Godless Capitalism

Death, and taxes, have traditionally been the great levellers of society. This week, however, as news of laid-off Wall Street accountants dominated the airwaves, the vagaries of the economy emerged as a powerful equaliser of wealth. Faith in the free market may have been shaken by this financial crisis, but it also forces one to objectively reevaluate the culture of laissez-faire economics.

While frenzied fingers point in different directions to find a scapegoat, one is reminded of the old Nigerian saying that when one points a finger at somebody, there are three fingers pointing towards oneself. The current meltdown was orchestrated by the environment of deregulation that has been sweeping American markets for the last couple of decades. The theory was that competition would automatically convert a free-market into a fair-market, and a stable equilibrium would be maintained between the seller and the buyer, the employer and the employee, the lender and the borrower. Unfortunately, anybody remotely familiar with the tragedy of the commons knows that, without the supervision of a law-enforcer, human greed will always prioritise selfish gain over societal good.

The same is true for the free market. As is becoming increasingly clear, left to their own devices, the unregulated financial industry did not accomplish the goal of self-policing that would have provided long-term benefits to its employees, its shareholders and to society. On the contrary, the cumulative effect of years of malfeasance was so far-reaching that, ironically, big-government needed to be called in to save the day. Such an instance of heads-I-win-tails-you-lose would have been less likely in the presence of a government oversight body entrusted with the responsibility of raising flags for dicey transactions. Of course, a free market economy would allow a private company to make a risky investment, if it is approved by its board, but it should not expect to be saved by taxpayers if the deal sours.

Unfortunately, the ideology of deregulation is not just limited to the financial market. For instance, Nobel laureate Milton Friedman, father of modern American capitalism, had argued for the abolition of the Food and Drug Administration since, in his view, no private company would gamble with the health of its consumers. Although the FDA survived his campaign, years of budget cuts and gradual asphyxiation have rendered the watchdog as ineffective as a toothless tiger and the recent food contamination scandals demonstrate that faith in the moral compass of merchants is misplaced.

Paradoxically, most proponents of free markets, who dismiss the need for rules and regulations in the financial world, do not hesitate to sneer at a communist for believing that there is no need for a God who governs the lives of men.


AFTERTHOUGHT
I used to rule the world
Seas would rise when I gave the word
Now in the morning I sleep alone
Sweep the streets I used to own.
Coldplay, Viva la Vida

4 comments:

Sanjit said...

The letter quoted in the link below, I think, is one of the many examples of why the government may be no good.

http://cafehayek.typepad.com/hayek/2008/09/make-risky-loan.html

I am more and more convinced that the Govt. usually has an agenda which is less aligned with the good of its people and more aligned with ensuring its own good. I think the Govt's interests are short-term interests.

Yes, private concerns should not be bailed out of trouble using taxpayers money. In fact, most economists seem to agree that bailing out is just suppressing the symptom, more like turning eyes away from solving the problem. In fact most of the others support the bailing out as it will help control the "panic". I would dare any mainstream political party to come forward and propose not bailing out the failed firms. In fact bailing them out gives firms a false sense of security and very little incentive to have checks in place to avoid similar disaster in the future. As has been said by many in the last few days, you cannot socialize the risks in a capitalist economy.

It is difficult to see how regulation will ensure a stronger anything. Well, maybe if regulators were "God", but then we know that they are not. Consider the example of the FDA. It can ensure that the consumer knows the best that can be achieved in terms of food quality standards (that is a kind of effort I wouldn't mind my taxes going into). The FDA should come up with the best on the basis of what we know from scientific research. I don't see why companies won't adhere to the standards. Adhering to higher standards should give a company a greater market share. All we need is profit oriented companies. If the higher standards lead to a cost greater than what people can afford then even the regulators or the Govt. cannot do much. Of course, they can invest using taxpayers money but mere investment is no good and how does one decide what amount of the taxpayers money goes where and why should the government be the best judge of that (even in democracies of the kind we know)?

From the little I understand about free market ideology, it has nothing to do with faith in the morality of the merchants. In fact, it is an aspect of free markets that appeals the most to me. The markets, if driven only by demand and supply, provide incentives for greater innovation and betterment of the status quo.

Obama, although I find him saner than McCain, talks of increasing taxes for the rich. He seems to imply he knows better how the money that the rich have earned must be used. However, I am not convinced. We may or may not need God, but we sure don't need men acting God.

Sanjit said...

Interesting take:

http://www.nytimes.com/2008/09/19/opinion/19brooks.html?_r=1&ref=opinion&oref=slogin

Anonymous said...

sanjit, the op may have been hyperventilating when comparing regulation with playing god, but I disagree with your argument that free market dynamics will automatically hold a company to a higher set of standards in a non-ideal world.

for example, unions have no place in a free market because it is believed that it is in an employer's interest to pay the true and fair value of work otherwise he will lose the employee to a competitor, and we all know how well that worked out for blue-collar workers.

the fact of the matter is profit oriented companies, as you call them, believe in a different kind of god- MONEY, and the management cabal will cut any corner towards that end.

Sanjit said...

I am not too sure why free markets and unions don't go together. As long as the unions respect the right of a disagreeing worker to continue work and also the right of the company to employ cheaper labor if it so wishes, they have the right to exist in a free society. Of course, they cannot ransack property (as it doesn't belong to them) or harass the owners.

I don't see what is wrong with companies aiming at larger profits, more money etc. As long as the company is not using slave labor (and here is where the government needs to ensure that the law is upheld) or indentured labor I don't see why the company cannot choose what it pays its employees. Of course, how much one can demand or bargain will depend on the value of ones skills. It applies to both blue and white collar. Consider, for example, the software industry. Not all (for the same job description) get paid the same. Some move on to better paying companies while others cannot. Who can decide what the right salary of a software engineer should be? Also, do we really want all software engineers to earn a certain pre-decided "minimum wage"? If yes then what would be the incentive for any software engineer to do better, to give more to his/her job.

Another example, where regulation hurts, is that of the so called illegal immigrant unable to sell his skill for a price he/she is fine with (which is better than what he gets in his own country) because the government of the country where the opportunity exists has a minimum wage requirement. How fair is such a requirement? If such a requirement didn't exist and if people were allowed to avail of opportunities across borders illegal immigration would at least reduce drastically if not get completely eliminated.

I must also repeat that free markets don't allow for socializing of risks.