Capitalism and Democracy: An Expansion on My Rant

Having already been bashed, unfairly, for being ‘anti-capitalist’ I feel I should expand on my previous post.

Before I begin, here’s a post at Simon Johnson’s blog to demonstrate that I am far from alone:
The Economy and Popular Democracy – The Baseline Scenario

So here’s the way I look at this:

First, I happen to think that democracy and capitalism are antithetical systems. They are mutually destructive. I know this seems to fly in the face of received wisdom so I owe an explanation.

I see capitalism as a greed based, individual-centric and innovative system designed to generate wealth through the incentive of huge financial rewards unimpeded by any socially ethical considerations. It is intensely centered on individual brilliance and accomplishment as embodied in the iconic ‘entrepreneur’. It has both positive and negative consequences among which are the massive concentration of wealth within a capital owning class; and the acceleration of technical innovation, and subsequent economic growth, through open competition.

Democracy, on the other hand, I see as a more social-centric system designed to encourage a broad distribution of power and consequently a more egalitarian distribution of wealth. Because of its more consensual tenor and lower emphasis on competition, democracy can inhibit innovation but has the benefit of involving a broader segment of society in major economic activities and so makes better broad-scale use of a society’s intellectual resources. It tends to be bureaucratic and less incisive, but more inclusive.

Both systems can fall into extreme conditions: capitalism can produce oligarchy and democracy can produce rabid populism.

We have experienced both extremes recently.

During the just ended Reagan era the economy rapidly and clearly concentrated wealth in the hands of a small elite: highly educated, well connected, and predominantly in the financial world – including the various hangers on such as corporate lawyers, accountants and even academics who invented financial theories to support the development of the derivatives business. This group exerted sufficient power through lobbying and intellectual framing of public policy that it was able to secure an almost unprecedented share of the national wealth. It was able to influence policy on a grand scale – bank deregulation; the stifling of derivatives regulation; Federal Reserve Bank policy; and finally the Bush tax cuts which disproportionately shifted Federal revenues back into a very small number of hands.

The result of this concentration of power was the embedding of ‘market economics’ as the predominant worldview of policy makers and the gradual stripping away of the middle classes ability to retain wealth for itself: while the Reagan era was not totally a zero-sum game for wealth distribution, it was, by any standards, a massive shift of wealth from the lower and middle classes to the top income tier.

This ability to suborn an unequal share of the nation’s wealth resulted from the destruction of the post-war balance between capitalism and democracy. Reagan’s famous charge that government ‘was the problem’ undermined popular faith in a democratically elected government’s ability to rectify imbalances created by capitalism. The subsequent three decades saw a steady shift rightward in politics and consistent faith in market forces as the premier organizing force for wealth allocation.

Democracy was diminished.

Money flowed into politics and enabled the elites to consolidate power.

However, and inevitably, the elites overreached. The inherent instability within the financial system – finance has far fewer of the negative feedback loops that provide stability in the labor and goods sectors of an economy – led to two successive and ultimately destructive asset price bubbles. The economy fell into steep recession and increasingly populist reaction grew rapidly in response to the need to bail out the very financiers who had created the problem.

In other words we are now running the very real danger of an overly populist assertion of democratic ideas – wealth redistribution for instance – that could impair the innovative power of capitalism for decades to come.

The populist backlash is a natural and inevitable consequence of the Reagan destruction of the post-war social contract. Remember that the only economic indicator to run at above average rates throughout the past eight years was corporate profits. All else, including wage growth and the employment outlook underperformed. An increasing number of middle and lower wage earners found it impossible to maintain the mythic American dream – no matter how hard they worked. A backlash was bound to occur. The recession was simply the opportunity to articulate the unease and for populism to coalesce around the need ‘for change’.

The larger point I am trying to make is that the American genius has not been to unfetter capitalism or to establish democracy – other nations did that. It was to blend the two so that the negative sides of each counter and offset one another. From that blending emerged what we call the American Dream which is a simple and idealized balance of two opposing forces.

It is this balance that was broken by Reagan and which has led to the emergence of what Simon Johnson calls the new oligarchs. It has also created a pernicious and destructive populism that threatens our ability to cure the economy.

And it is only within this balance that I can defend the potential of what Schumpeter referred to as the ‘creative destruction’ of capitalism, or can tolerate the muddled and frustrating nature of democratic government that Churchill once described as the ‘worst form of government except all the rest’.

So am decidedly pro-capitalist. Within reason. And therein lies the rub.

Addendum:

The notion that capitalism is essentially naked greed seems to offend some people. Why? That’s what it is. To try to mask it with homilies to its socially beneficial side effects is simply an attempt to divert attention away from its central premise: capitalism is about making money. Period. The fact that other people may get a lift in life as a consequence of a capitalist’s actions does not imbue those actions with any higher moral purpose. We should look at intentions: was there an immanent moral driver in the action that gives us cause to view the capitalist as socially ethical? If so good. Otherwise let’s just call it what it is. Plain old fashioned greed. Nothing wrong with that, we’re all greedy in our own ways. But when greed spills over into entitlement and entrenched political power society has a problem. Inequity becomes rife and ultimately social stability is threatened. A wise plutocrat is one who throws a little money to others or contributes to public causes as a way to ameliorate the inequity: it helps distract the less fortunate. America is littered with so called charitable redistributions of income as a result of such wisdom, and most are dignified with the names of a plutocratic benefactor. Naturally, since we live in a capitalist society, we call these actions ‘giving back to society’. A less tolerant view would be to call the gifts an effort to numb the rest of us against the rawness of the greed that contributed to the accumulation of the original wealth. Or perhaps, most benignly, the plutocrats themselves realize the venality of their own motivations and their gifts are an attempt to buy social forgiveness: a self administered and self calculated benediction?

The word ‘self’ is the most appropriate to characterize the entire Reagan era. It was an era of ‘selfishness’ par excellence. Poverty reduction and health care, both indicators of communal spirit were cast aside as motivations for personal action. Instead our talents were thrown into creating mountains of bond trades, derivative contracts, and the resultant bonuses.

Paul Krugman hesitates to refer to the talented people who were drawn into finance by the lure of riches as our ‘best and brightest’. Matthew Yglesias comments here on the same theme: The Ethics of Home Economicus .

Bright they certainly are.

Best? Not so much.

Look for a rash of generous donations to galleries and hospitals as the Reagan era tries to cleanse its reputation in preparation for history.