On Capitalism

Wednesday, October 12, 2011

On Capitalism

Could you talk a little bit about why you support Capitalism?

(reposting as a text post by request so people can comment on it, etc.)

Sure, although just to be clear: Almost everyone in the entire world supports at least some measure of capitalism, including ostensibly communist governments in Cuba and China. Like, most people agree that private property has proven pretty useful, that cancer surgeons should be compensated more than young adult novelists, and that free markets have made it possible for more people to afford goods and services that lead to longer, healthier, and more productive lives.

(Take, for example, the refrigerator: In 1922, refrigerators cost almost twice as much as Model-T cars. Very few people could afford them, which led to increased food spoilage and likely higher rates of disease. Now, at least in the US, when people move into an apartment they expect to find a refrigerator. The story of how fridges came to be ubiquitous and cheap is a story of competition fueling innovation while also decreasing prices. You see the same story in technology—I paid a tenth as much for my iPhone as I did for my first computer, but my iPhone is more powerful and also fits in my pocket—and many other industries.)

But then again, almost everyone in the world, including most Wall Street bankers, supports regulated capitalism. Like, you very rarely find people arguing that Wal-Mart should be allowed to sell black-tar heroin to children. The free market is really good at finding efficiencies, but it is really bad at seeing far into the future: It doesn’t know that if we had a generation of teenage heroin addicts, it would hurt our economy in the long run. So we create a law that says Wal-Mart cannot sell black tar heroin to kids.

To me, the debate ought not to be about whether capitalism is good or evil, or whether government regulation is good or evil, but instead about what we as a community value, and what mix of regulations and free markets we need to achieve our goals.

So for example, let’s say we value the well-being of the planet. Well, free markets are pretty bad at figuring out that rain forests are valuable. Like, we all know that rain forests are valuable, because they increase biodiversity and turn carbon dioxide (of which there is too much) into oxygen (of which there is too little). This is a valuable service that rain forests perform for us, but markets have a very difficult time establishing its value, because it can’t be purchased or sold very effectively. So we need to step in and regulate by establishing value for trees that aren’t cut down so as to make them more valuable than trees that are cut down.

I’m a pragmatist: I believe economic policy should be driven by what works and not so much by idealism. Capitalism works. But unfettered capitalism fails, always and everywhere and spectacularly.

Let me add this in re Occupy Wall Street and the like: I believe that investment banking and finance are noble careers insofar as they serve the public good by figuring out how to distribute capital in a way that will maximize the creation of jobs, efficiencies, and innovation. But I think too many people in finance don’t take that social responsibility seriously and focus entirely on merely generating immediate profits for their clients. That’s not a problem markets can address, and the investment banking community seems unwilling to tackle it seriously. So it seems to me that government regulation is warranted.