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From the archives

Liberal Interpretations

Making sense of Justin Trudeau and his party

Clock Watching

The nuclear threat lingers still

Spending Power

Can compassion and efficiency be combined in the use of public funds?

Dilemma Capitalism

The system cannot change itself

Pamela Divinsky

The Theory of Moral Sentiments

Adam Smith

Andrew Millar in the Strand, 1759

An Inquiry into the Nature and Causes of the Wealth of Nations

Adam Smith

W. Strahan and T. Cadell, 1776

I grew up in a family that was half socialist and half monetarist — both equally convincing world views to an impressionable child. Every Passover, we celebrated the Seders and marked the liberation of oppressed peoples, but we also crossed picket lines during garbage strikes. We tried not to buy fruits and vegetables farmed by exploited labourers, but we were extravagant consumers of cars and shoes. Most importantly, we argued about it all — almost always over dinner. We debated and exchanged our thoughts, children and adults, over how this thing called “the economy” actually worked. Was it fundamentally about extortion and exploitation, or did it really create a trickle-down movement of increased purchasing power? Was it by definition a legitimization of corrupt and usurious power, or was it the best system that self-interest could create?

The debates were thrilling and intense, but we never settled anything around the dining-room table. I yearned for clarity, and I went to graduate school to study and argue further. I chose the one place known for its certitude on all matters economic: I sought out the cadre of pro-capitalist scholars known as the Chicago School, and my PhD adviser was none other than George Stigler (the tall Nobel-winning sidekick of the much shorter Milton Friedman). I arrived in Chicago hoping for truth, but the debate continued un­settled. For every explanation of IS‑LM curves, there were questions around market manipulation. For every reduction of human complexity to supply and demand, there were questions about the primacy of self-interest and rationality.

The questioning continues.

Today, a lively discussion about the viability of our current economic system of trades and exchange — some might say it’s the outing of this model — is centre stage. More and more people are asking, Does capitalism have integrity? Consider recent headlines, like “Economic Angst Persists for Good Reason” (New York Times, October 3), “Why American CEOs Are Worried about Capitalism” (Financial Times, April 22), and “Capitalism Is Not Working” (The Economist, August 24). And these are from publications that have traditionally defended capitalist market economics.

When things go wrong with the economy, we still point the finger at Fortuna.

Helena Rakic

There has also been an explosion of books critiquing the system. Thomas Piketty’s Capital in the Twenty-­First Century was a leader in exposing the increasing, self-reinforcing inequality of incomes. Humanomics, by Vernon Smith and Bart Wilson, explains just how important human sentiments are to the marketplace. Shoshana Zuboff’s The Age of Surveillance Capitalism emphasizes the challenge with its subtitle: The Fight for a Human Future at the New Frontier of Power. The Myth of Capitalism, by Jonathan Tepper, argues that capitalism has been overrun by monopolies. The provocative Winners Take All, by the insider’s insider Anand Giridharadas, exposes the self-serving ways that corporations and charities alike work to preserve the status quo. David Wootton, in Power, Pleasure, and Profit, charts the history of reason legitimizing pleasure and profit. Raghuram Rajan, the former governor of the Reserve Bank of India, shows in The Third Pillar that the essential value of community has been dismantled and lost by capitalism. Joseph Stiglitz, in People, Power, and Profits, makes it quite simple: an invisible hand does not exist. And Paul Collier’s The Future of Capitalism: Facing the New Anxieties explains how we have forgotten reciprocal obligations (even though humans are actually wired for them).

Then there is the arrival of “adjectival” capitalism. There are harmful adjectives: corrosive, metastatic, combative, malignant capitalism. There are explanatory adjectives: managerial, experiential, sharing capitalism. And there are the hopeful adjectives: fair, moral, collaborative capitalism. Whatever the modifier, the primacy of a system predicated on rational self-interests intersecting to create an efficacious production and distribution of wealth and goods remains intact.

While employment possibilities are expanding, according to expert economists, overall economic growth is sluggish. Inequality is far too stark and deep. The environment is ravaged. Politics is increasingly extremist. Business ethics continues to erode. Productivity is not trickling down. Better productivity is not improving incomes. The middle class is gutted. Society is increasingly bifurcated, with social mobility more a hope than a reality. It’s all proof that the self-reinforcing productivity-growth loop of capitalism is broken.

Yet even as there’s an unfolding consensus that capitalism is not working, the conversation is not a deep critique of the system. In the face of hard evidence of corporate deception and dishonesty — money laundering by international banks or tax evasion by multinationals, not to mention the lucrative business of human trafficking — people continue to believe that capitalism is the best system. Some may worry that it is not performing as it’s supposed to, but they still believe we can strive for a more perfect version.

The pervasive economic model that causes us so much stress and anxiety was created. Toward the end of the seventeenth century, in both England and Japan, there emerged new ways of trading, new ways of generating wealth — and these disrupted social conventions and relations. When William III established the Bank of England, in 1694, in exchange for lower interest rates on the money he borrowed to wage war against Louis XIV, a previously suspect “monied” class gained ascendancy. Those who played with money were poised to disrupt the social order and the values that underpinned it.

This world of money, stocks, and bonds was both magical and mysterious. Power and affluence had once been rooted in land, but the new reality was that pieces of paper could create substantive wealth from seemingly nothing other than promises of future payment. This market was capricious and volatile, and because it did not conform to received wisdom, it was irrational. Its mystery was personified by the goddess Fortuna. One minute, she would bless you with wealth and riches; the next moment, she would take it all away. Incomprehensible and unstable, she was the source of evil and mystery. She was blamed for the fall from virtue and the potency of disruptive self-interest. But blaming a woman was insufficient, as her new system of exchange only grew in its presence and its power. How, exactly, did it all work, and could it work in a way that satisfied the criteria of virtue, civility, and the public interest?

It was Adam Smith who tried to rationalize this still new “oeconomy.” He sought to demystify it, to reframe it as something natural. Smith’s endeavour was to demonstrate that the emerging system had virtue. It is important that he used the term “oeconomy,” derived from the Greek word for household management. He projected the familial values of frugality, stewardship, and kinship onto the many. Just like a family, the emerging monied market could be self-interested, yes, but it could also be virtuous.

Capitalism now had its founding story. Smith’s The Wealth of Nations, published in 1776, codified a set of principles and rules to guide collective and individual behaviour. If we could only follow them, we might all live together in harmony and prosperity. A purpose-driven mechanism that generates public good alongside self-interest, capitalism emerged as the new religion. But even religion is rarely without battle lines, and these were drawn between monied self-interest and the public good.

Near the end of Book One of The Wealth of Nations, Smith argues that society is made up of three “interests” of people: the landed, the monied, and the labouring. The landed interest understands the public good, as its members have the perspective and time to see it, but they do not understand the new monied reality. That lack of knowledge renders them unable to see the emerging public interest. While the monied class understands how the mechanism works, it is too driven by self-interest; monied individuals cannot be trusted to see, or act on behalf of, the public good. And the beleaguered labouring interest has neither the time nor the predisposition to understand either the new monied system or the public good.

Contemporary readers may scoff at the very notion of public good, but throughout the eighteenth century, it was a guiding ideal. But if no interest can be trusted, because each lacks knowledge or trustworthiness or both, how can society survive? Ultimately, those who could glimpse the public good were those who did not have to worry about quotidian matters of daily life — including money. Even if they did not understand the new monied mechanisms, they had a visionary vantage point. This defined them as citizens.

Again, we scoff: Aren’t all of us driven by self-interest? Aren’t we all citizens?

The price of a right was once a duty: the hierarchy was not linear but reciprocal. It had worked before the emergence of monied wealth, at least in theory, precisely because everyone knew their place and their obligations to others. It was the system of reciprocity that knitted people together into a geographically specific community that itself had an interest: the public interest.

A monied livelihood was, by contrast, unrooted. Because monied men were enslaved to their self-interests, they were thought unfit to be citizens. Yet, paradoxically, they were the ones generating wealth and prosperity — both necessary for a thriving public. Hence the conundrum: the monied interest was needed, but entirely antithetical to notions of community.

How did Smith reconcile this conflict? How did he turn a community of self-interested creatures into a virtuous community? He did so in three ways: He reduced all human activity to interconnecting truths. He provided a rule book for managing the components of the new monied market. And he demonstrated how self-­interest could create a system of integrated behaviours that together constituted a virtuous integrity.

First, Smith reduced interactions to supply and demand, which could explain every aspect of the new market. In its reductive simplicity, the framework of supply and demand accounted for both aggregate and individual behaviours. It translated human capriciousness into predictive certainty.

Smith’s rule book covered everything from taxes to public services. It included descriptions of industries that do not readily conform to supply and demand — things like public transportation. It even included important forewarnings of the system’s destructive tendencies. Competition might be the essential engine of the economy, but the pressures toward consolidation and monopoly are ever-present. (It’s a warning that’s been borne out. Just look at the accounting, pharmaceutical, airline, and technology sectors over the past twenty years.)

Smith also asserted that the core driver of human behaviour is the need for approbation: we all want to be adored and respected. It is in his earlier treatise, The Theory of Moral Sentiments, from 1759, that Smith reformulates self-interest into the very thing that could constitute a community. He makes it the deeply human tissue that connects us to each other. Self-interest could produce the public good — not because it is driven by self-absorption but because it is driven by mutual approval. Self-interest is, in fact, a virtue. And that was Smith’s conceptual twist on capitalism.

Smith’s model defined an idea and an ideal. His system would generate self-reinforcing financial security; align the roles of land, money, and state; and lay out a set of immutable values and comprehensive laws. The mechanics of the system could explain or absorb anything that would happen within it. This edifice — the one we inherited from Smith, the one that shapes how we understand our lives and our interactions with one another — depends on the most alluring of irresistible truths. Individual freedom is that truth. But, of course, it’s too good to be true.

Capitalism has an amazing ­ability to incorporate criticisms of itself. Recently, 180 CEOs gathered as part of the non-profit Business Roundtable, based in Washington, and they agreed to a new mandate. One signatory of that agreement, Marc Benioff, is the CEO of Salesforce. In October, he declared in the New York Times that “capitalism, as we know it, is dead.” Rather than “just take from society,” business should “truly give back.” What’s needed is a completely new capitalism: “a more fair, equal and sustainable capitalism that actually works for everyone and where businesses . . . don’t just take from society but truly give back and have a positive impact.”

Implicitly, Benioff acknowledges in his op-ed that capitalism is not fair and that it exaggerates inequality. But, he argues, a capitalism that takes and gives might work: “Suggesting that companies must choose between doing well and doing good is a false choice. Successful businesses can and must do both.”

There is growing evidence that other executives and corporations are embracing their new role as business-cum-social-change-agent. Leading fashion houses such as Prada are committing to environmental sustainability; Apple has pledged over $2 billion to build affordable housing; Bally is cleaning up Mount Everest (it created the hiking boots that Edmund Hillary and Tenzing Norgay wore); Tods is paying to restore the Colosseum; Goldman Sachs is funding the education of 10,000 women; and Maple Leaf Foods has recently gone carbon neutral.

Put another way, today’s proposition is that as long as corporations expand their responsibilities, we’ll all be all right. If corporations extend their sense of self-interest, we can create a world where “our communities will be more equal, our societies will be more just and our planet will be healthier,” Benioff claims. Corporate success can drive social success. But in this formulation, the fundamental axioms of capitalism remain intact: corporations just apply the existing rules of behaviour and engagement to a wider range of conditions and commodities.

Is this the emperor really changing his clothes and morphing into something new? Rapacious capitalism, complete with its malfeasance and deception, needs much more than a superficial makeover and a new pair of shoes. Claiming (even believing) that profit and purpose can be mutually supportive does not dismantle the foundational — and antagonistic — bifurcation of profit and social good. Indeed, the seductive alignment of profit and purpose is achieved only when purpose is transformed into another commodity, one that can be marketed and traded.

However difficult it is to question the truths of capitalism, we often imagine ourselves confronting its inherent contradictions. One only has to look at Hollywood to see how we adore heroes who pursue justice. The Marvel Universe, for example, speaks to our need to secure and protect our humanity, while shows like Billions and Succession feed our desire to see how we can game the system that we continue to cherish.

Even without superpowers, we can challenge foundations of the system that are by definition excessive, unsustainable, even inhumane. We can, for example, reduce consumption — by giving our lives the “Kondo” treatment or by joining the reuse marketplace. Ironically, we might even follow corporate talking points: Patagonia’s “Don’t Buy This Jacket” and Cuyana’s “Fewer, Better Things” come to mind. We can also move beyond binary language and question the system’s defining dualisms, its immutable definitions: supply and demand, profit and purpose. We can question Homo economicus, that supposedly rational beast who seeks both maximum utility as a consumer and profit as a producer. Increasingly, research demonstrates how social pressure, guilt, desire, stress, unhappiness, and happiness inform our financial behaviours — much more than rational thought. As David Hume told us centuries ago, reason is only the handmaiden of the passions.

And we can look to counterintuitive examples of self-interest. Icelandic horses stand together in a circle and rotate positions so they can protect each other from fierce winds. We see migrating geese share the load in similar ways each fall. Nature is full of self-interests and group interests working in mutually beneficial ways. Yet even as we see and study how other animals successfully balance self- and group interest, we rarely question the pure truth of capitalism, which can’t. We have faith in our economic religion. We really do want the capitalist ideal to work.

Which is why change has to be incremental. Twenty years ago, as more and more people pointed out that support of environmental and social issues could be good for business, boardrooms scoffed. Corporate social responsibility, socially responsible investing, and environmental, social, and governance goals have since confronted the system, to a degree. But as it has done in the past, capitalism has simply swallowed up the CSR/SRI/ESG critique. When we are asked at the checkout counter to donate to a corporate charity that benefits children, or when we are told that a company makes a donation when we buy a red scarf, or when we learn that Unilever has reduced its reliance on palm oil and is championing real beauty — that’s when many of us experience the very best of corporate citizenship first-hand.

But most purpose-driven initiatives, bereft of integrity or believability, manifest themselves as marketing and sponsorship tactics to build or defend a brand, rarely carrying the possibility of material social or environmental change.

It may be an uncomfortable truth that it is corporations that have the market heft and girth to drive true change. And, yes, the world needs true change right now. We need to be quite clear about the nature of corporate-purpose change, though: it remains transactional, subject to the momentary whims of hashtag commentary and driven by attempts to differentiate a brand. Even with the best of intentions, attempts at social change are deeply superficial, because once social issues become commodified, they become part of the transactional nexus of supply and demand. As long as we accept the rules and primacy of transaction, we continue the contradiction of living with the reality of capitalism while ­striving for its ideal.

For three full centuries, we have believed in a coherent economy. We have learned much about the detailed workings of interest rates, price fluctuations, and Gini coefficients; about the interconnectedness of the environment, politics, and the market; and about how our choices are socially constituted. Some of us even believe we understand how it all works.

We deeply crave the ideal of capitalism: that a society of self-interested, free individuals can form a market that produces and distributes wealth fairly, rewards effort with social mobility, and establishes transactional justice. We want to hold on to this ideal, even in the face of overwhelming contradictions and proof of the contrary. When we have to look at the reality of the system — and the terror it inflicts — few of us blame capitalism itself. That would mean abandoning the ideal. Instead, we identify the inexplicable anomalies or blame the right villains and disrupters.

In the most recent season of Goliath, the striving-to-be-rehabilitated, hard-drinking, smoking Billy McBride, played by Billy Bob Thornton, investigates the severe drought that has devastated a community in California. The story unwinds a lethal set of interests and alliances that are responsible for the destruction of the water table and of families. But at the end, the real culprit is, naturally, a crazy woman. Even with the wisdom of centuries, we still can’t help but blame capriciousness — of our weather, of our ships, of our economy — on the inconstant female. Associating the unpredictable and uncontrollable with her is a useful and traditional villainy — going all the way back to Eve, who not only disrupted but ruptured a good thing. And so we return, again and again, to the female trope when we can’t understand or control capitalism.

Have I come close to resolving any of those dining-room table or graduate school debates over how this thing called “the economy” actually works? It was not in a University of Chicago seminar room but at a business school casino night that I learned the secret. There must have been 300 of us, and we each received $500 in play money. After an evening of roulette and poker, there was an auction of goodies. I was interested in just one item — a white cashmere sweater — and given that I had “won” $3 million, I thought I had a chance. It was the last item to be auctioned, and there was one other person interested. The bidding started, and while we were still well below my budget, this woman shouted, “Seven million!” As I turned to leave, disappointed, she came up to me and asked, “Can I have your money?”

Stunned, I realized that she had thought two steps ahead: she knew that once the auction was over, any “money” that remained would be useless. She had only $100, but she believed she could collect $7 million from those of us holding the leftovers. Had I been feeling generous, I would have given her my winnings. Instead, I ripped up my cash in front of her.

At first, I thought she had cheated, but I was actually angry about my own short-sightedness. I thought the game was straightforward, that people would play it honestly, that there was integrity. What I learned is that the surface of the game hides the secret to its success. I learned you need to game the system if you want to win.

And that is the challenge of our current reality: gaming is dulling the ideal’s sheen. Corporate malfeasance — be it the Libor scandal, Volkswagen’s emissions, the Sacklers and Purdue Pharma’s opioids, subprime mortgages and countless other financial irregularities, or even beloved Johnson & Johnson covering up the presence of asbestos in baby powder — is the stark reality of the battle between profit and justice. How can we ensure that humanity triumphs?

What we do know is that once upon a time, capitalism was created. It was a solution to a deeply human problem of aligning individual selves into cohesive communities. Capitalism was and is a solution that animates our understanding of human behaviour and knits us together into a community of believers. We desperately want to believe that through reason we can adjust, refine, and improve the system in the pursuit of its ideal.

I have come to see that “the problem” is the essential tension between that and how we actually behave within a capitalist reality. The conflict is, quite literally, of our own making. When we privilege profit and growth, when we put self-interest ahead of mutual responsibility and stewardship, we create the conflict between profitability and humanity, between self-interest and public interest.

So how do we finally resolve the problem of capitalism? No amount of reasoned refining is going to overcome its inherent and dehumanizing double-game structure. Because we created it — its reality and its ideal — we have the power and the responsibility to reshape it and to define and pursue a completely new ideal. Because if there is one thing the founding story that created capitalism tells us, it is that we are responsible for ourselves, and for each other. That is the wisdom we need to return to.

Pamela Divinsky is the founder of the Divinsky Group. She holds a PhD in economics and history from the University of Chicago.

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