From Emanuel Derman
In the 1960s the key question for the East was: can you have Communism with a human face?
Hungary tried it in ’56, Poland and Czechoslovakia a decade later, and the answer pretty quickly turned out to be NO. Cuba hasn’t succeeded either, though it may not be all their fault. And as regards China, their face is only half human and it’s not Communist except in name.
But for us, on the heels of the Great & Ongoing Financial Crisis, the long poor tail of the income distribution in the U.S,. the general state of joblessness, and the riots in London, all coupled with some companies making records profits in the midst of a recession, the question is:Can you have capitalism with a human face?An answer to this would be an answer to many of the current problems of the West.
What stands in the way of a more human-focused capitalism? Here are only a few incomplete thoughts that come to mind in the light of everyday events.
In the USA, one item is the fear of being labeled “socialist.” Too much government and the dependence that goes with it is wasteful, but services and regulation are obviously necessary. We seem to have too much in areas government shouldn’t be in, and too little in areas they should. I like:
- minimal interference by the “state” with private behavior; but a good safety net for everyone including health care and certain basic amenities;after that
- private enterprise, with the risk, potential rewards and potential failures of risk-taking above that safety net, for both corporations and individual;
Nobody too big to fail; no confusing illiquidity with insolvency; let insolvent companies wind down; recapitalization with new management rather than prolonged resuscitation; but somehow, if resuscitation by taxpayers is occasionally unavoidable, then a large fraction of future earnings given to taxpayers for a long time as the cost of present taxpayer salvation (every put given demands a call in return); in short, allow people and corporations to move on from failure but don’t reward them for it.- taxation as far as possible used neutrally, with minimal attempts to modify people’s behavior (no mortgage deductions …); treat people as adults.
- Easy to say, of course, but how to put this into practice, or even agree on what it means, is another story.
- Another problem is the financialization of the economy, which is another way of saying that middlemen have been getting very rich. Banks are, or perhaps should be, glorified utilities, helping transfer capital from one set of people to another. Yet classes of bank employees who are the middlemen in these utility industries have become very rich, doing much better than their shareholders, who have received little return on their capital over the past five or more years. It’s a mystery how this persists. In the case of manufacturers, employees do well when shareholders do well; think Apple, and vice versa. In banking, that correlation breaks down. Another mystery is how this persists despite competition. In manufacturing, competition lowers profits. Think of what’s happened to computer manufacturers two decades ago, or the manufacturers of GPS systems for cars more recently.
- Perhaps one has to recognize that finance is an essential service of the economy, and treat some core of financial services, the least risk-taking part, as a utility, like water and electricity and fire brigades, provided by government, there in an emergency, regulated, compensated appropriately.
