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Wednesday, April 04, 2007

Is Capitalism "Courting Long-Term Disaster"?

This indictment of capitalism and call for the rich to share more with the poor seems a bit overwrought:

Overselling capitalism, by  Benjamin R. Barber, Commentary, LA Times: The Crisis in subprime mortgages betrays a deeper predicament facing consumer capitalism triumphant: The "Protestant ethos" of hard work and deferred gratification has been replaced by an infantilist ethos of easy credit and impulsive consumption that puts democracy and the market system at risk.

Capitalism's core virtue is that it marries altruism and self-interest. ... Doing good for others turns out to entail doing well for yourself. Capitalism's success, however, has meant that core wants in the developed world are now mostly met and that too many goods are now chasing too few needs. Yet capitalism requires us to "need" all that it produces in order to survive. So it busies itself manufacturing needs for the wealthy while ignoring the wants of the truly needy. Global inequality means that while the wealthy have too few needs, the needy have too little wealth.

Capitalism is stymied, courting long-term disaster. We still work hard, but only so that we can pay and play. In order to turn reluctant consumers with few unsatisfied core needs into permanent shoppers, producers must dumb down consumers, shape their wants, take over their life worlds, encourage impulse buying, cultivate shopoholism and invent new needs. At the same time, they empower kids as shoppers by legitimizing their unformed tastes and mercurial wants and detaching them from their gatekeeper mothers and fathers and teachers and pastors. The kids include toddlers who recognize brand logos before they can talk and commodity-minded baby Einsteins who learn to shop before they can walk.

Consumerism needs this infantilist ethos because it favors laxity and leisure over discipline and denial, values childish impetuosity and juvenile narcissism over adult order and enlightened self-interest, and prefers consumption-directed play to spontaneous recreation. The ethos feeds a private-market logic ("What I want is what society needs!") and combats the public logic fashioned by democracy ("What society needs is what I want to want!").

This is capitalism's all-too-logical way of solving the problem of too many goods chasing too few needs. It makes consuming ubiquitous and omnipresent, turning shopping into an addiction facilitated by easy credit. ...

When we see politics permeate every sector of life, we call it totalitarianism. When religion rules all, we call it theocracy. But when commerce dominates everything, we call it liberty. Can we redirect capitalism to its proper end: the satisfaction of real human needs? Well, why not?

The world teems with elemental wants and is peopled by billions who are needy. They do not need iPods, but they do need potable water, not colas but inexpensive medicines, not MTV but their ABCs. They need mortgages they can afford, not funny-money easy credit.

To serve such needs, however, capitalism must once again learn to defer profits and empower the needy as customers. Entrepreneurs wanted! With micro-credit, villagers can construct hand pumps and water filters from the clay under their feet. Pharmaceutical companies ought to be thinking about how to sell inexpensive retro-virals to Africans with HIV instead of pushing Botox to the "forever young" customers they are trying to manufacture here. And parents can refuse to relinquish their gatekeeping roles and let marketers know they won't allow their kids to be targeted anymore.

To do this, we will require the assistance of democratic institutions and an adult ethos. Public citizens must be restored to their proper place as masters of their private choices. To sustain itself, capitalism will once again have to respond to real needs instead of trying to fabricate synthetic ones — or risk consuming itself.

The idea that the wealthy might not consume enough to prevent recessions ("the wealthy have too few needs") is at the heart of the debate between Malthus and Say in the early 1800s over the source and possibility of "gluts."

Malthus believed that lavish ("unproductive") consumption by wealthy landlords was needed to offset excess saving by the capitalists. He argued that saving would be too high because capitalists would not spend all that they earned, and therefore that demand for goods would be too low causing a recession (a "glut" of goods as they piled up in shops with nobody to buy them).

Thus, Malthus provided a defense of conspicuous consumption by the wealthy. The wealthy landlords needed to be encouraged to spend as much as possible to avoid having the economy slip into a recession. His solution was to redistribute income to the landlords through the corn laws, and the landlords would spend the extra income on unproductive consumption taking up the slack in demand. J.B. Say's response to Malthus, of course, was Say's Law: Recessions, i.e. gluts, are impossible because supply creates its own demand. The act of producing a good always produces the demand needed to consume it.

Malthus' worry that the wealthy might not consume enough is essentially the worry that saving will exceed investment. But this cannot persist. If savings exceeds investment, interest rates will fall causing investment to increase and saving to decrease until the savings and investment balance is restored.

Keynes would explain later how the process of equating saving and investment through movements in the interest rate could go awry causing the economy to get stuck in a recession, and how shocks to demand through government expenditures could help to solve the problem, but the point is that outside of Keynes' (and other) exceptions there is no need to encourage spending artificially, the system will adjust to resolve imbalances between output and expenditures.

I think it's reasonable to question our current savings and consumption mix, many believe that our current savings rate is too low to be sustainable and that a correction is in our future. But I don't think the reason for the imbalance is some fundamental change in human nature from several decades ago when the savings rate was much higher, i.e. that all of a sudden "hard work and deferred gratification has been replaced by an infantilist ethos of easy credit and impulsive consumption that puts democracy and the market system at risk."

Saving didn't fall because we suddenly decided to party rather than work or because we forgot the value of a penny saved. There are fundamental economic forces at work generating these changes, low interest rates, high saving rates in other parts of the world relative to attractive investment opportunities, the forces of globalization, and so on. Those forces are what we need to understand in order to construct effective policies to facilitate changes in consumption and saving patterns worldwide and unwind global imbalances with a minimum of economic disruption.

As to our treatment of the less fortunate, the other point of the essay, there I think the author has a point. We could do a lot better. Of course, exactly how to lift the poor out of poverty is the source of endless debate - see Sachs versus Easterly - but no doubt we could and should do more. However, the hope expressed in the essay that pharmaceutical companies and others will "defer profits" to provide cheap drugs, etc. to developing countries is wishful thinking. If we want these companies to help, they will have to be given the economic incentive to do so and that requires working withing the bounds of capitalism, not hoping for something different to take its place, or for some sudden change in human nature to fundamentally change our altruistic behavior.

    Posted by on Wednesday, April 4, 2007 at 04:32 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (106)

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