How to Fix Capitalism
hbr.org
hbr.org
The normal ding on Porter seems to be that he's no longer relevant.
The above article seems to claim that we can fix capitalism by adding socialism to capitalism.
socialism != capitalism
They are mutually exclusive for the most part.
First it is important to note that we do not live in a pure capitalist system. I would estimate it as 25% capitalism, 25% socialism, and 50% kleptocracy (special interests / corruption).
To blame capitalism for all the problems is akin to taking an Olympic gold metalist, tying him up in iron chains, throwing him in a pool and then blaming swimming as the cause of drowning.
Capitalism is by far the most efficient system for increasing the wealth of an ENTIRE society. History has shown that societies prosper in direct proportion to how much they embrace capitalism.
We are currently moving from capitalism towards socialism and kleptocracy (think klepto as in stealing).
The common complaints against capitalism are not actually complaints against capitalism; they are usually against corporatism (regulation that favors corporations) or kleptocracy. Why do corporations have tax breaks employees can't take even though their situations are similar?
Bank bailouts were not a failure of capitalism. Capitalism would say that no company can get money for free. All money must be traded from other individuals wishing to purchase from you. The fact that the banks knew they were most likely to be bailed out created a moral hazard that encouraged them to take risks. "Privitized gains, socialized losses". Under pure capitalism a bank would not take such foolish action because they would know they would have a high probability of going out of business.
Monopolies are often created by government policy, not by free markets. For instance, why do lots of communities only have 1 ISP even though there are competitors that would love to do business there? It is because the city grants a license to that one company for a long period of time. DNS registration was granted a monopoly by the government. Why can't we have other DNS authorities? Surely the vast majority of people on here can still make a profit and charge cheaper for domain names. Why does GoDaddy have to pay a fee to another company that doesn't actually provide any real value?
In capitalism, if I was able to invest at 30% each year I could open my own bank and give out 10% in interest to all my depositors. Instead we are stuck with abusive banks.
The only semi-rational (emphasis on semi) argument that I have heard against capitalism is that those with capital have a higher chance of getting more capital and that this would lead to a concentration of power. It may in fact do this, but the moment the power is abused, others with capital will combine their resources to take the place of the exploitative company, or there will be revolts and people will boycott that company.
The system is set up so that businesses are fettered with regulations such as minimum wage and hiring ethnically diverse people (as opposed to the most qualified). Under global capitalism, the companies in countries that do not have those laws will drive the US companies out of business. Businesses that can will be forced to move to those countries if they wish to survive. It is no shock to me that unemployment is on the rise.
The sad thing, however, is that the major premise of his philosophy will prove more damaging to capitalism (which he so passionately professes to defend) than most socialist ideas would. That premise is the notion that capitalism, or whatever remains from it in the mixed world economy of today, is fundamentally broken. That even those businessmen who thrive (or survive) by their own ability and productive effort are fundamentally guilty of looking after their own interest. They are guilty by popular opinion and have to find a way to exonerate themselves.
I urge all HN readers who have read the article carefully and understand that there is something wrong about it, to also read Ayn Rand's "Capitalism: The Unknown Ideal" (http://www.amazon.com/Capitalism-Ideal-Ayn-Rand/dp/045114795...) and judge for themselves dispassionately. Just because I happened to be reading the book today, I quote a couple of paragraphs, with which I agree:
"I [Ayn Rand] want to stress that our [objectivists'] primary interest is not politics or economics as such, but "man's nature and man's relationship to existence" - and that we advocate capitalism because it is the only system geared to the life of a rational being. In this respect, there is fundamental difference between our approach and that of capitalism's classical defenders and modern apologists. With very few exceptions, they are responsible - by default - for capitalism's destruction. The default consisted of their inability to fight the battle where it had to be fought: on moral-philosophical grounds."
"There are the businessmen who spend fortunes on ideological ads, allegedly in defense of capitalism, which assure the public that all but a tiny fraction of an industry's income goes to labor (wages), to government (taxes), etc., with these shares represented as big chunks in full-color process, and, lost among them, an apologetic little sliver is marked "2 1/2 percent" and labelled "profits."
"There is the display of charts and models, in a hallway of the New York Stock Exchange, presenting the achievements of free enterprise and captioned: "The People's Capitalism."
"Since none of these attempts can succeed in disguising the nature of capitalism nor in degrading it to the level of an altruistic stockyard, their sole result is to convince the public that capitalism hides some evil secret which imbues its alleged defenders with such an aura of abject guilt and hypocrisy. But, in fact, the secret they are struggling to hide is capitalism's essence and greatest virtue: that it is a system based on the recognition of individual rights - on man's rights to exist (and to work) for his own sake - not for the altruistic view of man as a sacrificial animal. Thus it is capitalism's virtue that the public is urged - by such defenders - to regard as evil, and it is altruism that all their efforts help to reinforce and reaffirm as the standard of the good."
Right now, IMO at least, the issue is that every time we have a recession, it takes longer and longer for "average folks" to be able to get work again. Last time, it wasn't until right before the bottom fell out again. This time, the jobs might never come back.
What do those people do now? That's what needs fixing in the current version of capitalism, IMO.
I get giddy thinking about being persecuted for predatory pricing, gouging, and colluding.
Never mind those anitrust people often persecute smaller companies for bigger win, ignoring the big guys.
Oh yeah, let ignore copyright and patent laws, which creates monopolies. It's for the "benefit of the public".
You want to fix capitalism? How about restoring the rule of law? Nobody get special privileges. Not the writers, the inventors, the big corporations, or small corporations.
You have James Watt extending his patent 20 years longer, delaying the industrial revolution quite bit. Then you have American writers fighting for copyright recognition of British author just so they stop British competition.
The manipulation and abuse of law not only took place in modern time but throughout the existence of IP history. Not only that, you have scant evidence to prove that IP are beneficial.
Or is that ridiculously and obviously stupid? Maybe it turns out that in order to do things right, you have to get into the weeds on an issue by issue basis and not rely on one size fits all approaches. Hands off economics are exactly the right thing to do most of the time, except when they aren't.
Also, 1929 in terms of government policy was totally different from now.
The key part of my statement was "consistent". Unclear direction creates uncertainty. The health care and tax legislation have created massive uncertainty. This is not good for recovery. This "lets take a new direction" approach played out in 1929 just as it is playing out today. In 1929 and forward there were many new approaches and many attempts at a "solution". All of these caused problems by changing the rules. Now, we will have more uncertainty because a new party controls the House. I don't see the rules stabilizing again for a while.
If disbanding the FCC is silly, then the absolute doesn't hold. That means we should evaluate on a case by case basis -- free markets are of course a good default position to deviate from depending on the exception, of course.
1929-1932 was most noteworthy for Hoover not trying a whole lot of new approaches. Then this FDR guy started, his whole thing was called "New Deal".
What?!? Where the heck does the "consistent set of rules" come from other than government? I have no real clue where your response comes from. As to you second 'point', look at the government changes and how long it took for business to recover.
Anti-trust regulations are unnecessary in a free economy, as inefficient monopolies by definition are vulnerable to competition, and efficient monopolies are already meeting their supply/demand ratio optimally.
Under the Antitrust laws, a man becomes a criminal from the moment he goes into business, no matter what he does. For instance, if he charges prices which some bureaucrats judge as too high, he can be prosecuted for monopoly or for a successful “intent to monopolize”; if he charges prices lower than those of his competitors, he can be prosecuted for “unfair competition” or “restraint of trade”; and if he charges the same prices as his competitors, he can be prosecuted for “collusion” or “conspiracy.”
The idea isn't a new one and can trace its roots back to Marx and probably beyond. Marx argued that the workers should own the means of production [1]. That's simply a different take on creating "shared value".
But this article, as you'd expect from Harvard, is high on naive ideals. For example:
Not all profit is equal...
The premise is that corporations have a social responsibility. I view this as being like the idea of keeping tigers as house pets. You can change the purpose of a tiger to be a domesticated animal but at some point that tiger is going to snap your neck because, hey, that's what tigers do.
Of course tigers aren't inherently bad. The point is that tigers are really not suited for the purpose you have in mind.
Trying to colour corporations with morality is I think much the same. Capitalism works because corporations are amoral entities that simply respond to their environment. Add warm water to dry yeast and it grows. Add salt and it dies.
You control the actions of corporations not by making them feel something. You control them by treating them as yeast and adding warm water, salt or whatever is required.
To put it another way: you control corporations by controlling their environment.
Unless you're a pure capitalist you will recognize that there is some place for government intervention and regulation, not only for the good of the people but for the good of the corporations themselves.
Antitrust for example came about because companies were too successful. You can get an algae bloom in a river. The algae will eventually die out but only after killing virtually everything in the river and then starving.
In England the road system was nationalized (many years ago). In the US, the railroads were.
The difficulty lies in deciding exactly how much intervention is required.
Our current woes I think boil down to one thing: there is a mismatch between the interests of people and corporations and the interests of the politicians who decide what the intervention is. Corporations and people have to deal with consequences for a very long time. Politicians are often only concerned about what happens between now and the next election.
Of the things broken with the current system at the top would be (IMHO) the financial system. By this I primarily mean the Federal Reserve, the IMF and the World Bank.
The IMF and the Federal Reserve now have a role where they are basically welfare for investment bankers. You have seen crisis after crisis in recent years that largely stem from financial institutions having almost no aversion to risk. Why? Because we've trained them that way. If they ever get in any serious trouble, don't worry, we'll bail you out!
Likewise the IMF/World Bank continue to throw money at developing nations because, basically, they can never lose that money. A country can't declare bankruptcy like a person or corporation can.
Initiatives like HIPC [2] are misguided. The country already can't pay. All you're doing is paying bank the organizations that never should've lent them money to begin with.
It should also be noted that some of these loans end up funding war, revolution and even genocide as well as funding the personal fortune of corrupt dictators.
Back to capitalism: capitalism has been the engine that in less than 200 years has turned us from a largely agrarian existence to computers and putting man on the Moon, while increasing the standard of living of billions of people to levels unprecedented in human history.
So when I read something like this, I think it's just the latest fad from Ivory Tower MBA academics who seek to justify their existence in a world that is largely coming to the conclusion that the MBA itself is a destructive fad.
[1]: http://en.wikipedia.org/wiki/Means_of_production#Marxist_ana...
[2]: http://en.wikipedia.org/wiki/Heavily_Indebted_Poor_Countries