A case for reforming capitalism
There is no dispute that market capitalism is a powerful force for good, for it fueled the rapid modernization around the globe following WW2, and — following Deng’s reforms in 1980s china — lifted half a billion people out of poverty in a single country. More than anything, the free trade and open markets consensus allowed the fruits of industrialization to be shared among enterprising individuals around the world, ushering global prosperity and peace.
But unrestricted capitalism has begun to rear its ugly head in recent decades, as years of stagnant wage growth and grotesque wealth inequality gave rise to popular unrests in liberal democracies and state-controlled economies alike. The 20th century model of capitalism may have been a guiding light for the free world after the horrors of the world wars and the Cold War, but it is painfully unprepared for the challenges of the humanitarian nature, namely decreasing social mobility, job extinction due to de-industrialization, and climate change.
The global consensus is breaking down, and we risk a return to zero-sum mentality worldwide that can only spell tragedy. The reactionary tendencies may manifest themselves differently in each nation, from Xi Jinping’s state mandated policies to Trump’s populist rise, but they take root in the same economic problem: how to manage resource allocation among a massive population with ever-increasing demand for goods and services. Planned economy crumbles in the face of such a complex problem, as is evident in the later years of Soviet economy, but the neoliberal experiment of letting transnational capitalists sort things out has given us plenty of evidence that self-interests alone is insufficient in promoting universal flourishing.
When the pie doesn’t grow as quickly as we hoped, the only path available to these capitalists is to cannibalize on the welfare of their fellow citizens, striking down less-equipped competitors and finding novel ways to externalize the costs of doing business. While capital grows in power, the idealized free markets that justified their existence is now no more than a crumbling facade.
Against this backdrop, opportunist politicians turn our attention to scapegoats. Trading partners become the enemy of the state, free enterprises become nefarious agents whose gains must be redistributed. The pain points around social inequity that they identified is real and haunting, but the policy prescriptions of these politicians have dire consequences. In socialist nations these pressing issue gives legitimacy to dictatorial powers to implement drastic reforms, whereas in democratic nations they propel populists to power, neither of which bodes wail for the long-term sustenance of liberal democratic institutions around the world. In this critical juncture, the impetus for change must be directed towards the root of the problem — it must be directed inwards towards the set of policy doctrines that we call capitalism.
At the core of free-market capitalism is a healthy skepticism towards the central planner. Price, as Hayek puts it, is the most effective agent for economic coordination between market agents who possess disparate information available only to them. No amount of central planning can compete with the power of distributed markets and in revealing consumer preferences and solving for optimal resource allocation. The neoliberal doctrine however takes this diagnostic one step further to advocate for de-regulation and a smaller government in order to reduce price distortion caused by public planning.
But what is to be done when the price distortion arises from the private sphere? In the event of market failures, be it through monopolistic price-setting of large corporations, or exploitation of unpriced externalities such as carbon emission, the information transmitted by these prices is at best inaccurate, and at worst wholly misleading. The neoliberal approach reveals its short-sightedness when these very real sources of inefficiencies are banished to the footnote and deemed too insignificant to challenge the orthodoxy for neoliberal policy-making.
Many of calamities and social inequities that we see today take root in half a century of negligence by governments. Government, as the rule-setter of the economic engine, has the ultimate responsibility to safeguard the flourishing of its citizens. The proper response to Hayek’s critique is not to take the hands off the steering wheel, but to approach governance from the correct perspective. Starting from the standpoint that free market is the solution for resource allocation problems, the economic duty of government thus becomes the provision of institutions that can secure the healthy operation of free markets, something that no private agent has the capacity nor incentive to effectively enforce.
What does this mean in practice?
Faced with the complexity of the modern economy, the government needs to adapt. Whereas courts of law and regulatory agencies helped protect against market distortion caused by anticompetitive practices in the last century, they are wholly insufficient to supervise the complex supply chains and interdependent business relations of today’s economy. Armed with a correct framework for state involvement in market regulation, they should instead seek to incorporate technology in administration.
Take for example, blockchain technology, borne out of an ideological response towards the 2008 financial crisis. While its initial proponents harbor libertarian perspectives, it cannot be denied that this technology has compelling properties of a public infrastructure. Chiefly, its immutability and programmability allows for unbiased contract enforcement, which can be used to adjudicate business dealings if sanctified by law. Recent advances such as privacy-preserving chains can further extend the application of blockchain to the realm of public procurement or taxation.
The key here is to separate the message from the messenger, to recognize that these privately-developed technologies may be the key to reforming capitalism in serving the primary objective of the state — protecting public welfare. Once these technologies are legitimized and promulgated by governments, we all stand to benefit from the realization of their full potential. Look no further than the historical example of how the commissioning of the Interstate Highway System by the Eisenhower administration completely reshaped the nature of travel and commerce between U.S. cities.
The perspective offered here is intended to be both critical and constructive. The neoliberal approach has failed, and we see instances of market failures everywhere we look. Rather than backtracking to state interventionism, the correct response is to take a hard look at the shortfalls of the existing modes of capitalism, and devise institutional and technological solutions to rectify them. Gradual reformation guided by clear economic thinking is the only way we can preserve liberal democracy through the crises of this century.
