Tuesday, December 8, 2009

Socialism vs. Capitalism: Does the system itself really matter?

I've been spending a lot of time lately thinking about what is wrong with our economic structure and how the policies of market liberalization and privatization have led to increasing inequality throughout the world. It seems that the belief in market efficiency that has led to this policy serves only to concentrate wealth in the hands of few who are already wealthy enough to afford to purchase these valuable resources once they are made available on the market. This belief that an efficient market will create wealth and spread welfare is flawed, I believe, primarily because the incentives for any single firm do not correspond with the incentives for the overall economy of a nation or the world as a whole. If a single firm chooses profit maximization as its main priority, as is encouraged by corporate governance laws on directors duties to shareholders, then they are likely to reduce wages and labor supply if possible and purchase goods from other countries where they are less expensive. However the impact on the local economy or even national economy can be negative because of the impact of job loss and/or wage reduction on overall demand.

I was fortunate to learn about these economic theories in class with Professor Joseph Halevi so at the end of the course I asked him if he had any ideas of how we may be able to regulate or influence the incentives of single firms to make them compatible with an economic ideal of full employment and growth for the whole economy. His reply, though not exactly an answer to my question, sums up the issue very well: the economic policy that is put in place reflects the current political mood and beliefs of the time, so even if it would be possible to change the incentives it is unlikely without an overall change in our political culture.

And actually, perhaps in that case we wouldn't need regulations at all! It seems that we are stuck in a catch 22: regulation is necessary because the current system is unfair, however regulation is not possible because it goes against the current belief system which is again the result of our current system. It also reflects the age-old problem of the chicken and the egg. Is the economic situation unfair because the system itself is flawed, or is the system unfair because our society simply does not believe in fair distribution of wealth?

I was inspired by this short clip of an interview with the Dalai Lama:

Dalai Lama - Capitalism, Socialism and Income Inequality

He also agrees that the system itself is not as much an issue as the society and motivation of individual actors. Perhaps we all need to take a moment to consider our own objectives. Are we greedy? Do we think we are better or more deserving than others? If we do believe that everyone is equal and has a right to a fair share of global wealth, then what can we do to spread this belief? Let's see what we can do to change the system from within by first taking a close look at our own desires and changing them for the better.