Self Interest without restraint destroys capitalism

18 Jan 2012    

When I logged onto the FT web site this morning I was horrified to find an article by the autistic journalist John Kay saying "Under the market economy greed is good!". But this afternoon Jeffery Sacks at the FT published what I think is the most powerful article about capitalism that I have seen in the Western press to date. Forgive my violation of copyright, I am going to reproduce the entire article below - for those of us who love justice this is a groundbreaking event and extenuating circumstances apply. So here it is:

Self-interest, without morals, leads to capitalism’s self-destruction
Jeffery Sacks, Financial Times, 18 Jan 2012

Capitalism earns its keep through Adam Smith’s famous paradox of the invisible hand: self-interest, operating through markets, leads to the common good. Yet the paradox of self-interest breaks down when stretched too far. This is our global predicament today.

Self-interest promotes competition, the division of labor, and innovation, but fails to support the common good in four ways.

First, self-interest fails when market competition breaks down. For example, natural monopolies in infrastructure, economy of scale monopolies, monopoly by environmental factors, monopoly by scientific discovery, or information asymmetries preventing consumers making rational purchasing decisions.

Second, self-interest can easily turn into socially unacceptable inequality. Imagine a scientist discovering a cure for cancer. He should be well rewarded, but not allowed to charge the market price.

Third, self-interest leaves future generations at the mercy of today’s generation. Environmental un-sustainability is a gross inequality of wellbeing across generations rather than across social classes.

Fourth, self-interest leaves our fragile mental apparatus, evolved for the African savannah, at the mercy of Madison Avenue. Today there is evidence of both hopelessly addictive consumerism and brain numbing cultural forces.

For these reasons, successful capitalism has never rested on a moral base of self-interest, but rather on the practice of self-interest embedded within a larger set of values.

Max Weber explained that Europe’s original modern capitalists, the Calvinists, pursued profits in the search for proof of salvation. They saved ascetically to accumulate wealth to prove God’s grace, not to sate their consumer appetites. Keynes noted the same regarding the 19th Century British economy. As he put it, the economic machine held together because those who ostensibly owned the cake only pretended to consume it. American capitalism, more secular and less patriotic, created its own vintage of social restraint. The greatest capitalist of the second half of the 19th century, Andrew Carnegie developed his Gospel of Wealth, according to which the great wealth of the entrepreneur was not personal property but a trust for society.

Our 21st century predicament is that these moral strictures have mostly vanished. Global capitalism has mostly shed its moral constraints. Self-interest is no longer embedded in higher values. Consumerism is the world’s secular religion, more than science, humanism, or any other -ism. “Greed is good” is not only the mantra of a 1980s Hollywood moral fable: it is the operating principle of the top tiers of world society.

Capitalism is at risk of failing today not because we are running out of innovations, or because markets are failing to inspire private actions, but because we’ve lost sight of the operational failings of unfettered gluttony. We are neglecting a torrent of market failures in infrastructure, finance, and the environment. We are turning our backs on a grotesque worsening of income inequality and willfully continuing to slash social benefits. We are destroying the Earth as if we are indeed the last generation. We are poisoning our own appetites through addictions to luxury goods, cosmetic surgery, fats and sugar, TV watching, and other self-medications of choice or persuasion. And our political system is becoming increasingly cowardly confused and pernicious.

Unless we regain our moral bearings our scope for collective action will be lost. The day may soon arrive when the political system implodes, markets have utterly devastated the environment, and gluttony relentlessly commands our personal choices. Then we will have arrived at the ultimate absurdity: the self-destruction of civilization at the very moment when technological know-how finally made paradise achievable.

I replied:

Thank you Mr Sacks, it's a very powerful and well written article that reaches deep into the philosophical heart of this socioeconomic crisis. Indeed, it's the best article I have seen in the FT series so far, and it's one up on the WSJ and other newspapers. I am thrilled to see the concept of "justice" hurled into the centre of the public debate so effectively and forcefully. Until we are prepared to grasp the vital reality you have here outlined - resisted by those on both the right and left of our political system - we can not begin to solve our existential challenges. You have a big fight on your hands to turn your readers around, but it's the most important fight in the world. This is what good journalism is all about, not pandering to readers, but changing the world.

What should a man such as yourself who has seen the light be thinking next? What is the next stage? Our legal framework is not designed to cope with self interest at the corporate level. Therefore we need to realise that some of the Washington Consensus non-interventionist dogma is inappropriate, and policymakers need to start thinking out of the box and turning a blind eye to old laws from time to time, and they need to concentrate on cajoling and arm twisting private sector entities to ensure they are acting in the public interest and not sitting back and raking in excessive profits. Human rights are fine for little people, but they don't apply to corporations and billionaires - and that should be the new motto of government.

Lets take a concrete example. Look at the difference between an iPad and Microsoft Windows. The iPad is a new invention, still fresh and ground breaking, still evolving and loved by a lot of people. Apple deserves the love of US government, but Microsoft is sitting on a shallow and populist and hated old monopoly. Over the next three years Microsoft will force the almost 50% of users who are hanging onto Windows XP to upgrade to a product they don't want at great cost. At minimum Microsoft should be forced to reissue Windows XP at a low price, it should be prevented from taking money out of its operating system division and tossing it into loss making projects, it should be bullied into building better products, and Steve Ballmer should be made to resign. Microsoft is a prime example of corporate malevolence and if the US government is serious about ethics and justice and social good it should make an example of Microsoft, it should punish it severely. Ideally Microsoft should be nationalised and Steve Ballmer stripped of his enormous wealth. Coming down on Microsoft would send shivers through the rest of the equity market, and companies like Apple would suddenly think about spending that offshore cash horde, perhaps building a few US assembly lines, and making sure their domestic profit margins don't get too exuberant. Obama could deliver a huge short term boost to the US economy and re-awaken all the political fire he once had in a shock and awe nationalization of Microsoft- that's not a just a big bazooka, that's thermonuclear war on corporate greed and incompetence.

Mr Sacks, ask yourself what Jesus or Socrates would do to Microsoft, if we were lucky enough to have Jesus or Socrates as our President instead of Mr Obama? Why am I labouring this example? Because the way to embrace a whole new paradigm change is to pick out some obvious examples and start by working on them. Don't let yourself be transfixed by the enormity of the problem and the absence of a coherent vision of the future, just begin by pragmatically taking on some of the bad guys and allow yourself to find the big vision as you go along. This isn't the time for long term vision of evil, let alone long term vision of righteousness, this is the time to focus on the short term battle and wipe out the biggest baddest guys standing right in front of your nose. It will take at least three years to acclimatize to new light level, think about short term war for now. What is the European Microsoft? The banks of course, nationalize the lot of them!

Zeus, the fire breathing god who condemns the hated to hell, would approve. I think up in the heavens tonight, the gods are a little happier. It's potentially a watershed article, but we shall see, the elite are famous for their good words, but what matters to both men and gods is their deeds.