The other unique right is that of “the pursuit of happiness.” It is in this respect that Capitalism differs most strongly from feudalism. Under a feudal system, serfs were relegated to a near-slave status, from which they could never escape. No matter how hard they worked, they were only entitled to the same level of benefits from their lord, which, subsequently, encouraged serfs to do the minimum amount of work required. They did not have the right to pursue higher goals or advance in society.
This is ultimately why feudalism collapsed. Since workers had no intrinsic motivation to be successful, all innovation was stunted. The majority of the wealth in a lord’s household came from warfare rather than economic competition; many lives were lost just so people could maintain a minimum standard of living. Therefore, the concept that each individual has the right and responsibility to pursue his own ends is both logical and moral. An individual who is acting in order to better himself as opposed to his lord will ultimately be able to contribute more to society as a whole. Knowing that working harder will help to advance one’s own goals will encourage the individual to be more productive and innovative.
However, acting in self-interest does not give one license to act unethically. Ethical behavior and transparency are necessary in order for capitalism to be successful. Unfortunately, the major issue afflicting business today is that consumers and investors do not have access to the same information that the managers have; unethical managers have chosen not to disclose the information to their stakeholders or present it in a deceptive way.
Furthermore, many managers have been acting unethically in order to achieve short-term goals, without looking at long-term consequences. These actions are ultimately self-defeating because they damage firm’s reputations, and hurting the stakeholders ultimately hurts the firm.
Capitalism is a moral system, which has unfortunately been exploited by some immoral people. Acting unethically is counter-productive to a firm’s success, but selfish people motivated by short-term gains may ignore this fact.
Therefore, it is necessary to create controls (both internal and external) in order to curtail these behaviors, with the bare minimum of necessary government intervention.
Too much intervention slows innovation and gives firms negative incentives to act, whereas too little intervention allows unethical people to exploit the system. That being said, a free state cannot exist without free markets. It is both necessary and moral to allow people to pursue self-interest.
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A version of this article appeared in the Feb 19 issue of the Collegiate Times.
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Great article, Mark. It's refreshing to hear discussion of freedom, liberty, and capitalism in higher education, where alternate views unfortunately dominate. With the drastic changes in US politics as of late, it is important for academia to consider life, liberty, and the pursuit of happiness once again, in order that we restore the Republic (not Democracy) this country was founded as.
I will add one note to your discussion: greed is NOT a natural psychological state. Self-interest is very naturalistic, and so is helping others. Greed only manifests itself when a person's happiness is interfered with, and they seek power, fame, or riches as ways to compensate for their unhappiness. Most often, this interference comes in the form of control by others, through things like regulations and penalties for various actions. As you said, there is a delicate balance between "just enough" control and too little.
This is why people mistakenly associate greed with capitalism - they fail to see the difference between greed and self-interest. If the public could understand those differences, and why self-interest becomes greed, support for capitalism and the free market would never be questioned on this matter again.
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I also thought it was a great article, but are you saying that without regulations and penalties there would be no greed? If so I could crack open my history book and find a few examples for you.
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No, I'm saying that controlling regulations and penalties are likely to lead to psychological degradation and possibly to greed (or power or fame). Regulations against false advertising, theft, inducing bodily harm, and the like are not controlling like regulations that say "you must" or "if ... then ...". I'm not summarizing well, but my point is that I don't believe complete anarchy to be the solution (though even in anarchy, basic moral laws occur naturally).
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The sad thing is that the "financial crisis" was most largely the result of government interventionist policies, yet capitalism gets blamed. It was the government that regulated banks to lend to unqualified buyers in the first place (look up the Community Reinvestment Act under Clinton). It was the government (more precisely, the Federal Reserve) that ARTIFICIALLY lowered interest rates for such a long period of time. From there, things snowballed and got ugly and there's blame on both sides of the table; however, it's significant to point out that things wouldn't have been able to get that far/out-of-hand without the government's involvement. Free markets--the "invisible hand"--are able to correct themselves. The government, instead, prolongs evils by attempting to put on band-aids to cover up the underlying problems (after creating them in the first place). The next crisis will probably be a currency crisis. It didn't make that much news, but something historic happened this week: China got rid of more dollar reserves than at any other point in history and Japan replaced China to become the number one holder of U.S. debt. Our country doesn't manufacture a damn thing and is projected to exceed 100% debt to GDP in a few years. We basically have nothing going for us. True, unadulterated capitalism (not this quasi-socialism sh*t that's been going on for the past several decades) is the only thing that can save this country.
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The CRA (around since 1977) accounted for just 9% of loans to higher risk / lower income borrowers. Private mortgage companies counted for the vast majorities of high risk loans. ( http://www.jchs.harvard.edu/publications/governmentprograms/n08-2_park.pdf ) The financial crisis happened due to a lack of government regulation. Without proper regulations, banks have the incentive to make as many loans as the can to add to their short term profit on paper. Then the banks can repackage and sell 100% of that loan to someone else and assume no risk if that loan defaulted. Banks made confusing sub-prime loans as often as they could because they were easier to give to borrowers while the borrower didn't fully understand them. Something about this needs to change and that change can only happen with strong financial regulation.
US debt is only 60% of GDP; which is not that high. You seem to be afraid of Japan, whose debt is at 170% of GDP.
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You don't really believe this, do you "Wrong"?
"Without proper regulations, banks have the incentive to make as many loans as the can to add to their short term profit on paper."
What? If a bank makes a bad loan, they LOSE profit. How do they have an imaginary incentive to loan? I hope you didn't take economics here...
"Then the banks can repackage and sell 100% of that loan to someone else and assume no risk if that loan defaulted."
So now you recognize the risk factor, but fail to acknowledge HOW these repackaged risks became possible?
"Banks made confusing sub-prime loans as often as they could because they were easier to give to borrowers while the borrower didn't fully understand them."
Whose fault is that? 'A fool and his money are soon parted.'
"Something about this needs to change and that change can only happen with strong financial regulation."
Yes, please control everything! And yet I'm sure you deny that we're employing socialism and moving toward communism, right?
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The CRA directly accounted for 9% of the bad loans. Beyond that, actions by the Justice Department (especially under Janet Reno) and community activists forced banks to make bad loans or else be subject to sanction. When counting the costs of the CRA, you have to consider those that were forced by the legislation, and the detriment caused by banks being pre-emptive or reacting to "soft" pressure by groups and agencies empowered by the act.
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Without proper regulations, banks can profit off of making bad loans. For example, say Bank X makes a loan to Bob for $100 to be repaid $120 after 1 year. Bank X can be perfectly aware that Bob probably won't be able to repay that loan. Then Bank X will turn around and find an investor named Joe. Bank X can say "Hey Joe, I got a great investment for you. Give me $110 now and in a year you will almost certainly get $120". Joe thinks he has a great investment but it is actually tied to Bob's risky loan. If Bob declares bankruptcy and doesn't repay the loan, then Joe loses his money. Bank X made $10 profit off the deal.
In order to stop this practice, we can have some regulations like requiring banks to maintain at least 50% of the risk for all loans they make. Also, we can require the terms of loans to be simpler and easier to understand so borrowers know what they are getting into. Loans right now can be 20 pages of leagalese fine print about 'credit default swaps' that no regular people understand. Financial regulations are not against the free market bit rather set the rules so the free market can operate fairly.
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Ken, the CRA is not perfect but it has helped poorer communities develop and not be left out of the economic process. However, my point was that it is wrong to attribute the entire sub-prime mortgage crisis to the CRA.
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The biggest merit of capitalism is that it is freedom. Any system that seeks to displace capitalism seeks to replace freedom. This makes that system, inherently, immoral.
Yes, people may do bad things with their freedom, but that's generally not an acceptable reason to curtail freedom, in general.
Any system that competes with capitalism must concentrate power in a small group of people whose intentions were are asked to trust. Yet, by the very fact that they sought that power, we know we cannot trust them. Nor is there no individual remedy if they break that trust. I cannot decide to work with the government's competitors. I can try to get them thrown out of office, but that's quite a bit harder than just leaving someone's business and going down the street.
Capitalism contains both problems and their remedies. Every other system can claim the former, but none the latter.
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One of the things that makes Capitalism a moral system is it's ability to take the evil of greed and turn it into the good of production. In order for this transformation to take place, the government must preserve the ability of a Capitalist market to function. (Read Hayek for an explanation of planning vs. central planning) Unfortunately in the run-up to this recession we perverted the incentives increasing the value of short term gains while minimizing risk through implicit or explicit government backing. Greed will exist no matter what economic system is followed, but Capitalism offers the best solution because it can use it for its own benefit. I would contend that an increase in intervention rather than an increase in greed is what led to this current failure, but I enjoyed your well written article.
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Interestingly, I don't recall seeing the author use the word "greed" in his article. Note that the CT chooses the titles for articles, typically.
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I read the headline expecting to be angered by the piece but agree with most of it. The comment about greed was more at the headline than the rest of the article.
On the second page near the end he talks about exploiting capitalism through immorality, where as my contention is that these represent departures from capitalism rather than a failure of capitalism.
As an alumnus who has read online since I graduated this article is part of a trend of better writing on the opinion pages this year.
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Funny, looking at these comments, absolutely no one here knows what capitalism is. Completely unreal.
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And you just demonstrated that you know, oh wise one. Care to enlighten and correct?
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Capitalism is the private ownership of the factors of production, at its base: land, labor and capital. People do not realize that capitalism did not fail during the bailouts, but rather, it succeeded by causing the greedy banks who took excessive risks to go under. This economic crisis is a victory for capitalism, and a failure for government intervention. What we should be after is corporatism and greed, which stand in direct conflict with capitalism. Each of us personally has a right to the fruits of his own labor: I fail to see how that's greedy or immoral. Do some more research, friend.
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Ok. I'm not sure I see who here isn't getting that. I see some slippage between capitalism and the free market, but I don't see anything beyond that. Can you quote and critique?
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Apart from the unfortunate choice of title (to make it provocative), the article is well written.
Still, it seems to me that the author confuses U.S. Constitution and political/economical system with Capitalism in general. "Pursuit of happiness" is a term specifically mentioned in the U.S. Constitution, isn't that so? What does that have to do with Capitalism and any economic theory? Apart from the fact that as American you would assume that what applies for the U.S. automatically applies to everybody else.
Also, following the logic from the article, one would conclude that a system of punishment, penalties, or some other form of regulation IS necessary. How else would you ensure that those CEOs who lack in moral properties do not exploit their position of power (agency problem), or the devastation of natural resources for the sake of profit of one corporation? The temptation is great - here you are, personally receiving millions, and governing hundreds of millions of dollars, and the regulation is not determined to prevent, stop and prohibit "greed" and "pursuit of self-interest" (which is the core of Capitalism). What do you do after such system collapses? Blame it on the government for trying to install order in chaos?
Thus, any critique of this article that is against all forms of regulation lacks argumentation, however well written it is.
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He may not have made this clear, but the penalty system is the one in place naturally - the risks of failure that go along with the prospect of success. ALL principles of liberty, freedom, free markets, etc etc have that at their foundation (ie freedom isn't free) and government intervention typically serves to take some of that risk away - eg bailouts of companies who make bad decisions but are deemed "too big to fail".
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I was referring to the penalty for immoral behavior, with some examples mentioned in my comment. The inherent risk of failure is not tackling this. That is the basic reason why some regulation is needed, and why government sets agencies to regulate industries. This is still a far cry from communism, which is perceived as the source of all evil.
It was sort of a reply to "What?", who regards any form of regulation as unnecessary.
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Capitalism is the skinniest kid at fat camp. It is the best alternative.
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What are the facts that substantiate your claim in the latter sentence?
I'm not saying it isn't the skinniest kid (that may or may not be true), but is it still too fat?
I still think the Capitalism isn't good enough. Especially one that is being preached by the U.S. government.
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I mean capitalism isn't perfect, but tell me what other economic system doesn't include its own winners and losers?
"What are the facts that substantiate your claim in the latter sentence?"
No. Find out yourself. I don't care what you think.
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http://www.youtube.com/watch?v=F0VHiONkot8 check it out
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all the positive points about capitalism cited are nice and dandy, but for who ? it seems only the minority of the white race -(who btw, did not create their colour but stupidly used it to preen themselves superior in their heads only)- Did the Natve Red INDIANS allowed to own their own lands ? WAS THEIR LANDS LEASED OR RENTED ? NO ! Simalarly, the white western races marched into other people foreign Lands ( their ancestors owned for centuries, by default) and stole their Lands and give them the Bible but also nicely used them as slaves or low paid workers. That consciously and proactively designed proverty for those foreign people in their own lands ! So who Capitalism is for? Only the Western unethical, overly aggressive and bullish lower-animal White Race benefited.
That truely defined Captialism - designed by them and accomplished throught the Use of Brute force, trickery, Lies, deceit, false promises, a false religion used for that purpose, etc. etc.
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all the positive points about capitalism cited are nice and dandy, but for who ? it seems only the minority of the white race -(who btw, did not create their colour but stupidly used it to preen themselves superior in their heads only)- Did the Natve Red INDIANS allowed to own their own lands ? WAS THEIR LANDS LEASED OR RENTED ? NO ! Simalarly, the white western races marched into other people foreign Lands ( their ancestors owned for centuries, by default) and stole their Lands and give them the Bible but also nicely used them as slaves or low paid workers. That consciously and proactively designed proverty for those foreign people in their own lands ! So who Capitalism is for? Only the Western unethical, overly aggressive and bullish lower-animal White Race benefited.
That truely defined Captialism - designed by them and accomplished throught the Use of Brute force, trickery, Lies, deceit, false promises, a false religion used for that purpose, etc. etc.
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