The humbling of American capitalism

In a somewhat parallel way, though not with the same level of gravity, two of the world’s largest economies – the United States and China – are being battered by internal problems requiring swift government intervention.

The US economy is struggling to get out of the quicksand of subprime loans and rotten properties, while China’s export economy is recoiling from the bad image created by its toxic toys and melamine-laced milk.  America could go into a deep recession, while China’s phenomenal growth could be derailed by the banning of unsafe Chinese products in foreign markets. Both situations bring to the fore the specter of state intervention and highlight the limits of profit-driven rationality.

Between the two countries, China is better positioned to decisively respond to its problem before this sets off a global boycott against all

Chinese goods.  The Chinese government, after all, is still run by the Communist Party. The US, in contrast, has to contend with the complexities of decision-making in a representative democracy.  The Chinese burden is how to persuade a skeptical world that it is addressing the problem and not just sweeping it under the rug.  The American burden is how to stave off panic by arriving at a quick solution to the problem, while maintaining transparency to ensure political acceptability.

It is an exaggeration to say that this is the death of capitalism. Beyond the need to prevent a general shutdown of the economy, we are not seeing the state takeover of the forces of production on any grand scale.  Both China and the US show that markets do work to create wealth and promote growth.  But their present problems, in their respective ways, also demonstrate that unregulated markets can spawn complex and dangerous products whose long-term effects are injurious to society.

In many ways, what is happening to the American economy is a portent of the way things are going to be in a modern functionally differentiated society in which there is no dominant coordinating center.  In such a society, the different specialized social systems will converge in present events, but they will always view these through the narrow prism of their respective codes.  None will be able to claim omniscience or super-rationality.

I think that a lot of Americans still look to the state as the seat of an overarching wisdom that can formulate not just a prudent but a wholly rational approach to their economic problems.  And so it must be frightening for them to watch President Bush, so cocky about the decision to invade Iraq, make the unprecedented move of inviting the two presidential candidates to join him in crafting a consensus on how to deal with the financial crisis. Congress has shown it is not inclined to allow the US Treasury and the Federal Reserve to have the last say on how to deal with the problem. If billions of dollars in public funds are going to be used to bail out ailing financial firms, the politicians on Capitol Hill want to show the voters that their interests are amply protected, and that none of the highly-paid executives of these firms will be let off the hook so easily or least of all rewarded for their greed.

The proposed bail-out scheme, urgent as it is, faces rough sailing in all directions. The Republicans are asking why the state should intervene at all in the affairs of private firms.  They demand strict criteria for deciding when to bail out private firms and when to allow them to sink. The Democrats are asking why there is a rescue package for the already rich and none for the small distressed homeowners who have a hard time meeting steep mortgage terms. They want whatever profits are going to be made by the state from these deals to be earmarked for low-cost housing.

But, in the end, the political system will find a solution that is deemed acceptable to American voters and immune from any legal challenge. The posturing of politicians will give way to a basic political consensus on what to do, on the ground that doing nothing will be more costly.  But, it is important to keep in mind, that the solution will be no more than a limited response aimed at restoring confidence in the financial market, rather than a comprehensive answer to the threat of economic instability.

The attempt to conserve stability amid constant instability will be a permanent feature of the modern economy.  It is what it needs in order to evolve.  One can thus foresee the emergence of new specialized internal norms and strong mechanisms explicitly aimed at regulating adventurous behavior. But these will not be based on any universal principle of rationality so much as on notions of what constitutes prudent behavior in a highly complex world. They will calm the markets for a time, until new unscrupulous players will again find a way of making more money by going around them with impunity.

To do more than this, however, in an effort to plug sources of instability once and for all is to risk stripping the modern economy of the autonomy that has been the source of its dynamism.  Recently, the US Securities and Exchange Commission moved to shield some stocks from vicious attack by so-called “short-sellers.”  In an instant, the value of these stocks went up, and companies jostled with one another to have their stocks included in the protected list. The agency found itself performing a complex role that until then had been a function of the market.

American capitalism is not dying, but it is undergoing a humbling crisis that is changing its face and cherished beliefs.


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