Is Capitalism the Problem?

I think it is a mistake to conflate the way an economy is organized with the way that people with wealth and power behave within an economic and political system. Historically, socialist and communist economies have often experienced much worse political and economic problems (atrocities, in some instances) than capitalist economies because of the much stronger "marriage" of political and economic power that results from state ownership of the means of production.

Remember that when Adam Smith, who some regard as the "father of capitalism," wrote Wealth of Nations, he devoted much of the book to discussing the very pronounced ways in which the rise of commerce and trade based on the division of labor benefited the poor and middle class. He, too, noted the collusion that occurs among those with power and wealth, but recognized that well-functioning markets act to counter such collusion.

The economic and political sequelae of current problems in the financial and housing sectors derive in part from companies and banks that have become so large (due to economies of scale and scope) that competition has become effectively dampened. Add to this that some are now considered "too large to fail" and you can see that we have departed the capitalist model and markets that Smith so eloquently described and lauded. It doesn't help that consumers haven't been paying attention or that most US citizens don’t really understand economic theory (through no fault of their own). Capitalism in its truest sense (many small firms that are all price takers, free entry, no externalities, no economies of scale or monopoly power) would solve many of the problems commonly and incorrectly associated with “capitalism.”

For these reasons, we need to dissociate "capitalism" and "capitalists" from discussion of the current problems in financial and housing markets, just as we need to dissociate “socialism” from discussion of healthcare reform.

We need another name for unprincipled, short-sighted, self-interested people who may or may not be capitalists. I call them Gyges.

Gyges was a fellow described in a dialogue in Plato's Republic who found a ring that made him invisible (like Gollum in Lord of the Rings). Gyges used the ring to enter the king's castle, seduce the Queen, slay the king, and take over the reins of power, setting himself up as king. His wealth, power, and prestige were unearned and undeserved, thus violating every principle of fairness (not to mention the murder thing).

One participant in Plato’s dialogue is a fellow named Glaucon who asserts that in the absence of accountability, we would all do as Gyges did. I don't happen to agree with this, but I agree that without accountability the Gyges of the world will flourish and can do a lot of damage to the rest of us (e.g., recent mess in financial markets brought on by many Gygeses obscured behind complex models and risk instruments).

No matter how an economy or a political system is structured, Gyges will always be part of it. For this reason, economic and political institutions (the law, regulations, social norms) will have to take account of and prevent him doing damage to the larger society.

In a local capitalist economy with many small firms, the market does a pretty good job of exposing and weeding out Gyges. It gets harder as the economy becomes more global and firms become larger with more market power. It is particularly difficult when Gyges obtains both economic and political power (which is a strong argument against uncritical endorsement of “government-run” anything). In some situations, the internet is one possible antidote to Gyges, but it requires that informed people be paying attention and not get distracted by emotionally-laden flak generated by the MSM.

In order that the social benefits of capitalism continue to outweigh the harms, we need a new perspective on capitalism that acknowledges the existence of Gyges and the potential harms he can inflict in corners of the economy where he is able to lurk in near invisibility (e.g., behind complex mathematical models and risk-based derivatives). We also need a new perspective on capitalism that recognizes the benefits and harms of corporate size and of restructuring or regulating to take account of them. I call this enlightened capitalism (post-modern capitalism?).

And we need a return to a moral philosophy that recognizes both the individual's obligation to the community and the community's obligation to the individual. Such a philosophy would include the corporation's obligations to community and consumer as well as to share and bond holders. This is the tension of an expanded social contract that reflects the realities of our economy.

It is also the tension of the market that small business owners know so well: the requirement to live in and respect the community that they serve and that serves them if they want to stay in business. Anything that moves the dialogue away from the straw men of socialism and class and the misuse of "capitalism" to the real issues of creating a political economy in which Gyges is inhibited, individual freedom and social cohesion are balanced, and corporations, banks, consumers, and government are responsible will be a major step in the right direction IMHO.