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Jedediah Purdy Headshot

The (Im)morality of Capitalism: How to Have the Argument We Aren't Having

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A democracy must be able to engage its own economy -- even a democracy as money-bloated and doubt-ridden as ours has become. To do that, we need a way of talking about the (im)morality of capitalism that lets us get hold of the issue and grapple with it.

My post last week on why personal morality is the wrong way to think about banking provoked plenty of people, left and right. Here's the next installment. It's a sketch of what a productive argument about the morality of capitalism might look like.

A few quick assertions, followed by a lot more detail:

  • The morality of the economy is exactly what our political debate should be addressing. The right conversation to have about it, though, is whether the ground rules of the economy are fair, not whether individuals within it are good or bad people. That's because the ways that the economy hurts people -- lost jobs, bad jobs, wasted talent, lack of opportunity -- are going to happen, once the rules are in place. If we want to change it, it's not enough to shout down the guy who got rich by being nasty. We have to change the rules that reward nastiness.
  • Treating the economy as a matter of personal morality isn't just misplaced: it's actively counterproductive. It encourages the fantasy that if people were just nicer and more responsible, bad things wouldn't happen. That's often true in personal relationships, on sports fields, and in lots of other situations, so it's natural to think it's true in economic life. But it's not. If the rules offer rewards for selfish, greedy behavior, someone will take them up on it. It doesn't matter if 99 percent of people would never do that: it takes just one person, one company, one investment vehicle, and they will pocket the cash.
  • From any individual's perspective, the economy is "just there," an impersonal force, so that if Mitt didn't do the deal, his second cousin Flit would have shown up to do it six months later; so that if you don't become a cold-hearted private-equity jock, the next person in your freshman economics class will. But from the standpoint of the whole political community, the rules can change. This is the basic reason to talk about economic morality from that perspective -- a legal and political take on the whole system -- rather than from the individual standpoint.
  • Nonetheless, the personal revulsion lots of people feel about some of Bain Capital's deals is worth listening to, and so is the doubt about whether you, personally, would want to be the one doing those deals. To be productive, though, these moral instincts have to be turned to criticism of the rules that underlie the deals. Otherwise, to repeat, those deals will keep happening. That's guaranteed.
  • By the way, before we get down to the meat, it's perfectly fine for voters not to want a president who decided to spend a lot of his life building Bain Capital. That choice says a lot about Mitt Romney's priorities, his feelings about economic fairness, and what he would want to do with the White House. To flip the point, if you really like things just the way they are, you probably shouldn't support a community organizer for president, since that person decided to spend some of his best years challenging existing power, and probably sees a lot of things differently from you. If you think there are some real problems of fairness in our economy, you probably don't want to support a guy who spent his best years riding its hectic waves like a hungry porpoise. He most likely doesn't see things the way you do.

None of this, though, amounts to a political argument about the morality of the economy. That's a different conversation. It's not about personal morality (Am I hurting people?) or personal integrity (Am I being true to myself by taking this job?). It's about fairness.

I hope President Obama takes this on in his State of the Union address tomorrow, and it looks like he will. (If he wants to sound even more like the great Teddy Roosevelt than he did last fall in Kansas, here are some tips.)

So, what are the questions to ask about a fair economy? At a fairly abstract level, they're simple.

What things do we think people should get just for being part of the political community, such as education or health care, and what do we think they should have to earn, such as high salaries? Some fine Americans, notably Franklin Roosevelt and Lyndon Johnson, would have made the first list pretty long. For others, it's much shorter. As anyone who glances at the politics of Social Security, or welfare, realizes, this debate is central to what it means to be American.

What counts as "earning" it, anyway? That is, what kind of behavior do we reward? Do we allow the financial industry to reap huge rewards from hyper-refined investment instruments, or do we shut down some of those rewards, which would redirect talent to other areas -- such as, possibly, medical research and public policy? Teddy Roosevelt thought a fair economy would reward only what was socially useful. What do we think that means, and what rules do we set up to achieve it?

How much do we care about economic equality, and what are we willing to do about it? Supreme Court justice Louis Brandeis thought we had to choose between democracy and great concentrations of wealth. Ronald Reagan called his America a place where anyone could get rich, even if most people don't. What's our mix of these visions?

How much do we value economic security compared with dynamism? Do we want to discourage those deals Bain Capital made, even though the companies it broke up may not have been squeezing every fraction of a penny out of every dollar of capital? Do we want people to get to retire from jobs they've held all their lives, or are we willing to treat those jobs as collateral damage for some kind of larger efficiency?

How much do we care about the ability to take initiative in your economic life -- to own a small business downtown rather than work for a chain store, or control decisions on your farm instead of taking marching orders from a big poultry company or grain purchaser? This is the traditional concern of antitrust law, recently a pretty moribund area. Brandeis, again, though the initiative of the smallholder was invaluable, and inveighed against what he called "the curse of bigness." Do we agree, even a little, or maybe a lot?

These are some of the basic questions for a conversation about economic fairness. We aren't likely to agree on them. But, if we were disagreeing about them, at least we would be talking about the right things.

How would we start that argument?

The first thing to understand is that capitalism doesn't exist. No, really. And not just in some avant-garde, "This is not a pipe" kind of way. Talking about "free-market capitalism," or "the free-enterprise system," as Republican candidates do when they attack Newt Gingrich for attacking Mitt Romney, is like talking about "the weather," or "music." It leaves out all the important detail: hot or cold, pouring or drought, string quartet or garage band or drum circle? If someone really thinks you can be for or against such a vague abstraction, you should either stop talking to that person or try to educate him.

Don't take it from an essayist and law professor. Amartya Sen, who won the Nobel Prize in economics in 1998, likes to point out -- to put it more bluntly than he does -- that saying "the market" doesn't tell us a damned thing. To know what we're talking about, we have to know who owns what and what they're allowed to do with it. Is wealth concentrated or dispersed? Are there unions, minimum-wage laws, protection against being fired? Do you have to pay for your pollution and greenhouse-gas emissions? Are monopolies allowed, and what counts as a monopoly? Can you make a contract for prostitution? Can you buy and sell other human beings? (After all, some of the most important markets used to be slave markets?) More pertinently today, can you trade in complex derivatives that risk destabilizing the whole system? Can one company control so much wealth that it presents the government with the stomach-churning too-big-to-fail problem? Answer each of these questions, and many, many more, and you've begun to describe an actual market.

In the real world, outside the abstraction of "the market," each of these questions gets answered by the law -- property law, environmental law, financial regulation, the tax code, etc. Not having a law about some question only gives an implicit answer: no environmental law means you don't have to pay for your pollution.

And the law, in a democracy, ultimately gets its answers from politics. That's why having a political conversation about the fairness of our economic rules is worthwhile.

What are the moral arguments in favor of capitalism? When you come down to it, two positive ones and one negative one. Positively, (1) it makes us free and (2) it makes us rich. Negatively, (3) nothing else works.

The last (3) is the simplest. It's true that Stalinism and Maoism were unmitigated catastrophes from every reasonable perspective and that the self-styled socialist parties of Europe are in intellectual disarray. So, yes, as Margaret Thatcher liked to say, There is no alternative -- no programmatic alternative in large-scale economic policy.

But, again, if anyone wants to argue about whether "free-market capitalism" is better than being ruled by Mao or Stalin and a handful of his trusted companions, you should stop talking to that person. (Heavily credentialed and well-salaried people will sometimes try to have this argument, which does make you wonder about the market in ideas and intellectual talent; but that's another issue.) The real question is which market, or what kind of market. The idea that saying no to Mao means saying yes to a lightly regulated Wall Street, a regressive tax code, unrestricted capital flows, etc., is a ridiculous fallacy that no one should take seriously.

What about (1) capitalism makes us free? This goes all the way back to Adam Smith (whose books on law and moral psychology should be required reading for those who like to name-check him as the patron saint of "the market"). The basic idea, which has never gone away, is that a market system is defined by the free choices of the people involved in it. No one tells you whom to work for, where to live, what career to follow, or how to invest or spend your money.

For Smith himself, this was all in contrast to feudal serfdom, where your economic life bound you to the land and some aristocratic lord, and slavery, where economic decisions arose from masters' orders rather than free agreement. In the eighteenth-century market that he envisioned, everyone in the economy would be author of his or her own fate, making the deals and doing the work that she, and no one else, judged worthwhile. (Smith would not have "she," but we can take liberties.)

An economy that deeply and systematically serves personal freedom is a great idea (as Gandhi remarked ironically of Western civilization). Ever since Smith, it has been one of the great arguments for more open-market policies, as against traditional roles and restrictive regulation. But it's more complicated than the choice between the laissez-faire highway and the Road to Serfdom.

This is partly because free choice isn't just about getting to decide: it's also about the range of decent options you can choose among. There's a big difference between deciding to take the black-market, sub-minimum wage job that's the only one you can get and choosing between a high-paying finance job in New York and a literary internship in San Francisco. And, as anyone who lives in the real world knows, whether you have the first option set or the second isn't just a matter of whether you're smart and hard-working: it depends a lot on where you were born and educated and how well you picked your parents.

A lot of laws work to give more people more good options -- by providing good education for all, ensuring medical care, enforcing minimum-wage laws, etc. These laws are redistributive, in the sense that they give people resources and options that they wouldn't have without the laws. But, remember, the baseline they're "redistributing" from -- where everyone gets to keep what they already have -- is also a legal and political choice. In shaping an economy, we're always balancing these two dimensions of personal freedom: letting people make their own decisions and enabling them to decide among options they value. It's much too simple to say that only one of these makes people free. They both do. Balancing them requires deciding what sort of market we're going to have.

Another difficulty is that, in a world that's much bigger and more complicated than Adam Smith's, the economic decisions that shape your life aren't always yours to make. The employees at the companies that failed under Bain Capital freely decided to take their jobs in the first place, but they had no part in the decisions that took away their jobs. In a world shaped by big concentrations of capital, economic change often hits an individual, family, or community as suddenly and arbitrarily as a natural disaster. Anyone who lived through the financial crisis and housing crash understands this. And what the US has experienced in the last few years is small beside the hurricanes of capital influx and flight that have swept across countries like Indonesia and Argentina over the last fifteen years, erasing industries and creating epidemics of unemployment and bankruptcy.

If we think freedom means making your own choices and taking responsibility for them, big and complex financial capitalism doesn't meet the test in any simple way. It leaves too many people out of too many of the choices that shape their lives most basically. The only level where it's possible to exercise control over these decisions is political and legal. Regulations have their costs and problems, of course, but so does less regulation. Talking about freedom doesn't dissolve the question, and decisions about what kind of market to have are not avoidable -- although of course it is possible to ignore them and pretend we never made a decision. But that is thoughtlessness masquerading as tough-mindedness.

As for (2) capitalism makes us rich, it's also too simple to tell us whether we should allow complex derivatives, foster strong unions, allow unlimited capital mobility, etc. It's pretty clear that regulation can choke growth, especially if it involves a lot of bureaucratic micro-management of economic decisions, which is the model of regulation that a lot of semi-socialist countries (notably India) labored under for decades in the twentieth century. It's also pretty clear that capitalist crises like the last crash destroy a lot of wealth, and would probably do worse if the government didn't get involved (though of course government can always make things worse -- anyone can always make things worse). While "capitalism makes us rich" is a great argument against adopting, say, India's 1970s policy for the 2012 US economy, that's about the level of detail it gives us.

Anyway, if you think there's an argument to have about the fairness of the economy, then by definition you think wealth is not the only important thing. We surely disagree about how important wealth is compared to equal opportunity, job security, environmental health, natural beauty, and lots more. But if you're having this conversation at all, then you don't think that what makes us rich is the first and last question.

So, by all means, let's keep arguing about the morality of Bain Capital. But let's ask questions that give us answers we can use.