Capitalism

The heat of these charges makes it urgent to understand at long last that what goes by the name of capitalism in ordinary language is a hybrid system crossbred from liberalism and social democracy, where the freedom of contract is allowed to work in some respects but is stymied in others and where perverse incentives springing from taxation and regulation are mixed with the profit motive that drives competitive markets. It is the performance of this hybrid that draws every man's hostility. But even if it were fully realised that the economy we live by is a brew of freedom and regulatory constraint, market and government, who can really tell whether it tastes bitter by too much market or too much government?

 Every economic system puts some labour and some capital in double harness. What distinguishes capitalism from pre-capitalist and putatively socialist systems is that in capitalism the two factors labour and capital are furnished by separate sets of persons who are linked contractually in a node together by firms.

Some evergreen objections to capitalism:


1.capitalism is socially irresponsible
2.capitalism panders to greed instead of meeting need
3.capitalism is unstable and so the strong hand of the state must hold it on course
4.capitalism fosters reckless risk-taking
5.capitalism needs re-regulation to survive

Argue back:
1. capitalism is socially irresponsible
In the language of political correctness, this is summed up in the phrase that the firm must consider its "stakeholders" and not just its shareholders.


What this argument overlooks is that managers/CEO mostly don't own the company, they are the agents of shareholders. If managers spend money in philanthropy just to satisfied their own sense of altruism, they have betrayed shareholders' benefits by using their property against their wills.

The apparent bias against labour is mostly an optical illusion due to the fact that adversarial bargaining over wages and conditions is highly visible, while no such adversarial bargaining surfaces in the firm's recourse to its shareholders or to the capital market.

2. Capitalism panders to greed rather than meets greed
In any type of organisation, the top dogs are greedy and can exploit for personal gain any latitude they can get away with.The blame lies not with capitalism, but with the wide range of human characters.

If socialism were ever realised, its hopeless inefficiency at meeting needs and its unresponsiveness to wants would no doubt be blamed on its not being capitalism. Any system is liable to be censured for not being another.

3. Capitalism is unstable and so the strong hand of the state must hold it on course

One factor in the vulnerability of the economy to the shock it received in the latter part of 2008 was high indebtedness. It is fair to say that its major cause was government policy.Compulsory "social" insurance and state provision for health care and old age pension weakens the precautionary motive for saving by households.

4. Capitalism fosters reckless risk-taking

Because of the recognition that owners are not necessarily the best managers and may be wise to entrust their assets to others who show expertise in the art and science of making the assets work, the principal-agent problem increasingly penetrates the capitalist economy. The intrinsic conflict of interest can at best be attenuated.


The main way capitalist practice found to do this is to pay corporate executives in leaving the firm bonuses and stock options that are contingent on results achieved by the executive, his team or department, or the whole corporation.

5. Capitalism needs re-regulation to survive

Government can create more severe failure.