09/06/2012 12:58 pm ET Updated Nov 06, 2012

Capitalism at the Crossroads

I have never shied away from being a staunch believer in capitalism as an economic system. Not that capitalism is perfect. It is far from it, as evidenced by a myriad of environmental catastrophes, social ills and corrupt behavior. Capitalism also has the inherent flaw of creating 'asset bubbles' (irrational exuberance) over products that somehow inexplicably become 'coveted' or 'in vogue' such that their attributed value vastly exceeds their actual worth. It is also important to remember that capitalism is an economic system and much of what bothers people is the culture associated with the dominant form of capitalism, which throughout much of the 20th Century has been the American culture.

And yet, to steal a bit from Winston Churchill (speaking about democracy), the other systems are worse -- worse for the environment, worse for people and worse for an almost inherent corruption that takes place when individuals have no alternative but illegal means to meet to their personal financial needs.

Back in the early days of trade, the barter system was used. Someone who had milk from his (or her, but usually his) cow would trade it for eggs from the neighboring farmer who had chickens. This net-gains approach continued as our society included money to pay for goods and services; buying from the local farmer made sense because then that person had the money to buy from you. Those early days when one directly and personally knew those with whom we did commerce provides some of the basis behind Adam Smith's concept of the 'invisible hand':

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. -- [for his original context, search on 'invisible hand' in this PDF of "An Inquiry Into The nature and Causes of The Wealth of Nations"]

Smith is arguing that while individuals have self-serving motives, their preference for the use of domestic industry and labor enriches and promotes the interests of society as a whole.

But today we live in a massive, interconnected global economy where phrases like 'buy local' and 'buy American' seem to fly in the face of trade imbalances and the fact that the existence of multinational companies and complex supply chains make it virtually impossible to buy something entirely produced domestically. American companies from Apple Computer to auto manufacturers rely on production facilities around the world. Even the phrase 'Made in America' is used to accurately but sometimes disingenuously to describe goods produced in North America, but outside the United States (as an example).

The question becomes, then, can 'selfish' personal interest be aligned with the public good in a global economy and if so, how?

I believe that the answer is yes, and find evidence in the work of Nobel Prize-winning Elinor Ostrom who argues against the idea of "The Tragedy of the Commons," a 1968 article by ecologist Garret Hardin who theorized that whenever multiple individuals are acting independently to further their own self-interests, they will ultimately deplete a limited shared resource, even when it is clear that it is not in anyone's long-term interest for this to happen.

In contrast, Ostrom's work suggests that the tragedy of the commons may not be as prevalent or as difficult to solve as Hardin implies, based on examples where people have come together to sustain limited natural resources such as forests, fisheries, oil fields, grazing lands, and irrigation systems.

Knowing that there are examples where people have come up with solutions to the commons problem themselves, without government regulation or oversight is good news for a global world, because (as we have seen) global regulation and oversight are often difficult to create and harder to enforce.

We have the power to 'reconnect' the invisible hand by reversing the conventional wisdom. When we think locally, in order to act globally we acknowledge that our individual best interests are interconnected. The 'commons' has expanded and consumers, companies, suppliers, employers and even government and NGO watchdogs must work together to ensure our common fate is a sustainable and not a tragic one.