Can we fix Capitalism?

 

Adam Smith Revisited - The Moral Crisis of Capitalism

Shahid Mehmood in The Friday Times

When the economic recession of 2008 struck the world economy, not many would have guessed that this event would set off a wave of serious introspection about the nature and morality of present day capitalism. Many, including economists, thought that this is just a continuation of the traditional cycle that an economy goes through, whereby periods of growth are followed by recessions (which in general means lower GDP growth rates). It was expected that things would be back to normal within a few years.

But something different transpired this time around. Millions of people around the globe, especially in the leading centers of global capitalism like London and New York, spilled onto the streets and vented their anger against the present state of capitalism. This movement became the ‘Wall Street vs Main Street’ movement. Many years down the line, the world economy (mainly the industrialised world) is yet to regain its growth trajectory and the waves generated by the movement still reverberate. In effect, what we have is a crisis of the workings of capitalism. It would be interesting to delve into some details in order to understand how this state of affairs came to be?

This discussion takes us back to a Scottish professor of moral philosophy and his writings on market economy and capitalism. Adam Smith, who is now revered as the father of economics, wrote his magnum opus Wealth of Nations (WON) in 1776. Considered the bible of economics, one of the most outstanding insights of the book was that a person’s greed ends up benefitting the community as a whole. Two sentences (abbreviated) lay out this principle; Smith contends that: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest…” and “Every individual… neither intends to promote the public interest nor knows how much he is promoting it… 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”.

Smith’s workings of an efficient capitalist system is tied to the workings of the ‘invisible hand’, the famous concept which explains how greed that ends up promoting the greater good. But the most noticeable aspect of this concept is that Smith first mentioned it in an equally remarkable (though less discussed) book of his called the Theory of Moral Sentiments. Published before WON, it outlined the moral pre-requisites for an economy to function properly. Smith’s concept of the invisible hand, therefore, was closely tied to morality. It reads as follows: “[The rich] consume little more than the poor and in spite of their natural selfishness and rapacity…they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life …”

What Smith envisioned has, up till the end of 20th century, worked pretty well. What we saw in the industrialised nations was that capitalists and entrepreneurs, in pursuit of profit, implemented ventures and projects that ended up benefiting the society as a whole. Setting up a plant for production, for example, was purely done for personal gain. But the venture needed employees, and thus many aspiring job seekers found their sustenance due to the pursuit of greed by the industrialists/capitalists. Gradually, in the face of rising resistance in the form of Marx and others, the economies of nation states gradually transformed into welfare states, whose main beneficiaries were the larger, lower segments of the population and the middle classes. This setting worked remarkably well, and explains how it managed to weather stiff resistance over centuries, none bigger than Communism which met its demise in 1991 with the dismemberment of the Soviet Union.

But the 21st century has seen the consensus starting to unravel, with the Wall Street vs Main Street only the first sign of widespread consternation. And the simple reason is that the workings of the invisible hand are now skewed starkly in favour of the one percent.

The signs of this dysfunction are all around, in numbers and other instances. All around the world, labour’s share of total national income is on a constant decline. The real income (income adjusted for the cost of living), except for top percentile of earners, has been falling gradually. Income inequality is at a historic high. Credit Suisse, which tracks global wealth, estimated that the richest one percent now own half of total global wealth (estimated at $280 trillion).

The 18th, 19th and 20th century witnessed entrepreneurship and capitalism in a manner that every new venture resulted in creation of newer job opportunities, generation of real wealth and comparatively proportionate distribution of wealth. In contrast, today’s wealth creation is largely centered upon financial engineering and application of technological developments. The former is merely a transfer of wealth from the lower percentiles (poor and middle classes) to the rich, and the latter is leading to lesser need for workers as artificial intelligence (AI) does the work without requiring any benefits (wages, health insurance, etc.) and thus saving the owners/entrepreneurs major costs of operating a venture. The global economic scene was once dominated by companies like GM that employed thousands of people. Now, it’s dominated by organisations like Google and Amazon whose quantum of wealth is much larger, yet they employ not even half of the labour employed by big players of yesteryears. Facebook, for example, has a market cap of $370 billion, yet employs no more than 14,000 people.

What factors drive this concentration of wealth? The main culprit, apart from others like government regulations, is technology, especially software and AI. Today’s technology has this extraordinary feature that only a small initial investment is needed to make the first software copy, but the millions following it can be replicated at zero cost. Thus, the owner can earn billions without the need to invest further. In technical lingo, there is zero marginal cost of replication, which makes all this different from yesteryears. These technologies do produce jobs, but these are ‘gigs’ rather than good, quality jobs with financial security. And they pay little, usually sustenance level wages except for technically exceptional people. This means that majority of workforce is already out of contention for good, high-paying jobs, thus contributing towards the labour’s falling share of national income.

The anger of Main Street is understandable. Today’s capitalism delivers wealth in the hands of a few. Those responsible for all those Ponzi schemes that destroyed the hard-earned savings of the working class have largely gone scot-free (too big to fail phenomena). And today’s global economic scene has a heavy imprint of rent-seekers, tax dodgers and financial wizards who do not contribute much to the well-being of the citizens or the real economy. This situation aptly describes the challenge faced by Capitalism. A system that has been exceptional in delivering prosperity and successfully warding off challenges over time now finds itself under severe scrutiny because its underlying mechanism of shared prosperity has, to a large extent, stopped working. Not surprisingly, as the dreams of shared prosperity recede, so does the moral ground for its continuation.

Economists have started to take morality seriously

Ben Chu in The Independent

“We don’t do God,” Tony Blair’s press secretary, Alistair Campbell, once famously remarked. Similarly, economists don’t “do” morality.

They are a breed concerned with economic efficiency not spiritual uplift; human choices and incentives, not human values. They believe questions of morality can be left to philosophers and theologians.

There’s an element of truth in that stereotype. Economists have indeed tended to leave aside issues of morality. In some cases that’s because they think, on ideological grounds, that it has no place in the discipline.

But even more thoughtful and less dogmatic economists have tended to shy away from the question on the grounds that moral values are tricky to pin down, much less quantify.

That’s not to say that their research agendas have not supported “moral” agendas. They often expose market failures which harm the less well-off. And they defend the right of governments to intervene in markets in ways that might reduce short-term economic efficiency, such as by fining polluters.

They argue for the responsibility of governments to provide public goods like education. And there are also plenty of mainstream economists who justify progressive taxation on the grounds that high inequality is socially undesirable.

Yet their theoretical models themselves have generally had no place for morality.

But things might be changing. Two economic Nobel laureates at a meeting on the German island of Lindau last week outlined a bold attempt to put morality into theoretical economical modelling.

Oliver Hart, a 2016 Nobel winner, presented a paper, co-authored with Luigi Zingales, in which he looked at how the personal morality of shareholders might affect the behaviour of the companies in which they invest, in particular whether those firms will behave in a way that will maximise profits or whether they sacrifice some profit for the sake of behaving in a socially responsible manner.

To give an example, it’s perfectly legal for the American supermarket giant Wal-Mart to sell automatic weapons. But its executives could, in theory, choose not to do so. So what determines the corporate decision?

The Hart model raises the possibility that the incentives in the system of stock-market listed companies – the psychology of shareholders and the pressures on managements – might be behind an “amoral drift” in corporate behaviour.

In a similar vein, Jean Tirole, who won the Nobel in 2014, outlined at Lindau a theoretical framework in which he, along with Armin Falk, tries to model behaviour taking into account how certain popular “narratives” can inhibit people from doing what they would normally consider the right thing. A good example of such a narrative in the British context might be popular opposition to the admittance of Syrian child refugees on the false belief, pushed hard by the right-wing media, that they are all really adults pretending to be children.

“Economics is fundamentally a moral and philosophical science, embedded in the larger social sciences,” Mr Tirole said, urging other economists in the audience to join in the project of trying radical new approaches.

It remains to be seen whether this particular research agenda gets anywhere. There are plenty of holes that one can pick in the very simple models presented by Hart and Tirole and the broad-brush assumptions they make about people’s decision-making processes – something they both readily acknowledged.

It may turn out that the particular value that economics adds does indeed lie more in analysing the behaviour of broadly self-interested individuals in markets (whether competitive or not) rather than trying to build models that factor in more complex human motivations.

Yet those who criticise the “dismal science” for assuming that we are all self-interested robots should at least acknowledge these efforts by some of the luminaries of the field.

And this work is also a useful rebuke to the charge that by analysing human behaviour as narrowly self-interested the economics profession is implicitly encouraging people to behave in that selfish way, that the axioms of classical economics have a “normative” impact on society. 

And in a sense this is a return to older ways of thinking. Seventeen years before he wrote The Wealth of Nations in 1776 Adam Smith produced The Theory of Moral Sentiments.

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it,” wrote the revered father of economics.

Some of Adam Smith’s successors, at least, are taking those insights seriously.

Tax havens have no economic justification, say some top economists

Thomas Piketty and Jeffrey Sachs among signatories of letter urging world leaders at UK anti-corruption summit to lift secrecy

 

The British Virgin Islands. More than half of the companies set up by Mossack Fonseca, the law firm in the Panama Papers leak, were incorporated in British overseas territories such as BVI. Photograph: Alamy


Patrick Wintour in The Guardian



More than 300 economists, including Thomas Piketty, are urging world leaders at a London summit this week to recognise that there is no economic benefit to tax havens, demanding that the veil of secrecy that surrounds them be lifted.

David Cameron agreed to host the summit nearly a year ago, but the event is in danger of simply turning a spotlight on how the British government has failed to persuade its overseas territories to stop harbouring secretly stored cash.

British officials are locked in negotiations with the crown dependencies and overseas territories, trying to persuade them to agree to a form of automatic exchange of information on beneficial ownership of companies. So far the overseas territories have only agreed to allow UK law enforcement agencies access to a privately held register of beneficial ownership, but the automatic exchange agreement would give a wider range of countries access to information on the ownership of shell companies.

Many overseas territories including the Cayman Islands are resisting the idea, and their attendance at the summit is in doubt.

Apart from Piketty, author of the bestselling Capital in the Twenty-First Century, the impressive roll call of economists includes Angus Deaton, the Edinburgh-born 2015 Nobel prize-winner for economics, and Ha-Joon Chang, the highly regarded development economist at Cambridge University.

Other signatories include Nora Lustig, professor of Latin American economics at Tulane University, as well as influential experts who advise policymakers, such as Jeffrey Sachs, director of Columbia University’s Earth Institute and an adviser to UN secretary general Ban Ki-moon, and Olivier Blanchard, former IMF chief economist.

In total 47 academics from British universities, including Oxford and the London School of Economics, have signed the letter which argues that tax evasion weakens both developed and developing economies, as well as driving inequality.

The signatories state: “Territories allowing assets to be hidden in shell companies or which encourage profits to be booked by companies that do no business there are distorting the working of the global economy.”

To counter this, they are urging governments to agree new global rules requiring companies to publicly report taxable activities in every country in which they operate, and ensure all territories publicly disclose information about the real owners of companies and trusts. A concerted drive by the EU is now under way to require companies to declare where their profits are made, and to ensure tax is paid there rather than in the country in which it is declared.

In a tough broadside against the British prime minister, Jeffrey Sachs said: “Tax havens do not just happen. The British Virgin Islands did not become a tax and secrecy haven through its own efforts. These havens are the deliberate choice of major governments, especially the United Kingdom and the United States, in partnership with major financial, accounting, and legal institutions that move the money.

“The abuses are not only shocking, but staring us directly in the face. We didn’t need the Panama Papers to know that global tax corruption through the havens is rampant, but we can say that this abusive global system needs to be brought to a rapid end. That is what is meant by good governance under the global commitment to sustainable development.”

More than half of the companies set up by Mossack Fonseca, the law firm at the centre of the Panama Papers leak, were incorporated in British overseas territories such as the British Virgin Islands.

The signatories admit: “Taking on the tax havens will not be easy; there are powerful vested interests that benefit from the status quo. But it was Adam Smith who said that the rich ‘should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion’. There is no economic justification for allowing the continuation of tax havens which turn that statement on its head.”

Oxfam, which coordinated the letter, is urging the UK government to intervene to ensure that Britain’s offshore territories follow its lead by introducing full public registers showing who controls and profits from companies incorporated there. 

Oxfam estimates that Africa loses about $14bn (£10bn) in tax revenues annually – enough money to pay for healthcare that could save 4 million children’s lives a year and employ enough teachers to get every African child into school.

Mark Goldring, chief executive of Oxfam GB, said: “It’s not good enough for information about company owners in UK-linked tax havens to be available only to HMRC – it needs to be fully public to ensure that governments and people around the world can claim the money they are owed and hold tax dodgers to account.”

Watch out, George Osborne: Adam Smith, Karl Marx and even the IMF are after you

When even the IMF's free market ideologues recoil from the UK chancellor's austerity politics, democracy itself is at stake

• 
• • Ha-Joon Chang
  • The Guardian, Wednesday 8 May 2013

The Spanish Inquisition gets a Monty Python makeover. 'Being told by the IMF to go easy on austerity is like being told by the Spanish Inquisition to be more tolerant of heretics.'

George Osborne and his Treasury officials are gearing up for a fight. They've promised to make life difficult for the other side for the next two weeks. The unlikely opponents are the team of economists visiting from the IMF for a regular policy review.

Why has this routine meeting, which would hardly be noticed outside professional circles, become a confrontation? Because the IMF has recently dropped its support for the chancellor's austerity policy and repeatedly urged him to rethink it. It even said he was"playing with fire" in refusing to change course.

This is an astonishing development. For in the past three decades the IMF has been the standard-bearer for austerity. Back in 1997 it even forced South Korea – with an existing budget surplus and one of the smallest public debts in the world (as a proportion of GDP) – to cut government spending. Only when the policy turned what was already the biggest recession in the country's history into a catastrophe, with more than 100 firms going bankrupt every day for five months, did it do an embarrassing U-turn and allow a budget deficit to develop.

Given this history, being told by the IMF to go easy on austerity is like being told by theSpanish Inquisition to be more tolerant of heretics. The chancellor and his team should be worried.

If even the IMF doesn't approve, why is the UK government persisting with a policy that is clearly not working? Or, for that matter, why is the same policy pushed through across Europe? A certain dead economist would have said it is because the government is "in reality instituted for the defence of the rich against the poor". Dead right.

Current policies in the UK and other European countries are really about making poor people pay for the mistakes of the rich. Millions of poor people have lost their jobs and the support they received through welfare, but how many of those top bankers who caused the crisis have suffered – except for a cancelled knighthood here and a partially returned pension pot there? If anyone has suffered in the financial industry, it is its poorer members – junior analysts who lost their jobs and tellers who are working longer hours for shrinking real wages.

In case you were wondering, it wasn't Karl Marx who wrote the words that I quoted above. He would have never put it so crudely. His version, delivered with typical panache, was that the "executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie". No, those damning words came from Adam Smith, the supposed patron saint of free-market economics.

To Smith and Marx, the class bias of the state was plain to see. They lived at a time when only the rich had votes (if there were elections at all) and so there were few checks on the extent to which they could dictate government policy.

With the subsequent broadening of suffrage, ultimately to every adult, the class nature of the state has been significantly diluted. The welfare state, regulations on monopoly, consumer protection, and protection of worker rights are all things that have been established only because of this political change. Democracy, despite its limitations, is in the end the only way to ensure that policies do not simply benefit the privileged few.

This is, of course, exactly why free-market economists and others who are on the side of the rich have been so negative about democracy. In the old days, free-market economists strongly opposed universal suffrage on the grounds that it would destroy capitalism: poor people would elect politicians who would appropriate the means of the rich and give handouts to the poor, they argued, completely destroying incentives for wealth creation.

Once universal suffrage was introduced, they could not openly oppose democracy. So they started criticising "politics" in general. Politicians, it was argued, would adopt policies that maximised their chances of re-election but damaged the economy – printing money, handing out favours to powerful monopolies, and increasing social welfare spending for the poor. Politicians needed to be prevented from making important policy decisions, the argument went.

On this advice, since the 1980s, many countries have ring-fenced the most important policy areas to keep politicians out. Independent central banks (such as the European Central Bank), independent regulatory agencies (such as Ofcom and Ofgem) and strict rules on government spending and deficits (such as the "balanced budget" rule) have been introduced.

In particularly difficult economic times, it was even argued, we need to insulate economic policies from politics altogether. Latin American military dictatorships were justified in such terms. The recent imposition of "technocratic" governments, made up of economists and bankers who have not been "tainted" by politics, on Greece and Italy comes from the same intellectual stable.

What free-market economists are not telling us is that the politics they want to get rid of are none other than those of democracy itself. When they say we need to insulate economic policies from politics, they are in effect advocating the castration of democracy.

The conflict surrounding austerity policies in Europe is, then, not just about figures on budget, unemployment and growth rate. It is also about the meaning of democracy.

As José Manuel Barroso, the president of the European commission, has recently recognised, the policy of austerity has "reached its limits" in terms of "political and social support". If European leaders, including the British chancellor, keep pushing these policies against those limits, people will inevitably start asking: what is the point of democracy, when policies serve only the interest of the tiny minority at the top? This is nothing less than crunch time for democracy in Europe.

A rightwing insurrection is usurping our democracy

For 30 years big business, neoliberal thinktanks and the media have colluded to capture our political system. They're winning

• 
• • George Monbiot
  • The Guardian, Monday 1 October 2012 20.30 BST

After contemplating a military coup Sir James Goldsmith went on to form the Referendum party, slogan: Let the People Decide. Photograph: Jacqueline Arzt/AP

To subvert means to turn from below. We need a new word, which means to turn from above. The primary threat to the democratic state and its functions comes not from mob rule or leftwing insurrection, but from the very rich and the corporations they run.

These forces have refined their assault on democratic governance. There is no need – as Sir James Goldsmith, John Aspinall, Lord Lucan and others did in the 1970s – to discuss the possibility of launching a military coup against the British government: the plutocrats have other means of turning it.

Over the last few years I have been trying better to understand how the demands of big business and the very rich are projected into policymaking, and I have come to see the neoliberal thinktanks as central to this process. These are the groups which claim to champion the free market but whose proposals often look like a prescription for corporate power.

David Frum, formerly a fellow of one of these thinktanks – the American Enterprise Institute – argues that they "increasingly function as public relations agencies". But in this case, we don't know who the clients are. As the corporate lobbyist Jeff Judson enthuses, they are "virtually immune to retribution … the identity of donors to thinktanks is protected from involuntary disclosure". A consultant who worked for the billionaire Koch brothers claims that they see the funding of thinktanks "as a way to get things done without getting dirty themselves".

This much I knew, but over recent days I've learned a lot more. In Think Tank: the story of the Adam Smith Institute, the institute's founder, Madsen Pirie, provides an unintentional but invaluable guide to how power in Britain really works.

Soon after it was founded (in 1977), the institute approached "all the top companies". About 20 of them responded by sending cheques. Its most enthusiastic supporter was the coup plotter James Goldsmith, one of the most unscrupulous asset strippers of that time. Before making one of his donations, Pirie writes, "he listened carefully as we outlined the project, his eyes twinkling at the audacity and scale of it. Then he had his secretary hand us a cheque for £12,000 as we left".

From the beginning, senior journalists on the Telegraph, the Times and the Daily Mail volunteered their services. Every Saturday, in a wine bar called the Cork and Bottle, Margaret Thatcher's researchers and leader writers and columnists from the Times and Telegraph met staff from the Adam Smith Institute and the Institute of Economic Affairs. Over lunch, they "planned strategy for the week ahead". These meetings would "co-ordinate our activities to make us more effective collectively". The journalists would then turn the institute's proposals into leader columns while the researchers buttonholed shadow ministers.

Soon, Pirie says, the Mail began running a supportive article on the leader page every time the Adam Smith Institute published something. The paper's then editor, David English, oversaw these articles himself, and helped the institute to refine its arguments.

As Pirie's history progresses, all references to funding cease. Apart from tickets donated by British Airways, no sponsors are named beyond the early 1980s. While the institute claims to campaign on behalf of "the open society", it is secretive and unaccountable. Today it flatly refuses to say who funds it.

Pirie describes how his group devised and refined many of the headline policies implemented by Thatcher and John Major. He claims (and produces plenty of evidence to support it) either full or partial credit for the privatisation of the railways and other industries, for the contracting-out of public services to private companies, for the poll tax, the sale of council houses, the internal markets in education and health, the establishment of private prisons, GP fundholding and commissioning and, later, for George Osborne's tax policies.

Pirie also wrote the manifesto of the neoliberal wing of Thatcher's government, No Turning Back. Officially, the authors of the document – which was published by the party – were MPs such as Michael Forsyth, Peter Lilley and Michael Portillo. "Nowhere was there any mention of, or connection to, myself or the Adam Smith Institute. They paid me my £1,000 and we were all happy." Pirie's report became the central charter of the doctrine we now call Thatcherism, whose praetorian guard called itself the No Turning Back group.

Today's parliamentary equivalent is the Free Enterprise Group. Five of its members have just published a similar manifesto, Britannia Unchained. Echoing the narrative developed by the neoliberal thinktanks, they blame welfare payments and the mindset of the poor for the UK's appalling record on social mobility, suggest the need for much greater cuts and hint that the answer is the comprehensive demolition of the welfare system. It is subtler than No Turning Back. There are fewer of the direct demands and terrifying plans: these movements have learned something in the past 30 years.

It is hard to think how their manifesto could have been better tailored to corporate interests. As if to reinforce the point, the cover carries a quote from Sir Terry Leahy, until recently the chief executive of Tesco: "The path is clear. We have to be brave enough to take it."

Once more the press has taken up the call. In the approach to publication, the Telegraph commissioned a series of articles called Britain Unleashed, promoting the same dreary agenda of less tax for the rich, less help for the poor and less regulation for business. Another article in the same paper, published a fortnight ago by its head of personal finance Ian Cowie, proposes that there be no representation without taxation. People who don't pay enough income tax shouldn't be allowed to vote.

I see these people as rightwing vanguardists, mobilising first to break and then to capture a political system that is meant to belong to all of us. Like Marxist insurrectionaries, they often talk about smashing things, about "creative destruction", about the breaking of chains and the slipping of leashes. But in this case they appear to be trying to free the rich from the constraints of democracy. And at the moment they are winning.

Adam Smith's Market never stood alone

 

  By Amartya Sen

Published: March 10 2009 20:15 | Last updated: March 10 2009 20:15

Exactly 90 years ago, in March 1919, faced with another economic crisis, Vladimir Lenin discussed the dire straits of contemporary capitalism. He was, however, unwilling to write an epitaph: "To believe that there is no way out of the present crisis for capitalism is an error." That particular expectation of Lenin's, unlike some he held, proved to be correct enough. Even though American and European markets got into further problems in the 1920s, followed by the Great Depression of the 1930s, in the long haul after the end of the second world war, the market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years. Not any more, at least not right now. The global economic crisis began suddenly in the American autumn and is gathering speed at a frightening rate, and government attempts to stop it have had very little success despite unprecedented commitments of public funds.

The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. The invoking of old and new capitalism played an energising part in the animated discussions that took place in the symposium on "New World, New Capitalism" led by Nicolas Sarkozy, the French president, Tony Blair, the former British prime minister, and Angela Merkel, the German chancellor, in January in Paris.

The crisis, no matter how unbeatable it looks today, will eventually pass, but questions about future economic systems will remain. Do we really need a "new capitalism", carrying, in some significant way, the capitalist banner, rather than a non-monolithic economic system that draws on a variety of institutions chosen pragmatically and values that we can defend with reason? Should we search for a new capitalism or for a "new world" – to use the other term on offer at the Paris meeting – that need not take a specialised capitalist form? This is not only the question we face today, but I would argue it is also the question that the founder of modern economics, Adam Smith, in effect asked in the 18th century, even as he presented his pioneering analysis of the working of the market economy.

Smith never used the term capitalism (at least, so far as I have been able to trace), and it would also be hard to carve out from his works any theory of the sufficiency of the market economy, or of the need to accept the dominance of capital. He talked about the important role of broader values for the choice of behaviour, as well as the importance of institutions, in The Wealth of Nations ; but it was in his first book, The Theory of Moral Sentiments, published exactly 250 years ago, that he extensively investigated the powerful role of non-profit values. While stating that "prudence" was "of all virtues that which is most helpful to the individual", Smith went on to argue that "humanity, justice, generosity, and public spirit, are the qualities most useful to others".*

What exactly is capitalism? The standard definition seems to take reliance on markets for economic transactions as a necessary qualification for an economy to be seen as capitalist. In a similar way, dependence on the profit motive, and on individual entitlements based on private ownership, are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist? All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy.

It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed. Perhaps the biggest mistake lies in interpreting Smith's limited discussion of why people seek trade as an exhaustive analysis of all the behavioural norms and institutions that he thought necessary for a market economy to work well. People seek trade because of self-interest – nothing more is needed, as Smith discussed in a statement that has been quoted again and again explaining why bakers, brewers, butchers and consumers seek trade. However an economy needs other values and commitments such as mutual trust and confidence to work efficiently. For example, Smith argued: "When the people of any particular country has such confidence in the fortune, probity, and prudence of a particular banker, as to believe he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them."

Smith explained why this kind of trust does not always exist. Even though the champions of the baker-brewer-butcher reading of Smith enshrined in many economics books may be at a loss to understand the present crisis (people still have very good reason to seek more trade, only less opportunity), the far-reaching consequences of mistrust and lack of confidence in others, which have contributed to generating this crisis and are making a recovery so very difficult, would not have puzzled him.

There were, in fact, very good reasons for mistrust and the breakdown of assurance that contributed to the crisis today. The obligations and responsibilities associated with transactions have in recent years become much harder to trace thanks to the rapid development of secondary markets involving derivatives and other financial instruments. This occurred at a time when the plentiful availability of credit, partly driven by the huge trading surpluses of some economies, most prominently China, magnified the scale of brash operations. A subprime lender who misled a borrower into taking unwise risks could pass off the financial instruments to other parties remote from the original transaction. The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.

This institutional vulnerability has implications not only for sharp practices, but also for a tendency towards over-speculation that, as Smith argued, tends to grip many human beings in their breathless search for profits. Smith called these promoters of excessive risk in search of profits "prodigals and projectors" – which, by the way, is quite a good description of the entrepreneurs of subprime mortgages over the recent past. The implicit faith in the wisdom of the stand-alone market economy, which is largely responsible for the removal of the established regulations in the US, tended to assume away the activities of prodigals and projectors in a way that would have shocked the pioneering exponent of the rationale of the market economy.

Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.

The economic difficulties of today do not, I would argue, call for some "new capitalism", but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.

Britain can’t afford to fall for the charms of the false economics Messiah Paul Krugman Superstar economist Paul Krugman wants us to change course, but his solutions are simplistic.

Jeremy Warner in the Telegraph

What does the future hold as Europe slides, ever more hopelessly, towards the abyss? As David Cameron has pointed out, there have been 18 EU summits since he became Prime Minister little more than two years ago, and none of them has produced anything remotely resembling a solution.

The stand-off got a whole lot worse this week. France and Germany are now in open conflict over the way forward, if indeed there is one. For the UK, already bleeding badly from the after-effects of the financial crisis, the situation could scarcely look more threatening.

The fiscal consolidation chosen by the Coalition was always likely to have a negative impact on output, at least in the short term. To make it work, the Government needed the following wind of decent growth elsewhere in the world economy. Instead, it’s facing a hurricane. We look set to be broken by the storm.

But fear not – salvation is at hand. Next week, there comes to these shores a Messiah, a prophet of great wisdom and understanding whose teachings promise to vanquish despair and “end this depression”. He is Prof Paul Krugman, a superstar polemicist who has been described by The Economist as “the most celebrated economist of his generation”. Actually, “celebrated” is not exactly the right word, for Krugman divides opinion like no other. To his followers, he’s a saint; to his detractors, he’s a false prophet with satanic intent.

I’ve been a little misleading here. He’s not really coming to Britain to save us, but rather to promote his latest book, End This Depression Now! Krugman is an economist with attitude, and he thinks Britain is in the midst of a “massive blunder” in economic policy. The UK is the very worst example of austerity economics, he believes, for unlike the poor beleaguered nations of the eurozone periphery, we’ve not had this misery forced on us by the ghastly euro, but have opted for it as an unnecessary penance for the sins of the boom. If only we could be persuaded to forsake “Osbornomics” and tread the path originally set out by our dearly beloved former leader, Gordon Brown – that of spending our way back to growth – then all would be well again.

Put like that, of course, it sounds ridiculous, but the fact that Krugman is a Nobel prize-winning economist gives Labour’s calls for a U-turn on the economy an intellectual credibility they would otherwise struggle to attain.

All the great economists – from Adam Smith to John Maynard Keynes – were as much moral philosophers as dispassionate analysts of events, and Krugman is no exception, preaching his message with all the passion of the religious zealot. He feels our pain and begs us to let him help. “The road out of depression and back to full employment is still wide open,” he insists. “We don’t have to suffer like this.”

Krugman may appear loud and radical, but he follows a fairly standard Keynesian text. By his own admission, the social cost of the present downturn doesn’t come anywhere close to the Great Depression of the interwar years, or not yet. None the less, there are parallels, and we already meet Keynes’s classic definition of a depression as a “chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse”.

In such circumstances, monetary policy can help, but only up to a point. In a depression, even those with the balance sheet strength to spend and invest won’t do so, whatever the encouragement offered through ultra-low interest rates. It follows that governments should step into the breach and do the job instead, as a kind of spender of last resort. They can worry about the accumulated debt later, once output has picked up again.

To Krugman, it’s understandable that policymakers screwed up so monumentally in the Great Depression; they didn’t understand what was going on and there was no template for the circumstances they found themselves in. To his mind, there is no excuse this time around; it’s textbook stuff, which is being wilfully ignored.

But haven’t we already tried borrowing to stimulate? And what did it deliver other than fiscal ruin, which in the eurozone periphery is so serious that markets have stopped lending altogether? Krugman has an answer for these questions, too. It’s not the policy that was wrong, merely that the stimulus wasn’t big and sustained enough. As for the eurozone, again, it wasn’t the policy, but the euro. Countries with their own currencies and central banks won’t run into this kind of problem. In extremis, they can always print the money.

Easy peasy, then. What’s not to like? Well, I’m sorry, but I just don’t buy it. It may or may not be possible for a vast, largely internalised economy such as the US, with its reserve currency status, to run double-digit deficits into the indefinite future without adverse consequences, but for the UK it is a much more questionable policy.

True, Britain has lived with much higher debts relative to GDP in the past, but this has nearly always coincided with major wars. With demilitarisation, much of this borrowing to spend falls away and domestic consumption comes roaring back. No such get-out-of-jail-free card exists this time around. Further, the demographic is completely different from that of the post-war baby boom generation, where growth and therefore debt erosion were more or less guaranteed. Today, the unfunded liabilities of an ageing population stretch menacingly into the long-term future.

As it is, government spending in the UK is already approaching 50 per cent of GDP. Just how high does Prof Krugman propose it should go? It’s all very well to say “jobs first” and worry about the deficit later, but once government spending becomes entrenched, it’s very difficult to get rid of it. Even Reagan and Thatcher struggled to make significant inroads.

In any case, the picture Krugman presents of wrong-headed British austerity is a caricature of the reality, though one admittedly encouraged by the Coalition’s rhetoric. Yesterday’s revised GDP figures, showing that the country is even deeper in recession than we thought, would appear to support the mocking tone in which Krugman condemns the idea of “expansionary austerity”. But where is this austerity? In fact, one of the few positive contributors to output in the last quarter was government spending, which grew by 1.6 per cent. Krugman seems to have forgotten the automatic stabilisers, which because of our welfare state are considerably bigger than in the US. In America, much current UK spending would count as a discretionary fiscal stimulus of the sort End This Depression Now! advocates.

As Raghuram Rajan, a former IMF chief economist, has argued, today’s troubles are not simply the result of inadequate demand, but of major changes in the world economy brought about by globalisation. The old monopoly of knowledge and expertise once enjoyed by advanced economies has been swept away. For decades, we compensated for the jobs and income lost to technology and cheaper foreign competition with unaffordable government spending and easy credit. Much of the growth enjoyed in these pre-crisis years was simply unsustainable.

Paul Krugman’s message is seductive, but it’s also unrealistic. If only the solutions to our plight were as simple as he thinks.

Neoclassical Dogma – : How Economists Rationalise Their Hatred of Free Choice

By Philip Pilkington, a journalist and writer living in Dublin, Ireland

What if all the world’s inside of your head
Just creations of your own?
Your devils and your gods
All the living and the dead
And you’re really all alone?
You can live in this illusion
You can choose to believe
You keep looking but you can’t find the woods
While you’re hiding in the trees
– Nine Inch Nails, Right Where it Belongs

Modern economics purports to be scientific. It is this that lends its practitioners ears all over the world; from the media, from policymakers and from the general public. Yet, at its very heart we find concepts that, having been carried over almost directly from the Christian tradition, are inherently theological. And these concepts have, in a sense, become congealed into an unquestionable dogma.
We’ve all heard it before of course: isn’t neoclassical economics a religion of sorts? I’ve argued here in the past that neoclassical economics is indeed a sort of moral system. But what if there are theological motifs right at the heart of contemporary economic theory? What does this say about its validity and what might this mean in relation to the social status of its practitioners?

Let us turn first to one of the most unusual and oft-cited pieces of contemporary economic doctrine: rational expectations theory.

Rational Expectations: Irrationality and an Encounter with the Godhead

Rational expectations is indeed an obscure doctrine. It essentially holds that people operating within a market generally act in line with the expectations of neoclassical theory. This tautology – for it is a tautology – can be traced back to Adam Smith’s ‘invisible hand’ which we explore in more detail later on.

But this goes beyond simple tautology. The neoclassical assumptions are themselves especially stringent and seem to be wholly counterfactual to any observer of human behaviour. Rational expectations theory expects people to act, well, rationally. More specifically it assumes that people always act in order to ‘maximise their utility’ and that such actions result in optimal behaviours that ensure that prices are always perfectly in keeping with what they ‘should be’ – that is, an equilibrium price that perfectly balances supply and demand. Prices then become a pristine and perfect measurement; they translate consumer desire perfectly and are beyond question.

Utility maximisation is a strange doctrine that goes right to the heart of rational expectations theory. It assumes that a fixed value can be placed on the satisfaction people derive from the things they buy. It also assumes – implicitly – that people are in some sense aware of this value and that they undertake their actions rationally in accordance with their perception of it.

At a glance this seems outlandish. Take consumption as the most glaring example. Anyone who has ever encountered any sort of marketing knows well that people don’t act in a perfectly rational manner. People often consume in line with what they perceive to be group expectations. Marketers and corporations take advantage of this and use it as leverage to jack up prices on certain goods. For example, are my brand name jeans really worth that much more in tangible terms than a non-brand names pair of jeans? I would say not.

Economists might counter this by arguing that consumers are still acting rationally insofar as their responding to marketers and brand names helps them further their social esteem: it gives them ‘social capital’ and it is this that the marketer is selling. To argue this is to fundamentally misunderstand the psychology of the consumer. The consumer may indeed identify with the group through the consumption of the product, however this is a deeply emotive act – not one in which the consumer cynically calculates that the product might enhance his or her ‘social capital’. It is not a rational response to the ‘social mores’ that the marketer is selling but rather an irrational response triggered by certain stimuli.

Marketers have understood this for nearly a century. Consider the case of a Lynx ad run a few years ago during the World Cup (here is the ad) – note also that Lynx have been running similar ads for years (which presumably means that this campaign has proved so effective that they have no need to fundamentally change it).

There is a certain amount of group identification present in this ad certainly (doesn’t every guy want to be the Don Juan who ‘scores’ all the chicks?), but there is definitely a deeper strata operating here. I don’t think I need to even point this out. The ad says it quite explicitly: ‘Spray more, get more’. This means that not only will you ‘get more’ women if you use Lynx, but also that if you literally spray on more Lynx you will literally get more women – a fantastic assertion.

Look again at the ad. Note how the guy is using an awful lot of Lynx. Indeed, it almost appears as if more women appear as he sprays on more of the deodorant (if one were to be terribly cynical one might read his end reaction in the ad as a sexual climax induced by his extremely liberal use of the deodorant). Anyone who has stood at a bar in a nightclub next to a guy smelling extremely heavily of Lynx will not doubt that this campaign has been at least somewhat effective.

The idea – a classic in marketing – is that not only to tie the consumer to the brand through group identification and the promise of sexual fulfilment, but to actually influence how the consumer uses the product itself. This ensures that the consumer will purchase more of the product because they will consume it faster. To claim that this behaviour is somehow rational is to pervert the English language itself. This behaviour is strongly irrational and those that attempt to manipulate it know this better than perhaps anyone else.

While we won’t go too far into the argument here, these observations can safely be transferred to most of the decisions that people make in all of the spheres dealt with by rational expectations theory. From direct investment to the purchase of stock to so-called inflation expectations, all have a strongly irrational aspect that is often manipulated by institutions for political and economic ends (the amount of institutions attempting to manipulate inflation expectations at the moment is quite incredible).

One example might be that of housing. During the boom years people invested money in housing not just because they might see a profitable return, but also because it became fashionable to own property – while the following clip is from a comedy show, the social observation is a sound one as far as Irish society during the property bubble is concerned. The boom rested not simply on the fact that it became ‘cool’ to own a house (this would be the social identification element as identified in the above clip), but also because being a homeowner has certain emotive overtones (having a family, being free from one’s parents etc.). These social expectations and emotive responses are key components not only in all speculative bubbles, but in all so-called market activity.

The fundamental point here is that people – be they consumers or producers, investors or forecasters – often act in an almost wholly irrational manner; one that is quite open to manipulation. And once we allow for this the very premise upon which rational expectations theory rests upon falls to pieces.
This is all very interesting, but it has nothing to do with theology, surely. Well, it is in the next key tenet of rational expectations theory that we truly encounter the Godhead.

Rational expectations theory assumes that people always operate on a complete amount of information. Economists call this ‘forecasting’ – although they might call it ‘crystal-ball gazing’. They do not assume that all consumers forecast perfectly at all time. However, they do assume that when any forecasting errors are made they are simply anomalies. This paper sums it up quite nicely:

The hypothesis of rational expectations means that economic agents forecast in such a way as to minimize forecast errors, subject to the information and decision—making constraints that confront them. It does not mean they make no forecast errors; it simply means that such errors have no serial correlation, no systematic component.

The idea here is that all economic actors have access to almost perfect knowledge of economic variables over time (prices, inflation etc.). True the above author qualifies that such forecasting is ‘subject to information and decision’** – which is more than many other economists allow – but this is a smokescreen. If we assume that market actors do not make mistakes in a given market then they must, by default, have access to almost perfect knowledge of that market; otherwise, to say that they don’t make mistakes is silly. If they were to have incomplete information then they would have to act, at least to some extent, on their gut instinct and so would, by definition, not be acting wholly rationally.

In rational expectations theory when market actors get market variables incorrect or act in an ‘incorrect’ manner on these variables this error is not taken to be indicative of some underlying uncertainty in their action, but simply an anomaly; an exception to the rule. Economic actors are assumed to have access to near perfect information, not just about the present but about the past and future as well.

Scratch a little deeper and you’ll find that this is an even more incredible assertion than it first appears. Rational expectations theory essentially assumes that consumers are omniscient beings – or at least, when they are acting ‘normally’ they are omniscient. This is where we encounter truly theological motifs in the edifice of neoclassical economics.

In many theologies, God is assumed to have perfect knowledge. And in order to gain access to this knowledge one needs only to try to build one’s relationship to God onto a higher plateau. In rational expectations it is assumed that individuals can indeed make mistakes – in theological terms: they can Sin – but these mistakes are never systemic – in theological terms: individuals are always on the way toward Salvation. As long as the individual keeps with the ‘tenets’ of the theory (which is presupposed), Sin is minimised and the individuals acts in line with the being possessing perfect knowledge.

The being of perfect knowledge is here not thought of as ‘God’ per se, but instead is given the name ‘The Market’. On a purely intellectual level the ideas seem almost identical. Both are overarching principles governing our lives, both are generally ‘followed’ unless perverse deviations (Sinners) crop up and both are perfect information processors.

We will return to this when we pick up Smith’s theory of the ‘invisible hand’ – a theory from which this all stems. For now let us turn to the true neoclassical Godhead: the efficient markets hypothesis.

The Efficient Markets Hypothesis: The Godhead Embodied

As we shall see shortly, ‘the Market’ is and always was a strongly theological idea. However, it is in the efficient markets hypothesis where the Godhead is truly to be located today.

Whereas the rational expectations model of the economic actor assumes that he or she is always in some sort of relationship with a being of perfect knowledge, the efficient markets hypothesis points the way to this divine being itself.

To really boil it down, the efficient markets hypothesis essentially states that all information is always already built into markets and hence they operate perfectly in line with how neoclassical theory would expect them to operate (i.e. with supply and demand in perfect equilibrium and prices reflecting this perfectly). In a way, the efficient markets hypothesis assumes that markets are made up of the actors we previously encountered in the rational expectations model. Since, as we have already seen, these actors always act in a predictable way, a conglomeration of them will process information perfectly.

The question to be asked is of the ‘chicken and egg’ variety: do these theories begin with the rational actor and then build upon this to form the efficient markets theory OR do these theories begin with the assumption of an overarching arena of rationality which is called ‘the market’ and then assume peoples’ actions based on this abstraction?

I would argue that the latter is the case. As we shall later see, if we trace these ideas right back to their roots we find that the theory of markets is far more primal than the theory of the rational individual – the latter is, in many ways, derived from the former.

So what status does this give the being that we call ‘the Market’? Well, if it is a being that is presupposed to exist while only being seen through its effects and is given the power to direct the behaviour of individuals, then it is surely of the theological variety. It is the Godhead embodied.
Many commentators – including this blog’s editor Yves Smith in her book ECONNED – have pointed out that the efficient markets hypothesis was used by policymakers to justify their cutting back on regulations and allowing ‘the Market’ to operate without constraint. These commentators have pointed out that it was this policy prescription that led to the current financial crisis.

It is also to be pointed out that these prescriptions were always undertaken with a kind of faith. Past experiences had cast into doubt that financial markets operated in line with the efficient markets hypothesis and yet those who pushed for deregulation were true believers in the hypothesis; they acted as if they were in a sort of irrational reverie, a suspension of historical remembrance wholly driven by their beliefs. It should not be surprising then that we find this idea to be a very close approximation of certain religious ideas and ideals.

The idea that there might be some overarching being – whether called ‘God’ or ‘the Market’ – that is directing all our activity and through whom we can be sure our actions are just and righteous, is a very attractive one. Like the religious ideas of yore it can both justify our actions when they are ethically questionable – we can assure people that such actions are in keeping with the Market’s Divine Will – and can assure us that the actions we undertake are reflected in and through some higher ideal – in this case a perfectly rational being we call ‘the Market’.

These ideals can also justify our actions after the fact when the God, so to speak, has failed. When this occurs – as has certainly happened today – devotees can assure the general public and their colleagues that it was simply a glitch, perhaps a testing of our faith and that we should never question the Market’s Will. Some of the more extreme devotees might even suggest that we have Sinned too greatly and that we have not followed the Market’s Will adequately enough. More deregulation is needed otherwise we might incur further punishment from the Divine Wrath.

Lying behind rational expectations theory and the efficient markets hypothesis is Adam Smith’s old notion of the ‘invisible hand’ and it is to this we now turn.

The Invisible Hand and Predestination

For by grace you have been saved through faith, and that not of yourselves; it is the gift of God, not of works, lest anyone should boast. For we are His workmanship, created in Christ Jesus for good works, which God prepared beforehand that we should walk in them – Ephesians 2:8-10

It was on this passage of the bible that the famous Protestant theologian Martin Luther based his idea that human beings had no free will. They were always subjects of God, bound up with Him and merely danced to whatever tune he played. This is the essence of the Protestant idea of Predestination. God has a plan for each and every one of us and we are just cogs in his great harmonious machine. It is His invisible hand that controls our actions and our destinies.

The importance of the invisible hand in the work of the first modern economist Adam Smith is hotly debated, since he used the metaphor only three times in his whole work and even then he used it only loosely. However, it is thought by many – and rightly, I think – as distilling the main thrust of his work in a single, useful phrase.

For Smith, the Market should be free to largely act autonomously. It ironed out its own inconsistencies and operated effectively and harmoniously. But what place did this leave for the individual?

Many today claim that Smith was the great prophet of human freedom. Yet if his theories are read as being wholly deterministic this surely cannot be the case. If the Market acts autonomously, unconsciously dictating all our actions then is there really space for liberty in classical or neoclassical economic theory? I would argue not.

The invisible hand permeates all aspects of neoclassicism. In a seminal paper entitled ‘Situational Determinism in Economics’ the philosopher of science Spiro Latsis shows that the whole neoclassical research program relies on an overarching determinism which he refers to as ‘situational determinism’. What he means by this is that, given a certain situation that a particular individual might find him or herself in, they will always necessarily choose one path – their behaviour will always follows a certain given direction.

This is, of course, the invisible hand at work. The person is directed or guided by an invisible force that leads them to undertake one action and avoid another. This should also be recognised as one of the fundamental aspects of rational expectations theory as outlined above: the individual is assumed to always act in a specific way and any other actions are thought to be ‘deviations’.

The invisible hand is truly the hidden thread tying together all sorts of neoclassical theories – from rational expectations to the efficient markets hypothesis. And in this it is simply a reiteration, in quote-unquote ‘secular’ form, of an age old Protestant theological assertion. What we get is a view of a world governed and controlled by a mystical and invisible force that sorts everything out for us. Everything operates without human governance, the world adheres to a set of laws handed down by an invisible agency; everything in its right place. This is Predestination pure and simple.
(It should be noticed that Austrian School ideologue Ludwig von Mises recognised that the invisible hand in Smith was in fact an image of God. He held, however, that secular reasoning led in this direction and did not see a problem with this. One can only assert that von Mises was more self-aware than other believers. See: note 3 on page 147 of Mises’ ‘Human Action’ – an ironic title given the thrust of our present discussion).

In modern neoclassical theory we find this structure operating mainly through the two theoretical postulates discussed in the first and second parts of this piece.

The efficient markets hypothesis postulates that there is an overarching and invisible force that cannot err. This is an image of a God controlling the world and ensuring that order emerges automatically out of chaos. All of us individuals are then conceptualised as living inside of this holy sphere. This leads to the assumptions of rational expectations theory.

In rational expectations theory, individuals are taken to act in the way assumed by neoclassical economics: that is, they rationally seek to maximise their gain in a particular way etc. The theory allows that they sometimes make mistakes, but these are thought of as ‘deviations’ and are never allowed be the norm. The Market, being infallible, omnipotent and unable to err, effectively ensures that individuals are not allowed to make mistakes in any systematic way. To cast this in theological language: God, being infallible, omnipotent and unable to err ensures that individuals are not able to Sin in any systematic way. While Sinning does take place, the overall thrust is for Man to follow the path that God has laid out for him.

The neoclassical paradigm offers its adherents a very attractive theology. It allows them to look at the world through a remarkably powerful set of rose-tinted glasses. It assures them that everything is okay – provided regulators and Sinners don’t get into positions of power – and that order and harmony will be established by an over-arching, quasi-external power. It gives its adherents a being that they can, in a very real sense, worship. It gives them a moral code that they can follow and that they can use to justify their actions, even when these appear to an external observer as being disgusting, idiotic and objectionable.

Dogmatism and Its Dangers

Perhaps this last point is the key one. The most dangerous personality trait of dogmatic religious devotees is their ability to insist that their extreme views are pure truth and that any action they undertake, no matter how destructive and stupid, are always already sanctioned by a higher power.
In his modernist classic ‘Ulysses’, there is a beautiful sentence in which James Joyce sums up the hypocrisy of religious dogmatists who use their fixed beliefs to justify actions that they might not be able to otherwise undertake in good conscience. Speaking of Oliver Cromwell’s brutal military campaign in Ireland in the mid-seventeenth century Joyce writes:

What about sanctimonious Cromwell and his ironsides that put the women and children of Drogheda to the sword with the bible text ‘God is love’ pasted round the mouth of his cannon?

What about him indeed? Such is the epitaph we might one day see on the tombstone of that strange secular religion that is neoclassical economics – although rather than the text ‘God is love’ pasted round the mouth of its collective cannon, there are instead written the words ‘the Market is always right’.

** As we will soon see, the meaning of the word ‘decision’ here is very shaky. How can a deterministic theory which claims to know how people will act allow them to have the power to make a decision? If they have the power to make a decision then, by default, this decision will be uncertain and no overarching theory will be able to capture it. By making reasonable qualifications to accompany an unreasonable theory the above author unwittingly destroys the theory itself.

Pigeonholing protesters as anti capitalist will only allow those who are against reform to avoid the issue

• 
• • Ha-Joon Chang
  • guardian.co.uk, Tuesday 15 November 2011 21.00 GMT
  • larger | smaller

In Singapore 'a staggering 22% of national output is produced by state-owned enterprises'. Photograph: Luis Enrique Ascui/Reuters

The Occupy London movement is marking its first month this week. It is routinely described as anti-capitalist, but this label is highly misleading. As I found out when I gave a lecture at its Tent City University last weekend, many of its participants are not against capitalism. They just want it better regulated so that it benefits the greatest possible majority.

But even accepting that the label accurately describes some participants in the movement, what does being anti-capitalist actually mean?

Many Americans, for example, consider countries like France and Sweden to be socialist or anti-capitalist – yet, were their 19th-century ancestors able to time-travel to today, they would almost certainly have called today's US socialist. They would have been shocked to find that their beloved country had decided to punish industry and enterprise with a progressive income tax. To their horror, they would also see that children had been deprived of the freedom to work and adults "the liberty of working as long as [they] wished", as the US supreme court put it in 1905 when ruling unconstitutional a New York state act limiting the working hours of bakers to 10 hours a day. What is capitalist, and thus anti-capitalist, it seems, depends on who you are.

Many institutions that most of us regard as the foundation stones of capitalism were not introduced until the mid-19th century, because they had been seen as undermining capitalism. Adam Smith opposed limited liability companies and Herbert Spencer objected to the central bank, both on the grounds that these institutions dulled market incentives by putting upper limits to investment risk. The same argument was made against the bankruptcy law.

Since the mid-19th century, many measures that were widely regarded as anti-capitalist when first introduced – such as the progressive income tax, the welfare state, child labour regulation and the eight-hour day – have become integral parts of capitalism today.

Capitalism has also evolved in very different ways across countries. They may all be capitalist in that they are predominantly run on the basis of private property and profit motives, but beyond that they are organised very differently.

In Japan interlocking share ownership among friendly enterprises, which once accounted for over 50% of all listed shares and still accounts for around 30%, makes hostile takeover very difficult. This has enabled Japanese companies to invest with a much longer time horizon than their British or American counterparts.
Japanese companies provide lifetime employment for their core workers (accounting for about a third of the workforce), thereby creating strong worker loyalty. They also give the workers a relatively large say in the management of the production process, thus tapping their creative powers. There are heavy regulations in the agricultural and retail sectors against large firms, which complement the weak welfare state by preserving small shops and farms.

German capitalism is as different from the American or British version as Japanese capitalism, but in other ways. Like Japan, Germany gives a relatively big input to workers in the running of a company, but in a collectivist way through the co-determination system, in which worker representation on the supervisory board allows them to have a say in key corporate matters (such as plant closure and takeovers), rather than giving a greater stake in the company to workers as individuals, as in the Japanese system.

Thus, while Japanese companies are protected from hostile takeovers by friendly companies (through interlocking shareholding), German companies are protected by their workers (through co-determination).
Even supposedly similar varieties of capitalism, for example Swedish and German, have important differences. German workers are represented through the co-determination system and through industry-level trade unions, while Swedish workers are represented by a centralised trade union (the Swedish Trade Union Confederation), which engages in centralised wage bargaining with the centralised employers' association (the Confederation of Swedish Enterprise).

Unlike in Germany, where concentrated corporate ownership has been deliberately destroyed, Sweden has arguably the most concentrated corporate ownership in the world. One family – the Wallenbergs – possesses controlling stakes (usually defined as over 20% of voting shares) in most of the key companies in the Swedish economy, including ABB, Ericsson, Electrolux, Saab, SEB and SKF. Some estimate that the Wallenberg companies produce a third of Swedish national output. Despite this, Sweden has built one of the most egalitarian societies in the world because of its large, and largely effective, welfare state.

And then there are hybrids that defy definition: China, with its large socialist legacy, is an obvious case, but Singapore is another, even more interesting, example. Singapore is usually touted as the model student of free-market capitalism, given its free-trade policy and welcoming attitude towards multinational companies. Yet in other ways it is a very socialist country. All land is owned by the government, 85% of housing is supplied by the government-owned housing corporation, and a staggering 22% of national output is produced by state-owned enterprises. (The international average is around 10%.) Would you say that Singapore is capitalist or socialist?

When it is so diverse, criticising capitalism is not very meaningful. What you have to change to improve the Swedish or the Japanese capitalist systems is very different from what you should do for the British one.
In Britain, as already physically identified by the Occupy movement, it is clear the key reforms should be made in the City of London. The fact that the Occupy movement does not have an agreed list of reforms should not be used as an excuse not to engage with it. I'm told there is an economics committee working on it and, more importantly, there are already many financial reform proposals floating around, often supported by very "establishment" figures like Adair Turner, the Financial Services Authority chairman, George Soros, the Open Society Foundations chairman, and Andy Haldane, the Bank of England's executive director for financial stability.

By labelling the Occupy movement "anti-capitalist", those who do not want reforms have been able to avoid the real debate. This has to stop. It is time we use the Occupy movement as the catalyst for a serious debate on alternative institutional arrangements that will make British (or for that matter, any other) capitalism better for the majority of people.