I went to a debate at the Oxford Union a week ago on this topic, and I just came across the notes I made. Not having the chance to speak on the debate floor, I decided to simply publish my thoughts to the world:
The question above should not be a debate between Freedom and Communism. Neither is communism the antithesis of capitalism, nor is capitalism the defender of freedom. Capitalism is a mechanism for “social efficiency.” It is not a means of wealth distribution as much as it is a way of thinking about wealth and deciding how to measure it. Money is the part of the equation we are used to, but capitalism actually is based on the idea of value.
To that, I would say there is a challenge. Value to consumers and suplliers in the capitalist system is not necessarily equivalent. The fact that a consumer places a high value on an item does not necessarily mean they should, can, or do pay a lot for it. I’m going to be a bit unfair and use the example of life-saving drugs. This, in capitalism, would be an inelastic consumer because they are willing to pay almost anything to get it; or, the value to the consumer is very high.
The assumption that mutual self-interest is at the heart of the exchange between the sick and the pharmaceutical companies is not off base, but it does not ascribe any sense of morality. In my next post I will discuss game theory and how supports and exposes certain economic assumptions, but this is the biggest semantic point that, I think, needs to be remembered when discussing economic models. Socially efficient markets are not necessarily socially moral markets. Nor does socialism provide a perfectly free or moral system, and that is not the case I am making here. What I am advocating is a rejection of the hypothesis that capitalism alone can save the world.
Too often we see two systems as polar opposites. Though I do tend to believe government intervention in some industries damages the sum of social value (I’m thinking of nationalized airlines as I write this) I also think much government presence is a tremendous source for good. Governments, when active, are inherently anti-capitalistic. Whether a government winks in the direction of a business or bails out an entire banking system, it is involved and the market is not entirely free. We need to accept this fact and, perhaps, move to greener pastures where business and government work together rather than seek dominance. Both are institutions with social and commercial implications and both need to recognize their presence in those spheres.
Assuming that governments by nature are socially motivated is not a stretch of the imagination. Nor is the assumption that a firm, motivated by self-interest, is abstractly only in existence to serve some need in the market. Governments in reality are not always motivated by social welfare, but when I am asked if capitalism can save the world, I think self-interest does not have the scope to measure the actual costs of decisions. Sheer self-interest can create competitive environments where the big picture is not seen or there is no incentive to respect all consequences. Markets can sustain continuous growth until every shred of rare resources are stripped from the earth, and if the firm has done all it can do because of that it can simply disappear or move on. Societies, however, cannot disappear if the resources they rely on disappear. Nor do they move on. There was a time in human history when a dry river meant moving the village, but now we face a time when we are talking about global impact. Governments and firms can fail, but society is a force of nature, and governments and firms are both manifestations of society.
Can governments with social welfare as motivation save the world? I don’t think that is the case either. There is an element of nature in capitalism and self-interest manifests in every system. In a perfectly social system it takes only one self-interested party to reduce the aggregate value for all others. That is why we see communist governments trading in capitalist markets, because capitalism represents a game where people lose value if the rules are ignored. Capitalism was present in the most communist periods of history, though perhaps the value being traded was not overtly recognizable as dollars and pounds.
So what am I advocating? I’m advocating pluralism. We need firms, we need governments, and we need them to work together. Appropriate governing keeps things in check and defends the long-term welfare of the people. Honest firms live or die on delivering value to the end consumers. Both can be socially beneficial, and both have different measures of success and failure. In these days, failure is a concept that forces me to write on, perhaps a bit longer than most attention spans.
Roman builders staked their lives on quality. Upon finishing a bridge or aqueduct, the director of the project would stand underneath the stone arch while the scaffolding was removed. Failure has terrible consequences, and free market capitalism would allow failure and is more likely to ensure success in whatever units success is measured as. It may seem ironic that in the current financial crisis to think of failure as a good thing, but it is a motivator and a measure of past decisions that will affect future decisions. Some executives have been fired and some careers have been ruined, but this pales in comparison to the pain felt by so many people across the world on the backs of decisions that certainly made some people very, very rich.
Financial institutions are partly social utilities, and we all feel that now. In that regard, though, we cannot allow such a utility to be managed with the incentive structure that capitalism demands. Growth for self-interest proved inefficient this year as the real costs of things like sub-prime mortgage and securitized debt finally manifested. I could say the same for the sustainability of consumption models promoted by organizations like Wal-Mart, where we will surely see international economic impact and environmental impact within the next generation or so, if not before. These companies and practices are not evil, but they do require regulation and appropriate measurement. Governments must look past short-termism incented by capitalist markets and seek a balance between social sustainability and social efficiency.
Capitalism in the current system, is not prepared to measure externalities of business. Cash, an abstraction of value, is the basic assumption of trade, and even cash is abstracted further in many transactions. As a society, we have lost touch with the concept of value, an abstract concept in itself. Capitalism is not wrong to measure value, but our application of this basic concept is sometimes akin to Social Darwinism as an application of evolution. Dominance of capitalism and concepts of human nature are quite beyond my scope here, but measurement is the key, and measurement is currently the realm of society. We must demand better appreciation of cost and benefit in everything we do. Environmental destruction is not taken into account in price or in carbon trading markets, social disruptions are merely risk valuations in futures markets, and the value of access is confused with the idea of price ceilings. We face harder questions than the media is prepared to handle, and I wonder if society is prepared to discuss them. Can capitalism save the world? Not alone.