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Don't Blame Capitalism for Wall Street's Corruption and Lawlessness
When Mahatma Gandhi was asked what he thought about Western civilization, he answered:
I think it would be a good idea.
I feel the same way about free market capitalism.
It would be a good idea, but it is not what we have now. Instead, we have either socialism, fascism or a type of looting.
If people want to criticize capitalism and propose an alternative, that is fine . . . but only if they understand what free market capitalism is and acknowledge that America has not practiced free market capitalism for some time.
I'm not talking about Michael Moore's latest movie. I'm talking about worldwide opinion.
Specifically, a poll conducted by the BBC shows that the vast majority of people worldwide say that capitalism is not working.
The poll shows that:
Nearly a quarter -- 23 percent -- said the system is "fatally flawed."
RawStory describes the poll by saying:
Worldwide poll: Vast majority say capitalism not working...
Dissatisfaction
with capitalism is widespread around the globe 20 years after the fall
of the Berlin Wall that heralded the demise of European communism, a
poll released Monday showed...
A bare majority, 51 percent, believed its problems can be solved with more regulation and reform, the poll said.
People
pointing to the Western economies and saying that capitalism doesn't
work is as incorrect as pointing to Stalin's murder of millions of
innocent people and blaming it on socialism. Without the government's creation of the too big to fail banks, Fed's intervention in interest rates and the markets, government-created moral hazard emboldening casino-style speculation, corruption of government officials, creation of a system of government-sponsored rating agencies which had at its core a model of bribery, and other government-induced distortions of the free market, things wouldn't have gotten nearly as bad.
As Justice Louis Brandeis said:
In
a government of laws, the existence of the government will be imperiled
if it fails to observe the law scrupulously. Our government is the
potent, the omnipotent teacher. For good or ill, it teaches the whole
people by its example. If government becomes a lawbreaker it breeds
contempt for law: it invites every man to become a law unto himself. It
invites anarchy.
If there has been lawlessness and
corruption among Wall Street players, it was partially simply modeling
the lawlessness and corruption of the Executive Branch and Congress
members. I've written elsewhere about how the government lied by saying
Saddam had weapons of mass destruction and was behind 9/11 (when he
didn't and wasn't), that we don't torture (when we did), that we don't
spy on Americans (when we did), etc. Just like kids model what their
parents do as well as what they say, Wall Street modeled the unlawful and corrupt actions of our government employees.
Being
against capitalism because of the mess we've gotten in would be like
Gandhi saying that he is against Western civilization because of the
way the British behaved towards India.
Note 1: I am not
anti-regulation. I believe we need laws like Glass-Steagall, antitrust
laws, fraud laws and other laws to ensure a level playing field. You
can't have a football game without rules designed to keep the game
fair. Same with capitalism.
Note 2: Maybe somebody can convince me that something else is a better system. I am open to listening to alternatives. But - to date - I have never heard of a better economic system than free market capitalism ... but if and only if it is truly free.
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Market capitalism is based on incomplete economic theories and it is flawed. Economists dismissed networks as "market failures" more than a century ago (read Marshall). It turns out that finance is ruled mostly by networks, so the center of capitalism is not even understood. Most of the failures of the current system (more than 120 financial crises around the world since 1980) are due to some concentration of capital or market power, which is natural in networks unless regulated.
BTW, it would be a good exercise for those Austrians in ZH to look at networks, the Austrian School claims that there are no market failures, if they can explain networks then I'm all ears,
http://en.wikipedia.org/wiki/Market_failure
It's like blaming airplane crashes on gravity. Hat tip to whoever said that first.
In capitalism, man exploits man. In socialism, it's the other way around. I vote for the looting analogy. It's not so much that we need new laws. Granted we need to reinstate some, but to me, the bigger share of the problem comes from the fact that no one is enforcing the ones we already have. It's a chicken and egg thing. Is it the structure that corrupts the people or the other way around? In the end, it seems like it's the people's fault really. As Chet said, no system is perfect. But it seems like a lot of us wanted something for nothing for a long time as well. We sat back, hung on, and thought we could float forever on these balloons. Even worse, over the last ten years, we allowed these two corrupted parties to crush the free market, nullify the bill of rights, and exploit our own citizens and others far far away. Not a day went by in the last days of the last president when we bitched about a criminal, murderous war and a host of other atrocities. Now we keep our mouths shut. And nothing has changed. Except its worse.
While Chet may be right, that this is the "natural mechanism" of captalism, there is nothing natural or human in the concentration of power, the criminalization of power, and the ultimate control of government by a select few. And although it only lasts as long as we tolerate it, the longer we wait, the harder it gets.
Every salient point I was going to make was said better by you.
Free market capitalism would work if:
Sadly, free market capitalism is fatally flawed as it exists. Bite me Kudlow.
I think what you meant was:
"Free market capitalism would exist if"
I would add society more or less would be capable of making long term rational decisions.
Even if it existed under those conditions it wouldn't last.
The system is inherently unstable. The way to win at the free market game is to play within the rules until it is no longer a free market - typically when players establish a monopoly/cartel through government intervention (laws, etc), lies, secret proprietary information, or just outright direct elimination of competition. Once that happens the free market system stops, the game is over and you have something else entirely.
Near as I can see there is no force counter-acting this outcome in our present popular view of capitalism. Some feel that regulation is an effective counter, but it seems history has proven that the regulated simply corrupt the regulators and then use them to create the conditions for the formation of a monopoly/cartel (ie GS/JPM). Others feel unfettered freedom for corporations is the solution, but in that case they simply establish a monopoly through lies, secrecy and other tactics designed to prevent competition.
One must accept that no business actually wants a free market or competition and they work as hard as they can to prevent it. Absent rules they will succeed, with rules they will corrupt the rule makers.
My opinion is that the only way to create a natural feedback to correct for this is to completely eliminate secrecy and government created monopoly as a part of business operations. Every contract must be open for all to view, every price paid for anything by any company must be known to all, the composition and nature of all assets inside a company must be known and no company can 'compete' based on the monopoly of an idea (no copyright, no patents, no trade secrets).
It is quite likely such a system would fail for other reasons, but understand that is what market *freedom* is about - you may have the freedom to keep something secret, but I also have the freedom to prevent you.
If the temperature of the world will rise 9 degrees Celsius sometime between now and the end of the next few decades and the population will rise to 9 billion by 2050, I see no possible value in arguing about capitalism. It is finished, give or take a decade or two.
an excellent point!
By the way, that's not capitalism as well (below) :
"BEIJING, November 9 - China has executed nine people convicted of violent crimes during ethnic rioting in the far western Xinjiang region in July, the first to be put to death over the unrest, the China News Service said on Monday." - FT
You can barely describe wall street firms as capitalist. They don't have any capital. They pay out more in bonuses than their entire capital.
The closest thing to a wall street firm is not a capitalist enterprise like a factory, but a pirate ship. Everyone gets on board to do some looting and pillaging, then at the end of the run (end of the year) the surviving pirates split up the loot, then start over again with new crew members.
Here it is ....Let's make this simple....
An exchange is established....
All companies that list on this exchange report
factual information only....quarterly....
The exchange is a direct access electronic internet
based exchange....that has the exact same transaction
costs for all size accounts....approximately 20 cents per
100 units....
Margin....is 4:1 for both overnight and intraday....
There is no account minimum....or maximum....
There is a restriction on size or number of shares
that a specific account can trade....
Short sales.....are not allowing beyond the number of shares
outstanding....electronically tagged....
Banks act as local banks only....and IBs provide for the means to going public....
Individuals are the backbone of securities supply/demand....
The exchange promotes the idea that a few large accounts controlling large positions is a much poorer form of markets formation....and thus promotes that having millions of individual accounts provides for a superior marketplace....
Companies that are public.....recognize that it is not a good idea that the heads of the firm can be paid 500 times the average worker....and that 10 times the average worker would be the maximum allowed by law....and stock awards are based on merit.....The cash pay of the company leaders has to be much smaller than the pay in stock....
There are no taxes of anykind on the exchange....and any individual in the world....can participate in the language and currency of choice....
The internet provides factual based wiki format information on all companies....
................................................
Here is the point.....with proper design.....capitalism can be one of the very few means to create and distribute wealth....
............................................
How about providing the above FOR ALL ?????
Then capitalism will no longer be questioned....
+1 Spot On.
I <sarcasm>like</sarcasm> the recurring quote our 'benevolent' interventionists like to use: "Failure to act is not an option." They mistake activity for acheivement -- Stimulus, Health Care, War, etc are all activities that serve to paint a picture of a caring and undestanding government, while they destroy the foundations of our society and economy from the inside out.
'To Big To Fail' plays into this charade in the same manner -- that is not capitalism... more like fascism/communism.
Totally agree. What we have here in the US is NOT real capitalism. There is no fair playing field when the best business advantage come from influence on the government rather than innovation, agility, foresight, intelligence, hard work, etc.
Captitalism is the best system we know of. But it's wrong to diefy it and believe it's infallible. It's just a system. It isn't inherently bad OR good. That's why regulation is necessary.
The natural mechanism of capitalism is to move the bulk of wealth up and up the chain until it's more and more concentrated at the top. That's just how it works when left to its own devices. That is ultimately very bad for society and leads to de facto aristocracy, whether we call it that or not.
I disagree that the accumulation of wealth by an uberclass that we've seen in recent decades is some horrible abuse of capitalism, and that it wouldn't happen under a more "pure" capitalist system. I think it would still happen.
The solution is some limited measure of the types of things we don't like: redistribution, unions, regulation. The less we can get by with, the better, but some is needed.
There's a difference between regulation and enforcing capitalism. No one says that there ought not be a rule of law within a capitalist society. On the contrary. In order for capitalism to work, it must, invariably, uphold the rights to property and bind individuals/business to contracts.
That is NOT what we have. Contracts are arbitrarily broken by 'regulators', companies like FNM would not exist, GM, GS, C, AIG would've been bankrupt long ago. The market would've corrected all imbalances on its own. The only thing that capitalism demands is Enforcement of very basic principals: Bear responsibility of your own actions, bear responsibility of contractual obligations, mutual respect of property rights.
Regulation sounds nice, but it's a con job. It places arbitrary power in the hands of the few, it values certain groups (GS/C/AIG) above others (Tax Payers) etc. The whole idea of a Pay Czar is insanity in its purest form.
And above all else, none of the regulators that we have/had saw any problems whatsoever! Bernanke & Paulson repeatedly claimed that "Problems are within their control" and that "economy is resilient". Let me impact this: Giving more power to regulators does not make them more clairvoyant! Here's a reminder:
http://www.zerohedge.com/content/confidence-game-quotes
You are mistaking temporary dislocations for systemic problems. In so doing, you have highlighted the problem of free-market capitalism within a democratic framework.
Given freedom and time, wealth distribution would work itself out. Politicians don't give anything time. The jump right in to screw it up. Then the dislocations become part of the system since there is no longer a free market to work it out.
"Given freedom and time, wealth distribution would work itself out."
I frankly don't see the evidence for this. It strikes me as an article of faith, little different than a religious article of faith.
As stated, I think given freedom and time, wealth is distributed to the very top, leaving a large underclass.
"Given freedom and time, wealth distribution would work itself out."
Interesting internally dissonant sentence. Wealth redistribution via central command is anything but freedom.
Perhaps you have a point but I don't see enough meat here to parse it.
The subtle difference between distribution and re-distribution. :) I agree completely with you (and your direct reponse comment above). My point which was hastily (poorly) written was that a market that is actually free, given time, will allocate resources (wealth) appropriately so there is no need for redistrubution. I disagree with Chet's statement that capitalism inherently bubbles wealth up. Regulations and central planning do nothing to balance income/wealth; they simply switch the players.
Given that restatement, it is my pleasure to declare we are in agreement.
Free market capitalism always leads inevitably to market consolidation, barriers to entry of new competitors, collusion among the remaining firms and then ultimately monopoly. Corruption of government is one of the many tools that are used to achieve the goal of pricing power, both the power to sell at the producers desired price and to buy materials and labor at the producers desired price.
This is what free market capitalism does, that is what it is by nature.
Anything less is not free market capitalism, and presuming that there is any way that this beast can be tamed is foolhardy.
Republicans have said that they want to keep government small enough to drown in a bathtub. Likewise, corporations must be kept small enough to drown, otherwise they inevitably take society on a ride for their own corrupt and greedy ends.
just off my head i would say the capitalist system = mass societies = unsustainable for most regions, given the ever increasing inputs and emphaisis with economies of scale. Mass societies require intensified globalisation to survive. YES, they reduce poverty while however stimulating population growth in areas where the land could never other wise carry it.
Man, just look at what a flaccid, brain-dead X-factor watchin moron is the result of such a system, with its infinite "markets" and so called "needs" and tell me we arent getting stupider by the day because of this materialist stystem. That is what it is at the end of the day. Materialism before anything else..environment, spirituality, a sense of belonging etc have never been at a lower ebb.
Im reading Adorno now to try and get an understanding of this whole mess and to see if being a consumer is really all I can do or the is the hightest, noblest ideal.
My main problem with capitalism is that its unsustainable the way its spreads and spreads and the inputs it needs. That and it tears up the planet.
From another zh contributor, dont remember the name:
"When we amass, or centralize, authority and/or resources we become more vulnerable to physical annihilation. Centralization breeds specialization of function, glorifying economies of scale and discounting risks of scale. It is myopic. It brings a gravy train of prosperity at the expense of dependency on an asymmetric system. It is asymmetric because it is one unit, one world, one system. If one part of the system fails we all are doomed. The more units and the broader based the skill set of those units, the more symmetrical a society. Naturally, a symmetrical society is limited in scope but indestructible. If one third of the world is wiped out by catastrophe in an asymmetric society, the other two thirds would soon follow. If one third of the world is wiped out by catastrophe in a symmetric society, the other two thirds would be unaffected. We would do well to pursue symmetry."
whatever, flame away.
Seems you might be equating what we have as being capitalism, which is an honest mistake. Little if any of what we have can be considered an example of capitalism. We must look beyond those single variables used by economists to see what is really going on.
Capitalism promotes savings. A purely debt based system promotes spending/consumerism to escape depreciating currency. More spending = more resource consumption.
Allowed to run its course capitalism is a very decentralized system seeking more efficient ways to employ capital (human, and money).
How much more efficient would our transportation be if govt had not got in bed with RR's in early 20th c. and autos later on. Perhaps we would be off fossil fuels by now? Who knows.
Just my $0.0002...inflation adjusted
WE can thank the MSM for propagandizing the Capitalist smackdown.
Capitalism has at its very heart the NECESSITY to penalize those who are wrong. Once that penalty was selectively removed by government, it tore out the two-chambered, albeit reptilian, heart of Capitalism and created some kind of hydra-headed monster.
There is no better system. Our government ought to give it a try instead of creatin special get-arounds for oil companies, labor unions, and now Investment and other banks.
To see capitalism in real action, you need to get down to the level of competition among retailers trying to capture the consumer's dollar.
Totally agree, George!
I agree as well; it's almost word for word what I tell anyone who will listen.
Unfortunately, most people would rather circulate falsehoods that consist of emotional sloganeering. And I don't mean only circulating to others, I mean circulating in their own brainbag, because it takes a lot less effort and personal reflection (and responsibility) to repeat simpleton bullshit to themselves than it takes to quietly contemplate. it takes less courage to spit bullshit in these matters because to truly sit and think about what is happening to them, they'd have to also consider their role in aiding and abetting the monstrous frauds we endure. Heaven forbid they consider taking any action; even in the solitude of their own skulls, that word is just verboten.
Most people I know barely take the time to consider their own place in the universe, let alone the unspeakably bald lies they believe and propagate.