Friday, December 19, 2008

Has Capitalism Failed?

We all know socialism on the Soviet model has failed. But perhaps Capitalism is failing as well. Or perhaps only certain specific strains of Capitalism succeed--and the U.S. is now infected with the failed strains.

From time to time I will be addressing issues I have discussed with polymath/media maven Richard Metzger, who kindly interviewed me for a few months ago (An Interview with Charles Hugh Smith); I'll call these In conversation with Richard Metzger. The views presented here are mine alone unless otherwise noted; Richard's views will be presented via excerpts of our (voluminous) email correspondence.

Richard and I have discussed the possibility that the strain of capitalism which dominates the U.S. economy has failed, and the nationalization (either outright or cloaked) of entire industries such as autos and healthcare is now likely or perhaps even inevitable.

From one perspective, Capitalism in its dewy perfection of self-interest enriching us all via "the invisible hand" has had a stupendous run of propaganda since the early 1980s when the "command economy/welfare state" of nations such as the U.S.S.R. and 1970s-era Britain were so clearly in decline/collapse.

But just as various think-tanks and politicos were heralding the ascendancy of global Capitalism, a funny thing happened on the way to Capitalism's Uncontested Victory: Global Depression.
The propaganda machine of Capitalism (which does a nice business congratulating itself) likes to present the Bill Gates model of Capitalism in which a scrappy entrepreneur wrests code from a small company and then gets amazingly lucky as IBM stupidly hands him the keys to a money printing press... oops, I don't mean the "real story" of Microsoft, I mean the PR one that Bill Gates' maniacal drive for dominance of a growing industry via any means necessary has enriched the world and not just himself and his cronies.

(Why am I getting flashbacks to Mr. Rockefeller and Standard Oil ?)

The Steve Jobs story actually runs a little closer to the ideal/myth, and there's no denying that the heady mix of vulture capital--oops, I mean "venture capital"-- government funded research, top universities and entrepreneural zeal that form the backbone of Silicon Valley has worked Capitalistic miracles from Hewlett-Packard all the way to Google.

But let's not forget the other strains of Capitalism out there--like the one dominating West Africa. There, "entrepreneurs" see a market and well, they plunder it because there's nobody to stop them. (A ragtag "army" of AK-47-toting teens has certain persuasive powers, as do kidnappers and other assorted extortionists and thieves.)

But wait--you can't call "business" in West Africa Capitalism. Oh, really? Why not? It's certainly a free market--as free as you can get, because there's no heavy-handed government telling anyone what to do.

So let's draw a quick distinction: Capitalism requires a strong rule of law. Otherwise, your ideas get stolen (welcome to Capitalism 3.0, the Chinese version), goods are adulterated to boost profits even as they poison buyers (welcome to Chinese Capitalism as actually practiced), your products are pirated/copied (see above), roadblocks to profits like annoying air quality standards are removed or ignored via bribes (see above) and those empowered as "gatekeepers" of the public good can enrich themselves via said bribes and various profit-sharing deals.

If we consider the idea of Capitalism as an organism of sorts, we can easily see that it has mutated into a variety of different strains. The Japanese model of heavy government involvement in private enterprise, cross-ownership of shares, etc. has run into a 18-year patch of bother, and other than a brief Springtime caused by selling machine tools to China during its ascent, there is really nothing to suggest that this strain of Capitalism is self-healing. It seems to be slowly choking Japan.

So let's posit another distinction: government intervention and planning is good for certain strains of Capitalism--until it's not.

Here in the U.S., we've been congratulating ourselves most heartily for the past 28 years about how successful the "American model" of Capitalism has worked.

Uh, but some holes have appeared in the model recently--are they just holes, or is the entire fabric shredding? True believers will claim that the entire subprime mortgage mess was caused or enabled by government regulation. Really? If there were no banking regulations at all, then what's to stop a sharp entrepreneur from inventing derivatives and 100-to-1 leverage?

After all, the basic structures of credit, leverage and derivatives have been in place for hundreds of years, since Capitalism circa 1600 was stretching its trade tentacles around the globe.
Exactly how Capitalist is it for a government to:

1. buy shares in companies, whether the company approves or not
2. inject hundreds of billions of public funds into a private banking system
3. act as a lender of last resort for various enterprises and private homeowners
4. facilitate the bankruptcy of various private firms

What is the difference between these actions and a command economy? I submit that if you scrape away the flowery propaganda the answer is: fundamentally nothing.

So when did the U.S. government decide to "take command" of the economy? When Capitalism had failed so badly that the well-being of the citizenry and the nation were at risk.

The army of apologists for markets free of annoying government regulations are silent now that Bernie Madoff pillaged $50 billion from "free markets." Hey, caveat emptor; by the no-gloves rules of "real" Capitalism, the buyer has to beware. Under these ideals, all the investors who lost their money trusting Madoff simply got what the market dishes out: risk and losses. Nobody forced them to entrust their money with him, and nobody forced all those homebuyers to sign up for option ARM mortgages or agree to pay $600K for a house that sold for $150K a few years before.

So why is the U.S. government intervening to keep the market from working?

It's intervening because the entire system is at risk of unraveling, and those players with the most skin in the game are desperate not to lose their stakes. In certain ungovernable parts of the world, they'd hire a private army to set the markets in their favor--or simply take what they want. Here in the U.S., some subterfuge is required to get the same results.

Perhaps we're being distracted by the Kabuki Theater of "Bad Eggs" Corrupting Our Pristine Capitalism. Maybe the strain of capitalism we've nurtured has failed at far deeper levels than who's on stage.

For example, let's consider the "healthcare" (a.k.a. sick-care) system in the U.S. This industry is growing like, well, an out of control mutant, devouring about 20% of the entire GDP and producing less and less results in terms of longevity and well-being. In fact, the system is depriving an increasing number of citizens any healthcare at all except what can be provided by county emergency rooms--facilities which are teetering on the edge of insolvency.

Only paid flaks can claim the system is working seamlessly and efficiently, serving all 300 million citizens well via "the invisible hand" of self-enrichment. We all know the system is broken, and we're all waiting for something to finally crack.

If the government just got out of the business of regulating healthcare and funding it, would the free market resolve all the knotty dilemmas? Perhaps. But the free market involves risk, and therefore it leaves a lot of losers in its wake. As in, you got no money, the charity line is over there.

Am I against such a "pure" model of Capitalism? Not necessarily; it may well be that the only real solution is to let providers and consumers sort out prices and what will be offered and what will be paid for various services. But such a workout will take down the entire system because the number of citizens who can afford to pay $100,000 cash for an operation and a few days in a hospital is vanishingly small.

So in a truly free, unfettered market, every hospital, every HMO and every provider will go bankrupt. Malpractice insurance will simply vanish, because if all people can pay is $30 for a visit with a doctor then that certainly won't leave millions of dollars floating around to spend on attorneys' fees and/or malpractice.

About all that government might do in this "unfettered competition/free market" Capitalism is require care providers to post the verifible statistical results of their care and their posted prices for various services on a public forum, i.e. the Web. Then consumers could pick and choose based on some relevant facts, just as they now pick vehicles based on mileage and other features.
But what are the costs of such a "market solution"? Financially, all the players in the current system will lose, and those without resources will have little access to care.

Few will accept these two conditions, and so a full-court press to maintain the present "partly government-subsidized, partly not" system will be made. But as the economy frays further and government funding becomes squeezed by interest payments and lower tax revenues, then the internal political logic for complete nationalization becomes ever more evident.

For instance: as counties go bankrupt, who will pay to keep their emergency medical services open? The Federal government; there is no other source of funding. Is that de facto nationalization? Rather clearly, the answer is yes. It's not too hard to see the same pressures to buy/prop up/fund being applied to hospitals and HMOs as they go bust.

Various forces will work to "save" private profit in such an awkward alliance of public funding and a high-cost-structure private sector, but the opportunities for private profit will be slim in a Depression. Ideologically, Americans have been trained to see command-economy ownership and control as failed Socialism; and it's certainly true that as in Capitalism, Socialism has various strains, too.

So the U.S. may end up with a peculiarly bloated and inefficient system which is nominally "private" in certain areas for ideological reasons but which for all intents and purposes is run and regulated on a command-economy nationalized basis.

Will this work better than the system we have now? It would be difficult to design a worse system than the one we have now--inefficient, clogged with paperwork, beholden to special interests, and unable to offer care to some 40 million citizens even in flush times--so perhaps it will be an improvement.

Will it be Capitalism? Maybe in some Orwellian fashion, some will insist on that label for various small pieces; but as a whole system, the more accurate description would be "command economy." Capitalism in healthcare--at least the strain dominating the U.S. economy-- has failed, and will be replaced by either a nationalized system or a Capitalism which will necessitate the almost complete destruction of the current ownership of healthcare assets and a re-ordering of entitlements and funding on a vast scale.

Which one we end up with will be decided by how much purchasing power the government will be able to muster with its bonds (debt) and paper money.

28 new reader comments --selected from the flood of comments sparked by the 12/15 and 12/16 entries.

Thank you, Alexander P. ($20) for your most generous donation to this site. I am greatly honored by your support and readership.

Thank you, Edward M. ($10) for your generous donation to this site. I am greatly honored by your support and readership.

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