Re: Capitalism and Morality

by William Easterly

I am rather puzzled by this comment by Paul Ormerod. I certainly agree that social norms and ethics affect the behaviour of all of us. For example, they are quite effective in deterring cheating in business transactions, which would cause a businessman or corporate leader to be disgraced and ostracized. But selling a lot of things people want to them in exchange for money is not cheating or unethical, so I am not sure what Professor Ormerod thinks is wrong with the ethics of business. And where exactly is the evidence that corporate philanthropy towards the poor has become enough of a social norm that it will make a huge difference both to the poor and to the image of capitalism? I think most people will be more convinced by the huge amount of evidence that conventional capitalism brings increased wages for unskilled workers than they will be impressed by creative capitalism because of a few pennies for AIDS victims from Product RED T-shirts sold by the Gap.

Falling all over ourselves apologizing for capitalism and then offering a token amount of corporate philanthropy to try to repair its imagined defects is lame. If consumers of corporate products want those corporations to give a little bit of the money to the poor, then I am sure corporations will respond to demand. But this is small stuff as a force against poverty based on any available track record. A more reliable path to success against poverty is to simply take advantage of all the power of conventional capitalism that has already been abundantly demonstrated in the steady fall of global poverty over the decades. (One of the triumphs of capitalism is that it overcomes the probability of failure in most human enterprises that Professor Ormerod describes so well in his wonderful book "Why Most Things Fail.")

As far as the reaction to the Great Depression leading to some to favour Soviet planning at the time and afterward, well that was obviously a mistake wasn't it! Hopefully, few will make the same mistake again by overreacting to the current financial crisis. The secret to understanding is to keep our eyes on the long run and not the short run (Keynes' snide remark that we're all dead in the long run totally missed the point -- first, we do see the payoff in our lifetime, and second, it's thanks to our parents' commitment to free markets that we are where we are, and why don't we do the same for our children?) In the long run, on the other hand, the Chinese Communist Party dictatorship that Professor Ormerod sees as a rival gave us famines, great leaps backward, cultural revolutions, and deaths of tens of millions, and yes, the recent boom. But the latter came when the Communist mandarins gave up much of their totalitarian power to markets.

Yes, capitalism is frustratingly unstable and unequal, financial crises recur time and again, but what other system comes close to delivering the cornucopia Professor Ormerod acknowledges? The economists who got it right in the long run in the 20th century were Schumpeter and Hayek, who understood the gales of creative destruction and the chaos and unpredictability of free individuals interacting, yet realized that very chaotic freedom was the nursery of a material abundance unlike anything the world had ever seen.

Comments

[Anthony Castaldo]

Productive Capitalism

We are in agreement. However, the gales of creative destruction blow only when competition drives innovation and cost reductions. When competition is suppressed by competition outside the marketplace (creating phony legal hurdles, phony patent infringement lawsuits, selling at below cost to drive out startup competition, colluding with government for preferential treatment or tariffs) or impossible due to insurmountable barriers to entry, competition ends.

Unlike living organisms, companies do not grow old and die, and do not have to create offspring that will inevitably compete with them. Unless they make a fatal management error, which becomes less likely as they gain experience and learn, the natural outcome of unregulated competition is for the strongest company to eventually monopolize its niche.

Although it is possible for some physical or political catastrophe to undo them, it is far more likely that any cause of demise for an unregulated monopoly is terminal mismanagement; failing to police their niche and absorb or suppress nascent competition.

It is the competition for customers, workers, investors and supplies that makes Capitalism deliver the cornucopia of its benefits, but it must be controlled by government to perpetuate this competition and avoid the natural outcome.

I believe the reason there is any call for "Creative Capitalism" and Corporate Social Responsibility is precisely because the government has failed in its mission, so the corporations are seen as having the power, and the natural response is to ask THEM to step in and perform the government function that is going undone.

Leave the corporations to their task. Stop the monopolies, tax the companies, and demand that government use those taxes to alleviate poverty, invest in infrastructure and education and environmental controls. That is their job, to take the long view and do the necessary but fundamentally unprofitable tasks, such as defending the country or building roads or protecting the environment or funding fundamental scientific research. Or to execute tasks where a profit motive is unwanted, such as police protection or courts.

If you really want to put Capitalism to work alleviating poverty, progressively tax the profits of corporations and have the government hire, monitor and audit competing firms to do the work of alleviating poverty.