Fishing for the Truth
Originally published in Flourishing April/May 2012.
It’s been said that a fish is unaware of the water in which he lives. Similarly, many Americans have no awareness of the nature or institutions of capitalism, which make modern life the miracle it has become. Ignoring pandemic corruption in government, and thanks to swarming political demagogues, abetted by a similarly corrupt and swarming mainstream media, many people see only instances of corruption on Wall Street and conclude that capitalism itself is corrupt.
This brings up an interesting question: Why do even the avowed anti-capitalists rely so thoroughly on the products and institutions of capitalism? They do it, because – as a fish lives in water – they have no choice. Capitalism and its institutions are how human beings deal with each other spontaneously, naturally, rationally, and harmoniously. The alternative, as history testifies – and much of Europe shows currently – is not some other viable and lasting system, but mob violence and the virtual collapse of all economic activity.
Capitalism is the system used by anyone who wants to get things done through peaceful and voluntary cooperation with others. Even where it has to work outside of the law, capitalism still finds some kind of traction. Indeed, this underground capitalism, the global black market, has grown into a vast $10 trillion shadow superpower1. We’re not talking drug dealers and human traffickers here, but networks of peaceful entrepreneurs quietly trading everything from sand and shovels to haircuts and hosiery.
This underground capitalism is one of the world’s largest employers. Nearly two billion people are working in jobs that are neither registered nor regulated2. They are usually paid in cash and they are frequently avoiding income taxes. At best, this is a primitive form of capitalism, and the inexhaustible Peruvian economist Hernando de Soto3 has repeatedly shown that this is the price paid by corrupt and over-regulated economies for ignoring the virtues of free markets and the institutions of capitalism, including – most notably for de Soto – property rights and the institution of bank lending, which those rights engender.
However, we’re talking about America, the world’s most sophisticated economy. So, suppose an American entrepreneur begins by borrowing against his savings or other valuable and legally titled assets at his local community bank; and that as his business grows, he decides to incorporate and sell shares in his business to investors. If growth continues, he might then expand further by seeking foreign direct investment in his business in the form of additional loans that would allow him to manufacture and sell his products in countries like China and India, or Chile, Brazil and Argentina –even Europe. But, such erudite investors might not commit to making these loans unless they’re able to limit their liquidity risk by securitizing those loans for potential resale to other investors in secondary markets, or to limit their exposure to default risk with a type of financial insurance known as a credit default swap. How many business owners do you suppose have the ability to do all this without help?
Exactly! That brings us back to our local community banker who first helped our “little guy” get started with a loan against his home, or his farm, or his VW microbus. Much later, perhaps, come those guys in expensive suits and ties, who know how to make billion dollar deals over dinner at Del Posto4 in New York. We may not see it, nor fully understand it, but this is indicative of the cooperative division-of-labor process that can provide us with the miracles of modern life – from iPods to artificial hips. It also helps make America the world’s richest, deepest, and most resilient economy5. [The European Union (EU) is ranked number one in GDP ($15.39 trillion versus $15.04 trillion); but of course, the EU consists of twenty-seven countries.]
Community banks are essential to local prosperity, and most of us recognize that. But, we must also know that international banking and finance are necessary for First World prosperity and, not coincidentally, for turning New York City into a superlative urban playground, not only for the well-turned-out, but for you and me, too.
Despite the improvident pejoratives hurled by its critics, if modern capitalism didn’t exist, we would simply have to invent it. My proof is that where it doesn’t exist, people do try to invent it. To truly prosper, a country must make it possible for savings to become capital. That means that we require banking and all of the people and institutions involved in raising, managing, and distributing capital to its highest and most effective uses.
The truth is that capitalism and its institutions of high finance are the water we swim in; and corruption aside, Wall Street’s profits are a small price to pay for our innovative and bountiful civilization. mh
3 The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Hernando de Soto, PhD. Basic Books, 2000.