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Jedediah Purdy Headshot

The Morality of Capitalism: Where to Start the Debate

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Despite what David Brooks thinks, it is not true that Barack Obama has forced Mitt Romney into a debate about the morality of capitalism. Too bad. But with Bain, LIBOR, and offshoring all in the campaign mix, it's just possible that that the debate might happen. If we manage to have it, a few points should come into focus.

First, there are some good moral defenses of capitalism. They appeal to freedom, dignity, responsibility, and humanitarianism.

Second, these arguments are weakest as defenses of the kind of finance capitalism that Bain Capital and much of Wall Street practice these days. This hyper-capitalism borrows the traditional defenses of the system, but it doesn't much deserve their support.

Third, all the good defenses of capitalism are equivocal. They don't say that it produces the best imaginable world, but that, all things considered, it's the best we can do. This is the basis for a mixed economy of intelligent regulation, a strong public sector, and responsible capitalism. How to create that balance should be the question, not a for-or-against punching contest between blow-up caricatures.

Why a moral conversation? Why not just talk about the economists' go-to, efficiency? Well, partly because efficiency is itself a value, not a neutral and objective principle, and partly because, as Brooks admits in the New York Times today, it isn't enough. I will come back to it.

So, what are the moral defenses of capitalism? They belong to a tradition that goes back to Adam Smith and earlier.

1. Freedom. This has always been the first appeal. Smith called "natural liberty" the power to buy and sell, take or leave a job, make a deal with whomever you like. This was urgent for Smith because he saw markets as the best of three ways to organize economic life, the others being feudal hierarchy and slavery. Those alternatives assigned people to work based on unequal status and obligation, while markets let them sort themselves by choice. Today it is part of the American ideal to be able to start a business, a new career, or a new life, by pulling up stakes and trying something new. People who complain about the regimented life in, for instance, Cuba, talk about lacking this kind of freedom,

But freedom to design and market complex derivatives instruments, do proprietary trading with little oversight, or make opportunistic raids on temporarily weak companies does not necessarily promote this value. As conservatives are generally better than liberals at remembering, freedom needs to be limited to maintain social order and security -- including security against financial crisis and predatory market practices.

Also, freedom is at least a two-part thing: it can be limited by someone's preventing you from making the choice you want -- which happens a lot in Cuba -- or by economic circumstances' denying you any attractive alternatives -- which happens to plenty of people in the United States. Capitalism is generally good at protecting the first aspect of freedom, but mixed on the second. That's part of the reason good education, labor regulation, health care, and other aspects of security have been core parts of North Atlantic models, from the relatively libertarian U.S. to the relatively socialist Sweden. These are compromises from the point of view of dogmatic capitalism, but -- if they are done competently -- they are gains from the point of view of promoting freedom.

2. Dignity. Adam Smith thought markets promoted a kind of community that people should aspire to have: one based on mutual respect for others' talent, energy, and hard work. Anyone who has worked with, or been, a craftsperson, tradesman, or professional with a small practice has some idea of what this is about. These relationships are not the love of a family or the solidarity of a band of firefighting volunteers; but neither are they the selfish stratagems of heartless, caricatured capitalism.

Finance capitalism helps create an economy that is pretty far from Smith's ideal. People who have worked for Bain-style outfits talk in private about firing low-level employees of newly acquired companies at random, with a keystroke, because eliminating every third person on the payroll was a cheaper way of improving short-term profits (before unloading the company) than looking into each one's performance. I might not believe it if I had not heard it first-hand (and on background).

These grotesque incidents aside, the last fifteen years of finance capitalism have hardly been about producing respectful bonds among competent, hard-working people. They have mostly rewarded esoteric cleverness, the knack for taking advantage of tiny margins and subtle loopholes, and -- it is more and more clear -- political connections, not least the kind that can be purchased. This kind of capitalism is at best devoid of any concern for the individuals whose jobs and businesses it upends.

Respectful, mutual relations, where people have some sense of getting what they have earned, do best in moderately stable and secure economies. There has to be room for innovation and competition, but the constant churn of speculative finance and consolidating mega-companies has actually reduced the share of Americans who own their own businesses -- the paradigm of capitalism dignity.

3. Responsibility. Giving people what they earn, and not what they don't, is close to the core of American economic culture. Our capitalism is always defined against people who take advantage of some system to get what they don't deserve -- for instance, gaming disability benefits, enjoying a subsidy or a coddled union job. The sentiment is just as intelligible as resentment of sneaky Wall Street traders and those who fool around all their lives with inherited wealth. Since, psychologically, most people compare themselves with those down the street or in the next income bracket, rather than remoter contrasts, these responses should not be surprising.

The problem is that our finance capitalism doesn't reliably reward hard work and talent. It does so pretty much to the extent that it secures freedom (because you can't take responsibility for what you never had the opportunity to do) and dignity (which, in this context, means "how it feels when people appreciate your responsibility"). Like the other values, this is a double-edged blade, defending markets against some alternatives on the one hand, but showing their shortcomings on the other.

4. Humanitarianism. The real appeal of efficiency, the touchstone capitalism value, is that it fulfills more human needs and wants with the limited resources we have. Drawn in crayon strokes, the general theory of market efficiency is that every transaction is mutually beneficial (or else it wouldn't happen), which adds up to a vast system of mutual benefit. Wasted money ultimately comes out of someone's pocket, someone's education, someone's health care. If we lavished our money on idle social programs and failed collective quests (the wars in Iraq and Afghanistan come to mind), the cost would come in lives unsaved and needs unserved.

Again, finance capitalism is not exactly a poster baby for humanitarian efficiency. As mentioned, it often makes profit out of what amounts to complicated accounting tricks -- even when the tricks don't include manipulating the numbers or trading on inside information. Wall Street does not generally produce better medicines, prosthetic limbs, or good schools. If Bain Capital had, we would have heard about it before now. Private, profit-seeking companies do produce these things -- though not so much schools; but whether the constant churn and speculative pressure that finance capitalism puts on the whole economy really improves these processes is open to debate. It is especially unsure considering the humanitarian cost of speculation-driven crises like the one whose effects we are still feeling, and which, despite the lull in bad news from Europe, may not be over yet.

As anyone who has made it to week two of an introductory economics class knows, even steel-and-brick capitalism doesn't automatically produce efficiency. Often the best way to make money is by unloading costs on other people. Polluting industries know this, which is why they try to avoid environmental regulation. Consumer finance companies know it too, which is why people who have worked for efficiency specialists like Bain Capital and McKinsey talk -- again, on background -- about designing deposit, lending, and checking fees that will maximize credit-card companies' take from poor and unsophisticated clients. This is why an "efficient" economy that serves real humanitarian needs must have intelligent regulation to direct creativity in ways that produce actual benefit.

5. Dispersing Power: One of the better arguments against heavy regulation, and especially against political control of the economy, is the power it concentrates in one set of decision-makers. Dispersing control of the economy among many holders of capital spreads around this power.

The consideration on the other side is that capitalism also concentrates power, by concentrating wealth, and can turn that wealth back into political power through the kinds of corruption that are now constitutionally protected as First Amendment "free speech." Finance capitalism, with its huge concentration of rewards at the top of the income scale, is especially bad on this count.

Dispersing power is not so much a way of achieving a good thing as of avoiding evils, and in that case it is best not to imagine that either side of the balance is altogether good. This brings us to a different kind of general defense:

6. Pragmatism/Lesser Evil: When the utopian arguments of market fundamentalists are exhausted, capitalism does pretty well by fallback that it is the "least worst" system available. "What else you got?" is a reasonable response to critics, at least when the topic is what to do next. (It's also important to be able to have a clear discussion about the harms and benefits of our economic system, regardless of immediate practicality; but that's a different topic.) Pointing to the anarchists of the Occupy encampments is not much of an answer, and the authoritarian socialist regimes of Eastern Europe failed their people pretty badly even when not violating basic principles of democracy and human rights.

But, again, defending a lesser evil is very different from praising a prefect good. There is no reason that accepting the lesser-evil argument should mean embracing market fundamentalism or the excesses of finance capitalism.

The only serious lesser-evil capitalism is a mixed economy, intelligently regulated to reward real entrepreneurs and responsible managers while discouraging predators and opportunists. Yes, these are moral terms, and there will be debates about how to define them, but if we are going to have a moral argument about capitalism, we will have to have to use them, or words like them. The discussion has to be about how to secure freedom, dignity, responsibility, and humanitarian efficiency, given the dangers of concentrated power and the limited cogency of any alternatives. That is where any debate should point.

The deepest concern about the way American capitalism has developed in the last fifteen years is that it has concentrated so much wealth and power in a few hands -- and arguably the wrong ones -- that it has become a major barrier to intelligent public conversation about its own strengths and limits, and about the direction reform should take. Supreme Court decisions protecting wealth as speech make this worse, but money collects political power in any case, especially when money benefits so much from absent, weak, or misplaced regulations. The right-wing attack on government itself has both polluted the debate and weakened governing institutions, making it hard to stage a useful conversation and maybe even harder to act on intelligent judgments about reform.

Since Teddy Roosevelt, the steady refrain of American reformers has been that, in a complex society and economy, unrestrained markets cannot do the good that early Americans expected from them, and which market fundamentalists still expect. Reformers have looked for ways to pursue such uncontroversial values as freedom, dignity, and humanitarian efficiency in a world that demands regulation and a healthy balance of public and private effort. Their reforms have come from coalitions of politicians, professionals, policy thinkers, and enlightened businessmen like Warren Buffett and the Gates family. If our mix of inequality and ideology has disabled us from creating another generation of reform, that would be the strongest and saddest case against American capitalism.