Capitalism: The Missing Links

Truth is not determined by majority vote.

~ Doug Gwyn

Update: This article was included in the Money Hacks Carnival #113 at Learn Save Invest. Thank you!

This is the third and final post in our mini-series introducing some basic thoughts on capitalism. In the last installment we asked Is Capitalism Broken? Whether you think our economic system is fatally flawed, functioning well, or in need of some repairs, most of us would probably agree that there’s room for improvement – although I’m sure a few might want to debate whether our current system should even be called capitalism.

It seems to me that there are 4 main qualities that are lacking in our current version of capitalism. I’ll briefly describe each here, although if I thought about it long enough, I’m sure I could find a few more missing links and write a full post on each. But that’s a challenge for another day.

Integrity

“Politics, it seems to me, for years, or all too long, has been concerned with right or left instead of right or wrong.”

~ Richard Armour

My old dog-eared dictionary says that integrity means “fidelity to moral principles; honesty” or “soundness; completeness”. I’ve always seen integrity as the cornerstone of success. It doesn’t matter whether I’m thinking in terms of business, economics, or family life. I don’t think you can experience true happiness without integrity. Or maybe it’s just me.

Matt Taibbi has been extremely vocal in his criticism of America’s largest financial institutions, and the role that their greed might have played in the near collapse of the global economic system. His most recent missive, Looting Main Street, is a scathing, no holds barred critique of the banking practices of some of the largest and formerly most respected financial institutions in the States. The subtitle says it all: “How the nation’s biggest banks are ripping off American cities with the same predatory deals that brought down Greece.”

I tend to agree with Mr. Taibbi (although I could probably express my opinion adequately with a lot fewer expletives). A lack of integrity is something for which capitalism should have no tolerance. It’s at the core of the rotten apple that spoils the bunch. Unfortunately a lack of integrity seems to have been part of the current zeitgeist for some time now.

Michael Lewis is another author who has been highly critical of Wall Street’s integrity deficit. His most recent book, The Big Shortwas released only a month ago. Its subtitle says it will take you “inside the doomsday machine” that manufactured the financial crisis. You can read the Washington Post review if you want a little more detail.

Cooperation & Effort

“This is a story about four people named Everybody, Somebody, Anybody, and Nobody. There was an important job to be done and Everybody was sure that Somebody would do it. Anybody could have done it, but Nobody did it. Somebody got angry about that, because it was Everybody’s job. Everybody thought Anybody could do it, but Nobody realized that Everybody wouldn’t do it. It ended up that Everybody blamed Somebody when Nobody did what Anybody could have.”

~ Author Unknown

I don’t think I can add much to that. Recall the sound bites from politicians and business leaders around the world over the past 2 years. Think about how little got fixed after the internet bubble, Enron, and countless other scandals and excesses. Ponder the story above in the context of improving our economy and our society and I think you’ll have plenty of food for thought – if you’re not too dizzy.

Failure

“We found a moral hazard in the balance. While relaxing regulations reduced the probability of violating game laws, they increased the probability of hunters mistaking another person for game.”

~ John Pepper

This quotation is actually taken from an economist’s comments on hunting regulations. I just thought it was kind of funny how it might actually be applied to capitalism as well. By relaxing limits on leverage at financial institutions and failing to regulate increasingly complex financial instruments like credit default swaps and securitized products, it seems we unwittingly gave large institutions the ammunition they needed to place the average citizen and the financial system as a whole in the crosshairs. Whether, or to what degree, these financial players did this on purpose, we may never know, although some less than flattering emails are providing some pretty damning evidence of corruption.

But the fact is that many very large institutions and a couple of car companies that should have failed were rescued by taxpayer dollars, ostensibly to prevent wider economic damage. We will all be paying higher taxes in the very near future as a result. Count on it. By rescuing these profligate businesses, we have sent the message that failure is no longer (or only selectively) part of capitalism.

Don’t forget that there were many other businesses that did fail as a result of the crisis that these rescued institutions helped to create. They are no longer here. Their employees no longer have jobs or pensions. But many of the biggest business failures are still here. We have rewarded failure. That’s not what capitalism is supposed to do.

Leadership

“Those who are too smart to engage in politics are punished by being governed by those who are dumber.”

~ Plato

I think our leaders currently reflect the other 3 missing links. Few display the integrity and cooperation that are necessary for success. Many have supported the regulations (or lack thereof) that cultivated moral hazard and in turn precipitated the financial crisis.

In some respects, we are all responsible for the current state of capitalism. Those of us who are lucky enough to live in democratic countries have elected these leaders. Part of the problem might lie in the fact that few of us want to vote for candidates who propose the fiscally responsible measures that might be required to pull us out of the mud. Like the story in in Cooperation section above says, it was Everybody’s job.

Witness California, a state with an economy that is larger than Canada’s. It’s ultra-democratic. It seems they vote on everything there. Unfortunately, a lot of folks voted for various laws with their own immediate interests rather than the long-term viability of the economy in mind. Now that state is in very serious financial trouble, having gone so far as to issues IOUs for tax refunds in lieu of cash last year.

These are a few areas where I think capitalism could use some improvement. What do you think of these? Can you think of any others?