March 13th, 2009
The Financial Times is running a major series called The Future of Capitalism. It includes numerous articles, analyses, and features. The real value of this series is that it takes a step back from the immediacy of crisis reactions and permits thoughtful reflection on where we are and where we should be going.
Many will disagree with some of the opinions expressed in this series. Liberals will think there needs to be more movement toward European-style socialist solutions. Conservatives will object to the drift toward those same socialist solutions. Libertarians will will be unhappy, as usual, with government involvement in anything. And so on. Perhaps that’s the strength of the series.
Here are a few examples of thoughts from some of the articles. (Reading more than two or three will probably require registration with FT. It’s free.):
Adam Smith’s Market Never Stood Alone by Amartya Sen, Professor at Harvard University and recipient of the 1998 Nobel Prize in Economics:
The crisis, no matter how unbeatable it looks today, will eventually pass, but questions about future economic systems will remain. Do we really need a “new capitalism”, carrying, in some significant way, the capitalist banner, rather than a non-monolithic economic system that draws on a variety of institutions chosen pragmatically and values that we can defend with reason? Should we search for a new capitalism or for a “new world” – to use the other term on offer at the Paris meeting – that need not take a specialised capitalist form? This is not only the question we face today, but I would argue it is also the question that the founder of modern economics, Adam Smith, in effect asked in the 18th century, even as he presented his pioneering analysis of the working of the market economy.
Read the Big Four To Know Capital’s Fate by Paul Kennedy, Professor at Yale University:
Since today’s leaders cannot possibly read all the major works of political economy, let us help them by selecting four of the greatest names from Robert Heilbroner’s classic collection The Worldly Philosophers : The Lives, Times, and Ideas of the Great Economic Thinkers: Adam Smith, the virtual founder of the discipline and early apostle of free trade; Karl Marx, that penetrating critic of the foibles of capitalism, and less reliable predictor of its “inevitable” collapse; Joseph Schumpeter, the brilliant and unorthodox Austrian who was certainly no foe of the capitalist system but warned of its inherent volatilities (its “perennial gale of creative destruction”); and that great brain, John Maynard Keynes, who spent the second half of his astonishing career seeking to find policies to rescue the same temperamental free-market order from crashing to the ground. …
…capitalism, in modified form, will not disappear. Like democracy, it has serious flaws – but, just as one find faults with democracy, the critics of capitalism will discover that all other systems are worse. Political economy tells us so.
The Audacity of Help by Chrystia Freeland:
This determination to turn the world’s deepest economic downturn since the Great Depression into the beginning of a new era of progressive politics in America is the most important political consequence – and the biggest political gamble – of the crisis of capitalism in capitalism’s homeland. …
…for all the bold reach of the progressive agenda Mr Obama has laid out, neither the president nor anyone in the Democratic mainstream is challenging the tenets of the market economy. Indeed, the Democratic White House has been more allergic to the idea of nationalising banks than have some leading Republicans. …
Mr Obama, the most ambitious president since Reagan, is determined to use this pivotal moment to advance an agenda on income inequality he began to talk about before the credit crunch began. But even as he lays out bold – many would say too bold – plans for the long term, he and his team recognise that their first and necessary step is to patch up America’s faltering capitalist engine.
A Need to Reconnect by Francesco Guerrera:
Once hailed as examples of an American dream that rewarded success with large pay cheques, lavish perks and popular admiration, executives and their companies have been caught in the grip of a storm that will revolutionise business. The deep freeze of capital markets, the implosion of financial groups and the resulting rise in governments’ sway over the private sector have called into question some of the foundations of Anglo-Saxon capitalism. …
After years of soaring pay, business chieftains in America can expect to reap relatively meagre rewards in the coming years. As the downturn moved from Wall Street to Main Street, even companies that have not received federal aid, such as GE, FedEx and Motorola, have joined those on government life support in slashing top executives’ compensation.
Many are also re-examining the gap in pay between executives and other employees. In America, the discrepancy between the compensation of those at the top of the corporate tree and those further down the trunk has grown steadily for decades, reaching an estimated 275 times the average in 2007 and contributing to rising wealth inequality in the country.
Now Is the Time for a Less Selfish Capitalism by Richard Layard, London School of Economics Centre for Economic Performance:
Three ideas taught in business schools have much to answer for. One is the theory of “efficient capital markets”, now clearly discredited. The second is “principal agent” theory, which says the agents will perform best under high-powered financial incentives to align their interests with those of the principal. This has led to excessive performance-related pay, which has often undermined the motive to work well for the sake of doing a good job and introduced unnecessary tension among colleagues. Finally, there is the macho philosophy of “continuous change”, promoted by self-interested consulting companies, which disregards the fundamental human need for stability – in the name of efficiency gains that are often not realised.
We do not want communism – as research shows, the communist countries were the least happy in the world and also inefficient. But we do need a more humane brand of capitalism, based not only on better regulation but on better values.
Values matter and they are affected by our theories. We do not need a society based on Darwinian competition between individuals. Beyond subsistence, the best experience any society can provide is the feeling that other people are on your side. That is the kind of capitalism we want.
Articles written by Tom Carter
Tags: capitalism, economy
Categories: Economics, Politics | Comments (5) | Home
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I think each of the cited authors make good observations. But I am particularly struck by that quoted middle paragraph from Chrystia Freeland,
…for all the bold reach of the progressive agenda Mr Obama has laid out, neither the president nor anyone in the Democratic mainstream is challenging the tenets of the market economy. Indeed, the Democratic White House has been more allergic to the idea of nationalising banks than have some leading Republicans. …
Either she’s wrong or the reich-wing pundits trying to spread fear by crying “socialism” are wrong. N’est pas?
Well, I haven’t heard any responsible Democrat (or Republican, for that matter) advocate nationalizing banks, although some ideas come very close to that, at least on a temporary basis.
It isn’t fair or reasonable to characterize all Democrats as wanting to make the U.S. a European-style social democracy, although many want to move further in that direction. It also isn’t fair to characterize all Republicans as advocating doing nothing about the crisis, letting the chips fall where they may in service to an unfettered free market, although some do think that way. The real debate, and the one that we should be openly engaged in once this crisis is over, is how far we want to go in one direction or the other. It bothers me that the Obama Administration seems to want to use the economic crisis as an opportunity to move us significantly further left. I’d like more transparency.
My personal view is we need to aggressively protect the economy. That means spending a lot of money, exercising control over certain banks for a while if necessary, and propping up mega companies like AIG for a while. But as soon as we can get back to a more normal economic environment, we ought to do it.
In the specific case of General Motors and some other companies, they ought to declare bankruptcy if they can’t make it without government money. That might be the best thing that could happen. It would give GM room to reorganize and solve some problems instead of pushing the crisis further down the road.
As far as regulation is concerned, I don’t see how anyone can say there should be no regulation of businesses and Wall Street. Regulation is necessary for the economy and the country. The kind I’d like to see is specific, well-enforced, and generally distant.
Tom, the problem is that when governments assume powers, they rarely, if ever, give them up without bloodshed. King John did not sign the Magna Carta without a sword held to his throat. George III did not give up the colonies without 5 years of ultimately futile struggle. So it has gone throughout the course of history. The free market has not failed here. If anything, the lesson that should be learned is that government involvement in the free markets is the greatest causative agent of economic problems for most people.
Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience. — C.S. Lewis
Brian, I’ll agree that politicians and government bureaucrats are uniquely ill-suited to manage businesses and, for that matter, national economies in a detailed sense. Everywhere it’s been tried on a large scale, the result was miserable failure. It’s a demonstrable fact that free markets operating in free societies are the true engines of creativity, production, and wealth.
However, an unfettered free market is dangerous in many ways. Without some degree of regulation and the countervailing influence of unions, we’re back to robber barons, sweat shops, child labor, and all the other ills we’ve seen in the past. This isn’t theory–it’s historical fact.
That’s why I say that we need regulation to protect all of us, including business, that is rational, specific, well-enforced when necessary, and distant from the daily functioning of markets and the overall economy.
Regulation for tortious activities is one thing. Regulation because “life isn’t fair” is quite another, and there seems anymore to be precious little otherwise.
The beauty of being a free moral agent living in a free market environment is that the top is just as accessible as the bottom. Watch the true story called “Pursuit of Happiness” starring Will Smith if you think otherwise. In a free market, you will tend to rise as far as your persistence will carry you. Take special note that we no longer have truly free markets in this country.
The indolent will always be at the bottom. It is neither my moral responsibility or job, nor yours, to ensure that they reside anywhere but where their laziness puts them. Those that are willing to hustle may start at the bottom, but they will not long remain there.