Two Views of Capitalism

Thanks to the financial crisis, I’ve been paying more attention to the business press than usual. The business press, of course, is trying to sell to businessmen and businesswomen. Thus, it tends to reflect the general presumptions and outlook of businessfolk. And I think it’s noteworthy that the business class, as a set, has a curious and somewhat incoherent view of capitalism and why it’s a good thing. Indeed, it’s in most respects a backwards view that strongly contrasts with the economic or political science take on why markets work.

The basic business outlook is very focused on the key role of the executive. Good, profitable, growing firms are run by brilliant executives. And the ability of the firm to grow and be profitable is evidence of its executives’ brilliance. And profit ultimately stems from executive brilliance. This is part of the reason that CEO salaries need to keep escalating — recruiting the best is integral to success. The leaders of large firms become revered figures. Not only important because, in practice their decisions are significant. But they become celebrities and dispensers of advice and wisdom. Their success stems from overall brilliance, and thus they must have enlightening things to say on a variety of subjects.

The thing about this is that if this were generally true — if the CEOs of the Fortune 500 were brilliant economic seers — then it would really make a lot of sense to implement socialism. Real socialism. Not progressive taxation to finance a mildly redistributive welfare state. But “let’s let Vikram Pandit and Jeff Immelt centrally plan the economy — after all, they’re really brilliant!”

But in the real world, the point of markets isn’t that executives are clever and bureaucrats are dimwitted. The point is that nobody is all that brilliant. Nobody really has a reliable method of surveying the scene and accurately gauging What Is To Be Done. But in a market economy, we don’t need anyone to have such a method. Instead, a bunch of people get to do some inquiries into the issue and then give it their best shot. And the ones who are wrong will fail. And the ones who are right will succeed. And the ones who are right don’t have to have been right for the right reasons or have any real insight into the situation. They might be smart, they might be lucky. Most likely, it’s some combination of the two. Some smart people will inherit an impossible situation, or suffer from events outside their control. And sometimes dumb people will catch a break — maybe a combination of dumb regulations and growth of the local yuppie population will turn your mediocre overpriced thai restaurant into an incredible success. But this arbitrariness isn’t a flaw in the system, it’s the whole rationale for the system. The world is just too complicated and too weird, the future too uncertain, for economic decision-making to be put in the hands of planners and visionaries. That’s why you have capitalism. But it also means that the people who control the firms operating in the market economy probably aren’t brilliant planners or visionaries either. They’re imperfect people making imperfect decisions based on imperfect information, and the ones who rise to the top are the ones whose bets pay off.