Posted on: December 17th, 2008 Whose System Is It Anyway?
Three questions: what went wrong, how will we fix it and how long will it take? Not surprisingly the answers to question two and three depend on adequately answering “what went wrong”?
Unless we understand how the financial market floated out of control to create the biggest economic crisis in human history, the solutions prescribed to fix it will be mediocre at best. They will prolong the downturn or create a false recovery setting in motion another crisis in the near term. Our cultural tapestry is not strong enough to weather either result.
For this reason I am going to explain in clear economic terms what went wrong. Before I begin I need to provide disclosure regarding my assumptions about the economic system and who it belongs to.
1. The Economy Is An Invention
We invented the capitalist market system as a method of allocating society’s resources efficiently and effectively. We equipped it with a sophisticated credit structure and enforced it with property rights to fulfill wants and needs because it can work so effectively. Critical to the invention of the market system is the acceptance of a series of beliefs about how people will behave.
As a culture we agree business people operate in their own self-interest; we believe it makes them work harder. We agree that profit maximization is a worthy goal for entrepreneurs to determine the least cost method of production for the highest quality output. We have decided that price is the most important signal in the market place for identifying consumer demand. We support the availability of dependable information in a timely and reliable manner. We believe that it’s unacceptable to misrepresent, mislead or lie. We rely on competition to reward success and discipline failure and thereby expect that the best and brightest ways and means of doing things will surface. Much of how we operate in the market is based on trust and the notion of good faith.
When the market fails, we feel shocked, but we also feel betrayed. We forget that the nature of the economic game is such that is can easily become bigger than the players–and that the players are us. We need to remember that the system is our invention. We need to reclaim control over it by adjusting the terms of how it operates so we achieve economic success for the benefit of society.
A sustainable economic system must support our dreams and desires and, over time, improve the quality of life for all people. The economic system should not be structured to benefit the privileged or the few at the expense of the many. Participation in the economic system is a basic human right. The game works on the notion that if you practice hard and play fair there is every reason to believe you can improve your standard of living and quality of life.
Why would sane people invent a system to work any other way?
2. Expect Market Failure
The market system requires sound regulatory control because there is nothing inherent within it to avoid market failure. Market failure occurs when the pursuit of self-interest by one or a few players results in an unfair advantage in market power. This unfair advantage results in actions that lead to unsatisfactory results for society, and in the extreme can cause the demise of the system.
Our system is a cat and mouse game. Unfortunately, during the past three decades the role of government intervention in the economy has been demonized. Not only have the mice been winning, they have evolved into rats.
Since markets are not self-adjusting intervention is necessary. Effective regulation is a sign of a healthy system because it keeps the game honest and clean. It is not the role or responsibility of business people to regulate their behavior in the public interest. Their job is to play the game and endeavor to win–to try to seek an advantage. It is the job of regulators to make sure that any advantages gained enhances the overall effective functioning of the system in the public interest. If not, then the opportunity for advantage must be removed. It is imperative that we hold both business and government accountable.
3. Capitalism and Democracy Are Not Inherently Compatible
Capitalism is good and democracy is good but they are not inherently compatible. They both must be nurtured and protected to ensure they continue a healthy co-existence.
Capitalism is efficient and effective in deciding how goods and services are allocated and wants and needs met. But our reliance on the market economy moves us away from democracy–away from one person; one vote. It moves us toward a reliance on wealth to determine voice. The price system determines that whoever has more money, has more decision making power, has more control and hence, has more freedom.
Our reliance on democracy to govern society attempts to redress this imbalance. If efficiency was the main criteria then monarchy, dictatorship, fascism, or any other form of authoritarian control would be preferable. But we have chosen to uphold the values of fairness, equality, and justice and we believe that each person has the right to participate. Market capitalism attempts to exclude, democracy attempts to include.
To ensure democracy remains strong people must participate and hold the system accountable. We must be engaged in the democratic process to ensure that the free market is not taken over by the interests of the few and powerful. We must guard against the power of vested interests who attempt to weaken consumers and overburden taxpayers with the costs of their irresponsible and irreverent pursuit of money. We must acknowledge their greed. We must understand they will continue to behave in the same manner that got us into this mess as we are called upon to get them out of it.
As this crisis unfolds we must use the opportunity to demand full disclosure. If public investment and/or loans are required then it is necessary the public obtain commensurate ownership and/or right to collateral that reflects the risk of the support. We must reintroduce access to the credit markets for consumers–not just the business elite. As business complains about how hard it is to cover checks it never should have written in the first place–we must remain strong. These are alligator tears.
As government rushes to the rescue using our future to underwrite their plan without adequately protecting our interests, it must be stopped. Government has spent the past thirty years perfecting the art of benign neglect, how can it be expected to understand how deep the problems run or how difficult it’s going to be to come out from under them.
This is going to be a long and drawn out problem, make no mistake. You can’t create a tangled web of contracts, complete with inadequate security, unbridled risk, and destabilizing side-bets that amount to more than $55 trillion of toxic hot air and not have it pollute the workings of the entire system when it explodes. It’s time to shift the balance of power. We are being called upon to be accountable. The least we deserve in return is commensurate control. If nothing more, it makes good business sense.
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