We should be screaming from the rooftops, “Capitalism is dead, long live capitalism!” The truth is capitalism of the form that had arisen by 2008 is flawed and has always been flawed. By that year, as a result of over 20 years of lobbying, we had one of the most regulation-free economic systems since before the Great Depression. Instead of a capitalist utopia, we were met with the biggest economic crisis since the Great Depression. Even Alan Greenspan, the chief economic adviser to five presidents and an Ayn Rand devotee, was forced to admit that he had found a flaw in the thinking that caused him to deregulate so many facets of our economy, specifically in the banking industry.
Capitalism is an important part of our society and history. It provides us with an incentive to work, innovate and create. It has provided us with an economy that has allows us to work with each other toward building a better world for ourselves and for our families.
However, capitalism has a very large drawback: It leaves each person at the mercy of another person’s greed. On a small scale this isn’t so bad. It’s not hard to learn who is likely to give you a bad deal and then avoid them. However, in a more complex system, the outcomes of transactions are often harder to understand until months or even years down the line, and by then it’s too late. Furthermore, since our economy is so interdependent, a failure in one sector can lead to failures elsewhere.
This problem can often be exacerbated by fact that corporations almost always award people for near term profit. A good example of this practice is at General Motors where the company offered workers lower wages in exchange for larger benefits packages. In the short term it was able to make more money as it was paying its workers less, but in the long term it ended up being unable to fulfill its promises to its workers. While this was not the only reason for GM’s failure, it was one of the largest contributing causes. By the time that GM failed, the people responsible for negotiating the terms had long since moved on.
While capitalism has many glaring holes, I would not venture to call it a failed system. However, it is clear that in its current form, capitalism cannot stand. The government has a role to play in this new form. It needs to achieve three goals: 1) remove lobbyists from the regulation process, 2) enforce transparency and 3) regulate the current industries and be ready to regulate new ones.
Lobbyists can be like a double-edged sword. They serve to educate lawmakers, but they also exist to advocate for a particular company, and in doing so they only present one side of an issue. President Barack Obama has made some headway on this first goal this fall by forcing lobbyists off federal advisory boards. Obama has also created a stringent set of guidelines to prevent lobbyists from having too much access to people in his own administration. While lobbyists still have a part to play in Washington, these guidelines and ones like them should make a significant dent in how the lobbyists do business.
Transparency is more important than ever. Even before the dust had settled from the banking crisis there were new scams in the works. Two new scams that have made recent news are high frequency trading and life insurance securitization. High frequency trading works by using faster access to the stock market to unfairly manipulate it for a profit. In theory no one should be able to have an advantage of speed in the markets and such practices, in part because they don’t require transparency, can cause instabilities in the market. Life insurance securitization is essentially the same scam we saw in the mortgage sector where companies tried to bundle high and low risk investments in order to hide the high risk investments. This kind of scheme is exactly what caused so many problems for us today.
Obama has talked about requiring new regulations but has yet to implement them or propose any specifics. It is time for him to put his money where his mouth is. A good first step would be to reinstate the Glass-Steagall Act, which prevented banks from engaging in the activities that caused the banking crisis and, in turn, our current recession. It was at best extreme short-sightedness and at worst downright corruption that Glass-Steagall was ever repealed. Regulators also need to be ready to educate themselves on new sectors of the economy as they appear. As our economy becomes ever more complex and the modes of trade ever more varied, we need to be more careful about how they are allowed to affect the rest of our economy lest we have another banking and mortgage crisis.
Most of the economic indicators say that our economy is improving. While this is good news, it does not speak to the stability of our economy. We need to put structures in place to prevent a relapse. I do not claim that creating these structures will be easy, but it is necessary. Capitalism serves a purpose, but it is not perfect. Government may not be perfect, but it does serve us, and it should be used to help provide us with stability so that all actors in our economic system can act in good faith.