1/26/12

Alan Greenspan is unapologetic in his defense of capitalism in a Financial Times column today (Meddle With the Market at Your Peril). He argues that history proves it is the most productive economic system, and also rejects the notion there is a trade-off between competition and equality. He says history shows the most productive economies have been able to do the most for their citizens. Without wealth creation there are no resources for government to distribute. (This brings to mind Margaret Thatcher’s well-worn phrase that socialism works until we run out of other people’s money.)

There are two ironies involved here. One is that Greenspan did much to tarnish the reputation of financial capitalism by not doing enough to contain the internet and housing bubbles. The other is that the FT, a business newspaper, sides with Barack Obama, the distributionist, and argues that free market Republicans are mostly to blame for political gridlock in America (The State of Barack Obama). Greenspan’s column is one of a series of articles in the FT about the condition of capitalism in the world today.

The Wall Street Journal reminds us, in an editorial today (The Buffett Ruse), that Barack Obama said in 2008 to Charlie Gibson of ABC News that he favored a higher tax on capital gains because it was “fair,” even though it might result in lower tax revenues and less growth. Obama is willing to sacrifice economic growth in order to advance his idea of “social justice.”

Greenspan writes:

“While central planning may no longer be a credible form of economic organization, the intellectual battle for its rival–free market capitalism–is far from won.”

Since Greenspan is such a staunch defender of Adam Smith (or Hayek) style capitalism it is fair to ask why he did not do more to protect it while he was Fed chairman. I think he answers that question when he says that we are really criticizing human nature when we attack capitalism. Greenspan may be brilliant, but he is also human. People who are brilliant tend to have a problem with humility. Greenspan probably enjoyed his reputation as a genius and was reluctant to spoil the party. His other failing is he was too rational. He professed to believe that rational people would not purposely act in ways that were self-destructive. However, since he is so rational he should have known the chief executives of the major Wall Street firms were hired hands who lacked an ownership mentality.

We cannot know for sure what is in Obama’s mind, but if we understand human nature we should be skeptical of people who claim to feel our pain. Chances are that, like most politicians, Obama is motivated by a desire for power. The way to achieve it is to build political coalitions, and the way to build coalitions is to hand out benefits to favored groups. (If we want to solidify our skepticism and realism we might want to read the works of Friedrich Nietzsche, who would have claimed even Mother Teresa was motivated by a desire to feel good about herself.)

In the years I have managed money for wealthy people I have discovered that guilt feelings are most common among people who have inherited money. It is less prevalent among people who started with little. I think that might account for Mitt Romney’s hestitancy when it comes to explaining his activities at Bain Capital. He says he became successful without using his father’s money, but it is likely his privileged background influences the way he thinks. Romney should stop saying he does not want to apologize for being successful, and instead give some specific examples of how capitalist efficiency helps America and how it compares with the inefficient and wasteful nature of government- run monopolies.

Greenspan could have pointed out that no matter how good an idea is it can turn bad if carried to excess. He once mentioned “irrational exuberance” and then seemed to forget about it. Moderation is a virtue, said Aristotle. In 1980 my investment performance was unusually good. I could not resist the temptation to make sure our chief investment officer was aware of this. My accounts were up about 80 %, while the overall market might have been up 15 %. It was because I had invested heavily in energy stocks. He sent me a note in response. It said: “Don’t overdo it.” He was right. It took nearly a decade for energy stocks to return to favor.

]