Wednesday, June 24, 2009

Zakaria's Capitalist Manifesto falls short

In the June 22nd edition of Newsweek, prominent contributor and political centrist Fareed Zakaria offered us The Capitalist Manifesto sub-titled Greed is Good (to a point). I'll let slide the all too common failure of free-market enthusiasts to confuse rational self-interest with greed, though it should be noted that classic capitalism was originally based on the later, not the former and that they ought not to be confused.

I wish to criticize Zakaria on a different point. For Zakaria there is absolutely nothing wrong with the system that brought about our current economic crisis. His argument is that we are just in a bad period and it will soon - in fact already is getting - be all better. After all, Zakaria assures us, every economy has ups and downs and the doomsayers always hail the downs as unprecedented failures, only to be shortly thereafter proved wrong by a boom.

Here are Zakaria's actual words on this matter

Capitalism means growth, but also instability. The system is dynamic and inherently prone to crashes that cause great damage along the way. For about 90 years, we have been trying to regulate the system to stabilize it while still preserving its energy. We are at the start of another set of these efforts. In undertaking them, it is important to keep in mind what exactly went wrong. What we are experiencing is not a crisis of capitalism. It is a crisis of finance, of democracy, of globalization and ultimately of ethics.

"Capitalism messed up," the British tycoon Martin Sorrell wrote recently, "or, to be more precise, capitalists did." Actually, that's not true. Finance screwed up, or to be more precise, financiers did. In June 2007, when the financial crisis began, Coca-Cola, PepsiCo, IBM, Nike, Wal-Mart and Microsoft were all running their companies with strong balance sheets and sensible business models. Major American corporations were highly profitable, and they were spending prudently, holding on to cash to build a cushion for a downturn. For that reason, many of them have been able to weather the storm remarkably well. Finance and anything finance-related—like real estate—is another story.

Finance has a history of messing up, from the Dutch tulip bubble in 1637 to now. The proximate causes of these busts have been varied, but follow a strikingly similar path. In calm times, political stability, economic growth and technological innovation all encourage an atmosphere of easy money and new forms of credit. Cheap credit causes greed, miscalculation and eventually ruin.

There is, of course, some real truth here. But one already sees the problem: Zakaria reminds us that Capitalism is inherently unstable, busts and booms are common. Yes. We all know this. But, he seems to think, we should simply accept this as the inevitable by-product of all that wonderful growth we shall get in the long term.

Zakaria is not wrong about this. But he fails to ask himself and his readers two questions, questions that demand to be asked: 1) is there another system other than pure capitalism that can give us the growth we need, without the frequent busts and recessions? 2) Who profits from the growth? The more deregulated capitalism is, the greater the growth. That's empirically certain. But what Zakaria fails to mention is that fewer and fewer people actually get that growth, leading to a widening gap in which the rich get richer and the poor get poorer. unchecked capitalism leads to wealth and power finding their way into fewer and fewer hands. This also is empirically certain (cf. Paul Krugman The Return of Depression Economics and the Crisis of 2008). Zakaria not only fails to address but fails even to mention these issues.

Of course, on Zakaria's behalf It is only fair to note that he does think a little more regulation is needed. Capitalism should not be totally unrestrained. I grant that the minimal regulations Zakaria - and the Obama Administration - call for are better than nothing. But they are far too little to make a real difference in the long run.

Zakaria - and again the Administration is on the same page - believes that the system of a market dominated by huge multi-national corporations is fundamentally sound. The problems with that system are seen to be the fault of a few greedy companies and individuals who need to be watched a little more closely. If this is done, Zakaria thinks, then everything will just be wonderful.

In Zakaria's own words

There's a need for greater self-regulation not simply on Wall Street but also on Pennsylvania Avenue. We get exercised about the immorality of politicians when they're caught in sex scandals. Meanwhile they triple the national debt, enrich their lobbyist friends and write tax loopholes for specific corporations—all perfectly legal—and we regard this as normal. The revolving door between Washington government offices and lobbying firms is so lucrative and so established that anyone pointing out that it is—at base—institutionalized corruption is seen as baying at the moon. Not everything is written down, and not everything that is legally permissible is ethical.

So the answer for Fareed Zakaria is that we should all be more responsible and more ethical people. Of course we should be. But will a few oversights and a call to conscience really solve the problem? The all too common corruption in the corporate world, the massive amount of exploitation and harm caused by the free market suggest that the problem may be far deeper than a few greedy executives (Cf. The Corporation)

There is ample empirical evidence that the widening gap between the rich and poor, the concentration of wealth into fewer and fewer hands, the exploitation of the working classes the world over, and the buying of our politicians by corporations is the direct result of giving too much freedom and power to the market, whose goal after all is profit (again see Krugman's work and also The Corporation)

Think about it this way: the modern corporation has one goal, to maximize profit. The way to do that is simple: overcharge, scam, cheat, exploit, underpay, rip-off, externalize costs, buy politicians, and otherwise scheme whenever and however you can. One may object to this claim, but on what grounds? If your goal is profit and you are given unimaginable power, very little oversight, and only minor penalties ... well, what do you think will happen? Corruption and deceit are inevitable in system that operates solely for profit, unless that system is very strongly restrained and checked.

Perhaps this evidence can be explained. Perhaps, these charges can be answered. Perhaps a case can be made for capitalism as against other alternatives. Perhaps Zakaria is right to tell us - as he does directly - that capitalism is the best possible system. But he does not discuss any other options. He does not consider the claim that the system itself is irredeemable a serious suggestion.

And this is the core problem with Zakaria's defense of Capitalism: the real possibility that the entire capitalist system - at least corporate capitalism in which multinational corporations run the system - is a serious one, but Zakaria fails to treat it as such.

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  1. I think there is an important analogy between a) corporations operating in a minimally regulated market where production is substantially subsidized by the government and where legislation (such as trade agreements, copyright laws, patents, etc.) is written to favor current business practices and models, and b) Plato's story of the ring of Gyges, in Book II of the Republic. In both scenarios, there is no incentive whatsoever to treat the other with respect and dignity and every incentive to exploit, since the conditions are such that the agents involved can live without having to suffer any consequences for their actions.

  2. Nate that is an excellent analogy! I wish Zakaria would have had that pointed out to him.


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