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Forbes Column 2009: Capitalism’s Fundamental Flaw

Posted on Friday, Nov 6th 2009

You cannot help the poor by destroying the rich.
You cannot strengthen the weak by weakening the strong.
You cannot bring about prosperity by discouraging thrift.
You cannot lift the wage earner up by pulling the wage payer down.
You cannot further the brotherhood of man by inciting class hatred.
You cannot build character and courage by taking away people’s initiative and independence.
You cannot help people permanently by doing for them, what they could and should do for themselves.

William J. H. Boetcker (often misattributed to Abraham Lincoln)

The system isn’t rewarding the right people: innovators and creators. Read more in this week’s column, Capitalism’s Fundamental Flaw.

This segment is a part in the series : Forbes Column 2009

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I read a few of you articles, which are well thought out. I have a few criticisms. First with regards to banking, you ignore the Federal Reserve, which is more of a corporatist / bankers guild model, and not free market. Related to this is fiat currency, which rewards those who first get it. You also contradict yourself by saying we need regulation to keep the banks from looting more taxpayers money. But surely if banks are somehow getting ***taxpayers*** money, you aren’t dealing with capitalism.

Now I agree we have problems. Why are CEOs taking down 100’s of millions? What is the flaw in corporate governance. Why are speculators, who produce nothing, making millions? Believers in free markets need to address these problems. One thing to consider, though, is that the explosion of CEO pay and rank speculation correlates well with Nixon taking us off the gold standard. So if we had a gold backed dollar, and 100% reserve banking, would we be seeing these abuses? That is a tough question to answer.

As an aside, with regards to ethics in the free market, please search for “Rerum Novarum” at the WWdotEWTNdotCOM document library. I think that will fill in the gaps. It’s basic premise is respect for private property and a condemnation of socialism.

JamesD Saturday, November 7, 2009 at 12:14 PM PT

Ms. Mitra:

I just read your article about capitalism’s flaws and enjoyed it very much. In particular I enjoyed your brief recounting of the early development of (and influences on) your maturing ideology and world view. I
smiled because I travelled a very similar road although, judging from your photograph, I got started a bit earlier.

I have one embryonic thought for you to mull over, then one observation. Several decades ago we worried about the fact that tax-lawyers and investment advisors earned more than engineers and scientists. One group represented overhead and transaction cost, the other productivity and economic development. You raise similar (and legitimate) concerns, if cast somewhat differently. You might consider the possibility that these relative prices are the correct market clearing (if unseemly) expressions of value. They may result not from market failures (or failures in capitalism itself) but from market recognition of unwholesome disequilibria in capital markets. Specifically, there may be “too much” money (investment demand) chasing “too few” sound and viable economically productive investment opportunities (supply).Investors desperate to get off the sidelines and put money to work may be willing to pay a significant premium to those “able” to put their money to work at “reasonable” rates of return.

We may all have a tendency to attribute unpleasant market results to market failure. The danger in such a possible mischaracterization is that disengaging or dismantling more or less naturally occurring market mechanisms (particularly if they are getting the prices “right”) may induce very different long term externalities and unintended consequences than addressing the root causes of market imbalances. This is why the diagnosis/characterization may be so important. I SUSPECT that speculators are periodically (and currently) rewarded more highly than creators/producers because there is far too much cash (money) chasing far too few economically productive investment assets. So there is, in effect, (as an agnostic market sees it) a glut of productive – creative – symbolic problem solvers relative to economically productive assets with which to create and produce; and a severe shortage of people capable of finding attractive investment channels for the surplus of unemployed money currently sloshing around.

This may help to explain the idiotic mortgage backed securities instruments that induced our housing bubble. I suspect too that it explains why otherwise mercenary and self-interested investors are willing to allow investment bankers (that is to say brokers and transactional functionaries) to realize such extraordinary fees (market rents) in a time of economic scarcity. My guess is that the market is working just fine as a market clearing and pricing device and that capitalism is working as well; but that we have very serious structural (perhaps even transformative) issues which must be addressed. It would be a shame to dismiss markets, including capital markets, just because they are working – particularly when
they may be the very tools we need to correct the underlying problems.

It seems likely that these problems (too few productive assets and economic input-consuming enterprises and too many unemployed inputs – both capital and labor) will persist, even become worse, before they get better. Current federal policy strongly suggests this.

And finally: As you know, the lion tends to react to every other animal in the jungle as if it were a lion (and a threat). When those commenting on your published thoughts suggest it preposterous to assume that people acting in their own economic self interest can or will do the right thing, they are either 1) revealing something unseemly about themselves and their own behavior or instincts, not those of others whom they do not know, or 2) have never been economic activists or known the satisfaction of contributing to the greater good while attending to one’s own economic self interest.

Bill Bishop Monday, November 9, 2009 at 11:13 AM PT

My compliments on your comment. I found it to be educational and informative. However, I am not sure if it is ingeniously constructed to confuse while directing opinion or my intellect is seriously lacking.

While you profess to address a disparity between value attributed to creators and manipulators (or leeches to be crude) the general crux of your comment seems to be a contradiction, both maligning the status quo of a debt based fractional reserve economy creating a surplus of investment and a justification of this same situation via a description of a "working market."

My own instinct would deduce, correctly or naively, that for every taxpayer funded technological advance an efficiency is created that is invariably forced to create an extra layer of profit or non-productive job creation (sales, marketing, advertising or simply casino style movement of imaginary funds back and forth) rather than an increase in lifestyle or reduction in working ours for those actually "creating" wealth.

I don't pretent to have the answers. It's a lot easier to spot something wrong than to come up with something right. I agree that selfish interest is selfish but only if you can create a situation when mutial interest is recognised. Game theory recognises this, as do simplistic proverbs referring to a single person "cheating" for gain but a group collectively losing out when everyone "cheats." I've got the feeling I'm rambling so I'll sign off with an invitarion to please correct me where I'm wrong or provide informative argument for or against anything I've wrote.

TheZen80 Wednesday, September 15, 2010 at 4:09 PM PT

I am sorry I don't understand what you are saying.

sramana Wednesday, September 15, 2010 at 8:27 PM PT