The "Crisis of Capitalism" Is a
Lack of Capitalism
February 23, 2012
(This item originally appeared at Forbes.com on February 23, 2012.)
“The American economy increasingly
serves only a narrow part of society, and America’s national
politics has failed to put the country back on track through
honest, open, and transparent problem solving. Too many of
America’s elites-among the super-rich, the CEOs, and many of my
colleagues in academia-have abandoned a commitment to social
responsibility. They chase wealth and power, the rest of society
–economist Jeffrey Sachs, in The Price of Civilization:
Reawakening American Virtue and Prosperity
Adam Smith, you may remember, was a fan of capitalism. He also wrote
a pretty good book on moral philosophy, and had a day job as a
professor and tutor of moral sentiments.
One of Smith’s core ideas, which for some reason we forget today, is
that capitalism is supposed to be a system which channels base
instincts into productive societal activity. Since the beginning of
time, there has been some fraction of the human population that is
concerned wholly and completely with their own self-aggrandizement –
chasing wealth and power, as Jeffrey Sachs puts it. Think of Ghengis
Khan. Or Napoleon, off to plunder the wealth and power of Russia. Or
your local mafia boss.
At the same time, the great mass of average people have never had
enough “commitment to social responsibility” to make a functioning
society without some sort of proto-capitalist system – at least
beyond the tribal level of perhaps sixty people or so. One thing we
have learned from hundreds of experiments in shared, communal
living, from the pilgrim settlers or the hippie communes or the
artists’ colonies or the kibbutzes, up to the size of communist
China, is that they almost always fail. We are simply not
spiritually advanced enough, as a whole, to operate in that fashion.
We never have been, and probably never will be, for at least a few
Smith saw that this rampant self-interest was channeled by the
capitalist system – basically a system of private property and
common law – into activity that would benefit others. Those focused
on wealth and power, instead of using rape, plunder, pillage and
enslavement, as was common through millennia of history, would have
to provide some sort of useful good or service to others, in a way
that provided a profit. Those chasing wealth and power would find
that the easiest path to their goal would be to provide something
beneficial for society as a whole. Through competition, this profit
has never been very high. Corporate profits average about 8.3% of
revenues, a lot lower than most people think. Less than most sales
Despite today’s increasing disgust with the “rich and powerful,”
those people who gain wealth and power by providing a useful good or
service – who, inadvertently and accidentally perhaps, improve
society as a whole — are still celebrated by the masses. Look at the
outpouring of affection for Steve Jobs. Steve Jobs was not a saint:
there was that business about backdating stock options (a means of
outright theft from shareholders), and the working conditions at
Apple contract manufacturer Foxconn have been known to provoke
employee suicide. Lots of musicians have been complaining about
their treatment by iTunes. Nevertheless, the pluses outweighed the
minuses. What about billionaire Oprah Winfrey? Or Elizabeth Taylor,
who became a billionaire (believe it or not) mostly from perfume
sales? How about Ty Warner, who became a multibillionaire from sales
of Beanie Babies? A harsh word has never been spoken.
This idea – of encouraging socially productive behavior, and
discouraging socially damaging behavior – translates into lots and
lots of rules. For example, we discovered that the self-interested
pursuit of profit could often lead to rather terrible environmental
degradation. So, many rules were made regarding pollution and so
forth. This changed the incentives. People can still pursue a
profit, but they must do so in a way that is not environmentally
destructive. We’ve developed regulations for workplace safety, child
labor, bankruptcy, and on and on an on, ideally to prohibit socially
damaging behavior, and channeling activity into socially productive
The United States was not only an experiment in democracy along the
lines of philosophers like Rousseau. It was an experiment in
capitalism, along the lines of Adam Smith, whose famous book The
Wealth of Nations was published in the year of the Declaration of
“Capitalism” has elements that go by the code words “free market” or
“laissez-faire.” These are labels for rather complex, sophisticated
ideas that would take tens of thousands of words to explain in full.
They don’t mean that “anything goes” or “do what thou wilst.”
Capitalism is a system of rules, finely tuned to produce certain
beneficial outcomes, even if the participants themselves have no
interest in the condition of society as a whole. The virtue is in
In practice, it helped that many did understand and support the
virtuous principles of capitalism. Many corporate leaders wanted to
abide by the rules, because they understood that the rules benefited
everyone. They did not devote themselves to undermining the system
that made America wealthy and prosperous, among all social classes.
However, someone has to make the rules. Technically, this is
Congress – not a group known today for its commitment to social
responsibility or understanding of capitalist principles.
Theoretically, the virtue and high ideals of Congress were supposed
to be generated by the electoral process. The voters would choose
those who had the interests of society as a whole at heart. But,
this system can be corrupted, and clearly doesn’t work today.
Even by design, the U.S. system is only slightly democratic, without
the direct proposal and referendum system of Switzerland, for
example, where the electorate can decide on policy directly. When
was the last time you voted on a war? (Don’t worry – Congress
doesn’t either.) Politicians can make promises, and then do
something completely different when in office. We get the same Hope
and Change blather every year, from both parties, and nothing ever
Today, rather fantastic benefits are being enjoyed by those who have
provided nothing to society, whose works have been, especially in
recent years, destructive by any reasonable measure. Primarily this
has been in the financial system, which is enjoying hundreds of
billions in taxpayer funds (euphemistically known as “bailouts” but
really just plunder), even after they, in large part, caused the
economic difficulties today. In the savings and loan crisis of the
early 1990s, over two thousand bank executives did jail time.
Societally destructive behavior was punished. In today’s much
larger, much more widespread crisis, nobody gets punished; they just
get more and more money!
Even Jon Corzine, of MF Global, is still walking free today, after
outright securities law violations. When futures broker Refco
collapsed in 2005, president Phillip Bennett was prosecuted for
similar violations. In 2008, Bennett was sentenced to 16 years in
prison. (Refco later became the heart of MF Global.)
MF Global, in turn, is being reorganized under subchapter III of the
Chapter 7 bankruptcy law, which is for equities brokerages, instead
of subchapter IV of Chapter 7, which is for futures brokerages,
although MF Global is a futures brokerage. Why? Because it benefits
certain too-big-to-fail banks, who are able to pay for this sort of
thing. There are no laws today, only plunder.
This is a lesson not only to those in the financial industry, but to
those chasing wealth and power in all avenues of society: you can
break the old rules, you can steal, and nobody gets punished.
Today, following the long-established principles of capitalism seems
like it is a game for suckers. Capitalism is a tough game.
Competition is fierce. The risk of failure is high. The profits, as
noted, are often low. No wonder the successful are so highly
regarded. American Airlines, General Motors, and Kodak provided
useful goods and services for decades, on a grand scale, and
provided prosperous employment for hundreds of thousands of
employees. Nevertheless, they didn’t quite meet capitalism’s
Theft is a much easier game. The risk is low. The profits are high.
There is no competition. You don’t even need employees. You just pay
off the Congressman, and stick the money in your pocket.
This is not confined only to the financial industry. The entities
that are thriving today are those that enjoy some sort of government
favor. Defense contractors and the war industry. The education and
healthcare cartels. Government employees and their absurd
compensation plans. Competition is low. Profit margins are high. And
why do we keep having wars with countries with lots of oil (or
heroin)? You know why.
To all who are paying attention, the incentives have changed.
Socially destructive behavior is much more rewarding than socially
beneficial behavior. Government-supported cartelism and taxpayer
theft pays better than providing goods and services in the difficult
capitalist marketplace. A society reaches a perilous tipping point,
when, responding to the existing incentives, the energies and
ambitions of the most energetic and capable are channeled into
socially destructive behavior.
Rape, plunder, pillage and enslavement are back! It is a little
soft-edged today, unless you happen to be a Muslim living atop a
large oil deposit. This soft edge often helps with keeping the
victims docile, since they can’t quite figure out what is going on.
But, essentially, it is the same.
Running a normal business is getting less and less rewarding. Small
businessmen, in particular, are giving up. Taxes are too high.
Regulations are too cumbersome. Competition with government-favored
cartels is difficult. Monetary instability is chronic. The economy
is getting worse, and there is little hope that it will improve.
For as long as socially destructive behavior is more rewarding than
socially constructive behavior, things will get worse. This can go
on for a very long time. In 17th century Spain, the government
gradually made it impossible for the middle class manufacturers and
merchants to survive, while the parasite class of aristocrats,
military and government employees grew and grew. The merchants paid
huge sums (to the government) to become minor aristocrats, clipped
coupons on government bonds, learned the manners of courtiers to
gain access to the government feeding trough, and abandoned the
unpleasantness of business. The workers rushed into “safe, stable”
government jobs. The parasite devoured its host, and the empire
The decline continued for more than a century, until, in 1701, by a
quirk of royal succession, the grandson of Louis XIV of France, who
did not even speak Spanish, was anointed the next King of Spain. He
brought in some French advisors, who cleaned out the whole corrupt
government, reformed the administration upon the French model, and
Spain’s recovery began at last.
Spain once held the world’s grandest empire. It stretched from
California to the Philippines. Today, five centuries after Spain’s
peak, the country is a nice place for British and Germans to go on
vacation – unless soaring unemployment and upcoming sovereign
default make it unsuitable even for that.
Today, conservatives in the U.S. are all too willing to defend the
status quo, despite its ever-increasing corruption and decay.
Liberals don’t seem capable of even coherently expressing what is
happening, and have fallen back on century-old platitudes that are
barely more than cartoons of political dialogue.
Some people today say that we are experiencing a “crisis of
capitalism.” I say that we are suffering a crisis of what happens
when you don’t have capitalism, in the moral sense that Adam Smith
intended. We have an increasing trend toward theft, plunder and
parasitism, divorced from the capitalist imperative to provide
useful goods and services. Where this path leads is obvious to
anyone who thinks about it for a while.