23 Things They Don't Tell You About Capitalism

This is not a place to spell out all the detailed proposals required for the reconstruction of the world economy, many of which have been discussed in the foregoing 23 Thingsanyway. Here I will only outline some principles– eight of them – that I think we need to have in mind in redesigning our economic system.

To begin with: paraphrasing what Winston Churchill once said about democracy, let me restate my earlier position that capitalism is the worst economic system except for all the others. My criticism is of free-market capitalism, and not all kinds of capitalism.

The profit motive is still the most powerful and effective fuel to power our economy and we should exploit it to the full. But we must remember that letting it loose without any restraint is not the best way to make the most of it, as we have learned at great cost over the last three decades.

Likewise, the market is an exceptionally effective mechanism for coordinating complex economic activities across numerous economic agents, but it is no more than that – a mechanism, a machine. And like all machines, it needs careful regulation and steering. In the same way that a car can be used to kill people when driven by a drunken driver, or to save lives when it helps us deliver an emergency patient to hospital in time, the market can do wonderful things but also deplorable ones. The same car can be made better by putting in improved brakes, more powerful engines or more efficient fuel, and the same market can be made to perform better through appropriate changes to the attitudes of the participants, their motives and the rules that govern it.

There are different ways to organize capitalism. Free-market capitalism is only one of them – and not a very good one at that. The last three decades have shown that, contrary to the claims of its proponents, it slows down the economy, increases inequality and insecurity, and leads to more frequent (and sometimes massive) financial crashes.

There is no one ideal model. American capitalism is very different from Scandinavian capitalism, which in turn differs from the German or French varieties, not to speak of the Japanese form. For example, countries which find American-style economic inequality unacceptable (which some may not) may reduce it through a welfare state financed by high progressive income taxes (as in Sweden) or through restrictions on money-making opportunities themselves by, say, making the opening of large retail stores difficult (as in Japan). There is no simple way to choose between the two, even though I personally think that the Swedish model is better than the Japanese one, at least in this respect.

So capitalism, yes, but we need to end our love affair with unrestrained free-market capitalism, which has served humanity so poorly, and install a better-regulated variety. What that variety would be depends on our goals, values and beliefs.

Second: we should build our new economic system on the recognition that human rationality is severely limited. The 2008 crisis has revealed how the complexity of the world we have created, especially in the sphere of finance, has vastly outpaced our ability to understand and control it. Our economic system has had a mighty fall because it was rewired following the advice of economists who believe the human ability to deal with complexity is essentially unlimited.

The new world should be formed with a clear recognition that we have only limited powers of objective reasoning. It is suggested that we can prevent another major financial crisis by enhancing transparency. This is wrong. The fundamental problem is not our lack of information but our limited ability to process it. Indeed, if lack of transparency was the problem, the Scandinavian countries – famously transparent – would not have experienced a financial crisis in the early 1990s. As long as we continue to allow unlimited ‘financial innovations’, our ability to regulate will always be outstripped by our ability to innovate.

If we are really serious about preventing another crisis like the 2008 meltdown, we should simply ban complex financial instruments, unless they can be unambiguously shown to benefit society in the long run. This idea will be dismissed by some as outrageous. It’s not. We do that all the time with other products – think about the safety standards for food, drugs, automobiles and aeroplanes. What would result is an approval process whereby the impact of each new financial instrument, concocted by ‘rocket scientists’ within financial firms, is assessed in terms of risks and rewards to our system as a whole in the long run, and not just in terms of short-term profits for those firms.