The Future of Capitalism

by Paul Collier

  On the bedrock of this practical communitarian ethic, I turn to the divergences that have been ripping our societies apart. The new geographic divide, between booming metropolis and broken provincial cities, can be tamed but it requires radical new thinking. The metropolis generates huge economic rents which should accrue to society, but to do so requires a substantial redesign of taxation. Restoring broken cities is feasible, but the record is poor. Neither the market nor public interventions have been very effective. Success requires that a range of innovative policies be co-ordinated and sustained.

  The new class divide between the prospering educated and the despairing less educated can also be narrowed. But no single policy can transform despair: contrary to the Utilitarian fixation with consumption, the nature of the problem is far too deep to be solved by increasing consumption through higher benefits. Even more than with broken cities, a wide range of policies will be needed to change life-chances, not just for individuals but for their relationships. Its social interventions would aim to sustain families that are stressed, rather than assuming for itself the role of parent. Some of the problems of despair have been compounded by the self-aggrandizing strategies of those who are well educated and highly skilled. There is some scope for curtailing the most damaging; again, it is not just that consumption is excessive and needs to be curbed by taxation.

  As to the global divide, the confident paternalist vanguard has been cavalier about globalization, seduced into anticipating a post-national future. Yet, individually rational private responses to global opportunities are not inevitably socially beneficial. For economists, well-founded opposition to high trade barriers elided into unqualified enthusiasm for liberalization. Trade does usually benefit each country sufficiently that whoever gets the gains could fully compensate those who lose out. But while economists were vociferous advocates of trade, they kept very quiet about compensation. Without it, there is no analytic basis for claims that society is better off. Analogously, well-founded insistence on the rights of racial minorities elided into the unqualified espousal of immigration. Yet despite the shared label of globalization, trade and migration are very different economic processes, one driven by comparative advantage, the other by absolute advantage. There is no analytic presumption that migration produces gains either for the societies that migrants join, or for those they leave; the only unambiguous gains are for the migrants themselves.

  A MANIFESTO

  Capitalism has achieved a lot and it is essential for prosperity, but it is not the economics of Dr Pangloss. None of the three new social cleavages can be healed by relying only on market pressures and individual self-interest: ‘cheer up and enjoy the ride’ is not only tone-deaf, it is too complacent. We need active public policy, but social paternalism has repeatedly failed. The left assumed that the state knew best, but unfortunately it didn’t. The vanguard-guided state was assumed to be the only entity guided by ethics: this wildly exaggerated the ethical capacities of the state, and correspondingly dismissed those of families and firms. The right put its faith in the belief that breaking the chains of state regulation – the libertarian mantra – would unleash the power of self-interest to enrich everyone. This wildly exaggerated the magic of the market, and correspondingly dismissed ethical restraints. We need an active state, but we need one that accepts a more modest role; we need the market, but harnessed by a sense of purpose securely grounded in ethics.

  For want of a better term, I think of the policies I propose to heal these cleavages as social maternalism. The state would be active in both the economic and social spheres, but it would not overtly empower itself. Its tax policies would restrain the powerful from appropriating gains that they do not deserve, but not gleefully strip income from the rich to hand to the poor. Its regulations would empower those who suffer from the ‘creative destruction’ by which competition drives economic progress to claim compensation, rather than attempting to frustrate the very process that gives capitalism its astonishing dynamic.* Its patriotism would be a force for binding together, replacing the emphasis on the fragmented identities of grievances. The philosophical bedrock of this agenda is a rejection of ideology. By this I do not mean to imply a ragbag of ideas thrown together, but rather a willingness to accept our diverse and instinctive moral values, and the pragmatic trade-offs implied by that diversity. The device of overriding values by resort to some single absolute principle of reason is doomed to be divisive. Accepting our diverse values is grounded in the philosophy of David Hume and Adam Smith. The policies in this book cut across the left–right spectrum that characterized the previous century at its worst, and is returning with a vengeance.*

  The twentieth century’s catastrophes were wrought by political leaders who either passionately espoused an ideology – the men of principle – or who peddled populism – the men of charisma (and yes, they were usually men). In contrast to these ideologues and populists, the most successful leaders of the century were pragmatists. Taking on a society mired in corruption and poverty, Lee Kwan Yew tackled corruption head on and turned Singapore into the most successful society of the twenty-first century. Taking on a country so divided that it was on the point of secession, Pierre Trudeau defused Québécois separatism and built a nation proud of itself. From the rubble of genocide, Paul Kagame rebuilt Rwanda into a well-functioning society. In The Fix, Jonathan Tepperman studied ten such leaders, searching for the formula by which they each remedied serious problems. He concludes that what they had in common was that they eschewed ideology; instead, they focused on pragmatic solutions to core problems, adjusting to situations as they went along.11 They were prepared to be tough when necessary: their willingness to deny patronage to powerful groups was a hallmark of success. Lee Kwan Yew was prepared to gaol his friends; Trudeau denied his fellow Québécois the separate status they craved; Kagame denied his Tutsi team the customary spoils of military victory. Before their eventual success, they all faced intense criticism.

  The pragmatism of this book is firmly and consistently grounded in moral values. But it eschews ideology and so is guaranteed to offend the ideologues of every persuasion. They are the people who currently dominate the media. An identity of being ‘on the left’ has become a lazy way of feeling morally superior; an identity of being ‘on the right’ has become a lazy way of feeling ‘realistic’. You are about to explore the future of an ethical capitalism: welcome to the hard centre.

  Part Two

  Restoring Ethics

  2

  The Foundations of Morality: From the Selfish Gene to the Ethical Group

  Modern capitalism has the potential to lift us all to unprecedented prosperity, but it is morally bankrupt and on track for tragedy. Human beings need a sense of purpose, and capitalism is not providing it. Yet it could. The proper purpose of modern capitalism is to enable mass prosperity. Perhaps because I was born poor and work with poor societies, I know that this is a worthwhile goal. But it is not sufficient. In a successful society people flourish, combining prosperity with a sense of belonging and esteem. Prosperity can be measured by income, and its antithesis is despairing poverty; flourishing is currently best approximated by well-being, and its antithesis adds isolation and humiliation.

  As an economist, I have learned that decentralized, market-based competition – the vital core of capitalism – is the only way to deliver prosperity, but what are the founts of the other aspects of well-being? Whereas economic man is presumed to be lazy, purposive action such as work is important for esteem.* And whereas economic man is self-regarding, belonging depends upon mutual regard. A moral capitalism that supports esteem and belonging, alongside prosperity, is not an oxymoron. Understandably, however, many people think that it is; they judge capitalism to be fatally tainted by relying on the single drive of greed.

  Confronted by this criticism, supporters of capitalism often parrot the Marxist doctrine that ‘the end justifies the means’. This is a fundamental mistake; a capitalism driven only by greed would
malfunction just as badly as Marxism, generating humiliation and division but not mass prosperity. Indeed, capitalism is currently taking societies down that path. This book sets out an alternative in which the means are infused with moral purpose. That reset will take more than warm-hearted slogans crafted by the PR departments of corporations, or Davos man.

  Part Two of this book sets out the ethical foundations upon which these solutions rest; while Part Three is about practical solutions to our widening social divisions. This chapter explores how our morals are linked to our emotions, how they evolve, and how things can go wrong.1

  WANTS AND ‘OUGHTS’

  The glib supporters of capitalism who argue that the end justifies the means invoke Adam Smith’s famous proposition in The Wealth of Nations that the pursuit of self-interest leads to the common good. ‘Greed is good’ became the intellectual underpinning for the zeal of the Reagan–Thatcher revolution. Smith’s proposition is a valuable corrective to the naïve notion that an action is good only if well-motivated. But modern economics, which The Wealth of Nations launched in 1776, is built on a character who is utterly despicable. Economic man is selfish, greedy and lazy. Such people do exist and you will meet some of them. But even billionaires do not live that way: the ones I know are driven workaholics who have built their lives around some purpose much larger than their own consumption. Many economists are ready to admit these limitations, but protestations of innocence hit brutal facts: students of economics become distinctively selfish,2 and the malign assumptions of the models we use to guide policy set the parameters for serious discussion.*

  Yet Smith did not think that we are economic man.3 He regarded the butcher and the baker not just as individuals pursuing their self-interest, but as morally motivated people in a society. A computer predicts the behaviour of economic man from the axioms of rational self-interest. But we predict the actions of the butcher and the baker by putting ourselves in their shoes; it is known as the ‘theory of mind’. Smith recognized that seeing a person from the inside not only enables us to understand them, but induces us to care about them and assess their moral character. These emotions of empathy and judgement he saw as the foundation of morality, driving a wedge between what we want to do, and what we feel we ought to do. Morality stems from our sentiments, not our reason. He set this out in The Theory of Moral Sentiments (1759). In it, we can find three distinct intensities of obligation.

  The strongest obligations come from intimacy. They are most far-reaching and unconditional for our children and close kin, but spread around those we know. The weakest obligation is towards distant people in distress. In a famous passage, Smith uses the example of an earthquake in China: it would not be sufficiently emotionally upsetting to prevent an eighteenth-century Englishman enjoying his dinner. Despite social media and NGOs, the same is true of a twenty-first-century clubber going out for the evening. In Refuge, a book about the refugee crisis, Alex Betts and I invoked this obligation, calling it a duty of rescue. Smith related it to a sense of impartiality: we know, objectively, that in situations such as that earthquake we ought to help. In The Bottom Billion I invoked a different duty of rescue. A billion people face despairing poverty. You do not need to be a saint to recognize that we should do what we can to bring hope.

  Between intimacy and duties of rescue are the emotions that Smith made the focus of his book: the gentle pressures such as shame and esteem that enable us to exchange obligations – I’ll help you, if you’ll help me. The trust that makes that feasible is underpinned by the emotions that discourage breaches. Why do people feel such sentiments – they are not part of the psychology of economic man? The answer, supported by evidence such as our regrets, is that people are better described by the term social man. Social man cares about what others think of him: he wants esteem. Social man is still rational – he maximizes utility – but he gets utility not just from his own consumption, but from esteem. Like greed and belonging, it is a basic drive.

  The Nobel Laureate Vernon Smith saw that The Wealth of Nations and The Theory of Moral Sentiments are built on a common idea: the mutual benefit from exchange. The arena for exchanging commodities is the market. The arena for exchanging obligations is the networked group, the subject of this chapter. For two centuries, economists thought that Adam Smith had written two incompatible books and ignored The Theory of Moral Sentiments. Only recently has he been properly understood: there are not two Smiths but one, and his neglected ideas are profoundly important.4

  People are motivated partly by the ‘wants’ of The Wealth of Nations, and partly by the ‘oughts’ of The Theory of Moral Sentiments. For each, Smith saw that the change from self-sufficiency to exchange was transformative, but his own assessment seems to have been that The Theory of Moral Sentiments was the more important, as if the exchange of ‘oughts’, trumped the exchange of wants. Are the ‘oughts’ just mental chatter? Isn’t behaviour shaped only by ‘wants’, or greed, as the textbooks and the critics of capitalism, imply?

  Social science now has evidence as to their relative psychological importance, and behavioural experiments find that ‘oughts’ matter as well as wants. Here is some ingeniously simple new evidence as to which is more important. People were asked to recall and rank those past decisions that they most regret. We all make mistakes, and the worst mistakes rankle; the responses were grouped into categories. We know what economic man would most regret: ‘if only I had bought that house’; ‘if only I hadn’t messed up that interview’; ‘if only I had bought shares in Apple’. Our regrets would be our failures to fulfil our ‘wants’. Yet they barely register in this study. People make plenty of such mistakes, but they seldom dwell on them. The regrets that fester are overwhelmingly about failures to meet ‘oughts’, when we have let someone down, breaching an obligation.5 We learn from such regrets to keep our obligations. Although our decisions are biased towards momentary folly, when we consider our actions ‘oughts’ usually trump wants.

  Social psychology has also vindicated Smith’s proposition that morality derives from values, rather than reason.6 Jonathan Haidt has found evidence for just this dominance. People try to justify their values by citing reasons for them, but if our reasons are demolished we conjure up others, rather than revise our values. Our reasons are revealed as a self-deceiving charade, a sham called ‘motivated reasoning’.7 Reasons are anchored on values, not values on reasons; or, as graphically put by Smith, ‘reason is the slave of the passions’. It gets worse for rational economic man. In what is already recognized as a major advance, in The Enigma of Reason Hugo Mercier and Dan Sperber show that reason itself has evolved for the strategic purpose of persuading others, not to improve our own decision-taking.8 Motivated reasoning is why we developed the capacity to reason, and how we normally use it. Yet more fundamentally, the massive brain expansion of the past two million years has been driven by the need for sociality.9 Far from Smith’s ideas looking quaint, they sketch the future direction for economics textbooks.

  Often, values complement each other, generating further norms. Fairness and loyalty, two of the values Haidt found to be common, jointly support the norm of reciprocity, which is what links our fundamental drive for esteem to the shame and guilt we feel when we breach an obligation. Experiments have shown that reciprocity is the sweet-spot at which even demanding obligations are sustainable. While the value of care underpins the duty of rescue, if those in a position to help form a group, they can harness fairness and loyalty to build mutual commitments: ‘I’ll help, if you’ll help’. Just as we learn to prioritize wants, so we prioritize values. Through practical reasoning we refine values that at first sight conflict, letting the context reveal the compromise.

  This was the thinking of Smith and Hume. Building on it, the philosophy of Pragmatism advocated this intertwining of the common moral values with practical reasoning. In its origin it is communitarian, seeing the task of morality as doing our best to fit our actions to the values of our community and the specifics o
f context.* We should use practical reasoning to deduce the right action; it rejects ideology, no one value is overarching, absolute and timeless. In real communities, the relative importance of values evolves; pragmatism asks ‘What, here and now, is most likely to work?’

  In contrast, ideologies each lay claim to supremacy, derived from reason, over those who disagree with them. The custodians of the supreme ideology are a vanguard of the cognoscenti. Religious fundamentalists invoke a unique divine being as the ultimate authority; Marxists invoke the dictatorship of the ‘proletariat’ guided by a hierarchy;10 Utilitarians invoke the sum of individual utilities and Rawlsians invoke ‘justice’, as defined by themselves.11 Just as Pragmatism stands in contrast to ideology, it also stands in opposition to populism. Ideology privileges some ‘reason’ over the rich array of human values; populism dismisses practical reasoning based on evidence, making brazen leaps from passions to policies. Our values, intertwined with practical reasoning, combine the heart and the head. Populism offers the headless heart; ideology offers the heartless head.

  Pragmatism has its dangers. The freedom to deduce moral actions situation-by-situation has to be bounded by our inherent limitations. Reasoning takes effort, yet our will and capacities are limited. Worse, we are tempted to fit reasons to our values. Worst, our judgements are no better than our knowledge. Pragmatists admit these limitations: our individual moral judgements are fallible. All societies have developed ways of coping: we use rules of thumb, some of which get codified into institutions. At their best, institutions encapsulate the accumulated social learning from a range of experience too vast to be known by an individual. For many moral decisions, it may be best to be guided by them. Those political philosophers most sceptical of the capacity for individual practical reasoning favour the accumulated wisdom incorporated in institutions: this is conservatism.* Those least sceptical favour the freedom that it offers: this is liberalism.* Both concerns are well based: the answer is balance.