Thu Aug 7th, 2008 at 12:42:16 PM EST
Now that the world is going through one of its periodic economic convulsions there is increased activity among the chattering classes as to what went wrong (this time). First I'll lay out the types of criticism of the situation. Second I'll explain what "capitalism" is. Last I'll go into why capitalism needs to be replaced and how to design the new economic system. If you aren't interested in the definitions, skip to the last part.
Part I - Critics
Basically there are several schools of thought.
Part II - What is Capitalism?
- Poor implementation. Some group of key individuals were/are incompetent and just didn't know how to manage effectively. Right now popular choices include the heads of the big three auto makers as well as several large banks. Translation: "People are stupid, but I'm not." This is a popular theme of neo-cons about the failures in foreign policy and the libertarians over the failures of capitalism.
- Improper ideology. Those who believe something which isn't true, but pursue policies based upon their error can cause disaster. This is true in other ares besides economics, for example the president and health minister in South Africa both denied solid research on HIV and the number of cases soared. The prior, libertarian, head of the Federal Reserve still believes the myths he learned as a young man at the knee of uber-wacko Ayn Rand.
- Improper ideology, hypocrisy division. The most common example of this these days is in the area of laissez faire economic policy. This includes both "free" trade and the removal of constraints on business activities of for-profit firms. Those who stand to gain preach an ideology which they don't follow in practice. Rather than pursuing unfettered competition they spend vast sums of money buying politicians so that policies are enacted which favor their interests explicitly. They are further aided by a large chorus of useful idiots who spout the ideology without looking at the real situation.
- Imbalance of power. This is the "liberal" school which thinks that excesses can be handled by proper regulation (especially by government and international agreements). They are reinforced in their view by the limited successes that have occurred in the past after similar disruptions. They posit that humans are prone to excess (hence the seven deadly sins), but think that social structures can be put in place to tame the excesses, especially of greed and the lust for power. Unfortunately such social structures are run by people who are also susceptible to the same forces. Recent events have shown the ease with which regulatory agencies can be rendered ineffective. As for those who become autocrats, societies have a hard time preventing their rise or wrenching power from them once they take command. Power shifts away from these autocrats usually involves armed conflict and social unrest.
- Inadequate investment. The thought is that the money has been pouring in too easily and that this has led to complacency and a lack of investment for the future. This lack of investment shows up in inadequate R&D by governments and companies. It shows up in a lag in the amount spent on upgraded infrastructure as well as poor support for education. If we had only spent more money on alternative fuels over the past X years we would not be in the current bind. True, but an oversimplification. Fossil fuel is not the only thing that we are running out of. We are running out of fresh water, arable land and several other key natural resources as well. Much of this is as a result of a lack of a global population control policy.
What all these schools have in common is a belief in a single cure to the problems. The cure is to remedy the failing (greed, ideology, underinvestment, etc.) so that growth can resume. This growth will be based upon a capitalist form of finance. Let me make clear what this means, without the euphemisms and misdirection popular these days.
Capitalism is a system of finance. It is not a system of government, nor is it even a system of management of the capitalist enterprises. One borrows money or sells shares to raise capital. This capital is then used to finance the operation of the firm. To pay back the investors the firm must make a "profit". To make a profit it must generate more revenue than the investors put in. This revenue has to come from someplace. The "someplace" is the natural environment which provides the inputs to the firm. This can be raw materials or human effort. These are, in general, non-renewable. Something is being consumed and turned into money. In addition investors are usually not interested in putting in their money and having it returned later with interest, they want the investment to continue which means the firm must continually strive to grow. A part of this year's profits are plowed back into the firm for expansion, or the promise of future growth is used as way to attract further investment.
Capitalism requires growth, or there will be no investment. What all the worriers are in agreement over is that we need more growth. All they differ on is how best to achieve this growth. Should we continue to expand a laissez faire business climate, or should we try to re-regulate it? Should we expand "free" trade or should we allow developing nations to use special protections to shelter immature industries? Should we expand R&D and hope that technology will find a way out of current shortages or should we focus on efficiency?
The discussion of capitalism gets mixed up with that of governance. Many people assume democracy and capitalism are related. Conservatives in the US make it a habit of associating these two concepts in people's minds frequently, implying that if you are a critic of capitalism you are also "anti-American". The success of private enterprise in China has shaken up these conventional thoughts, we now hear of "authoritarian capitalism". The US is a democracy (that it has a "republican" implementation is a detail), in that people vote for their leaders. It is a two party state. China is a one party state, people still vote for their leaders, but there is only one choice. Recently there have emerged some contested local elections in China so this may being relaxed slightly. Several countries in Europe are multi-party states and usually have to form a coalition to govern, but they still have elections.
Who decides which sorts of new enterprises will be formed and how existing ones will be managed? In the west, it is, ultimately, the bankers who provide the capital. If you come in with a promising idea you will be able to attract capital. There is a big enough pool of capital that government is usually not involved unless the project is going to have a large social impact. Right now building power plants and weapons contracts get this kind of scrutiny. In authoritarian states, the government usually meddles in all but the smallest enterprises. It may control capital directly or it may influence investment through licensing or other requirements. This suffers from the defect that central control is averse to innovation and entrepreneurship. This is what is making the Chinese case noticeable, the constraints have been lifted to a large degree over the past few years. Russia hasn't done as well, the long history of authoritarian central command has yet to be overcome.
Part III - After Capitalism
Ecological economist Herman Daly summed up the situation forty years ago. When capitalism was invented we lived in an "empty" world. There were few people compared to the space and resources available. If people over consumed or the local population became too large, they could move to a new area. We now live in a "full" world. There are no unexplored regions, and hardly any unsettled ones. Even the most inhospitable places are being exploited for their resources. The planet is finite, but the demands for growth by the capitalist model are unceasing. He doesn't have a good solution, but favors something he calls "sustainable" development. Things get better, but not necessarily bigger.
I don't have a model for what should replace capitalism either, but we do have examples from the past to look at for inspiration. Early societies that survived learned how to live in balance with their environment. Many were subsistence level economies, and there are still about one billion people living in this state right now, but there were several cultures that were much more prosperous. The Aztec, Inca and Egyptian societies manage to build huge, permanent structures which shows that they had an excess of labor over the needs for obtaining sustenance. With our improved technological expertise we should be able to provide sustenance for the world and allow everyone time for activities not related to survival. Focusing on non-materialist satisfactions such as community involvement, ceremony, friendship, personal development and even loafing can provide alternatives to acquiring "stuff" and the pressure for firms to be tasked to meeting this demand.
It is possible to have an enlightened ruler that will direct policy for the good of society, but the chances are small, so the best way to design such new social structures is via democratic governance political mechanisms. There are no capitalist enterprises that are run democratically, even in the western democracies. They all are manged in a top-down fashion, by hand-picked managers and self-perpetuating boards of directors. The ability of the "owners" (the shareholders) to set policy is non-existent in reality, regardless of the nominal structure. New enterprises will have to be managed democratically and their goals will have to be part of the greater social good and not just to "maximize profits" for the shareholders.
We have some models for these types of enterprises as well. In the past we have had mutual societies (banks, insurance, etc.) as well as cooperatives and employee owned enterprises. Variations on these arrangements need to be explored. It's the lack of imagination by economists, social scientists and politicians that is holding us back. Perhaps new ideas will have to come from the bottom up.
When you have a patient dying of obesity the first thing to do is stop expanding his consumption. We have a sick planet and the old ways won't work in the future. Capitalism must die!