THE FULL MEANING of globalization in the twenty-first century hit home with the first worldwide recession. Revealing again the intoxicating mix of profit prospects and bad judgment that has precipitated panics in the past, the world’s financiers constructed a rickety structure of derivatives and hedge funds based on American real estate mortgages. When housing prices tumbled in 2007, they brought the fancy new securities with them. Venerable firms went bankrupt, money became scarce, and millions of mortgage holders found themselves owing more on their houses than they were worth. Soon the trouble spread to the heart of the capitalist system, the financial center, where a liquidity crisis became one of solvency. Without a new bubble on the horizon to distract people from economic fundamentals, this strong dose of reality led to calls for a return to regulations and international cooperation to contain the damage.
Sometimes a cameo event acts like Tennyson’s “flower in the crannied wall” and reveals a truth about a larger phenomenon. After the 2008 sequence of financial meltdowns, panic on the stock market, and a freezing of the flow of credit, an old news story from Cleveland made more sense. The city council in 2002 traced a blip in foreclosures to predatory lending practices, like charging high fees and repayment penalties along with ballooning interest payments. The council passed an ordinance to stop them. Toledo and Dayton followed suit. This jolted Ohio banks into action. They contested the ordinance in court and lobbied the legislature, which obligingly passed a law disallowing such ordinances. The Ohio Supreme Court reversed an earlier favorable ruling and disallowed the ordinances. Subsequently, the U.S. Office of the Comptroller of the Currency stepped in and ruled that not even states could pass legislation directed at national banks.1 National and state power trumped local prudence. Nor was this an isolated example of legislatures’ disproportionate willingness to protect businesses from their monitors.
The history of capitalism doesn’t repeat itself, but capitalists do. The fact that rarely does anyone register surprise when a crisis arrives, even though few have done anything to prevent it, points to a quality that capitalism cultivates, an optimism that denies reality. The “spirit” of capitalism is that of the salesman who exudes confidence. When no one is in charge, and most participants are searching for new (and, if possible, easy) ways to make money, panics, crises, and meltdowns become inevitable. People worldwide can be counted on to seek out lucrative deals outside the patrolled precincts of regulation. When the good deals tank, governments rush in to fix what’s wrong, with varying results.
Before the world recession of 2008–2009, the market’s stumbles had grown ever more frequent and painful, starting with the crash of 1987, followed by the junk bond crisis of the late 1980s, the 1989 sinking of the savings and loan industry, the Japanese depression, the Asian fiscal crisis of 1997, the Long-Term Capital Management near default of 1998, the bursting of the dot-com bubble of 2000, the Enron and WorldCom debacle of 2001, climaxing with the rippling losses from the mortgage-based securities debacle in 2008. Mounting foreclosures, beginning in 2007, put the brakes on the subprime mortgage joyride, but the problems went deeper. China’s great savings had made borrowing cheap. American consumers apparently decided to let the Chinese do the saving while they spent in a grand style. At the same time, low interest rates drove the managers of capital to seek new ways to get more for their money, even if they had to invent fancy stratagems to do so.
The trauma began with the failure of Lehman Brothers, an event that did not stir the U.S. government to act. The incredibly tight “sink-or-swim together” union of world financial institutions became apparent. So much so that the government quickly moved to save in succession Bear Stearns, its sponsored residential mortgage companies Fannie Mae and Freddie Mac, and the insurance company American International Group, while negotiating a fire sale of Merrill Lynch to the Bank of America. Worldwide, governments acted quickly, if somewhat erratically, raising the hope that the lessons from the Great Depression of the 1930s and Japan’s “lost decade” of deflation in the 1990s had left a residue of wisdom. The downside of a twenty-year run of high returns on capital unmistakably manifested itself, starting in New York and spreading to the major financial centers of London, Frankfurt, Hong Kong, and Tokyo. An autonomous nation, Iceland, verged on bankruptcy, leaving institutions that had invested in high-interest-yielding Icelandic bonds the poorer.
Bankers, whose caution in the nineteenth-century world of J. P. Morgan had mediated market development, became as risk happy as promoters of the latest Silicon Valley start-up. Enticed by the possibility of greatly increasing earnings, bankers began competing with one another on the basis of service fees. Unlike their predecessors who financed railroad construction in the nineteenth century, they invested in the securities they created for their customers, throwing caution to the wind in order to make loans with fewer assets as ballast. Corporations replaced partnerships, allowing executives to take more risks without assuming personal responsibility. In all this they were greatly aided by the repeal in 1999 of the Glass-Steagall Act of 1933, which separated commercial from investment banks and prohibited commercial banks from owning corporate stock. The go-go spirit of the 1990s also kicked in.2
The 2008 financial crisis had two underlying causes roiled by a wild card. The first predisposing cause was set in place in the late 1970s, when a recession stirred interest in eliminating the regulations that formed a legacy of the Great Depression of the 1930s. Writers began depicting capitalist enterprise as a Gulliver tied down by a thousand Lilliputian strings from environmentalists, safety monitors, and the like. Business people argued that an economy became robust when its participants had the freedom to act freely and quickly. This era of deregulation, associated with English Prime Minister Margaret Thatcher and President Ronald Reagan, was completed in the United States in 1999 with the Gramm-Leach-Bliley Financial Service Modernization Act, signed into law by President Bill Clinton.
A boon to banks, brokerage firms, insurance companies, and highfliers generally, the law permitted banks to merge with insurance companies and liberated investment banks from many of the restrictions that applied to regular commercial banks of deposits. The statute gave bank customers privacy protection. Far more important, it freed from oversight such esoteric investments as the multitrillion-dollar market for credit default swaps, a tricky instrument that investors used to hedge their bets on various securities. Perversely, these were developed to minimize and manage risk, when in fact they encouraged speculators to game the system.
Credit default swaps were a form of insurance that people took out to balance a possible downside to their investments. But others could also contract for a CDS if they thought a certain enterprise would fail, even without having an investment. It would be very much like taking out an insurance policy on a neighbor’s house because his negligent smoking habits indicated that sooner or later the house would burn down. As an insurance company, AIG witnessed a rush of contracts from investors who wanted to insure their investments in securitized mortgages. With sophisticated computer models designed to estimate risk, this conservative firm plunged into the turbulent waters of collateralized debt obligations on its way to almost drowning. In a 2004 coda, the Securities and Exchange Commission unanimously voted to exempt America’s biggest investment banks—those with assets greater than five billion dollars—from a regulation that limited the amount of debt they could take on.3 The rest, as they say, is history.
While legislatures were busy deconstructing the regulatory system, an unusual amount of money was sloshing through global markets. Financial assets had been growing faster than real economic activity. High rates of saving among people in Asia’s developing nations, combined with governmental efforts to stimulate their economies, had considerably reduced interest rates.4 Unhappy with rates in the 2 to 3 percent range, the mavens of finance began thinking up ways to increase that return. A boom in housing in the United States gave them the opportunity they were looking for. They contrived a dicey array of new financial investments. Bank mortgages were divided up and turned into derivative securities, a term that refers to assets with value derived from other assets. Soon these securitized mortgages passed from commercial to investment banks, which were not regulated, as were commercial banks. Investment banks repackaged and sold the securitized mortgages to investors or other banks. Lots of other individuals and institutions, looking for places to park their money, bought them too. Once commercial banks had sold their mortgages, they were free to write new ones in what became a jolly round of growth for those in the know. The actual mortgage payments from homeowners sustained the value of the securities. Alas, bankers underestimated the risks, which grew exponentially as the number and dubiousness of the mortgages increased. Even worse, foreclosure proceedings in 2009 uncovered widespread negligence in record keeping when some foreclosers could not provide proof of holding the mortgage.
For those playing the real estate market, mortgages offered a great scope for leveraging. If one bought a million-dollar house with a down payment of $100,000 and turned around and sold it for $1.1 million in a rising real estate market, he or she could recover the down payment plus another $100,000, doubling the initial investment. Leveraging is possible when you gain title to some object with a partial payment of it. To be successful, there must be an appreciation of value. Real estate prices in the United States enjoyed such a rise, nearly doubling between 2000 and 2006. Aptly called casino capitalism by Ralph Nader, mortgages showed the way toward securitizing any form of credit from automobile payments to credit cards.
Wanting to keep the good times going, financial institutions began issuing mortgages to people with risky credit records or insufficient income to make their payments. Banks and savings and loan companies lured customers with low down or no down payment offers. A whole new market for leveraging was tapped. The Federal Reserve Bank’s downward pressure on interest rates also made home mortgages more appealing. Both Democratic and Republican administrations promoted homeownership as sound public policy. These additional buyers drove house prices up even higher. As more and more people with subprime credit records took out subprime mortgages, the risk grew exponentially. During the heyday of the housing market, many homeowners used the rising value of their property as a bank. Sharing in the financial sector’s optimism, they took out home equity loans on the enhanced value of their houses. With these, they could pay for a child’s college tuition, start a business, buy an SUV, or landscape the new home.
The unintended consequences of perfectly rational, individual decisions can help explain how the world’s financial centers skidded into a trough in 2008. When Asian families decided to build nest eggs after their 1997 financial crisis, they didn’t intend to stimulate American consumption with the cheap credit their savings created. When Republican and Democratic administrations endorsed homeownership as sound social policy, they didn’t intend to set off a race among bankers to issue subprime mortgages so they could securitize them for eager investors. When CEOs at investment banks and hedge funds paid their star traders handsome year-end bonuses, they intended to reward and encourage superior performance. Totally unintended was the creation of a testosterone-driven competition so intense it kept at bay second thoughts, looking at the larger picture, or listening to naysayers. The notion of unintended consequences doesn’t lend itself to the mathematical models favored by economists, but the freer the market system, the more widespread are individual initiatives that pull along in their train the unintended consequences of their actions. And when they converge, as they did in 2008, they can create unexpected consequences.
Risk taking is integral to capitalism, but it plays differently in the financial sector than it does in technology. Banks, like utilities, contribute most when they are dependable and efficient. Instead bankers became as ingratiating as used car salesmen. The cold shoulder they used to give to incautious borrowers turned into a warm welcome for all comers. Of course, if they never lent to risk-taking entrepreneurs, capitalism would suffer. Balancing stability with innovation eluded banks in the first decade of the twenty-first century. Investment banks even started buying the asset-based securities that they were selling to others, with disastrous results. Some say strategies of risk taking changed for bankers when their institutions went public, allowing them to bet on other people’s money instead of their own. Year-end bonuses on performance furnished a further incentive to expand operations and became a major bone of contention in the public realm after the financial institutions came begging for government help to stay afloat. Those who didn’t work on Wall Street considered bonuses running in the millions obscene. Nor were they impressed with the financial wizards’ logic that they should profit handsomely from what they were able to sell for their company—or “eat what they killed,” in insider lingo. They remained mute about what should be done when the kill roared back into life and brought their firms near bankruptcy.
We might dub this the world of virtual investment whose material reality was a stream of electronic messages issuing from some sixty thousand terminals around the world. Technological advances made possible the increasing volume of financial transactions. There was also some double duping, when mortgage salesmen encouraged people to assume mortgages they couldn’t afford and financial firms talked pension fund managers and municipalities into buying their asset-backed securities without sharing information about the risk.
During the last ten years, financial services grew from 11 percent of our gross national product to 20 percent. Some otherwise sober men and women were able to leverage at a ratio of 1:30 for money invested, spreading risk without tracking it. The really daring investor would nest several forms of leveraging into a single investment vehicle. More damaging to the nation in the long run, physicists, mathematicians, and computer experts were drawn away from their original work to join the high-earning financial wizards. At least 40 percent of Ivy League graduates went into finance in the early years of the twenty-first century. With million-dollar annual incomes commonplace, Wall Street formed a tight little winners’ circle where all the incentives were thrown on the take-more-risk side and positive disincentives discouraged caution or even candor.
Those working for the Securities and Exchange Commission feared offending the leaders of the major firms they hoped would hire them later. Credit-rating agencies like Standard & Poor’s and Moody’s were similarly disinclined to lower the ratings of bank customers that took on too much risk. In retrospect, people who were making decisions affecting the economies of dozens of countries were sealed into a cozy club of high-fiving camaraderie where there was no tomorrow.5
The wild card in this scenario was psychological and endemic: the feeling of confidence that encouraged people—in this case institutional investors and hedge fund managers—to purchase the new asset-backed securities. In retrospect, their misperception of the risk seems bizarre. Pretty mindless during an upswing, optimism is contagious. Working the other way around, rumors and foolish public statements can cause a precipitous fall in confidence just about as easily as reports of disappointing earnings or turbulence in foreign markets. Whether upbeat or downbeat, these responses from traders and investors introduced a degree of risk that impinged on the whole global economy because of the easy access the world’s investors had to these “good deals.” One could add that the United States benefits from this selective blindness because of the world’s indifference to the country’s annual seven-hundred-billion-dollar trade deficit.
A Nobel Prize–winning chemist named Frederick Soddy had some ingenious observations to make about debt when he turned from chemistry to economics during the great bubble of the 1920s. People buy debt (i.e., lend money) because they want to realize more wealth in the future. The rub is that no one knows what will happen in the future. If I lend a farmer $100 in the expectation of getting back $110 when the harvest comes in, I am banking on good weather and no visit from locusts. If there are in fact more claims upon future wealth than can be redeemed, then some of those with claims on future earnings are going to lose out. The market in futures not only is volatile but must always cope with this uncertainty.6 And in the case of the securitized mortgages, the number of claimants grew exponentially.
The American Dialect Society voted “subprime” the word of 2007.7 During the euphoria over rising housing prices, the lexicon of global finance migrated out of Wall Street into daily newspapers, where you could find references to option adjustable interest rate mortgages, collateralized debt obligations, interest rate swaps, swaptions, and special purpose vehicles! Hedge funds grew fivefold in the first decade of the twenty-first century, attracting managers of pension money, university endowments, and municipal investments, all now suffering with the retraction. Those people who ran hedge funds, established derivatives, and created option adjustable rate mortgages had built a house of cards with mortgage paper. Their initial success with rising house prices bred the “irrational exuberance” noted in an earlier bubble by the former Federal Reserve Bank president Alan Greenspan, himself a somewhat repentant opponent of regulation. Ignoring their conflicts of interest, credit rating agencies gave artificially high ratings to mortgage securities. Thus even those created to assess risk failed the system.
When house prices started to fall in late 2007, the securities they backed fell too. Like a boa constrictor, deleveraging—i.e., paying for securities bought on the margin—squeezed all along the financial line from bankers to insurers, hedge fund investors, and their institutional and private customers. Liquidity dried up; money became tight. Even legitimate business borrowers couldn’t get loans. So bad were things that Goldman Sachs and Morgan Stanley sailed into the safe harbor of greater regulation and scrutiny by becoming commercial banks and leaving the shark-infested waters of investment banking. Of course they also gained access to government aid and lending sources.
Financiers who wanted a free hand are not alone responsible for the 2008 crisis. It also took public officials, from city councillors to members of Congress, mayors to presidents, to dismantle the regulatory system that had monitored financial firms. The U.S. government went from being a more or less neutral umpire of economic relations to an advocate of business interests. Changes in political campaigning promoted the collusion between economic and political leaders. With the emergence of television as the principal medium for election campaigns forty years ago, money—never negligible—took on a new importance. The expense of TV spots threw officeholders and their challengers into the arms of business interests. As slick Willie Sutton once explained, he robbed banks because that’s where the money was. And that’s why candidates of both parties went to the wealthy to seek contributions.
A toxic combination of greed and need—greed on the part of the high-flying engineers of finance and need from politicians to pay for their ever more expensive campaigns—made officeholders beholden to business executives who wanted government off their backs. The free market ideology dominating public discussions gave cover to those in government. Even so, after the passage of the Gramm-Leach-Bliley Act, some legislators still tried to limit the trade in derivatives. They accurately predicted the cascading effect of any downturn. Representatives proposed measures to combat predatory lending, like those the Ohio cities had passed, but the leave-enterprise-alone advocates blocked their efforts. When regulation has been discredited as it was in the 1980s, even those regulatory agencies left intact become faint of heart and inattentive.
Complacent administrative officials and legislators defended the relaxing of regulation on the ground that American bankers would have taken their money out of the country and built their securitized mortgage empires elsewhere. Competition, the elixir of capitalism, worked inexorably to promote risk taking. When more cautious bankers saw their rivals riding high, they wanted to do the same thing. Raining on a parade has never won popularity. Shorn of oversight, the banks’ trade in credit default swaps ballooned from $900 billion in 2001 to $62 trillion in 2007.8 Hedge funds grew in one decade from $375,000 to $2 trillion in 2008, plunging losses into the trillion-dollar column. The figures are hard to grasp, but not the dimension of the problem. Nor should consumers be let off the hook, if blame is to be assigned, for many Americans demanded easy credit and cheap mortgages.
As befits a litigious people, homeowners began sueing their banks, mortgage lenders, Wall Street banks, little banks, big banks, and those same banks’ loan specialists. Even municipal governments got sucked into buying high-yielding shares of securities backed by mortgages, subprime and prime. Some as far away as Australia took investment banks to court for hiding the risks of the securities that they were selling. Such a respectable firm as General Electric, expanding into financial services, got hit with a suit from an insurance company for following fraudulent standards. Recent Supreme Court rulings have favored Wall Street, but that won’t stop the march of people into lawyers’ offices to seek retribution, if not full compensation.9
Housing prices did not need to decline very much before many homeowners owed more on their mortgages than their houses were worth. By 2009 more than one-quarter of all homes with mortgages—about thirteen million properties—were “underwater” foreclosures averaged five thousand a day! Investors lost upward of four hundred billion dollars. Mindful that the Japanese government had not acted swiftly enough to stem the losses in its 1990 depression, the U.S. government struggled to get a handle on the recovery process and to speed the return of confidence. The Federal Reserve Bank and the Treasury Department at first offered seven hundred billion dollars for “troubled assets.” “Bailout,” with its strong suggestion of a sinking boat, lost favor as a term. Soon people were talking about stimulus, followed by promises of recovery. The new administration of President Barack Obama put in place the largest public works program since the Great Depression. All official efforts aimed at convincing ordinary market participants that the worst was over, or, as Franklin Roosevelt’s 1932 campaign song had it, “Happy Days Are Here Again.”
Meanwhile the long-brewing decline of the American automobile industry led to calls for infusions of taxpayers’ funds. General Motors and Chrysler had run out of money, and Ford was barely limping along. The carmakers’ intractable problems challenge one of economists’ strongest convictions: that we can rely on the rationality of market participants. Enlightened self-interest should have whispered into the ears of Detroit leaders back in the 1970s that something was amiss when Hondas, Nissans, and Toyotas made their American debuts. Of course most people in Michigan “buy American,” so they didn’t see those natty new cars on the freeways of California and New York. Being large enough to control a whole region, the automakers’ CEOs could indulge themselves in pipe dreams, responding to short-run tastes for gas-guzzling SUVs while exporting their innovative designs to showrooms abroad. In 1989 Michael Moore’s popular film Roger and Me, mocked the studied myopia of GM’s CEO Roger Smith after the layoff of fifty thousand auto workers in Moore’s hometown of Flint. And there must have been regular reports on their dwindling market share. Such willful ignorance can’t last forever. When all the sick chickens finally came home to roost in 2009, when both General Motors and Chrysler went into bankruptcy.
Among the woes of the heads of General Motors, Ford, and Chrysler, which employ 75 percent of the nation’s some three hundred thousand auto workers, are their escalating payroll costs. When they went to testify before Congress in 2008, the head of the United Auto Workers of America went with them. This troubling entanglement of caring for present and retired workers is ironic because their predecessors had opposed national legislation for health insurance. Proposed in the 1940s, a bill would have funded the universal care through the Social Security Administration. Fearing that such a provision would undermine workers’ loyalty, Detroit’s leaders worked against the measure, pushing unions to fight successfully for their members’ benefits at the bargaining table.10 The fact that workers in American plants making Hondas and Toyotas didn’t earn the equally high wages and benefits of Detroit’s workers rankled with members of Congress and their constituencies. In an earlier time, the public might have wondered why those other workers weren’t doing better. Three decades of slow wage growth and the success of low-wage employers like Walmart had effected a marvelous change in perceptions.
To counter these attitudes, labor leaders have awakened to the need to rebuild the solidarity that once existed between the public and organized labor. With the goal of representing a third of the American work force, as it did in its heyday in 1950, the AFL-CIO began a campaign explaining how a strong labor movement energizes democracy and keeps alive a moral commitment to living wages and decent working conditions worldwide. The facts on the ground back it up: Between 1978 and 2008 CEO salaries went from levels 35 times those of an average worker to 275 times. Nor have corporate heads been generous to their workers, as Henry Ford once was. Although the rate of American productivity has risen since 2003, wages have not, and benefits have declined in value.
Organized labor backs the Employee Free Choice Act, which Republicans blocked with a filibuster in the Senate in 2007. EFCA would protect workers’ right to organize their plant once a majority of them had signed cards expressing their intent to form a union. Statistics indicate that one-quarter of all employers have illegally fired at least one person for union organizing, so unions consider EFCA essential to organizing new plants. Reports of flat wages coupled with escalating incomes in the top tenth of the top 1 percent of American earners have brought much of the public back to the union side. The disgrace into which laissez-faire economic theory fell during the fancy-free years that opened the twenty-first century bodes well for organized labor too, but it will have to contend with the countervailing force of shuttered shops and the monolithic opposition of American business.11
Missing warning signs of disaster apparently is a human trait found in capitalist and noncapitalist countries alike. In his study Collapse, Jared Diamond showed that failed societies invariably clung to their value systems long after they were dysfunctional.12 The insistence that the market has its own self-correcting mechanism may be a fresh example of an old human failing. It certainly sounds now like whistling through the graveyard. Does each generation have to learn its own lessons? It would seem so. The post-World War II fiscal arrangements ushered in a quarter century of widespread prosperity in the capitalist homelands. Maybe it can be done again. The French president and the prime minister of Great Britain have called for a Bretton Woods agreement for the twenty-first century to rebuild the financial foundations of the world economy. For them evidently the accords hammered out in New Hampshire in 1944 represent a symbol of a shared appreciation of the clout of cooperation.
Although the center of the subprime mortgage debacle was in the United States, the meltdown of credit credibility spilled over the entire globe. The trouble brewing in lower Manhattan quickly reached cities and towns across the nation, not to mention foreign investors who took a ride with America’s financial Evel Knievels. Even America’s cockiest center of enterprise, Silicon Valley, felt the cascading effect of the credit crunch as orders dropped off, no small matter considering that computer and software sales account for half the capital spending of businesses in the United States. Normally awash in venture capital, the technology sector saw that dry up some as well.
When people who had borrowed against the rising value of their houses in the frenetic days of the real estate boom stopped spending, it hurt big and little exporters who counted on the dependable American consumer. Latin American leaders, often critical of the Goliath to the north, engaged in a bit of schadenfreude until they saw the looming danger in their own countries from collapse of the housing market in the United States. Like a booby trap with a trip wire that catches a walker unawares, this financial blowout caught everyone. Only India, saved by its conservative banking traditions, escaped relatively unscathed. The unexpected fragility of these securities—an oxymoronic term—that American banks were pushing worldwide left leaders of many emerging economies angry at the perpetrators of the debacle.
Globalization got another notch in its belt with the first worldwide Ponzi scheme, one that came a cropper at the end of 2008. Named after Charles Ponzi, the notorious swindler of the Roaring Twenties, such flimflams rely on enticing ever more people to invest in order to pay off those who have already bought into the fake firm. Buoyed by strong earnings, the shareholders then become informal salesmen of their remunerative investment. Bernard Madoff, a respected Wall Street financier, acknowledged that he had bilked fifty billion dollars from his clients, selling shares in one of his firms across a large swath of the world, including the United States, Canada, Europe, Middle Eastern countries, and China, before he ran out of new prospects.13 So indifferent to its charge was the Securities and Exchange Commission that despite an insistent expert who told it repeatedly that the emperor Madoff had no clothes, it refused to investigate.
The dominance of the financial services industry in the last fifteen years is a classic case of the tail wagging the dog. Financial institutions developed initially to facilitate enterprise, but at the end of the twentieth century they became venture capitalists themselves. Stock markets, begun more than two hundred years ago, have acted as mediators between the public and publicly traded companies. Once the preserve of the wealthy, the stock market now serves thousands of institutions and millions of small investors. Banks too funneled funds into the production of goods and services. Power accrued to them. In the twenty-first century, financiers increasingly intruded into the affairs of the companies whose stock they traded and whose loans they negotiated. This shift of authority from company managers to debt holders had a profound impact on corporate decisions because of an emphasis on immediate gains. Shareholders have benefited from this—at least in the short run—while many values associated with strong firms have cratered.
If the goals of financial capitalism differ too much from those of enterprise generally, then the public suffers, as became apparent in 2008. When President Dwight Eisenhower chose General Motors CEO Charlie Wilson to be secretary of defense in 1953, Wilson made headlines by saying he thought: “What’s good for the country is good for General Motors, and vice versa.” Wilson got pilloried for that remark, made at his confirmation hearings, but there was sense in what he said. Then America’s automakers were paying auto workers good wages and making consumers happy with their cars. The enormous profits to be made from the dexterous leveraging of paper transactions like mortgages pushed all the incentives into the short run, as have the complicated and generous CEO salaries of the early years of the twenty-first century. With hindsight, perhaps firms will put executive bonuses in escrow accounts to be paid after a spell of good years instead of a couple of flashy seasons.
The subprime mortgage collapse points up the difficulty of stabilizing the relentless revolution of capitalism because the past is a very imperfect guide to the future. Barney Frank, chair of the House Financial Services Committee, wryly commented that the surge of subprime lending was a kind of “natural experiment,” testing theories about the radical deregulation of financial markets.14 A whole new banking system materialized outside the safety net put in place in the Great Depression of the 1930s. Major concentrations of capital moved from conventional commercial banks that held deposits and lent money to investment banks that lent money through a veritable mangrove maze of lines of credit. Nor is this an anomaly. It is integral to capitalism that investors will seek new ways to make money, preferably free of regulation.
The time of reckoning finally arrived. The G20, formed in 1999 to give developing countries like Argentina, Brazil, Mexico, India, and China a chance to talk with the G7 industrial giants of France, Canada, Germany, Italy, Japan, Great Britain, and the United States met in São Paulo at the end of the tumultuous year of 2008. The finance ministers and central bank governors of the emerging economies called for cooperation in reconstructing the world’s financial architecture. They stressed that the “rest” was no longer content letting the West carry on irresponsibly. Another meeting in Washington followed quickly. Protocol at the White House state dinner gave some hint of the rest’s success. Luis Inácio Lula da Silva, president of Brazil, sat on President Bush’s right and Hu Jintao of China on his left. The times were again propitious, as they had been after World War II, for reaching international solutions to global instabilities.15
The new phenomenon of globalization made itself known in diverse ways, perhaps through the sight of a scarved elderly woman in Turkey using a cell phone or from TV images of Iranian youths dancing to American hip-hop or learning that some beautiful gerbera daisies were grown in Nigeria. For others, the recognition of our interconnectedness was more shocking and came in the form of a plant closing that supported a whole community like the Hershey Company in Hershey, Pennsylvania. As readers of this history know, global trade began in earnest in the sixteenth century with the arrival of spices from the East Indies and silver from the New World. Why then does globalization deserve our attention now? Because world communication and transactions have tied our lives together in ways unimaginable even fifty years ago. Governments have become more open, and their borders more porous. “The world is flat,” as Thomas Friedman announced, by which he meant that people, money, and goods moved freely across the plane surface of the globe.16
Going well beyond telegraphy and telephones, the Internet links individuals, firms, and institutions instantly with messages, tables, photos, and spreadsheets. The incorporation of Asian nations into world markets made cheap imports available to the world’s consumers. It also tied all these producers and consumers into the ups and downs of the international market. It hardly took the financial meltdown of 2008 to demonstrate that when the United States (or Germany or China) sneezes, the rest of the world gets a cold. The first decade of the twenty-first century also brought a lot of hype about global integration, typified by a two-page newspaper advertisement that IBM ran. Sharing the globalphilia of Friedman, the ad expatiated on the theme of a smarter world where sensors carry intelligent messages to cars, appliances, cameras, roads, pipelines, livestock, and medicine! To stress the point, IBM described its “holistic management approach that promotes business effectiveness and efficiency while striving for innovation, flexibility and integration with technology.”17 But intelligence and communication are not enough, as the recent financial fiasco demonstrated. Wisdom is required too.
Economists are now talking about something called moral hazard, a term that refers to the dangers of giving people the wrong incentives. It’s a moral hazard for the government to bail out banks because bankers in the future will take foolish risks if they conclude that they will not have to pay for them. It’s reminiscent of the expert who claimed that “capitalism without bankruptcy is like Christianity without hell.”18 A systematic means of controlling sin apparently is as necessary in economics as it is in religion. The phrase “moral hazard” itself suggests that market participants now realize that capitalism has an essential underpinning in social norms. People may say that virtue is its own reward, but most of us find that an insufficient return. We prefer vacationing, but because we must eat or we covet a higher standard of living, we are willing to work.
So there is something of a disconnect between what the market requires and what its participants want. We didn’t see this for a long time because we as a society have been committed to the moral benefit of hard work. Only recently has an ethic of pleasure seeking become prevalent. And that’s the problem. The free enterprise economy depends upon competition, sensible choices, and widely shared information, even as it rewards people who corner a market, trick others into foolish bargains, and use secret information to their own advantage. It’s just possible that the real moral hazard today is that capitalism is battening off an older ethic taught by parents and teachers when there was an adult consensus about how to rear children to behave responsibly. If this set of values fades altogether, we will be bereft of the moral base of capitalism, which depends upon men and women’s meeting obligations, managing resources prudently, valuing hard work, and treating others fairly.
The 2008 financial disaster was severe enough to reinstate regulations and a sense of caution among officeholders. It also changed the conversation in capitalist countries, and not a moment too soon. What is needed more than a new financial system is a legal overhaul. Capitalism can work pretty well to deliver on its promise of progress and prosperity when its participants have secured, as one expert detailed, “an effective legal system, a trusted judiciary, enforceable contract law, a disinterested civil service, modern bookkeeping, accurate property records, a rational system for tax collection, a successful educational system, clean police, clean politicians, transparent campaign financing, a responsible news media, and a widespread sense of civic responsibility.”19 Capitalism generates the wealth to pay for these social benefits. Whether the political will exists to secure them is now the question.
Capitalism’s History Recapitulated
The origins of capitalism’s flaws can be detected in its history, when things commercial moved from the periphery in premodern aristocratic societies to form the center of modern ones. Bargaining was as old as human association, but it had always been contained within the interstices of societies largely run by warriors. When Europeans traversed routes to the Indies, they found exotic Asian ports where they could buy silks and spices. Going in the other direction, they encountered a new world with two continents bracketing dozens of tropical islands. Lucrative trades sprang up, demonstrating that Europeans already had impressive savings to invest in foreign ventures.
The aristocracies that supported European monarchies in the sixteenth century looked down upon merchants because of their absorption with making money, but they liked the challenge of expanding European influence and power. They believed unquestioningly in human inequality. Some few were born to head diplomatic missions, serve the law or the church, advise kings, and lead armies; the remainder were the hewers of wood and drawers of water, not to mention the farmers and servants who lived lives of drudgery. As an urban group merchants fell somewhere in between these categories, respected for their skill and money but demeaned for their lack of distinguished family ties.
In the seventeenth century, in England at least, attitudes began to change as buying and selling things became more prevalent. When the primitive agricultural system yielded to improved techniques for raising food, larger harvests brought down food prices. At the same time, many of the farmers’ children were no longer needed on the farm and moved into rural industries or left to pick up city trades or thicken the distribution networks of England’s unified market. In the eighteenth century practical applications of scientific knowledge succeeded in getting steam to drain mine pits, power factories, and drive locomotives. These changes ran athwart the mores embedded in the laws, religion, and popular lore of the day. Proponents of economic developments marshaled arguments to justify the novel practices. They depicted the incipient capitalist system as natural, liberating, progressive, and rewarding. Once they secured belief for this view, capitalists had the ideological punch to disrupt settled communities and their values.
Scarcities continued to characterize Western societies in the eighteenth century because population began to grow in the 1730s and 1740s. Still, in cities buyers found objects of delight and usefulness, from maps and travel books to jewelry and clothing decorated with precious stones; exotic foods like sugar, coffee, and cocoa; and fascinating contrivances like eyeglasses, scientific instruments, and pocket compasses. The exultation at human inventiveness that had become part of the spirit of capitalism started to take hold of the public imagination. Invidious comparisons between the West and the rest of the world entered public discourse.
After the end of the seventeenth century, there were no more famines in England, and they became less severe elsewhere in Western Europe. The dreaded plague, which had revisited Europe with regularity since the Black Death of the fourteenth century also made an exit after its 1723 visit. That sense of life’s precariousness that justified the invasive authority of fathers, magistrates, and kings would now slowly fade. Calls for greater political participation, religious toleration, and personal mobility grew louder as market participants acquired, or seized, the freedom to move outside the skein of social prescriptions. Short-term individual goals replaced old worries about the future. The aggregation of such decisions set prices and rates without anyone’s taking responsibility for their consequences.
The celebration of the individual inventor—homo faber—gained ground as the initial experiments with steam turned into a revolution in production processes. The industrial era began in earnest in the nineteenth century, gaining momentum as it moved out from England to France, Germany, and the United States. By the end of the century the magic of the steam engine had been overtaken by the wizardry of electricity. Chemistry joined physics as a handmaiden to industry. Eager investors promoted a sustained search for new inventions, which led in time to organized research. This meant a constant delving into the qualities of the natural world and its elements, as they studied reactions to heat, cold, stress, compression, tension, and gravitational force. This work infused a wondrous quality into the material universe as it was replacing an earlier spirituality. Some called it the disenchantment of the world. While this constant bombarding of nature with questions began with natural philosophers, inventors came right behind them to commercialize their findings and diffuse their impact.
The social world that wound around the repetitions of each year’s seasonal tasks and holidays morphed into one of constant variation. Change, always something to be feared, acquired a Janus-like quality. It could actually bring improvements; it could also obliterate long-standing ways of being in the world. To keep the economy developing required men and women to take risks, think innovatively, and accept changes that made their lives very different from those of their parents. New too was the idea of people’s earning their place in society regardless of family origins. Social mobility, which seems so ordinary a concept to us, was an abomination in a society structured around the statuses of nobility, gentility, commoner, and servant—the dependent many and the independent few.
The ambition that played an essential role in inducing people to be more productive could be sustained only if there was room on the higher rungs of the social ladder. While statuses had supported stasis, striving promoted expectations of moving up and fears of moving down or being pushed there. Once uprooted from the old agrarian order, men and women learned crafts like shoemaking, worked in construction, formed the human ligaments of commerce, or were drawn into factory work. Two new classes emerged to take the place of the old ranks: those of workers and employers. Working with your hands was further distinguished from working with your brains. While these positions were open to all claimants as the old statuses were not, social mobility had its limits. But geographic mobility increased as farm people found work in rural industry and then in the cities. The more adventurous left Europe altogether to find a place and perhaps a fortune in South and North America. Capitalism benefited enormously from its association with political freedom, even as it created new forms of control. Factories replaced the home and the shop as work sites. Those who built, ran, and invested in them acquired power. Yet they held fiercely to the ideology of individualism, independence, and human rights that accompanied their rise to predominance.
Capitalist ideology battened off the concept of human nature. It specified rights as universal that prompted those dispossessed to agitate to enjoy the fruits of their labor and liberties. Yet the legal traditions of Europe distinguished sharply between the rights and privileges of masters and servants. Employers tried to maintain these old legal advantages, even as their employees saw themselves as the bearers of rights. Domestic consumption also became more important to capitalist economies. The supply side warred with the demand side. Producers wanted to keep wages low and hours long when making goods, but they needed to have customers well paid and interested in shopping when it came time to sell those goods.
The prospect of getting rich unleashed a rapacity rarely seen before in human society. Great wealth was to be made importing tropical plants like sugar, tobacco, tea, and cocoa to European consumers with purchasing power and addictive tastes. Rather than import these products from Asians and Africans, Europeans organized a system of plantation agriculture to raise these appetizing novelties in the New World. This trade was made possible because they could buy slaves by the millions from Africa and ship them to the Caribbean islands and Atlantic coasts of North and South America. The European exploitation of vulnerable people began with slavery in the sixteenth century and moved to on-the-site exploitation in distant countries, especially Africa in the nineteenth century. Then Germany and Italy joined Spain, Portugal, Great Britain, and France in building empires with capital investments directed to developing their colonies’ natural resources. In treating colonial laborers and their societies as so many aspects of production, capitalists dehumanized their relations with the people outside their continent.
While the belligerent rivalries of Europe were very old, the wealth generated by capitalism changed the terms of engagement in the twentieth century, enabling the countries to sustain hostilities for years. When war broke out in 1914, no one expected this outcome. Most people thought it would end in months; instead it dragged on for four bloody years. Since the competition was in part over imperial holdings, far-flung colonies were dragged into the conflict. Two decades after World War I, the Second World War began. Perhaps no greater contrast has existed than that between the sense of accomplishment at the opening of the twentieth century and the despair that reigned when the Second World War ended in an explosion of ferocious energy in 1945.
The year 1900 opened with the marvels of the automobile, electric power, and reconfigured city centers dotted with skyscrapers. Life expectancy got longer, and public health measures checked the spread of diseases that had once ravaged populations. Four decades later war had killed millions of men and women, expelled millions of others from their homes, and utterly demolished thousands upon thousands of city blocks. Men and women who had been young for the First World War entered middle age chastened. Hard times promoted serious thought. After a second world war, capitalist nations recognized the need for cooperation and created templates for international organizations of lasting value.
Between the two world wars, Europe suffered a massive decline in commerce. Known as the Great Depression just as the First World War was originally known as the Great War, this sudden deceleration of the capitalist tempo left experts in a state of shock. Dozens of economies fell into shambles. Despite efforts at ameliorating the loss of jobs and savings, most government policies fell short. It took the massive spending of the Second World War to get the capitalist system humming again, a result that vindicated the theory of John Maynard Keynes. Keynes argued that private investments alone could not pull economies out of depression. Like the biblical reference to seven fat years followed by seven lean ones, capitalism has oscillated between good and bad times, though with less predictability. The pent-up demand after World War II and the great wealth that the United States was willing to spend to help in the recovery of Western Europe and then Japan led to a golden age of a quarter century. A generation later a new matrix for recession brought to an end the bounteous prosperity of the postwar era.
People began in the 1970s to take notice of the environmental toll taken by the accelerating levels of fossil fuel consumption, a fact driven home by the emerging power of OPEC, the association of oil-producing countries. Exercising something of monopoly power, OPEC voted a dramatic rise in oil prices, making noticeable several other problems in the homelands of capitalism. The most prominent was that for the first time rising prices did not signal a period of growth, but rather one of stasis or stagnation or, in the term of the hour, stagflation. The income equalizing of the postwar period reversed, followed by a four-decade-long stretch of the gap between low and high incomes in the United States. The mutually beneficial agreements among big business, big labor, and big government grew weaker. Organized labor, the beneficiary of depression despair and postwar growth, lost its purchase on the popular imagination. Stagflation also broke up the consensus that Keynesian solutions would work for all of capitalism’s problems. As labor power waned, that of employers waxed.
While capitalist nations were taking in these troubling facts, capitalism moved into high gear with a cascade of new technologies that brought in the age of the computer, the transistor, and the Internet. Schumpeter’s “perennial gale creative destruction” blew in with a new generation of ingenious devices. Every economic downturn gives critics a chance to draft obituaries for capitalism, but they underestimate the fecundity of capitalism in promoting ingenuity and turning novel prototypes into great cash cows.
Contemporary Capitalism and Its Critics
Gordon Gekko, the business antihero in the movie Wall Street, said that “greed, for lack of a better word, is good,” but few agree. Alan Greenspan, for one, pointed to the dangers of an “infectious greed” while speaking to Congress in 1997 as chairman of the Federal Reserve Board. Nor is greed the only thing that people hold against capitalism. I’ve made a little list, and it includes such charges as responding to short-term opportunities to the neglect of long-term effects, dispensing power without responsibility, promoting material values over spiritual ones, commoditizing human relations, monetizing social values, corrupting democracy, unsettling old communities, institutions, and arrangements, and rewarding aggressiveness and—yes—greed.20
Two other capitalist responsibilities have cast long shadows forward: intractable poverty and a deteriorating environment. While most of the world economies have been developing nicely, sixty years of effort by the First World to stimulate prosperity in many Third World countries has ended in disappointment. Experts are regrouping to test some novel approaches to animate stagnate economies and revive failed states. Thinking more broadly, some think it’s time to correct the flaws in capitalism instead of expecting another technological spurt to divert attention elsewhere. On the agenda for the new century is a multipronged effort to halt the environmental damage that a century of population growth, fossil fuel burning, water pollution, and various other human intrusions on the planet have caused.
Capitalism’s critics fall into three groups. There are those who are offended by the vulgarity and ugliness that the pursuit of profit promotes. They don’t like the surfeit of goods and the materialistic preoccupations of their fellow global citizens. This complaint usually comes from members of a social or academic elite. Others fight capitalism for the sins of a globalization that has enlarged the scope of the rich countries’ rapacity at the expense of the vulnerable poor. The multinational corporation is the bogey of the antiglobalization movement because it is seen as acting without social responsibility or sensitivity to human needs. Critics depict multinationals as octopuses whose tentacles cling to any profit-promising scheme, however dubious. A third group wants to work within the framework of capitalism to make the system more open, more fair, and as responsive to people as dollars. These latter seem the most interesting, if only because they are the most constructive in the fight against tenacious poverty and the misery and injustice that come with it.
Since the mid-1970s, developments in Korea, Taiwan, China, and India have lifted three hundred million people out of poverty. Millions of other men and women have moved themselves out of poverty by emigrating to more prosperous places.21 For example, half a million Romanian immigrants are now supplying the labor of the missing youths in an aging Italy. And Italy is not the only European country losing population. France, Germany, Spain, and Greece all are dipping below the replacement rate.
Elsewhere, Middle Eastern oil fields, construction work, and domestic service in cities like Dubai are pulling workers, mostly young and male, from India and the Philippines. A wave of immigrants from Africa pushes its way through the European doorway of Spain every week. The remittances these expatriated workers send back home run to the hundreds of billions, but the cost of separation from home is cruelly high. Perhaps if global communication had not shown these men and women how the West lives, they wouldn’t care, but they do know and want it. Still, without televised incitement, fifty-one million Europeans and two million Asians came to North and South America between the 1870s and 1930s, forty-nine million Southern Chinese and Indians migrated to Southeast Asia, and forty-eight million Russians and Chinese left home for Central Asia, Siberia, and Manchuria.22
The Problem of Poverty and Its Analyzers
Although “bottom billion” has not migrated out of Paul Collier’s study of that name, it’s an evocative label for those mired in poverty. Of the six billion people living today, one-sixth of them are in advanced capitalist economies, another four billion are in developing countries, and the remaining billion live in countries with stalled economies.23 World Bank figures for 2005 indicate that 1.4 billion people live below the poverty line, earning less than $1.25 a day. Unlike the backward, underdeveloped Third World nations of yore, the bottom billion today live in particular countries—fifty-seven in fact—that are treading water while the world around them is swimming toward development, even during a world recession. They are not the BRICs (Brazil, Russia, India, and China), which have won attention as “emerging markets.” Instead they are “failed states” that have begun to wear out the patience of philanthropists and test the imagination of aid organizations. Today more money is pouring into combating disease than into promoting economic change, evidence of a certain despair about development.
The fifty-seven states tethered to the bottom of the global economy are not like others in the world. They carry special burdens, which means that the conventional aid programs will not be effective with them. In his carefully analyzed study, Collier notes that the fifty-seven that have made no progress toward economic development have been plagued with bad governments, civil wars, landlocked locations, and, surprisingly, being resource rich. These conditions are often mutually enhancing. Natural riches like oil, ivory, or diamonds actually give the leaders of such countries abundant resources for bribery. The leaders don’t need to court their people because they have the money to steal elections or buy off opponents.24
Civil war is another trap. Estimating that a typical one costs sixty-four billion dollars, Collier recommends military intervention in countries like Afghanistan and Somalia to rescue them from this trauma. Arguing that such interventions should last at least a decade in order to lay the foundation for sound government, he wants the intervening organizations to clarify their intentions through an international charter. Collier views neither trade nor aid alone as being of much help to failed states. Change must come from within, he maintains, but domestic reformers will succeed only with assistance from the industrialized world. Nor does he place faith in globalization per se because the entrance of India and China has made it much harder for latecomers to get into the world marketplace. A former official with the World Bank, Collier recognizes the tyranny of the already tried and urges a revitalized debate on the subject.25
The best ideas for tackling poverty have come from people, like Muhammad Yunus, Hernando de Soto, Amartya Sen, Frances Moore Lappé, Walden Bello, Raj Patel, and Peter Barnes, who want to use the strengths of capitalism in new ways to enhance everyone’s life. This of course is what Marx wanted to do: build on the capitalistic base of wealth to provide for the entire society. He failed to foresee the danger of joining a society’s economic and political power through state ownership of property. This consolidation of power ossified programs and created a ruling apparatus impervious to popular will. Yet the issue that Marx addressed persists: how to make the riches generated by capitalism increase the life chances of everyone, including the bottom billion.
Quite obviously what the poor lack is the magic of capital or even access to capital. There are now some ingenious ideas for changing this situation. Muhammad Yunus has come up with one of them. Born in British India in 1940, Yunus earned a Ph.D. at Vanderbilt University, where he taught nearby for three years in 1969–1972. The movement to create an independent Bangladesh lured him back home, where he began teaching economics at Chittagong University. Two years later reality came rushing at him in the form of a national disaster. With a terrible famine raging in Bangladesh, “it was difficult to teach elegant theories of economics in the university classroom,” he recalled.26 His contact with the villagers surrounding his campus convinced him that many poor people could pull themselves out of abject poverty if they could just lay their hands on a little money. Yet without collateral they could only borrow from loan sharks who charged as much as 30 percent interest.
Seeing women who made bamboo furniture pay such usurious rates to purchase their bamboo that they could never get their heads above water, Yunus thought of extending loans without collateral. He started with $27 from his own pocket and lent small amounts to forty-two women. It worked; they paid back their loans along with a reasonable interest rate. He next set up the Grameen (it means village) Bank in 1976 with a government loan. In 1983 the bank became independent. It grew from the village to the district to the nation as a whole. Grameen is now owned by its borrowers except for 10 percent the Bangladesh government owns. By 2007 it was lending $6.38 billion to more than seven million borrowers, inspiring hundreds of other microlending start-up institutions worldwide.
The Grameen Bank approached more women than men because they were the more likely to spend their earnings on their families. Yunus also recognized the need for creating support networks among the bank’s clients. The bank wrote into their contracts mandatory weekly meetings so that groups of borrowers living near one another could gather to discuss their enterprises and share ideas. Participants in these groups also acted as coguarantors of repayment. The record of Grameen loans has been sensational with repayment rates above 90 percent. Radical leftists opposed the bank as an enticement into capitalism, and conservative clergy threatened female borrowers with denial of a Muslim burial. But nothing could stop the momentum of this effort. When he won the Nobel Peace Prize in 2006, Yunus donated half of his $1.4 million to start a company to make low-cost, highly nutritious food for the poor. Grameen’s Village Phone Project has brought cell phones to 260,000 villagers in fifty thousand villages, many of whom rent out time on them. These have become a boon to urban day laborers who can now telephone their list of prospects rather than lose precious time traipsing all over town looking for their next job.
Today there are literally hundreds of microlending institutions working with one hundred million families on all continents. The largest private bank in India, ICICI, wants to take microfinance to a new level by cooperating with the Indian government and another one hundred partner organizations. Inspired by Yunus’s example, ICICI has lent six hundred million dollars to three million customers. Its next project is to create a biometric identity card with one’s credit rating encoded so a person could access credit at Internet kiosks or bank branches everywhere with the press of a thumbprint. Meanwhile Yunus has teamed up with Mexican telecom mogul Carlos Slim Hélu to bring microlending to Mexico in a big way. A contender with Warren Buffett and Bill Gates for the title of the world’s wealthiest person, Slim has been a great benefactor. He has poured money into foundations, but as a monopoly owner of many sectors of the economy he is also part of the problem of Mexican poverty. He employs a quarter of a million men and women. Like Yunus, he has declared war on poverty and is turning his attention to helping fund Mexican health and education programs. “My new job,” Slim says, “is to focus on the development and employment of Latin America.” Critics ask if he intends to pay a working wage commensurate with the rest of North America.27
Yunus understands that one of the underpinnings of poverty is the widespread conviction that it is an ineradicable evil, like dying. “I firmly believe,” he says, “that we can create a poverty free world if we collectively believe in it.” In a poverty-free world, he says, “the only place that you would be able to see poverty is in a poverty museum.”28 Advocates for the poor are pushing against the same obstacles that eighteenth-century opponents of slavery confronted: acceptance of an evil because of its age and familiarity. It’s hard to be outraged by a condition like poverty that’s been around for millennia. That prevailing attitude once applied to slavery. Then, with remarkable suddenness, the idea of abolition aroused a cadre of reformers who successfully pushed against public complacency in less than a century. The legislature of Pennsylvania demonstrated in 1780 that an institution as old as the Bible could be abolished by statute. Northern states followed Pennsylvania’s example, most of them providing for emancipation gradually according to the enslaved person’s age.
“A house divided against itself cannot stand,” Abraham Lincoln said on the eve of the Civil War. But the same Lincoln quoted scripture to say that the poor will always be with us. Thomas Robert Malthus’s popular theory about population growth taught that poverty was the inescapable lot of the mass of men and women. Breaking through this penumbra of resignation has not proved easy. Almost two centuries ago the English radical William Cobbett denounced the cruelty of jobs that kept sober and industrious workers fully employed but did not pay them enough to feed their families. Cobbett’s working poor have now attracted the attention of today’s activists who have succeeded in getting more than a hundred cities in the United States to pass living wage ordinances for their employees and those working for firms with municipal contracts.
Amartya Sen, like Yunus, was born in what has become Bangladesh, but he emigrated to India after the partition of 1947. Sen has spent his adult life teaching at Cambridge, Oxford, and now Harvard. Awarded a Nobel Prize in economics in 1998, he has been both a moral force and an intellectual heavyweight in the fight against poverty or, more precisely, against the misconceptions of what causes poverty and what might relieve it. Sen has used his highly mathematical scholarly work to open the best minds in economics to new ways of thinking about the poor. Again like Yunus, an earlier Bengal famine, that of 1943, profoundly influenced his thinking. Studying this catastrophe, he discovered that people starved not because there was no food but because they couldn’t buy it, owing to declining wages, rising unemployment, and faulty distribution.
Over time these reflections led Sen to develop the concept of social capabilities that are ends in themselves, not merely agents of economic development. More than social capital, they open up larger vistas. Education, for instance, may promote productivity, but more important, people have a broader perspective for making choices. Such capabilities could include women’s being free to discuss contraception, which he found increases the possibility of their society’s making it available to them.29 The basic thrust of Sen’s teachings is to see freedom as a positive force rather than discuss it as the absence of restraint. Governments must assume the responsibility, in his view, to make sure that their citizens have developed their potential. His emphasis has changed the way that aid and deprivation are evaluated. Many poor suffer because their governments fail to address their most basic needs, a neglect less likely to occur where freedom is respected, he says.
Hernando De Soto is another warrior in the fight against poverty. A Peruvian economist with strong connections to international banking and engineering firms, he now heads Peru’s Institute for Liberty and Democracy. The institute concentrates on a different way to empower the poor: get them legal title to the land they occupy and the outfits they operate. De Soto has drawn attention to the informal economies worldwide where people cultivate land, improve their dwellings, and run businesses without having title to their property. This means that they can’t use their property as collateral for loans, though the land may have been in their families for several generations. In De Soto’s view, people choose to operate in the shadow economy because getting licenses to do business and title to land is usually an onerous and expensive task. Through his institute, De Soto has been able to eliminate dozens of restrictive registration and licensing laws, helping more than a million Peruvians and close to half a million firms gain legal title to their property. In Egypt, De Soto has counted seventy-seven procedures devised by thirty-one different public and private agencies necessary to complete before one can register even a lease for land. Having gained favor with the World Bank, De Soto is now sponsoring similar campaigns against bureaucratic restraint in El Salvador, Tanzania, and Egypt.
The best way to open opportunities to the children of the poorest in any society is to invest in public benefits like good schools, health care, parks, clean air, unpolluted water, effective police protection, and public art. Only in this way can some of the inequalities of very unlevel playing fields be addressed. This takes money or, more precisely, revenue. Peter Barnes has a number of ingenious ideas for raising money within the capitalist system. Barnes was one of the founders of Working Assets Long Distance, an organization that combines telecommunications with liberal do-gooding like encouraging customers to buy worthy books, donate to environmental causes, and fire off letters to their congressional representatives. In Capitalism 3.0, Barnes explores the idea of “the commons,” the things that we share like air, water, ecosystems, languages, and cultures. He makes a good case for including science, technology, and legal arrangements in our concept of the commons. Arguing that we need to cultivate our common wealth to balance private wealth, he stresses that what we own in common is much greater than we realize because we don’t think about it, measure it, or exploit it.
One of our greatest shared assets is the legal instrument of incorporation. We own it; our legislatures dispense articles of incorporation; our courts adjudicate corporate issues. So why not exact some rent for this valuable privilege? After all, it enables firms to limit their liability and create a new entity, the corporation, endowed with rights and privileges. Barnes also proposes new institutions to manage common property, now rather sloppily run by various government agencies, subject to the whims of incoming administrations. Using the Alaska Permanent Fund as an example, he shows how it turned the windfall from state leases to oil companies into a public investment company paying yearly dividends to every resident. He sees the need for more of the already existing state land trusts. Nothing if not imaginative, Barnes imagines a public awakened to its great wealth starting an air trust, a watershed trust, a buffalo commons trust, a children’s opportunity trust, and an airwaves trust. Like most reforms, the ones that Barnes advocates require that people break out of conventional ways of looking at things. In other words, they must innovate the way private entrepreneurs do.30
Feeding the world’s hungry has inspired Frances Moore Lappé, Walden Bello, and Raj Patel, all of whom have written powerful studies of what’s wrong with our efforts. Patel, a sociologist, worked at the World Bank, World Trade Organization, and the United Nations, experiences that turned him into an outspoken critic of organizations promoting globalization. Lappé achieved fame as the author of Diet for a Small Planet, which sold several million copies. In 1975, she launched Food First to educate Americans about the causes of world hunger. Like Sen, she has emphasized that world hunger is caused not by the lack of food but rather by the inability of hungry people to gain access to the food abundance that exists in the world. Contrasting the “thin democracy” of mere voting with a “living democracy” enriched by participants’ wise choices of what to buy and how to live, she is a tireless advocate for the poor. Bello, a sociologist like Patel, has founded Focus on the Global South, a policy research institute based in Bangkok.
The spike in food costs has triggered an interest in the potato, whose virtues have been rediscovered. The United Nations declared 2008 “the Year of the Potato.”31 Its price has not soared like those of grain and rice because it is highly perishable and hence not suitable for export. It is favored more in the West than elsewhere, but food experts have been urging the world’s poor farmers to plant them. Harvests ripen in fewer days with less land and fertilizer. Chinese production of potatoes rose 50 percent between 2003 and 2005. The fact that two of the most powerful newcomers to the world economy, China and India, must grapple with the prospects of famines means that the challenge of getting food to the hungry will not drop out of their minds, as it does so easily among the well fed.
These imaginative thinkers are not without critics. Opponents of De Soto’s program to secure land titles for the poor say that this effort weakens collective tenures. The poorest squatters may even be evicted when others, less poor with better claims, register the land. They lament that the most able of the poor benefit to the detriment of the least able. The same argument could be lodged against microlending institutions like the Grameen Bank. Not all poor women have the talent to run their own operations even if reasonable loans were made available to them. This criticism calls attention to the fact that capitalism is a system of rewards. Those who do well in their market transactions prosper. In traditional societies, men and women inherited their status while command economies like those of the former USSR, Eastern Europe, China, and Cuba offered their people equality and guarantees of a certain standard of living. Neither traditional nor command economies were very good at creating wealth. They suffered through years of famine, even in the modern period, but they did respect shared human needs and put a brake on the incessant competition among their people.
There’s actually a phenomenon called Yugonostalgia which is an expression of yearning for the days of leisure, fun, and equality once enjoyed in the Balkan states of the former Yugoslavia before its disintegration in 1989. As one sufferer from Yugonostalgia explained it, “in Yugoslavia, people had fun. It was a system for lazy people; if you were good or bad, you still got paid. Now, everything is about money, and this is not good for small people.”32 Those committed to the capitalist West want to scream, “But what about medical advances, great universities, laborsaving devices, easy global communication, and longer lives that hard work and deferred pleasure have brought us?” Worldwide life expectancy went from forty-eight years at mid-twentieth century to sixty-six years in 1999, and it’s continuing to rise! Still, it would be nice to eat cake while keeping lazy ways too.
Signs of a Green Revolution
The Green Revolution is not philanthropic, but it is visionary in its plans for the future. Capitalism’s voracious appetite for natural resources, especially oil, has led to the unthinkable: human beings making the atmosphere of their planet permanently inhospitable. It’s a problem so profound that it was hard to take it seriously. The moment of truth and celebrity arrived when Albert Gore’s movie An Inconvenient Truth won an Oscar, his book of the same name a Pulitzer, and his personal efforts a Nobel Peace Prize in 2007. Acceptance of the possibly monumental consequences of environmental degradation has been made difficult by the fear that it could not be solved in the usual way with new techniques. Or could it be?
Even though doubting Thomases continue to resist the idea of global warming, the elevated prices of oil in the first decade of the twenty-first century gave venture capitalists the push to move ahead on the technological front.33 The Natural Resources Defense Council Action Fund has run ads explaining that “tackling global warming will generate a jobs program of epic proportions.” The U.S. Senate has a Climate Security Act on its docket. The Russians have pioneered nuclear-powered civilian ships as icebreakers in the Arctic Circle. Nuclear power, never abandoned in France, may get a second chance to replace oil elsewhere.
Rediscovering human power may also fight the battle of the bulging waistline. Municipalities in Europe are buying thousands of bicycles to place strategically around their cities for their citizens to pedal to their destinations. Most popular in France and Spain, sharing bikes joins old technology to new. Electronic cards and computerized bike stands let riders pick up and drop bikes with fees easily registered on their credit cards.34 The green industry is finding cheap space for making the component parts of their wind machines and solar panels in the closed factories of the Rust Belt. Builders in Germany are constructing houses that use virtually no energy for temperature control. Venture capital is accumulating for the next round of fuel innovation. Detroit is getting serious about making electric cars. The broad reform and recovery plan of President Barack Obama made energy independence for the United States one of its goals. The adjustments are going to be wrenching. Still, the augmentation of artificial energy is absolutely essential if we are to confine evidence of poverty to museums.
Some Closing Thoughts about Capitalism
Capitalism is not a unified, coordinated system, despite that suggestion in the word “system.” Rather it is a set of practices and institutions that permit billions of people to pursue their economic interests in the marketplace. There is no monolithic international corporate power, but many diverse players in the world market with, yes, a wide disparity in the influence that each wields. Among all the legitimate interests at play in the market are the less appealing opportunities to exploit legal loopholes, buyers’ ignorance, and unexpected windfalls. Because of these and without coordination from any center, capitalists can cause serious damage, as the subprime mortgage meltdown abundantly proved. And it will not be the last panic. The dot-com bubble and the housing bubble had their forerunners in the South Sea Bubble of the eighteenth century and the tulip bubble of the seventeenth century. It’s hard to believe that it won’t happen again.
Capitalism’s history suggests that democracy and capitalism might be decoupled because they generate values that are often in conflict. Democracy means majority rule with regular, contested elections; American and European democracies include the protection of civil and personal rights. Capitalism refers to investments in productive processes that may or may not rely on politically empowered participants. Capitalism is amoral while democracy is suffused with moral concerns about the well-being of the whole and the rectitude of leaders. Since capitalist growth depends upon innovation, and innovation upsets the status quo, the free market system regularly creates social problems that the government must address. “We, the people” then jars against “I, the individual.” Capitalism relies upon technological wizardry to maintain its momentum, but applying new techniques requires stability in order to secure labor, supplies, customers, legal protection, and even peace. Democracy and capitalism go together nicely, but they often act like the couple that can neither live with nor live without each other.
A good deal more fraught with tension is the relationship between capitalism and equality, but its roots are entwined. The concept of equality as a prime social good emerged out of the Enlightenment. It found expression in the closing decades of the eighteenth century in the American Declaration of Independence and the French Revolutionary slogan of “Liberty, equality, and fraternity.” Prior to that, the inequality that made some people dukes and others porters seemed as normal as the rising of the sun each morning. The Enlightenment thinking that undermined this acceptance of inequality owed much to capitalism, to the awe stirred by the human capacity to comprehend and harness natural forces for the benefit of all. The prosperity that the French espied across the Channel in England gave rise to the hope that the future would bring benefits, both tangible and intangible and previously unthinkable, to men and women, among them to be treated equally. Equality has remained more ideal than real, but an ideal with legs.
American economic leadership is now about one hundred and twenty years old. Since the middle of the 1880s the United States has had the world’s largest economy, accounting for 25 percent of the whole, except during post–World War II decades, when its share totaled 50 percent! It will probably remain twice the size of China for the next two decades. Unlike the other two great centers of wealth and dynamism—Europe and East Asia—the United States is geographically independent with vibrant market centers on coasts that front both the Atlantic and Pacific trade worlds.35Globalization, which the United States has pushed for at least a century, has succeeded spectacularly in creating many centers of influence and wealth. Perhaps because of this sponsorship, countries around the world consider America’s leadership essential to recover the momentum behind its once expanding prosperity. Americans too are learning that what’s good for a national economy is also good for a global one: competition, open access, and cooperative ventures. Nothing promotes growth more than having rich neighbors, as Adam Smith pointed out in his eighteenth-century classic Wealth of Nations.
Another eighteenth-century seer, James Madison, the so-called father of our Constitution, said something else pertinent to our times when he warned that the concentration of power in one branch of government is tantamount to despotism. The whole structure of the U.S. Constitution involves a balance of powers with additional checks on abuses (you remember those civics lectures on “checks and balances”). The danger of concentration is even greater if the two leviathans in our lives—the government and the economy—read off the same profit sheet. When government works hand in glove with the nation’s businessmen, you can be sure that the market’s own corrective mechanism will be disabled. Competition will then be muted, cronyism rampant, and inefficiency protected. The cash nexus between candidates for public office and wealthy donors, including labor unions, causes problems. Lobbyists have a field day with the quid pro quo of donations and favors. In the long run, raising small campaign donations from ordinary voters through the Internet may reduce politicians’ dependence upon big-buck contributions. For the near future the convergence of good intentions with close encounters with disaster might revive some of the market’s own self-regulating mechanisms. New and better regulatory systems are in the offing.
Schumpeter raised the possibility that capitalism was doomed because of its tendency to destroy the institutions that protect it.36 The corruption of auditing firms in the 2008 mortgage collapse would be an example, as would be the way economic fluctuations undermine stable families needed to inculcate the discipline and respect for law that is essential to the market working well. But Schumpeter failed to take into account the different experiences market participants draw upon when making decisions. Their opinions differed when he wrote in 1942 from those that participants hold today or will have in another half century. People do learn from their mistakes. There is no reason to think that societies won’t continue to modify and monitor their economies in pursuit of shared goals. A relentless revolution, yes, but not a mindless one.