In the fight between capitalism and business, capitalism is getting whupped

Godzilla vs Mr. Bill

I recently finished reading Chrystia Freeland’s Plutocrats, which is about the world’s rising elite class and the enormous buildup of wealth at the top of the spectrum. Easily the most satisfying part of the book is towards the end, when she discusses the potential impact of this phenomenon for our economy and our democracy. Here she shares a brilliant quote from Luigi Zingales, an economics professor at UChicago’s Booth School of Business, which I felt compelled to share:

True capitalism lacks a strong lobby. That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one.

Industry has been throwing its weight around to the detriment or the larger marketplace — and to society in general — for decades, if not longer. As Zingales describes, this includes purposefully stifling open competition, and in doing so hurting other companies operating in the marketplace, as well as the consumers who would otherwise benefit from the better quality and prices that a competitive market would bring. To take one recent example we’ve already covered here on this blog, the lines separating media companies, political lobbyists/fundraisers, and government policymaking have been blurred, possibly paving the way for regulators to sign off on ever-growing oligopolies, and thus crowding out efficient competition from smaller firms. In other words… cable is too frigging expensive!

But beyond just stifling competition, there are innumerable ways that businesses and industry groups distort the free market with their political power. More than fifty years ago, Eisenhower prophetically warned of the “military industrial complex”, where an industry that stood to profit from war would skew the nation towards unnecessary debts and perpetual conflict. There are countless corollaries today in other industries. Big banks lobby against financial regulation, strengthening their bottom lines while potentially increasing the likelihood of another devastating financial crisis. Producers of fossil fuels quietly spend huge sums trying to confuse the scientific debate on climate change, holding the price of carbon emissions inefficiently low while the earth gradually warms. The farm lobby assiduously maintains the political backing for agricultural subsidies year after year, paid out of the pocket of the US Treasury. ¬†Each case is an example of “extracting rents”, in economics speak. That is, a small and powerful minority with political power extracting value from the broader society and keeping it for itself, all the while compromising the efficiency of the free market.

This is not capitalism, or certainly not “true capitalism”, as Zingales puts it. True capitalism can be, and should be, ethical and egalitarian in its principles. And with the right rules and regulations, it can lead to generally fair and stable outcomes for society (see America for about thirty years following WWII). But not many people can spot the difference between “true capitalism” and what I’d call “rigged capitalism”, and most people nowadays appear hopelessly resigned to the latter.

Is it capitalism that’s so rotten? Or is it us?

Is this really the face of capitalism?

Is this really the face of capitalism?

Economists and other social scientists are familiar with a concept called “framing”. Ask a question one way, and you might get a particular answer. But ask the same question differently, or in a slightly different context, and your answer may change completely.

There are tons of experiments that show the power of framing in influencing our decisions. A recent example I read about in this Atlantic article, however, tells us something important not only about ourselves but about the debate over capitalism.

As the article summarizes, an experiment a few years ago had college students play a classic “prisoner’s dilemma” game — that is, a game between two people where the individual has no incentive to cooperate — and separated the participants into two categories. The behavior of the students in these two groups was strikingly different:

[The researchers] told half the students it was called “Community Game” and the other half that it was called “Wall Street Game.” And that was all it took to turn these undergrads from team players into Gordon Gekkos. Fully 67 percent of the students cooperated when they were told they were playing “Community Game,” but only 33 percent cooperated when they were told they were playing “Wall Street Game.”

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Don’t throw the capitalist baby out with his gross bathwater

My dad is a huge fan of Bill Moyers and encouraged me to watch Moyers’s recent interview with the economist Richard Wolff. The video is online Bill Moyers & Company: Richard Wolff interview.

In the interview, Wolff makes his case that our current capitalist system is corrupt and that we should be investigating alternatives. Here’s one thing he tells Moyers that caught my attention:

I think this is a capitalism that I would say has lost its sense of its social conditions, its social limits. It’s killing the mass support without which it cannot survive. So it is creating tensions and hostilities that will take left wing, right wing, a variety of forms. But it’s producing its own undoing and doesn’t imagine it because it focuses so much on making more money in a normal way of business that it somehow occludes from itself. It doesn’t see the larger social conditions and what its behavior is doing to them.

I completely agree with Wolff on this point. One of the most severe economic risks we face today as a global society is that individuals might lose faith in capitalism, and reject the system altogether in favor of a more state-centric model. That’s a story that’s been played out numerous times in Latin America, to take one example where over the years many countries have experienced the rejection of a capitalist strongman in favor of a populist, more socialist idealism. That promise is rarely fulfilled, and the remedy for capitalism often has turned out to be worse than the disease.

One might tend to shake one’s head at the foolishness of the Cubans, Venezuelans, and Bolivians who reached for that socialist dream at various points in history, and who are suffering under the weight of economic mismanagement today. But the real fools were the leaders who preceded these countries’ populist adventures, often enriching themselves and their class while doing little to improve the lives of the poor and disenfranchised. They were the ones who truly killed the goose for a few measly golden eggs, by creating an association between capitalism and their own failures.

I’m an unabashed supporter of free markets, not because I am a Baha’i, but because I am so hard pressed to find historical examples of sustainable economic growth, development, or poverty reduction when they are absent. But there is a difference between free markets and what Shoghi Effendi decried as “unbridled capitalism”, a system with little rules or protections. You can make the argument that the current economic system here in the US (and many other countries, for that matter) is worse than “unbridled capitalism”, in that our system has rules that are actually rigged in favor of the wealthy and powerful.

A well regulated capitalism — where people make their own choices about what to buy or sell or lend, the market drtermines prices and quantities, etc — is good. But a well-regulated capitalism is not what nearly drove us to economic oblivion in 2008, or is currently worsening the gap between rich and poor, or is driving up the costs of health are for all of us. To use faux-economics terminology, what we have now is not capitalism but institutionalized rent-seeking on an enormous scale. The solution isn’t dumping free markets altogether, just a different set of rules and a basic sense of modesty, justice, and integrity that’s required for those markets to work the way they’re intended. I hope people have enough patience to recognize that, channel their frustrations in the right direction, and avoid desperately reaching for an even more disastrous Plan B.