the code of existence whose tool and symbol is money.