Capitalism's Fatal Flaws

In The Worldly Philosophers, Robert Heilbroner tells us that all the great economists foresaw a time when capitalism would come to an end. In Stabilizing an Unstable Economy (1986), Hyman Minsky outlines an agenda for ending capitalism as we've know it (what Heilbroner called "Capitalism as a Regime" in Behind the Veil of Economics). Minsky suggests that we replace laissez-faire capitalism (Wiki link) with a less-flawed version of Capitalism that allows for much better automatic stabilizers than found in our current system.

Minsky, following his reading of Keynes, tells us that modern financial institutions (with inherent tendencies toward monopoly) inevitably will turn into predators on other economic subsystems. Minsky also tells us that most economic theories, with emphasis on "equilibrium" while allowing only for occasional shocks to the system, are ill-equipped to deal with the systemic problems stemming from stability that breeds instability. Minsky (p.280):

In a world with capitalistic finance it is simply not true that the pursuit by each unit of its own self-interest will lead an economy to equilibrium. The self-interest of bankers, levered investors, and investment producers can lead the economy to inflationary expansions [including asset inflation] and unemployment-creating contractions. Supply and demand analysis—in which market processes lead to an equilibrium—does not explain the behavior of a capitalist economy, for capitalist financial processes mean that the economy has endogenous destabilizing forces. Financial fragility, which is a prerequisite for financial instability is, fundamentally, a result of internal market processes. …

Institutions such as the Federal Reserve, which were introduced in an effort to control and contain disorderly conditions in banking and financial markets, are now slaves of an economic theory that denies the existence of such conditions.

The "stability breeds instability" process is now well-know to complex systems theorists. As systems age, newly emergent systems first gain, then lose redundancy and therefore resilience—they become fragile, brittle, or tightly-coupled. At some point a shock to the system will cause catastrophic failure (if the system just doesn't get stuck in a "poverty trap"), setting the stage for rebirth of that system or newly emergent systems that arise in the wake of the old. (See, e.g. adaptive cycle, or more generally: Resilience Alliance.)

Minksy's dream is a hard sell in the American culture, with our new-found American values. Minsky's agenda is to relegate market mechanisms to relatively minor roles. Minsky's "solutions" which he offered up humbly, are for bigger government, smaller banking institutions, and an elimination of "welfare" via a government-sponsored "employment strategy". It is an agenda that is still being pitched by some of Minsky's disciples, although there is dissension among the disciples as is always the case with economists. Minsky also advocated for a "balanced budget" — balanced not every year, but over a reasonable time-frame so as to avoid hyper-inflationary possibilities.

Time will tell whether Capitalism will survive (and if it does, In what form?). In the meantime we all watch and wait, cuss and discuss.

For more on Minsky and more on the bankster crisis, see:
Economic Perspectives from Kansas City.
For more on monetary complex systems thought, see:
Macroeconomic Resilience

Comments

[Curt Doolittle]

We might note that Heilbroner changed his views later in life, once he matured.

This debate over capitalism is not one that is open to solution, because it is a chimera: capitalism as a set of institutions is the only method by which calculation and incentive can be used to further the division of labor and knowledge in real time, and it is the only system we have found to date that makes possible to replace the decline in effectiveness of laws and religion, both of which are useful only when the majority of the populace is effectively operating in the equality of ignorance and poverty. Furthermore, only capitalism is capable of providing competitive innovation between nation states.

Capitalism is an 'ism' only if is a set of beliefs which governors employ to make decisions about the unknown, instead of a set of institutions that make calculation and incentive possible in an increasingly complex division of knowledge and labor.

It is entirely possible to maintain the institutions of capitalism, and to have good government that makes best use of the institutions and best use of man's abilty to solve problems that markets cannot, or cannot easily solve in real time. But it appears, that our democratic political order, at least, post-civil war, cannot tolerate the level of diversity that has been imported into the country in a post-war, post-consumer, post-western era.

Our government is too unbounded to be able to solve these problems rationally. Because to solve them rationally requires the information to make rational decisions: information that it is not possible to possess outside the calculative systems provided by the capitalist economy.

you can have your cake and eat it to: capitalism and redistribution, but to do so means it must remain calculable.

Otherwise, whether you thikn you are right or not, (and it appears from this posting you are simply a believer in one thing or another), you are just using no more rational an argument than your opponents: one of belief not calculation.

[Dave Iverson]

Curt says,

"it appears, that our democratic political order, at least, post-civil war, cannot tolerate the level of diversity that has been imported into the country in a post-war, post-consumer, post-western era.

"Our government is too unbounded to be able to solve these problems rationally. Because to solve them rationally requires the information to make rational decisions: information that it is not possible to possess outside the calculative systems provided by the capitalist economy.

"you can have your cake and eat it to: capitalism and redistribution, but to do so means it must remain calculable."

I reply,

This is not the first time (post Civil War) that American culture has stumbled and ground to a halt -- impasse if you will. As James Fallows observes in the Atlantic, we do this periodically and each time, if we survive as a nation state, we search our souls, reinvent our democracy and become stronger as a collaborative/competitive state. "Can American Rise Again", James Fallows, Jan/Feb. 2010: http://www.theatlantic.com/magazine/archive/2010/01/how-america-can-rise-again/7839/

I struggle as much as anyone with the fact that "market mechanisms" at once are an engine for innovation yet, as Joan Robinson observed, are "cruel and unjust". No one has come up with a viable system to replace capitalism. Hyman Minsky just wanted to set up a system that would dampen the outrageous swings, "irrational exuberance" to "irrational pessimism" and back again, that seem to be occurring (at different places around the world, now at many places at once) ever-more-frequently these last couple of decades. I am open to other suggestions beyond Minsky's but I can't seem to find viable ones. And as I closed my little post, I don't see Minksy's as a viable right now either. Maybe after the shit hits the fan big time. But not right now.

I most certainly don't believe that "capitalism" as currently structured will save the day. Too much concentration of wealth. Too many myths of "supply side economics." Too many so-called externalities, that allow producers to gain by passing burdens on to others, including future generations. These burdens include toxin that threaten the earth's ecosystems. Too much longing for a return to those glorious days of yesteryear: Adam Smith's dreamland of small shopkeepers, individualistic consumers, etc. Too much outright looting by the so-called financial industry, insurance industry, medical industry, military industry. (All "industrial complexes" that, with the help of government allies or lackeys, are destroying both capitalism and democracy).

Neither do I believe that "rationality" will save the day. Humans are just not that rational. We have to deal with politics, emotions, traditions, religion, and much more in setting societal courses and course-corrections.

PS.. I am not as well read as I need to be. Show me where Heilbroner changed his views later in life.

[Dave Iverson]

Following up on Curt Doolittle's lead, here is the Robert Heilbroner's "deathbed repentance" article:

"The Man Who Told the Truth:
Robert Heilbroner fessed up to the failure of socialism"
by David Boaz
Reason Magazine, Jan. 21, 2005
http://reason.com/archives/2005/01/21/the-man-who-told-the-truth

And here is Heilbroner on "Socialism", really the rise and fall of socialism, at the Library of Economics and Liberty
http://www.econlib.org/library/Enc/Socialism.html

I need to dig deeper into this, but I suspect that if in fact Heilbroner was singing praises to capitalism "later in life", he would probably regret such today if he had lived long enough to see the recent collapse. PIIGS are NOT flying, and at least five states in the US are similarly in deep dodo. And what is the state of US or Japan's debt structure? And now China is once-again vowing to keep it's currency peg solid. Interesting times!

[Dave Iverson]

Followup (on 11:01 am): I did dig deeper. I couldn't find but abstracts of Heilbroner's last articles for the New Yorker, but what I found lead me to believe -- perhaps incorrectly -- that Heilbroner did not in fact change his views radically in his later years.

From Heilbroner's Reflections,"The Triumph of Capitalism", 1989
http://www.newyorker.com/archive/1989/01/23/1989_01_23_098_TNY_CARDS_000351619

"... The economic enemy of capitalism has always been its own self-generated dynamics. Thus, despite the rout of centralized planning, one would have to be very incautious to assume that capitalism will now find itself rid of its propensity to generate both inflation & recession, cured of its intermittent speculative fevers, or free of threatening international economic problems...

"For both capitalism & socialism, the immediate aim is to create systems that will work well enough. Despite the triumph of capitalism, that's not to be taken for granted."

From Heilbroner's Reflections,"After Communism", 1990
http://www.newyorker.com/archive/1990/09/10/1990_09_10_091_TNY_CARDS_000357236

"...Socialism may not continue as an important force now that Communism is finished. But another way of looking at socialism is as the society that must emerge if humanity is to cope with the ecological burden that economic growth is placing on the environment. From this perspective, the long vista after Communism leads through capitalism into a still unexplored world that roust be safely attained and settled before it can be named."

So, for now I'll await more information before I change my perspectives on Heilbroner's life and works.

PS.. In the earlier comment, the 2005 "Reason Magazine" article is by David Boaz, director of CATO. Not exactly a "go to" source for me. Indeed, a testimonial from Boaz is, perhaps, a testimonial that would have Heilbroner spinning in his grave.
Here's more on Boaz"
http://www.cato.org/people/david-boaz

[Curt Doolittle]

Dave

(Apologies. I did not see this response until Google picked it up today.)

RE: "capitalism as it is structured...."

Let's separate calculative institutions, cooperative institutions, political institutions, and philosophical institutions.

You cannot replace the calculative institutions. They are the necessary component of human cooperation, without which human beings cannot perceive and act in large numbers in a division of knowledge and labor. The first set is the Narrative, Counting, Arithmetic, Accounting, Money, Credit and Interest, all of which are conceptual tools only.

The second set is property (of some granularity), objective truth, trade, contract, banking, and dispute resolution, all of which are cooperative institutions. We cannot do without these tools if we wish to exist in large numbers.

The third set is political tools of taxation and law, all of which are forms by which groups compete against other groups for the purpose of DISTORTING calculative and cooperative institutions. Note how I am treating Law, as a means of distorting if the law is made, and a means of recording if the law evolves as a practice among the people. Currently we use limited representative democracy over very granular (individual) property rights. This is a common western political structure for rapid economic advancement because it distributes the necessity of calculating the use of wealth over a large number of people, and provides a competitive and rational means of forcible redistribution of that capital, as well as a forcible means of redirecting that capital to infrastructure that contributes to trade and prosperity.

The fourth set is philosophical tools, which are used to assist individuals in the political process in using 'reason' or 'argument' in the means of distortion, redistribution, and redirection. Functionally, we lack the knowledge to consider these philosophies sciences, and they are questionable means of argument, because we do not know the limits of cooperative technology, because we lack a scientific means of testing them.

We can correct these limits by increasing calculability everywhere in society. Libertarians unfortunately have fallen on property rights as a moral question, rather than a calculative one. And failed to understand the problem correctly: that redistribution can be measured and planned in at least broad terms, if we can calculate such a thing, rather than rely on 'ism's' - which are only necessary because we lack the information to rely on calculative rather than moral arguments.

It is this basic set of ideas i am trying to expose you to. First, to separate calculative and cooperative institutions, which are as great a human invention as was farming, and second our political institutions and philosophy which are what you are probably arguing about. Remember that philosophy emerged when farming did, and is a part of the farming culture's need for government of larger numbers of people who must cooperate in a market rather than by familial or tribal ties. Philosophy is inseparable from 'market'. you do not need a philosophy if you don't have one, because philosophy is a political construct mandated by the necessary ignorance of a person in a large population, where he possesses insufficient knowledge to make decisions in such a complex environment without general rules by which to make them.

As such the problem you are discussing is politics and the means of knowing something, and making decisions about something else in groups, so that we can compete as groups for the spoils of cooperative competition. It is not capitalism, which is a set of fairly scientific institutions that have evolved, (NOT BEEN STRUCTURED) in response to increases in population and the division of labor that made such increases possible.

So, when you speak of capitalism, I suspect you are not clear which of these sets of institutions, all of which are separate in function, you are discussing or criticizing. Since none of the calculative or cooperative were 'designed or structured', then it is the political and philosophical that are 'designed and structured' and open to change. As they are open to change, they can only be so, if we replace their assumptions, (their philosophy) with knowledge. And since we cannot have knowledge of things we cannot perceive without categories and measures, then the problem is creating sufficient knowledge and measures so that we no longer rely upon philosophy and knowledge.

Until this past quarter century it was impossibly expensive to record causal financial information - something which computing and communication technology have repaired. Unfortunately, our accounting is very far behind in this development, and our Political structure is still stuck in the world of farming. The way to fix this problem, effectively, is to eliminate the pooling of financial information. Pooling is laundering. Pooling of taxes, or costs is always money laundering.

Taxes and religion are artifacts of farming age. We are now in the capitalist age. And in that age, credit and credit rating have replaced taxes and laws as constructs by which people govern their lives. This change is important, because in a division of labor post-farming, we are too 'different' from one another 'unequal' to rely on constructs such as law and taxes which are collective constructs that must of necessity treat people as equals.

In other words, try not to give human beings more credit than they deserve. Try to give them the tools that they need to make rational decisions. While libertarians have been wrong in their approach, they have been right in many, many of their solutions. Use their solutions, and then redistribute. The side effect of this process will be a very visible status difference that is measurable by all citizens. This is the reason the left does not want it. They can make a suffrage argument and the information is invisible currently to show otherwise.. Most people are consumers and nothing else. As such they simply provide demand so that others can innovate and together they can drive down prices for all.

I am rushing and cannot edit this so I hope it does the topic justice.

[Curt Doolittle]

RE: "I need to dig deeper into this, but I suspect that if in fact Heilbroner was singing praises to capitalism "later in life", he would probably regret such today if he had lived long enough to see the recent collapse. PIIGS are NOT flying, and at least five states in the US are similarly in deep dodo. And what is the state of US or Japan's debt structure? And now China is once-again vowing to keep it's currency peg solid. Interesting times!"

I suspect that Heilbroner would make the same statement: I think you are confusing capitalism with the government's abuse of the financial system by flooding it with cheap credit yet not regulating it's use. And that isnt capitalism. That's just bad government. Socialism (government control of production) isn't possible because of the problem with information and incentives. That's why the whole world has converted to capitalism, without converting it's political structures to democracy. Government is bad at most things. So it's better to keep it to it's limited functions.

If you talk about redistribution of the wealth generated by capitalism then thats a different problem from socialism. You can argue about the DEGREE of redistribution and the impact of redistribution. But redistribution is possible, where central control of the economy is not.

Laissez faire capitalism is not going to fly anywhere in the world for long, because there are real and unavoidable costs to creating the institution of property that require all participants in a geography. That is just exploitation, and perhaps, under the right conditions, theft.

More another time. But the problem with such arguments about capitalism or socialism is defining these things in terms of human actions such that we know what we're actually talking about.