Spreading the Wealth

A friend forwarded this link to me today.  It's a brief excerpt from a 1979 discussion between Phil Donahue and Milton Friedman about capitalism vs. other systems.   To sum up, Friedman argues (effectively, to me) that capitalism most closely resembles human nature and encourages innovation.  Yes, it's greedy, and it rewards greed, but that's how we are, as humans.  We are collectively acting in our separate self interests.   Let's not fight it: let's use a system that rewards that natural instinct.  After all, the only system worse than this one is every other one.  

Generally, I agree with Friedman.  However, what we as a society seem to be missing is that it is in our own long-term self interests not to be so greedy, not to push the system as far as it will allow, not to take advantage of every opportunity when it is disadvantageous to someone else, because the collective failure of the system is bad for our self-interests.  The mortgage crisis is a perfect example of that: too many people acting greedily, without regard to harm to others, and eventually the system collapses from being pulled in too many opposing directions.  Then we all suffer.  And then, suddenly, we collectively whine and moan and demand for someone (i.e., the government) to do something about it.   And the government responds.  Like a parent to a naughty child.

Lots of folks get upset at the phrase "spreading the wealth."  Folks don't want government sticking its nose in our finances and playing some modern-day version of Robin Hood.  But we're screaming for that help now, as shut-downs, layoffs, loan-freezes, and other market-stopping events happen as a result of our collective poor decisions.  We would have no need for oversight, for bailouts, for multi-billion-dollar stimulus packages were it not for our own irresponsibility.  --If mortgage companies had thought about the long-term harm of bad loans with variable interest rates rather than the short-term benefit from selling those loans; if home buyers had stayed within their means; if appraisers had not continued re-upping the "value" of real estate; if any one type of player in that system had thought about what was good for everyone involved in those transactions.   If we had been more responsible, we wouldn't be here, begging for help.  

So, we can blame our representatives, our presidents, our governmental bodies for spending all of this money for the various rescue attempts; but they are only doing that which we've requested.  We're the guy who went parasailing in a hurricane.  Should we leave him stuck in the tree because of his stupidity?  Or do we organize a rescue effort?  

I don't really know the right answer to the question.  My instinct is to let us get ourselves out of that tree, to learn something from the painful stupidity.  But I'm not an economist, and I don't know if we can get ourselves out.  Irrespective of the right way to get out of this mess, though, I think we should be sure to (to paraphrase the evil catch-phrase from the election) "spread the blame:" we wouldn't be talking about nationalized banking systems and bailouts if we had managed ourselves better.

On Darwin and Capitalism and Bailouts

I heard this tonight on NPR Marketplace.  It said much of what I've been considering lately about capitalism, bailouts, and whether there is room for compassion in capitalism (or, if so, in what way there is room).

Kai Ryssdal:  Today is Charles Darwin's 200th birthday.  He is, of course, the English scientist who came up with the theory of evolution.  Over the years, that theory's been applied to all sorts of fields beyond just science and biology.  If ever there was a place the phrase "survival of the fittest" applies you'd think it'd be Wall Street.  But commentator Natasha Loder says recent events show us that selection in business is far from natural.

Natasha Loder: When the economy is strong it is easy to kid ourselves that the market is Darwinian.  In other words, that the least fit companies go out of business leaving only the strongest.  But in times like these, it is much easier to see why this isn't how our world works.

If nature were to run its course in markets right now we'd see a mass extinction.  But because many businesses serve vital social functions, we are not letting this happen.  We need the banks to survive, so we are bailing them out.  Ditto Fannie Mae and Freddie Mac, or AIG.

Artificial selection is what humans do.  We regulate everything from how much capital banks must have, to how companies treat their employees.  Sure, there is some natural selection going on out there--Microsoft killed Netscape using its power as the dominant breeder.  And of course there are more companies out there than can survive.  But the big companies with political leverage are currently getting the bailouts.  Is this really the invisible hand at work?

Markets are more likely unruly gardens than the wild forest full of nature red in tooth and claw.  And we are always trimming, weeding and fertilizing this garden so it grows the way it suits us.  It's just the same inside companies.  What goes on is artificial, more like domestication of cattle than anything natural.  Companies decide what kind of employees they want, whether they are selecting for ruthlessness or brilliance.  If you want to change a company, you buy a stud CEO, cross-breed him with all the suitable specimens on staff, and send the rest off to slaughter.

It might sound brutal, but that doesn't make it Darwinian.  Darwinian is having bank bosses fight to the death for their bonuses armed only with letter openers.  Listen.  I'm not saying bad companies never get weeded out, just that what goes on is nothing like natural selection.  Should we let more companies fail?  Darwin might think so.  In the long term, propping up companies has got to be bad for efficiency.  But nobody is really looking at the long term right now.

--Natasha Loder is the science and technology correspondent for The Economist magazine.