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A big conceptual mistake which many smart people have made over the last 260 years is to conflate money with capitalism and capitalism with money, to misperceive that they are two sides of the same coin, joined back-to-back 360 degrees in the round and so conjoined like Siamese twins.

Money and its more generic category of economic dynamism – financial liquidity – are part and parcel not only of capitalism, but of all human socialized economic systems.

Ancient societies had money.  Feudal aristocrats used money and got into debt.  Stalin’s classic communist regime had currency.  None of these systems was capitalist.

Inflation – when money loses its value – is pernicious in its effects on social equality.  Under conditions of inflation, the rich get richer more easily and the middle class and the poor see their purchasing power decline.

But is inflation – the creation of too much money – inherent in capitalism?  No.

Rather, inflation and its opposite – deflation – turns capitalism away from fulfilling its promise to optimize wealth creation for all of a society.

Here is a chart on the declining real value of the U.S. dollar:

In what sense was American capitalism responsible for this?

Real median American household income after taxes fell 8.8% to $64,240 from 2021 to 2022 and the poverty rate after taxes, as measured by the Supplemental Poverty Measure (SPM), increased 59% to 12.4%.

In the U.S., from 2021 through mid-2023, prices have increased more than wages.

Here is a chart on growing inequality between the rich and the poor:

In the U.S., the share of national income going to those who provide labor, not capital, has been declining, exacerbating the effects of inflation on real wealth creation for most Americans.

How Inflation Eats Away at the Promise of Capitalism

Inflation works through money and other forms of liquidity.  As the supply of money/liquidity grows, the value of each unit of money/liquidity is worth less and less.  Simple supply and demand.  If ten dollars are in circulation, each dollar is worth 10% of the total pie.  If one hundred dollars are in circulation, each dollar is worth only 1% of that pie.

Now, under conditions of inflation, the poor and middle classes have limited opportunity to increase their incomes.  Most of what they earn, they spend.  They don’t have enough to save.  As prices rise in money terms – one ear of corn costs more in currency than it did – the poor and the middle classes must reduce consumption.

For the rich, it is different.  As Hemingway once retorted, “They have more money.”

They have enough to spend and to save.  As they save, they benefit from rising interest rates, which usually accompany inflation.  Their savings mostly go into financial markets, where they earn money on money.

The important point is that the private sector and markets do not create currency and other forms of money.  They do pass some of their money around as loans, but they don’t manufacture paper dollars or metal coins.  That is illegal.

While inside the capitalism system of private sector economic activity, thought financial institutions trade in money and liquidity.  The production of money is a government function.  The manipulation of interest rates and loan opportunities in the private sector is also a government function in a modern market economy.

So, where inflation is concerned, government can act at variance with social justice ideals.  The same is true when government policies in contracting the money supply can result in a recession or depression.

Now as money/liquidity circulates in an economy, it tends to flow from consumers to producers and sellers of goods and services.  Thus, those who are in business and finance gain a disproportionate share of the money/liquidity in circulation.  Those who have assets see the nominal value of those assets rise with the growth of money/liquidity.  They can borrow against those assets and thus, grab hold of more money with which to invest.

The Wall Street Journal just reported that interest rates on 30-year bonds issued by the U.S. government rose to 4.55%, the highest rate since 2011.  The yield on 10-year debt obligations of the U.S. government is now 4.479%, the highest rate since 2007.

We can ask with the Roman Judge Lucius Cassius: “Cui bono?” – “Who benefits?”
Not poor inner-city families living in subsidized apartments and on welfare.  Not the middle class paying more for gasoline with declining real incomes.

The total debt to be paid by the U.S. government is now $33 trillion.

That is a lot of liquidity sloshing around.  The bigger the government debt and the higher the interest rate, the more cash the government must come up with to pay interest and then retire the principal.  The payment obligations increase the government’s annual budget.  Since tax revenues are not enough to pay all of such budget increases, the government will run deficits – government money going out as expenditures to fuel more inflation – with more debt accumulating for higher outlays down the road.  A doom loop?

And private sector capitalism is responsible for this?

Inflation is not the only way in which money can cause disequilibrium in capitalism, interfering with its ability to optimize the production of both private and public goods.  Both debt and asset bubbles, which frequently are interlocking, divert capitalism into misapplication of investment and misuse of wealth.  Too much debt – too much borrowed cash in hand – coupled with too little prospect of repayment, leads to enterprise collapse or personal loss of assets.

Too much money, often borrowed, spent on assets with the hope (often illusory – “irrational exuberance”) of appreciation in asset value in the minds of potential purchasers raises the market price of assets above what long-term demand will support.  At some point, short-term demand evaporates, as long-term demand sets market prices.

My alumni magazine from Harvard University came recently.  By chance, it included two short articles, each of which supported the conclusion that we human persons have a moral sense, whether we want to or not.

The first article reports that Harvard professor of biological anthropology, Joseph Henrich, argues that human intellectual brilliance emerged from generations of sharing information in communities and networks.  We humans, he says, are uniquely able to engage in collective information processing.

We can do this because we are moral creatures.  Aristotle made this point centuries ago, calling us zoon politikon – creatures driven by social and political needs for association and mutual understanding.

The threefold expansion of the size of our brains over the last two million years was driven, Professor Henrich says, by the need to acquire, store and organize cultural information.  From this, he concludes that societies which best capture and transmit inherited culture enjoy greater success.  Successful cultures facilitated specialization and intergenerational transfer of intelligence and skills.

Specialization, with its creation of a demand for cooperation and intergenerational interdependencies, depend on morality in the mind of individuals, tied together by those relationships and reciprocal responsibilities.

The second article reported on research identifying who are the best team players.  Professor David Deming at the Kennedy School ran simulations of team collaboration looking for clues as to who most enable success for the team.  A measure of teammate strength was developed to generate data for analysis.  The data led to identification of those better at teamwork.  Then, the researchers looked for traits those more proficient teammates had in common.

The most interesting commonality was a high score in the Reading the Mind in the Eyes Test (RMET).  This is a test for social intelligence developed to test for autism and Asperger’s.  The subject is shown photographs of human eyes and is asked to identify the emotions revealed by those eyes.  Being able to correctly infer another’s emotions just from looking at their eyes is a skill that leads to excellence in working with others in a team.

But that skill, in turn, is made possible by a mind that has moral awareness of others and of emotions.

The most common and universal skepticism about the possibility of a moral capitalism is that people can’t be trusted to be responsible for others that, as Herbert Spencer and other social Darwinists believe, we human persons are thoroughgoing egoists without any moral sense or at least with only very intimidated ones.

If, on the other hand, we are each born capable of developing a robust moral sense, as Adam Smith believed, then moral capitalism is a very practical alternative economic system.

Recently, I read the following pessimistic assessment of the state of humanity:

“In the future, …. we will surrender ourselves to our entertainment. We will become so distracted and dazed by our fictions that we’ll lose our sense of what is real. We will make our escapes so comprehensive that we cannot free ourselves from them. The result will be a populace that forgets how to think, how to empathize with one another, even how to govern and be governed.” – Megan Garber, “We Are Already Living in the Metaverse,” — The Atlantic, March 2023

I was re-reading Cicero’s De Officiis (On Moral Responsibility) after our recent Global Dialogue.  I trust you have received a copy of the statement of participants in those dialogue discussions on the immediate need to promote responsibility across cultures and sectors, from individuals to organizations.

Our Caux Round Table Principles for Government rest on a premise of responsibility using the concept of office as a trust.

I was reading Walter Miller’s translation from the Latin and was quite surprised to see, for the first time, that Cicero had advocated the same moral vision for those in government as does the Caux Round Table.

Cicero wrote:

For the administration of the government, like the office of a trustee, must be conducted for the benefit of those entrusted to one’s care, not of those to whom it is entrusted.  Now, those who care for the interests of a part of the citizens and neglect another part, introduce into the civil service a dangerous element—dissension and party strife (Book I, XXV, 85).

Our Principles for Government start with this standard of conduct:

Fundamental Principle: Public power is held in trust for the community.

Power brings responsibility.  Power is a necessary moral circumstance in that it binds the actions of one to the welfare of others.

Therefore, the power given by public office is held in trust for the benefit of the community and its citizens.  Officials are custodians only of the powers they hold.  They have no personal entitlement to office or the prerogatives thereof.

Holders of public office are accountable for their conduct while in office.  They are subject to removal for malfeasance, misfeasance or abuse of office.  The burden of proof that no malfeasance, misfeasance or abuse of office has occurred lies with the officeholder.

The state is the servant and agent of higher ends.  It is subordinate to society.  Public power is to be exercised within a framework of moral responsibility for the welfare of others.  Governments that abuse their trust shall lose their authority and may be removed from office.

It is reassuring to discover that our approach has an excellent precedent.