Sunday, February 22, 2009

Qualified Capitalism?

There have been several recent calls from some unlikely quarters for what might be termed qualified capitalism. It is somewhat unfortunate that the name of capitalism, the system of free market economics first systematised by Adam Smith in The Wealth of Nations (1776), was coined by its arch-enemy, Karl Marx. Indeed, many of the misconceptions that persist to this day about free market economics can be traced directly back to Das Kapital (1867) (or simply Capital in English) and Marx's other works.

Here are three examples of calls for qualified capitalism that I have heard recently:

  1. Inclusive Capitalism
    (Dr. Mo Ibrahim, Founder of Celtel International and the Mo Ibrahim Foundation)
    Dr. Ibrahim has often discussed the notion of inclusive capitalism e.g. in a May 2005 speech at an IFC (International Finance Corporation) conference. He defined Celtel's "inclusive capitalism" strategy as follows: (a) sharing equity with management and staff; (b) including local equity partners; and (c) developing local entrepreneurs.

  2. Creative Capitalism
    (Bill Gates, Founder of Microsoft and the Bill and Melinda Gates Foundation)
    In his 2007 Harvard commencement address, Bill Gates spoke on the theme of creative capitalism. This is what he said in part:

    If you believe that every life has equal value, it’s revolting to learn that some lives are seen as worth saving and others are not. We said to ourselves: “This can’t be true. But if it is true, it deserves to be the priority of our giving.”

    So we began our work in the same way anyone here would begin it. We asked: “How could the world let these children die?”

    The answer is simple, and harsh. The market did not reward saving the lives of these children, and governments did not subsidize it. So the children died because their mothers and their fathers had no power in the market and no voice in the system.

    But you and I have both.

    We can make market forces work better for the poor if we can develop a more creative capitalism – if we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequities. We also can press governments around the world to spend taxpayer money in ways that better reflect the values of the people who pay the taxes.

    If we can find approaches that meet the needs of the poor in ways that generate profits for business and votes for politicians, we will have found a sustainable way to reduce inequity in the world. This task is open-ended. It can never be finished. But a conscious effort to answer this challenge will change the world.
    [Emphasis added]

  3. Moral Capitalism
    (David Cameron, Leader of the UK's Conservative Party)
    At the 2009 World Economic Forum (WEF) meeting (28 January-1 February 2009) held in Davos, Switzerland, David Cameron made an impassioned speech calling for moral capitalism, "a new, more popular capitalist system - capitalism with a conscience." He suggested three reasons why capitalism has become so unpopular: (i) Markets without morality. (ii) Globalisation without local competition. (iii) Wealth without fairness. Mr. Cameron then outlined his vision for a new moral capitalism ("A capitalism with a conscience"):
    So I think it's time to update the free market orthodoxy that has dominated the past few decades. It's time to assert a fundamental truth: that markets are a means to an end, not an end in themselves. Markets are there to serve our society, not to suck the joy out of it or trample over its values. So we must shape capitalism to suit the needs of society; not shape society to suit the needs of capitalism.

    That is what I mean by responsible business. Business helping to create a society that is greener, safer, fairer - and where opportunity is more equal. Business helping to create a society that is more family-friendly, where responsibility and power are decentralised, and where we value and build up the institutions of the public realm and civic society.

    So if markets, and capitalism, and the activities of individual businesses conflict with our vision of the good society and a better life if damage is being done to our environment, or if family life is being undermined we must not sit there and take it, going along with the old orthodoxy that nothing should be allowed to impede the pursuit of profit. We must speak out.

    Yes, as I've said many times, we must stand up for business, because it's businesses, not governments or politicians, that create jobs, wealth and opportunity, it's businesses that drive innovation, and choice, and help families achieve a higher standard of living for a lower cost. But we must also stand up to business when the things that people value are at risk. So it's time to place the market within a moral framework - even if that means standing up to companies who make life harder for parents and families.

    It's time to help create vibrant, local economies - even if that means standing in the way of the global corporate juggernauts. And it's time to decentralise economic power, to spread opportunity and wealth and ownership more equally through society and that will mean, as some have put it, recapitalising the poor rather than just the banks.

    The best chapters in our economic history are those that embrace the many, not the few. In America in the 1950s there was a sense that everyone could have a slice of the pie. In the 1980s Margaret Thatcher led an ownership revolution that gave millions a new stake in our economy. That was truly popular capitalism, and we've never needed it more than we do today.

    All of us - politicians, campaigners, economists, business leaders - need to help lead the change. Our financial system boasts people so bright they've created financial instruments beyond even their own understanding. Now they need to use those talents to help the poorest build assets. To go into our most deprived communities, giving them the tools to make the most of the market, to help them with banking and saving and owning.

  1. Inclusive Capitalism
    Dr. Mo Ibrahim's inclusive capitalism sounds to me like good old-fashioned free market economics and common sense. Consequently, Dr. Ibrahim's qualified capitalism is no different from unqualified capitalism.
  2. Creative Capitalism
    Mr. Gates proposal, seems to me, to be based on ideas that are fundamentally opposed to the principles of free market economics. It is based on the notion of "market failure". But in order to ascertain whether markets have failed, we need to be clear as to what exactly the purpose of the markets is. If we approach the issue from that angle, we see quite clearly that what Mr. Gates calls failure is actually something that lies outside the scope of markets. Healthcare markets, for example, do exist in both rich and poor countries, as do markets for other goods and services, but their exact characteristics are determined by (0ther) factors outside their direct scope and control. Humanitarian initiatives, such as those spearheaded by the Gates Foundation, can help alleviate human suffering in the short-term, and perhaps even eradicate certain diseases. That is commendable. But the long term solutions lie in poor countries putting their own houses in order. Mr. Gates' qualified capitalism is misguided and would ultimately be ineffective (or perhaps even counterproductive) in achieving its stated aims.
  3. Moral Capitalism
    Mr. Cameron's proposal is, unfortunately, the most mistaken of all. Initially this seems rather surprising coming from a Conservative Party leader, but on reflection perhaps not such a surprise given the seismic (leftward) shift that Tony Blair's decade in power wrought on British politics. Mr. Cameron's proposal is highly interventionist and, if carried out, would exacerbate the UK's already dire economic situation. The morality Mr. Cameron is saying should be added to capitalism is already there: a free market economy cannot function outside a strong moral framework of trust, respect for the law, respect for contracts, and so forth. Mr. Cameron's qualified capitalism would be an economic disaster.

Adam Smith still has it broadly right, some 233 years after he figured out how it all works.

Here's what the great man said in The Wealth of Nations (among very many other things, of course):

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.

(Book One: Of the Causes of Improvement in the Productive Powers of Labour, And of the Order according to which its Produce is Naturally Distributed among the Different Ranks of the People, Chapter II: Of the Principle which gives occasion to the Division of Labour)

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

(Book Four: Of Systems of Political Economy, Chapter II: Of Restraints upon the Importation from Foreign Countries of such Goods as can be produced at Home)

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