Debate on Issues in Modern Capitalism -August 15 2012

This is the second and concluding report on the Capitalism debate.

Charles Murray a scholar at the American Enterprise Institute has recently contributed an interesting expose´ in the Wall Street Journal under the caption “Why Capitalism has an image problem.” Murray opines that Capitalism has lifted the world out of poverty because it “gives people a chance to get rich by creating value and reaping the rewards.” Murray states that celebration of Capitalism in the American mindset has been replaced by ambivalence. He cites two important changes in objective conditions as contributing to the change in the perception of Capitalism. One is the rise of what he calls “collusive Capitalism.” According to him, in today’s world, every business’ operations and bottom line are affected by rules set by legislators and bureaucrats. The result has been corruption on a “massive scale”. Sometimes the corruption is retail, whereby a single corporation creates a competitive advantage through the cooperation of regulators and politicians. Sometimes the corruption is wholesale, creating an industry wide potential for profit that would not exist in the absence of government subsidies or regulations (like ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back). Collusive capitalism has become visible to the public and increasingly defines capitalism in the public mind.

Another change has been the emergence of great fortunes made quickly in the financial markets. “It has always been easy for Americans to applaud people who get rich by creating products and services that people want to buy”. That is why Thomas Edison and Henry Ford were heroes a century ago and Steve Jobs was one recently. When great wealth is generated instead by making smart buy and sell decisions, it smacks of “inside knowledge, arcane financial instruments, opportunities that aren’t accessible to ordinary people and hocus pocus”. The financial shenanigans of the likes of Bernie Madoff and Rajaratnam extensively reported in the media, have also caused negative reactions about these “masters of the universe” to borrow Tom Wolfe’s characterization of such financial manipulators from his bestseller about Wall Street malfeasance, “Bonfire of the Vanities.” It is worth recalling that in one of Hollywood’s blockbusters a couple of decades ago about insider trading in Wall Street, the main character rationalizes his illegal actions by stating that “greed is good.”

Murray suggests that the case for Capitalism needs to be made anew. According to him the US was created to foster human flourishing. The means to that end was the exercise of liberty in the pursuit of happiness. Capitalism is the economic expression of liberty. The pursuit of happiness, with happiness defined in the classic sense of justified and lasting satisfaction with life as a whole, depends upon economic liberty every bit as much as it depends upon other kinds of freedom.

In conclusion Murray advocates the desirability of evolving a bipartisan consensus affirming that Capitalism embraces the best and most essential things about American life; that freeing Capitalism [of regulation] to do what it does best won’t just create national wealth and reduce poverty, but expand the ability of Americans to achieve earned success-to pursue happiness. I personally believe that laudable as this goal is, it will remain a tall order until the rising inequality in America – masterfully detailed by Nobel- laureate Joseph Stiglitz in his latest book – is meaningfully addressed and reduced.

Economic inequality in the US had been exposed 50 years ago by the path breaking book “The Other America” (1962) by Michael Harrington. I remember reading this book in my final year at Cambridge. It was an eye opener. More contemporaneously the theme of the divide between the rich and the poor has also been elaborated skillfully by David Shipler in his acclaimed book “The Working Poor: Invisible in America” (2005).

Stiglitz, who teaches at Columbia University following other senior assignments at the I.M.F and elsewhere, is the latest of a crop of writers who have sounded warning bells about the growing economic inequality in the United States and the need to address it to regain America’s economic health. According to Professor Thomas Edsall reviewing Stiglitz’s book in the New York Times Book Review, Stiglitz “holds a commanding position in an intellectual insurgency challenging the dominant economic orthodoxy”. Concentration of [economic] power in private hands, Stiglitz suggests, can be “just as damaging to the functioning of markets as excessive regulation and control.” Edsall further informs us that Stiglitz has demonstrated that “excessive inequality amounts to sand in the gears of Capitalism, creating volatility, fueling crises, undermining productivity and retarding growth”.

Interestingly, Edsall states that if Mitt Romney becomes President next January, his tax and regulatory proposals will most likely “embody all that Stiglitz finds repugnant.” Edsall concludes his important review by saying that “the trends would seem to be moving towards Stiglitz’s pessimistic vision of the future, with little prospect of change no matter who wins office on November 6”.

Let’s hope that the Stiglitz critique errs by being too harsh. One can only hope that the present economic team which advised Obama, with hardly stellar results –dubbed by some writers as “Rubinites” being associated with former Treasury Secretary Robert Rubin- would be replaced by other experts less beholden to Wall Street, so that more realistic economic policies, shorn of leftist or rightist ideology, can be crafted by the next administration in righting the currently listing economic ship.


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