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Does Capitalism Rest on a Mistake? July 9, 2009

Posted by Dwight and Lynn Furrow in Current Events, Dwight Furrow's Posts, Political Philosophy.
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Adam Smith famously provided the rationale for capitalism:

“It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantage.”

Each individual pursues her own self-interest. But the invisible hand of the market distributes wealth in such a way that in the end it serves the greatest good.

When each producer and consumer is allowed to buy and sell freely, the market will settle on prices that benefit the whole community. Producers trying to maximize their profit will adopt the most efficient methods of production, but will charge the lowest possible prices in order to undercut competitors, and investors will put their money in areas of the economy that are most urgently needed because increasing demand will increase their profit. Everybody wins.

Philosopher Jonathan Wolff has a nice explanation of why this doesn’t always work out.

But here comes the flaw. This is all very well when shopping for tonight’s dinner. If the butcher sells you rotten meat, you’ll go somewhere else tomorrow, if still alive. It is this that keeps the butcher honest. But suppose you are buying meat that won’t be supplied for 20 years? Still want to rely on the greed of the butcher? Thought not. By the time you have found out if he is cheating you, it will be too late to switch supplier. When there is a substantial time lag between purchase and consumption, as there is for pensions, savings schemes and sub-prime debt, the market loses its magic and the purchaser is vulnerable. Regulation might not be a bad idea after all.

Sound familiar? With all those exotic financial instruments peddled by banks and investment houses, there was no way to tell if the meat was rotten.

On the face of it, it is absurd to think that an economic model that explains transparent, short-term transactions between people who are familiar with each other could possibly apply to a global market of distant, opaque others engaged in long term transactions.

Modern capitalism appears to rest on a mistake.

 book-section-book-cover2 Dwight Furrow is author of

Reviving the Left: The Need to Restore Liberal Values in America

or Visit the Website: www.revivingliberalism.com

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Comments»

1. Huan - July 10, 2009

Woah, that’s simple yet somehow elusive. Never really thought of it like that before. I wonder how an economist would respond?

2. Moriae - July 11, 2009

There is really no mistake, only a failure to note what the appeals to self-interest entail. Greed is a heck of a motivator. Charity in this country would hardly exist if the givers weren’t enticed with “tax deductions.” Most of the serious fiscal problems we’ve encountered in the past year nationally are not due to the sudden appearance of people eager to swindle others—they are something of a constant. On the other hand, the numbers of people who like to think wealth is easy, because they don’t understand the role of patience and the hard work of investigating crucial issues before jumping into serious financial exposures, are at an all-time high. Bernard Madoff is a classic illustration. The fact that Mr. Madoff was able to swindle thousands of people out of billions of their own money is less a reflection on the character of Madoff than it is the credulity and venality of many people who should have known better. Being offered 10% or better return is a signal to even junior fiscal functionaries to avoid any further contact. The same would apply right now to offers of 5% interest on CD accounts—they are simply signs of the next banks that will close. That many people who have no excuse not to know better were taken for a ride is not Madoff’s problem, but a sign of the age. No SEC protections can be implemented to protect people from their own venality.

3. Huan - July 11, 2009

Blaming the victim makes sense to a degree, but it does take two to tangle. The bottom line is: What’s easier to fix, a world of stupid people, or a handful of overly greedy capitalists?

Huan - July 11, 2009

I meant tango. 🙂

4. Dwight Furrow - July 15, 2009

Moriae,

I quite agree with you about the cause of our financial problems. But that reinforces my point about capitalism resting on a mistake. The Madoff case is especially interesting because many of the people who were swindled were members of his family, friends, members of his synagogue, etc. The vigilance of customers isn’t sufficient to “keep the butcher honest” even when they are directly acquainted with the butcher. The idea that the market can be self-regulating or that it naturally tends toward conditions of justice is a fantasy.

As to whether regulators can protect people from their own venality– probably not. But it would be nice if they were only 1 step behind the swindlers instead of not being on the trail at all; and it surely would be a good thing if the regulators were not drinking the same kool-aid as the people they are regulating.

5. Xiao - August 4, 2009

But isn’t there a better alternative than simply adding new regulations, which may or may NOT work?

The mistake of capitalism is probably not obvious enough when we only think about butchers or speculators in the financial market. After all, a piece of rotten meat can’t cause me much more harm than a few days of sickness, and while speculators may have indirectly caused me to lose some income or some good job opportunities, this kind of result is not what they intended or foresaw. However, the real problem is much more than that. The dishonesty of a butcher and the greed of a speculator are just a tip of the iceberg.

What are the best careers in the US? To most people, doctor and lawyer must be on top of their lists, and the reason is money–being a doctor or a lawyer means a lot of money. But ask them the question: “Do you trust a doctor that chose to be a doctor just for the sake of money?” “Can you rely on a doctor that, instead of being concerned about your health, is thinking about how to make some extra dollars out of your suffering?” Certainly nobody would answer yes. But by accepting the assumption made by Adam Smith, one has also granted that a doctor who is only thinking about making money is also a doctor that one can trust–while he is promoting his own interests, he must be promoting the patient’s interests as well. Moreover, the implication of Smith’s argument is that, if somebody is not thinking about promoting his own interests, he must be wrong headed and cannot be trusted.

Even ethics of healthcare practitioners would only be a snapshot of the inevitable moral crisis if everyone only worried about how to make more money. This is an age of ever increasing specialization. At the time of Adam Smith, it was possible for one to have some good knowledge in every field. One could be a carpenter while still be able to distinguish fresh meat from rotten and to tell good tailorship from bad. Thus, when buying meat from a butcher or service from a tailor, he could make desicions based on plenty of information, and even if he visited the butcher only once a month and the tailor only once a year, his knowledge would keep him from falling into a too disadvantage position. Today, this is no longer possible. Even those at the top of the ivory tower have only a tiny share of the entire pool of human knowledge. While at the same time, we become more and more reliant on others to provide us with the necessities that we can’t possibly provide for ourselves. Thus, everywhere and every day, we count on other people’s expertise to survive and flourish, and thus, almost every time we buy goods or service from others, we face an asymmetry of information–sometimes small and sometimes quite large. Most of the time, we have no choice but to trust others to use their expertise to our interests. If our interests are also their interests as Smith asserts, fine, I can trust them if all they want is to promote their own interests. But what is there to assure that our interests is also their interests? If I don’t know how to tell good meat from bad and if my stomach doesn’t know either (suppose there is no verifiable result between the bad meat and my having a stomachache), what prevents the butcher from selling me bad meat? If I don’t know whether the doctor is treating my disease or deliberately causing more complications so that he can make more money from more expensive services, what prevents him from doing so? –How many people reading this post understand the decisions made by your doctors and can critically evaluate them?

This leads to the question of whether capitalism really promotes morality. It is first to be doubted whether it really promotes autonomy. While capitalism does offer far more choices than older socioeconomic forms, there is one important choice that the vast majority of people don’t have under capitalism: being part of the huge money making machine, they can’t choose not to serve the purpose of money. When an ordinary person, a wage earner, lives from paycheck to paycheck while probably also preparing his children for the same life path, does he have the choice not to do so? Probably not. To most people, this is the situation and there are no alternatives. Moveover, even those who are financially sound don’t have as many choices as we may think. If they opt out of the game, their wealth will certainly decline. In a society where success is measured in terms of wealth, such a decline is a mark of failure and is shameful and unacceptable. Now consider the question: is a person more likely to develop good morality in his work if he chooses to work than if he is forced to work? The answer is obvious. This suggests that a welfare state isn’t a bad idea–it enables people to choose to work, along with which not only will come good morality but also higher productivity.

The second question is: why is autonomy so important to morality? Indeed, moral worth depends on autonomy, and actions that are not free have no moral value. But in practice, why do we care so much about moral worth? Worth is accompanied with cost. To have autonomy, there must be alternative choices available. The implication is that, whenever a morally good choice is made, there has to be a morally bad alternative available, which is the inevitable cost. Otherwise, the good choice will be morally worthless. Indeed, when a person who grew up in a community full of crimes and negative stereotypes chooses to pursue good, his choice is much more valuable than one made by a person that grew up in a healthy community. Indeed, when a person chooses to tell the truth while he has the alternative to tell a lie, to work hard while he has the alternative to be lazy, to be kind while he has the alternative to be cruel, his choices are much more valuable that those made by people who have never thought about telling a lie, who have never tasted the pleasure of idleness, and who have never learned how to be cruel. But do we really care when a person is telling the truth whether it is because he has critically evaluated and rejected the choice of telling a lie, or because he never knows there is such a thing as dishonesty? Do we really care, if people around us are all good people, whether they have chosen to be good while bad alternatives are equally available, or because they never know how to be bad as a result of successful social conditioning? The questions are worth thinking about.


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