Why Modern Economic Systems Fail

Ever since the United States dove headfirst into a recession a few years ago, everyone has been quick to say, “See, Capitalism doesn’t work! Capitalism has failed us!” The alternative, however, have been some type of socialism, a hybrid of Capitalism and Socialism developed by the economist John Maynard Keynes. The system basically calls for more regulation, more spending, and more government oversight; by doing all three things, so the theory goes, we’ll get out of a recession.

Many proponents of “Keynesian economics” point to WWII as an example where massive spending actually increased the job force and allowed us to have an economic boom in the 50s. In fact, the current system has been Keynesian economics put into practice with the bailouts under Bush in 2007 and then under Obama in 2009. Yet, even after the massive influx of cash into the economy we’re still stuck in a recession (the stock market isn’t a good measure of the economy; looking to actual unemployed or underemployed figures, actual consumer spending, and foreclosure rates are better ways of measuring the health of an economy). 

Many then argue that we should turn to some type of laissez faire Capitalism where the government just lets the market work itself out. Most proponents still support government oversight in preventing monopolies or acting on anti-trust laws, but still believe that beyond these restrictions the government should stay out. Yet, the United States had laissez faire Capitalism once before and it still lead to a recession that the market couldn’t fix. In fact, up until the New Deal in the 1930s, the US had a recession almost every other year. Since the New Deal we’ve been able to keep recessions to once every five years (until recently).

But more philosophically, an unregulated market will never regulate itself. The powerful will eventually take over and corporate Darwinism will eventually conquer the market. I sometimes shake my head at people who support an unregulated market; when most people with business degrees don’t even take a class in business ethics what makes you think that business person will do the right thing? For those that have taken a class in business ethics, it’s usually structured on some antiquated and disproven ethical theory, such as pragmatism or utilitarianism.

The whole point is economic systems fail and fail hard because we don’t have an ethical foundation for our economy. For an economy to run in a manner that is conducive for the vast majority of a society, four things must be present: Justice, temperance, courage, and prudence. If a society as a rule lacks these or doesn’t seek to achieve them, then the economy will only lend towards corruption and alienation of the weak.

A society must seek after justice, which is fairness. Currently our economic system tends towards “cronyism” where massive bailouts and tax benefits are given to corporations while small businesses suffer. For instance, GE can spend millions of dollars on lawyers who find every loophole in the tax code to “legally” avoid paying billions of dollars in taxes. Yet, the small business man can, at best, afford some computer program that guides him through the tax system, often leaving the small business owner having to pay a high amount of taxes. The current system is always prevalent in a socialist society or even a communist society; even when major corporations are nationalized, the ones in charge of the government become the cronies. Therefore, a society interested in justice will seek out fairness.

But in seeking out fairness it will be forced to eradicate the “welfare state” and many government programs. For how is it fair that Peter works to pay Paul when Paul refuses to get a full-time job, yet one is available for Paul to have? How is it fair that a teacher who is incredibly good at her job and has been teaching twenty years doesn’t make significantly more than her counterpart who has only taught for three years and is a horrible teacher? While many think “fairness” is pure equality in earnings and in everything concerning material gains, it’s not. Fairness gives to people what they have earned or what is owed to them. Someone who works 16 hours a day trying to get his business off the ground and eventually succeeds deserves more than someone working 30 hours a week at McDonalds.

Yet, in pursuing justice, people will still seek to do the right thing. No economic system will ever eradicate the “rich and the poor.” There will always be rich people and there will always be poor people. Anyone selling you an economic system that claims to eradicate poverty is shamming you. But a society interested in justice will seek to help the truly poor, that is, those poor because of a recession (which is inevitable no matter what; but ethics can help guide us out of the recession) or disability or some other reason they can’t help. While this won’t always be executed perfectly, it will be attempted.

As for the other virtues, they also help in the economy. When a society pursues temperance, when applied to businesses and to the rich it would refer to doing things in moderation or having self-control. We would see a cessation of the rich spending money on excesses. Companies like Walmart would stop developing at a certain level because they would simply have enough money, which would allow mom and pop stores to stay in business. If we were in pursuit of prudence then businesses simply wouldn’t take as many risks, or would put more thought into the repercussions of taking a risk.  More importantly, they would think over whether a certain action is morally appropriate or economically appropriate at the given time, which would cut down on losses. Finally, if our society pursued courage then companies wouldn’t lay off employees at the first sign of trouble, nor would they cower at doing the right thing just because it will lead to a profit loss.

The only way for an economy to properly succeed where there isn’t an ever-growing gap between rich and poor is for a society to have a strong, virtuous base. If a society loses its ethical base then the economy simply isn’t sustainable and will totally collapse at some point (see the USSR or other economies that totally failed; without a strong virtue-based society, all aspects of the society became weak and crumbled under their own weight).

Of course, some still want to be moral relativists. They want to argue that we can do what we want so long as we don’t harm anyone else. Others want to argue that ethics have no place in the world of businesses, because business is about facts, figures, and shareholders while ethics are about feelings and personal preferences. They have bought into a fact/value dichotomy with business being about facts and ethics being about values. But the world doesn’t function this way, anymore than saying that math is concrete while gravity is a subjective idea. The virtues are moral laws, laws that if not followed will lead to negative consequences and the eventual collapse of an economic system. If we are to have a viable economic system then we must have a society vested in pursuing virtue; without it, a societal collapse is inevitable.


6 thoughts on “Why Modern Economic Systems Fail

  1. Yet, the United States had laissez faire Capitalism once before and it still lead to a recession that the market couldn’t fix.

    Far from being a laissez-faire economy, many blame the Federal Reserve’s monetary inflation policy for the cause of the Great Depression. You might also be interested in reading Gabriel Kolko’s revisionist history of the Progressive Era in which he makes the case that regulatory reforms were adopted at the behest of favored business interests and trusts wanting to cement their economic status.

    1. I think there is some merit to the idea, but I was also looking at the overall impact even pre-Civil War. Prior to the Civil War we still had multiple recessions, showing that a recession is inevitable even under laissez faire Capitalism. I would contend, however, that the Depression resulted from a government panic and over-regulation of the banks, much like our current economic crisis.

      However, if we lived in a virtuous society, while recessions would still occur, they wouldn’t have nearly the impact they do now due to the amount of savings people would have. That is, there wouldn’t be panic, over-regulation (which would prolong the recession, and so on). Most importantly, it would keep the gap between the rich and poor manageable and allow the middle class to thrive and not face the threat of extinction (as they would under a system where only the richest corporations ruled or where only the government ruled).

      1. Prior to the Civil War we still had multiple recessions, showing that a recession is inevitable even under laissez faire Capitalism.

        I do not believe that chattel slavery is characteristic of laissez-faire capitalism. Nevertheless, states chartered their own banks, decided who could operate and how many branches could operate. Along with practicing fractional reserve banking, state-run banks and state-chartered banks were incredibly inflationary, often suspending specie payments. Also, the way in which recessions are measured (by GDP growth) also gives a misleading account of the number and severity of recessions. The general deflationary trend of the 19th century makes those recessions appear worse than they were, and the 20th century’s general inflationary trend makes recessions appear less harmful than they actually were. Interestingly, Christina Romer, a former member of the Obama administration, has done research to support the conclusion that 19th century recessions were less harmful than were those in the 20th.

      2. Maybe so, but let me back this up a bit.

        I would contend that laissez faire Capitalism is the best system so long as you have a completely virtuous society. Unfortunately, such a society doesn’t exist. Likewise, though flawed, early American society did strive for virtue (even if they completely missed the boat on key issues). Thus, when a company made x amount of dollars and that amount met the needs of the owners, plus extra, they generally stopped growing. They didn’t turn to cut-throat tactics in order to eliminate all competition, nor did they engage in price setting, or try to choke the economy by becoming a monopoly. Rather, they were fair. Even if the store owner was the only store owner in town, he wouldn’t (in most cases) overcharge for his goods because to do so would have been unjust.

        What I’m pointing to is a meta-view of economics, one that critiques all economic systems and shows that they are fully dependent upon the moral status of the society. While I think socialism will and would always fail regardless of the moral system, if the society is immoral it makes socialism all the worse. While I think laissez faire Capitalism could conceivably work in a perfectly virtuous society, such as society has not and never will exist. Rather, we’re left with societies that will pursue the ideal of virtue, but inevitably fall short; but pursuing the ideal will put them in a better spot than those societies that abandon such a pursuit.

        This is why I think laissez faire Capitalism simply isn’t tenable or practical. You will always need oversight of some sort, whether it be to prevent price gouging, price setting, or monopolies (where a monopoly is unnecessary). But I will say this, that the more immoral a society is, the more oversight will ultimately be implemented. I’m not saying this should be the case, I’m saying this is the inevitable outcome. Thus, any society that wishes to have liberty in the economy should pursue virtue, for a society pursuing virtue has little to no need for oversight, except in the examples of the people who simply choose not to be virtuous and attempt to cheat the system.

      3. This is why I think laissez faire Capitalism simply isn’t tenable or practical. You will always need oversight of some sort, whether it be to prevent price gouging, price setting, or monopolies (where a monopoly is unnecessary).

        Oh, I see what you are saying then, and I agree with your sentiment that a more virtuous society is going to be a freer economy. My point (and you might agree) would be that regardless of the morality of the individuals involved, a freer economy is preferable to a less free economy. Even if everyone in society were narcissistic sociopaths, it would be preferable that the government would have less power, because the people who would gravitate toward that power would be the very people we would want to be protected from.

  2. I do agree for the most part. The only caveat I would add is that a free market economy can still collapse on itself if a few corporations, or if the wealthiest corporations, end up having de facto control over the economy.

    I think where you and I agree is that regardless of the morality of a society, a “democratic economy” where the flow of capital is controlled by the most amount of business owners is the best economy one could have. A highly regulated market ruins liberty, which ruins any hope of moral reform.

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