The “Crisis of Capitalism” Is a Lack of Capitalism

The “Crisis of Capitalism” Is a Lack of  Capitalism
February 23, 2012

(This item originally appeared at Forbes.com on February 23, 2012.)

http://www.forbes.com/sites/nathanlewis/2012/02/23/the-crisis-of-capitalism-is-a-lack-of-capitalism/

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.