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the future of capitalism

April 10, 2009

I have noticed a lot more discussion about capitalism versus socialism lately, and while I think that this is a good thing in general, I am disheartened by those who hold economic theories more like religious ideologies than models invented by people abstracting their features through various means. As I have said before, I believe that no model is perfect, and all economic and political ideologies are going to be flawed in some way.

One of the main reasons for this is that there is an unstable variable in the whim of the individual—in their ambitions, desires, needs, etc. It is one thing to construct abstract models and theories based upon personal ideals and observations, but it is quite another to put those abstract models and theories into practice on a larger scale. In any model, there is always going to be the possibility that each individual will end up working at cross purposes, and this can lead to things like the negation of social consensus in the case of socialism, or opening the door for exploitation in the case of capitalism, etc.

Modern day capitalism itself has had a long and often troubled history.

As Capitalism for Beginners, a quite humourous comic about the history of capitalism, summarizes, Adam Smith essentially had the idea that the selfish and unrestrained (i.e. free) pursuit of self-interest would improve the general welfare. The idea was that private profit would translate into public benefit. This was the theoretical foundation behind free market capitalism. Unlike the corporate free market model of today, however, Smith himself not only treated high wages as desirable, but high profits as undesirable (Adam Smith on Profits–Paradox Lost and Regained). In the Wealth of Nations, for example, he closes his chapter on the profits of stocks with the statement:

“Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”

This is direct contrast with the likes of Arthur Young, who, as Nathan Rosenberg notes, wrote in his Farmer’s Tour through the East of England that “every one but an idiot knows that the lower classes must be kept poor or they will never be industrious; I do not mean, that the poor of England are to be kept like the poor of France, but, the state of the country considered, they must (like all mankind) be in poverty or they will not work.” Smith envisioned his version of capitalism supporting a more egalitarian society where everyone benefits from their labour, not just the capitalists and property owners. But a “free” market tends to get hampered by greedy and powerful capitalists in the form of cartels, monopolies and oligopolies, inequality of opportunity and, of course, government interference. And when the Great Depression hit, many people thought that the capitalist system was nearing its final end. This is where James Keynes came in.

As Capitalism for Beginners puts it, although Keynes was often critical of certain aspects of capitalism, his goal was not to replace it with another system such as socialism, but to reform it and make it more inline with Smith’s idea of an egalitarian society by recommending a “somewhat comprehensive socialization of investment” (General Theory, 378). He differed from Smith in that he advocated more government involvement in the market because Smith’s “invisible hand” (i.e., the self-regulating nature of the marketplace) no longer seemed to work, and he was deeply concerned about the looming long-term deficits in investment, aggregate demand (i.e., the total amount of goods and services demanded in the economy at a given overall price level and in a given time period) and employment. As Keynes famously wrote:

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

In certain parts of Europe, especially post-war Britain, this economic philosophy lead to social-democratic governments that nationalized certain sectors of industry, including health care, and instituted stronger social welfare programs, while in the United States, economists and politicians focused upon Keynes’ fiscal policy and monetary policy while ignoring Keynes’ “endorsement of more egalitarian redistribution and social control of investment” (Capitalism for Beginners, 106). Nevertheless, there were problems with both approaches, and the simultaneous appearance of inflation and high unemployment (i.e., stagflation) eroded confidence in Keynesian economics, which, thanks to the economic theories of Milton Friedman, gave way to the rise of monetarism (i.e., the idea that the government’s only role in the market should be controlling the money supply) in the United States and Britain.

Monetarism had moderate success in the United States in the late 70s-early 80s, where it produced a deep recession but cured double-digit inflation, but less success in Britain, where is also lowered inflation but contributed to a deep recession and mass unemployment (A Critique of the Chicago School of Economics). But it appears that the overall failure of purely monetarist policies to sufficiently stimulate economic growth, combined with the apparent damage done to the global economy caused by the deregulation (i.e., the reduction of government control over business activity) and privatization (i.e., the selling of public assets to private industry) associated with monetarism, has led to a resurgence of Keynesian-style policies.

Today, considering the scale of the current global economic crisis and the vast array of economic policies and systems in play, the question is, What’s next? How do we level the playing field? How much government interference is ideal? How can economic growth rates be increased in sustainable way? What mechanisms should to be implemented to keep giant multinational corporations from dominating the market, not to mention political discourse? These are the kinds of questions that continually need to be asked in any capitalist society. Adam Smith struggled with these questions at the end of the 18th century, and 200 years later, we are still struggling with them.

So far I have found some of Socialism’s longstanding concerns regarding the drawbacks and weak points of the capitalist system amazingly prescient, especially in regard to commerce and credit, but the fact that most socialists are decidedly biased against it seems to blind them to the potential ability of future generations to solve some of these problems. Perhaps socialism is the next evolution of economics that will lead the world to a wonderful new level of prosperity and cooperation, and then again, perhaps not. But ultimately, I think it all depends on what direction we want to take our global society. Are we ready to see that we are all citizens of the world and work toward a better future together? Or are we still content to pursue our own individual self-interests above all else?

I suspect that Smith was right in that the pursuit of self-interest will improve the general welfare, but only when we realize, as a collective whole, that we are all in this together.

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