The New New Capitalism
By Timothy SpanglerSeptember 20, 2012
Free Market Revolution by Don Watkins and Yaron Brook
Wealth and Poverty by George Gilder
DOES CAPITALISM NEED a moral defense? Do capitalists need a moral philosophy?
George Gilder’s book, Wealth and Poverty, was originally published in 1981, in a world much different from the one we encounter today. The threat of Soviet and Chinese communism loomed large. Japan seemed to be doing capitalism much better than America. Europe was wrestling with the consequences of excessive statism. At the dawning of the Reagan era, Gilder laid out a comprehensive detail-rich series of arguments that attempted to provide a rousing defense of pure capitalism, of the sort that had been lost under decades of government expansion in the US.
In 2012, the world looks considerably different.
Technology has fundamentally changed the way information and data moves from point to point, both in our day-to-day lives and in the business and financial world. Perhaps more importantly, the last 25 years have also seen belief in the discipline of market forces surpass its more obvious philosophical rivals. After decades of stalled growth and the accumulating byproducts of repression, a long list of totalitarian states that professed Marxist ideas, but ultimately made do with militarized garrison states, set aside their past mistakes and began taking steps towards open markets. Some even argue that capitalism no longer needs defending, having been adopted as the reigning economic approach by policy makers in all parts of the globe.
Capitalism prioritizes productivity over distribution and envisions an “open system” with innovation as a key component, regardless of the destructive power that it inevitably unleashes. Failure is an unavoidable feature of human existence, and rather than hide it or dissemble it away, capitalism acknowledges and accepts the risk of failure as crucial to achieving wider aims.
But the recent global financial crisis has given free marketeers a number of awkward questions to answer — questions about how markets operate in the real world, especially when governments and too-big-too-fail financial institutions begin to act in ways that shift losses away from those who have incurred them and onto the backs of others.
Gilder, a moral philosopher at his core, has returned to revise Wealth and Poverty at a time when the “golden years” of the Reagan Administration have receded far enough into the background to have obtained an ivory-carved sense of inevitability. The “new normal” that was established during those eight years have not yet been systematically rejected despite two turns in the White House by notionally populist Democratic successors. This “new normal” continues to be the base case for many (but not all) in 2012 when evaluating economic policy, tax reform and financial regulation.
To Gilder, capitalism is much, much more than simply the “least bad” system available to us. Capitalism is something more moral and more effective than the alternatives.
The 1981 edition of this book was a key component in the Reagan revolution that was about to unfold. As such, Wealth and Poverty will always hold a position of historic importance. Thirty years later, the Obama administration has begun to shift the direction of the country back towards the Keynesian consensus that held on both sides of the Atlantic for several decades. As a result, Gilder now seeks to re-introduce his thoughts to a new generation of questioning readers.
Interestingly, his original opening sentence was stunningly prescient. “The most important event in the recent history of ideas is the demise of the socialist dream.” Many readers at the time could be forgiven for believing that socialism in the Soviet block and across the Far East was alive and, if not actually well, at least stable and evolving at its own internal pace. Today, the sentence needs little in the way of elaboration or explanation. The bipolar philosophical standoff of the second half of the twentieth century is now consigned to history. But the assertion that follows continues to strike an uncomfortably awkward note. “The second most important event of the recent era is the failure of capitalism to win a corresponding triumph.”
The fact that the market economy works is not enough for Gilder. As billions of people have turned away from the socialist dream in the past 30 years, Gilder wants more than a reluctant acceptance of capitalism. In the face of the Obamacare and the Occupy movement, the Enron collapse and the Madoff debacle, Gilder has updated Wealth and Poverty to make his case for free enterprise and free markets relevant to the twenty-first century. In sum, Gilder believes that he and his supply-side comrades were ultimately too timid in their arguments and their aspirations. “All these years later,” he now writes, “it has become clear that we were not radical enough.”
To Gilder, the free markets and government operate at the expense of each other. As government grows, the market is stifled and suffers. By expanding the power of the markets, governments will be beaten back to their smaller, more limited size.
The Tea Party, representing millions of Americans disenchanted with “Big Government”, seems to agree.
In an attempt to provide a broader philosophical underpinning for the skepticism at the heart of the Tea Party movement, Yaron Brook and Don Watkins have turned to the work done during the last century by controversial writer and thinker Ayn Rand. Rand’s legacy since her death have been mixed, but even her critics cannot deny her impact continues to this day, as politicians and businessman and commentators continue to name-check her with surprising frequency.
I can still remember reading The Fountainhead in eleventh grade, when our English class stepped bravely away from the established syllabus to read Rand’s roman-cum-exposition. The lure of a potential cash scholarship for the winner of an essay contest sponsored by her eponymous society was perhaps too great a temptation for our teacher to withstand. In hindsight though, this perhaps says more about the state of California public education in the mid-1980s than about the appropriateness of Randian philosophy as subject matter for impressionable 17-year-olds.
In Free Market Evolution, Brook and Watkins use Rand’s writings to attempt to explain a host of problems currently facing America, both political and economic. The welfare state and overregulation are clear targets, but time is also set aside to analyze the 2008 housing crisis and other less obvious topics. Like Gilder, Brook and Watkins want to provide champions of capitalism with a defense of the system.
Critics of capitalism are quick to blame free markets for the current global financial crisis, which we are slowly and tentatively coming to grips with. The Occupy movement, now in forced hibernation so as to not distract unduly from President Obama’s re-election campaign, was able to capture the world’s imagination, if only for a short time, in order to make the case that the current economic approach was flawed. Unfortunately, the Occupiers failed to provide any direct or memorable message that viewers at home could take away.
But the feeling that there is something not quite right about the current consensus lingers on. For Brook and Watkins, the answer is more markets, not less, and less government, not more. They make the familiar case that rational beings pursuing their long-term self-interest are better decision-makers than a distant government filled with bureaucrats subject to distraction or corruption.
Establishing the morality of capitalism provides an added buttress to the defense of the market system, which is especially useful when evidence contraindicates belief in the inevitable success of markets. Although many “market failures” can be readily explained away as actually being “government intervention failures,” there is an obvious appeal for free marketeers in having a general defense on philosophic grounds, one that provides a foundation for their assertions in these debates.
Steve Forbes has come out as a big supporter of both books, writing the foreword of Wealth and Poverty and contributing a pull-quote full of praise for Free Market Revolution. The two-time former Presidential candidate and magazine publisher has well-burnished credentials as an advocate of flat taxes and limited government. In Forbes' eyes, Wealth and Poverty is one of the greatest books ever, on par with The Wealth of Nations by Adam Smith.
The report published by the Financial Crisis Inquiry Commission published in 2011 laid the blame for the meltdown squarely at the feet of people, not the system as a whole, noting that, “The crisis was the result of human action and inaction.” People made certain decisions, or went to great length to avoid making certain decisions. These people worked in the investment banks and commercial banks, and in the regulatory institutions. They created arcane investment structures or they entrusted their saving to sellers of arcane investment structures. People made mistakes and now people are paying for those mistakes. As a long bust now appears to be settling in after the much-heralded “Long Boom”, some may question whether such a dynamic and innovative financial system is actually worth the full price that is being paid for it.
The 2010 Dodd-Frank Act seeks to plug holes in a regulatory system that suffered a series of stinging criticisms for the manner in which it failed to limit, or even adequately acknowledge, the scale of the problems that became evident beginning in 2008. Unfortunately, huge portions of Dodd-Frank remain unimplemented, and the Securities and Exchange Commission continues to fall behind on its Congressionally imposed timetable for adopting the required rules and procedures.
Making promises in legislation that regulators can’t fulfill on the ground, on a day-to-day basis, is perhaps the worst thing that can be done to insure investors are protected. An investor who thinks that a regulator is watching out for his or her best interest, who naively believes that someone “up there” is actually reviewing filings and processing whistleblower tips and following up on red flags that arose in inspections will be deeply disappointed, and potentially grievously harmed, when the truth is later revealed that staff at the regulator was in fact doing nothing like that at all.
When Dodd Frank was first passed, even some of its most ardent champions warned that delegating so much of the details to existing regulators was potentially a grave mistake. Two years later, we continue to wait and see how the new regime will actually look.
When the next financial crisis occurs, as it inevitably must, will it be seen by the next generation of commentators and pundits and think tanks as a failure of market participants to comply with the rules of the road, or as a failure of the last round of government intervention to accomplish what was promised?
One wonders what Ayn Rand would have made of private equity funds and hedge funds if she was writing her thick novels today. Champions of these new capitalists portray them in glowing terms, as turnaround experts who rescue companies from the brink of collapse and save many jobs at the cost of some painful restructuring, or as financial rocket scientists who are able to identify temporary inefficiencies in the market and take profits from their ability to locate and monitor these brief glitches. Perhaps Rand would now set her book in Greenwich, Connecticut, or Geneva, Switzerland or the fashionable streets of Mayfair and St James in London.
Gilder recognizes private equity and hedge fund managers as new species of entrepreneurs, who have risen up to do battle with oligarchic banks, smothered in government regulations. These funds were among the first to realize that the AAA ratings being hung around the necks of mortgage-backed securities were undeserved. Contrasted with the ignorance that he identifies within the large financial conglomerates (ultimately bailed out by the government), these financial innovators look heroic.
Gilder’s view of the underlying causes of the 2008 financial crisis are philosophic and categorical, not simple technical missteps and regulatory blind-spots. “The great divorce of knowledge and power, information and finance, entrepreneurial realities on the ground and cantilevered paper towers in the sky was complete and cataclysmic.” The scapegoating of certain investment firms holds little water for Gilder. The challenges facing the economy are large in scale and broad in effect. In that regard, he has something in common with his more progressive critics.
Four years on from Obama’s election in 2008, the President’s most ardent supporters, including those who anticipated a new “New Deal,” are quietly disappointed that the progressive agenda has not fully surfaced in his first term. Perhaps a second term is needed to allow Obama to put his purported progressive credentials fully on show. In the meantime, his re-election team continues the attacks originally crafted by Republican primary challengers earlier this year. Private equity is supposedly nothing more than vulture capitalism, and those who practice these dark arts are greedy and self-interested job destroyers.
Not all of capitalism’s various faces look equally appealing at first glance. Unfortunately, moving the debate towards larger issues such as the morality of capitalism and the proper role of government in a free society rarely makes an impact on the next day’s news cycle. Ad hominem attacks and inflammatory accusations riddled with words such as “greed” and “tax dodger” are much more effective.
To Gilder, however, capitalism is about optimism.
Even in the face of the global financial crisis, Wealth and Poverty makes its arguments positively and unashamedly. Capitalism is labeled “the supreme expression of human creativity and freedom,” and Gilders points out again and again that “free economies climb spirals of mutual gains and learning.” Gilder argues against the conception of economics as a “zero sum game,” where every dollar of profit invariably comes from the wallet of an unemployed single mother struggling to pay for groceries for her newborn baby. He recognizes that markets can produce “huge disparities” that appear at first glance to “defy every measure of proportion and propriety,” but that eventually the rising tide lifts all boats.
Interestingly, Gilder’s altruistic morality of capitalism sparked a fierce rebuttal, in 1981, from no less than Ayn Rand herself, whose more atheistic approach had no room for such generosities.
His new prologue gives a succinct, but comprehensive, rundown of his views of the causes of the financial meltdown, putting them in the context of a broad supply-side and neo-conservative literature that precedes this particular crisis. He attempts to re-contextualize his book’s main themes for the information age that has sprung up in the intervening years. His stress is repeatedly on the value that entrepreneurs bring the economy at large. “An economy can only grow if its profits are joined with entrepreneurial knowledge.”
The chapters that follow continue along the path Gilder embarked on three decades ago. Leading thinkers from various ages and countries are introduced and critiqued. He alternates deftly between philosophical speculation and the granularity of economic statistics. An enthusiastic defense of the principles of supply-side economics are provided to readers brave enough to dive into the detailed argumentation, and well as repeated discussions of Keynesian ideals.
Gilder does not shy away from controversial topics, such as race, gender and class. As a result, the book rambles freely across a broad field of subjects, each eventually tying back into one or more of his major economic themes. Gilder is hunting big game in Wealth and Poverty and is willing to patiently work through each component and consequence methodically.
Wealth and Poverty, however, is not a book which is designed to change people’s minds. Instead, for those inclined to believe in the primacy of the economic over the political (or the cultural), Gilder provides a detailed intellectual foundation to support this approach, and thus performs an admirable service. Like the authors of Free Market Revolution, Gilder attempts valiantly to turn belief in an economic theory into a wider philosophical system, one that can sustain adherents across a broad array of life experiences. But some less-receptive readers will find that making secular saints of entrepreneurs and financiers populates a relatively sparse celestial display. In 2012 the touchdown lines are not quite where they were in 1981, and the force of Gilder’s arguments, which were so powerful three decades ago, don’t compel the same sort of ground-shaking effect today.
Brook and Watkins’ attempt, although more modest than Gilder’s, is set comfortably within the current frames of debate now unfolding. Free Market Revolution is clearly more of a call to action, peppered with relatively current pop cultural references, its narrow task to re-affirm that big government “just feels wrong.” Many of the same post-War thinkers are referenced, and in many ways the two books complement each other — one a large dense and highly ornamented Wagner opera, the other a memorable Broadway show with tunes you can hum during the cab ride home.
Brook and Watkins maintain their heroine’s distrust of Gilder’s belief in altruism, and make it evident that the market is ultimately superior to all other social endeavors. When the authors turn from recounting the problem to outlining the solution, however, the path they carve through the dense forest of red tape and misaligned incentives and the alphabet soup of government agencies leads to a similarly comprehensive set of beliefs. They offer to give the reader the means to live their entire lives more fully and more rewardingly in chapters on “The Morality of Success” and “The Nobility of the Profit Motive,” “Rethinking Selfishness” and “Selfishness Unleashed.” Along the way, Rand’s wider philosophy on individualism is introduced in bit-sized chunks, alongside recent anecdotes from business and technology.
Despite the difference in tone and line of attack, Free Market Revolution is similar to Wealth and Poverty in that it sees the intellectual justification of market economics as a key that opens the door to wider applications of these ideas in daily life. Both books hope to enlist the reader in a consistent and comprehensive resistance to the progressive forces of government expansion led, in their eyes, by President Obama and his attempts at redistributionist policies. And both see their economic policies as part of a larger, all-encompassing belief system.
Even someone as repeatedly amazed by the power of the market to allocate scarce resources, drive innovation to unimagined heights, and ensure the continued production and distribution of increasing varieties of goods and services, as indeed I am, does not necessarily need to look to capitalism for a philosophy that can be applied across the range of all human endeavors.
The market doesn’t explain why I love my three mischievous and exhausting children so much. It doesn’t explain why I find bonfires at the beach so aesthetically fulfilling. And most importantly, it doesn’t explain why the best comedy to ever run on American broadcast television — namely “Arrested Development” — was cancelled after just three seasons.
For these important issues (and countless more), we must look elsewhere.
Timothy Spangler is a commentator, lawyer, and academic who divides his time between Southern California and the United Kingdom. The two decades he spent working on Wall Street and in the city of London have given him unlimited access to the inner workings of the global financial markets, and the economic trends that that are driving international affairs in the 21st century. Timothy has appeared on CNN, CNBC, BBC, and Sky News, and has been featured in The New York Times, Wall Street Journal, Washington Post, Financial Times, and The Economist. He also writes the award-winning blog, “Law of the Market,” dedicated to covering the politics of Wall Street regulation and the regulation of Wall Street politics (www.lawofthemarket.com and @lawofthemarket).When not contemplating the ridiculous and absurd aspects of finance and politics around the world, Timothy follows the rising and falling fortunes of Fulham Football Club in the English Premier League, and beyond.
LARB Staff Recommendations
SLAVOJ ŽIŽEK, a philosopher and psychoanalyst from Slovenia, is one of the few academics to have achieved a degree of genuine popularity among...
EVEN BEFORE HE'D FALLEN terminally ill in 2010, Christopher Hitchens — a writer legendary for rapidly executing his deadlines on the fly — had begun...
Did you know LARB is a reader-supported nonprofit?
LARB publishes daily without a paywall as part of our mission to make rigorous, incisive, and engaging writing on every aspect of literature, culture, and the arts freely accessible to the public. Help us continue this work with your tax-deductible donation today!