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Monday, December 6, 2021

How capitalism didn’t fail

Something has been lost. Populist sentiment is on the rise. The public’s confidence in America’s leaders and her businesses is broken. The world’s admiration for America’s financial prowess is fading. American capitalism is under assault.

This frustration is evident most clearly in the recent backlash to Wall Street’s reward of a lavish $18 billion bonus after receiving taxpayer bailouts. For certain segments such as college students, this is the future disappearing; for others, this indicates the losses of a moral compass and ethical consciousness. The rebukes signify a broader desire for greater government regulationcapitalist greed here appears to be the antithesis to the values that defined previous generations.

But what this incident truly illustrates is that the very fundamentals of capitalism haven’t changed. The conception behind the free market and its corrective powers remain the same. Its goals relative to the broader community stay the sameearning profit. What has changed is our conception towards capitalists and capitalism.

America has always prided herself on the strength of her capitalist ideals. Capitalism, broadly defined, is the economic practice where privately owned and produced goods are traded for an equal valuationmost commonly, money. Based on mutual agreement, it transfers property from one party to another, independent of government intervention.

In many ways, capitalism mandates the optimal meeting of minds. A producer makes a good, values it and markets it to a potential buyer. The buyer, assigning his own valuation of the good, then proceeds to either accept or reject it. There is typically no external interference to the pricing process.

This liberty to choose and dispose is the quality that makes capitalism so attractive. Should the seller’s relative valuation be too high, the buyer can choose a competitor’s product. Recognizing this cost, sellers price products depending on confluent factors. For economists, this system allows the optimal pricing of goods and subsequently, broad economic efficiency.

And this is precisely what happened in the real estate industry, the source of our current economic malaise. They marketed mortgages with variable payments, and people bought it because the interest rate, or payment on loans, was very low. These mortgagesa variation of the exotic derivates, where an asset’s values change depending upon that of another assetare the products sellers originated. Buyers bought it. Government oversight was absent. Capitalism worked perfectly fine.

Thus, what really failed here was not capitalism, but a collective failure to understand the way capitalism works. The blame is not squarely on the Wall Street capitalistsas much as they have shown contempt and an attitude bordering on arrogance to the national plightbut rather on a network of multiple interlinks, including banks, credit rating agencies, loaners, investors, regulators, the government. The mortgage loaners created very poor productsfinancial instruments no one really understood; or, if some did, chose to ignore the risksbut consumers bought it nonetheless.

Capitalist companies are not responsible for the welfare of Americans. A company is only interested in maximal profit, in its sole perseverance. Wall Street behaved like this because we enabled it. They thrived because we perpetrated it through numerous individual and broader decisions.

The cost of our failures is staggering and, potentially, lasting. So, what should truly be reexamined is not just capitalism. It is the relationship and attitudes we have toward products and commodities. As college students, acting carefully, deliberately and prudently might help, as well as not buying products we don’t have the credit for. Practicing sound financial investments and spending behavior are positive approaches.

Capitalism isn’t to be solely blamed. It is a time for personal reflection.

 

ZACH HAN thinks that the populist anger is a nice bandwagon to jump upon. Follow his lead at zklhan@ucdavis.edu.

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