The Flaw in the Crystal of Capitalism

"We live at the end of two centuries of evidence for the triumph of capitalism. From the dawn of the Industrial Revolution in England, to the rise of the "Asian Tigers," to the impact of global capitalism in India and China--everywhere capitalism has spread, human life has been radically transformed for the better."

-Robert Tracinski (GOP 'Fusionism' Becomes Unfused, Real Clear Politics, 1/11/2008)


Adam Smith's 'Invisible Hand' doesn't exist, and American economic history since the Reagan era is the proof. Under Reagan, despite the 'turn-around' of American economics as a whole, the rich got richer while the poor became increasingly disenfranchised. Worse, the 'upswing' of the American economy during the Reagan years was not genuine economic growth. Instead it was the product of cost-cutting strategies designed to increase profit margins and raise stock prices in the short term. During a period of then-record economic 'growth' (truly growth in stock prices, with actual shrinkage in the world of labor and trade we call 'the economy'), unemployment and homelessness skyrocketed. The long-term effect, unfortunately, was to eliminate infrastructure and labor force in American corporations and make them less competitive around the world. The recession of the early 1990s, which ended the first Bush presidency, was simply the inevitable result of such short-term, easy-money-in-the-bank policies. Unfortunately, the United States has not learned from this pattern and has repeated the cycle under President Clinton and President Bush II. President Clinton's 'record job growth' consisted primarily of minimum wage jobs in the service industries and also counted the second jobs of people already active members of the workforce. President Bush's record makes Clinton look like Leon Trotsky.

The problem is that capitalism is a philosophical ideal; just like any other philosophical creation it depends on metaphysical speculation that cannot be either disproven or proven scientifically. The cornerstones of capitalism are vague terms like 'Market Forces', 'the Market', and 'the Invisible Hand.' These are labels given to tendencies and assigned the force of law because those tendencies appear to recur consistently. The problem is that these 'laws' of capitalism are dependent on something else: rational self-interest.

The key word in that simple phrase is 'rational.' The market tendencies of capitalism are only present to self-regulate the market when the self-interest of capitalists remains rational. When businessmen, entrepreneurs, and corporate raiders succumb to amoral greed on a massive scale then those tendencies are vastly weakened. While 'market forces' will eventually reward such destructive policies with the harvest of debt and failure currently being reaped by the American automotive industry, what do those 'market forces' matter if government subsidies allow failed companies to continue to pad the pocketbooks of executives?

The sad fact is that people often do not know what is best for themselves. A philosophy dependent on rational self-interest cannot sustain itself in a world where self-interest is rarely rational. The idea that competing spheres of self-interest will work to regulate the economy in the best interests of all has been repeatedly disproven. During the first great industrial successes of the earliest mass-producers, women and children were destroyed by harsh labor and dangerous machinery while able-bodied and skilled men lost their jobs and were forced to sit helplessly by while their wives and children died to put food on their table. Even then, the apostles of the religion of capitalism were outspoken against any interference in the machine of wealth-building. Economist Thomas Malthus argued that to regulate industry to make the condition of laborers he admitted were terribly abused would be to destroy the system and to make conditions worse for all.

This is the ultimate law of capitalism: for there to be great prosperity there must be exploitation. This is why economies are booming in India and China. American corporations are exploiting cheap labor markets to become competitive again, while local capitalists are realizing they can exploit their own people to crack in world markets. Thus conditions do improve, in the short term. In the long-term, when the entire world has become industrialized and intelligent, rational societies have regulated industry? Where will we ship our factories then? Who will we exploit?

Pure socialism is not the answer. Like capitalism, socialism is a philosophical construct based on metaphysical ideas not subject to scientific method. However, there is truth in socialism just as there is truth in capitalism. Hugh Miller, discussing religion, said 'A faith that destroys or weakens society cannot be true; a faith that strengthens or invigorates society may be true (emphasis mine).' Now the key word becomes 'society.' Not the wealthy or the privileged, but the people as a whole. It is necessary to take what may be true, what strengthens society, from both capitalism and socialism while rejecting that which is clearly untrue, what weakens society.

This is a radical solution, but then the problem is radical as well.