The Limits of Capitalism

The emerging paradigm shift I mentioned a year ago is now in full flower.    The extremes are represented in today’s Post, as usual, by Robert Samuelson and E.J. Dionne.  Samuelson, an ardent conservative, argues that “the age of entitlements is over”, so get over it.  He says that the traditional belief that hard work and playing by the rules will yield prosperity and security no longer applies, but hey, that’s life. Sooner or later, the business cycle, which like Mother Nature, can’t be fooled will catch up with you and government action to provide entitlement safety nets will be too expensive and go to “undeserving” people (whoever they are.)  To expect fairness is unrealistic.

Dionne argues that conservatives’ arguments for deficit reduction and austerity only come out when their profits are threatened (they don’t mind deficits produced by tax reductions), and that their arguments for austerity have been proven to be both based on faulty data and wrong when viewed in the light of comparing results from stimulated versus austere economies.  To some extent then, Samuelson and Dionne are engaged in the usual economists’ mud fights.  Neither recognizes the limits of their own arguments or the validity in their opponent’s arguments.

The middle provides more interesting views.  Both sides recognize the reality of the problems, differing in how they should be treated.  Three weeks ago, eulogies for Margaret Thatcher were flying all over the press and the internet. I was taught as a child never to speak ill of the dead (Hitler and Vlad Dracul, the Impaler, being exceptions), but apparently, Thatcher was requiring a lot of help.  One of the more intriguing defenses, on April 12 in the Washington Post, was by Michael Gerson, and titled “Thatcher: the moral capitalist.”   Even more interesting was that 5 days later, the Post’s feature article in the Sunday Outlook section, by Steven Pearlstein, had the headline, “Is Capitalism Moral?”  Those two represent in differing ways the moderate middle in the battles raging over the truths and utility of classical economics versus “the social market.”  Gerson is one of those socially conscious conservatives whom I admire for his thoughtfulness, and his arguments this time show why. The thrust of Gerson’s article was that free-market capitalism can be value free only to the extent it exists within a society that has moral values to constrain it.  He quotes Edmund Burke, the revered father of conservatism (Gerson was speech writer for George Bush and is a traditional conservative) as saying"Men are qualified for civil liberty in exact proportion to their disposition to put moral chains upon their appetites.”  Gerson amplifies that by stating that “Freedom requires virtues it does not produce and may even help undermine.”  He, as a conservative, believes that virtue must be provided by the individual, not imposed by government through regulation.  If results of the market are sick, it is because society is sick and must be cured, not the market.

The Pearlstein article argues that for free-market capitalism to defend itself validly as being moral in itself, as opposed to the value-free capitalism recognized by Gerson, capitalism must be able to demonstrate that economic outcomes to individuals are necessarily consistent with their economic contributions.  You are paid what you are worth, and the invisible hand of the market washes away all sin.  This capitalism cannot do.  Poverty does come upon hard working people, and the idle rich do prosper.  The child of a poor family, no matter how gifted, is less likely to succeed than an equally talented child of the wealthy.  Executives of failing companies are usually compensated just as well as those of successful ones.  As Joe Stieglitz, the Nobel Laureate economist, argues this is because the first thing that any person or company finding success in the market seeks to do is establish what economists call a “rent”, a lock on some kind of unearned income, and these rents inevitably produce skewed market outcomes.  As the rich get richer, the poor get poorer.  Thus, a totally free market inevitably produces immoral results.

Both Gerson and Pearlstein, and Stieglitz, essentially are agreeing that some third party outside the market must act to obtain virtuous outcomes.  Gerson, interestingly, is tacitly repudiating “the invisible hand of the market.”  Gerson identifies the required third party as the sense of moral responsibility of individual market participants; Pearlstein sees it as the regulatory function of government.  Gerson argues that reliance on anything but the internal moral norms of individuals erodes liberty, but agrees that liberty itself erodes moral norms by treating every value as equal.  Pearlstein argues that government necessarily must act to assure all citizens an equal chance for success that is dependent only on their effort and talents, but agrees that government too frequently regulates in favor of equal outcomes rather than equal opportunities.  Its outcomes too are flawed.  We are encountering here a fundamental paradox of democracy.  Free men, and their markets, detest regulation, but imperfect men, and their markets, require it.  As James Madison put it, “It is because men are not angels that government is necessary; it is because men are not devils that government is possible.”

Part of the problem may be the traditional view of regulation as a combination of severely worded “thou shalt not’s” and stern punishments for malefactors.  B.F. Skinner pointed out positive reinforcement as a better way over 50 years ago, but most regulation still has 19^th century roots.  J.D. Trout, a behavioral scientist, reports in The Empathy Gap that in the Amsterdam Airport for many years they had what were regarded as among the filthiest men’s rest rooms in Europe. Stern posters were of no avail and fines to international travelers impossible.  They solved the problem overnight by painting a fly in the center of each urinal. Now their rest rooms are among the cleanest. That approach represents the use of positive incentives for good behavior.  Another positive approach is barrier removal.  The assumption here is that people will want to do the right thing but find it easier to do the wrong thing; making it easier to do the right thing will point them in the right direction.  For example, a system of initial strict inspections then inspections scheduled more infrequently after a reasonable period of non-violation should encourage those really working “to do the right thing” by making regulation less of a burden. 

Of course there are always those who feel the need to “beat the system” or to “gain a competitive advantage.”  They will always require stern regulation.  The problem remains also of determining what exactly “the right thing.” is.  Here the best advice remains that given by a top corporation CEO:”If you can see the line, you’re too close to it.”  Competitive advantage has, for too many years, been the flimsy excuse given for unconscionable behaviors.  The solution resembles that used by an experienced teacher at the start of a new year: begin with strict rules and ease up as experience shows less strictness is needed.  Re-enact Glass-Steagall.  If it’s realistically too stern, then back off from there, very gradually.  Impose strict limits on fracking, then gradually back off if they’re not needed.  The key point in all these approaches is that they seek to recognize and reward good behaviors.   Free and responsible men know that capitalism is a tool, not an end in itself, and does not serve our needs unless handled with care.