The Downside of Capitalism

I am a capitalist in the sense that I believe free and open markets are generally the best way to allocate resources, establish societally beneficial incentives, foster wealth creation and help lift standards of living for all. That is not to say that I believe capitalism is the only and best way, or that free and open markets are the only and best way to do something or bring about a rise in living standards.

In fact capitalism and free markets are two different things (but that is a discussion for another day).

Unfettered capitalism and unfettered free markets are not necessarily the best way to do or achieve something for society. And capitalist forces (incentives) often lead to sub-optimal outcomes (externalities) and a hollowing out of society's moral core.

Case in point. Consumerism and the trend toward consumption. Capitalism and modern societies are structured around and predicated upon the phenomenon of growth which is in turn is predicated upon people consuming more things. In the case of the medical profession it has lead from previously people being cared for by their family doctor (whom they trust and respect) to the professionalization of the business and the running of medical practices as businesses (where doctors are incentivized to "treat" people as clients). In that environment, clients (sick people) are treated as consumers and are sold (in a profit maximizing way as possible) a raft of medical "services". I believe this has changed the nature and the essence of the profession - in a not too positive way. The same forces can be seen in education, accounting, law and financial services (and no doubt many other cottage industries which are now businesses).

I say this somewhat facetiously. In the old days "capitalists" were easy to see. They were the robber barons, the natural resource exploiters, the telecom and transportation moguls. They were the landowners, the industrialists. They were the ones who arb'd the poor. These days everyone is a capitalist. Everyone has drunk the koolaid (of consumerism) - and it is not always for the better.

The Achilles Heel of Capitalism

Taleb makes the point that the achilles heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival.

I have made a similar point previously. Basically, those companies that appear to be "best in breed" are oftentimes those that are the rottenest, ie. they are cooking the books (eg. AIG).

Capitalism and Democracy inherently flawed

The flaws within both capitalism and democracy relate to the breadth of the human self.

Just as it is self interest that serves as the impetus for a positive marketplace, so to it is selfishness that ends up distorting a marketplace.

Just as it is self interest that sets-up a system of governance that benefits the whole of society, so to it is selfishness that leads to a system that gives the majority what they want (rather than what they need).

The "free market" paradox

Now there is no such thing as a pure free market system, just as there is no such thing as a pure egalitarian system.

The capitalist system as we know it is an amalgam of different markets, industries and entities generally constrained by a system of market-based rules, laws and institutions, all of which is married to a social-democratic safety net. The emphasis and balance between free market institutions and govt based redistribution networks varies a little from country to country, but the basic framework is the same across most developed nations.

I find it amusing that some of the most vocal supporters of the TARP, central bank bailout measures, and government stimulus were also some of the greatest proponents of free markets. The belief that you need to abandon the market to save the market is ironic on its face. This speaks to a crack in the free market ideological armor (it will be interesting to see where this leads).

Taking a step back from the bailout, I just find it strange that we generally don't give two thoughts to the irony of a central bank in the midst of "free" financial markets. Faith springs eternal, and the human ability to sustain incongruent positions is pronounced.

I've Got To Confess...

...all this talk about "the failure of capitalism"* and the "need to reinvent capitalism", etc., etc. seems to me pure gibberish. One, it doesn't need to happen. And two, it isn't going to happen. We may get a little regulation here, a little limitation there, but I doubt very much we have a wholesale reinvention of the global economic system.

What we are seeing, in this financial crisis and the markets response to it, is capitalism in action. To me, the beauty of the capitalist system is that the laws of economics are allowed to operate somewhat freely (by the way, the laws of economics operate within all economic systems). Given that the system is predicated upon self-interest (not a great moral foundation I might add), it also needs reasonable safeguards and constraints to protect consumers, and ensure that bad apples and bad actions have consequences. But if you live beyond your means and you get swept up in the euphoria of the masses (and fail to assess risk appropriately), then there is an inevitable price to be paid. No system can stop you from making dumb decisions. But the capitalist system seems most reasonable from the perspective of economic efficiency and wealth creation. Issues of wealth distribution and equity are generally best dealt with through the political system.

*The discussion about capitalism is full of hyperbole and ridiculous assertions on both sides. Things such as, "if you believe in capitalism you believe the market is always right and should be given free reign," and "capitalism is morally bankrupt and the cause of all evil," etc. Such comments are ridiculous on their face, and should be treated with the contempt they deserve (by ignoring them).