Friday, December 9, 2011

Capitalism has mislaid its moral compass

(First published in the Nelson Mail and Manawatu Standard, December 7.)

Cast your mind back to the 1990s. The Berlin Wall had collapsed, and with it the entire rotten edifice of Soviet communism. Democracy and free enterprise were taking root in countries previously kept under repressive state control.

Internationally there was a marked swing from left to right. Thatcherism in Britain and Reaganism in the United States had radically changing the political landscape.

Even in countries such as Britain, Australia and New Zealand, the traditional parties of the left were shedding their socialist heritage and reaching a new accommodation with economic liberalism.

Political scientist Francis Fukuyama was sufficiently emboldened to write in 1992: “What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalisation of Western liberal democracy as the final form of human government.”

It was hailed as the ultimate triumph of capitalism over socialism. The great battle of the ideologies that had raged for much of the 20th century was proclaimed to be over. But was it?

Many of us thought so at the time, but we reckoned without one very important factor – that old human impulse, greed.

Capitalism’s golden age – if that indeed is what it was – turned out to be disappointingly brief. The Western world went on a delirious spending binge using borrowed money, precipitating what is now known as the Global Financial Crisis.

Consumerism – the urge to acquire the newest and best of everything – was rampant. In New Zealand, we joyously threw off the shackles after decades of tight economic controls by going on a residential property spree that drove house values, especially in fashionable suburbs and coastal resorts, to preposterous levels.

The new princes of capitalism, the bankers and financial traders in centres such as London and New York, acquired wealth previously undreamed of. Taking full advantage of an environment that spurned regulation and control in the belief that markets could safely be left to govern themselves, they created complex financial instruments tied to real estate values; and as these continued their apparently limitless upward trajectory, the money men rewarded themselves with stratospheric bonuses.

In New Zealand, investors fell over themselves in their eagerness to entrust their money to dodgy finance companies, some of them run by the same sharks who had feasted on the gullible during the sharemarket and property boom of the 1980s.

As is often the case, those closest to the centre of the action were the least capable of foreseeing how it would play out. They seemed to think the party could go on forever, but of course it couldn’t, and didn’t.

A catastrophic economic collapse reverberated throughout the West. Once-solid banks fell over like dominoes and had to be bailed out by the taxpayer, even as the bankers – by now completely detached from reality – continued to reward themselves with huge bonuses.

America was traumatised by unemployment and mortgage foreclosures. Thousands of New Zealand investors, many of them elderly, lost the savings they had counted on to keep them in their retirement.

More recently, the European Union has been through convulsions as incompetently managed economies collapsed under a mountain of debt and had to be rescued by more responsible member states.

Where this will end is hard to predict, but the unravelling of the EU can’t be ruled out. The industrious Germans can’t be expected to prop up the feckless southern Europeans indefinitely. And in the meantime, democracy itself is being undermined as elected politicians are replaced by technocrats appointed from Brussels.

Capitalism hasn’t covered itself in glory in Russia, either. There, assets that once belonged to the state have been corralled by a small coterie of ultra-rich and often corrupt oligarchs – hardly a good advertisement for the free market economy. Small wonder that the communist party still appeals to many Russian voters.

It’s fair to say, then, that capitalism is in crisis. In fact you could say it’s on trial.

You can sense a distrust of capitalism lurking behind public unease about our own government’s proposed partial selloff of state assets. People haven’t forgotten that when this last happened, state-owned businesses were flogged off at fire sale prices, stripped of assets and, in several instances, had to be bought back in order to save them.

There’s also a perception that unbridled capitalism runs counter to the spirit of egalitarianism that New Zealanders pride themselves on. I think too much is made of the gap between the rich and the poor; we shouldn’t worry that some people are stonkingly rich as long as everyone has enough, in the words of Listener columnist Joanne Black, to live decently. Yet there’s little doubt that social cohesion is undermined if people perceive that they live in a stratified society where status is determined solely by wealth.

One consequence of capitalism’s recent failings was the emergence of the Occupy movement, but it’s impossible to take seriously the ragtag protest groups that have taken over public spaces such as the steps of London’s St Paul’s Cathedral, New York’s Zuccotti Park, Auckland’s Aotea Square and Dunedin’s Octagon. They are mostly young and their idealistic minds are unencumbered by knowledge or wisdom.

Their objections to capitalism are vague and often incoherent. They express a fervent conviction that there must be something better, but they don’t know what it is.

The truth is that if there is a better way than free-market capitalism, humanity has yet to discover it. Capitalism may have temporarily let itself down, but it remains the world’s best hope for prosperity and peace. The world’s most liberal, humane, peaceful and prosperous states are all capitalist democracies – something the na├»ve young idealists of the Occupy movement don’t seem to grasp.

Certainly, socialism is no solution. Capitalism may not work perfectly all the time (what human system does?), but socialism has never worked anywhere, under any circumstances.

What’s needed, then, is for capitalism to rediscover its moral compass. In the words of Ken Costa, a former chairman of international investment bankers Lazards, the markets have “slipped their moral moorings”.

Costa was asked last month by the Anglican Bishop of London to lead discussions on how a form of “ethical capitalism” might work. While he believes markets are still the best system for creating growth and jobs, Costa said the market economy had shifted from its moral foundations “with disastrous consequences”.

The challenge now is for capitalism to set about regaining public trust. It may be a long haul, but it must be done.


Anonymous said...

What makes you think that the 'market economy' has a moral mooring, or that capitalism has a moral foundation. The most ardent advocates of unfettered capitalism, such as von Hayek, argued that there was no basis to make a moral judgment about market outcomes, as long as the players observed the law. The fact is that the Wall St big shots, and the local equivalent, are crooks, and they usually get away with it.

rivoniaboy said...

Why do we keep blaming Capitalism for our present predicament?
It is not true to say - "It’s fair to say, then, that capitalism is in crisis. In fact you could say it’s on trial".
Please allow me to spell it out for you - the entire calamity was caused by Government interference by not allowing Capitalism to work.
It was Government policy to compel banks to write mortgages with fuses
attached - to borrowers that had no hope of being able to repay.
It was Government who decimated state authority to regulate the financial sector
It was government that shielded subprime lenders from prosecution.
Guess who introduced the policy of
"privatizing profits and socializing debt"? It was not Capitalism.
Guess who introduced the policy "of too big to fail"? It was not Capitalism.
And while we are on the subject it is Government that has been debasing our currency for decades.
The challenge now is for governments to set about regaining public trust. It may be a long haul, but it must be done.

Redbaiter said...

Rivionaboy is dead right.

The way to improve capitalism is to get the damn socialists out of it.

Kiwiwit said...

It is no surprise that the biggest frauds and business failures in recent times have happened in what is perhaps the most regulated industry on earth - banking and financial services. Banks are completely controlled by government central (i.e. Reserve) banks who tell the retail and wholesale banks how much they can lend, at what interest rate and (in many countries such as USA) to whom.

This is not a failure of capitalism but another example of the law of unintended consequences - government regulation achieving the exact opposite of what was intended.

Rivoniaboy is right - the government bail-outs around the world (i.e. "privatizing profits and socializing debt") will only make the problem worse because it will prevent investors from understanding the true nature of risk.

Anonymous said...

what utter nonsense the right wingers make on this blogsite. The idea that central banks completely control private banks is a joke. All the major banks have branches in tax havens and have been operating outside national jurisdiction for years, all in the cause of tax evasion. If it is not the market players who created 'too big to fail' who was it, nobody forces merchants banks to merge with each other.

Kiwiwit said...

The Sentinel - I suggest you read the Reserve Bank Act and the Basel Accords on which much of it is based. It is these regulations that led directly to the development of derivatives, junk bonds and the secondary mortgage market that has caused all the problems in recent years.

Artist said...

Karl, do you know 'who' appointed De Bres as Race Commissioner?, why he was re-appointed after his first term...and the likelihood of him being re-appointed next year?

granddad said...

Karl, the financial crisis was caused largely by government. In other words it was largely a failure of government not 'capitalism' (whatever that means). In particular the idea that (in the US especially) that governments could 'bend' the time honoured rules of fiscal prudence in an attempt to put as amnay as possible into their own homes was the primary driver. Bankers and others simply respnded to the incentives places in front of them and acted accordingly.
This is not to exonerate bankers etc (eg credit rating agencies). A good analysis is provided by the book 'Reckless Endangerment'

The probligo said...


GHW Bush was a socialist. Ah, now that explains a lot. He "deregulated" Freddie Mac and Fanny Mae so that they became secondary lenders of last resort. In fact it could be argued that it was a "regulation" rather than "deregulation".

I can accept that Bill Clinton was a Socialist. He signed the Gramm-Beach-Bliley Law that removed the long-standing block on retail banks also acting as investment banks. The law was passed in large part to legalise, post facto, a merger of Citicorp and Travellers to create the foundation of what is now Citibank. BTW all three of the sponsors were Repubs (Texas, Iowa and Virginia). So I guess that makes the Repubs Socialists as well.

Too big to fail? Ever heard of Continental Illinois National Bank and Trust Company? That was in 1984. Yes, George Orwell was a Socialist so I guess that CINB's failure was his fault. Or was Ron Reagan a Socialist as well. It was on his watch. Oh, and CINB went broke from buying bad loans from Penn Square Bank - oil loans and the like.

I just can not stand idiots who try re-writing history.

rivoniaboy said...


You silly little socialist you.

The probligo said...

Facts make me a socilaist? If I rank with GHW and Ronald then I am truly in good company.

Richard McGrath said...

Capitalism does have a moral foundation.

It has been defined as a political system based on the primacy of equal individual rights - with the government's role restricted to protecting individual rights by prosecuting the initiation of force.

The implications of this are profound. A society based on the capitalist ethic would mean the end of taxation, which is the collection of money via extortion (threats of asset seizure and/or incarceration) and redistribution according to the whims of politicians.

Essentially, capitalism means equal rights, the free exchange of goods and services, the rule of law - in short: anything that's peaceful.

It's the rule of law, with respect for individual rights, that differentiates capitalism from anarchy (a lack of any government, which has no moral foundation).

Anonymous said...

I recommend that those who don't think that the global financial crisis was caused by finance capitalists look at the film version of 'Too Big To Fail'. This is where the former Goldman Sachs head is made US Treasury Secretary; Paulson and Bernacke realise the system is about to collapse, and they throw billions of dollars at the banks to rescue it. But because the banks are actually private, they still don't whether the financiers are going to use the money to save the banking system, or enrich themselves. If that isn't market failure and moral hazard caused by a lack of system regulation, and pure greed, well...

The probligo said...

RM, I always understood that Capitalism was a convenient name given to an economic system, sort of "economic anti-communism" if you will.

What your vague description fits best is called "democracy" by most. That is a political system, "political anti-communism" if you must.

There is another aspect that Karl has confused as well - that of "materialism". (Doancha just LUV all these "-ism" words?) The age of materialism is far from the golden age of capitalism as Karl has suggested. If I must, I would attribute that label to the period of the First Industrial Revolution, 1700 to 1850. That was the time of least government interference in economic change. But it is critical that the social impacts of those changes are remembered.

rivoniaboy said...


Look up "Capitalism" on Wikipedia you seem to be confused.Hank Paulson and Ben Bernanke were part of the Government.
It's good to see probligo finally bothered to look it up, after giving us his irrelevant version of US history.

Hank Paulson and Ben Bernanke were part of the Government

Richard McGrath said...


Goldman Sachs et al are not capitalists. They are corporatists who are happy to jump into bed with politicians and curry political favour. The banks willingly received corporate welfare at the expense of others.

A pro-capitalist government would have let the banks fail, so that their resources and personnel could be redeployed into more successful ventures. Bailing out banks encourages their delinquent behaviour, and it comes at a cost - people have to be taxed, or money borrowed, to pay for it all.

A pro-capitalist government would have abolished the Federal reserve, along with Fannie Mae and Freedie Mac, insitutions that were intimately involved in the property bubble and subsequent collapse in real estate values and foreclosures.

That anyone thinks the global financial situation is a failure of free market capitalism is an indictment of our education system and of the general level of economic intelligence in our country.

Anonymous said...

It is **socialism**, not capitalism, that is on its death-bed.

Welfare doesn't work. State-housing doesn't work. The welfare state was supposed to function like a trampoline - instead, it has become a hammock.

The left are utterly bereft of ideas, whining, moaning andreheating the same old failed "solutions".

Welfare is now utterly discredited, and state-housing is not far behind. State education will be the next thing to be discredited by the introduction of charter schools.

Capitalism and "the right" have won the battle of ideas, and deservedly so.

rivoniaboy said...

At last, both Richard McGrath and
thor42 understand the problem.

There is hope after all.
Thanks guys.

The probligo said...

Riviona, and Redbaiter for that matter as well,

I can get you any number of "free market totally unregulated capitalists".

Funny thing is that most of them are in Nigeria and Albania.

Brendan McNeill said...

This public talk recently hosted by Maxim Institute in NZ addresses the question very well.

"Democracy and the market are not machines that can run themselves," according to public intellectual, George Weigel, from the Ethics and Public Policy Centre in Washington DC. "It takes a certain kind of people, who are living a certain set of virtues, to make democracy work. As we have seen in Europe recently, a deficit of democratic culture can be as dangerous to the future of societies as fiscal deficits."