Before I even read his article I was put off by the idea of a "new" capitalism. Before we get to Amartya Sen's viewpoint, here is my viewpoint...
I don't think a "new" capitalism is needed. We need a constrained capitalism, the kind of constrained capitalism that Adam Smith and every reasonable thinker has always foreseen. To put it simply, capitalism is method for organizing a part of our social life dealing with the marketplace. The marketplace has always required rules: where do you locate the bazaar, how does one get a right to put a stall in the bazaar, restrictions on how you present your goods, how do do a deal, and how you collect the sums agreed in the deal.Amartya Sen provides a similar argument using historical sources to make the same point. Here are the key tidbits from Amartya Sen's article:
And on top of these regulations, the deep thinkers have always seen that the marketplace is but a part of our social life. Nobody wants a market in baby-rearing, domestic chores, friendship, worship, or social conversations. These are outside the world of monetary transactions.
The horrors of 2007-9 are the result of ideologues who believed that markets were perfect and should be unfettered, should be encouraged everywhere and in everything, that markets should be unregulated, that greed is good, and that the best outcome is always the market outcome. This ideological excess created the economic collapse.
2008 was a year of crises. First, we had a food crisis, particularly threatening to poor consumers, especially in Africa. Along with that came a record increase in oil prices, threatening all oil-importing countries. Finally, rather suddenly in the fall, came the global economic downturn, and it is now gathering speed at a frightening rate. The year 2009 seems likely to offer a sharp intensification of the downturn, and many economists are anticipating a full-scale depression, perhaps even one as large as in the 1930s. While substantial fortunes have suffered steep declines, the people most affected are those who were already worst off.
The question that arises most forcefully now concerns the nature of capitalism and whether it needs to be changed. Some defenders of unfettered capitalism who resist change are convinced that capitalism is being blamed too much for short-term economic problems—problems they variously attribute to bad governance (for example by the Bush administration) and the bad behavior of some individuals (or what John McCain described during the presidential campaign as "the greed of Wall Street"). Others do, however, see truly serious defects in the existing economic arrangements and want to reform them, looking for an alternative approach that is increasingly being called "new capitalism."
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However, even as the positive contributions of capitalism through market processes were being clarified and explicated, its negative sides were also becoming clear—often to the very same analysts. While a number of socialist critics, most notably Karl Marx, influentially made a case for censuring and ultimately supplanting capitalism, the huge limitations of relying entirely on the market economy and the profit motive were also clear enough even to Adam Smith. Indeed, early advocates of the use of markets, including Smith, did not take the pure market mechanism to be a freestanding performer of excellence, nor did they take the profit motive to be all that is needed.
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The most immediate failure of the market mechanism lies in the things that the market leaves undone. Smith's economic analysis went well beyond leaving everything to the invisible hand of the market mechanism. He was not only a defender of the role of the state in providing public services, such as education, and in poverty relief (along with demanding greater freedom for the indigents who received support than the Poor Laws of his day provided), he was also deeply concerned about the inequality and poverty that might survive in an otherwise successful market economy.
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Smith never used the term "capitalism" (at least so far as I have been able to trace), but it would also be hard to carve out from his works any theory arguing for the sufficiency of market forces, or of the need to accept the dominance of capital. He talked about the importance of these broader values that go beyond profits in The Wealth of Nations, but it is in his first book, The Theory of Moral Sentiments, which was published exactly a quarter of a millennium ago in 1759, that he extensively investigated the strong need for actions based on values that go well beyond profit seeking. While he wrote that "prudence" was "of all the virtues that which is most useful to the individual," Adam Smith went on to argue that "humanity, justice, generosity, and public spirit, are the qualities most useful to others."
Smith viewed markets and capital as doing good work within their own sphere, but first, they required support from other institutions—including public services such as schools—and values other than pure profit seeking, and second, they needed restraint and correction by still other institutions—e.g., well-devised financial regulations and state assistance to the poor—for preventing instability, inequity, and injustice. If we were to look for a new approach to the organization of economic activity that included a pragmatic choice of a variety of public services and well-considered regulations, we would be following rather than departing from the agenda of reform that Smith outlined as he both defended and criticized capitalism.
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Smith called the promoters of excessive risk in search of profits "prodigals and projectors"—which is quite a good description of issuers of subprime mortgages over the past few years. Discussing laws against usury, for example, Smith wanted state regulation to protect citizens from the "prodigals and projectors" who promoted unsound loans:
A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.[4]
The implicit faith in the ability of the market economy to correct itself, which is largely responsible for the removal of established regulations in the United States, tended to ignore the activities of prodigals and projectors in a way that would have shocked Adam Smith.
The present economic crisis is partly generated by a huge overestimation of the wisdom of market processes, and the crisis is now being exacerbated by anxiety and lack of trust in the financial market and in businesses in general—responses that have been evident in the market reactions to the sequence of stimulus plans, including the $787 billion plan signed into law in February by the new Obama administration. As it happens, these problems were already identified in the eighteenth century by Smith, even though they have been neglected by those who have been in authority in recent years, especially in the United States, and who have been busy citing Adam Smith in support of the unfettered market.
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The present economic crises do not, I would argue, call for a "new capitalism," but they do demand a new understanding of older ideas, such as those of Smith and, nearer our time, of Pigou, many of which have been sadly neglected. What is also needed is a clearheaded perception of how different institutions actually work, and of how a variety of organizations—from the market to the institutions of the state—can go beyond short-term solutions and contribute to producing a more decent economic world.
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