“Greedy bankers, overpaid executives, anaemic growth, the stubbornly high
unemployment—these are just a few of the things that have lately driven
protesters on to the streets and caused the wider public in the developed world
to become disgruntled about capitalism. The system, in all its different varieties, is
widely perceived to be failing to deliver.”
This is
how, in January of 2012, the Financial
Times started its series “Capitalism in Crisis” (italics are
mine). Even worse, the introductory article then continued, the above mentioned
villains simply bought the politicians and “bought themselves protection from
proper societal accountability.” So for the next four weeks, economists,
politicians, editorial writers, and just about anybody else, attacked or defended
something called “capitalism,” trying to offer explanations for what we have
experienced in the last several years.
Two
books reviewed here are, in a way, the continuation of this same battle. The Morality of Capitalism: What Your
Professors Won’t Tell You is a short book edited by Tom G.
Palmer, of the Cato Institute but also of Atlas Network and Students for
Liberty. It consists of his Introduction and fourteen essays by fourteen
different writers, all of them categorically defending capitalism as the best
and most moral system of all economic systems tried so far. The book,
unapologetically, offers the reader the Truth: “Capitalism is a system of
cultural, spiritual, and ethical values. . . . Indeed, capitalism
rests on a rejection of the ethics of loot and grab . . . [It is in
other economic systems where] predatory elites use [a] force to gain monopolies
and to confiscate the produce of others through taxes.”
As a
professor, I must admit, I have no problem with defending a system so defined,
but the question I pose is, has capitalism really proved itself so pure in the
real life? We’ll come back to this in a moment.
Defending
the Free Market: The Moral Case for a Free Economy, by Father Robert Sirico, president of
the Acton Institute, has the same goal but a different approach. Through a
personal story, Father Sirico tells us how he came to discover the
Truth—actually two truths: economic and spiritual. Realizing that our country
has a huge problem, he warns that “when a people surrenders their [sic] freedom
to government—the freedom to make moral, economic, religious, and social
choices and then take personal responsibility for the consequences—virtue tends
to waste away and faith itself grows cold.” Only responsible people can save
America. “Philanthropy, charity, voluntarism, activism, and care for the family
and the poor are all related to the same impulses that drive the market
economy: the peaceful and free association of people in the service of others.”
Again, no problem in defending such a system, but is such a system possible at
all?
Let’s
turn, first, to some definitions, as one must be careful in word choice when
economic systems are discussed. Palmer does insist, as the title of the book
implies, on using the word capitalism. In the section “The History of a Word,”
he tells us that the word was not invented by Karl Marx, as usually believed;
it was already used in the twelfth and thirteenth centuries. Only with the
birth of socialism did the word become a term of abuse. Despite his explanation,
I, myself, see no reason for insisting on the word. Even several of the
contributors in his book use terms like “the free market” and “the market
economy,” trying to avoid a word so ambiguous and by now so ill-reputed. The
above quoted article from the Financial
Times insists on many variants of capitalism. Father Sirico
himself calls it “admittedly a narrow and problematic word.” Palmer simply
decided to shrug off such linguistic pedantry.
Unfortunately
for Palmer, the term “capitalism” must be heavily qualified to have any
meaning. The word has become so horribly unclear that it may have about as many
interpretations as interpreters. It may describe financial capitalism, where
mathematical geniuses are allowed to turn almost any piece of paper into wealth
by using esoteric equations and giving them fancy names, like “synthetic CDO
squared” instruments; the word may describe state capitalism, as in fascism and
National Socialism, where governments decide what, when, and how to produce the
things they deem important; it may describe free-market or entrepreneurial
capitalism, as those who like the word usually call it; it may describe cowboy
capitalism, as those on the left prefer to call it; or, finally, the word may
describe crony capitalism, as Palmer himself does a couple of pages later.
(Sirico tries to escape the traps of crony capitalism by naming that concept as
cronyism, but the main problem persists: would the real capitalism please
stand up?)
The
fact is, for those less informed than Palmer (including perhaps those
professors from the subtitle?), it is too easy to put all capitalisms in the
same category and conclude that capitalism tends to devolve into an immoral
system. Even Palmer sets himself up when he discusses crony capitalism. First,
he tells us how Marx himself praised capitalism for improving productivity, for
creating “a world literature,” for overcoming the hatred of foreigners, among
other advantages. But then he quotes Marx as saying that the whole system is
based on public credit. It is the state that helps the capitalists become
richer, that protects them, and “[a]ll political upheavals perfected this
machine instead of smashing it. The parties that strove in turn for mastery
regarded possession of this immense state edifice as the main booty for the
victory.”
Two
pages later, in a section titled “Free-Market Capitalism vs. Crony Capitalism,”
Palmer complains that we should never confuse the two. Sadly, he says, “crony
capitalism is the term that can with increasing accuracy be applied to the
economy of the United States, a country in which failed firms are routinely
‘bailed out’ with money from taxpayers, in which the national capital is little
more than a gigantic pulsating hive of ‘rent-seeking’ lobbyists, bureaucrats,
politicians, consultants, and hacks, and in which appointed officials of the
Treasury Department and the central bank [the Federal Reserve System] take it
on themselves to reward some firms and harm others.”
Isn’t
that exactly what Marx just said? Is Palmer proving Marx right? Does capitalism
inevitably end up in crony capitalism? And if so, how can Palmer declare
capitalism not only moral, but the most
moral of all economic systems?
In the
first contribution to the book, Palmer interviews John Mackey. The co-founder and
co-CEO of Whole Foods, Mackey praises capitalism for all the good things, such
as creating value for the consumers, allowing people to voluntary exchange for
mutual benefits, and engaging in all kinds of win-win relationships for the
benefit of the whole society. But then Palmer introduces a question about
“crony capitalism” happening in so many other societies, to which Mackey
responds: Capitalism needs “an equal application of the law to everyone as the
primary goal—no special privileges to some and not to others. So what’s
happening in a lot of societies, and what I think is happening more and more in America,
you’ve got special favors given to the people who have political connections. It’s
wrong. It’s bad. [In crony capitalism] you are not in a free market society any
longer and you’re not optimizing prosperity; you’re unnecessarily keeping many,
many people less prosperous than they would be if you had a truly free-market
order with the rule of law supporting it” (italics mine). After giving two examples
of crony capitalism in America (Obamacare and “all these subsidies . . . taking
[money] from taxpayers and redistributing it to people who are politically
favored”), Mackey is adamant: “I call
it immoral. . . . It certainly violates my ethics and my sense of what’s right
and wrong.”
Both
Palmer and Mackey insist that crony capitalism is opposite from a free-market
capitalism, and some people would agree. But for a majority capitalism is
capitalism is capitalism—crony, state, or whatever other adjective is in front
of it. And what does one call a system—other than immoral—in which a single man
can lower interest rates to zero and rob American savers for about $400 billion
(a perfect example of Bastiat’s legal plunder), and in which the same man has a
right to create untold trillions of dollars out of thin air and disburse that
money to foreign central banks, foreign and domestic investment banks, hedge
funds and insurance companies, and more or less to whomever he pleases? How to
call a system in which governments intentionally debase their currencies,
therefore raising prices on almost everything, to prop up failing banks and
companies that are deemed “too big to fail,” a.k.a. too connected to fail? And
how to call the CEOs of those banks and companies who award themselves bonuses
of tens and even hundreds of millions of dollars after receiving such
government “aid”? How to call a system in which some people make about ten
dollars an hour while others make millions of dollars in a nanosecond (using
another “brilliant” financial innovation—high speed trading)?
In
theory, capitalism may be moral; in practice it is, without some other moral
basis, a different story. In practice, capitalists turned plutocrats privatize
profits while socializing losses. The moral hazard arises; the corrective
process of the market, Adam Smith’s invisible hand, disappears, leaving
taxpayers to hold the bag. The latest financial crash (and many more will come)
inflicted such huge losses on the innocent—all those who lost their jobs, their
houses, their families—and all that suffering so the masters of the universe,
the real culprits, could be saved from losing their own wealth they had
“risked” playing a game most of them never mastered. Therefore, it won’t do, as
some try, to use the circular argument that capitalism is the best of all bad
options. The fact is, as Kevin Dowd and Martin Hutchison end their book, Alchemists of Loss, “The basic weakness of the capitalist
system, the problem of how to prevent management and powerful interest groups
more generally from enriching themselves at everyone else’s expense, has
escalated to the point where the capitalist system itself is now in a major
legitimation crisis . . . These interest groups have also taken over the state
itself to a very significant extent, in the process turning modern capitalism
into an ugly and corrupt system of crony capitalism that cannot be defended and
is rightly reviled by an increasingly restive man in the street, who is called
upon to pay for it” (italics mine).
So, if Palmer fails to prove his case, what choice do we have? Well, we
still may have a choice: A system with secure and transferable property rights
and a reliable contract enforcement in which people can exchange their skills,
their ideas, their goods, and their services freely with other people, where
consumers rule, not producers: a system called free market. The defense of this
system is offered, as already mentioned above, by Father Sirico. Although he
also uses the word capitalism too often for my taste, his defense of a
free-market economy is much better reading. For Sirico, to create a prosperous
society people must be free, and to create a free society people must be
virtuous. In such a society, people will exercise their God-given talents,
their reason and creativity, and will achieve their personal goals more
successfully than in any other known alternative.
Several
chapters in the book are especially delightful to read. The chapter on the
creative-destruction part of the market should be required reading for all
those who don’t understand how a higher standard of living is created. The
chapter on health care, for me at least, having lived in an “Obamacare” system
for forty years in Yugoslavia, is brilliant. Being a Christian myself, I found
the best chapter to be the last one, “A Theology for Economic Man.” It is here
that Father Sirico admits that to “build an authentically free and virtuous
society is far more complicated and difficult” than (as I would put it)
simplistic and mechanistic economic theories would have us believe, “requiring
habituation to just deeds, both visible and invisible.”
Sirico
is especially angry at the mechanistic approach of modern textbooks and their
idea of homo economicus, “the
imaginary perfectly self-interested human being,” whose “sole purpose in life
is to maximize utility. He never stops calculating costs and benefits . . . The
results dictate his next choice in life. This patter repeats itself every day
from maturity until death, and in every aspect of life.” But, he concludes,
this “caricature of homo
economicus” does not help us in understanding the real nature of
the market system, with all its limits and potential disappointments for so
many market participants.
Thus,
in my view, Father Sirico’s book, explaining the pluses and minuses of a market
economy, is much more convincing than Palmer’s, whose take-no-prisoner,
you-are-either-with-us-or-against-us approach will gain him few converts.
Sirico’s model, to integrate sound economic thinking with a proper
understanding of the human person, to explain all other social institutions,
especially the rule of law, without which the same market economy cannot exist,
and to add the moral component, which textbook economics tries to avoid, might
offer better explanations to those who despair over the present state of the
world economy.
The
issue is much more than semantics. The leading world economies, those that go under
the name of capitalism, are, for all the practical purposes, bankrupt.
Advocates of capitalism are confronted by a question: With huge and
unrestrainable governments, highly interventionist and mostly plutocratic,
going increasingly into unsustainable debt all around the world, and then
allowing irresponsible central banks to “monetize” this debt through printing
trillions of dollars, euros, or whatever other currency needs saving, are we,
with every new day, closer to the final bankruptcy of this system, whatever one
pleases to call it?
Tumultuous
events over the last twenty-five years—the stock market crash of 1987, S&L
crises of the late 1980s, the dot-com crash, LTCM default, the flash crash in
May 2010, the LIBOR scandal, the MF Global and Knight Capital scandals, the
Great Recession here in America, the bankruptcy of Greece, Spain, Italy,
Ireland, and Portugal in Europe—have all been, directly or indirectly, products
of the same governments, which have been hopelessly trying to “manage the economy,”
stimulating production at times, stimulating consumption at other times,
redistributing from the rich to the poor at times, and then redistributing from
the poor to the rich at other times. Not so surprisingly, most people have by
now lost any confidence in a “free” market economy. Once the distinction is
blurred between capitalism, socialism, fascism on one side, and free market on
the other, the case for the free market is lost. When the catastrophe finally
occurs, most people will want a knight on a white horse to save them, not a
free market. History is perfectly clear here.
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