"The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of misery." - Winston Churchill
What should the proper goal of an economic system be? Should it be prosperity or social justice? The easy answer, of course, is "both", and any policies that simultaneously promote growth and help the impoverished are going to be popular.
But many times we are faced with a decision to advance either one or the other; greater wealth or greater equality of wealth. The two goals can't be pursued in tandem; policymakers must choose which goal is of greater importance. This is complicated by the fact that advancing one goal may not just ignore the other; it can actually cause the other to lose ground. Higher taxes make more job training available, but hurt the balance sheets of companies who might otherwise want to hire the newly trained workers. On the other hand, reduced tax rates offered to select industries to promote job growth can spark a bidding war between jurisdictions, cutting tax revenues for each one without actually generating any new jobs.
So it's usually a trade-off. How do we decide what to trade off, and what to keep? Many free-market enthusiasts will plump for prosperity. The role of the state at most is to work for equality of opportunity; then the market will reward best those willing to work more, or with greater skill or intelligence, or with greater judgment on when to save or when to invest. Let those who earn success keep the rewards of success. Those who don't succeed either judged badly or didn't try hard enough in the first place, and deserve no special consideration.
That's a pretty extreme position, and even most free market fans will temper that with a little mercy. No one can guarantee equality of opportunity. Those whose parents push for education will tend to be more skilled than those whose parents act otherwise. Some people invest wisely, but still come short due to sheer bad luck. In fact, many of the most successful American capitalists of the past (Jay Rockefeller, Andrew Carnegie, Henry Ford), who cut their teeth in ruthless markets, were also dedicated philanthropists whose foundations and social work pay dividends even today. This tradition continues, as many of today's successful businessmen are active in community service groups such as Rotary, Kiwanis, and thousands of local charities and churches. Many who appear to be tough-as-nails on the job are deeply involved (personally and financially) in non-profit organizations to help the less fortunate.
I think the feeling of sympathy and compassion for others is a common thread in most of humanity, regardless of political or economic views. Where the true division lies is who should shoulder the burden of aid. Free-market types put their faith in private philanthropy, while believers in social justice see this as the proper role of the state.
There is sometimes a deeper motive for using the state in the role of benefactor. It's not just a matter of helping the poor. It's a feeling that what is really needed is punishment of the rich. There's a sense among many people that being wealthy is a moral failing. "Behind every great fortune is a great crime, to misquote Balzac. Envy is human, but for some this goes beyond mere jealousy. This is class warfare (if you're not rich, as Karl Marx was not) or self-loathing (if you are rich, as Max Engels was). The need to soak the rich with punitive taxation, undermine private enterprise with burdensome and damaging over-regulation, and replace local charities with bureaucratic public programs frequently stems from a visceral desire to humble those who are at the top of the ladder of success.
This is not economics. This is not ethics, either. On a small scale, it's petty. When it becomes a philosophy of governance, it's poisonous. To make success at commerce a cause for wrath is to make prosperity impossible to achieve, at least legally. Ambitious people leave the private sector and enter the public sphere, turning their energies (and their egos) into building power bases rather than building thriving commercial enterprises.
A grasping government, it turns out, doesn't do much to pursue social justice anyway. Better to leave the creation of prosperity, and the pursuit of social justice, to the private sector.
Thursday, August 27, 2009
Thursday, August 20, 2009
Market Morality: Why Free Markets?
Are free markets the right answer for economic development and a moral society?
As a people, Americans have shown a stronger preference for free markets than have the people of nearly all other nations. We instinctively trust in free enterprise vs. a planned economy, and view public services as naturally indifferent to customer needs and inefficient in delivering desirable products and services. This preference is a deep-rooted element in our culture, and goes back to before the American Revolution, when the King and Parliament were in faraway London, and the early colonists had no one to rely on but themselves. Since then, fresh waves of immigrants, fleeing rigid and rickety economies in Europe and elsewhere have preserved and reinforced our ancient habit of relying on ourselves and our neighbors, rather than our “public sector”, for providing us with food, shelter, and other goods and services.
Yet today we are experiencing perhaps the deepest disillusionment with free markets since the Wall Street Crash of 1929. Last year saw the meltdown of financial institutions and financial markets across the globe. Unemployment and foreclosures skyrocketed. Meanwhile, 401(k) values and retirement investments crashed. Whole sectors of our economy, such as investment banks, home builders, and auto manufacturers, saw bankruptcies on a massive scale. What went wrong? Who shoulders the blame? How can we fix our economy to keep this from happening again?
One cry that has risen across the country is outrage over the failures of Wall Street and its high-paid managers and executives. Financial firms placed huge bets on exotic instruments, and when things went sour our Federal government had to pour billions (or maybe trillions) into insolvent firms to keep the rest of our economy from going into a meltdown. Meanwhile, the CEOs who led their firms into collapse collect hundreds of millions of dollars in “performance bonuses” and “golden parachutes”. Why are ordinary Americans being forced to pour so much money into the pockets of the same men who undermined our prosperity?
The answer, of course, is to try to protect what is left of our own prosperity. Saving the paychecks of failed CEOs is an unfortunate side effect of bailing out our nation’s credit system. These men are ruined in reputation regardless. (Many are ruined in wealth as well, as this recession has savaged asset holders with a ruthlessness rarely seen in economic downturns). But to let the nation lose its great financial institutions would be a calamity?
Why would it be so bad? Perhaps you don’t care a whit about the New York Stock Exchange, or the prime rate, or the yield curve. You just want to earn a living and put something away for retirement. The credit system isn’t something you use every day, so who cares if it has a tough year?
The reason why you care is because you almost certainly use the credit system for your personal life. I’m not talking about checking accounts or credit cards. Those are useful (almost necessary), but that’s just the mechanics of one part of our credit system. The part of the system that affects our daily lives, and that went into jeopardy, is the part that loans money. You may not be a customer for T-Bills or credit default swaps. But how many times have you paid cash for a house? Or a car? Nearly all such purchases are made on credit, and the failures of Citibank and GMAC go right to the use of mortgages and car loans for ordinary Americans to make big-ticket purchases.
The bigger question is, What Next? Was this a market failure? Or is the idea of markets a deeper failure? How can our economy serve society and its members best, through free enterprise or through public activism?
In the real world, of course, there is always some mix of the two. In the most laissez-faire state (Hong Kong is a good example), government still regulates financial markets (as well as providing infrastructure, public safety, etc.). In the most totalitarian states (North Korea, for example), private property still exists, though it is effectively limited to personal effects such as clothing, furniture, tools and such. But the emphasis between private vs. public sector is quite different for these two nations, and the results are also vastly different.
So what is the proper mix? When is the state the solution, and at what point does the state become the problem? What is the proper aim of our economic system? Is it to create prosperity or advance social justice? Is it to enable personal freedom, or generate the greatest wealth for the greatest number? Are public officials honest brokers or empire-building egoists?
It’s my aim to explore those questions here at Market Morality, and shed some light on what has become the defining question of today’s political debate.
As a people, Americans have shown a stronger preference for free markets than have the people of nearly all other nations. We instinctively trust in free enterprise vs. a planned economy, and view public services as naturally indifferent to customer needs and inefficient in delivering desirable products and services. This preference is a deep-rooted element in our culture, and goes back to before the American Revolution, when the King and Parliament were in faraway London, and the early colonists had no one to rely on but themselves. Since then, fresh waves of immigrants, fleeing rigid and rickety economies in Europe and elsewhere have preserved and reinforced our ancient habit of relying on ourselves and our neighbors, rather than our “public sector”, for providing us with food, shelter, and other goods and services.
Yet today we are experiencing perhaps the deepest disillusionment with free markets since the Wall Street Crash of 1929. Last year saw the meltdown of financial institutions and financial markets across the globe. Unemployment and foreclosures skyrocketed. Meanwhile, 401(k) values and retirement investments crashed. Whole sectors of our economy, such as investment banks, home builders, and auto manufacturers, saw bankruptcies on a massive scale. What went wrong? Who shoulders the blame? How can we fix our economy to keep this from happening again?
One cry that has risen across the country is outrage over the failures of Wall Street and its high-paid managers and executives. Financial firms placed huge bets on exotic instruments, and when things went sour our Federal government had to pour billions (or maybe trillions) into insolvent firms to keep the rest of our economy from going into a meltdown. Meanwhile, the CEOs who led their firms into collapse collect hundreds of millions of dollars in “performance bonuses” and “golden parachutes”. Why are ordinary Americans being forced to pour so much money into the pockets of the same men who undermined our prosperity?
The answer, of course, is to try to protect what is left of our own prosperity. Saving the paychecks of failed CEOs is an unfortunate side effect of bailing out our nation’s credit system. These men are ruined in reputation regardless. (Many are ruined in wealth as well, as this recession has savaged asset holders with a ruthlessness rarely seen in economic downturns). But to let the nation lose its great financial institutions would be a calamity?
Why would it be so bad? Perhaps you don’t care a whit about the New York Stock Exchange, or the prime rate, or the yield curve. You just want to earn a living and put something away for retirement. The credit system isn’t something you use every day, so who cares if it has a tough year?
The reason why you care is because you almost certainly use the credit system for your personal life. I’m not talking about checking accounts or credit cards. Those are useful (almost necessary), but that’s just the mechanics of one part of our credit system. The part of the system that affects our daily lives, and that went into jeopardy, is the part that loans money. You may not be a customer for T-Bills or credit default swaps. But how many times have you paid cash for a house? Or a car? Nearly all such purchases are made on credit, and the failures of Citibank and GMAC go right to the use of mortgages and car loans for ordinary Americans to make big-ticket purchases.
The bigger question is, What Next? Was this a market failure? Or is the idea of markets a deeper failure? How can our economy serve society and its members best, through free enterprise or through public activism?
In the real world, of course, there is always some mix of the two. In the most laissez-faire state (Hong Kong is a good example), government still regulates financial markets (as well as providing infrastructure, public safety, etc.). In the most totalitarian states (North Korea, for example), private property still exists, though it is effectively limited to personal effects such as clothing, furniture, tools and such. But the emphasis between private vs. public sector is quite different for these two nations, and the results are also vastly different.
So what is the proper mix? When is the state the solution, and at what point does the state become the problem? What is the proper aim of our economic system? Is it to create prosperity or advance social justice? Is it to enable personal freedom, or generate the greatest wealth for the greatest number? Are public officials honest brokers or empire-building egoists?
It’s my aim to explore those questions here at Market Morality, and shed some light on what has become the defining question of today’s political debate.
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