Edward Hadas

Capitalism is the name people give to the way the modern economy is arranged. Now that Communism has been discredited as an economic system, there seems to be no real alternative. But the word is misleading.

A capitalist analysis of any economic issue starts with capital, both physical capital – factories and land – and financial – shares and bonds. It is associated with free and competitive markets for goods and labour.  And capitalism has come to designate a system where private property is the norm, with any exception needing some sort of justification. Capitalist analysis usually treats governments and unions as economic interlopers, and ignores the broader society.

That perspective is too narrow. Capital and markets are only two parts of the complex modern economic system. People don’t only matter because they bring their labour to the owners of capital – as in the original, 19^th century definition of capitalism. And governments over the years have become regulators and keepers of the monetary order. Moreover, the economy is so closely integrated with modern society that no clear border separates the two. Social forces – such as the thirst for technological innovation, the work ethic and other moral values – play a fundamental part and influence the workings of the purely “capitalist” system.

A limited analysis often leads to unnecessarily grim prognoses. Think back to the 1960s, when environmental pollution was first identified as a serious problem. Many observers, enthusiastic capitalists among them, thought that the capitalist system couldn’t deal simultaneously with environmental goals and the search for profits. Economic disruptions were predicted. But changes in the law, technology, corporate priorities and cultural values combined to bring about a remarkable success in reducing noxious emissions, without noticeable harm to prosperity or profits.  The system found a way to price externalities without endangering itself.

Half a century later, people, including enthusiastic capitalists, are again wondering whether the system can survive. Now they cite the long financial crisis, or issues such as the exorbitant privileges of the very rich. They are not wrong to be concerned. If the economy were simply or primarily capitalist, either of these problems could well be lethal. After all, neither factory nor financial capital can be expected to allocate income and wealth justly. And the financial system could be too wounded to heal itself.

But the separation of the rich from the rest in some countries isn’t basically a failure of either capitalism or free markets. At bottom, it is a sign of inadequate social solidarity. The more direct causes, from politicians and regulators’ complacency to society’s general indifference regarding corporate pay, are more social than economic problems. The solutions – new rules, taxes, and behavior – will have little to do with the functioning of the core capitalist system.

Similarly, the financial disorder may look like a crisis of capitalism, but its causes and cures are political and moral. Financial markets have failed because politicians tried to give citizens more wealth than they have earned, bankers forgot the common good, governments refused to live within their means and investors’ greed was celebrated rather than restrained. No solution limited to the technical operations of the financial system can work for long, unless it is a reflection of changed political and moral attitudes.

Words are not everything, but the unquestioned identification of the modern economy as “capitalist” tends to constrain economic arguments. The debate is almost completely stifled when hyper-capitalists assume that any impediments to free markets are regrettable signs of  “market failure”. That dismisses most of the economy – from the government’s 40 per cent share of GDP to the 90 percent of the workforce employed in meritocratic bureaucracies. But the capitalist obsession also limits the insight of economists friendlier to government intervention and more skeptical about free markets. They tend to downplay social values and ethical analysis.

A new name for the modern economy might encourage a broader approach. Something bland might work – the business, or the industrial economy. I prefer a title that has a bit of spin on it. Acronyms are fashionable; perhaps it is time to introduce the BCRINCF economy — bureaucratic, competitive, regulated, innovative, collaborative and financial. But that’s a mouthful.

I suggest the “social market economy”. The term was coined in Germany after the Second World War to show that capitalism could be combined with a strong government presence, workers participation in company boards and an extended social safety net. The combination is still apt, as each of the two words captures something essential. “Market” takes in capital, competition and the eager striving for improvement. “Social” pays tribute to the human element and the need for economic activity to serve the common, social good. It is appropriate that social comes first in the title, because the modern economy is a largely a construction by and for the whole community. If it had been merely capitalist, it would not have lasted this long.

The cruise industry demonstrates much of what works well in the industrial economy. The debacle of the Costa Concordia – 11 people confirmed dead and at least 23 missing, and a financial loss of as much as $1 billion – shows some of the ways that the economy can malfunction.

The loss of life from the accident off the Italian coast is tragic, and the loss of money is remarkably large for a business that has global annual revenues of around $34 billion, according to Cruise Market Watch. That is not a big business by global standards; airline revenues, as calculated by the International Air Transport Association, are 17 times larger.

Still, the cruise trade is large and familiar enough to provide an illuminating microcosm of the modern economy at work.

The industry started with a little entrepreneurial imagination – Ted Arison, who founded Concordia’s owner, Carnival Corporation, in 1972, believed that there was a mass market for cruises. He was right about this little corner of the consumer culture – cruises are now a popular luxury. Affluence is what now animates the industry – cruise customers must have ample amounts of both money and leisure time.

But the idea would not have borne fruit without technological ingenuity – ever larger ships with ever more luxurious features for customers. Investors willing to take risks were also necessary: Carnival and its rivals had to raise money to build ships that did not have a guaranteed market.

Finally, although it rings hollow right now, strong regulation has helped keep the list of cruising accidents short, with almost no deaths. Even taking the Concordia into account, this sort of sailing is much safer than flying. Put it all together, and you get an industry that has increased its passenger count at a fairly steady 8 percent annual rate for two decades.

That sounds good, but something went badly wrong with the Costa Concordia. On the surface, the problem was nothing more than human error. The captain seems to have sailed too close to land, breaking the rules and overruling the technology.

But basic rules are almost never broken in a well-designed industrial process, and when accidents do happen, there should be recovery systems to minimize the damage.

So look further. Engineers may eventually decide that giant cruise ships need more safety features or even that the whole design is faulty. If that’s the final judgement, it will be hard not to think that entrepreneurial enthusiasm got out of hand. Imagination and innovation are crucial ingredients of modern prosperity, but heedless expansion and experimentation are not.

The cruise industry may be right that its technological model is up to snuff. The failures in the human system are harder to deny. True, it’s too early to say the captain was definitely at fault, and if he was, to decide whether his flouting of the rules was typical or tolerated. But it is clear that the evacuation of the Concordia was poorly managed. Panic could have been avoided if the large crew – one crew member for every three passengers – had been calm and well-trained. A safety drill for passengers, which was supposedly mandatory but apparently skipped, would also have helped.

Look still further. The carelessness on one ship can be traced to the pressures on the whole of Carnival to perform. No, top management didn’t simply sacrifice safety for the sake of profits. Micky Arison, Ted’s son and Carnival’s current chief executive, knew perfectly well that a serious accident would cost much more than any penny-pinching on safety could gain.

The pressure is more subtle. It is built into the economic logic of this fast-growing and competitive industry. Any company that doesn’t build enough ships will soon have an old fleet and can quickly become an also-ran. Carnival, which has a market share of close to 50 percent, is particularly eager to stay on top. But it is easier and faster to build new ships, even ones that cost hundreds of millions of dollars, than to create the sort of instinctive reflexes in the personnel that can prevent stupid accidents and ensure intelligent responses in a crisis.

Once the expensive ships are built, it is punitively expensive not to put them out to sea filled with paying passengers, even if the quality of the staff leaves something to be desired. So unless something is done to alleviate the competitive pressure to run full speed ahead, the people will almost inevitably be the weakest link in the enterprise.

One remedy is for regulators to require more rigorous training. But it would be better if the companies themselves took on the moral responsibility. They could agree to slow expansion until the human capital can catch up with the physical. If bad publicity from the Concordia disaster sparks such a commitment to the common good, then the deaths and damage will not have been completely in vain.

PHOTO: A view of the Costa Concordia cruise ship that ran aground off the west coast of Italy, January 18, 2012. Italian divers suspended their search of the capsized cruise liner after the vessel shifted slightly on its resting place near the Tuscan island of Giglio, officials said on Wednesday. REUTERS/ Max Rossi

“It’s the economy, stupid.” The words date from Bill Clinton’s 1992 presidential campaign, but the basic idea that political shifts are the visible manifestations of hidden economic developments was first articulated by Karl Marx, who wrote before the word “economy” had its current meaning. When he declared, in 1848, that “The history of all hitherto existing society is the history of class struggles,” the notion was truly revolutionary. It has become a commonplace. Pundits ferret out economic causes for everything, politicians strive to present voters with economic good news, and careful studies show that economic trends influence elections.

Like most often-repeated generalizations (“Germans are orderly” or “an army marches on its stomach”) the claim that politics is fundamentally about economics has some truth to it. But I think pundits, politicians and voters would all benefit from a bit of revisionism. It’s not always the economy, and when it is, politicians cannot do much about it in a hurry.

Start with the expert commentators. I’m thinking of the people who confidently declare that the Arab Spring was caused by the increased cost of food. Or the ones who explain the poor performance of Vladimir Putin’s party in the recent Russian parliamentary election as a reflection of stagnating average incomes. The invasion of Iraq? It was the oil, stupid. The rise of anti-immigrant parties in Europe? Look no further than the job market.

Such claims cannot be disproved, since they concern motivations which are unknown to the actors themselves. I may “think” that I want to get rid of a kleptocratic government or that I’m uncomfortable with the president’s autocratic tendencies, but I’m just being, well, stupid. Idealism and xenophobia are mere covers for a calculation, possibly erroneous, of economic self-interest.

But it is the pundits who are being simple-minded, if not devious. Most of the leaders of the Arab revolts had prospered under the old regimes, and the recent elections in Tunisia and Egypt have been won by parties with a clear religious agenda but only vague economic plans. When protesters say they thirst for justice and when voters indicate they desire holiness, there is no good reason to think their stated views hide a more ignoble reality. An excessive focus on economic issues makes the pundits unreliable guides. They should remember that economic issues are sometimes crucial in people’s lives, but more often not.

Politicians do need to worry about the economy, if only because government spending in the G7 group of rich countries was equal to 45 percent of GDP in 2011, according to the OECD. The political decisions on how those sums will be extracted and spent – not to mentions the laws and regulations that shape the private economy – are crucial for the economy and important for the nation.

Politicians too often exercise their economic responsibilities in an irresponsible way. It takes years for policies that encourage investment, innovation and employment to bear fruit, but leaders often focus on creating enough good news to win the next election. That often leads them to increase fiscal deficits. These may seem painless for a while, but eventually politicians have to choose between fiscal austerity, which makes them unpopular right now, and continued fiscal recklessness, which will wreck the economy quite soon. Greek and Italian politicians were not up to making the choice. The best they could manage was an agreement to let non-political, technocratic governments introduce sensible but painful policies.

There is a better way. Politicians should stop trying to work economic magic. That means they should admit — publicly and loudly — that the only sustainable way to produce desirable statistics on incomes and unemployment in any month is to have made the right decisions many years ago. Consistent and sensible economic policy is the best support for durable prosperity.

Of course, politicians behave the way they do largely because voters seem to demand it. The American political debate is particularly disheartening to anyone with a minimal knowledge of economics. The nation’s combination of high fiscal deficits, stimulative monetary policy and a persistent trade deficit is an invitation for disaster, but neither Democrats nor Republicans are willing to admit it. They are following polls and focus groups, which tell them recklessness is all right.

The irony is great. If politicians were willing to teach and voters to learn, governments could put their economic houses in order. Of course, the transition would be much easier if politicians had not spent decades putting off virtuous behavior until after the next election, but in a rich country such as the United States the pain of getting policy right would still be modest, especially in comparison to the woes that will come whenever foreigners stop funding the government. Then it really will be the economy, thanks to some remarkable – and avoidable – stupidity.

PHOTO: Workers place construction chains at the Karl Marx sculpture of the Marx-Engels monument in Berlin, September 8, 2010. REUTERS/Tobias Schwarz