Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

20 October 2011

Capitalism Isn’t Broken; Wall Street Is

Now that the WSJ has succumbed to Rupert Murdoch’s plunder and lost all pretense to journalistic independence and quality, Bloomberg.com is the new apostle of capitalism. Today, it published a short piece under the provocative headline “Protests Show Capitalism is ‘Nearly Broken’.”

Of course that wasn’t an editorial. Bloomberg.com is as much committed to capitalism and Wall Street as the WSJ; it’s just more intelligent and objective about it. The headline was a quote from a capitalist investor, a refugee from eighteen years with Goldman Sachs, who now invests in forward-looking stuff like clean energy and environmental protection.

But the very idea that the new apostle of capitalism could publish such a headline is a sign of our times. Like the inevitable loonies wearing nothing but barrels and signboards proclaiming “The End is Near,” there are always bizarre theories in tough times. Now is no different.

The problem, of course, is theory itself. Everyone has a theory, AKA ideology, as to how the world works. For most of the last century, large parts of the world subscribed to variants of Marxism. Two huge societies―the Soviet Union and pre-Deng-Xiaoping China―tried Marxism for decades. They accomplished nothing but grossly retarding their national progress and making their people miserable. In the 1970s, China abandoned Communism for heavily regulated capitalism and took off like a rocket. Russia and its people are still suffering because their leaders can’t figure out what they want to do.

Today, the US and its fellow travelers have an opposing theory. “Government is the problem, not the solution.” If we just got rid of government and went back to nineteenth-century, brutal, unregulated, laissez faire capitalism, we’d be fine, they say.

But these people don’t know history and can’t predict consequences. If we went back to the nineteenth century with our population and far more massive industry today, we’d burn out our people and their children with massive exploitation of both (and probably spawn a bloody revolution), and we’d burn out our planet with massive environmental spoliation even quicker.

The problem, as I said, is theory. If we just junked theory and looked at actual practice, we’d be a lot smarter.

Marxism had two big, honest trials in the last century. Those experiments took seventy and nearly forty years, respectively. They were run by huge, authoritarian societies whose every level of leadership was totally committed to Marxism, which was taught in every school.

Those trials failed. Don’t ask the rest of the world, which might be biased. Look at those societies themselves. The Soviet Union is no more. Russia and China are now capitalist. So what does that tell you about the effectiveness of Marxism? Do you even have to ask?

Ever since the demise of monarchy and the Western Enlightenment brought real science and free markets to humanity, capitalist societies have beat their competitors hands down. First it was Britain and its colonies in the nineteenth century. Then it was we Americans in the twentieth. And today it’s China and India, both of which are enthusiastic proponents of regulated capitalism, despite the anachronistic and incongruous name of China’s ruling party.

So forget theory. What does experience, that is, history, tell us about capitalism? It tells us it’s the most successful and powerful economic system that we humans have yet devised. In contrast, Marxism is an utter failure. That result is unsurprising, for Marx and Engels were neither modern quantitative scientists nor even second-rank political thinkers. They were mere creative writers reacting to the evils of the nineteenth-century capitalism, which was all they knew.

But closet Marxists who keep pecking away at every stumble of capitalism are not the only short-sighted ones. A lot of people who style themselves “capitalists” are just as stupid and rigid. “If capitalists do it,” they think, “it must be right.”

Wrong. The mere fact that so-called “capitalists” do something doesn’t make it workable, right or proper. It doesn’t even make it capitalism.

And so we had the specter of bankers making millions of loans to people they knew (or ought to have known) couldn’t repay them. And then we had them stick their palms out to government, which they had maligned for thirty years as “the problem , not the solution,” to repay the losses their own greed and stupidity had caused.

That’s not capitalism. It’s welfare―welfare for the rich. And Wall Street got away with it because, in an era that disparaged and ridiculed government, Wall Street had slowly and secretly collected virtually all civilian power, at least here at home.

There is no doubt that the nation―ours―that has styled itself the chief exponent of global capitalism is now in steep decline. But that’s not due to capitalism. It’s due first of all to our financial sector, which has gone from capitalism to socialism for the rich without attracting much notice. And it’s secondly due to our political and business leaders, who made capitalism into a religion, with dogma replacing intelligent pragmatism.

So what’s the answer? For God’s sake it’s not more theory, thank you very much! It’s looking at experience, including history, and learning from it. The right wing wants us to learn (over and over again!) from the abject failure of Marxism but adamantly persists in refusing to learn from the worst stumbles of capitalism.

About a century ago, our economy tanked and took most of the world’s economies with it because our bankers and financiers, i.e., Wall Street, got out of control. It took about two decades, massive government regulation and human history’s greatest war to get things back in balance.

Recently, the same thing happened all over again. With the postwar economy humming smoothly, we relaxed our regulations and let Wall Street get out of control again. The Crash of 2008 followed, as night the day.

Then we compounded our error by bailing out the culprits, rather than their innocent victims. And now we find, mirabile dictu, that there’s no more money to bail anyone else out, including underwater mortgagors. So the global economy is slowly sinking in a mire of its own making.

Even China can’t help much, although it has its own bankers pretty much under control. It’s still a distant second in economic size. And since it has yet to let its renminbi float, it’s still not fully integrated with the global economy. It’s a good flywheel, but it’s not yet powerful enough or linked up enough with the global economic engine to balance things by itself.

So what should we do? The left―or at least the theorists among them―wants to junk capitalism because the financial welfare queens are abusing it. The right wants to make capitalism more “pure,” i.e., to jettison all the intelligent regulation that made it work so well during the last century. They’re kind of like the people who want to go back to coal, a nineteenth-century fuel that’s the dirtiest known to mankind, to make our industry run. Indeed, many of the economic troglodytes and the energy troglodytes are the very same people!

But we don’t need more theory or more fundamental revolutions. We know that capitalism is the best system we humans have yet discovered for running economies. We know it mirrors natural human evolutionary incentives to work hard for oneself, one’s family, one’s legacy (see, e.g., Steve Jobs) and (sometimes) one’s community. We know it works best when strong government regulation weeds out the worst of the stupidity that comes from unbridled and inappropriately rewarded greed. And we know full well who, at this particular moment in history, are the chief exponents and culprits of the stupidity that arises from unbridled and inappropriately rewarded greed.

So we don’t need to kill the goose that laid the golden egg, namely capitalism. We certainly don’t need to kill any of the excellent ABC . . . companies like Apple, Boeing, Caterpillar, Disney, Exxon-Mobil, Ford, Google, etc., which make all the modern marvels that enrich our lives. And we don’t need to try Marxism, which the two societies that tried it fairly have abandoned of their own volition as a complete failure.

What we do need to do is stop giving welfare to the people who secretly rule us and call themselves capitalists but are not. We need to stop coddling them, send the worst to prison, and make the others work as hard for their living as the rest of us do. In short, we need to bring Wall Street to heel.

That’s why the name of the movement is Occupy Wall Street, not “Occupy Apple, Boeing, etc.,” and certainly not “Occupy Silicon Valley, Route 128, Silicon Gulch, or Biotech Alley.” We need our industrial capitalists pretty much just as they are, maybe a little wiser. (In particular, they could benefit from a little less lemming-like class solidarity with financier-welfare recipients, who are slowly starving their businesses by depriving them of customers.) And we need to bring our rogue bankers and financiers back into the market discipline of capitalism. That’s why the name of the movement and its target are precisely correct.

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  • At Wednesday, August 21, 2013 at 2:37:00 PM EDT, Blogger George Carty said…

    Is there any real evidence that Marxism doesn't work? To me, the failures of the Soviet Union and of Maoism merely suggest that Leninism doesn't work.

    Marx expected that it would take centuries for socialism to replace capitalism, just as when capitalism replaced feudalism. And he never expected the first Marxist regime to take power in a country as backward as Russia!

    Lenin took a gamble (prompted by the way in which the Tsarist regime had been utterly discredited by defeat in WWI) and launched his revolution in the hope that socialists would also seize control in the rest of Europe and come to his aid, but the gamble didn't pay off.

    Do you believe that Lenin was right? Not on the desirability of a totalitarian state ruling in the name of the workers of course, but on the belief that a socialist society cannot evolve naturally, but only be brought into being by the diktat of a clique of professional revolutionaries?

  • At Thursday, August 22, 2013 at 10:34:00 AM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    Dear George,

    There is real evidence that Marxism doesn’t work. In honest trials over decades, it destroyed the economies of two great powers, Russia and China. And the one (China) that abandoned it quicker—after about three decades, rather than about seven—has left the other (Russia) in the dust. These vast human tragedies are the closest things to decisive economic experiments in human history.

    Your attempt to distinguish “Leninism” fails because force and coercion are essential components of putting Marxism into practice in the real world. Marxism doesn’t work because people are individual organisms and therefore are fundamentally selfish.

    While cooperation and empathy are our chief evolutionary advantages over other animals, they are not hard-wired in, as in the cases of bees and ants. Individual striving is a big part of our biological evolution. That’s why we compete for mates, jobs, places in universities, money and prestige.

    Cooperation is more a part of our social evolution, which proceeds much faster than biological evolution but often goes off track. (See, e.g., the twentieth century.) We have some weak biological triggers for cooperation, but we have to work hard at it.

    You can see all this happening in China today. It purports to be Communist, but its economic system is really authoritarian capitalism. It is probably the most authoritarian major power in the world today. (Russia tries, but is much less strict and disciplined.)

    Yet China is also the most corrupt major power in the world today, especially at the regional and local levels. Isn’t that a paradox? How can such widespread and debilitating corruption exist in the most authoritarian major power on Earth, ruled (in theory) by “party discipline”?

    The answer is that people don’t live by rules or orders, or by economic theory made up (in whole cloth) by armchair, solipsistic thinkers like Marx and Engels. They live by self-interest. They do what they think they need to do for themselves and their families, and they skirt, bend, or break whatever rules get in the way. That’s human nature. (The ancient Chinese understood this truth. They had a saying: “Heaven is very high, and the Emperor is far away.”

    Marxism failed because it was a made-up, abstract theory, not science. Modern economics, however “dismal” it may be, is real science. It takes people as they are, not as some intellectual sitting in his ivory tower thinks they ought to be. And it studies their behavior honestly and without prejudice, in order to create rules and institutions that better their condition, without coercion.

    This is not to say that capitalism is necessarily the height of human social evolution, especially as practiced today. The biggest error of thinking on both right and left today is the “either, or” duality.

    Marxism and capitalism are not two antipodes. They are two small dots on the enormous data plot of human history and real human societies. The seem even smaller and less significant when placed on a plot of human potential.

    If you take John Stuart Mill’s utilitarian criterion—the greatest good for the greatest number—the two most successful socioeconomic systems in human history were the American system of strongly regulated capitalism that arose out of the Great Depression, FDR’s New Deal and World War II and the similar British system of bureaucratic capitalism in the later stages of the British Empire.

    No two systems ever raised so many people out of poverty so quickly. That’s why Anglo-American culture, including capitalism, dominates the globe today. That’s also why those two systems, with all their warts, are still raising hundreds of millions out of poverty in developing nations today.

    (Reply continues below)

  • At Thursday, August 22, 2013 at 10:40:00 AM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    (reply to George Carty continues)

    In the social and economic spheres, Marx and Engels were like the old Greek “natural philosophers.” What they though they “knew” came from inside their own skulls. Their observations, if any, were impressionistic, not precise or quantitative. They of course did no experiments. (Modern economists do, albeit on a small scale.)

    Real human progress began about 400 years ago, when Galileo Galilei challenged the authority of the Church and of the old Greek philosophers and began the tradition of real science. Most of us now believe that conclusions about anything in the real world, including people, have to be derived from precise and quantitative observations of reality, not from solipsistic abstract thinking.

    In several of your early comments, you revealed a propensity to “fall in love” with nineteenth-century abstract thinkers. While these people were good writers, they were nowhere near scientists. They didn't base their views on accurate observation of what people really are and how they actually evolve socially. (Adam Smith, who founded modern economics, did.)

    Marxism is in the dustbin of history because it was like that. Some day, capitalism may be also. Almost certainly, the type of muscular, extreme capitalism espoused by the American right wing today will be.

    But what replaces both Marxism and extreme capitalism will not be a simplistic system devised by some abstract thinker, no matter how smart. It will be a system that arises naturally, through the continuing process of human social evolution, with assistance from real science, not some nonsense invented out of whole cloth by two creative writers around the turn of the twentieth century.

    So in answer to your last question (as you phrase it) Lenin was both right and wrong. He was right that a fully socialist society cannot evolve naturally, because it contradicts human biological evolution. He was wrong that it can be “brought into being by the diktat of a clique of professional revolutionaries." The history of the twentieth century proves conclusively that any attempt to do so will only produce vast conflict, bloodshed and human misery, on a scale exceeded only by the most horrible war in human history.

    We did those experiments in the last century. You should be thankful you live in this much more peaceful one and not be eager to repeat them. If we did that today, with widespread nuclear weapons, we might very well self-extinguish our species, as we almost did in October 1962.




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