Cynicism is a common reaction when expectations fall short of reality; it can be rational when markets fail on the promise of creating wealth or when leaders fail on their promise to lead. Thus Liberals tend to be cynical about free markets, which seem to create wealth disproportionately for those who already have it, and Conservatives tend to be cynical about government, which seems inept at solving the difficult issues facing the country.
But there is nothing inherently negative about either. Both are simply institutions in which individuals interact in an effort to provide for our common needs through mutual cooperation. Thus, the actual character of these institutions emerges not only from the incentive structure of each institution but also from the nature of the individuals who participate in them.
Recessions often expose the weaknesses of capitalism. To call our economy “capitalist” is a bit of a misnomer. True capitalism has never existed — the U.S. and the rest of the developed market economies practice a mixed economy with various levels of government intervention (that is why I have often compared Libertarians to Socialists — they are both starry-eyed idealists who fail to recognize the world we live in; somehow though, Libertarians have been deemed more credible).
Most often, this government intervention benefits society — consider abolishing the Food and Drug Administration, which makes sure products we ingest are safe to do so, or the Federal Trade Commission, which aims to “prevent unfair methods of competition in commerce.” Interestingly, my least favorite regulatory body, the Federal Communications Commission, is one that Conservatives champion in their effort to impose their own morals on the whole of society.
The recent financial crisis provides a good example of the shortcomings of our mixed economy.
Most free-marketers put majority of the blame on government intervention in the financial markets, and they do have a valid point, but I see the problems stemming from the incentive structure and moral bankruptcy of the corporate culture. The incentive structure, namely the bonus culture in high finance, meant that individuals received million-dollar bonuses not based on long-term viability but on short-term gains. Thus, banks packaged and resold subprime mortgages not worrying about the long-term solvency of their liabilities but simply focusing on the short-term profits that allowed their stocks to rise.
Government also created an incentive structure where profits were privatized while risk was nationalized through the bailouts over the years, allowing financial institutions to effectively profit off high-risk investments but not actually bear the risk themselves.
There was also depravity in the corporate culture. There are tapes of traders who knew that the mortgage-backed securities they were selling were much more risky than their AAA rating led on, but they sold them anyway to unknowing buyers because their bonuses depended on it, and they would face no repercussions anyway. When individuals within these investment banks decided to investigate their risk exposure and found troubling numbers, they were ignored by management and banished to smaller divisions, a reminder that one’s career depended not on the soundness of their investments, but on their acquiescence to management’s blind pursuit of maximizing short-term profits.
Government often faces the same shortfalls. The incentive structure of our government, based on periodic elections, makes it so that we pursue short-term “fixes” while ignoring long-term problems. That is why it took nearly 80 years to pass some form of health reform (pursued by both Democratic and Republican administrations) and proposals to reduce the deficit only focus on making cuts in 12.5 percent of the budget, ignoring entitlement reform and defense spending.
There is also a lack of responsibility in the “public marketplace.” Because we have a representative system, our politicians are supposed to represent our interests, with power resting with the people. But this creates a culture of unaccountability: citizens blame politicians, and politicians blame each other or special interests.
What both institutions have done is to substitute the by-products of success (profits and elections) for the true goals of each institution. The goal of both is no longer to create a “better union” but to pursue their own short-term self-interest and use that as evidence of their success.
Thus, corporations do not always aim to provide the best goods and services at the lowest price but may attempt to hijack the system to create windfall profits. They then use these profits as evidence of fulfilling their social duty. Likewise, election campaigns are now longer and more expensive than ever because elections have become the new goal for elected officials, not excellent public policy.
When the goals of each institution change and become narrower in their interests, the means to achieve those goals will invariably adapt and become narrower, most likely for the worse.
The crisis of confidence in markets and the government reminds me of former President Jimmy Carter’s so-called “Malaise Speech” in 1979.
President Carter believed the American people were losing their purpose and finding false comfort in material items when he said, “But just as we are losing our confidence in the future, we are also beginning to close the door on our past. In a nation that was proud of hard work, strong families, close-knit communities, and our faith in God, too many of us now tend to worship self-indulgence and consumption. Human identity is no longer defined by what one does, but by what one owns. But we’ve discovered that owning things and consuming things does not satisfy our longing for meaning.”
President Carter acted like a true leader in identifying profligacy as a root cause of American disillusionment, an idea that has applicability not only today, but has been the root cause of the downfall of all the great nations and empires throughout history. Nonetheless, the American people did not want to hear that the problem lay in their own principles and values and instead elected Ronald Reagan, who stated that “Government is not the solution to our problem; government is the problem,” the following year.
We can blame the institutions as long as we want. But disregarding the role individuals play will allow the same practices to continue with the same results. Recognizing the role of the individual is only to recognize our own complicity in the system, both through our interactions in the institutions and through the leaders we allow to have such large influence over those institutions.