How to Save Capitalism?

Capitalism has been successful because it is a system designed for people as they are rather than as they should be. Adam Smith discovered that a “side effect” of pursuing your informed self-interest is creating goods needed by others. We do not need to care, or even know people who benefit from our work. Imperfections of the system obscure its most fundamental feature from us: the extraordinary fact that it exists at all.

After 1989, capitalism remained on the world scene as the only winner of the clash which was symbolically launched by the Communist Manifesto of Marx and Engels in 1848, and ended by the signatures of Yeltsin, Kravchuk and Shushkevich under the act of dissolution of the Soviet Union in December 1991. The alternative model of a centrally planned economy, attractive especially to those who had never experienced it for themselves, ceased to exist. It was a black-and-white proof that capitalism or rather its contemporary version (3.3, as Anatol Kaletsky calls it in Capitalism 4.0) was the best system. You did not need to seek the evidence. It was provided by reality itself. The clash of the titans ended in a knockout of Communism by Capitalism.

Thanks to the end of the Cold War and the technological revolution in communications, globalization has accelerated as never before, providing spectacular examples of entire societies emerging from poverty. But globalization is not a spontaneous and autonomous process. Before the First World War, Great Britain and then the United States, as well as the institutions created by these countries, guaranteed freedom of navigation, promoted the elimination of tariffs and barriers to capital flows. Then institutions such as the World Bank, the WTO or the IMF were created, with a mission to put the Washington Consensus into practice. In This Time Is Different Carmen M. Reinhart and Kenneth S. Rogoff recall how in the 1990s the IMF experts forced Asian countries to increase the openness of their capital markets—which initially led to a great inflow of capital and then to its outflow and the 1997 crisis. It is no coincidence that globalization today is synonymous with companies such as Coca-Cola, McDonald’s or Google.

Those who benefited most from the easy global flow of capital have been its owners, able to invest capital where it brings the biggest profit. Cheap labor, low taxes, poorly developed Labour Code—this is what poor countries compete for global capital with. But these countries still benefit—through the inflow of new technologies, know-how and above all what they lack most, that is the capital itself. It is the higher premiums from having capital that are directly responsible for the growing inequalities in developed countries.

Paradoxically, it is the citizens of the developed countries who on balance lost the most on globalization. The highly qualified but expensive labor in such countries as the US has simply become uncompetitive in the global race of their own corporations for capital. In 1964, one in twenty American males aged 25–54 was out of work. Today it is one in six. Hundreds of millions of people have benefited from globalization. But tens of millions of blue-collar workers in developed countries have lost their jobs or have been forced to take a different one, much lesser paid. For a multitude of Americans consumption on credit replaced the increase in wages. At the same time prices of many products have fallen. This might be one of the reasons why increasing stratification in the US does not cause social protests.

“One critical measure of the health of a modern democracy is its ability to legitimately extract taxes from its own elites”—wrote Francis Fukuyama in his essay “Left Out” for the National Interest (January/February 2011). Unfortunately, in this respect modern democracies, especially the US, widely regarded as the democratic beacon, increasingly resemble unstable and corrupt political systems in developing countries.

Entrepreneurs portrayed by Tocqueville in Democracy in America were guided by their enlightened interest, building schools and parks, improving the quality of life of the community, for they knew that in the end everybody, including themselves, would benefit from that. Global companies might still have local addresses, but this is all which ties them to their mother countries. They generate employment abroad and the moderately taxed profits go to the shareholders. Today, the responsibility of delocalized companies for their “environment” is reduced to lobbying for the preservation of regulations favoring their business. What is good for the Wall Street, well it’s just good for the Wall Street.

Emancipation and individualization of the 1960s in the social and cultural sphere dramatically weakened the communal sphere. One result of the moral revolution was the economic individualization in the 1980s. A set of rules which an individual has to follow, but is compensated for that with a particular position in the society, has thus become unnecessary and obsolete. The consequences of this process are observed today, in the economy, but above all in politics.

One of the problems with contemporary capitalism is that previously it functioned within a framework of written and unwritten standards and rules. It was strongly connected with morality and principles, as Max Weber and others wrote. Robert Reich asks in an interview for Five Books: “Where has the moral centre of American capitalism disappeared? An economy depends fundamentally on public morality; some shared standards about what sorts of activities are impermissible because they violate the trust so fundamentally that they threaten to undermine the social fabric.”Today’s capitalism is alone on the battlefield. The fact that the only dominant value in the Western world is consumerism looks like a posthumous triumph of Marxist materialism.

The social effects of globalization—weakening of the middle class, which is the foundation of liberal democracy—should generate political resistance and then a correction of the system, as it happened in the US in the 1930s. The greatest global crisis since 1929 could have become such a watershed. But it has not. The question why it has not triggered protests is the key issue analyzed in this text.

After 1989, almost the whole word converted to global capitalism. The laws of economics were almost equaled with the laws of nature. They could be summed up as saying that the government should keep as far away as possible from the economy. That all government interventions in the market will only interfere with its operation. And on top of that they will be inefficient—for rational expectations of the consumers will make them adapt their behavior to the actions of the government, stimulating demand or increasing the amount of money in the economy. Economic models previously regarded as problematic started to be treated as dogma. Economics started to shift from the social sciences towards mathematics.

Economic inequalities produce political ones. The process of economical weakening of the middle class in developed countries also means the political weakening of the center and the ability of the political system to repair itself spontaneously. The empowerment of a consumer burdened with loans is different from the empowerment of a small company owner or a wage earner with independent income.

The government starts to lose its sovereign position towards markets, its ability to perform its duties as an efficient regulator, imposing solutions if it becomes necessary. “Politicians are in charge of a modern economy in much the same way as a sailor is in charge of a small boat in a storm,” wrote the British economist Paul Seabright in The Company of Strangers. Small states are dependent on the global bond market. In large states the mutual dependence of economic and political elites, of money and politics, is so big that it is not certain whether the change in the current state of affairs is at all possible.

In his latest book The Globalisation Paradox Dani Rodrik presents a claim which he calls a political trilemma of the world economy: we cannot simultaneously have national self-determination, political democracy and hyper-globalization. For now, it looks like we have everything. But democracy and self-determination are becoming more and more illusory.

In the already quoted book, Anatole Kaletsky claims that the fundamentalist thinking dominant among economists was augmented by their links with the world of finance. Theory and practice mutually enhanced each other, providing arguments for increasingly indefensible and increasingly unstable models. Kaletsky compares the paradigm of the ineffectiveness of government intervention to brainwashing, which affected the thinking of both the elites, and ordinary citizens. He believes that this dangerous illusion is also responsible for the belated reaction of the Treasury Secretary Henry Paulson, who allowed the collapse of Lehman Brothers, which nearly led to a bank run on the scale of the Great Depression. But even without that the effects were devastating. Just in 2009, American citizens lost 2 million jobs and 5 million homes. Finally, government intervention saved the system— including multimillionaires who had said before most vocally that the government should stay away from the market.

In his Les Jeux de l’échange, the second volume of Civilisation matérielle, économie et Capitalism, XVe-XVIIIe siecle, Fernand Braudel has proven that the history of capitalism was the history of a struggle between the government and the market, a continuous equilibration between them. The government had to stand guard to the rules, to cultivate competitiveness. Capitalism never was and never could be a self-regulating force, just like we do not expect that from a river flooding its banks in the spring. Market rules are safeguarded by the government and the law, which in its turn is a result of a certain political compromise.

Contrary to what many of its supporters believe, capitalism is not some abstract, independent entity. Capitalism is a game with constantly changing rules. Everyone is trying to bend them to their advantage. Today capitalism has become a victim of its basic assumptions, saying that people seek to maximize profit. The question arises: why this assumption should be circumscribed today. The answer is: because capitalism is too valuable an achievement of human civilization to leave it at the mercy of market fundamentalists.

In a free market, people are not sold and drugs are not traded. Child labor in developed countries is prohibited, an 8-hour working day and paid leave are (theoretically) in force. For our ancestors, these rules would constitute a flagrant interference in unfettered free enterprise. Today, we see them as achievements of modern civilization, and no one in their right mind is willing to give them up.

Capitalism was pilloried after the outbreak of the economic crisis. Given the benefits that humanity has enjoyed thanks to its existence, especially compared to all other systems, we should do everything we can to save it. To save it from its staunchest supporters.