Capitalism thrives on inefficiency

Berlin Republic The debate magazine

Good capitalism, bad capitalism

Will Hutton - Why fairness and proportionality are the indispensable cornerstones of any sustainable and livable new order.

Europe's center-left parties are troubled, on the defensive and on the run from reality. They believe that voters should have learned two things in recent years: that financial capitalism not only endangers itself, but also the economy and society as a whole; and that the citizen's state is a friend. It is true that the popularity of bankers is not at all good. But the liberal left has not benefited from the new situation. Instead, governments, debts and deficits are now being blamed everywhere. Social Democrats may have been saviors in need - they are not thanked for that.

According to British opinion polls, the majority of citizens believe that social scammers, immigrants and the state are responsible for today's evils. The bankers follow a long way behind. It looks similar elsewhere in Europe. Building a basis for new left-wing liberal engagement in such a harsh climate is not easy. In fact, not even the center-left is quite clear about what such activism should look like. What is socialism anyway? And what about social democracy? What would a good economy and a good society make? Which values ​​anchored in society can be linked to? Does the political left in any European country offer a compelling answer?

Obviously not. In this vacuum, nasty nationalist movements thrive, while on the left of the political spectrum the Greens are one of the few dynamic elements. Traditional social democracy in particular has to do its work much better, not least in the interests of the working people whom it claims to represent.

I claim that the center left has to start by thinking straight ahead. This task, in turn, begins with gaining clarity about one's own relationship to capitalism. The parliamentary left parties in Europe will never socialize the means of production - and they shouldn't want to. There is neither a social nor an intellectual basis for such impulses. And even if there were, the lessons of the 20th century would be clear: socialization doesn't work. It is economically inefficient and encourages authoritarianism. This does not mean at all that there is no role for public ownership or public action. But this action stands in a completely different context: the struggle for good capitalism and an open society, which is rooted in the European Enlightenment.

European social democracy is the descendant and guardian of the Enlightenment in an enduring capitalist economy and society. On the other hand, it is not exactly a raiding party of the European working class that is constantly pushing to conquer the heights of command of the economy or to transform economic and social relations. This distinction is a fundamental intellectual step - with fundamental consequences. Because this is exactly where the dividing line between socialists and social democrats runs. Social democrats do not seek to transform capitalism into something entirely different; Social Democrats want to get the best out of capitalism.

The first group of opponents of social democracy consists, of course, of those over-capitalists who claim that economic dynamism arises when capitalism can act out its atavistic predatory instincts. According to this logic, to differentiate between good and bad capitalism is a fundamental category error. Interestingly, overcapitalists and traditional socialists agree on one (and only) point: the nature of capitalism cannot be changed.

But both are wrong. There is good and bad capitalism. There is capitalism that adequately rewards productive entrepreneurs. These are entrepreneurs who challenge established top dogs and take calculated risks with the new. In this way they create exactly the kind of drive, movement and energy that even Marx recognized as a world-changing force. There is capitalism that understands that companies are social creations. There is capitalism, which understands that it is the experience of shared goals that moves men and women in the long term to invent something, to innovate and to offer it on the market. Creating something great together and making money from it - that is good capitalism. Squeezing out assets at all costs just to make a cut - that's bad capitalism.

Bad capitalism doesn't care about people

Good capitalism is not given by nature. It is a social construction that has arisen over time and through a multitude of political decisions. It is not independent of the social and political world, but is embedded in this world. It relies on governments to keep markets open so that established market participants are faced with new challenges. At the same time, good capitalism depends on the state investing in physical assets, in knowledge and in social assets - in science and in streets, in strong families, in social mobility and an independent judiciary. Public power with a democratic mandate lays down the rules for what the obligations that come with corporate ownership look like, how the financial market and the economy relate to one another, and how ordinary people are helped to survive the risks of life: unemployment, illness, old age and disability. All of this together creates good capitalism - and a good society in which such capitalism can thrive. Above all, good capitalism is based on a system of values: fairness, proportionality and mutual respect.

Bad capitalism is the opposite: a universe of bloated top dogs and politically lashed markets in which productive entrepreneurs are marginalized and public investment is neglected. Bad capitalism doesn’t care about people’s living conditions and risks. The United States, I contend, is now on the verge of transforming itself from a country where, by and large, good capitalism has triumphed to a country where bad capitalism has triumphed. The future of the 21st century will depend on this great country finding the inner strength to stand up to the selfish top dogs and their armies of lobbyists who are freezing the American economy.

In Europe, the same struggle is being waged in a different way. Although the European economy is unabashedly capitalist, there is still a lack of political forces openly committed to good capitalism. Two patterns are typical: Either the political left falls behind the right without a fight, in that it merely meets capitalism with mistrust and resistance, without at the same time putting anything in its place. Or the political left feels so compelled to prove its own economic friendliness and to stop any fundamental criticism of the current economic order that it loses contact with its political base. Without political guardians of their interests, the working classes then threaten to become easy prey for nationalists and right-wing extremists.

Social democrats in particular need to understand what a properly operated, good capitalism is capable of. And they have to show that - paradoxically - only progressive politics are able to maintain the political tension that brings the good out of capitalism. While the right is indiscriminately offered to any capitalism, the social-democratic mandate is to constantly tie capitalism back to its Enlightenment legacy and thus to put it at the service of the wants and needs of the common people. This does not mean, however, that every single aspect of the European social model should be defended at break and end; Good capitalism demands flexibility, adaptability and openness - also from the insiders of the labor market. This applies particularly to trade unions, whose claims and privileges make it no less difficult for creative newcomers to challenge powerful top dogs than capitalist monopolists.

Because capitalism is performing a balancing act. Its success depends on its ability to unleash productive entrepreneurship, which in turn provides knowledge that will advance the productivity and wellbeing of humankind. Capitalism is always exposed to two dangers: It threatens to be hijacked by elites who want to make manipulated profits in order to maintain their privileged status. And it can degenerate into pure gangsterism, into exploitation and speculation. Bankers, infocapitalists and monopolists - but also powerful unions - can be responsible for such undesirable developments. The paradox is that only a tie back to the principle of fairness can save capitalism from falling on its tightrope. This is precisely where the fundamental and indispensable task of social democracy lies.

Life - a lottery game?

In view of the global events of the past few years, it might seem eccentric or even foolish to emphasize fairness as the absolutely indispensable value of good capitalism. The political right replies that only a saint or a naive can be so unworldly as to call for fairness in capitalism. Certainly it is called capitalism survival of the fittestthey say, and of course it's "unfair". So what? This is life: a lottery game. Intelligence, talent, beauty, family background - all of this is distributed randomly. Some are born with happiness, others not. Demanding fairness in business and society simply contradicts the way in which nature distributes its cards: “Fairness? Come on! It's just left cloud cuckoo land. "

But injustice is not a fact invariably thrown out by the lottery of life. Nor is it something we have to accept for the sake of economic efficiency. Injustice can be combated and reduced. Great secular - and, of course, religious - thinking has always been guided by the assumption that good people should be destined for good - and bad people should be bad. And this should be done in a proportionate and impartial manner. People know that there is a connection between intentions and actions. And they want good intentions and good results to be rewarded and bad ones to be punished. We passionately believe that people should get their “fair wages” in proportion to what they have done, good or bad. Fairness understood in this sense must be the value system that animates the liberal left and fills it with life.

The very basis of morality is that everyone should get their “fair wages”. A capitalism that tries to move forward as if these instincts were quite unimportant runs astray very quickly - just as any socialism degenerates into a utopian impossibility, which has no sense of individual responsibility and the powerful desire of people for fair wages and just punishment . We cannot excuse individual behavior as the result of forces and structures that are beyond the control of the individual. Social Democrats should carefully distinguish between earned and undeserved wealth. You should also distinguish between honest and dishonest workers and between deserved and undeserved poverty. This point was already pointed out by Karl Marx in his criticism of the Gotha program. Too much, many leftists maintain the idea that “capitalism” is always to blame for failure and failure and never individual indolence, never deception or a lack of self-discipline.

A feeling of elemental injustice

Nevertheless, it remains true: without fairness, capitalism becomes toxic. It generates incomes and assets that are absurdly disproportionate to the economic and social contributions of their recipients. Beyond the privileged circle of the so privileged, no one can understand why society distributes its income so unfairly. People are beginning to wonder whether choosing certain careers - for example in agriculture, teaching, medicine or science - makes any sense when society pays them so poorly while at the same time so enormous amounts are earned in the financial world. In the face of such injustice, this self-questioning spreads like a virus. The rise of political groups can be observed almost everywhere in Europe - the English Defense League, the True Finns, the Italian Lega Nord, the Dutch Partij voor de Vrijheid or the Danish Folkeparti - which, to varying degrees, have made suspicion of foreigners their trademark do. The success of these parties cannot be explained by the fact that Europe suddenly became more xenophobic or even more racist. It is crucial that a feeling of elementary injustice has penetrated the social bloodstream.

There are no strong center-left parties or beliefs in Europe to express displeasure with the current functioning of capitalism. It doesn't exist because the center-left has no language to distinguish between good and bad capitalism. Instead, public anger is directed against the foreign "other": against the Muslim, against the European or the non-white immigrant. None of them paid into the collective pot. It may well be a legend, but immigrants today are portrayed as if they were even preferred recipients of housing, education and health services without having made their own contribution. In fact, they are seen as social fraudsters. Trust dissolves, suspicion reigns - and an atmosphere spreads in which economic and social relationships are equally eaten away.

Every concept of good capitalism and a good society must be based on a common concept of fairness. This does not currently exist. The rich declare that their wealth is just. Europe's rich believe increasingly that they owe little to nothing to society, government and public institutions. They do not accept limitations or proportionality. They only use other realms as a benchmark - an attitude that is perfectly expressed in the self-righteousness with which many bankers have recently justified their excessive and disproportionate bonuses. They even seriously threaten to leave the UK or Europe if their bonuses are reduced!

The fundamental value of proportionality

In such a climate, the willingness to donate to charity declines, tax evasion is rampant, and manager compensation increases exponentially. All three developments are justified by the doctrine that the rich deserve to be rich. Meanwhile, from the point of view of the rich and more aggressive right-wing media, the poor have to attribute their plight to themselves - after all, they could have taken a different path in life. The poor could work, save and show a little initiative. So why should they be pampered with government benefits?

In the face of such attitudes, banking reforms and lower bonuses, albeit of great importance to the stability of the system, only solve part of the problem. Banks could not have acted the way they did if the culture and practice of our companies had no deeper flaws. Before any reforms can really take effect, one must first question the moral structure that business elites use to justify their opposition to change. The principle that people should get what they are due is a vital part of European culture and needs to be reaffirmed. Most Europeans are not dyed in the wool apostles of equality. But neither do we believe that a person's dignity is expressed in their wealth.We believe that wealth must be earned and that wages must be in proportion to performance. Proportionality is a fundamental value. The fact that the financial and business elites so blatantly disregard this value conjures up an angry populist counter-movement. This does not feed itself, as is carelessly claimed, from envy, but it feeds from a deep-seated human instinct.

The definition of fairness not only includes the principle that performance and consideration must be proportionate. It must also include considerations about the role of happiness, which is obviously of great importance for each individual's fate. Everyone understands the importance of luck and bad luck. There is the kind of happiness to which we have contributed ourselves through our efforts and diligence ("option luck"); if people have worked hard for their happiness, then their success and the prosperity that comes with it are fair. One of the reasons that differences in income and wealth are tolerated more in the United States than in Europe is the widespread - albeit erroneous - belief that American society is sufficiently open. The rich in the US are typically rich because they have earned their wealth. The Europeans, on the other hand, are more skeptical. You live in an older part of the world where wealth is often acquired at birth. European culture is more aware that happy or less fortunate circumstances of origin have a huge impact on whether someone is rich or poor. It is the form of pure luck or pure unhappiness ("brute luck") that we have not "earned" through our own actions. We cannot praise the rich for having the right parents, nor can we blame the poor on their parents.

Pure luck and pure bad luck

The categories of “pure” luck and bad luck are much better suited to legitimizing collective interventions than the ideal of equality that leftists usually invoke when they want to justify the meaning of social insurance or inheritance taxes, for example. Nobody is seriously convinced that complete equality is "deserved"; It neither rewards effort nor punishes slackers - that is exactly the point that Marx already pointed out. It is different with pure luck and pure bad luck: Both are clearly part of the human condition, and it is just as clearly part of the social dimension of our existence that we act together to mitigate the effects of sheer luck or sheer bad luck. And suddenly the central argument for public health or social services is quite different: These services are not “socialist”, they are not “liberal” or “left”, but they have much deeper roots. It's about reducing bad luck.

For example, none of us can know the character of our own genomes - let alone change anything about it, even if we did. Whether our body is prone to serious illnesses - from cancer to dementia - is a question of sheer luck or bad luck. Of course, society should agree to insure each and every one of its members against the sheer bad luck of illness on a mutual basis, as well as against the risks of unemployment, disability and old age. My own belief is that these benefits are entitlements. But in order to protect them from the attacks of the political right, that too many people pursue benefit receipts as a “lifestyle” or that public health services are “socialist”, I think it is extremely important to ensure a clear connection between contributions and benefits: We pay for our pension, health and unemployment insurance; we receive these benefits because we have a well-earned entitlement to them - and not because our need would have been certified according to state screening and official discretion.

Similarly, the moment the happiness category is referred to, the tax dispute changes completely. The inheritance tax, for example, is not a “death tax” or “taxation of dying”; it is a "we-all-share-your-happiness" tax. With the principle of fairness, the conflicts around immigration can also be appeased. Ordinary people from the working class do not believe in the fact that newly arrived immigrants are immediately granted the full range of social benefits without having to make a contribution of their own. Elementary principles of fairness are violated here. Immigrants should be able to earn entitlement to social benefits over time; People - regardless of their religion or ethnic origin - are only entitled to full social civil rights if they have actively acquired this right. This secularized reasoning removes the racist undertones from the debate.

Because leftists are concerned with reducing the effects of pure luck or pure bad luck, they are primarily concerned with social mobility. We are therefore committed to an effective and smart housing policy, for good education and training, because the disadvantaged should be given a life that they themselves consider worth living. The path to this goal can be organized in a non-governmental and decentralized manner - in the form of housing cooperatives, free schools, etc., but the task must always be understood as an act of social mobilization.

The principle of fairness in business

The principle of fairness - performance and consideration, proportionality, luck and bad luck - must apply not only to the social sphere, but also to the economy. In social terms, the aim is to create and maintain a network of social institutions based on mutual payments and benefits in order to reduce risks. Something similar is necessary in the sphere of economics. The central weakness of the arguments for a pure market economy, as they are put forward by the right especially in the USA, lies in their complete blindness to the reality of the risk and the unpredictability of the future. The ingenuity of capitalism lies in the fact that it is able to process new things over and over again in the constant process of experimentation. He transforms advances in science and technology into new forms of production. But this is necessarily a highly risky process. Entrepreneurs can never know if their ideas or business will actually work. They live with the risk and the knowledge that their hard work and innovation may not be properly rewarded.

European economists across the political spectrum - Hayek, Schumpeter, Keynes, Knight - have always been aware that there is existential uncertainty inherent in capitalism, which leads to instability and injustice. In contrast, American economic theory traditionally tries to ignore the factor of uncertainty. For example, the expectations of market participants are seen as rational, and the markets are credited with repeatedly reorganizing themselves optimally in a mechanistic way. Markets are therefore idolized as almost perfect - an absurd interpretation that even market-minded European theorists like Hayek would never have advocated. Keynes understood Hayek's punch line very well: the core of capitalism lies in its brilliant process of discovery and testing. He replied, however: If markets - precisely because of this - are unstable and plagued by profound insecurities, then a democratic state must necessarily act as a counter-power in order to bring out the best aspects of capitalism.
That speaks not only in favor of an active fiscal and monetary policy - especially in the wake of the credit crunch - but also in favor of the state actively promoting entrepreneurs and entrepreneurial spirit. Only the state can reduce the risk that capitalist corporations face under capitalism. Entrepreneurship thrives best where it is woven into a network of risk-reducing institutions - an ecosystem of innovation and investment, so to speak. The state has to make sure that this ecosystem exists, that it works well and is kept going through financial support.

Certain things that are necessary - whether venture capital or the protection of particularly risky contracts - may be produced spontaneously by markets. But not much. Universities and research institutes that create new knowledge; Technology Transfer Institutes; Science parks; Banks and financial institutions supporting new ventures; Institutions that equip workers with contemporary skills; Price guarantees that apply far into the future and that make important investments in today's infrastructure economically sensible - these are all necessary interventions in the supposedly natural processes of capitalism. They enable companies to better deal with risks and thereby create wealth and jobs.

Good capitalism therefore has two important properties. On the one hand, it is a system in which the income of owners and managers is proportional to the risks taken (and not a system of “winner takes all”). On the other hand, good capitalism has politically and socially constructed institutions that help reduce the risk in such a way that greater risks can be taken at all. The right-wing claim is simply nonsense that successful entrepreneurship is primarily about individualism, unrestricted property rights, low taxes and little regulation. In fact, successful entrepreneurship arises in good capitalism - namely, where risks are reduced and shared and owners not only insist on their rights, but also recognize mutual responsibility.

Risks and dynamics will continue to grow

As the knowledge-intensive economy increasingly dominates economic activity, the risks and dynamism continue to grow. The social institutions have to change in order to cope with this change. The right is correct in arguing that excessive anchoring of workers' rights, such as generous severance pay, creates even more risks for companies. But the solution proposed by the right to curtail or completely abolish workers' rights is too crude. This would only transfer the risks to ordinary workers. Instead, the network of work, training and social security must be redesigned according to the principle of “flexicurity”. Previous labor rights that hinder new hires and employment expansion may need to be curtailed. But this is only possible if they are replaced in three ways: First Unemployment benefits must be increased to such an extent that employees do not suffer severe income losses when transitioning between jobs. Secondly Money earmarked for severance pay should be spent on continuing education for all workers. Third after all, governments - like Roosevelt's “Works Progress Administration” in the era of the New Deal - must step in as employers of last resort if necessary. Social democratic fairness demands this and nothing less: a good society in which good capitalism can flourish. The principle of flexicurity is a fair way to distribute and mitigate new risks and to keep at bay the sheer bad luck that the fast-moving, knowledge-intensive economy inevitably brings with it.

And there is a final dimension of fairness, perhaps the most important of all. Fair trials are extremely important to people. They want to have a voice, they want to participate and be able to rely on the impartiality of decisions - not only in public spaces, but also in the workplace. Of course, democracy and the rule of law are crucial procedures for fairness - but the same is true for the effective representation of workers' rights. Whether a political and media system can be considered fair and legitimate is measured, on the one hand, by the extent to which the entire spectrum of opinions can be expressed; on the other hand, whether newcomers in business, social life and politics have the opportunity to challenge the long-established staff.

The political project of fairness

Few Western democracies today meet this ideal - and the result is the drying up of economics and politics. Too much corporate power remains unchallenged, both in politics and in the workplace. One of the best aspects of the European model is therefore the system of employee participation, which obliges companies to at least provide information and consultation. At the same time, politics has become all too predictable to the extent that politicians limit themselves to maintaining the balance between established interest groups instead of formulating new goals based on values ​​and taking active leadership. The political left is as much to blame for this as the right - and maybe even more. But to do better, she needs both a moral anchor and a political project.

The definition of fairness proposed here is radical. It is more about justice than equality; but this does not make it less demanding. It turns to the economic and moral issues that have been ignored for the past two decades: the dramatic differences between wealth and power and the blind belief in individualism and the market. The idea of ​​fairness is about a value system that underpins liberal social democracy. This value system is liberal because it recognizes that individual behavior should be rewarded (or punished). But it is also social democratic because social and collective power should be used to dampen the effects of pure luck or bad luck. I claim that this value system of fairness shows the way in which the center-left in Europe can reinvent itself and achieve public approval. To repeat, fairness is the indispensable value that underpins good capitalism and good society. This value will be the cornerstone of any sustainable new order. «

Translated from the English by Tobias Dürr

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