Anthony Stahelski

Anthony Stahelski

I am beneficiary of capitalism, the greatest wealth-producing economic system ever devised. Indeed, most Americans and growing numbers around the world are also beneficiaries.

Libertarian supporters of unregulated capitalism believe that the benefits of capitalism would be even more widespread if only governmental regulation of markets would disappear, or at least be reduced. They are believers in Adam Smith’s thesis that the “invisible hand” of market transactions ultimately benefits everyone. Unfortunately he was wrong.

Capitalism is a competitive system, with competition between suppliers, between consumers, and between suppliers and consumers. This means that there are economic winners and losers, as there are winners and losers in any form of competition. Over time, because the biggest economic winners are likely to keep winning and losers are likely to keep losing, unregulated capitalism inevitably leads to the monopolistic power of fewer and fewer winners and thus more and more losers, ultimately leading to all wealth residing in the hands of the few.

Why is this inevitable? Human nature and individual differences. In a highly materialistic society like ours some people want more and more of everything that wealth brings: goods and services, resource control, status and power. We have a term for this motive: greed. Furthermore some people are simply better at economic competition than others.

Our country rests on two fundamental but contradictory concepts: capitalism is one, and democracy is the other. If capitalism is a competitive system that leads to inequality, then democracy tries to create some baseline equality through our founding documents and laws. From this perspective governmental regulation of markets is simply an attempt to assure that some measure of equality exists in our economic system.

However, market regulation is a delicate balancing act. Too little regulation leads to great economic inequality, and too much regulation inhibits capitalism from doing what it does best: providing goods and services and creating jobs. This needed balance requires a thoughtful answer to the following question: What regulations will allow capitalism to cooperatively coexist with democracy?

If we examine American 20th Century history we already have an answer. In 1933 during the worst of the Great Depression the Glass-Steagall Act was passed by Congress. This law separated commercial banks from investment banks and brokerages. Meaning, commercial banks could not sell stocks or bonds, and investment banks and brokerages could not offer commercial banking services. While this law was in place the American economy not only recovered from the Depression but expanded enormously over the next 65 years. Clearly the Glass-Steagall Act did not overly inhibit capitalism. Nonetheless, the law was repealed in 1999 during the Clinton administration.

Some commentators have stated that the repeal of Glass-Steagall was one of the prime causes of the 2008 financial meltdown. They argue that the repeal unleashed greed in the form of financial speculation (gambling) with other people’s money. How was greed manifested? Commercial banks, now allowed to buy and sell stocks, went after the same high rates of return that were previously only available to investment banks and brokerages. They did this by increasing the riskiness of their investments, which is a gamble, because increasing the risk increases the potential loss of the investment. Gambling is acceptable when investing your own money, or others’ money with their knowledge of the gamble, but it is not acceptable to gamble with others’ money when they do not know that you are gambling.

Most commercial bank depositors have no idea of the potential high-risk investments that can be made with their deposits, and if they did know, they would not be happy. In fact, the financial risk profile of most middle class citizens tends toward low-risk. Capitalism must serve the needs of this low-risk majority, as well as the needs of those seeking higher returns. Capitalism can only serve both of these needs if it is strongly, but moderately, regulated.

This column is a feature provided by Central Washington University to represent a variety of political viewpoints.


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