Saturday, October 3, 2009

Phony capitalism

Luigi Zingales’ article, “Capitalism After The Crisis”, should be required reading for everyone. I’m relatively new to thinking seriously about the most desirable relationship between government and business so this article helped me understand the absolutely crucial distinction between being pro-market and being pro-business. As Zingales makes crystal clear the two positions are far from the same and in fact should more properly be understood as opposing each other.

It’s hard to pick just one quote from an article which needs to be quoted in entirety but in keeping with the theme of my immediately preceding post I chose this paragraph:

When the government is small and relatively weak, the way to make money is to start a successful private-sector business. But the larger the size and scope of government spending, the easier it is to make money by diverting public resources. Starting a business is difficult and involves a lot of risk — but getting a government favor or contract is easier, and a much safer bet. And so in nations with large and powerful governments, the state tends to find itself at the heart of the economic system, even if that system is relatively capitalist. This tends to confound politics and economics, both in practice and in public perceptions: The larger the share of capitalists who acquire their wealth thanks to their political connections, the greater the perception that capitalism is unfair and corrupt.

Via Greg Mankiw of course.

1 comment:

Beard said...

At some point, I hope to read the Zingales article you link to. Looks interesting.

Meanwhile, I would like to put an alternate interpretation on the table, to consider (as I will be doing) while contemplating this and similar arguments.

In our society, especially the economic sphere of our society, there are not one, but two, species of intelligent agents participating, and not on the proverbial "level playing field". We individual human beings are members of the one species, and we seem to hold the touching illusion that we are the only species involved. Therein lies danger.

The members of the other species are corporations, by which I mean profit-making companies, non-profits, governments large and small, churches old and new, and probably several other kinds of corporate entities that I haven't named.

It's important to recognize that, once these corporate entities get beyond some small size, they become essentially independent of the individual human parts that make them up, just as you are independent of your cells and your organs.

A corporate entity is legally a person, in that it can own property, sign contracts, and so on. (This is a human innovation less than 400 years old, though there are corporate entities like the Catholic Church that are far older than that.)

Unlike individual human beings, corporate entities do not have a bounded lifespan, which is really helpful in the economic sphere, where the power of compound interest really kicks in after several decades of economic life. They are not invulnerable, obviously, since they can die of starvation, be eaten, or be killed in some other way. Nonetheless, at least the big ones have a substantial advantage over individual humans in the economic sphere.

Not surprisingly, the economic sphere flows over into the political sphere, and political decisions control access to money. (For a corporation, money is life's blood, so Darwin ensures that surviving corporations are focused on accumulating and protecting it.)

The U. S. Constitution gives the vote to individual humans, and not to corporations. However, corporations have accumulated large amounts of economic and political power, and are driven to survive (like any creature). How do you suppose they will respond to threats? Naturally, by taking actions to ensure that voters (i.e., individual humans), vote in ways that protect their interests.

Take a look at our society through this lens, seeing it as an ecology between two somewhat-interdependent species, each driven to survive, but each having different types of capabilities. Lots of things start to make new kinds of sense. And it doesn't look that promising for humans.

The Zingales quote you include in your post is about the competition among different corporations, where the US Government is certainly one of the larger (though one that is arguably more responsive to individual voter influence than, say, Exxon).

Note that creating a corporation is a little like having a baby. In the beginning, it is entirely dependent on its human creators, and maybe will be for the rest of its tiny life. But if it grows up and becomes large and successful, it becomes independent of its creator. Consider Bill Gates and Microsoft. Is it any wonder that Bill and Melinda have left Microsoft, and are focused almost totally on the Gates Foundation. (The Foundation will also outlive them, of course, but it is still far more under their individual human control than Microsoft is.)

What I am advocating here is a quasi-racist view of the world, not among races of human beings (who are equal under law), but between the species of human beings and the species of corporate entities (who are treated quite differently under law, and often not to the advantage of humans).

We may not be able to avoid having these two species live together. But we need to consider and govern the relations between them more carefully than we have thus far, while we humans still have the power to do so.