Thursday, August 4, 2011

Understanding the paradox of capitalism

Aug 4, 2011

What is meant by the 'cultural contradictions of capitalism', or the 'paradox of capitalism'?

THESE two themes are related, but not identical. The Cultural Contradictions Of Capitalism is the title of a celebrated 1976 book by American scholar Daniel Bell. One of its key insights has been concisely summarised by author Eric Liu in a Sept 24, 2010 article in The Atlantic magazine. This is the view that 'a self-denying work ethic leads to the affluence that gives rise to self-gratifying play ethic that ends up corroding the affluence'.

Another writer, Tracy Mehan III, writes that 'work, sobriety, frugality and sexual restraint' are some values that have come under assault from the 'play ethic'.

The notion of a paradox in capitalist systems is summed up well by University of Illinois economist Salim Rashid: 'The paradox of capitalism is that it is a system ostensibly based on self-interest yet wholly dependent on non-economic morals and values for its success.'

Referring to the enforcement of property rights, for example, he points out that 'before capitalism - a system of greedy individuals pursuing their self-interest - is to function, we need a set of judges who are individuals not motivated by greed'.

One common theme in both ideas of the contradiction or paradox of capitalism is that self-interest may generate economic activity, but that society needs limits to self-interested behaviour in order to function optimally.

The pursuit of greed, or self-interest, can become especially unhealthy in situations of 'asymmetric information', in which one party to a transaction has superior information to the other.

Such situations are pervasive in modern economies. Doctors, lawyers and other professionals, for example, are generally much better-informed about their respective areas of work than are their lay clients. If motivated by greed, they could well use their superior information to their advantage.

So also are chief executive officers of large firms vis-a-vis their shareholders (especially if the latter are many and dispersed), politicians vis-a-vis their constituents, regulators vis-a-vis the general public, principals and teachers vis-a-vis their students, and so on.

The previously stated discussion points to the dangers of seeking to run a society, including its economy, largely through the use of material incentives, which inherently appeals to self-interest.

Self-interest, applied in social engineering, may well become progressively accentuated over time. This will inevitably end up corroding the social and moral fabric of society, undermining its social and economic health over the long term.

But there is an alternative point of view. This states that self-interest need not play a significant role even in narrowly 'economic' transactions. The great Japanese entrepreneur Konosuke Matsushita once observed that profits 'should not be a reflection of corporate greed', but rather are useful as 'a vote of confidence from society that what is offered by the firm is valued'.

[A "timely" article considering the debate on nationalising the transport system?]
Some will argue that companies with community values beyond profit-seeking motives will do better over the long run than companies narrowly focused on the bottom line.

These days, a more active citizenry and civil society, expressing themselves through a wide range of media outlets, can help to identify and keep in check the unhealthy and extreme pursuit of self-interest across a wide range of activities in modern societies.

There is also a need for education and awareness of the limits of the prevailing capitalist system. Schools, religious bodies, enlightened political parties and the media all have fundamental responsibilities in this regard.

The writer is a professor of economics and director of the Singapore Centre for Applied and Policy Economics, Department of Economics, at the National University of Singapore.

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