Blaming Capitalism for Corporatism

Jan 31, 2012 Saifedean Ammous , Edmund S. Phelps

One of the big debates at Davos this year will concern the future of capitalism. But the system that is now in crisis is not capitalism, but corporatism, which chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness.

NEW YORK – The future of capitalism is again a question. Will it survive the ongoing crisis in its current form? If not, will it transform itself or will government take the lead?

The term “capitalism” used to mean an economic system in which capital was privately owned and traded; owners of capital got to judge how best to use it, and could draw on the foresight and creative ideas of entrepreneurs and innovative thinkers. This system of individual freedom and individual responsibility gave little scope for government to influence economic decision-making: success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise.

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

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Saifedean Ammous

Writing for PS since 2011
3 Commentaries

Saifedean Ammous is a lecturer in economics at the Lebanese American University.

Edmund S. Phelps

Writing for PS since 1997
28 Commentaries

Edmund S. Phelps, the 2006 Nobel laureate in Economics, is Director of the Center on Capitalism and Society at Columbia University and the author of Rewarding Work.

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0 Comments on this paragraph, 20 in all 20 Comments on this article

Moctar Aboubacar Jun 17, 2013

Framing things in terms of capitalism vs. corporatism is an overly simplistic and actually very misleading characterization.

Following this dichotomy the authors will find themselves very embarrassed indeed to explain Korea, to explain Taiwan or indeed China.

In a larger sense the constant 'state or market' assumption of mutual exclusivity (with corporatism, we learn in this article, the state chokes off the dynamism of private sector production and financial institutions) is getting old- I would point you to Dani Rodrik's latest book.

Reading this article is like reading the journal of a time-traveling Cato Institute fellow from 2006.
- Frank O'Callaghan Jun 17, 2013
  
  Indeed. A discussion from within and oblivious to the outside world.
  A new reply to this comment has been posted.
- Frank O'Callaghan Jun 17, 2013
  
  Indeed. A discussion from within and oblivious to the outside world.
  A new reply to this comment has been posted.
- Frank O'Callaghan Jun 17, 2013
  
  Indeed. A discussion from within and oblivious to the outside world.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Frank O'Callaghan Jun 17, 2013

All systems try to describe themselves in positive terms. Sometimes these terms do not sound positive to others. The worldview of unconnected cultures such as China, Greece, America and Sub-Saharan Africa of twenty centuries ago would not recognize our present discourse. Their theoretical frameworks were different.

All of these theoretical frameworks confer the attribute of virtue on the powerful. They say that power is deserved by the powerful. Sometimes this is based on what we see as supernatural reasons such as divine right or the mantle of heaven. In capitalism the twin claims of the general good and efficient inevitable outcome are put forward.

Capitalism claims that it is virtuous, necessary, efficient and that it best describes reality. Most fair-minded reasonable people now doubt these claims.

The wasteful use of capital clearly refutes the central claim. Unemployment of both ends of the economic scale is inefficient and hugely wasteful of resources and of the lives of those given to too much work and to too little.

Corporatism is here suggested as a rival to, or corrupter of, 'pure' capitalism. This is laughable. Corporatism is merely capitalism in a more authoritarian guise, using the state apparatus for repression rather than private 'muscle'. This allows the repressed to be taxed to pay for their own repression. It is not far from the billing of the family of the executed for the bullet. Doing this in a democracy is an impressive feat.
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Alex D. Jun 17, 2013

This is a very interesting article because its content is true and in one particular aspect wrong at the same time, I think.

First, it is true that politicians mostly concentrate on big corporates. Often big players receive help from politicians in many ways. Easy examples are subsidies. But often these companies benefit through economic stimulus package in the time of recessions. A good example is the "Konjunkturpaket II" in Germany in 2008. Every person was given for his old car 2500€ if he would buy a new car.
The problems inside the car industry were not solved in these times, they were only delayed.
Taxation is another important aspect. Most big palyers either don't pay taxes at all or they pay very little. That makes it harder for the small und middle sized companies to compete with these big players.

This is a very serious development because we all know that most of the innovation comes from smaller or even totally new companies.
Good examples are again car builders and big computer companies. I'd say these companies are realaxing in a oligopoly and others do the work. HP and Dell don't do anything innovative anymore. It is only about saving money because they are already too big. What was the most innovative development in the car industry during the last 15 years regarding the engines? A hybrid system? That was developed by a unfamous person called Alex Severinsky and not by Toyota!
We see similar developments in all kind of diffrent branches. So more capitalism with more competition, less rules for start ups, fair taxation for everybody would be great. That would creat more jobs, more innovation and more wealth for everybody.

BUT in my opinion you can't do that with every branch. If you take a look at banks the same argumentation becomes very dangerous.
Banks were heavily deregulated during the last 20 or even 30 years. The main duty shifted from providing loans to people and companies to gamlbing in the financial markets. With the deragulation of the derivate markets banks are able to make money with money. The economy is suffering after every bank crisis because banks have to be saved with public money. These rescues are often without alternative because these banks are too big to fail and would force the economy to shrink even more if the governments wouldn't help out!

So in this aspect more Capitalism doesn't even make sense because that was the same argument to deregulate the banks. Further deregulation won't even help because it would create even more damage.

So at this point I would completly disagree.
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Shane Beck Jun 17, 2013

I fundamentally disagree with this thesis. We don't have Corporatism, we have global crony capitalism where the object of the global elite is to loot as much profit as they can and hide it in off shore tax havens. Let's not pretend that multinational corporations are playing by any rules. Let's not pretend that the 1% are paying their share of taxes. This goes for the US elite, the Chinese elite and the European elite. (The Indian elite want to hoard their wealth in gold for some strange reason)
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Carol Maczinsky Jun 17, 2013

Americans don't understand ordoliberalism, the framework that solves the underlying issue.
A new reply to this comment has been posted.
James Scott Mar 14, 2013

Sir, you have some very well thought ideas, My research has lead me to believe that the rise of modern Corporatism can followed back to WWI. In 1928 the “Red Line” Agreement was signed this later morphs into the modern OPEC with British Petroleum & Exon Mobil acting in behalf of the westerns. Believe it or not Nixon is responsible for most of the modern problems we have. he allowed us to be sucked into the "Organization for Economic Cooperation and Development" (OECD) Other political groups also played a role such as Council On Foreign Relations and the Federal Reserve. These private groups influence government in a way that the small business owner never could, so it was an inevitable shift toward Corporatism. We as a country failed to heed our Founding Fathers warning and thus we have exactly what they predicted here and now. Sorry once i get started its kinda hard to stop this what my research has lead me to believe any way thanks for your time enjoyed your article
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William Wallace Feb 24, 2013

You describe a state of affairs yet offer no argument as to how or why corporatism arises. You dismiss the counter-arguments without presenting them, such as the success of China's mercantilism (at least so far.)

What this article is doing on Project Syndicate is beyond me. Lots of loose opinion and very little, if any, substance. Financed by some looney think tank, perhaps?
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Rock Steady Sep 14, 2012

This paragraph is where you lose me. I agree with everything you say to this point but I don't buy your implicit explanation for how we got to this situation. You seem to blame the typical "bogeyman" of your "free market" ilk -- government and bureaucrats run amok and squelching out individual freedom. However, government has become and instrument of corporations. I would argue that is precisely the influence of corporations on government that has caused this situation. In a corporatist society government is a tool of corporations and other powerful interest groups. They use it to squelch competition and seek rents. Corporatism is created by corporations that use money and influence to gain power and more money at the expense of everyone else. Capitalism thrives in a democracy with clear and fair rules of the game. Corporations dismantled those rules to their own benefit; and the result is the situation we are in. The way out of this is restoring balance and sanity to our democratic institutions by rejecting the corruption of cash contributions to the system.
- Giovanni Campanella Feb 14, 2013
  
  Responding to Train Train: "I would argue that is precisely the influence of corporations on government that has caused this situation. In a corporatist society government is a tool of corporations and other powerful interest groups."
  
  The question is then why do corporations lobby government? Why doesn't Starbucks lobby Microsoft?
  
  As long as we have a government bigger than its small, moral and legitimate role of protecting only life, liberty and property, you will have a super massive black hole that attracts people of low morality. Big government is the cause for corporatism - a small government that protects your rights has no value towards crony capitalists but a big government with sweeping regulatory powers is a pot of honey. This is because a big government has the moral support of millions of people who confuse it with society and safety instead of what it really is - people with the power to send men with guns to your house if you don't follow the law, no matter how right or wrong it may be.
  
  With small government there can be no predatory corporations simply because they cannot use the force of the state to eliminate the free market. If the proper role of government was understood by enough people, no power systems would be in place for powerful men to take advantage of. Look at the TARP bailouts for example - in a truly free market, the banks would have failed. What did big government do? It bailed them out with hundreds of billions of the people's money - why? Because it has the public moral support of intervention in the economy - intervention - not to be confused with defense.
  
  The problem with this conversation is that it has been reduced to a football game between conservative and liberal ideologues. Instead of looking at regulations as misguided intentions for protecting the poor or the unfortunate, it is straw maned into a support for gravy-train goodies and class envy. Instead of looking at free markets as a voluntary exchange of goods and services with a government only big enough to protect your life and property, it is bastardized into a support for fat cats in top hats, a 'dog-eat-dog' world and 'profits are the bottom line' society.
  
  Overtime, we get attached egoistically to these beliefs and cannot let them go when confronted with rational explanations. That is why many opponents of a free market system confuse corporatism with capitalism intentionally or ignorantly and will not question their faith of the state, the state being the most dangerous item in humanity.
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Sean Kampstra Jun 23, 2012

I don't wish to argue, since I clearly don't have the expertise of the authors, but it seems to me that corporatism is an immanation of capitalism. Thus, capitalism is still at fault, the degree of which can be debated. In my understanding, the fault of the authors thesis lies in equating "free market-ism" with capitalism.
- Giovanni Campanella Feb 14, 2013
  
  @Sean Kampstra: "...corporatism is an immanation of capitalism. Thus, capitalism is still at fault, the degree of which can be debated."
  
  The only way corporations can become predatory is through a large state. The state bails them out, grants person-hood to, provides limited liability to, allows them to regulate themselves through appointments to regulatory agencies, etc. If government were only small enough to protect people from crimes and fundamentally rejected the initiation of force in all it's actions, there would be no incentive for companies to lobby government since government would have no power to regulate or intervene in the economy, to subsidize, bail out, grant person-hood to, etc. Since the opposite is true, crony capitalists will always have an interest over government blocking things like: the entry of alternative fuels from entering the market, forcing everyone to purchase health insurance, keeping drugs illegal and waging nonstop warfare overseas.
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Elizabeth Pula Feb 22, 2012

My comments are about the article in general and also about Luke Ho-Hyung Lee's remarks (which I thought were real sparks!)
Ammous mentions interesting stereotypical, or generalized comparisons and information about one word “capitalism” that apparently gets misconstrued and misunderstood by many of us, - especially me. It is easy to project all kinds of “self-positioning” views and comments onto the meaning of his article. He gives a reasonable approach to different understandings and interpretations of one word, systems and infrastructures that develop in the real world because of necessary tasks or desires to survive in a world that is based on any kind of exchanges of any kind of monies.
As a result of his article, many people made comments and develop different thoughts that may or may not be applied to change how a person then views the world. Now viewing is different than actually changing or influencing anybody or anything to actually do anything any differently. It is also difficult to determine if any changes actually make any resulting new action any better or any worse.
It is a very complex process, and I could go on and on about little aspects of Ammous article and the word “capitalism” but then any reader would probably start reading something else. Hey, only so much attention can be devoted to only one word, right? Anyway, I especially liked/related to one comment about “supply-chain” activity. This person interjected a very credible issue and probably facts about the “real economy” and “infrastructure” of economies. His/her comments need further development and discussion.
So, I will quote:lukehlee from 01, Feb, 2012 …. And hey thanks for your words!
"I believe the existing market (or supply chain) process for the real market has been too heavily efficiency-oriented in the Modern Information Age and no longer suitable for the modern information market. With the real market (or supply chain) process as it exists now, the market as a whole cannot self-generate enough businesses and jobs to keep the level of consumer spending at the desired level, no matter how powerful expansionary or stimulus economic policies are adopted.
I would strongly suggest you see: (1) “Overcoming an Economic Sisyphean Task – Or, the True Path Back to Economic Prosperity” http://goo.gl/YzSfQ; (2) “The Real Cause of the Current Economic Crisis and a Suggested Solution” http://goo.gl/9y8Uf.
It is “real market process”."

Transportation and Communication are the two systems that have historically changed economic opportunities for individual members in societies. Right now, communication technologies can very well be so far advanced, in a way to cause extreme imbalance of opportunities at grass-roots levels for internet startups etc. to allow profits in small-scale entrepreneurial action. Reality is showing us that actually churning money activities for profits on the grass-roots level is minimal. Transportation organizational opportunities to supply and transport goods immediately for grass-roots profits by entrepreneurs may require deliberately fragmenting monopolies that have developed into only allowing profits for relatively few and extremely large corporation operations. Cost and proft margins are being tightened supposedly everywhere. Or perhaps, corruption of the real processes is being disguised on some levels, somehow.
Today are we really watching a type of predatory plundering that is creating certain profits for certain corporations or people? (Please don’t politicize the words that are describing the process, I’m just trying to focus on a type of process that can and is producing profit, especially in financial services resulting from real trade activities.) However, many of us are caught in a dilemma of being creative, having good ideas, recognizing opportunities exist, etc. while not really having access to any tools to actually materialize our ideas or physically change or do anything to manufacture any products independently etc. Are Angel investors really having significant impact, to generate jobs, and profits in micro-economies? Who is investing in what kind of companies and how is profit being generated? Is community infrastructure benefiting? Maybe nanotechnology development and transportation infrastructure changes could really be a key to develop practical changes to supply-chain limitations. Transportation issues pose risk and cost factors that definitely affect manufacturing and exchange of any goods for any money. Monopolies are also an important concept to examine with all the ramifications and political necessities that can affect so many people.
What if we are only dealing with “rolling financial crises” that allow oligarchs, or plutocrats, etc.(whatever labels any one wants to use) that really causes large population groups to be impoverished and left to survive and scramble for survival in more and more failed states? What is effectively being created? It looks to me that a regeneration of modern day enslavement of large population groups can be a very ugly and very real issue. Is enslavement isolated to only a few failed states or is enslavement actually prospering and becoming the new normal within failed states, as failed states become the new normal for nation? Who profits in the process?
To quote from original article: “success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise.” Are we willingly purchasing corporate goods? Who is bearing the results of corporate losses? When? Where? How?
Who is free to purchase what? Who is going out of business?
What new businesses are being created and are really profitable?
Who creates, who profits, who does what based on what statistics? Who has access to any and what kind of statistics?
Who is profiting from the “public good” and who cares? Who can care?
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Luke Ho-Hyung Lee Feb 1, 2012

So, the authors are insisting that it is “corporatism”. Simply, I do not agree with them, because I think there is something more important than corporatism. They have not considered this at all in their ruminations about the economy. What is that? That is the real market (or supply chain) process as the bloodstream of the real market or economy.

I believe the existing market (or supply chain) process for the real market has been too heavily efficiency-oriented in the Modern Information Age and no longer suitable for the modern information market. With the real market (or supply chain) process as it exists now, the market as a whole cannot self-generate enough businesses and jobs to keep the level of consumer spending at the desired level, no matter how powerful expansionary or stimulus economic policies are adopted.

I would strongly suggest you see: (1) “Overcoming an Economic Sisyphean Task – Or, the True Path Back to Economic Prosperity” http://goo.gl/YzSfQ; (2) “The Real Cause of the Current Economic Crisis and a Suggested Solution” http://goo.gl/9y8Uf.

It is “real market process”, not "corporatism".
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Philosopher's Beard Feb 1, 2012

Capitalism circa 1800 was deeply corrupt - that was a central part of Adam Smith's message. There was for example the travesty of slavery as a central institution of the global economy and the minor fact that the sub-continent of India was 'owned' by a private company. It was the intervention of democratic politics that ended those excesses. Yes there is a tension between democratic politics and the economy, but it is a productive and necessary one.

http://www.philosophersbeard.org/2011/01/politics-vs-economics.html
- Giovanni Campanella Feb 14, 2013
  
  @Philosopher's Beard: "Capitalism circa 1800 was deeply corrupt - that was a central part of Adam Smith's message. There was for example the travesty of slavery as a central institution of the global economy and the minor fact that the sub-continent of India was 'owned' by a private company. It was the intervention of democratic politics that ended those excesses. Yes there is a tension between democratic politics and the economy, but it is a productive and necessary one."
  
  Owning another human being is not an example of capitalism because it isn't a free exchange of goods, labor or services - it isn't free because the slave is denied the free exercise over the ownership of his or her body - the body being the rightful property of the person living inside it. Slavery existed because it was allowed legislatively and it wasn't understood by enough people that you cannot morally own another human being.
  
  On top of that, any government action that protects life, your liberty and what you justifiably own as property is a legitimate one and doesn't illuminate any faults with capitalism. If that were the case, you wouldn't be debating small government libertarians, you would be debating anarchists.
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Jake Tamarkin Feb 1, 2012

Perhaps the primary cause of corporate mismanagement is the principal-agent conflict. With fully two-thirds of the S&P 500 boards chaired by their CEO, one would be excused for believing that the fox is guarding the best hen-house. Meanwhile, too often it seems like the rest of the board acts like an incestuous rubber stamp, and shareholders have little recourse but to check out (no wonder stock returns are lagging profit growth!).

Once we get this much right, I'll join you on your anti-government crusade. Until then, your argument sounds like a tortured case of retrofitting reason to justify your ideology.
- Giovanni Campanella Feb 14, 2013
  
  No one is providing an anti-government position. The only thing being provided is the distinction between the merger of corporate and state power (corporatism) and the free exchange of goods and services with a government only big enough to protect your rights (capitalism).
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