15 Nov 2019
“From each according to his ability, to each according to his needs” Karl Marx wrote in 1875.
As a backlash against capitalism gathers momentum in the developed, capitalist west, among younger citizens in particular, Marx’s rallying cry has growing resonance. Why should the 1 per cent benefit while the 99 per cent go backwards?
"When we argue “capitalism” has failed what we are really saying is policy and regulation has failed.”
Why should Boomers reap the benefits of growing up with free education, cheap housing and secure employment while Millennials struggle to afford housing and avoid penury in retirement (if they get to retire at all)?
Is Big Capital destroying the environment and pillaging developing communities?
As a system for sustaining societies and sharing its production equably while protecting its vulnerable, Marx’s vision of a mature Communist society liberated by socialism sounds worth pursuing. As it always has. Apart from the fact it doesn’t work.
The fundamental flaw in Marx’s thinking is that while humans are social they don’t support socialism. Self-interest, the profit motive, tribal instincts, inherent biases and a cognitive reflex to see the world through individuals rather than aggregate populations means socialism inevitably goes awry. Some are always more equal than others.
There are no truly Communist or even socialist societies in the world today. Capitalism, be it flawed, crony-based, with certain “characteristics”, state-directed or policy distorted, underpins every economy – whether they be the most undeveloped or developed.
There are always “prices” on goods, capital and services - markets exist in Pyongyang as well as New York, agents transact everywhere. People trade, and they exploit their competitive advantages.
When we argue “capitalism” has failed what we are really saying is policy and regulation has failed.
Even in the global financial crisis, markets didn’t fail – indeed they worked all too well. The issue was price signals were wrong: those who didn’t realise they were carrying the risk paid the price. Too many who were being paid astronomically as if their risk was enormous actually were taking very little risk at all.
Yet there is no doubt there is a crisis of faith in capitalism and even if the wrong suspect is in the dock the crimes are very real: incomes are distorted, rents are all too prevalent, markets are being gamed.
So to paraphrase Reg: what has Capitalism done for us? Well, for all its distortions, as a population we are living longer and are healthier and wealthier with more leisure time than ever before.
That case has been made many times, backed by substantial evidence from myriad sources. A very readable, recent recapitulation by David Brooks for The New York Times: “I Was Once a Socialist. Then I Saw How It Worked” argues the case.
For Brooks, capitalism is essentially a peerless system for learning the best solutions because it offers constant choices and rewards.
“Socialist planned economies – the common ownership of the means of production – interfere with price and other market signals in a million ways,” he argues. “They suppress or eliminate profit motives that drive people to learn and improve.”
Brooks – and again he is far from the first to make this case – lists the real world superiority of capitalism over socialism:
Yet the criticism levelled against capitalism is genuine. Income disparity is widening, globalisation and, increasingly, technology disenfranchise some communities. While the world as a whole enjoys cheaper manufactured goods as their production shifts offshore, those communities which used to produce the more expensive goods suffer.
Technology, and particularly the so-called “fourth industrial revolution” of artificial intelligence and machine learning, have even fewer borders. In the recovery after the 2008 financial crisis, it is very clear owners of capital by and large became wealthier.
The challenge is the aggregate improvement in wealth has not been shared equally or fairly. All too often too much has gone to those with the money or political influence to distort the rules, obscure fair pricing and extract rents.
Consider a particular example of where capitalism appears to have gone awry: residential property ownership. While a secure place to live is an essential attribute of a healthy society, there is no direct connection between that and actually owning a home.
Indeed, the most recent edition of The Economist covered with an analysis called “The Horrible Housing Blunder”.
“Dysfunctional housing markets prevent vibrant cities from growing, as high prices make it hard for workers to move to where the most productive jobs are,” the newspaper opined. “The soaring cost of housing has created gaping inequalities and widened both generational and geographical divisions. This inefficiency and unfairness has also undermined public faith in capitalism.”
Again, the fault lies not with capitalism but with housing policies – over the decades – which have made of home ownership a cargo cult.
Or take the short-stay accommodation market driven by platforms like Airbnb. There are growing signs this market advantages property owners at the expense of society in general and their neighbours in particular.
That’s not because of capitalism but because the full costs of short term letting are obscured or ignored. As this market develops it is clear it is impacting the supply of rental accommodation, lowering the capital value and raising the maintenance and security costs of buildings with higher proportions of short-stayers and generating tax avoidance issues.
In pure capitalism, these higher costs, including the societal costs of less affordable housing, would be paid by the landlord – maybe by higher fees and taxes – who would measure them against the rental income. But at the moment landlords (and indeed other sectors which generate “negative externalities”) don’t pay for them.
This isn’t capitalism it is rent seeking – the rents being paid by all of us to the benefit of the landlord.
It is challenges like these – on a much grander scale – that need to be addressed to restore faith in a system which, fundamentally, has improved human existence.
As the Financial Times’ eminent economics commentator Martin Wolf argues, the problem today is capitalism has been “rigged” – by rent seekers, those with the power to influence policy and regulation, who can avoid the transparency of the market.
“We need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits,” Wolf wrote. “What we increasingly seem to have instead is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy.”
In place of crony capitalism and political expediency we need – in the jargon favoured by the latest World Economic Forum (WEF) – “stakeholder capitalism”.
At the WEF junket in Davos, Oxfam restated Marx’s original insight into the tension between labour and capital. Oxfam attributes the wealth gap to “greater financial return placed on money and assets (capital) than on work”, as well as corporate tax avoidance, tax breaks for asset owners, stagnant wages, insufficient public spending and a winding back of progressive taxation system.
These are issues with policy and transparency, not with capitalism. And something needs to be done.
Andrew Cornell is managing editor of bluenotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
15 Nov 2019
30 Sep 2019