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“The
American economy increasingly serves only a narrow part of society, and
America’s national politics has failed to put the country back on track
through honest, open, and transparent problem solving. Too many of
America’s elites-among the super-rich, the CEOs, and many of my
colleagues in academia-have abandoned a commitment to social responsibility.
They chase wealth and power, the rest of society be
damned.”
–economist Jeffrey Sachs, in The Price of Civilization: Reawakening
American Virtue and Prosperity
Adam Smith, you may remember, was a fan of capitalism. He also wrote a pretty
good book on moral philosophy, and had a day job as a professor and tutor of
moral sentiments.
One of Smith’s core ideas, which for some reason we forget today, is
that capitalism is supposed to be a system which channels base instincts into
productive societal activity. Since the beginning of time, there has been
some fraction of the human population that is concerned wholly and completely
with their own self-aggrandizement – chasing wealth and power, as
Jeffrey Sachs puts it. Think of Ghengis Khan. Or
Napoleon, off to plunder the wealth and power of Russia. Or your local mafia
boss.
At the same time, the great mass of average people have never had enough
“commitment to social responsibility” to make a functioning
society without some sort of proto-capitalist system – at least beyond
the tribal level of perhaps sixty people or so. One thing we have learned
from hundreds of experiments in shared, communal living, from the pilgrim
settlers or the hippie communes or the artists’ colonies or the kibbutzes, up to the size of communist China, is that they
almost always fail. We are simply not spiritually advanced enough, as a
whole, to operate in that fashion. We never have been, and probably never
will be, for at least a few more millennia.
Smith saw that this rampant self-interest was channeled by the capitalist
system – basically a system of private property and common law –
into activity that would benefit others. Those focused on wealth and power,
instead of using rape, plunder, pillage and enslavement, as was common
through millennia of history, would have to provide some sort of useful good
or service to others, in a way that provided a profit. Those chasing wealth
and power would find that the easiest path to their goal would be to provide
something beneficial for society as a whole. Through competition, this profit
has never been very high. Corporate profits average about 8.3% of revenues, a
lot lower than most people think. Less than most sales taxes.
Despite today’s increasing disgust with the “rich and
powerful,” those people who gain wealth and power by providing a useful
good or service – who, inadvertently and accidentally perhaps, improve
society as a whole — are still celebrated by the masses. Look at the
outpouring of affection for Steve Jobs. Steve Jobs was not a saint: there was
that business about backdating stock options (a means of outright theft from
shareholders), and the working conditions at Apple contract manufacturer Foxconn have been known to provoke employee suicide. Lots
of musicians have been complaining about their treatment by iTunes.
Nevertheless, the pluses outweighed the minuses. What about billionaire Oprah
Winfrey? Or Elizabeth Taylor, who became a billionaire (believe it or not)
mostly from perfume sales? How about Ty Warner, who became a multibillionaire
from sales of Beanie Babies? A harsh word has never been spoken.
This idea – of encouraging socially productive
behavior, and discouraging socially damaging behavior –
translates into lots and lots of rules. For example, we discovered that the
self-interested pursuit of profit could often lead to rather terrible
environmental degradation. So, many rules were made regarding pollution and
so forth. This changed the incentives. People can still pursue a profit, but
they must do so in a way that is not environmentally destructive. We’ve
developed regulations for workplace safety, child labor, bankruptcy, and on
and on an on, ideally to prohibit socially damaging
behavior, and channeling activity into socially productive behavior.
The United States was not only an experiment in democracy along the lines of
philosophers like Rousseau. It was an experiment in capitalism, along the
lines of Adam Smith, whose famous book The Wealth of Nations was published in
the year of the Declaration of Independence, 1776.
“Capitalism” has elements that go by the code words “free
market” or “laissez-faire.” These are labels for rather
complex, sophisticated ideas that would take tens of thousands of words to
explain in full. They don’t mean that “anything goes” or
“do what thou wilst.” Capitalism is a
system of rules, finely tuned to produce certain beneficial outcomes, even if
the participants themselves have no interest in the condition of society as a
whole. The virtue is in the system.
In practice, it helped that many did understand and support the virtuous
principles of capitalism. Many corporate leaders wanted to abide by the
rules, because they understood that the rules benefited everyone. They did
not devote themselves to undermining the system that made America wealthy and
prosperous, among all social classes.
However, someone has to make the rules. Technically, this is Congress –
not a group known today for its commitment to social responsibility or
understanding of capitalist principles. Theoretically, the virtue and high
ideals of Congress were supposed to be generated by the electoral process.
The voters would choose those who had the interests of society as a whole at
heart. But, this system can be corrupted, and clearly doesn’t work
today.
Even by design, the U.S. system is only slightly democratic, without the
direct proposal and referendum system of Switzerland, for example, where the
electorate can decide on policy directly. When was the last time you voted on
a war? (Don’t worry – Congress doesn’t
either.) Politicians can make promises, and then do something completely
different when in office. We get the same Hope and Change blather every year,
from both parties, and nothing ever changes.
Today, rather fantastic benefits are being enjoyed by those who have provided
nothing to society, whose works have been, especially in recent years,
destructive by any reasonable measure. Primarily this has been in the
financial system, which is enjoying hundreds of billions in taxpayer funds
(euphemistically known as “bailouts” but really just plunder),
even after they, in large part, caused the economic difficulties today. In
the savings and loan crisis of the early 1990s, over two thousand bank
executives did jail time. Societally destructive behavior was punished. In
today’s much larger, much more widespread crisis, nobody gets punished;
they just get more and more money!
Even Jon Corzine, of MF Global, is still walking free today, after outright
securities law violations. When futures broker Refco
collapsed in 2005, president Phillip Bennett was prosecuted for similar
violations. In 2008, Bennett was sentenced to 16 years in prison. (Refco later became the heart of MF Global.)
MF Global, in turn, is being reorganized under subchapter III of the Chapter
7 bankruptcy law, which is for equities brokerages, instead of subchapter IV
of Chapter 7, which is for futures brokerages, although MF Global is a
futures brokerage. Why? Because it benefits certain too-big-to-fail banks,
who are able to pay for this sort of thing. There are no laws today, only
plunder.
This is a lesson not only to those in the financial industry, but to those
chasing wealth and power in all avenues of society: you can break the old
rules, you can steal, and nobody gets punished.
Today, following the long-established principles of capitalism seems like it
is a game for suckers. Capitalism is a tough game. Competition is fierce. The
risk of failure is high. The profits, as noted, are often low. No wonder the
successful are so highly regarded. American Airlines, General Motors, and
Kodak provided useful goods and services for decades, on a grand scale, and
provided prosperous employment for hundreds of thousands of employees.
Nevertheless, they didn’t quite meet capitalism’s difficult
standards.
Theft is a much easier game. The risk is low. The profits are high. There is
no competition. You don’t even need employees. You just pay off the
Congressman, and stick the money in your pocket.
This is not confined only to the financial industry. The entities that are
thriving today are those that enjoy some sort of government favor. Defense
contractors and the war industry. The education and healthcare cartels.
Government employees and their absurd compensation plans. Competition is low.
Profit margins are high. And why do we keep having wars with countries with
lots of oil (or heroin)? You know why.
To all who are paying attention, the incentives have changed. Socially
destructive behavior is much more rewarding than socially beneficial
behavior. Government-supported cartelism and taxpayer theft pays better than
providing goods and services in the difficult capitalist marketplace. A
society reaches a perilous tipping point, when, responding to the existing
incentives, the energies and ambitions of the most energetic and capable are
channeled into socially destructive behavior.
Rape, plunder, pillage and enslavement are back! It is a little soft-edged
today, unless you happen to be a Muslim living atop a large oil deposit. This
soft edge often helps with keeping the victims docile, since they can’t
quite figure out what is going on. But, essentially, it is the same.
Running a normal business is getting less and less rewarding. Small
businessmen, in particular, are giving up. Taxes are too high. Regulations
are too cumbersome. Competition with government-favored cartels is difficult.
Monetary instability is chronic. The economy is getting worse, and there is
little hope that it will improve.
For as long as socially destructive behavior is more rewarding than socially
constructive behavior, things will get worse. This can go on for a very long
time. In 17th century Spain, the government gradually made it impossible for
the middle class manufacturers and merchants to survive, while the parasite
class of aristocrats, military and government employees grew and grew. The
merchants paid huge sums (to the government) to become minor aristocrats,
clipped coupons on government bonds, learned the manners of courtiers to gain
access to the government feeding trough, and abandoned the unpleasantness of
business. The workers rushed into “safe, stable” government jobs.
The parasite devoured its host, and the empire collapsed.
The decline continued for more than a century, until, in 1701, by a quirk of
royal succession, the grandson of Louis XIV of France, who did not even speak
Spanish, was anointed the next King of Spain. He brought in some French
advisors, who cleaned out the whole corrupt government, reformed the
administration upon the French model, and Spain’s recovery began at
last.
Spain once held the world’s grandest empire. It stretched from
California to the Philippines. Today, five centuries after Spain’s
peak, the country is a nice place for British and Germans to go on vacation
– unless soaring unemployment and upcoming sovereign default make it
unsuitable even for that.
Today, conservatives in the U.S. are all too willing to defend the status
quo, despite its ever-increasing corruption and decay. Liberals don’t
seem capable of even coherently expressing what is happening, and have fallen
back on century-old platitudes that are barely more than cartoons of
political dialogue.
Some people today say that we are experiencing a “crisis of
capitalism.” I say that we are suffering a crisis of what happens when
you don’t have capitalism, in the moral sense that Adam Smith intended.
We have an increasing trend toward theft, plunder and parasitism, divorced
from the capitalist imperative to provide useful goods and services. Where
this path leads is obvious to anyone who thinks about it for a while.
Nathan Lewis
(This item
originally appeared at Forbes.com on February 27, 2012.)
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