12/06/2011 10:07 am ET Updated Feb 05, 2012

Is Capitalism Moral? Wrong question, Part the Last

This is the last of four posts arguing that capitalism has an intrinsic morality. The first post disputed those who think that capitalism cannot have a moral dimension. Part two establishes that there is a moral context in which business is done. Part three reckons that this context means that ethics in business are essential to capitalism in a democratic society. Now I move to an even more basic level, pointing out that current macroeconomic theory is insufficiently scientific, and proposes a fresh theory that can satisfy the needs of business and political leaders, as well as all the actors in the economy of a democracy.

I assume that we agree that human freedom is not negotiable, and that the goal of an individual is to become what is possible for all, namely to become a good person, as well as developing each one's particular gifts, talents and skills. It follows that society needs to provide the conditions for such flourishing. In every human community, ethics, economics, and politics are always interconnected. The promotion of democracy, and effective implementation of it in governance, requires a clear understanding of this fact in order for correct macroeconomic decisions to be taken.

There is a temptation to try to short-cut the complexities by saying that all the firm need do is maximize profits. Whatever increases them is good, whatever diminishes them is bad. The board and the shareholders should reward the former and punish the latter. But doing that is not always good for the firm, first because it does not differentiate among types of profit. Some is needed to pay current expenses, some should be paid as dividends, some should be re-invested. Because these have different effects, they need to be thought of and spent differently.

Moreover, there are two economies at work. The first is the one concerning the firm, the labor, materials, expertise, marketing, and financial costs of maintaining and growing the business. The second economy is the more important in the long run, because it is what allows the whole of society to live and develop, the consumer economy in which the firm is selling its goods and services. They are not identical, but they are profoundly interconnected. Furthermore, the two economies are not static but subject to cycles that are not in sync with each other in terms of the effects of changes in the one or the other.

Then there is the government of the society that includes the oversight of the two economies. In a democracy, all these are influenced by the myriads of decisions made by consumers, investors, business leaders and entrepreneurs, legislators, regulators, enforcers. The temptation since the nineteenth century is either to have the large firms make all the important decisions or the government: monopoly capitalism or socialism. Historically, neither works for long.

One reason is economic: command economies cannot cope with changing conditions fast enough. A bureaucrat may be highly intelligent: a bureaucracy is always too stupid to make effective decisions quickly enough. Monopolies have the same limitation, once their activity reaches market domination. Another reason is political: either the bosses or the workers eventually rebel (to use some old-fashioned language), because both models require murderous coercion to maintain the decision makers in power. Therefore neither monopoly capitalism nor socialism is moral. Sooner or later, the consequences of evil decisions are unavoidable, and these are always material -- people suffer.

What I am proposing is that we attend not only to the bottom line but also to the real human dimension of being an actor in the economy, an entrepreneur, or a business leader. The case of Apple, Inc., exceptional though it is, shows the basic value to us all of entrepreneurs and the power of capitalism to effect change on a global as well as local scale. We have also seen the horrible downside of monopoly or oligarchical capitalism as well, its human and environmental cost around the globe. The world has also witnessed what kind of murder on a grand scale communism requires in order to function, and that it collapses over time of its own incapacity to create a living standard. ("We pretend to work and they pretend to pay us" was the old Soviet joke.)

What we are missing are better theories, especially macroeconomic, that can make useful accurate predictions that maintain both democracy and market capitalism. Bernard Lonergan, a Canadian polymath, spent much of his enormous brainpower on developing such a theory that allows real measurable understanding of business cycles, that is useful and applicable precisely because it can make predictions, not merely short term solutions that put off dealing with the long-term problems that such juryrigs can only exacerbate. See his Macroeconomic Dynamics and For a New Political Economy.

The latter opens with these words:

In the introduction to his General Theory (of Employment, Interest and Money) Mr Keynes considers the objection that only the more intelligent expert is able to understand the highly abstract theorems of modern economics. His answer is not altogether satisfactory. He says that if practical men like politicians and bankers and industrialists do not succeed in grasping the issue, they will be eliminated. Undoubtedly they will, but so shall we, for they are our leaders.

Better understanding of how economies function in societies and businesses within them will help everyone, from the voter and the legislator to the entrepreneur to the retiree to the CEO to the janitor to the investor to the unemployed, the banker, and so on. And given the current uncertainties and the possibility of a global economic crash, we need it none too soon. Bernard Lonergan offers such a theory, and it deserves far wider consideration than it has to date. (Part of the reason may be that Lonergan, like Jane Jacobs, was not a professional economist. )

In the final analysis, the morality of capitalism depends absolutely on the freedom of all people in the economy to be informed actors in it, to be able to make free and intelligent decisions about their lives, and to live with the consequences. This is the moral dimension of capitalism in a democratic society. It implies that other forms of capitalism or various socialisms are not moral, because they all require coercion to maintain the deciders in power. The present shadow banking sector of the economy, in that it allows only relatively few actors to function within it, to access its specialized markets, does not meet this acid test either. This is, I believe, the underlying message of Occupy Wall Street and the Los Indignados movement.

Present economic theory does not offer the kind of analytic tools that help ordinary people, including board members, corporate officials, homemakers, entrepreneurs, workers, make concrete decisions. The role of government in the economy, in terms of seeing what kinds of legislation, regulation, and enforcement are best, is poorly understood and therefore increasingly ineffective. The present crisis of "the dismal science" is that it is inadequately scientific. Instead of hard science, it produces commonsense ideas. Commonsense solutions are just that: common. They depend on the way we have always done it before. What is needed is the kind of theory that offers, as Lonergan wrote years ago, "a democratic economics that can issue practical imperatives to plain men."

There is a huge task of education in order to make such a thing practicable. It may be that we are so far gone that even an effective theory wouldn't make any difference. Perhaps we no longer accept that there is a common good at all, which is what democracy is supposed to protect and improve better than any other form of government.

In this age of unreflective gobbling of gigantic quantities of data, theory is neglected, even mocked. But flying by the seat of your pants, no matter who you are, will eventually get you killed.

There is a moral dimension to that, too.