Category: Commentary

Recently, Paul Rubin, an emeritus professor of economics at Emory University, had an important insight for moral capitalism which rests on the moral sense, published in the Wall Street Journal:

Karl Marx called his system “scientific socialism.”  Modern leftists advocate a similar ideology and call themselves “woke” to indicate that they understand the world better than the rest of us. Yet the worldview of Marxists and woke leftists alike is fundamentally primitive.

Dislike of the rich makes sense in a world where one can become rich only by exploiting others, but not in a society full of creativity and useful inventions.  Changing tax laws to soak the rich makes sense with a labor theory of value, but not with a sophisticated understanding of continual investment and technological change.

Recently, our colleague Jan Peter Balkenende, former Prime Minister of The Netherlands, was chosen to give a reflection the night before the king opens the new parliamentary year with a speech on behalf of the government.

Jan Peter’s remarks are a thoughtful – realistic, yet optimistic – assessment of our time.  He graciously mentions the Caux Round Table’s work in seeking to find common threads of belief, meaning and values among our different religions and wisdom traditions.

You may read his reflections here.

In the U.S., we have just experienced a moral capitalism episode with respect to the use of the internet.  It seems that Facebook’s Instagram product (or is it a service?) has negative, net impacts (externalities) on many users.

Facebook was aware that postings on Instagram made 25% of its teenage users “feel worse” about themselves.  Forty-two percent said that Instagram made them feel better.  Facebook knew that “being in a low or vulnerable state of mind means teens are more vulnerable to the content they see online.”

So what is to be done?  What should be the response of a moral business?  How should it internalize dealing with the consequences associated with use of its product or service?

One option under serious consideration in the U.S. is government regulation of what internet companies allow on their platforms or subjecting such companies to legal responsibility for misuse of the platform causing harm to others.  Another is voluntary company censorship of what is posted on its online platform.

But a third, overlooked option is setting forth ethical expectations for those who use Instagram and other platforms to communicate their thoughts, words and pictures.  Users exercise freedom to post.  They act on their own authority, for their own purposes.  Any such use of power implicates ethics and morals: is it good or bad, ethical or unethical, helpful or harmful?

Why do we not expect more of consumers of products and services?  The outcomes of capitalism, really of any system, flow from the decisions of those who use the system.  Consumers, as stakeholders of society, shape the quality of their own lives and the lives of those around them.

Can we not expect thoughtful personal assumption of responsibility as part of living in a moral society?

The path-breaking Caux Round Table Principles for Business were first proposed at a meeting in Mountain House, Caux, Switzerland in July 1994.

At the time, Mountain House was a conference center of the Moral Re-Armament Movement.  That Movement is now Initiatives of Change.

This year is the 75^th anniversary of the opening of Mountain House as a conference center.  Initiatives of Change is producing 75 stories of the important events which took place at Mountain House – one for each of its 75 years.

You can see the story of the launch of our Principles for Business here.

The website for Initiatives of Change, with information about its current global engagements, can be found here.

Merck and Ridgeback Biotherapeutics – two capitalist companies – have collaborated to create a pill with the off-putting name of “molnupiravir” to effectively treat Covid infections, saving lives and reducing hospitalizations.

The biological impact of the pill is to degrade the ability of the Covid virus to replicate itself into more viruses inside its host, thus reducing the number of viruses blindly working away, turning our cells against us. The fewer viruses in us, the less harm done to us by the infection and the less dangerous the virus to humanity in general.

Molnupiravir and similar antiviral drugs yet to be developed, promise, first, stabilization of the impacts of Covid infections and then subjugation of the global pandemic.

Similarly, the novel vaccines developed by Pfizer, Moderna and others have done more to thwart the pandemic and reduce transmission of the virus than most every regulation and order issued and imposed by our governments.

Thus, inventions made by capitalist companies have once again thwarted nature and reduced its capacity to harm civilization.

Some 250 years ago, the industrial revolution brought about by capitalist modes of production and distribution similarly manipulated nature into providing resources for human wealth creation.

The industrial revolution, now in its 4th generation of technological inventiveness, saved humanity from poverty, existential stagnation, elitist autocracies and theocracies and much suffering and brought us into enjoyment of our current standards of living – with modern medicines, electricity, the internet, longer lives, more education and all the rest of what we consume, enjoy and abuse.

Now, it must be admitted that capitalism did not do this all on its own. Public goods – law, police, market and political freedoms, roads, bridges, sewers, risk mitigation subsidies, etc. – were necessary supports for private sector invention and production. But as wealth was created by capitalism, taxes collected by governments increased so that governments could buy more public goods.

A capitalist may have invented the flush toilet, which did so much to lower death rates and extend lives, but governments or public utilities put in the water mains to bring water to our homes and the sewers to carry away our effluent.

Thus, has modern civilization been created by a virtuous circle of first, capitalism, then wealth creation, then more effective, responsible, government, leading to more fruitful capitalism, then to more wealth creation and then to more sophisticated and responsible government, which then gave rise to more…

We should, however, never overlook, nor diminish with ingratitude, the role of capitalism in bringing to us so much of the lives we live and wish to live.

Several times recently, I have circulated some personal concerns as to what is the “net impact” of the massive infusions of fiat currencies – liquidity – into national and global economies.  Has it mostly helped those who own capital assets, especially financial assets, do better and better, without breaking a sweat or taking a risk?

Our friend, Lord Robert Skidelsky, recently expressed similar concern in a column for Project Syndicate.

I am most honored to be in his company, as he has written a noted biography of John Maynard Keynes.  He may be the only independent in the British House of Lords.

He has kindly given us permission to send to you his commentary.

His thoughts on “where has all the money gone?” are here:

Quantitative easing risks generating its own boom-and-bust cycles and can thus be seen as an example of state-created financial instability.  Governments must now abandon the fiction that central banks create money independently from government and must themselves spend the money created at their behest.

LONDON – Amid all the talk of when and how to end or reverse quantitative easing (QE), one question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?

Between 2009 and 2019, the Bank of England injected £425 billion ($588 billion) – about 22.5% of the United Kingdom’s 2012 GDP – into the UK economy.  This was aimed at pushing up inflation to the BOE’s mandated medium-term target of 2%, from a low of just 1.1% in 2009. But after ten years of QE, inflation was below its 2009 level, despite the fact that house and stock-market prices were booming and GDP growth had not recovered to its pre-crisis trend rate.

Since the start of the COVID-19 pandemic in March 2020, the BOE has bought an additional £450 billion worth of UK government bonds, bringing the total to £875 billion or 40% of current GDP.  The effects on inflation and output of this second round of QE are yet to be felt, but asset prices have again increased markedly.

A plausible generalization is that increasing the quantity of money through QE gives a big temporary boost to the prices of housing and financial securities, thus greatly benefiting the holders of these assets.  A small proportion of this increased wealth trickles through to the real economy, but most of it simply circulates within the financial system.

The standard Keynesian argument, derived from John Maynard Keynes’s General Theory, is that any economic collapse, whatever its cause, leads to a large increase in cash hoarding.  Money flows into reserves and saving goes up, while spending goes down.  This is why Keynes argued that economic stimulus following a collapse should be carried out by fiscal rather than monetary policy.  Government has to be the “spender of last resort” to ensure that new money is used on production instead of being hoarded.

But in his Treatise on Money, Keynes provided a more realistic account based on the “speculative demand for money.”  During a sharp economic downturn, he argued, money is not necessarily hoarded, but flows from “industrial” to “financial” circulation.  Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.”  A depression is marked by a transfer of money from industrial to financial circulation – from investment to speculation.

So, the reason why QE has had hardly any effect on the general price level may be that a large part of the new money has fueled asset speculation, thus creating financial bubbles, while prices and output as a whole remained stable.

One implication of this is that QE generates its own boom-and-bust cycles.  Unlike orthodox Keynesians, who believed that crises were brought on by some external shock, the economist Hyman Minsky thought that the economic system could generate shocks through its own internal dynamics.  Bank lending, Minsky argued, goes through three degenerative stages, which he dubbed hedge, speculation and Ponzi.  At first, the borrower’s income needs to be sufficient to repay both the principal and interest on a loan.  Then, it needs to be high enough to meet only the interest payments.  And in the final stage, finance simply becomes a gamble that asset prices will rise enough to cover the lending.  When the inevitable reversal of asset prices produces a crash, the increase in paper wealth vanishes, dragging down the real economy in its wake.

Minsky would thus view QE as an example of state-created financial instability.  Today, there are already clear signs of mortgage-market excesses.  UK house prices increased by 10.2% in the year to March 2021, the highest rate of growth since August 2007, while indices of overvaluation in the US housing market are “flashing bright red.”  And an econometric study (so far unpublished) by Sandhya Krishnan of the Desai Academy of Economics in Mumbai shows no relationship between asset prices and goods prices in the UK and the US between 2000 and 2016.

So, it is hardly surprising that, in its February 2021 forecast, the BOE’s Monetary Policy Committee estimated that there was a one-third chance of UK inflation falling below 0% or rising above 4% in the next few years.  This relatively wide range partly reflects uncertainty about the future course of the pandemic, but also a more basic uncertainty about the effects of QE itself.

In Margaret Atwood’s futuristic 2003 novel Oryx and Crake, HelthWyzer, a drug development center that manufactures premium-brand vitamin pills, inserts a virus randomly into its pills, hoping to profit from the sale of both the pills and the antidote it has developed for the virus.  The best type of diseases “from a business point of view,” explains Crake, a mad scientist, “would be those that cause lingering illness […] the patient would either get well or die just before all of his or her money runs out.  It’s a fine calculation.”

With QE, we have invented a wonder drug that cures the macroeconomic diseases it causes.  That is why questions about the timing of its withdrawal are such “fine calculations.”

But the antidote is staring us in the face.  First, governments must abandon the fiction that central banks create money independently from government.  Second, they must themselves spend the money created at their behest.  For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs.

Doing this will bring about a recovery without creating financial instability.  It is the only way to wean ourselves off our decade-long addiction to QE.

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University.  The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.