How Serious Is the Crash? Does the Economic System Need Minor Reforms or a Massive Overhaul?
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The current collapse of the global economy puts before us a critical question: Is the current economic system fundamentally sound, needing only minor correctives, or has it reached its limits, requiring fundamental rethinking? It is my contention that the unconstrained free-market ideology imposed on American economic thinking for the last thirty-five years has been a hijacking of the evolutionary development of capitalism that could otherwise offer us a just, sustainable economics.
The word “economics” comes from two Greek words, oikos or “house” and nomos, “one who manages,” so etymologically economics has a broad meaning, something like “care for the household.” If the purpose of our economy is to care for our common household, what are the values that should guide our innovation? I suggest that adequate care for the national household must provide at a minimum:
• a job for everyone who wants one on which one can support a family
• good education for each of our children
• adequate universal health care
• basic security for old age or in the event of unemployment or illness, and
• environmental sustainability.
A Brief History of Capitalism
American capitalism as it evolved over our history was well on its way to realizing such a vision. To understand the evolution of market economics, the forced detour of the last generation, and how we might get back on track, a short historical tour of capitalism is helpful.
Before the science of the free market was understood, economists of the time conceived of the world’s essential economic problem as scarcity: There wasn’t enough food, enough shelter, enough transportation, or enough education to divide among the world’s population and have everyone get an adequate amount. (Yes, even then, distribution of the resources that did exist was probably a more important problem, but scarcity became the dominant issue for economists.)
In 1776, Adam Smith, the prophet and champion of capitalism, published The Wealth of Nations in which he laid out the fundamental principles of economic competition within a “free market” to maximize efficiency as follows.
1. The economic system works best if each person pursues his or her own self-interest, ie, the greatest profit.
2. The profit motive drives economics. The only basis for making economic decisions should be what brings the greatest monetary profit.
3. In order to make economic decisions, everything must have a price. Money provides the measuring rod of economic value.
4. Decisions about whom to produce things for are determined by supply and demand, by income relative to others. Private wealth determines the distribution of goods and services.
5. Wealth is primarily private property that, within certain legal limits, one can do with as one will.
Smith recognized that from a traditional moral point of view, these assumptions were suspect, but he believed that the free market would automatically transform self-interest into the greatest good for the greatest number of people, “as if by an invisible hand.” And he was certainly correct that capitalism would become an extraordinary engine of economic growth. It was, and remains, simply the most efficient system yet implemented for creating wealth; given that the most important economic problem of the time was scarcity, capitalism did appear to live up to its promise of the greatest good for the greatest number, radically increasing the average material standard of living—even, it has been argued, for the poor. Since the end of the Second World War and especially since the collapse of Soviet Union communism beginning in 1985, capitalism has had no serious challengers. English Prime Minister Margaret Thatcher famously declared, “There is no alternative.”
Why has it been so effective? I would underline four general reasons.
• Following Smith’s first principle, capitalism liberates from moral opprobrium one of the most powerful human drives: self-interest. Working for one’s own economic benefit creates a powerful incentive to work hard over the long term. While community solidarity or altruism can evoke great bursts of energy, the historical record is not kind to such experiments on a large scale or over the long run. Like it or not, self-interest is a powerful motivator.
• Following Smith’s second and third principles, capitalism’s price mechanism is an extraordinarily efficient information management system that organizes essentially infinite amounts of data for straightforward decision making. Any economic system requires many decisions in each firm that must take into account similar decisions in many other firms: Which firm should get what supplies? What should workers get in return for their labor? When should a firm expand? When should it take on new technology? Who should get the products? Looked at as an entire system, those billions of individual decisions become an unbelievably complex and interwoven web that overwhelms, for instance, a large centrally planned economy. But capitalism’s price mechanism organizes this information overload in detail and then farms out the decisions to millions of individual actors, who need ultimately heed only one variable: their own self-interest. Capitalism simplifies and then decentralizes decision making.
• Capitalism has been so productive because for the last several hundred years the global economic system has had available to it natural resources that were, for practical purposes, inexhaustible. Capitalism stimulated the technological capacity to utilize those resources while there was only limited recognition that they were, in fact, limited and non-renewable. In this environment of abundant, vastly underpriced resources, capitalism’s efficiency naturally flourished. Capitalism’s extraordinary productivity, for instance, has depended upon the extraction of the limited resources of oil, natural gas, and coal unhampered by ecological constraints. That unique era in human history of “unlimited” natural resources is now over, but that does not change the extraordinary capacity of capitalism over the past several hundred years.