The morality of capitalism v. redistribution

Where to begin with the question "Is capitalism moral"? Let's start with the title. Kind of a loaded question. Anyway let's be precise. Pearlstein is really discussing political economy, i.e. how our laws and governance influence commerce and the general welfare. Pearlstein means to debate the role that government should play in the economy. 

To start, Pearlstein correctly notes that, "For most of the past 30 years, the world has been moving in the direction of markets," and yet increasingly over that same period we have "stagnant incomes, gaping inequality, a string of crippling financial crises and 20-somethings still living in their parents’ basements."

Thus Republicans have pivoted, Pearlstein says, to focusing on capitalism's moral superiority because they certainly can't make a prima facie case for capitalism's benefits. Unfortunately, Pearlstein takes their bait and tries to analyze, more or less objectively, which side -- the "free-market capitalists" or the "redistributionists" -- is indeed morally superior, and the flaws with each.

The truth, as with most things, is muddled and complicated.  But I want to lay down a few markers. First, very few liberals/progressives/Democrats insist on having this "moral" debate. Why? Because we liberals are outcome-based. By contrast, conservatives and free-marketeers believe that one's moral principles should determine the rules of the game, and if one's moral principles are sound, then ipso facto, the results will take care of themselves. More precisely, conservatives believe that economic results are morality-free; only our political economics must be morally sound.

Let's admit though that his whole debate has been predicated by recent shitty economic outcomes. For a liberal, a more appropriate question would be to ask: whose political economy is the most responsible for the shitty state of today's economy?  True liberals would be even more precise: what specific policies have led us to these terrible outcomes? Conservatives would obviously like to dodge this question, and instead talk in philosophical or moral abstractions, parables and anecdotes, because the facts -- the results -- of their 30 years of neo-liberal rule do not support the morality of their political economy.

Second marker: to quote Paul Rosenberg: "economics used to be called 'political economy', because the great classical economists never lost sight of the fact that economics was a thoroughly political activity, not something outside of the life of a political community." In other words, economics never, ever, ever happens in a political vacuum. Thus, the notion that, in some ideal country, the free-market capitalism of Adam Smith hums and churns along for the betterment of all, unfettered by and independent of government, is naive and silly. Government has a role to play, it sets the rules of the economic game, we all know that.  To what extent government is involved is a matter of degrees. 

Again, liberals believe that government's role should be evidence- or outcomes-based, i.e. tweaked according to the outcomes achieved, whereas conservatives believe that outcomes, like people, should take care of themselves. What's important for them is to set up a system of rigid, unchanging moral conditions under which people operate.

Third marker: noting the terrible results of recent deregulation, privatization-outsourcing and tax cutting is not the same as saying "capitalism is bad." Conservatives and perhaps Pearlstein would like to provoke us liberals into saying that. It's not necessary, or rather, it's an academic argument rather than a real one, since we have not had a "free-market" system for a very long time, if ever. Indeed the U.S. Government has been "meddling" in the economy for a very long time, just in different ways and to varying degrees. 

The recent political-economic bag is mixed: just as union membership has been plummeting, charter schools have been blooming, taxes on the One Percent were being cut, and regulations on Too Big To Fail banks were being torn down, so was USG spending on the military-industrial complex going through the roof (Afghanistan, Iraq, and the Department of Homeland Security apparatus), not to mention Dubya's tremendous addition to the Medicare entitlement -- altogether resulting in a 91 percent increase in our national debt from 2002-2009. 

To be sure, we also had the Great Recession from 2007-2009 that is almost entirely to blame for our persistently high unemployment and deficits since then. This begs the question: what political-economic philosophy was more responsible for the Great Recession? Because we wouldn't be having this discussion right now if it weren't for the Great Recession. You could skip all the junk I wrote above and below, and if you answer this one question correctly, then you are nearly at the truth....

But anyway, back to Pearlstein. He critiques liberals because "they have yet to articulate the moral principles with which to determine how far the evening-up [redistribution] should go -- not just with education but with child care, health care, nutrition, after-school and summer programs, training, and a host of other social services."  There are two big problems with where Pearlstein is going with this.

First, his critique is simply untrue. Liberals have laid out their moral principles, most eloquently in President Roosevelt's 1941 "Four Freedoms" speech that included the "freedom from want," and then in President Johnson's "Great Society" initiatives in the 1960s.  

In fact, our moral calculus is much easier to understand than conservatives'. We believe that, in the richest, most powerful nation in the history of the world, nobody should go hungry, uneducated or without health care. Furthermore, we believe that our nation's children, elderly and disabled deserve special care and protection, including additional food, medical and housing assistance. This is pretty easy to understand, and to verify. Can a child perform well in school relative to his peers? Does a person go hungry or malnourished? Does a child have a roof over his head? And so on. Depending on the answer, we have a moral obligation to do something. It couldn't be easier to understand.

Second problem: Pearlstein asks liberals to lay out: 1) our moral principles [check]; but also, unfairly, 2) a formula for government redistribution that is clear and will work forever and ever, amen. That's just childishly naive, I'm sorry. Pearlstein needs to get real. First, he ignores political reality that demands compromise. Nobody gets his way all the time, 100%. And let's just remind ourselves why this matters: if tomorrow President Obama would say that a "fair share" of taxes on the One Percent was, say, 30 percent, then this would be all anybody could talk about. Conservatives and their armies in think tanks, cable and talk radio would parse and mince it to death for weeks and months. When in fact it's all relative; and liberals don't care what the number is, as long as it generates sufficient revenues and ensures economic growth. (But historically, until the 1980s, the top marginal rate didn't fall below 70%).  At the end of his essay, Pearlstein admits as much:

Moral philosophers since Adam Smith have understood that free-market economies are not theoretical constructs -- they are embedded in different political, cultural and social contexts that significantly affect how they operate. If there can be no pure free market, then it follows that there cannot be only one neutral or morally correct distribution of market income.

Second, Pearlstein fails to acknowledge that liberals, unlike conservatives, think and act according to feedback loops: from problem/result --> intervention --> result/problem, and so on. Therefore, without observations of actual events, we cannot tell you what will be a fair and equitable taxation rate 5, 10 or 50 years from now, or a fair distribution of wealth. We won't even hazard a guess. 

Such tolerance for uncertainty drives doctrinaire conservatives to conniption. But that's a fundamental difference between us.  Therefore, a real liberal would start with our current and projected expenditures and sources of revenue and go from there; he wouldn't start the analysis with, "Well, it's just plain unfair and immoral for somebody to pay more than x percent of his gross income in taxes."  And besides, if that is my "moral" conviction, then how in the world can we debate that? We'd start at an impasse.

Pearlstein does argue that the distribution of economic rewards will shift over time, but liberals already know this:

[T]he way markets distribute rewards is neither divinely determined nor purely the result of the “invisible hand.” It is determined by laws, regulations, technology, norms of behavior, power relationships, and the ways that labor and financial markets operate and interact. These arrangements change over time and can dramatically affect market outcomes and incomes.

Pearlstein's next critique of liberals is that they "have been able to create a welfare state only by addicting a middle-class majority to government subsidies -- subsidies that now can be financed only by taking more and more money from the rich." 

Do I really need to cite statistics about tax and income inequality and the disappearing U.S. middle class?  If so, read this, this, this, this and this. And don't even get me started about the $29 trillion bank bailouts, that primarily went to save financial markets in which the top One Percent owns 42 percent of all financial wealth, and the top 20 percent owns about 90 percent. The TBTF bank bailouts clearly demonstrate who is really "addicted" to Big Government and to what degree! 

Overall, although Pearlstein leans conservative, he touches on most of the important questions. The main take-aways from our debate are these:

• Pure capitalism (or socialism, for that matter) has never existed anywhere, nor can it;
• We are only worried about rising deficits and redistribution payments because of the Great Recession that in turn resulted from financial deregulation that conservatives support, even to this day;
• Liberals should never feel obligated to justify the morality of their political economy, when if fact we are much clearer on this than conservatives who claim to care about the poor just as much as we do, yet have no idea how to remedy persistent poverty;
• Liberals should not fall into conservatives' trap of naming "ideal" marginal tax rates, debt:GDP ratios, or anything of the kind, because 1) it's unwise tactically, in a political system that demands compromise, and 2) the correct answers will change over time.

A final note on political-economic morality: Pearlstein doesn't mention it but I will: conservatives' economic morality depends on personal pain and suffering. They firmly believe that pain teaches us lessons and can be personally redeeming; therefore, for redistributionist Big Government to deny a person the pain that he "deserves" is to deny him the chance to learn and improve himself.  

There is also a religious conservative variant of this belief: even if one's suffering wasn't caused by one's poor decisions, it may still be part of God's plan for that person; therefore, for redistributionist Big Government to prevent that pain and suffering is to interfere with God's plan for that person. Moreover, government assistance to a suffering person denies true Christians the opportunity to curry favor with God by performing charitable works for that suffering person. 

I hope I don't have to explain how sick and twisted such moral reasoning is, much less why it cannot be the basis for our country's political economy....

Finally, a note on redistribution. I will take the liberty here of quoting myself at length:

[L]et's recall for a minute what the U.S. Government -- any government from the dawn of human civilization -- actually does, in pure basics: it collects taxes from the people how it sees fit, and then spends that money how it wants. It does not, for example, say, "Mr. David Koch, since you contributed 0.01 percent of federal income tax revenues in FY 2011, we are allocating 0.01 percent of the FY 2012 federal budget to you."  

Since our government doesn't do this -- since no government has ever done this, ever -- then by definition, what our government does is redistribute wealth.  Moreover, sooner or later all government spending ends up in private hands -- just not necessarily (and not usually) in the hands that gave it its money in the first place.  If that's not redistribution then I don't know what is.

Is capitalism moral?

By Steven Pearlstein

March 15, 2013 | Washington Post

URL: http://wapo.st/WLTcrp

'Socialist' Adam Smith on owners v. labor

Rosenberg's latest post is worth reading in full; I'll just copy two quotes he gives from the father of economics Adam Smith regarding the "masters" and "workmen" of the world, because his observations still hold true. The first one relates to collective bargaining, without which individual workers are always at a disadvantage to their employers:

A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

And here's a second one... so apropos the present-day USA!

Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

Remarks Rosenberg:

This is why economics used to be called "political economy", because the great classical economists never lost sight of the fact that economics was a thoroughly political activity, not something outside of the life of a political community.

Politics -- not economics -- is why our "masters" of business are not only beating our "workmen" in the state-by-state battle against right-to-work laws and a higher minimum wage; it's also why they are able to win expensive federal and local tax breaks, not to mention direct financial incentives -- and meanwhile, nobody bothers to do a cost-benefit analysis, even ex post facto.

But we sure can see the effects on workers' wages over the past 30 years, despite their ever-rising productivity, there's no denying it.

Socialist firebrand Adam Smith points the way in struggle for a living wage

By Paul Rosenberg

December 15, 2012 | Aljazeera

URL: http://www.aljazeera.com/indepth/opinion/2012/12/20121214131829224157.html

#Occupy Adam Smith

Gee whiz, Adam Smith sounds like the intellectual father of the global Occupy movements.  (Maybe he liked to defecate in public too, who knows?....)

Economic policy in the hands of the few serves those few – just ask Adam Smith

By David Wearing

July 30, 2012 | Guardian

Free market economics has taken such a battering of late that one might almost begin to feel sorry for it. In 2008, a cataclysmic meltdown in the barely regulated financial industry plunged the world into an economic crisis from which it has yet to emerge. For Nobel laureate economist Joseph Stiglitz, "market fundamentalism" was as discredited by this experience as communism was by the fall of the Berlin Wall. Recent scandals at Barclays and HSBC have merely served to underline the point.

Meanwhile the Conservative party, which derives half its funding from big finance, has set about making the public pay for the bankers' crisis, with disastrous results. "Market fundamentalism" told George Osborne that, as the dead weight of the public sector was cut away, the thrusting dynamism of private enterprise, hitherto crowded out by the state, would be unleashed to create jobs and propel growth. Instead, austerity destroyed demand, wiped out the recovery and plunged Britain into a new recession. "Expansionary fiscal contraction" proved to be exactly as oxymoronic as it sounds, breaking the reputation of the chancellor barely two years after he entered Downing Street.

So all in all, there's never been a better time to quote Adam Smith, especially if you're a socialist. Counterintuitive perhaps, but true nonetheless.

Smith, the 18th century Scottish philosopher, is of course best known for advocating the liberalisation of markets (arguably necessary at a time when the punishment for illegal livestock export was to have one's hand cut off and nailed up in the local marketplace, for a first offence, and the penalty for a second offence was death). However, what is less well known is that Smith shared some of the key concerns of today's critics of neoliberalism. His most famous work, The Wealth of Nations, offered a powerful political critique of the "one per cent" of his day, to borrow the terminology of the Occupy movement. In what he himself described as a "very violent attack" on an unjust status quo, Smith repeatedly emphasised the role of power, influence and class in distorting economic policy to serve the interests of a narrow elite.

Smith noted that the "English legislature has been peculiarly attentive to the interests of commerce" because policymakers were continually "imposed upon by the sophistry of merchants". The vested interests "like an overgrown standing army … have become formidable to the government, and upon many occasions intimidate the legislature". They argue their case "with all the passionate confidence of interested falsehood", predicting national ruin if their demands are not met. Of course, all this has a very familiar ring.

The politician who serves the one per cent, Smith noted, "is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance.  If he opposes them [he is subjected to] the most infamous abuse and detraction". One thinks here of the hysteria elicited by Ed Miliband's mild suggestion in his last party conference speech that some parts of the capitalist system were working a little less well than others.

Smith observed that "all for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind". The class power of wealth and big business makes the elite the "principal architects" of policy, "an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it". Smith repeatedly stresses that while the mercantile system does not serve the public interest, it does benefit the "principal architects" of policy, which is no less true of today's hyper-financialised, neoliberal capitalism.

This is not to argue that Smith should be automatically deferred to simply because he is a renowned intellectual figure, but rather that it can be useful to return to his writings in light of historical experience.  We have learned that it is possible for deregulated markets to fail the public disastrously. But the larger point is that when power and influence over policymaking is heavily concentrated within an economic elite, policy will be designed to serve that elite, often at the public's expense. What Smith can teach us today is that the question of who decides, and in whose interest, is crucial to our understanding of how economic policy is made.

Adam Smith on selfishness v. self-interest

UPDATE (06.08.2013): Originally, I posted this article without any commentary although I found it extremely interesting, and, I won't kid you, very heartening for my progressive beliefs. For some reason it's one of my most popular posts.  I'm not sure why.  Maybe it's because people of all stripes, even today, see Adam Smith as the final authority on capitalism.  

Personally, I'm not willing to go that far. Experience and scholarship have contributed much to our understanding of capitalism/free enterprise, call it what you will, since Smith's time.  To give one giant example: Keynes. Say what you want, but the guy invented macroeconomics. Until him, there was only microecon, Smith's provenance. So we gotta give prop's where they're due.

Nevertheless, it's certainly worth discovering in the article that follows what Adam Smith himself actually thought about "capitalism," a word that wasn't even invented in Smith's lifetime; it was coined by 19th-century socialists to disparage what they saw as an economic system that exploited the working class.

I'm no economic scholar, I'm not even an entrepreneur. However, during extensive international experience as a consultant I've seen in developing countries what confirms Smith's belief that a certain moral underpinning (trust, fair dealing, a man's word is his bond, deal on a handshake, etc.), not to mention robust courts that enforce verbal as well as written contracts, are necessary for "economic individualism" to flourish without harming the common good. As Americans and Westerners, we overlook their powerful role too often. And it undermines our credibility when we preach the virtues of the "free market" to developing nations: like criticizing the composition of their roof while ignoring the crumbling foundation.  

Speaking of the common good, or general welfare, that's a concept under constant threat in the U.S., although it's specifically mentioned in the U.S. Constitution. Constitutional "purists" tell us there are no superfluous words in that revered old parchment, so it's worth contemplating what exactly was meant by the general welfare, and how it can be protected. Alright, enough of my two cents.



A Tale of Two Smiths: What Capitalism's Founder Would Think of Goldman's Greed

By John Paul Rollert

April 20, 2012 | Next New Deal

Adam Smith made a distinction between self-interest and selfishness -- and he knew that too much of the latter would lead a nation to ruin.

It has been over a month since Greg Smith's letter of resignation sent Goldman Sachs into full PR panic mode. Since then, the firm has completed its great "muppet" sweep, Mr. Smith has secured a blockbuster book deal, and Lloyd Blankfein has found himself fighting off stories of a growing power struggle at the top of Goldman high command.

All of this makes for good copy, but it risks obscuring the enduring moral dilemma at the heart of the original letter. Namely, when it comes to doing business, can we make a meaningful distinction between self-interest and selfishness? Or, apropos of Mr. Smith, should a place like Goldman ever hold itself to a higher standard than "How much money did we make off the client?"

Another Smith certainly thought so: Adam Smith, the founding father of modern economics. He first made his name as a moral philosopher with The Theory of Moral Sentiments, a careful diagnosis of the concern we have for others, the attention we show ourselves, and how the tension between the two underwrites a common code of ethics.

One of the principal villains of Smith's work was Bernard Mandeville, an occasional philosopher who impishly elided fine-grained distinctions. His scandalous work, The Fable of the Bees, was an allegorical poem involving a thriving beehive that bore more than passing resemblance to 18th-century England. Accounting for the affluence and ease the bees enjoyed, Mandeville made two contentions sufficient to give any high-minded economist heartburn. 

First, he claimed there was no essential difference, morally speaking, between the con man and the merchant. Both were driven by selfish instincts to get the better of their fellow man (or bee), and to that end, both trucked in deceit. Yes, the con man broke the law, but the merchant hid behind it.

Mandeville's second claim was even more scabrous: So be it. Vice, not virtue, kept the wheels of commerce turning, with the benefits shared by all:

Thus Vice nurs'd Ingenuity,
Which join'd with Time and Industry,
Had carry'd Life's Conveniences,
It's real Pleasures, Comforts, Ease,
To such a Height, the very Poor
Liv'd better than the Rich before,
And nothing could be added more.

If these lines sound a little bit like "greed is good," then you get Mandeville's point. Human beings are selfish, and thank goodness for it. Otherwise, we might end up like the bees, who are nearly wiped out after a spell of virtue saps their ambition, spoils their economy, and exposes them to outside attack.

When he stepped forward to challenge these views, Smith knew that he had to provide a compelling distinction between pursuits that are self-interested and those that are merely selfish. He granted Mandeville that there was "a certain remote affinity" between them insofar as both are motivated by a concern for personal well-being, but he appealed to common sense in saying that that we don't view all human desires equally. My interest in having a clean shirt is not only legitimate, it's laudable, whereas my longing for a panda skin sportcoat is not only illegitimate, it's an outrage.

Fair enough. But how exactly do we make these distinctions? Smith says we come by them naturally, by engaging others and discovering where our desires echo, overlap, and, finally, are at odds with one another. This process, iterative and ongoing, defines our moral sentiments, the felt necessities of right and wrong that shape and restrain our actions.  It also defines for us what Smith called "a fair and deliberate exchange," the very type of interaction at the heart of a commercial enterprise. 

When he turned his attention to economics, Smith did not think of himself as devising a system that was antagonistic or even alien to the one he had already developed. A free market provided individuals a space to engage each other in the pursuit of their own private interests, but that realm was not free from moral sentiments, nor should it be. Engaging in business was no less a part of human interaction than raising children or making friends, and the idea that a commercial sphere dominated by the grossest behavior would not contaminate the rest of society was not only silly, it was dangerously naive.  

This was Smith's greatest difference with Mandeville: He did not believe that a nation in which people pursued their interests irrespective of one another would be affluent. It wouldn't even be stable.  Riven by "hostile factions," society would seethe with conflict, for people with different interests would view each other with "contempt and derision."  In such an environment, Smith observed, "[t]ruth and fair dealing are almost totally disregarded," for the interests of others have no moral claim on us.

Is Goldman Sachs such an environment? Greg Smith says so, but only the people who work there know whether the culture is as "toxic and destructive" as his letter claims. Yet to the degree that clients are viewed with contempt and derision, especially by leadership, Adam Smith would say that we should hardly be surprised, as the other Mr. Smith seems to be, by "how callously people talk about ripping their clients off." This is to be expected. The line between selfishness and self-interest, in business as in all human pursuits, appears only when we feel that the interests of others occasionally require us to restrain our own. When we stop caring, that line disappears, and with it some very worthy things — personal integrity, self-respect, professional pride — that money can't buy.

John Paul Rollert is an Adjunct Assistant Professor of Behavioral Science at the University of Chicago Booth School of Business.

B Corporations: The synthesis of Adam Smith?

Adam Smith Was Not Schizophrenic

By Kyle Westaway

December 1, 2011 | HBR Blog Network

Despite the recent crackdowns in New York and Los Angeles, it's not surprising that the Occupy Wall Street movement has exploded into 900 chapters. The Occupy movement — as well as The Tea Party — are both "mad as hell" about the current state of affairs. Both sides share a general dissatisfaction with our current capitalist system. The left wants to end capitalism. The right says if we could just get the government out of the way, then the capitalist system would work.

I think both groups' conception of capitalism is off the mark. To gain some clarity, we need to consult Adam Smith.

Adam Smith, the father of modern economics, was the first to assert the concept of free market capitalism. In his most popular work The Wealth of Nations he wrote about the oft-quoted "invisible hand." But in his first work, The Theory of Moral Sentiments — which he considered his most meaningful contribution — he writes about our duty to fellow members of society. Pundits on either end of the political spectrum quote whichever work suits their argument. Predictably, the right quotes Wealth of Nations and the left quotes The Theory of Moral Sentiments. Given the gap between modern capitalism and the morals-based approach from his first book, one can't help but wonder if Smith was an intellectual schizophrenic, essentially promoting two competing theories.

I don't think he was. In fact, I see his two preeminent works amounting to a unified theory, a blueprint for a more stable and sustainable version of capitalism; a conscious capitalism. The Wealth of Nations presupposed actors in the capitalist system operating on the moral framework he laid out in the Theory of Moral Sentiments. The free market has no conscience of its own: it is made up of billions of people transacting. Though Smith asserts that each of these people are guided by their self interest, he presupposes that each of the actors in the marketplace are guided by some internal morality and an awareness of one's place within the broader context of his community — locally and globally.

The current version of capitalism is not the one envisioned by Smith at all. He was seeking to create a system defined by efficient allocation of resources driven by self-interest, but guided by self-restraint. This is conscious capitalism.

The current version of capitalism's guidance from self-interest in the corporate world is evidenced in the legal duty to maximize shareholder value, which opens directors up to a lawsuit from their shareholders if they make a decision that fails to make the highest possible profit for their shareholders. Thus, the duty to maximize shareholder value handcuffs directors that want to make decisions that seek to create benefit for people and planet as well as financial returns.

There is debate whether this duty exists, but it is such a dominant perception among directors that it is the practical reality. In order for corporations to be free from the shackles of maximizing shareholder value, the fiduciary duties must be broadened.

Fortunately, many state legislatures in the United States are seeing the need for a new legal structure that embraces conscious capitalism by broadening the fiduciary duty from maximizing shareholder value to maximizing stakeholder value — the legal mandate to take make decisions that pursue not only a positive benefit on the bottom line of the shareholders, but also the community, environment, employees and suppliers. This broadening of fiduciary duty is a fundamental shift at the very core of the corporation. This new type of corporation that embraces conscious capitalism by broadening fiduciary duty is known as a Benefit Corporation.

The Benefit Corporation embodies the theories of both The Wealth Nations and the Theory of Moral Sentiments, and ushers in a version of conscious capitalism that promotes both self-interest and the benefit of society. Adam Smith would be proud.