I received an interesting question from a good friend, or rather a series of points that are worth considering separately:
"How far do you extend the logic before some kind of intervention is justified though? Should banks be allowed to freely collude with one another to artificially manipulate the LIBOR rates, for example? Capitalist organisations have proven time and again that they cannot act with integrity without state intervention. The problem with treating everything as a marketplace is that it disadvantages the already-disadvantaged (and this cannot fairly be attributed to their performance in the marketplace). If capitalism is allowed free rein what then happens to the disabled, the old, the infirm? Under capitalism they are treated as valueless or even a drain on resources. The gap between the richest and the poorest has widened greatly in our lifetime, under capitalism. By what measure can that be considered a success?" - HB
Of the many strands here, let me first pick on what I see as the key issue:
1) Modern banking is not capitalist - but a state created, funded, subsidised, guaranteed industry.
Modern banking is not a free market phenomenon - the entire system is created on a huge state sponsored scam called fractional reserve banking. In the market place, a supplier cannot pretend to have more goods on his shelves than he does, and to borrow funds on assets that do not exist is to commit a basic fraud. With human nature being fickle and short-termist certainly we expect fraudsters to exist in the market place - but they do not last long. Fraud is typically uncovered by accountants or investors or interested parties sniffing something wrong. It is different with state owned, funded and supported industries: fraud can be covered up, ignored, or passed off from government to government. Modern banking is essentially an enormous fraud and it exists because it can create funds (credit - out of thin air) to buy government bonds and thereby supply the government with an easy purchaser of its debts. In other words, it gets away with the kind of fraud that companies in the market place cannot.
Modern banking is the tumour at the centre of our modern world: banks are permitted - by the state - to unleash money created out of thin air, creating huge business cycles and distorting economic activity while enriching the few who control the banks at the expense of the rest of the population. A lot of our suffering and our wars, by the way, find their source in the modern banking system. Modern banking developned from the formation of the Bank of England in 1693 to get the government of William and Mary out of the debt that their Stuart cousins had created. The Bank went bankrupt in a few years as it employed fractional reserves (lending out more than it had earned in deposits) but then was given special protection by the state to ensure that it had a ready supply of cash (paper notes) to fund wars and government excess.
Today, the Central Bank adds liquidity to the banking system, prints money, or buys up commercial shares and bonds following a policy called inflationism. Inflationists believe that increasing the supply of money (artificially with paper or electronic credits) encourages economic growth or gets countries out of depressions (which were created by earlier inflationism!). The reality is so different - rather than 'stimulating' general growth, inflationism redistributes wealth from the productive sectors to the non-productive sectors, from savers to speculators, from the poor to an elite rich who are embedded in the great banking behemoth. Such wealth transfers then get a lot of people damning capitalism - rather than state intervention and subsidy of the greatest fraud ever perpertrated on humanity.
2) Is capitalism out of moral integrity?
Capitalism is an economic system based on the private ownership of goods and service, and their free production and distribution through markets in which people voluntarily come together to trade. The alternative system is an economic system based on the state ownership of goods and services (often called 'public' to give the impression that you and I are actually part owners, which we are not - this is testable: try taking some government property and you'll soon find the weight of the police force on you!), and a political distribution of goods and services: i.e., political bodies (elected or otherwise) decide what resources should be produced, in what quantity relative to other commodities and services, and then how they should be distributed and to whom. While markets are based on the presumption that people are free to produce or not, free to consume or not, state systems are based on taxing people of their energy, money, and time, and then distributing goods and services according to political criteria.
At this point, we are merely describing not evaluating. Whether one is a moral system in itself or not can be ignored for a moment and we can focus on the ability of either system to produce and distribute efficiently or not.
The market system wins hands down on that one: where markets have flourished, producers and consumers have all had to face strong incentives to adjust their behaviour according to how other people enter and exit markets across an economy. The interconnectedness of markets is embedded in the price of any single good, as well as its price relative to other goods and services. So if producers leave a certain market or production suffers because of a natural problem, then the relative price of associated products will rise; this encourages consumers to swap to substitutes or to conserve their resources better.
The efficacy of an action is deemed moral by consequentialist or utilitarian thinkers; it is rejected though by deontologists and rights theorists, and questioned by virtue theorists. So we could ignore the results produced by markets and review them from alternative moral theories.
Rights theory is an interesting place to start (it also connects somewhat with deontology, or duty based ethics, but that would require another essay comparing and contrasting the two).
If people are said to possess rights, we can ask what kind of rights we mean. Arguably, rights are things that cannot contradict one another as mentioned in the famous quip that "You have a right to swing your arms wherever you like, as long as they don't hit my body."
Philosophers divide rights into negative and positive forms - negative rights are the kind that involve not being harmed, not being restricted, not having resources stolen, and not being involuntarily subject to another's will. Positive rights are those that reflect an entitlement to something - such as a right to shelter, food, water, education, and health care. Unfortunately, there is a huge clash between the two. Sam enters the market place and buys a water butt for his home to collect rainwater for his garden. After setting it up, Gary comes and takes the butt and puts it on his own property. All cultures around the world have deemed such an act as theft and have generally recognised that Sam has a right not to have his stuff taken from him without his permission. But now flip it around. Gary claims that he has a (positive) right to water and that entitles him to take Sam's water butt so that he may capture water for his garden. The contradiction is now apparent and only one side of the argument - the argument for negative rights - makes sense: if Gary is said to have a positive right to his neighbour's energy, time, money, and stuff, then Sam likewise has the same rights against Gary. This could end up in an incessant war (characterising much of human history), but it could also end up with Gary and Sam asking a third party to adjudicate fairly.
In many respects this is what governments do when negative rights are not acknowledged or are ignored - such as over 'commonly owned' property such as the seas, rivers, wilderness, policing and defence even. And because politically imposed solutions are rarely efficient, it's not surprising to find most of our problems and short-comings reflect state adjudicated solutions and the ignoring or violation of negative rights. For instance, some governments ignore the negative rights of indigenous peoples not to be removed from their land and then rent or sell that land to large corporations for resource exploitation. The violation is followed by a distorted, subsidized price for the extracted resources, which would not have been gained so easily had the natives rights to their own lands been acknowledged.
3) Capitalism? "C'est nous, vous fou!" (it's us, you fool!)
Because the nature of the market system (capitalism) is based on individuals acting and reacting in the millions of market places around the world, its short comings are very much our own short comings. We all have a tendency to act for the short term, to seek pleasure in the now over longer term consequences, to indulge in unhealthy buying habits and lifestyles; we are prone to irrationalism, downright stupidity, and overestimating our own abilities.
But if this is true of human nature, it is true whether the economic system is based on markets or on political distribution. The advantage of the market system is that the consequences of our actions are reflected in the energy that we attract, repel or dissipate - in other words, friendship and love in the social sphere, reputation and fame in our professional sphere, and money in the commercial sphere.
Economists naturally focus on the last, but the same principles operate in the social and professional spheres.
Prudence, acumen, and foresight are 'rewarded' in the market system with a steadily growing net asset position and increasing cash flows; imprudence, irrational spending or investing, and short-termism are reflected in a declining net asset position and decreasing cash flows. In simple terms - the hard working, intelligent, constantly educating and learning entrepreneur or employee is more likely to improve his or her position in the market place compared to a lazy, unintelligent, non-adaptive, stagnating entrepreneur or employee. Now, it's not the monster "market" that rewards and punishes like a whimsical king (for that, consider in contrast the effects of political distribution), the market is the matrix of millions of people across millions of markets all acting, reacting, and interacting according to alteratiions in the price signals generated by each other; but put simply, the market rewards those who serve people better than those who do not. The diligent employee serves the company better than the tardy, lazy, incompetent employee and is more likely to earn a higher return on his or her time and expertise; the entrepreneur who serves more people than the competition is likely to attract more investment and higher profits.
It's the opposite in government produced services and state distributed fiunds: a failing industry that's well connected gets more money (other people's) to support it; when governments seek to regulate large industries, the industries create lobby groups to generate mutually benefitting political solutions, which typically results in higher entry costs for potential competition as well as ignoring consumer wishes. Sometimes these solutions are paraded as rational because they are the product of academics or political committees, but they rarely are: they are political solutions and hence subject to the usual set of inefficiencies and distortions. In the long term, such cosy relationships often create an unhealthy political and economic parasitism in which large corporations act upon governments for their own agenda, and vice versa, and in which commercial losses are subsidized by taxpayers employing nebulous or malleable terms such as the 'national interest' or 'too big to fail' (cf. banks...)
Asimple analogy brings it home quicker: in a regular market, the marzipan seller is not doing as well as the egg seller, for she attracts fewer customers than her neighbouring stall. As she approaches failure, would it be right for her to dip into her neighbour's earnings to keep her going? Surely not. If the other stall holders can see she's struggling, they could offer advice (she could ask too!), and perhaps offer a temporary loan, but that is their choice based on their situation. If she can just dip into the coffers of the successful, the successful are likely to avoid her and that market.
The positive rights argument involves the formation of such entitlements which in turn fosters a parasitical ethic and culture. In the formation of the United States, the Founding Fathers noted that people have a right to 'pursue happiness' not that they have a right to happiness. When groups of people or corporations begin demanding their rights to something, we generate the opposite of a free polity and economy - we create a political system in which people have a hand in the pocket of their neighbours and vice versa. Parasitism rarely gets support from any political system.
4) The disadvantaged.
Yes, some people are massively disadvantaged in life. Resources, talents, energy, ability, beauty, speed, intelligence, etc., are all unevenly distributed across the human population and that is a description that we have to live with. Some people with talent never use it, some who are physically disable put the able bodied to shame; some people with great intelligence use it for immoral purposes (harming or exploiting others), while some with lesser intelligence serve their fellows well.
There are a minority who do require our assistance and, donning the humanist position, a lot of suffering is so unnecessary. Giving and charity (the word charity comes from the Latin caritas, meaning love) reflect our sociable nature: most people want to help those who struggle, but we can ask what better system enables us to help more effectively - one that is voluntary or one that is involuntary? Also, we can ask which economic system produces more resources for those more unfortunate or disabled?
In both cases, voluntary action and the market system work more effectively in helping people channel their charitable energies. Simply put, successful entrepreneurs, capitalists or the rich have more funds to donate than the poor. What causes poverty - nothing, being nothing, doing nothing, serving nobody; what causes poverty is easy to grasp, but we are not taught what causes wealth, which leaves most critics of capitalism creating a basic Robin Hood morality that other people's wealth is there for the taking so it may be politicall distributed. If we are to bring more people out of poverty, we need to encourage wealth creation rather than penalise the wealth creators.
Capitalism does not see the disadvantaged as a drain on resources - people do. Families who look after the elderly, infirm, and disabled are certainly drained relative to families who are more able bodied. But even here, individual and family choice can make all the difference. Last week I sat opposite a family in a restaurant; they had a disabled young man of around 20, who needed feeding. The mother's face was pained with embarrassment and bitterness. From the little I know, her culture may have also played a role in her discomfort, but more importantly she was choosing every day, every second to be embarrassed of her son. It broke my heart looking at the family - her son was still a beautiful soul caught in a slightly broken body, but the mother's embarrassment was painful to see. On the other hand, I have known families who pour love on their disabled children and who work harder or more intelligently to provide them with a better life, 'sacrificing' their time and energy because their love is so strong.
Given that people will create their own values, we can again consider whether government or family and community are in a better position to help the disadvantaged. Government systems create distortions, they are innately based on political decisions, they are far removed from the situation of individuals and local communities. An old phrase, "charity begins at home" is perhaps a little overlooked today: it begins at home because that is where love is found, and it is also where community action can be most beneficial and relevant.
4) Rich and Poor
As for the gap between the rich and the poor - it will grow when the elite connect to the banking systems to suck resources from the productive sectors to their own pockets. In other words, the more politicised our economic systems become, the more unequal resources become distributed. People point to the inequality in the US, forgetting that in the past eighty years or so, the US has become an incredibly regulated system in which markets are directly or indirectly distorted by state action - never mind the fact that the central bank and the major banks rule the economy, and these, we know, are not free market institutions. Although the US is far removed from the centralized system of a totalitarian system, it has moved much towards a fascist model that Mussolini would have recognized. A political elite (government and corporate based) has systematically enriched itself while the middle class in the US has been drained; the poorer income groups have been systematically reduced to a dependency on government hand outs that all but effects a dark political revolution, the kind that destroyed Rome and every other polity with grand designs for games and bread for the poor.
But when societies are open and recognize (negative) rights, and when people are keen on improving their lot and can do so without being punished, then the gap between rich and poor, while it may still exist, is dynamic rather than static. A snapshot of income inequality does not describe whether poor people can move into riches, and rich people into poverty; simple statistics do not explore the individual story. On the other hand, longer term qualitative and quantitative studies of individuals and families can give an insight into the social and commerical dynamics of life. Most commentators agree that in the US, the middle class real earnings and wealth has stagnated in the past two decades or so, the time when the US government has become more interventionist and indeed more aggressive towards other countries and their economies.
Nonetheless, when we review the past two hundred years in which capitalism and commerce have mainly flourished, it is undeniable that the poor have become relatively less numerous and have gained access to goods and services that were barely available to the rich, or non-existent, in the past. Take a good look at what the productive family or individual has available today compared to forty years ago even: heating, two cars, mobile phones, iPads, holidays abroad...Then look at the services available for the disabled - provided by entrepreneurs, from hearing aids to motor scooters, ramps, showers, lifts, artificial limbs, and such advances in medical and especially surgical technologies (the product of commercial investment, even if bought by government run services) that have transformed people's lives.
We could also review the environmental sector. It has undeniably been distorted by government action, inaction, subsidy, incompetence, and political lobbying, but when the government ran the energy sector in the UK (or any country), it was characterized by a heavy dependency (and monopoly) on coal and oil - unions and the government battled between them while customers were poorly serviced with an expensive and unreliable service; strikes were common, pollution usual. When the energy market was freed up, the market system provided alternatives - hot water panels, solar panels, LED lighting, ground source energy, insulation, recyclable batteries...Electric cars are now gaining in popularity, and GPS systems enable people to plan their routes effectively and even to keep abreast of live traffic conditions to avoid queues and incidents.
5) Brief summary
The market works and has always worked to serve others better than politically produced and distributed services. When we don't serve in the market, we don't earn, when we don't earn, we can't do what we want nor help others who can't earn (disabled, children, old folk, the ill...). On the other hand, when we put more resources through political channels we create distortions and frustrations - rarely do we see entrepreneurs go on strike and march in city centres (they just quietly pack up and offer their services to humanity elsewhere), instead we see public sector workers and those affected by government distributed goods and services such as health, policing, and education.
But at the core of every market is a person. Markets are just made up of you and I making decisions on what to invest in, what to purchase, as well as what not to invest in and what not to purchase. Our actions reflect our beliefs about ourselves, and, as we know, our beliefs can often be crazy and ineffectual, non-adaptive or emotional (chocolate!!) - but we stand, everyday, responsible for the past choices we have made and for the new futures that we can create in our financial and professional selves. Only we can make decisions and choose our paths - and in turn, we are fully accountable for those actions. Many people don't like being responsible, but we are, and that's a fact. Integrity - that implies being principled and being true to ourselves, which in turn means accepting who we are, what we have, what we can do about it, accepting the freedom that we possess to err and learn, and the results that follow us with humility and intelligence. We we deny our innate humanity - our freedom - we shift to blame others and to demand of others that they provide for us, that is, we reject integrity for dependency and irresponsibility.
Freedom can be read as either moral nor immoral, it merely reflects our condition. Markets in turn are a mere application of that freedom. Assuredly though, when we choose freely rather than under duress or as a servant to the state, we are in a better position to develop ourselves and serve others and hence become people of integrity.
I hope that has covered my friend's essential concerns - they are concerns that many have of capitalism and where we currently stand.
Alexander Moseley, PhD
Editor, econcircle.co and the Economics Circle digital magazine on itunes for students of economics and business: