Where has capitalism gone wrong?
In its added excess and insatiable curiosity for investigating the limits to growth?
In it’s drive for inefficiencies?
In it’s stagnant mode?
Has the invisible hand ben playing with itself?
Or in it’s applications?
Yes, probably gone wrong on all fronts.
Because it has gone wrong disastrously.
Yet the roots of discontent with capitalism run much deeper than the current slump.
Now am here to debate that Capitalism in it’s basic form – plain vanilla Das Capital management – hasn’t gone wrong in and of itself but has been micromanaged to death by inept and afraid handlers of our resources and proxies of our vote and governing systems.
Over the past three decades, as capitalism has become freer and more globalized, the rich have benefited enormously while the many have often been left with the crumbs. The gap between rich and poor has been widening just about everywhere. In a 2011 report, the Organisation for Economic Co-operation and Development figured that the level of income inequality in the 22 member nations it studied increased by 10% since the mid 1980s, with conditions deteriorating in 17 of them. Free-trade-led globalization has forged an international labor market that pits Indian and American college students against one another, pushing those who can’t compete to the sidelines. Factories are shuttered in the U.S. and Europe, only to reopen in China, costing the West millions of manufacturing jobs.
Those still on the payroll in the US don’t gain as much from today’s capitalism as their bosses do. A recent report by the Institute for Policy Studies, a Washington-based think tank, found that CEOs at large U.S. firms earned, on average, $10.8 million in 2010, a 28% increase from the year before, while the average worker took home $33,121, a mere 3% more. At that level, CEOs’ paychecks are 325 times bigger than their employees’. In the 1970s, CEO pay rarely topped 30 times more. A lot of people say capitalism doesn’t work. We want to see capitalism used to create more, not consolidate power into one small subset, where the rest of America is saying, “Where’s our slice?”
Last week, Mitt Romney the Billionaire Republican Presidential candidate, finally admitted that he pays a measley tax rate of just 15 percent, which is lower than that of all middle-class families. Romney is taxed at such a low rate because, as he freely admits, all of his income comes from investments, and is thus subject to the top capital gains tax rate of 15 percent, rather than the top income tax rate of 35 percent.
However, Romney has refused to sign on to the Obama administration’s “Buffett rule,” which aims to ensure that millionaires can’t dodge taxes to the extent that they’re paying less than teachers. When Billionaire investor Warren Buffett himself was asked about Romney’s tax rate, replying that letting millionaire investors like Romney pay such low taxes is “the wrong policy” because he makes his income by just “shoving around money”: ”He makes his money the same way I make my money. He makes money by moving around big bucks, not by straining his back and going to work cleaning the toilets or whatever it may be. He makes it shoving around money. I make it shoving around money. If you look at the 400 highest incomes in the United States, they average $220 million. Something like 90 of them are effectively unemployed. They have no earned income, and that number has gone up over the years. [...] It’s the wrong policy to have. Nothing wrong about Romney doing that. He will not pay more than the law requires. I don’t fault him for that in the least, but I do fault the law that allows him and me, earning enormous sums to pay over all federal taxes at a rate that is about half what the average person in my office pays.”
As the global economic crisis enters its fourth excruciating year, just about everybody who can be blamed for the downturn has been blamed. Irresponsible bankers. Greedy corporate executives. Incompetent regulators. Bickering politicians. Underpaid Chinese workers. Overpaid Greek workers. George W. Bush. Ben Bernanke. Angela Merkel. Credit-rating agencies. The euro. Spendthrift American consumers. Aliens. Yet after the worst financial disaster since the Great Depression of the 1930s, there has been no shortage of vilification to go around. With another grim year likely ahead and no ready solutions in sight, a new target has arisen in the public’s crosshairs: capitalism itself.
It’s easy to see why. As jobs remain scarce and the welfare of middle-class American and European families has come under strain, capitalism, as it functions today, seems to have failed to do what it is supposed to do: provide economic opportunity and a better future for all. We’re taught in school that capitalism is a meritocracy that rewards the hardworking and talented. In the wake of the 2008 financial crisis, however, capitalism often appears to benefit only the connected and privileged. Too many, Wall Street financiers remain unreformed and unrepentant. After all, they’re still getting rich off the same sport of risky shenanigans that caused the US and the global economy to tank in the first place. Bankers evict families from their homes only to tear those homes down. Greek, Spanish and Portuguese citizens suffer through budget cuts and tax hikes to appease impatient bondholders and bankers. CEOs pocket multimillion-dollar bonuses while laying off thousands.
Capitalism, of course, has confronted such criticism many times before. Karl Marx famously said, that oppression is built into the very way capitalism operates. The Great Depression was pinned on capitalism as well. Immoral bankers ran amuck through unregulated financial markets and caused the disaster, the thinking went. Yet capitalism defeated its chief rival communism, and has absorbed more and more of the globe into its dynamic orbit. That’s simply because no other economic system in human history has proved more adept at delivering the goods, while generating plenty of wealth and development.
Only in the last couple of hundred years, since the first textile looms of the Industrial Revolution began to stir has humankind climbed out of the primordial sludge of peonage and destitution into a new world of opportunity, entrepreneurship and social mobility. Global GDP and imperfect measurement of human progress has nonetheless increased by a factor of seven over the first 1,820 years of the common era, but since then and during the two centuries dominated by modern capitalism, it has surged by more than 70 times. Capitalism has eradicated poverty on a grand scale; propelled innovation in medicine, information and transportation; and stitched together a global community through trade and finance.
The one reason capitalism has been able to deliver such success, however, is that it never stays static. It is fully dynamic and it has been proven so, since it has survived and thrived. It has done so simply because it has reformed, and adapted itself in an evolutionary fashion again and again and again. Always in response to the circumstance, to the ills and to the vagaries of the moment and the economic and sovereign markets. Recently in the last hundred years, the huge pain and suffering brought on by the Great Depression sparked a movement to make capitalism equitable and stable, which led to greater government protection and regulation, led to the New Deal and led to the European welfare state. Then, to overcome the stagflation of the 1970s, capitalism had to be more productive and innovative. Ronald Reagan and Margaret Thatcher ushered in an era of deregulation, free trade and free flows of capital that spawned a global economic boom. Today, amid the protracted downturn, capitalism has reached another inflection point. The world’s financial sector remains so unsound, and the pain inflicted on the average family has been so great, that capitalism needs to morph yet again, to become more inclusive and balanced and less prone to recurrent meltdowns. The question is not whether capitalism must be reformed. It is how.
On that, there is no agreement. The answer lies with the never-ending waltz of the state and market that has determined the many historical twists and turns of capitalism. Many today believe the financial crisis was caused, like the Great Depression, by capitalism gone wild, fueled by 30 years of willy-nilly deregulation. Left to their own devices, this thinking goes, bankers and executives can never be trusted to act responsibly. They’ll risk the well-being of the economy to ring up bigger profits or work people to death without paying a decent wage. The solution is a renewed government role to control the worst excesses of capitalism.
But governments may not have that much muscle left. With debt and deficits bulging, governments across the industrialized world have been forced to cut back on the social-welfare spending that protects the poor. The debt is also pressuring politicians to make capitalism even freer — breaking down barriers to entrepreneurship and loosening up protected labor markets — to enhance the competitiveness of their economies. Instead of riding to the rescue, governments across the West are sounding the retreat.
And still, some argue that’s exactly what capitalism needs. The woes of the global economy, they contend, were caused not by a failure of capitalism but by a failure of government. And although we have a lot of sympathy with the Occupy Wall Street guys, they should be occupying Pennsylvania Avenue and the Federal Reserve, not Wall Street. At the end of the day, it was regulators who permitted the banks to ignore risk, then bailed them out when their risky behavior became a threat to economic stability. Ever since, the Fed has helped Wall Street dodge reform by spoon-feeding it easy money, which allows bankers to turn profits at little cost. In doing so, government has thwarted the self-regulating nature of capitalism by outlawing the punishing failure of the errant banker wankers. And that’s the moral hazard we are all experiencing now…
Because by rescuing big banks, the governments screwed up the game and overturned the just verdict of the markets and rewarded bad practices. And they sent the message to the errant wankers that they are safe no matter what idiocy they perform and no matter how stupid their errant ways are.
But if capitalism had been left to its own devices, none of these wankers would still have a job. The only way to make them responsible is to allow them to fail wholesale. Capitalism hasn’t perpetrated injustice; faulty government policy has. The way to fix that problem is more capitalism: only freer markets can ensure that wrongdoers lose and do-gooders win. In all honesty, true capitalism hasn’t been given a chance to do it’s work properly. Therefore we must free capitalism to make up it’s own mind about it’s own development and adaptation if we want to have the best system available in order to serve our species’ economic needs and our societal tribal hunt for equilibrium. Let’s Free Capitalism from the fetters of moral hazard and interventionist meddling fearful governments and weasely banker wankers and all is gonna come upright again…
Capitalism, though, hasn’t regulated itself all that well either. Government officials and central bankers aren’t the only ones who failed to prevent the financial crisis. The shareholders, board directors, accountants and other agents of capitalism tasked with monitoring risk and corporate behavior didn’t do their jobs. Big-bank CEOs are more of a threat to capitalism than those on the outside protesting. Reform of capitalism is concerned with restoring the checks and balances that police a well-functioning free-market economy. Shareholders and directors are supposed to safeguard the health of corporations and link compensation to performance. Instead, managers of banks and companies have been incentivized to notch short-term profits over long-term gains, encouraging them to take dangerous risks and earning them tens of millions in undeserved payouts. Such behavior defeats the moral justification for having a capitalist system—that it is more fair and based on merit. Solution is to repair capitalism one boardroom at a time by strengthening corporate governance. The problem with our economic system today is not a problem of capitalism per se, but rather it is due to a lack of fully exercising capitalism in a free style of just punishments and rewards. You cannot remove the stick from the carrot and expect the Pavlovian response to work from imperfect human beings…
These debates will play out for long, yet the capitalism that emerges from this Great Recession will be a different capitalism than your grandfathers version of it. The groundswell of public discontent that has exploded on the streets from Los Angeles to London to Athens simply cannot be ignored and it shapes the new Capitalism fully…
Yet however loud the calls for change, capitalism is here to stay because there are not even marginally better alternatives and because it offers us the best method for the most efficient allocation of scarce resources we have ever invented. Free markets make for free minds and vice versa. Or as the old saw goes free your mind and your ass will follow…
While many in the West have soured on the system that made them rich and developed their countries, others like China, India and much of the rest of the rapidly advancing emerging world are inexorably turning toward freer trade, deregulation and more-open capital flows in their drive for elimination of poverty and occasional wealth, if not outright riches.
The challenges facing the world’s politicians, economists, bankers and corporate leaders are many but the main one should be how to reform capitalism in ways that enhance its power to grow and uplift the downtrodden while mitigating the ill effects of globalization and greed. The outcome will shape not just the fortunes of capitalism — and the world economy but the lives of the next generations to come and the global South to emerge on a more equitable Darwinian level playing field.
Same goes for capitalism as it competes with other economic systems for our hearts and minds…
Let it be FREE
Yours,
Pano
PS:
The thing with my economic theory is that economies and markets pursue some sort of equilibrium, always.
The invisible hand of the market doesn’t exist any more than Santa Claus does, but we still get the holiday gifts because of the both of them.
But rather than observing the disequilibrium the cloak of invisibility of the markets bears, we best attract the present equilibrium as the better place to be.
Yet this equilibrium is seldom achieved, because the fighting occurs between the haves and the have nots and the usurpers of power vs the Status Quo.
So for my ideal scenario, I must say that there are no ideal ways of equilibrium but rather a constantly changing and dynamic equilibrium.
That’s my theory and my chance at the Nobel prize and am sticking with it.
So don;t look to going back to the good old days.
That boat has sailed and is not coming back.
Instead be happy with what happens today, adjust to it as if it’s permanent and be grateful for it.
You’ll see great success through this method…
After all, less is more.
