Capitalism with a human face?

By Emanuel Derman
August 11, 2011

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.


26 comments

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odd that you talk about taxes and treating people like adults without mentioning progressive taxation.
You want to be treated like an adult, make every adult responsible to pay for his EQUAL portion of our country’s cost.
why should warren buffet pay $8 million for the EXACT same services that 1/2 the adults in this country get for free?

Until you have the guts to tackle that, don’t come at us with this nonsense about mortgage deductions taking away our adult status.

Posted by ActualTaxpayer | Report as abusive

taxation is a great way to modify people’s behavior. If the USA had less tax on good things like work and more tax on bad things like landfills we would end up with a more optimal society with less uncompensated negative externalities

Posted by calvinbama | Report as abusive

But who decides on what to modify, and how? The adults in the room? Who are they? And how do you identify them? Good things? Bad things?

I’m not convinced that taxing people a percentage of their income is a bad thing. You want everyone to pay the same amount, arithmetically, I want it geometrically. Not obvious which is fairer, at all. Nice that you are so worried about Warren Buffet though.

Uh, Warren Buffett has tens of billions of dollars in Berkshire Hathaway stock, while a low-income individual (say below the level of income necessary for paying income tax) has very little personal property. Warren Buffett sits in a room reading and making judgments all day, while the low-income individual probably spends 40 hours a week in a thankless low-wage job getting bullied by managers that hardly care about the person. Said individual likely has little bargaining power to affect the person’s wage, work conditions, scheduling, or otherwise.

Calvinbama wants them to eat pay an equal portion of the country’s cost since they get equal service. Buffett gets the protection of the courts for billions of dollars of property; he gets the freedom to fly in his jet the Indefensible using the services of the FAA as well as municipal/state airport services; the largest military on earth protected him and his business empire from communism and now from terrorism; …need I go on? What does the low-income worker get from the scheme? I doubt it’s the same level of service as Buffett, in dollar terms.

Progressive taxation for individuals needn’t hurt productivity for three reasons. First, individuals can always form corporations that have never had the huge tax rates that those individuals enjoy/suffer (for example, the top bracket at one point was over 90%, while corps have never been that high). I can’t think of any asset an American owns that can’t be placed in a corporation from which the individual can draw the income they need. Second, the individual can invest in municipal bonds. Done properly, that’s tax free. Third, current rates on the top bracket – in the 30s – by no means eat up the earnings a rich person enjoys from trying to earn more. At the end of the day, these “penalizing performance” arguments don’t really stack up.

Besides, Buffett is more than happy quoting Kennedy’s line about doing for his country. Unlike GE, his company pays its taxes.

Posted by Jayhay | Report as abusive

Or rather, it was ActualTaxpayer, not calvinbama. Sorry about that.

Posted by Jayhay | Report as abusive

“taxation as far as possible used neutrally…” should include neutral distribution of tax deductions and tax credits. Give every taxpayer the same tax credit amount. Create a tax credit market much like the bond market and let the recipients of these tax credits sell them on this market. Have fun thinking about the details of this market and how income would be redistributed as a result….

Posted by SGillW | Report as abusive

I agree with much of what the writer says, however one big problem was raised by Romney. He stated that “corporations are people.” But, in fact, corporations are not people, should not be, never should have been. In fact, they’re “super people” because they have all the rights of people but far fewer of the responsibilities. The fact that we grant them such a status is one of the biggest problems with Capitalism(tm) as we practice it.

This is why the rich don’t operate as “people,” themselves. They form a network of corporations that represent them – in which they are merely “directors” – so they can abuse this “super person” status and get away with so much, while protecting their wealth from any real legal challenge.

“Corporations as super-people” is why Capitalism(tm) is different from a true free market. The fastest way to fix free markets is to eliminate that status and force the owners of capital to act like normal human beings, with the same responsibilities and legal ramifications.

Posted by TheDagger | Report as abusive

Government is too big, spends too much, has no return and is at best a Ponzi scheme. Those are facts. The moment we allow the beast out of its Constitutional cage it is just a matter of time before it becomes a monster controlling US.

The Federal government was supposed to be limited. Make it so.

1) Separate entitlements from general services. Taxes collected for Social programs must not be used to fund anything else, 2) Return to the gold standard. That eliminates the inflation tax and allows the accumulation of real assets, and 3) Peg spending to a fixed percentage of GDP. Ten percent for local including education and five each for federal and state.

The current global crisis may make those steps politically imaginable and 20% is not that far from the numbers in the national sales tax legislation (see FairTax.org) that has been floating around in Congress for years.

Posted by GLsword | Report as abusive

Firstly, in the words of Communist Party leader Dubcek, Czechoslovakia was seeking “Socialism with a human face”. Secondly, this experiment can’t be said to have failed when it was crushed by the Soviets. Finally, why doesn’t socialism deserve a chance when you seem to admit capitalism has failed, or at least failed to provide the desired human face?

Posted by commentmaker | Report as abusive

Question: CAN YOU HAVE CAPITALISM WITH A HUMAN FACE? Answer: Yes, we can! Look at Germany for example.

Posted by vonjd | Report as abusive

“Minimal interference from state..”

It’s not interference – it’s meaningful regulation to keep the “ugly-head” of capitalism in check that is rooted in corruption in fraudulent practices, at the expense of public that supports this business.

Posted by Mott | Report as abusive

A self-correction in the form of near real-time monitors is imminent that will drive the consumer behavior based off responsible corporations rooted in supporting of local systems in a balanced manner and discriminating the irresponsible ones that currently are addicted to one-way exploitation without local support.

It’s the latter segment that laments on the government regulation of corrupt and fraudulent practices and scream for illegals that both in fact, are a drain to the honest and hard-working public at large.

Consumer ethic and awareness at-large, will drive this correction over time.

Posted by Mott | Report as abusive

I fail to understand why we are even talking about Taxation not based on percentage of income. Taxation should be treated as fixed costs for individuals too i.e. cost of earning money in this country…
But all things said and done.. I want to know how I am paying more tax than GE

Posted by bokababu | Report as abusive

[...] Capitalism with a human face? Emanuel Derman, Reuters (hat tip reader Peter J). Another fan of financial firms as utilities. [...]

The article raised some very good questions about the different “isms” at the beginning, but then the discussion fizzled out and all the discussion is now centered on the primary concern of the average US citizen, viz., TAXATION! In my opinion both communism and capitalism have failed mankind, not because of anything intrinsically wrong with those systems, but because of failure of the men and women who ran them – their greed, their ambitions, their selfishness. In fact, the only way a capitalistic system can REALLY succeed is by developing a HUMAN FACE . With a human face even a communist system can succeed, but for that to happen mankind has to be even more mature! We are centuries away from that, though.

Posted by drphaniraj | Report as abusive

First, the wealthy derive most of the benefits from the government, so it makes sense to make them pay proportionately more.

Second, it’s desireable to prevent the destruction of democratic values and practices that would come from the emergence of an aristocracy, and to that end the concentation of inherited wealth should be limited. Progressive taxation does that.

Third, there’s no particular reason to believe that the decision making by “malefactors of great wealth” has much, or indeed any, public benefit. Certainly the pervasiveness of accounting control fraud in the elite — an elite crime, by definition — would argue the reverse. Quite simply, we should take away their money so they have less power, because they use their power badly.

Posted by lambertstrether | Report as abusive

http://blogs.reuters.com/emanuelderman/2 011/08/11/capitalism-with-a-human-face

The notion of “capitalism with a human face” is Orwellian, which is fitting for a closeted socialist like the author. The reason capitalism produces good outcomes is that it puts power in the hands of individuals to make choices according to their own needs and wants, rather than a cookie-cutter approach imposed from above. Capitalism honors the true nature of economic activity, which is dispersed, decentralized, and non-ideological–Normal people with more or less ambition to pay their bills, take care of their families, maybe even save for a vacation, and yes, maybe even get rich (the horror). It is the sum of all the trillions of transactions between free individuals and organizations that occur every day, to the benefit of both parties, and to the degree that ignorant busybodies from the government don’t needlessly obstruct them.

So whose “face” should capitalism have? It is not a single will, like a human being. Capitalism is more like the Internet: An intelligent distributed system with no single point of control, and therefore no single point of failure. Capitalism is not an ideological program, but a simple recognition and therefore accommodation of the natural and value-trading relationships that spontaneously occur for every person alive, every single day. Capitalism lets people seek their own benefit, as they individually define it, within limits of law and civility–in other words, enlightened self-interest. Socialism, on the other hand, ties people’s hands and then beats the sides of their cage with a pipe, on the theory that such torment will eventually inspire the average citizen to attain the same moral perfection as the socialist scold. It’s arrogant, uncivil, and deeply, deeply immoral. But they love it, and they’re constantly trying to find avenues to stealthily advance it–hence “capitalism with a human face.”

A “human face” sounds warm and fuzzy, but strongly implies central planning, which is mutually exclusive with true free-market capitalism (as opposed to crony corporatism–Obama’s preferred mode–or capital-f Fascism). Humans each contain a single intelligence and single set of interests, but the capitalist system leverages the aggregated intelligence of all the participants, which, in the U.S., means 300 million+ people. For a bureaucrat to inject policies based on his own opinions of what constitutes “a human face” necessarily substitutes that person’s preference for the preferences of 300 million people.

This is socialism, of course. Socialists constantly run from that label (this piece’s author is no exception), and understandably so–their altruistic, centrally-planned economic model has caused more horrific and pointless instances of mass-scale human misery and death than any other idea in human history. So they come up with a slight permutation and say, “This is not socialism–it’s a middle way, it’s capitalism with a human face.” B.S. It’s a pretext to impose central planning paradigms on our economy. It may have a different name, and it may be constrained by political realities in America that the Soviets never faced, but the underlying political impulse is Marxism, pure and simple.

BTW I strongly object to the implicit parallel that the author draws between Communism and capitalism, as though they are both equally in need of reform (the “human face”). Whatever its shortcomings, Western capitalism is not remotely comparable to Communism. What a sickening insult to the hundreds of millions of people murdered by Communist regimes, and the hundreds and millions more whose lives were reduced to terror and subsistence. The memories of their horrific deaths are to be swept aside by the back of the author’s hand, because such memories are inconvenient to the ignorant, capitalism-bashing rhetorical point he wants to make. The author should be ashamed (but, of course, won’t).

The only thing that needs to find its “human face” is the Left, which thinks it is somehow immune from moral failure, and can therefore reorganize our society willy-nilly, as compelled by their bizarre and insatiable lust for pushing other people around. If only they would look in the mirror at THEIR OWN face, all too human, fallible and prone to egotism and self-delusion, the rest of humanity could finally crawl out from under the heavy, heavy yoke that Marxism has lashed to our backs.

Posted by aaronjsolomon | Report as abusive

I meant minimal w.r.t. private behavior of individuals.

I like the idea of government setting boundaries, but leaving you alone within them.

Many of the ten commandments have this form: “Thou shalt not …” They proscribe with respect to behavior: no other gods, no idols, no names in vain, no murder, adultery, theft, false witness, coveting. They prescribe only honoring the Sabbath and your parents. Very clear principles, lasted a long time. For interesting comparison, take a look at, just for example, GS business principles, which are more smuggish reflections on self than principles. God 1, Corporations 0.

Re: banking and competition

There’s a fairly straightforward theoretic argument that, because of their role in supplying money to the economy, banks need to make profits that are higher than those in other industries in order for honest behavior to be incentive compatible (assuming, of course, an absence of draconian penalties to dishonest banking). The implicit corollary of this is that efforts to use competition to reduce banking profits to those common in other industries is likely to result in “looting”.

Posted by csissoko | Report as abusive

I disagree with MOST of the well written article.

“minimal interference from the STATE (as if all states the same FORM of government.
IN the U.S. we have an democratic Republic Form of gov. not just a :state. (how spooky…the state!)

we have that minimal “interference” now, and the result is mean. not a human face on a police/war state.

The “fed” has show it has outlived it’s use, and has put the very currency under attack, and the U.S. dollar may yet be put in a “basket” by the rest of the world. INSTANT 20% depression.

The banks should be closed, banking emergency.
corporate Officers and employees should be arrested.
(in some more advanced Republics penalties are Capital, death as they have stolen from the nation and ALL the people).
Use the RICO laws, that should do well, and they can rat out each other, on TV. Today’s banks are a National Dictatorship and they act it out.

THEN declare a MORATORIUM on DEBT for 20 years, (just as the early founders had to do), and IF yr ‘nation, state or agents have ANY ‘interference” with the growth of the Republic, well, they get NOTHING back.
the idea is to grow and build an economy that can pay debts without killing itself…

THEN found the new National Bank of the United States
BASED upon development and industrial growth.
LOANS for manufacturing and industry set @ .025.
LOANS for spec, or for playing “markets” fx, CDO’s, 25.0%.

As today’s college students are planning 80% MBA’s to go to wall street, they will have to either change their majors to engineering or something USEFUL or lose student loans. Underwriting ‘free traders” studies, a certain loss to all-. “eco” stuies are a sham, HARD science, BIOlogy, large scale science.
(i hear some whimpering ; “its too big!’ check yrself).

Those republicans(small r) who understand the ‘acts’ of those who attack the Republic, as “big is bad” right wing,small is beautiful-left wing, as attacks on the FORM of government, rather than rotten content…oh yes, there is!- will help you understand your industrial roots.
Too many confuse FORM with content in the states, then they are easily led to attack the form of government, when they object to the content of bad Government law.(s)

Explain and show how “free enterprise and free trade” are both right wing attacks upon republican Industrial Capitalism.
They are ANTI capitalist republic in form.
IN the U.S. we fought a war in 1860 over this “issue” the rights to buy an sell anything. (w/out gov “interferences”) We’d STILL be growing cotton for LONDON!
Selling humans, etc.

Show how “ecology” and attempts to break up the republic into ‘eco zones” for free enterprise looting and support for this world wide with a costly police/prison ‘solution” has broken the governments abilities to serve the people. The planned “green police” and neighborhood
‘social workers” are yet another waste of the Republics Capital, as is the extensive ignorant costly prisons we have built.
Reject the ‘eco’ orders/ukase that you can ONLY think locally, only act locally, “community control” is a trap.
Reject their role as mere “consumer” a ralph nader death-trap of weakness, learn to be a PRODUCER as a citizen rather than mere tv bound consumer searching constantly for the best “deal”.

LABOR creates ALL wealth, even on wall street and the markets of the world.

THINK nationally, show black people there is a black man on the $50.00 bill, an use Hamilton’s ideas anew to build up the republic.
costfwar.com, a ‘non’ political site. Go there think big, IF you dare.

When peace does break out, have solutions from countries who know how to export PEACE and promote capitalism.
(you know who you are!).

Thank you for allowing me to post my ideas, just a simple working man in the U.S. who has the freedom to think, and to think LARGE- instead of LARGE waste, costly wars. I think beyond their given “constricts” of their small is beautiful/big is bad mind-warp designed for mass ‘consumption’.

Please learn to question, as that is the only way to communicate.
thx,
yuccachuck

Posted by yuccachuck | Report as abusive

That’s the dumbest, but funniest thing, I’ve heard this morning. Tax the unsuccessful and unemployed. Good Luck!

An article in the NYT today praises the Roosevelt administration for its effort to improve the economy, and claims that the federal debt was 109% of GDP by the end of the war. But it fails to mention that the income tax rate was at 90%. They don’t like comments so the author’s very misleading fantasy stands.

Something has happened to the format of the article text. It is cut off on the last syllables on the right.

Posted by paintcan | Report as abusive

@emanuel Deman: No one could beat the ancient Egyptians for the practices honoring their fathers and mothers and they would do so with mortuary tombs (for any income class that could afford one) where the custom was for very long lasting and ancient families to bring food offerings in memory of them – for centuries.

What the families may not have known was that the mortuary attendants and priests would have a side business stripping any precious objects from the mummies and (daddies) as the tombs became too full of previous generations. They would set fire to the heap to make room for daddy – or mummy – or any other new arrivals.

Aristocratic or royal tombs had more room to spread out and possibly better guards but none of those security precautions lasted forever. Tut’s tomb was misplaced, so to speak, and was one of the few that wasn’t robbed very soon after being established.

@the author: If one side of ‘China’s face” is human, what does the other half look like? If the state is “the other face” and is somehow comprised of something other than human beings, what does it look like?

I have to agree with Mott but can’t remember the last time I have heard one word about consumer protection on anything but auto recalls. Not in at least ten years. There is no real consumer protection for the Internet user. I can’t imagine what consumer protection in the financial services industry would be and only the people on Wall Street know what their rules really are. The Todd-Frank rules are being stone walled every step of the way? The Volker rule was sensible but it cramps the style of the big investment bankers.

Facebook is one of the most ephemeral businesses one could imagine. It is an advertisers venue similar to a shopper’s weekly but with a lot of exposure. It’s IPO was based on offering about 10% of the stock and than claiming that price reflected the value of the remaining 90% still in the hands of the banker and the board. Madoff would have understood the marketing strategy but facebook got a lot of media exposure prior to the offering. It was “come and get it before it’s too late”.

If that is the new businesses paradigm in this country – why would anyone go through the enormous expense of building a manufacturing facility costing billions? It’s so much easier to sell a digital cartoon and get the customer to fill in the colors and do all you market penetration for you. If the company goes broke – after the board and the bakers have milked it for whatever it can get- is there much of a market for old computers and some office equipment?

It’s a clever apparition.

Posted by paintcan | Report as abusive

When we have a presidential aspirant (Mitt Romney) telling us that corporations are people that about sums it up for where we are.

Posted by seattlesh | Report as abusive

Capitalism is an inherently exploitative system and its shortcomings are not limited to its failure to provide livable conditions for those living under it; it comes at a hefty cost to the third world and incentivizes violence, cruelty and conflict. The only winners are the rich, it is oligarchy and not democracy.

Posted by RighteousTruth | Report as abusive

“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.”

Wake up Emanuel, there’s no mystery, just lousy in-bed-with-crooks government. We all know Wall Street runs Main Street.

Doctors, accountants and lawyers have their professional status stripped off or at the very least suspended if they fail their clients through negligence or deliberate malice. What do our great bankers get for doing the same?
They get a golden handshake in the tens of millions. Who in their right mind wouldn’t be encouraged to walk the tigh-rope? Heads I win, tails you lose; SUCKERS!!!

Just change the laws and see how they behave. But judging from the recent efforts to just raise the debt ceiling, I guess most of the banks would be in ruins by the time the laws get changed. I am the pessimist, but circumstances and global events put me there. Humans are supposed to be the smartest beings on earth, but we seem to be outsmarting ourselves as well. Good luck to my fellow humans.

Posted by doctorjay317 | Report as abusive

Everyone should pay the same percent of their income or the income tax should be abolished. All the talk of fairness is baloney. Life is not fair. We are born with different talents and abilities, we die at different ages and from various causes. Some succeed, some fail. Fortunes are made, passed on and eventually lost. History is full of rags to riches and riches to rags stories. Our constitution does not guarantee fairness, just fair treatment under the law. There is nothing fair about half the country not being taxed while the “rich” half is forced to pay for everything. In addition. abolition of the income tax or a flat tax would prevent our politicians from using the twisted logic of “fairness” to forcibly take money from one group to promise largesse to the non tax payers so that they can get re-elected. It is time for a change. End the income tax.

Posted by zotdoc | Report as abusive