What is wrong with capitalism?

Some people think capitalism is a terrible evil that must be fought and destroyed. At the other extreme there are those who think that laissez-faire capitalism is the perfect economic system. I think both of these views are hugely mistaken but that the question what is wrong with capitalism is still an important one.

Anti-capitalists think that capitalism is wrong in itself for at least one of two reasons. One is that an alternative system would enable people to become more than they can be under capitalism. The second is that these alternatives could avoid terrible things like exploitation or alienation that are inherent to capitalism. At the other extreme some Libertarians (particularly Randian objectivists) think that laissez-faire capitalism produces the right distribution of goods in society and governments that interfere with the market more than necessary are exploiting those who are required to pay taxes or the costs of regulation.

I am not unusual in thinking both of these views are wrong-headed. But it is interesting to consider how you can argue the inherent rightness or wrongness of an economic system. After all an economic system is not an agent that can be held responsible for what it does—it is what is collectively brought into effect and enforced by our society.

Presumably an argument for or against a type of economic system will have to be teleological. An economic system has a particular purpose and if it does not or cannot achieve that purpose then it is wrong. My (uncontroversial) view is that the purpose of an economic system is to provide people with the stuff that they need and want for themselves and those who depend upon them in a way that is fair to all members of society. In follow-up blogs I will consider somealternative purposes for economic systems and some further arguments against markets.

Capitalist systems do a good job of achieving the above ends because:

1.       They provide people with incentives to work and invest in activities that will produce things that others want.

2.       They allow the transmission of information via prices without the need for any direct oversight.

If we are judging economic systems as I propose above then it is impossible to take the extreme pro- and anti- capitalist positions above. There are innumerable variations on capitalist systems and these should all be judged against any reasonable alternative when choosing which economic system (or range of systems) to support. As a liberal political philosopher I obviously think that we need to adopt the best available theory of distributive justice to decide. But what if we just think in terms of economic systems in general?

Given the position I take above, we should not ignore the consequentialist libertarian (think F.A. Hayek or Milton Friedman) arguments for leaving markets to do their work. In one sense the market is a bottom-up one in the way that left-wing anarchists claim of their proposals. However, instead of people voting to come up with a single communal position on everything under capitalism people vote with their money for what will be produced.

However, the libertarian (dis)utopia provides a good warning against following this market logic too far. Capitalism will tend towards inequality and monopoly, something which 19^th century left-wingers thought obvious from observing their societies and which some researchers such as Thomas Piketty and Tony Atkinson have been attempting to prove more recently. Following the money-voting analogy above you have a system of voting where some people are born with the chance to have a lot more votes than others.

There is an overwhelming case for creating a form of capitalism that is regulated to stop people being in a position to take advantage of one another and to ensure that the benefits of the capitalist system are shared among all those in society and not just a fortunate few. Ideally, people would have the opportunity to obtain a reasonably similar amount of money ‘votes’ over what is produced in society and how much of it they get compared with others.

The position I take above is fairly standard, but I wanted to link it to my tax and benefit reform proposals. The aim of my CLIPH-rate tax proposal is to allow capitalism to do its job in the production of goods while interfering with it in the (mal)distribution of goods.

This is done by taxing those who receive large amounts of income or wealth without having to work for it at the highest possible rates and to provide the maximum possible support those who work long hours at low wages, all while maintaining (or replacing) incentives to work that capitalism provides.

The laissez-faire capitalist state is productive because the poor have to work long and hard to avoid destitution while the rich are encouraged to invest and work long and hard by the huge financial incentives offered to them.

My proposal is to link people’s lifetime income to the amount of hours they have been credited for working (or been excused from working). This means that people will all start from a much more equal economic position (since they cannot benefit heavily from gifts early on in their lives but only over time as they gain more hour credits). It also provides a method to bring closer together the incomes of those who do very well and those who do less well in the economy.

Everyone is in the same economic class as all need hour credits in order to gain an income, and there are strong work incentives. Individuals will benefit from earning more money as they do under all capitalistic systems but they also benefit from working longer and gaining more hour credits. The rich and talented cannot hold the rest to ransom by claiming they will withhold their labour or investments if they are not provided with immense riches in return.

While individuals have their prospects drawn closer together the productive system can be perfectly ruthless. Companies will need to be competitive and innovative in order to survive and succeed and those which do not will face bankruptcy or take-over. There is no need to weep for companies which go bankrupt as these are not persons in any moral sense (though we might feel sorry for investors and workers who lose out having been duped by criminal executives).

The idea behind my CLIPH-rate tax and hourly averaging proposals is to take the best of capitalism while mitigating against the worst in capitalism, thereby creating the best available economic system. 

Interpreting and applying Dworkin’s hypothetical insurance

I have realised that I have not blogged about an article of mine published in the journal Moral Philosophy and Politics entitled The Holistic and Policy-Focused Interpretation of Hypothetical Insurance.

In the paper I consider the best way to understand and make use of Ronald Dworkin’s hypothetical insurance scheme. This is a procedure to determine fair policies to help the less well-off by asking people what they would agree to pay and receive if they did not know whether they were fortunate or not. So to work out how much people who suffer from an illness should get you ask what insurance people would buy themselves if they didn’t know whether they have it or not. If sufferers get less they are not being treated fairly. Conversely, if non-sufferers provide more to sufferers than they would have agreed to receive in the hypothetically equal position then they are not being fairly treated.

This lends itself to an interpretation of the approach that each of these decisions involves a separate decision about a transfer of resources from the fortunate in that regard to the less fortunate in that regard. Add up all of these transfers and you work out how each person should be paying or receiving all told.

The way Dworkin presented the approach lends itself to this interpretation, but he does make clear at times that he isn’t just talking about resource transfers—providing blind people with guide dogs and paraplegics with wheelchairs and carers might be a more sensible insurance choice than giving money.

I believe the best interpretation of Dworkin is a holistic one that allows the parties to hypothetical insurance not in terms of simple payments from fortunate to unfortunate but as a selection between the policies that are available to tax the fortunate and assist the less fortunate from a position of hypothetical equality.

This interpretation contrasts with the idea that each insurance choice is hypothecated from the others so money from inheritance taxation would have to spent to alleviate social inequality rather than go into a big pot to assist the less fortunate. It also contrasts with the insurance-focused understanding of Dworkin that implies that transfers are necessarily the main tool for sorting out inequalities (basically all sensible policy options are open to people to choose in their hypothetical insurance deliberations).

I believe my holistic interpretation better fits with the ideal of resource egalitarianism that people should have as much choice as possible from an equal starting point. It does so by allowing people a choice over the policies that will be used to achieve their insurance preferences.

My suggestion is that Dworkin’s insurance model can be readily applied to tax and benefit policies; though admittedly in some cases it will generate much more determinate and definitive answers than others. On some issues you might need to find out a lot about people’s attitude to risk, their values and the likely effects of various policies in order to work out the fair distribution. However, in my PhD thesis I argued that if you apply this reasoning to the taxation and benefit options then my CLIPH-rate tax proposal would be the popular choice for people choosing from an equal position.