Can Hard Work and Frugality Alone Explain the Functioning of the Economic System?

Max Weber teaches us in his “The Protestant Spirit and the Ethic of Capitalism”1 about how the Protestant dedication to hard work and frugality explains how modern day capitalism, with its overt emphasis on rational procedures to accumulate profits and drive business expansion, and its formally ‘free’ labor that exerts its energy in the name of God rather than remain idle2, could come into being. This, so Weber, needs to be contrasted with Catholics, who viewed work only necessary up to a certain point, when certain basic necessities are acquired, and then no more effort is required. However, the Protestants fell away from the materially minimalist and concentration on the spiritual otherworldly framework, and found their salvation in the acquisition of material wealth. They would piously spend their time working and would be encouraged to work more, be paid more, save a fraction of that income, and use it for enterpreneurial purposes. Those investments develop a business and commerical enterprise, which could not be built if people would have preferred to minimally produce and consume, or spend all the money they get. On the other hand, the excess money could not be used for purchasing luxury items, because it was considered a sin. Nor could it be used to charity for the poor, because it would confirm and prolong poverty, whose cause is laziness. Why should hard-working people subsidize lazy people, who choose not to work? They should be damned by God. So did the logic work (and so does it still prevail in the minds of many American people).3 Economic expansion and the idea of capitalism could develop because Protestants would exert themselves in industry and frugality.

It is ironic then that Weber would continue on in his observation by stating that even though Protestantism was a crucial explanation for the development of capitalism, capitalism has taken a life on its own by replacing the purposefulness that Protestants put into their daily labor activities with the purposelessness of money-worship on the side of the bourgeoisie, and fear for livelihood on the side of the proletariat. The pursuit of a worldly objective under spiritual auspices soon turned into worldly objectives for the sake of it. This explains why Puritanism has declined in importance, even though still alive in some very basic elements in American popular culture, but the worship of capital has gained in importance, and, according to Marx, the “motley feudal ties that bound man to his “natural superiors”” were “pitilessly torn asunder”, and “has left remaining no other nexus between man and man than naked self-interest, than callous “cash payment””.4

What I want to quarrel with in this argument is not that Weber is misguided in tracing the roots of capitalism to religion5, because it seems to be a valid point. He thought that capitalism sprang up nowhere but in Europe, so he was focused on the peculiarities of European culture and religious traditions to explain the rise of capitalism. I have a problem with his logic that frugality and industry are the only principle that can prevail in an economic system. If frugality and industry are not countered by wastefulness and idleness on the other side, the system can not function. Why should someone produce commodities, that he, then, is due to his Calvinist beliefs not permitted to buy? These commodities need to be sold to somebody else, who either has the money acquired from hard work, or has borrowed the money from “frugal” financiers, or is a wealthy capitalist. Otherwise, the cycle could not even be started.

The major attempt of a retort was developed by J.B. Say, who claimed that supply (production of commodities) creates its own demand. Products are paid for with products, because the rational businessman acquiring his revenues from the sale of commodities on the marketplace never hoards his money, but always spends it to re-generate the economic cycle, because money is perishable.6 Say’s law was popularized by other economists, including James Mill, David Ricardo and John Stuart Mill. Say’s law is valid insofar as if more is produced, more can be trickled down to the masses if their wages increase by an equivalent share, thereby increasing the overall standard of living. However, such logic was limited, because such a trickle down does not happen all the time, especially if labor is weak. Say’s law was later first ridiculed by Marx and then refuted by Keynes, who placed emphasis on aggregate demand, which, if it went mising, would lead to mass hoarding, especially as pertains to the capitalist, who intrinsically had most of the savings, whereas the working class spends all the money it gets anyway, but would nonetheless try to save pennies if it could, when faced with unemployment that was induced by hoarding decisions.7 The economic psychology of hoarding, of course, directly contradicts Say’s law, which assumed that all the money accrued from sales by the businessman is immediately returned to the economy in spending.

The most interesting position revealing the limitations of the frugality-and-industry logic is offered by mercantilist theorist, Bernard deMandeville.8 He was primarily concerned with maximizing revenues for the state by keeping labor wages low in the domestic economy, so exports could be sold competitively (cheaper) abroad and at higher quantity and value than imports. In order to accomplish this nationalist goal of enhancing national wealth, spending has to be restrained, and saving has to be extolled. It comes, therefore, very handy that spending is considered a vice, and saving a virtue. Considering something harmful would reduce its practice in society, whereas considering something positive would increase its practice. Bringing this into practice, however, would have created the dilemma I outlined earlier. If the state would accumulate the revenues without finding means of spending it, where would the justification for the production lie in?

Mandeville did not need to worry, because whereas the wealthy businessmen might be inevitably in the acquisitive mode of thinking, by which hoarding has become an indispensable feature for future accumulation, the vast majority of working people, spend most of their money, thus keeping the economic cycle going. Mandeville correctly noted that the private vice (waste, spending) is actually a public virtue (revenue enhancer). What Mandeville noticed with this logic was that pursuing this mercantilist policy, benefiting the state treasury (and private businessmen), can only work, when private people, i.e. workers, would spend all the money that they get. They should pursue their vice and wants, which it is “prudence to relieve, but folly to cure”. Such a consumerist lifestyle, of course, (he wrote at a time when workers were much poorer than today), requires the workers to constantly work. No notion existed of a labor union back in the early 18th century, which Adam Smith considered hardly possible (he wrote in 1776), because whereas “masters can comine much more easily, the law prohibits combinations of workmen.”9 The frugality-industry-logic has thereby been replaced by the more realistic wastefulness-industry-logic, i.e. work much, consume much.

The frugality-industry-logic is so fascinating, because many people, especially supply-side proponents become mesmerized about the people, who have accumulated so much wealth and count their great inventions and ownership of commodities in the marketplace as the major sources for innovation and greater societal prosperity. One only needs to look at people like Bill Gates or Steve Jobs, who are the celebrated heroes of contemporary American capitalism (even though Steve Jobs died last year). The emphasis on capitalists then poses the question of how that prosperity can accumulate in their hands, to which they ordinarily do not reply that they have been best capable of capturing a huge market share by underpaying their workers and overcharging their customers. Instead one points to their frugality and industry.

This logic is not merely restricted to capitalists, of course, even though they are a popular avenue. One can also extend it to whole nations, like Germany or China, which are posing the manufacturing hubs of the world, and in their economic policies seem to closely follow the mercantilist model proposed by Mandeville.10 They hold up a positive balance in foreign trade, while holding down domestic wages (even though they are rapidly rising in China in response to the inflationary pressures). Low domestic consumption as a response to low wages are compensated by this aggressive export policy, which generates huge foreign exchange reserves that can be used for investment capital. China has a savings rate of 50%. Germany, as a developed economy, has a savings rate of 11.6%.11 On the other hand, the U.S., Greece, Ireland, Spain, Portugal and Italy are the main importing countries. U.S. savings rates are a paltry 3.6%.12

Now that we have established that an economic system in which a part of the population is frugal and industrious can only then function when another part is wasteful and idle, I now need to prove that even if that condition were fulfilled it will not work over the long term. How come? If the frugal and industrious people produce all the goods in a country, and the non-producing countries import these goods, whence are the revenues of the non-producing countries to be derived from to acquire those produced goods? Answer: the industrious country that accumulated all the money, but does not spend it itself, lends the money to the non-producing countries, who finance their consumption on credit. They will continue borrowing until they no longer have the ability to repay these loans with their existing incomes. When that happens you have economic turmoil, a financial crisis, and a crisis of confidence. This scenatio played out painfully in the United States. Working people’s income had stagnated since the 1970s, corporate and bank profits went up, which led to the lending spree in the housing market. The mortgage market, which was all about wealthy investors around the world lending money via banks to poor people, who could not afford to repay the mortgage (subprime mortgage) in a deregulated market under government auspices, blew up in 2007, which led to a lending freeze, the bankruptcy of Lehman Brothers, and the near-bankruptcy of other financial institutions that ended up being saved by the taxpayers.13 The economy is still far away from a real recovery with real unemployment rate solidly in the 15% region.

The same logic applies to the European economic imbalances, by which wealthy countries such as Germany or Netherlands were lending vast sums of money to poorer Eurozone countries (reassured by the price stability of the common currency) such as Greece or Spain to purchase the German or Dutch commodities that had made the lenders so rich in the first place. The producers were reassured in their production, because they had customers and because the money, which they did not use for personal consumption, was lent out to poor borrowers, who would eventually repay the creditors- or so was the hope. The hope did not materialize. Greece suffering from massive corruption was hiding huge public debts with the help of Goldman Sachs.14 It was under the Papandreou government in 2010 that the real debt burden was revealed to the public with immediate punishment by the financial markets, interest rate hikes, austerity measures and now 25% in unemployment. Spain built up an unsustainable property bubble, in which developers were speedily profiting from setting up new buildings that had nowhere near the adequate demand to purchase those properties. A similar thing happened in Ireland, which subsequently forced these relatively frugal governments with low debt exposure to bail out their banks, and provoke the distrust of the investors and rating agencies, which spiked interest payments and the threat of fiscal and economic calamity.15 Spain too is facing a 25% unemployment rate.

The inability to balance the scales between production and consumption seems to be built into the capitalist system. Noting the frugality and industry of a certain part of the population may be a pre-requisite for a higher standard of living, but that frugality and industry that builds up huge investment capital can only then be warranted if there are other people that are willing and able to purchase the products. Doing this via loans and the financial system may sound like a fair idea, and initially this is what keeps business humming. But eventually it becomes an unsustainable system, because the idle and wasteful that accepted these loans can no longer repay these loans, which causes a financial and economic crisis, discontentment from the industrious and frugal, whose savings disappear, and uproar and despair in the idle and wasteful countries, whose people are subjected to undue austerity and a sharp decline in their standard of living. The system is then infested with distrust that will take years to overcome.

So what would be an honest solution to this dilemma? One can only think of four, and they really need to be seriously considered, when preventing market and societal instability is considered an important goal. First, the industrious and frugal countries retain their industry, but decide to become more willing to consume, thereby lessening the need for exports and keeping the economic cycle going domestically. That would require strong labor unions that can gain huge concessions from their employers to the benefit of the working class as a whole. It would also require a spending mentality, which is not so easy to call into being. Second, the industrious countries simply produce less, and prevent an oversupply. This seems to run counter to the nature of capitalism, that always needs more production and more profits. It would also run counter to people’s sense of workmanship. And if you don’t want to be industrious, then someone else will, and we would return back to square one.

Third, instead of loans, the wealthy, industrious countries could issue grants and subsidies to poor, idle countries. This way the consumers could legitimately acquire the products that they need without running into a debt crisis. The assumption would be that the frugal and industrious people could not need any more products, and offer it as a charity to those that work less, but have more demands. The major objection to this scheme is that this arrangement is very unfair, because those that have been frugal and industrious have not been like that just so they can be charitable. They do it, because they want financial security, the deferment of pleasure, perhaps even into future generations, not so that they can help out people, who don’t work but want to consume more. The Calvinists would go nuts, according to Weber. If fully implemented such a freerider system would set false incentives,. Similar incentives, of course, are built into capitalism with the employer freeriding on his worker’s labor. Even if such a system shall persist, it would strike as unfair, and would then be opposed.

Fourth, and most ideally, the industrious and frugal countries determine to reduce their workload (and perhaps increase their consumption), and share it with the idle and wasteful countries, who will then become less idle and less wasteful, because they produce the items through their own labor, and the income generated for consumption purposes could then not be regarded ‘wasteful’ but living within one’s means. The problem with this argument is that it is unrealistic to accomplish, even though it would be morally the most justifiable system. Can we simply convince the Germans to work less, and the Greeks to work more? But simply because this proposal is unrealistic does not mean we should shelve it. It means we would have to be creative about finding ways how to get there.

I may add a note clarifying the derogatory terms ‘idle’ and ‘wasteful’. It strikes as disconcerting even to non-Calvinists. These derogatory expressions are not meant to be derogatory, but merely fit well into the discussion about Protestant insistence on frugality and hard work, which are simply defined as the polar opposites to these two features. The logic works on both sides. If there are a group of people that are enormously productive, then other people can’t be so productive, because so much does not need to be produced, and the investment capital flows in that country where productivity is perceived to be the highest, which leaves out the less productive countries, making them involuntarily by definition ‘idle’. If there are a group of people, who are enormously frugal, then another group is more open to spending, lest overproduction is to be risked. If overproduction does occur (which under capitalism it frequently does), then any argument in favor of frugality would be pointless. Frugality in Mandeville’s (and our) time might be called a virtue, but can only be a vice if the assumption is that a higher standard of living is desirable, because frugality does not create prosperity.

References

1 Weber, Max. The Protestant Ethic and the Spirit of Capitalism. New York: Scribner, 1950 [1905]. Print & Web. http://archive.org/stream/protestantethics00webe#page/n9/mode/2up.
2 I have the suspicion that Weber will agree with the Marxian definition of ‘free’ labor. Marx writes that labor is ‘free’ in a double sense. He is free to sell his labor as his own commodity to the capitalist. He also is free of any other means to realize revenues from his labor, i.e. he owns no other commodities with which to make a living. His promised freedom turns out to be a trap. Marx, Karl, and Ben Fowkes. Capital: A Critique of Political Economy. Vol. 1. London: Penguin Books, 1990 [1867]. 272-273. Print.
Also discussed in Collins, Randall. “Weber’s Last Theory of Capitalism: A Systematization.” American Sociological Review 45.6 (1980): 925-42. Print.
3 In my opinion, it is the greatest shame that such a large number of people, be they working poor or middle class, are bashing the lowest ranks in the society, accusing them of laziness, when, in fact, the jobs are not available to remove poor people from the welfare rolls. I would also like to point out that our Puritan former President, Bill Clinton, passed welfare reform in 1996, which set a life-time limitation for welfare recipients by transforming the AFDC (Aid for Families with Dependent Children) into the TANF (Temporary Assistance for Needy Families), throwing millions of poor families into low-income jobs and greater poverty. According to Ron Haskins, the number of welfare recipients declined by 60% between 1994 and 2005. Haskins, Ron. “The Outcomes of 1996 Welfare Reform.” Brookings Institution. Testimony before the House Committee on Ways and Means, 19 July 2006. Web. http://www.brookings.edu/research/testimony/2006/07/19welfare-haskins. I see no indication of universal laziness having taken over the poor. To add insult to injury, many states now require welfare recipients to undergo drug tests. Sulzberger, A. G. “States Adding Drug Test as Hurdle for Welfare.” The New York Times. N.p., 11 Oct. 2011. Web. http://www.nytimes.com/2011/10/11/us/states-adding-drug-test-as-hurdle-for-welfare.html?pagewanted=all.
4 Marx, Karl, Friedrich Engels, and E. J. Hobsbawm. The Communist Manifesto: A Modern Edition. London: Verso, 1998 [1848]. Print.
5 Weber, in a way, relativizes this statement by noting that “it is, of course, not my aim to substitute for a one-sided materialistic [Marxist] an equally causal intepretation of culture and of history. Each is equally possible, but each, if it does not serve as the preparation, but as the conclusion of an investigation, accomplishes equally little in the interest of historical truth.” Weber, Max. The Protestant Ethic and the Spirit of Capitalism. New York: Scribner, 1950 [1905]. 183. Print & Web. http://archive.org/stream/protestantethics00webe#page/n9/mode/2up.
6 Say, Jean Baptiste, Charles Robert Princep, and Clement C. Biddle. A Treatise on Political Economy; Or, The Production, Distribution & Consumption of Wealth. New York: A.M. Kelley, 1971 [1803]. Print & Web. http://www.mises.org/books/politicalecon.pdf
7 Keynes, John Maynard. The General Theory of Employment, Interest and Money. New York: Harcourt, Brace, 1936. Print.
8 Mandeville, Bernard, and Irwin Primer. The Fable of the Bees: Or, Private Vices, Publick Benefits. New York: Capricorn, 1962 [1714]. Print.
“Bernard Mandeville Fable Of the Bees.” Scarlett- History of Economic Theories and Thought. N.p., n.d. Web. http://www.economictheories.org/2008/07/bernard-mandeville-fable-of-bees.html.
9 Smith, Adam, Edwin Cannan, and Max Lerner. An Inquiry into the Nature and Causes of the Wealth of Nations. New York: Modern Library, 1994 [1776]. 75-76. Print.
10 One can review Ian Fletcher’s insightful book review of Eamonn Fingleton’s “In the Jaws of the Dragon”, which is set to outpace America with its mercantilist policies of low domestic wages and high export. Fletcher, Ian. “America’s Fate Under Chinese Hegemony: A Review of Eamonn Fingleton’s Jaws of the Dragon.” The Huffington Post. N.p., 30 Apr. 2011. Web. http://www.huffingtonpost.com/ian-fletcher/americas-fate-under-chine_b_855809.html.
Fingleton, Eamonn. In The Jaws of the Dragon: America’s Fate Under Chinese Hegemony. New York: St. Martin’s Griffin, 2008. Print.
11 Wilder, Rebecca. “Household Saving Rates in the US, UK, and Germany: (possibly) Light at the End of the Tunnel.” News N Economics. N.p., 20 Aug. 2010. Web. http://www.newsneconomics.com/2010/08/household-saving-rates-in-us-uk-and.html.
12 Sparshott, Jeffrey. “U.S. Savings Rate Falling Amid Stagnant Incomes.” Wall Street Journal. N.p., 31 May 2012. Web. http://blogs.wsj.com/economics/2012/05/31/u-s-savings-rate-falling-amid-stagnant-incomes/.
13 Pritchard, Justin. “Mortgage Crisis Overview.” About.com Banking / Loans. N.p., n.d. Web. http://banking.about.com/od/mortgages/a/mortgagecrisis.htm.
14 Cabannes, André. “The European Monetary Crisis Explained.” La Passerelle Des Arts. N.p., Aug. 2011. Web. http://www.lapasserelle.com/billets/greek_crisis.html. Revised February 2012
Story, Louise, Landon Thomas Jr., and Nelson D. Schwartz. “Wall St. Helped To Mask Debts Shaking Europe.” The New York Times. N.p., 14 Feb. 2010. Web. http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=1.
15 Smyth, Sharon, Neil Callanan, and Dara Doyle. “Spain Real Estate ‘€˜Madness’™ Continues Despite Burst Housing Bubble.” Financial Post. Bloomberg News, 2 May 2012. Web. http://business.financialpost.com/2012/05/02/spain-real-estate-madness-continues-despite-burst-housing-bubble/.

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