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Conclusion: The Future of Capitalism

Successful economies are all characterized by the coordination of individual effort toward the production of goods that deliver prosperity to society, whereas unsuccessful ones are characterized by disorganization and the inefficient use of capital.

A quote from Tolstoy: "All happy families are alike; each unhappy family is unhappy in its own way." The same can be said of functional and dysfunctional economies, in that there are a myriad of ways in which an economy can be broken.

Through much of human history, dysfunctional economies evidenced themselves in military conflict: a nation incapable of sustaining its population by domestic production, or simply with the desire to have more regardless of its level of need, would attempt to seize the capital of another. Modern nations attempting to gain advantages in international trade and primitive tribesmen raiding one another's cattle are not very different in their motivation.

The internal politics of nations, insofar as economic advantage is concerned, are likewise motivated: whether through organized crime or trade unions, those who cannot produce what they want seek to obtain it by means other than being productive - namely, by seizing by force or deception the assets of those who are productive.

The recent financial crisis stemmed follows in that vein: the financial sector, which produces no value in the form of consumable goods, sought to use investments as a method to obtain capital by extracting it from the producers, the taxpayers, and one another.

Making the economy resistant to a repeat of the events of 2007-2009 must therefore impose considerable restraints on the predatory and cannibalistic behaviors of the financial system.

The defense of the free market

The author simplifies the argument in favor of an unrestricted market into three arguments:

  1. When the state intervenes to prevent a firm from failing, it is perpetuating failure and the free market system cannot be blamed.
  2. Because banking has been heavily regulated, it is because of the interference of regulators rather than the normal behavior of bankers that it has failed.
  3. Because money and credit are controlled by central banks beholden to governments, it is likewise the interference of government that has caused the present crisis.

In this way, the free-market advocates argue that what presently seems to be the failure of markets is in fact the failure of government, so the solution is not more restriction and interference, but less.

Without addressing these arguments, the author dismisses them as "dangerous" and avers "people simply will not tolerate" the free market system, but instead demand forceful intervention by their political system, which he feels is "rightly so."

He concedes, "There certainly were mistakes made over regulation" but feels that the answer to this is tougher and tighter control over the markets.

(EN: I can't agree, but this argument is typical of the leftist perspective: to pass laws to mitigate the damage done by previous laws, and more to mitigate the damage that those end up causing, which snowballs into a massive and complex system of regulation, never admitting that the patient eventually ends up suffering more from the side-effects of medication than from the original condition.)

Different types of capitalism

Even though the author favors heavy regulatory control of the economy, he nonetheless avers "what is needed now is not a rejection of capitalism but rather a radical reform of some of its institutions and practices."

Specifically, what we consider to be capitalism in present practice did not emerge fully formed, but evolved over time, and likely evolved in the wrong direction. However, there is not a single face of capitalism even in the present world. Consider the varieties:

(EN: The author speaks in shorthand here, and I do wish he would elaborate, but there it is.)

That is to say that capitalism has been adapted to different modes in different cultures - and while it is possible that these different takes on capitalism will continue, he suspects that there will be a new type that will emerge and rise to dominance, especially given that globalization has made markets less isolated, and less able to perpetuate idiosyncrasies.

A key problem is that "we have been trying to live comfortably in a completely new era with a system of controls and a set of ideas fashioned for an age long past." In spite of periodic upheavals, it can be seen that nineteenth-century capitalism worked out rather well in the nineteenth century. But the world has changed.

Moreover, economics is a "fuzzy" subject. A perfectly capitalistic system of economics, just like a perfectly democratic system of government, never has existed - not can theorists seem to agree on a common vision of what it might be.

In theory, free markets have the ability to deliver optimum results for society or at least, as we see in practice, have the potential to more nimbly adjust toward that end. The difference is that in practice, people must act on imperfect information and flawed assumptions - and each person acts on information and assumptions that are different and contrary to that of others.

As such, the effectiveness of the system cannot be prevented from vacillating - and this is where state control is useful in proscribing courses of action known to be harmful and requiring courses of action known to be beneficial, or at least benign.

The unresponsiveness of capital investment

The author considers "real" investment to be in the factors of production: plant, machinery, and new businesses. In this regard, the western countries have been sluggish and weak. He speculates that if the great Victorian entrepreneurs had access to so much cheap capital, they would have rebuilt the world.

But in the present age, this did not happen. The one nonfinancial explanation for this is that the pace of technological change and the spread of globalization have heightened risk for embarking on productive ventures: to institute a productive organization is to tie capital to technology that may soon be obsolete and to a market that may not be profitable, given the pace of change.

The other explanations are financial in nature, the first of which is seeking to maximize return on investment. Investors seek to maximize their return, and in an economy with a sustainable growth rate of 2% to 3%, the ability to purchase an investment vehicle offering a return of 10% or more were more attractive given the risk of investing in new enterprises.

A second financial reason stems from the shortening of financial horizons. Managers who are expected to make an immediate return are little interested in the greater benefit that will take time to generate by productive means. Their desire to maximize return in the short term this led them away from productive enterprises

The third factor is the schism between ownership and management of firms further encouraged managers to seek short-term returns rather than long-term growth. The financial incentives for a manager with a brief tenure, or a stockholder who intends to flip his investment rather than hold it long term, is likewise focused on maximizing short-term objectives to the detriment to longer terms.

Given that the Asian and oil producing nations are saving now to spend later, it should guide the western economies to prepare for this future surge of foreign consumption, hence demand for their exports, but investing in infrastructure. However, they are unable to predict when the surplus will be spent out, and what these customers will choose to spend their money on. As such there is no way to invest in infrastructure without the risk of wasting resources on the wrong infrastructure.

As such, it's no wonder that corporate managements, uncertain what the future will bring, will simply carry on as they customarily have, and to fill the deficit bankers created assets in the form of accounts receivable - specifically, dodgy loans to increasingly dodgy borrowers.

New problems, new solutions

It is in the nature of systems to have problems and failings - the more complex the system, the more such incidents will arise. It should therefore be neither surprising nor fatal that Capitalism, as an economic system, is troubled. As with any system, the users find a way of correcting problems or merely living with them. And as new problems arise, society must adapt and cope.

The great implosion laid bare five different sorts of failing:

  1. It revealed how fragile a financial system is
  2. It also revealed how bloated the financial sector has become
  3. It demonstrated the markets' excessive tolerance for risk
  4. It exhibited a failure of the market to provide reward to those who genuinely create value
  5. It revealed the problems of separation and disempowerment of owners from the control of their firms.

Ultimately, the crisis has shown the consequences of a financial sector that is "hell bent on pursuing its own profit while undermining, not promoting, the public good" and a system of corporate governance where managers are pursuing their own interest or the short-term performance of share price, and many times both at once.

In broader society, most "ordinary folk" have a deep mistrust of business executives, who see them as concerned with lining their own pockets with grievous indifference to the public good. There has been little evidence to the contrary.

It's also worth observing that the problems we face today emerged only since the 1970s, when the financial markets grew rapidly and became the center of attention in the economy, and the practice of attempting to make money by trading shares went from a fringe practice to the main driver of trading activity.

In its original sense, investment was an investment made into a productive operation, with the intent of profiting from its productivity, and an investment would only be sold in the event of an unforeseen need of capital. Even early economists such as Smith were cautious of trading investments as a matter of course, and warned that it could be damaging to markets.

While it may sound like a tall order, there is a need to return to investment in its original sense - to shut down the casino and refocus on the factory. Only when it is widely accepted that the purpose of business is to produce goods for consumption will executives focus on what matters most, and behave with restraint and responsibility - and in so doing will return honor and dignity to their profession.

Failure to do so will lead to a future that is "bleak indeed." Rampant greed and ludicrous levels of reward for nonproductive activity will continue to sap economies of their ability to contribute to the public prosperity, and keep them focused on enriching the few to the impoverishment of the many.

Many defenders of the old system feel a sense of relief that, by the middle of 2009. The crisis seemed to have abated and financial markets seemed to be settling down - but consider that in the days after the Bolshevik revolution, the Russian middle class didn't think much had happened because the prices in the Petrograd stock exchange held their ground.

And in much the same way, the economic crisis has not only been contained to the financial markets, but has had societal effects - which, allowed to perpetuate, will become threats to our collective prosperity and freedom.

Markets and government

In order to "save capitalism from itself" government must intercede in financial markets to mitigate their ability to wreak havoc. While the author supports free markets in principle, this does not mean he supports completely unrestricted markets.

Neither does he wish to be perceived as advocating "big government," as he wishes to position the measures he has advocated earlier in this book as a method to make the market mechanism more effective, merely proscribing those behavior that is counterproductive.

Neither does he wish to be perceived as advocating a "one world government," because his notion of a world central bank does not necessarily replace or disempower the central bank of sovereign nations, but provides a layer of governance at the international level, which is currently altogether missing.

Neither does he wish to be perceived as advocating heavy state borrowing. While he does believe that government spending can be used in exigent situations, to compel people to spend by taxing them and spending on their behalf, it is not a sustainable practice. Aside of instances of crisis, he feels that governments should maintain a tight fiscal policy and maintain a reasonable debt-to-GDP ratio.

Neither does he wish to be seen as an advocate of communism or socialism. While some aspects of financial markets require government control, he feels that the market system works very well on the level of individuals and families, who should retain some degree of control over their own labor and the way in which they choose to spend their incomes.

Getting it right for the future

Once we are free from the grip of the present crisis, the author considers that a new world order must be constructed. He suggests that "finance capital" has failed, but this does not mean that capitalism as a system is finished. That is, the activities of production and distribution can continue to take place by the mechanisms of the free market, but the means by which production and consumption are financed are in serious need of reform. Failure to do so will cause a constant cycle of boom and bust, with perennial abuses and crises.

In spite of the obvious danger, the present time also abounds with positive possibilities. Chiefly, the reduction of surpluses in China and other nations will result in an improved standard of living, and providing goods and services on which that surplus would be expended provides an opportunity for production and wealth in other countries. The end state this seeks to achieve is one in which production and consumption are balanced, such that all benefit by being productive and enjoying the fruits of their labor.

The author is hopeful, but is not particularly confident that the leaders in government and industry the world over will steer us down the right path - it is possible for things to turn either way. Which is to say that we have the understanding to do better, but the will to do so is questionable - but a course well worth considering.

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