Inefficient and unfair

The three main party leaders have all recently made speeches on capitalism. All three - though Clegg to a lesser extent - seem to be stuck in an out-dated mindset.

What I mean is that  for years, politicians from the centre-right leftwards agreed that capitalism was unfair but at least delivered the goods. However, it is now questionable that it can even do the latter. The problem is not, then, simply that capitalism is predatory, irresponsible, unfair or immoral. It’s that it is inefficient too. As Faisal Islam rightly says, the party leaders just don’t see this.

Now, before the closed-mind libertarians whine, I’ll agree that capitalism has been a massive force for global prosperity. But on this, everyone agrees. It was Marx, not Hayek, who wrote that capitalism “during its rule of scarce 100 years, has created more massive and more colossal productive forces than have all preceding generations together.” However, to presume that this must continue is to mere inductive reasoning, of the sort the chicken commits when he expects to be fed by the farmer, only to have her neck wrung.

I’ll also agree that capitalist economies are superior to centrally planned ones. This is as true as the fact that I’m a better fiddle player than Abu Hamza - and as relevant.

Instead, what I mean is that there are (at least) four problems with capitalism, which the current crisis has revealed rather than caused:

1. The rise of low-wage competition from Asia, the slowdown in the rate of innovation, and the difficulty of monetizing some innovations has lead to a long-standing dearth of profitable investment opportunities and thus to slow real growth. One effect of this has been that money has flowed into malinvestments instead, creating a tendency towards speculative bubbles and slumps.

2. Top-down control of companies is inefficient, both for Hayekian reasons (bosses haven’t the knowledge or rationality to control big organizations) and because of perverse incentives and selection effects.

3. Capitalism concentrates ownership of (some) risky assets into a few hands, and thus creates greater fragility and vulnerability to crises than is technically necessary.

4. There’s a division between ownership and control. The problem of collective action, allied to the fact that the key asset in many firms is human rather than physical capital, means that shareholders are unwilling and unable to control firms. The result is that they become mechanisms whereby bosses and key workers can tunnel assets away from formal owners to those with real power.

One can, of course, question how severe these problems are. We shouldn‘t expect an economic system to be perfect; as Adam Smith said, there is a lot of ruin in a nation.

And one could argue that these problems can be mitigated or glossed over by better macroeconomic policy - though I‘d be sceptical of this; in an economy lacking investment and capacity, increased aggregate demand would lead to inflation before full employment.

My point, though, is simple. The flaws with capitalism are, increasingly, not merely those of fairness but of efficiency too. And the political parties don’t seen sufficiently aware of this.

Comments

[Jimmy Hill]

If your point at 2 is correct doesn't that make the very notion that Cameron/Clegg/Miliband are able to do anything about the inefficiencies of capitalism absurd?

[Steve]

Do you have anything on #3, regarding why you think it is a characteristic of Capitalism to concentrate ownership of some risky assets into a few hands, and what you think would happen in a better world? Surely the typical Socialist solution - having the Gov manage the risky assets - is even more fragile and vulnerable. What would you do instead?

[Account Deleted]

I think what Chris means by "risky assets" are those financial transactions that offer fat profits most of the time but are catastrophic when they go wrong.

It is in the interest of a trader to grab as much of an opportunity as possible, so maximising his profit. If a trader were a bookie, he'd look to lay off some of the bet, reducing his profit but also reducing the risk.

As we have seen, modern financial trading thought it had cracked the risk problem by spreading it through derivatives and other hedges. We also had the issue that trading room culture valued risk-taking, in part because the trader would not have to personally bear any part of a loss (he just didn't get a bonus). Finally, we had the backstop that government would step in if the loss were big enough (the socialist solution in extremis).

There's an interesting piece on this by Tyler Cowen here: http://www.the-american-interest.com/article.cfm?piece=907 (see "going short on volatility" and "moving first").

As the previous post that Chris links to points out, a large part of the fear re the Euro crisis is the knowledge that once profitable sovereign bond assets, which may be about to get a haircut, have become concentrated in "systemically important financial institutions."

[Account Deleted]

A thought exercise. What does the medium-term future of mankind and the planet look like? I'd suggest 3 broad directions of travel (it's a bit sci-fi):

1) The neo-Malthusian vision of resource depletion (the limits of growth, Earth's carrying capacity etc.)

2) Post-scarcity, i.e. we finally invent cheap, limitless supplies of energy and material (plus personal jet-packs.)

3) Somewhere in the middle, i.e. we muddle along, don't fry the planet, and material prosperity continues to get cheaper (so we spend less time working and earning.)

I don't see capitalism coping well with any of these scenarios.

#1 will probably lead to increased regulation and cooperative action (central planning) to prevent the waste or hoarding of what will be seen as collective assets. The externalities of capitalism will be too great to tolerate at anything other than a local level.

#2 would mean the end of money and a return to barter, i.e. gift exchange. Capital accumulation would be pointless. Property would largely lose its significance as a social differentiator (there would still be scarce stuff, e.g. antiques, and thus a market, but more like card-swapping).

#3 will gradually come to look more like both #1 and #2, which are of course not mutually-exclusive. There's scope here for a long, slow death of capitalism, but no more. As Marx suggested, capitalism may just be a phase we're going through.

What is more significant is what underlies any economic system, i.e. power. The more I think about it, the more odd point 2 (command and control in business) looks. I once had a boss who, when challeneged, would always say "this isn't a democracy, you know", to which the only logical answer was "why the fuck not?"

[Richard]

What do you think of the analysis of Kevin Carson and the left-libertarians? Their call for genuinely freed markets (as opposed to the current system of neoliberal capitalism) would allegedly put a stop to overproduction and lead to more decentralised 'green' and sustainable economies.

[Account Deleted]

I'm dubious that "genuinely freed markets" is anything other than utopian, and Carson's historical analysis is unquestionably romantic (e.g. "the free peasant society of Anglo-Saxon times"), but I think he is particularly valuable because of his insistence that capitalism and free markets are not the same thing and are actually antagonistic.

There was an amusing illustration of this on Newsnight last Thursday (http://news.bbc.co.uk/1/hi/programmes/newsnight/9682627.stm) when Jermey Paxman asked, in so many words, why can't we envisage an alternative?

The answer is the ideological hegemony of capitalism. We have a paradigm and we can't easily see round the edges. Julie Meyer made this explicit by stating that capitalism is the market economy.

Tristam Hunt attempted to put capitalism in a historical context but made the tactical error of mentioning Marx, which led to a 3-vs-1 monstering about the moral failings of Eric Hobsbawm and the wonders of Brent Cross shopping centre. He should have directly challenged her premise.

The makeup of the debate was, of course, itself an example of the hegemony: a neoliberal loon, a more subtle conservative, a grumpy liberal, and a social democrat.

Instead of addressing Cameron/Clegg/Milliband's waffle, they should have been debating how a free market (the Internet) has produced post-scarcity (the copying of digital products at zero marginal cost, i.e. "piracy"), which causes capitalism (Rupert Murdoch, for shorthand) to insist on state intervention (heavy irony) to protect property rights.

[Dipper]

quite.

Instead we have the rise of Militant Social Democracy. The system is basically okay, the problem is some bad people told lies and ripped off the good people. So the answer is for all the good people to get together and punish the bad people.

We all know where that ends up ...

[ortega]

In the movie 'I want to live!', when Susan Hayward is arrested, her boyfriend says: Live is not just. To wich she answers: Compared to what?
So I ask, capitalism (a term that probably, as John Kay just said in the FT, does not mean anything) is inefficient and unfair compared to...? Daydreams do not count.

[Account Deleted]

@Ortega, capitalism is inefficient and unfair compared to ... something else you might envisage.

Anything that does not yet exist can be dimissed as a daydream (the defeat of Hitler was a daydream in 1940), but this does not mean that it does not count. To suggest otherwise is to privilege the winners, which leads us down to road to "might is right."

To imply that particular ideas (however speculative or fantastical) are of no value, merely highlights how ideology, or the "cultural hegemony" in Gramsci's phrase, works.

We struggle to envisage an alternative because the ruling ideology has so colonised our thoughts and language that an alternative seems incomprehensible (this was Paxo's problem) or inexpressible (this was Tristam Hunt's failing).

We collectively suppress memories that do not fit the narrative. A recent example: the film 'The King's Speech' hilariously claims that the King and Queen weren't supporters of Nazi appeasement but admirers of Churchill. The reverse is true.

Many people remarked on this rewriting of fact, but ultimately accepted it because we could appreciate the film-makers need for simplicity, i.e. the Amercian cinema market couldn't cope with a more complicated narrative (this is where the ideology of market forces intersects with historical whitewashing).

In reality, we have just connived with the creation of a myth. Tell someone in 2030 that the Queen Mum was a supporter of appeasement and the response will be "does not compute."

[Account Deleted]

And another thing (pressed 'post' too quickly) ...

As well as rewriting history, we abuse language. Consider what the words "free" and "enterprise" actually mean. Sunshine is free, the electrification of the Soviet Union was an enterprise.

This is the chief insight of Orwell. Many people have come to believe he thought such abuse was only to be found in totalitarian systems (Newspeak etc), but his original point (in the essay 'Politics and the English Language') was universal.

Orwell is a good example of someone who understood and critiqued cultural hegemony but was posthumously co-opted by the ruling hegemony for its own ends.

[Claytonnash]

Many of these reasons are not an issue with capitalism but with the odd system we have today. Crony capitalism is real and dangerous - but shouldn't exist in a 'real' capitalist process.
I'm not disagreeing with your premise - that there may be something beyond capitalism that we simply refuse to envision - but at the very least we should try to remove the distortions before we declare the experiment over.
As an aside, I'm reading Lords of Finance - about the central bankers post WW1 trying to right the worlds economies. It contains an exact analogue of this process in the attempt to re-instate the gold standard with a somewhat paradigmatically limited view that this was the only path to prosperity. And to some extent it actually worked but only because everyone shared this view. One of the problems today is that a number of players - Asia in particular - have decided to play a different game and some of the assumptions of capitalism don't hold under those conditions - at least in the medium term.