Capitalism is a rigged game — but one we’re far better off playing

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By Cormac Lucey

A columnist with The Irish Times recently wrote that the global financial crisis had revealed that capitalism was rigged as “no accountability was ever apportioned: few were arrested or jailed”. He also referred to global income and wealth inequality as evidence to support his case.

The column was written by Chris Johns, a blue-chip capitalist and formerly chief investment officer for global fundamental equities at State Street Global Advisors. For that reason alone it is worth investigating his claim.

His first argument about the global financial crisis — that no accountability was ever apportioned and that few were arrested or jailed — is debatable.

In Ireland there have been several inquiries into the disaster, none of which was slow to apportion blame. Following the crisis there was also an obvious clear-out of political leaders and less publicised removals of swathes of people who had been at the top of our commercial banks as well as the Central Bank of Ireland/financial regulator.

Johns’s assertion that few were jailed in the aftermath of the financial crisis seems to imply that the crisis was the result of criminal acts that merited many more incarcerations than occurred. The trouble is that a banking crisis, like a pile-up on a busy motorway, is not necessarily a criminal act. Both are generally the result of too many people trying to do the same thing at the same time and underestimating the risks.

Both may be aggravated by individual wrongdoing. And that wrongdoing, if established, ought to be prosecuted. Several people were prosecuted and jailed for crimes committed at Irish banks in the run-up to the crisis. But to suggest that big crises justify multiple jailings is to head down the pre-enlightenment path of those who responded to crop failures with human sacrifice.

The charge that capitalism is rigged appears to be on much firmer ground when we consider inequality. Not only is there significant inequality in the western world but global inequality is such that large numbers of people risk their lives trying to cross the Mediterranean to escape Africa and get to Europe. Worse still, much inequality is persistent.

The poor in Ireland are likely to be the children of the poor. Poor countries today are likely to be countries that were poor yesterday. This is where the charge by John’s (pictured above) is strongest. To a considerable extent people’s material wellbeing is decided by factors beyond their control: where they are born and to whom they were born.

Having said that, life has always been this way. Unless they strike oil, poor countries don’t suddenly become rich. If they do strike oil, the resulting wealth tends to be grabbed by a small kleptocracy. So, if you’re born in a poor country, you are relatively disadvantaged.

Compared with the US and the UK, this was the fate of Ireland for much of its history. Mass emigration was the result. Then, as much by accident as by design, we followed the strategy of “if you can’t beat ’em, join ’em” and used no — and then low — corporate taxes to become one of globalisation’s big winners. Over recent years mass immigration has been the result.

Societies, such as our own, can occasionally transform the fate that capitalism has meted out to them but the situation is not so easy for individuals within societies. The better-off have very many advantages that they can and do use to bequeath their status to their children. They tend to spend a considerable portion of their money providing time, education and nutrition to their offspring hoping to propel them forward.

On top of that, higher intelligence is associated with higher incomes and that intelligence is highly heritable. Couple those phenomena with assortative mating — whereby people increasingly marry others of a similar background — and you have powerful factors likely to sustain inequality.

In America, a research paper published by the National Bureau of Economic Research suggests there has been a rise in assortative mating. The paper Marry Your Like: Assortative Mating and Income Inequality argued if matching in 2005 between husbands and wives were random, instead of the pattern observed in the data, then the Gini coefficient — a measure of inequality — would have fallen considerably.

However, inequality between nations existed long before capitalism spread its tentacles across the globe. The same can be said for the uneven distribution of intelligence and assortative mating. The real question isn’t whether inequality persists under capitalism, it is whether life is better or worse under capitalism than other systems. The secondary question is over how capitalism affects the persistence of inequality.

Here the evidence is that capitalism and globalisation have operated in two different directions over recent decades. On the one hand, they have acted to significantly reduce global inequality. By opting for capitalism and freer markets, states such as China and India have replaced periodic famine with mass, if not yet universal, prosperity. That has reduced the inequality between nations.

On the other hand, inequality within countries has tended to rise. Globalisation has seen huge rises in the incomes of those — such as sportspeople, musicians or bankers — who can sell to a massive global market. Conor McGregor is said to have earned $100m (€84m) for his bout with Floyd Mayweather; how much could he have earned 50 years ago?

Is capitalism rigged? Yes. Your life outcome, in terms of your income and living standards, depends heavily on where you were born and on who your parents were. But capitalism has worked to close the gap between countries, as we have seen in this country after we moved from policies of Celtic twilight autarky to open competition in globalised markets.

And capitalism is no worse than other systems in dealing with individual poverty. Compare the material conditions of a poor, working person living in Ireland today with that of King George V in England 100 years ago. Diet and nutrition are much better today and the same can be said for medical care.

Life expectancy is longer, travel is much easier and we have far more access to information and entertainment. How many of us would choose to be George V if our decision were based solely on material conditions?

Churchill said of democracy that it was the worst system of government, except for all the others. Something similar may be said for capitalism: it’s the worst system of economic management, apart from all the others.

Published in The Sunday Times (Ireland edition)

September 3rd 2017