What is the Role of Government Vis-à-Vis Capitalism?

The debate this month boiled down to the extent of government's role in relation to capitalism, says professor Jim Heskett. While some readers argued for a relatively narrow role for government, others disagreed, and commented on the challenges it faces today. (Forum now closed. Next forum begins Dec. 3.)
by Jim Heskett

Summing Up

How broad is government's role in a capitalistic society? The debate this month boiled down to the extent of government's role in relation to capitalism. Those arguing for a relatively narrow role included C. J. Cullinane, who commented, "Government should have little to do with capitalism … there is a place for government, and economists, in the capitalistic system, but in this case less is more." Gerald Nanninga suggested that we "limit government's role to defining capitalistic criminal activity and the means of eliminating such activity." Marshall Cammack asked, "If we take the invisible hand of capitalism away would we ever learn from our mistakes? … The more government steps in the more accountability for actions decreases."

Charles Green set forth an opposing view: "In the real world, competitors compete to get rid of competition. In such a world, it is absurd to talk about 'free' competition—it is inherently unstable, but for the good efforts of government." Alan Ecclesston added, "Let's not confuse 'free market' with freedom from rules and oversight." Elizabeth Doty commented, "…business and markets depend on … 'rules of the game' that we create together as citizens," but cautions that "… when we engage in that process, we need to be equally aware that we are foolish to try to prescribe HOW the game should be played within those rules." Marlis Crichewsky stated: "The overarching question is purpose: What do we need governments for? … as mediators between the different actors of society…. What do we need economy for? … value creation … For … those reasons we need laws and a government to enforce them." Edward Hare joined in, saying that, "Government's role should be to set the conditions for capitalism, practiced fairly and responsibly, to flourish. And to make the punishments for not doing so appropriately threatening and onerous for those who don't."

Others were less definitive in their comments. As Philippe Gouamba put it, "Capitalism is an extremely efficient economic model…. The problem with this model is that we are …greedy … human beings." Paul Browne commented, "Capitalism as an economic ideology that confers control of productive institutions to the owners of capital is often at odds with democracy…. Hence the tensions that arise when a society commits itself to democratic capitalism…. Our focus should be on sorting out these tensions … rather than clinging to a notion that 'free markets' are efficient (good) and 'government' is inefficient (bad)."

Several commented on the challenges that government faces in carrying out its role. In doing so, they left us with interesting questions. Fidel Arcenas described one such challenge: "A bureaucratic apparatus that's way off the pace of the market forces is useless." Do you agree? Jacoline Loewen commented, "Government is about setting the rules and boundaries but also reminding us about the nobleness of the game… (à la Thomas Jefferson)." Sergio Coutinho asked us to allow him to reframe the question thusly: "Is there an objective set of rules that can dictate when the government should and should not interfere?" What do you think?

Original Article

Recently a number of questions have been raised about capitalism and how it serves us, particularly in boom and bust cycles. But perhaps a bigger debate has arisen about the role of government in helping capitalism to serve us better in times of economic stress. That's why Bruce Scott's new monograph, The Concept of Capitalism, deserves some attention. In it, Scott describes the context in which the debate about the role of government should take place. It's an exercise in political economics, one in which the relationships between democracy (politics) and capitalism (economics) are explored.

Scott's primary thesis is that "Two systems of governance—capitalism (involving economic actors) and democracy (involving political actors)—prevail in the world today … [T]hey can and do influence each other. Indeed, participants in one system can use their positions in that system as a base from which to compete for power in the other."

Scott argues that past analyses by proponents of the Friedman school of economics fall short because they regard markets and pricing mechanisms as the means by which economies are to a large degree self-regulating. It's a free market philosophy governed by the classic "invisible hand" that Scott claims leads at times to a "free-for all," like an athletic contest without rules. What's to be done about it? That's where a political authority comes in, one similar to FIFA in soccer. Its responsibility, whether in a democracy or an authoritarian regime, is to establish institutions, regulations, and regulators that create what Scott terms "formal markets" that foster competition within constraints set by a political authority. In short, political and economic systems are interdependent.

Even in a democracy, according to Scott, "… government by the people is no assurance that it is for the people. For the market frameworks of a capitalist society to best balance societal costs and benefits … [p]olitical leaders working through the political institutions of legislatures are responsible for shaping the institutions of capitalism such that the markets function for the people." Scott describes the role that government plays in preserving both capitalism and democracy. In his words, "Capitalism requires more than markets, firms, and individual economic actors; it requires structure, security, and adaptability…. Until we accept government's framework-defining role as an essential feature, we will not have a satisfactory understanding of capitalism as a system of governance."

What is government's role in supporting or constraining markets? Is it to set the rules and enforce them? Does the sports analogy apply here, with government setting and enforcing the rules even-handedly through officials in its employ? Or is government's role instead to let market mechanisms and the "invisible hand" do their best? Have economists approached these issues too narrowly in the past? What is the role of government vis-à-vis a capitalistic system? What do you think?

To read more:

Bruce Scott, The Concept of Capitalism (Heidelberg: Springer, 2009) (The words in parentheses in the quotes are mine.)

    • CJ Cullinane
    Government should have little to do with capitalism. Yes we need some rules and guidelines but government intervention should be the last resort. Just look at Freddie Mac and Fannie May, the Post Office, the SEC handling of Bernie Madoff, even the "Swine Flu" vaccine, the government made these problems worse.

    The government should not interfere with the basics of the system as it did with GM and Chrysler. If a company cannot compete in the market place it should go into bankruptcy and be reorganized.We can now see how government is too 'political' to create a level playing field. Big government just does not seem to work. How can government impove the system if it cannot handle Swine Flu or enforce the laws already on the books?

    I believe there is a place for government, and economists, in the capitalistic system but in this case less is more.
    Capitalism seems to work efficiently (not perfectly) the government is not efficient.
    • Troy
    • Marketing Manager, Software Technology Company
    "It's a free market philosophy governed by the classic "invisible hand" that Scott claims leads at times to a "free-for all," like an athletic contest without rules."

    But that's just it, the invisible hand lends to markets correcting themselves. Having error-prone humans, who inevitably will not have all of the information necessary to "referee" a complete economic system, is just that...error-prone.

    If humans were perfect, without biases toward their particular constituents and lobbyists, then maybe more politicians would be valuable...but I don't ever see that as a possibility.
    • Tom
    • Skilled Trades, Dana
    You guys are not getting it. First of all Prof Scott is saying that there is no such thing as a free market because elements inside a market can un-naturally influence the market, therefore rendering it non-free. A truer statement has never been uttered.

    Second of all, he is using the structure of a government (self-governing in theory) as an example of an organizational framework that markets should be made to follow so that impending market collapse is will be eliminated. He is not advocating a government controlled market like socialism. He is saying that if a market governs itself it will strive to make decisions that will ensure its future profitability.

    What is so often called "the survival of the fittest" in nature, natures way of filtering out the weak, is the excuse used by the "haves" of the economic world to eliminate the "have-nots". But, in the e-world, unlike in nature, when a weaker player is eliminated and their wealth is assimilated/accumulated by the stronger player, those acts create an unbalanced advantage, a monopoly, within the market. And because we are imperfect humans that cannot resist the temptations of total power, the market that allows the monopoly (AIG) to exist is destined for total destruction.

    Prof Scott is right, the fallacy of the "free market" is that it is anything but free and without some kind of structure, ie. a self governing body, we are doomed to repeat the destructive economic cycles of the past.
    • Sergio Coutinho
    • Partner, Toff Brasil
    The question: "should the government be more or less active in the economy?" does not address the problem properly in my point o view. It will always be possible to construct valid arguments and find examples of success to defend both sides.

    If you allow me to re-frame the question:
    Is there an objective set of rules that can dictate when the government should and should not interfere?

    I think it is possible to build that, but first, I think it would be interesting to read more opinions on the matter.
    • Gaurav Goel
    • AGM, RCom
    Capitalism rewards risk taking abilities of individuals and organizations. In capitalist society the outliers (in terms of being successful) are invariably people who have continuously taken calculated risks in their lives. Their success makes them role models. Sometimes for the wannabes the line between right and wrong may become very thin, they may not even realize that their acts might be compromising their integrity or impacting the balance of society. This is where the government can play a crucial role of drawing boundaries and creating infrastructure capable of enforcing the rules (law). Government's role should be to ensure that capitalists are accountable for their actions.
    • Shane Twomey
    • Owner, HR Dynamics
    To assume that a self-regulating market is sufficient, even if such a thing exists, does not take into account the reality of human behaviour. An individual will, given the opportunity, exploit any system to their advantage. Witness the reality of the utopias of various marxist states around the globe. The financial market did eventually correct itself last year but the excess was so great that the correction had to match its excess.

    The role of government should be as Guarav puts it to 'ensure that capitalists are accountable for their actions'. Set broad rules, enforce them and make the consequences of breaking them worse than the benefit of keeping them.
    • Gerald Nanninga
    • VP, Retail Ventures, Inc.
    The assumption here is that not all behavior in the capitalistic arena is "good" behavior (like ponzi schemes, theft, fraud, etc.). We then call the bad behavior "criminal" behavior and use the government to control criminal activity.

    The problem is that not all behavior in the political arena is good, either. As a result, definitions of what should be criminal get distorted and the enforcement gets distorted. It gets even more complex, since capitalism transcends any political boundaries and must navigate different definitions of what is criminal.

    My suggestion:

    1) Limit goverment's role to defining capitalistic criminal activity and the means of eliminating such activity.

    2) Create a means of defining political criminal activity (and a way to eliminate such activity) which actually works (and is not controlled by politicians). Perhaps give this role to the capitalists?

    If we can eliminate the criminals on both sides of the equation, then all the rest of the argument essentially becomes moot.
    • Marlis Krichewsky
    • consultant-researcher, IFE (France)
    The overarching question is purpose:

    What do we need governments for? I would say we need them as mediators between the different actors of society.
    What do we need economy for? I would say value creation so that our societies can survive and perhaps even prosper.

    Yes, capitalism seems efficient to a certain extent. But we should pay attention to certain pathologies of capitalism such as:

    1) market bubbles

    2) huge accumulation of wealth and power in the hands of very few individuals who might abuse of them

    3) absurdity of money for money's sake in the place of money as a means of social well-being

    4) externalization of risk, pollution and costs: investors take the money while society has to put up with pollution, risks and social costs of the capitalistic activities.

    For all those reasons we need laws and a government to enforce them.

    Marlis Krichewsky (http://m.krichewsky.free.fr)
    • Charles Green
    • CEO, Trusted Advisor Associates
    I've been waiting to see Prof. Scott's writings since I saw a presentation by him several years ago. He is massively, decisively, hugely right (in my opinion), and I hope he gets a lot more space to talk about it.

    The idea that there is even argument about the validity of the two roles as interconnected should itself be shocking. Yet somehow this view has gotten dangerously mainstream.

    If you go back and read Friedman's writings about things like 'the only role of business is to make profits' you'll find he prefaces those sorts of comments with the caveat 'in a competitive market' or 'in a free economy.'

    Hello--there is no such thing. Never was, never will be. In the real world, competitors compete to get rid of competition. In such a world, it is absurd to talk about 'free' competition--it is inherently unstable, but for the good efforts of government.

    Imagine the airline industry without the FAA. Imagine how the tobacco industry would behave without the FDA. We've seen what happens when the SEC.

    The role of government is clearly to represent the will of the people, to whom both government and business are ultimately responsible. So called 'capitalist free market' fans forget that corporations are not granted legitimacy by some deity. They are social creatures, deriving their legitimacy from broader society.

    The fact is, government uses business as a vehicle for pension and unemployment delivery, old-age payment vehicles, health care and so on. We as a society meddle with business all the time. For some businesspeople and economists to prattle on about how government 'should' remain aloof is not only narcissistic, but disconnected from reality. It just ain't so, and god forbid it should be.

    Prof. Scott has it very right, and I hope he gets a lot more room to expand on it.
    • Philippe Gouamba
    • Vice President of Human Resources, Skyline Windows, LLC
    Capitalism is an extremely efficient economic model. Survival of the leanest, fittest, strongerst is a core tenent of this model. The problem with this model is that we are human beings. We are not animals. Capitalism legitimizes the "rape" of the weak by the strong. It is one thing to watch this sort of disaster unfold on Discovery Channel nature show filmed in the African jungle; it is an entirely different dilema to experience it as HUMAN BEINGS are the ones that are being eviscerated or eaten alive.
    I beleive that greed is a part of human nature that will not ever change. I also beleive that greed cannot be legislated. A deeper problem enters the mix when we acknolege that personal initiative, ingenuity and greed are an important driving foirce of capitalism and the great American (USA) success story.

    My dream is that MAN should continue to innovate for the true benefit of mankind. I also dream that man should be less greedy and self-centered. Until the day my little dream comes true, we will need goverment to step in as sort of a referee to admonish the greediest of capitalists.
    Survival of the fittest ..YES...but let us remember that we are not ANIMALS; we are human beings.
    • Marshall Cammack
    • Marketing, ESRI
    Question: Can the government prevent people from making poor choices? Many of the economic problems we have today are a result of consumers, and businesses, making poor decisions. This is a hard period of time for our economy but it has sure been a learning experience that has left an impressionable mark on U.S. citizens. If we take the invisible hand of capitalism away would we ever learn from our mistakes? Do you think that recent troubles have made GM want to make better cars and finally listen to consumers? Will it make people look a little harder at what the terms of a mortgage are?

    Lessons have been learned, however the more government steps in the more accountability for actions decreases. Will GM be smarter if it knows the government will bail them out when in trouble? Will home buyers continue to purchase expensive toys through home equity loans if the government helps ease their burden when something goes wrong?

    Life is a learning process, one that is improved when mistakes of the past shape success in the future. Should the government impede this learning process? It is hard not to when people do not want to be responsible for their actions and blame others for their mistakes.
    • Phil Hood
    • CEO, Publishing
    Great article and interesting thread. I find it interesting that in business we like sports analogies but all our major sports leagues are anything but free markets. The reason is that without sufficient rules the league will suffer even as individual teams prosper--but once the league is weak, even great individual teams won't reach their potential. I think that is the same argument we use for regulating markets. The economy works better if it works well for the vast majority of citizens--that was Henry Ford's belief, which was almost revolutionary in 1914. The Friedman belief--that markets should be perfectly free, puts the rights of capital above the rights of voters, but there has to be some balance over time.
    • Paul Browne
    • Dean, Sidhu School, Wilkes University
    Capitalism as an economic ideology that confers control of productive institutions to the owners of capital is often at odds with democracy, a political ideology that confers control of governmental institutions to the citizenry. Hence the tensions that arise when a society commits itself to democratic capitalism.

    At the heart of the dilemma is the question of what constitutes capital. We tend to define it as does the accountant, tangible assests that can be used in production: cash and cash like assets, raw and intermediate materials, inventories, physical plant, and legally enforceable claims on the productive assets held by others. In most modern societies, this means that capital is controlled by the owners of firms. In this model we do not consider those who contribute ideas and effort to the production process as controlling any capital even though we speak of intellectual capital and human capital. In fact we tend to grant control of the former to the owners of firms through patents when the effort and knowledge that created an idea can be shown to have been applied as work for hire, or when the owners of firms can use cash of other assets to purchase patents from inventors. This further increases control of the owners of firms over decisions about production.

    A second tension arises from information asymmetries. Often owners of firms and their agents control information that others in the market need in order for the market to "clear" efficiently. They tend to hoard such information, or at times create false information to mislead others in the market in a attempt to use the differential power to earn a higher return. An ideology based on the notion that maximizing the return to capital creates the best social good encourages the creation and perpetuation of such information asymmetries.

    If ownership of firms were atomized through the wide spread ownership of shares across all economic actors, we would approach a situation where a free market for capital would interact with a free market for other contributing factors to production. However, in practice we have established mechanisms that favor the concentration of capital in the hands of a few; and even where there is widespread participation in ownership there is a tendency to vest control of the firm in the hands of a subset of owners with a disproportionate number of shares and the agents (senior management) they are able to hire through a controlling board to manage the firm on their behalf.

    Ironically, in the US we tend to argue that political control of societal institutions is hurt by the concentration of power that accrues through represenative institutions (legislatures) and elected and appointed administrative staffs, because "government is inherently inefficient and corruptable." Yet we seem comfortable with the concentration of economic and administrative control of productive institutions because we believe that "the invisible hand" will provide discipline. Doesn't our ideology also posits that the "ballot box" will play a similar disciplining function on the political side? It is dissappointing, then, to see elections being "bought" and legislators being "hired" by those with disproportionate control over the financial assets of the productive economy.

    Our focus should be on sorting out these tensions, addressing them seriously, and working to create societal mechanisms that harness them in favor of the welfare of society as a whole, rahter than clinging to a notion that "free-markets" are efficient (good) and "government" is inefficient (bad).
    • Eddie Ross
    • Student, TSU
    The banter on the role of government in matters economic really boil down to a deeper issue within society. The less internal restraint members of society are capable of endorsing (read free markets acting nobly in determining the greatest value for society as well as individually), the more external restraint is required to manage human passions (read government intervention).
    • Alan Ecclesston
    • owner, Changework Associates
    I agree with professor Scott and I believe the sports analogy is appropriate.

    Recent experience just proven that when there are inadequate rules, or designated watchdogs fail to enforce the rules, it can threaten the entire economy in this country and beyond.

    If all parties must function under clear and appropriate rules the playing field is level and competition is enhanced--quality, efficiency and innovation are rewarded. Let's not confuse "free market" with freedom from rules and oversight.
    • Eric H
    I would recommend reading Gabriel Kolko's ironically titled _Triumph of Conservatism_ as background to this discussion. Kolko shows that Big Business clearly favored most of the regulations passed in the Golden Age of progressivism. That trend continues today as Mattel succeeds in using a panic brought about by their irresponsibility, media hype, self-righteous Naderite astroturf interest groups, and pandering politicians to increase the cost of entry to the toy market and protect their own market share. The idea that the government can be arbitrarily directed to work for "the public good" (whatever that might be) is naive at best.

    The modern structure of capitalism (really, state-capitalism) is one set of remedies piled on top of the problems created by the last round of remedies, etc. Ecologists refer to this as "parachuting cats", a term whose amusing origins can be found with a quick search. If we want to truly address the problems without perpetuating them, we need to strip the system all the way back to the enabling legal premise of limited liability used to shield high level execs from the bad outcomes of their risky decisions. I doubt that would politically feasible.

    So what we're left with is a system dominated on one hand by people who claim to prefer no regulation, by which they really mean no *more* regulation or at most no regulations passed in the past generation or two, and on the other by people who prefer the illusion of democratic control, the mechanism by which they have been "saving capitalism" (and in the process creating oligopolies that are too big to allow to fail). These can be represented by Friedman and Krugman. They aren't really in conflict in terms of actually addressing the underlying problem, so the system cannot help but to perpetuate itself until it gets too big to bail.
    • Aldo
    • innovator, x-it products
    we must choose to serve one another, not money. this does not mean the end of prosperity, but rather points the way to the narrow path of true prosperity. wealth must accrue for service to man not deception of man and service to money.

    we need simple solutions that are built on timeless truths. complexity has enabled deception to rule. we are all suffering at the hand of our own nature. government should be the way we pass this wisdom along to the benefit of all. governments focus must be to enable and maintain integrity between all peoples.

    a good start would be to recognize our system elects by bribe or graft. we need a system that enables people to gain office without owing favor to big interest/money.

    hopefully this can happen by forced evolution and not revolution. that itself would be a great victory for how far we have come. we all must seek to effect positive change in areas where we have expertise and demonstrated credibility/trust.

    presently for me that is patent reform;

    hope this is helpful and fruitful.

    many thanks,

    • Paul T. Jackson
    • owner/consultant, Trescott Research
    "where the government can play a crucial role of drawing boundaries and creating infrastructure capable of enforcing the rules (law). Government's role should be to ensure that capitalists are accountable for their actions."

    The quote of the person above is telling. Unfortunate the government has not done that, i.e., made capitalists accountable.

    Also above someone suggested the government "by" the people...not always "for" the people. My observation of representatives and presidents in government over the past 50 years suggests to me that government does not govern "for" or "by" the people, but is made up of individuals who have their own agendas and supporters with their own agendas. As someone once said about the golden rule, "those who have the gold, make the rules." is still pretty much true as it has always been. And those who don't have the gold, end up footing their bill.

    It seems there are no standardizing values and morals; haven't been and are not now found in government, so how is that supposed to help economics?
    • John
    • Writer, Hollywood
    Do we even know what pure capitalism is without government meddling in some for or another? Meddling with money supply, interest rates, subprime incentives, arm-twisting with the best of intentions?

    The great crime of our time is that we bailed out failing institutions and, in essence, rewarded failure.

    I agree with the notion that in a free market private companies trend toward monopoly. But no more so than government trends toward absolute control.
    • Andy Robin
    • HBS MBA 1980
    It's got to be obvious to the casual observer that with no framework of "structure, security, and adaptability," as Professor Scott puts it, capitalism results in gross excesses that cause great damage to the wellbeing of the nation. Only somebody who was born this morning could avoid that simple truth. The government must provide the needed framework through a variety of regulations, monitoring authorities, and enforcement.
    • Elizabeth Doty
    • Founder, WorkLore
    This is one of the most important questions we can be addressing right now in Western culture -- thank you for raising it and to others for joining it.

    There's a lot that could be explored, and I like the idea of asking whether there is an objective set of rules that can be used.

    I also subscribe to Thomas Friedman's view in Hot, Flat, and Crowded that government's role is not to intervene but to create the rules of the game that enable markets to be free.

    We in Western society, and business-educated professionals especially, have great faith in the invisible hand that leads individual self-interest to create the greatest societal good in an ongoing, self-correcting process. That is a good thing.

    But what we miss is that there are certain fundamental conditions that have to be in place if that is to work -- and there is a catalog of market failures that distort the invisible hand and lead to a net cost the society. (To name a few: Information asymmetries that impact awareness of risk, externalities from pollution or CO2 emissions, downstream health impacts, insufficient investment in public goods like infrastructure, or monopoly power that bottles up supply.)

    The market cannot price things accurately enough for the invisible hand to work when these market failure are operating. Innovation doesn't work when the rewards and costs are distorted. McKinsey just produced a study that showed 10-15 environmentally responsible actions companies can take that lead to POSITIVE cash flow -- so why do companies need to be convinced companies to get on board with such no-brainers? Because there are market failures preventing the most beneficial outcomes from happening.

    So, who makes the rules that enable the free market to do what it does best?

    Problematic as it may be, that is the role of our social-political process. Because our civil relationships come before our professional ones, we as a society need to grapple with the challenging process of working out those rules of the game -- and correcting the immense distortions that have crept in.

    To my thinking, most of the failures of government that others have referred to here are a result of two things. 1. An interventionist approach (Fannie Mae) that doesn't limit itself to the rules-of-the-game or 2. Government that is too susceptible to influence from market actors.

    When Madoff intimidates the SEC and lobbies against stronger enforcement, when we take the teeth out of the FDA's ability to enforce food safety with the Peanut Corporation of America, it is only possible because markets have not been operating freely, power has concentrated, and those economic powers are driving our civil processes.

    What we need is stronger democratic processes -- with all their messiness -- and a clearer understanding that business and markets depend on the infrastructure of trust, rule of law, political stability, value systems, and "rules of the game" that we create together as citizens.

    And when we engage in that process, we need to be equally aware that we are foolish to try to prescribe HOW the game should be played within those rules. The immense need for innovation we face now is only possible with the creativity of efficiently operating markets.
    • Anthony Nicholas
    • Principal, APN Consulting
    In addition to the question about objective standards for government regulation and policies to help capitalism succeed, there is the need to address the societal impacts of individual firms' decisions and behavior. Corporations are not managed and governed in a way that enables them to address effectively their industry's impact on"the balance of society".

    If government is essential in addressing global trade arrangements, is it not also essential to addressing private enterprise behavior impacting pollution, energy conservation, human rights, and scarce resources such as water? In the U.S., Government's track record in addressing public policy issues is a lot better than in operating any activities.
    • Anonymous
    The major issue of Government versus Capitalism centers on distribution and allocation. Politicians want to redistribute income for 'social justice' for their personal gain and power. In practice, this means diverting resources into state entitlement programs to secure a broad electoral base dependent on the state and increasing control over institutions that expands their power for patronage over those outside the government.

    By its very nature, government distribution carries high moral hazard for cronyism and abuse. It also leads to misallocation and abuse of resources for personal and political gain.

    Capitalism has been largely transformed in the US to a corporatist hostile to market forces and the Schumpeter concept 'creative destruction'. A growing share of the US economy is now heavily subsidized by the US government.

    The bailouts have played a big role in 2008-2009. Obama care, cap and trade, and 'green energy' will further expand Government control over allocation of resources and production.

    These programs will create a new elite, who gain access to every greater wealth though their crony relations to the Beltway. They will be largely sheltered from competition and heavily subsidized by the government.

    It is likely that the US will become less competitive globally in the future and look more like an emerging market country with expanded political cronyism, high public debt levels, and a weak currency.

    This may lead to serious sovereign debt issues as public debt rises to unsustainable levels to finance the subsidies.
    • Paul Bland
    • Business Faculty, Virginia Union University
    Professor Scott is correct. "Free for all" markets are great up to a point, but government must maintain a, as needed, hands-on posture to keep the capitalist system functioning. Otherwise, our system will self-destruct.
    • Anonymous
    It is all so different in the developed world where there are structures in place to deal with exigencies and where there exist safety nets for the under-privileged in the form of social welfare.

    For us in the developing world, I would make bold to say that while encouraging capitalism (including the provision of enabling environments, level playing field, etc.), governments must also protect the masses from over exploitation from the capital owners.

    I think the role of governments in the developing countries should include the provision of some level of protectionism to its citizens to curb capitalistic excesses.
    • Cliff Norman
    • Partner, API
    The discussion of government versus capitalism has been catapulted from the election when the economic collapse was labeled as "greed" by both Obama and McCain. The start of the current collapse of the markets and of the sub-prime crisis began with government intervention under the Clinton Administration in 1998 and further coddled along by the Bush Administration until 2005. A lone NY Times reporter predicted in 1999 that a collapse of markets could occur given the risky loans combined with an unforeseen downturn in the economic. Stephen Holmes (1999) predicted the effects would be worse than the Savings and Loan mess of the 1980s, another government induced program.

    Lincoln noted that "government should only do for people what they cannot do for themselves." Reagan noted,"The role of government is to protect people from each other. There is no amount of government that can protect you from yourself." It appears with all the bailouts, we are now attempting to protect people from the consequences of their own actions combined with some ignorance facilitated by the very politicians that are trying to save us from the "greatest economic calamity since the Great Depression." Amazing chutzpah!

    (Reference: Fannie Mae Eases Credit To Aid Mortgage Lending by Stephen A. Holmes, September 30, 1999.)
    • Bruno Bégin
    • Owner, Hospitalité Québec
    Capitalism has demonstrated that it is the most efficient system invented so far. On the other hand, it is by its very nature a very violent system, the name of the game is to get market dominance and destroying one's competitors is certainly a good way to achieve this.

    Jean-Jacques Servan-Schreiber, the founder of the French L'Express news magazine, said at some point that the role of government is to protect the people from this very violence. We have seen that the free for all philosophy of the last decades, certainly did not achieve that goal.
    • Anonymous
    Why do we always assume that Government is an exogenous force when it comes to capitalism? Why do we not think of Government as an endogenous force which actually drives and, God forbid, sustains capitalism? Indeed, apart from abstract models, and even then only perhaps, I'd like to see even one example of any form of capitalism not insulated or isolated from the rest of the real world which exists in the absence of Government.
    • Kamal Gupta
    • CEO, EdSeva Software
    Scott is right in principle. A free market needs rules, just like a free society does. The problem comes in the execution. Politicians frame rules without an expert understanding of the issues - and there is always a hidden agenda to keep control of the levers.

    There has to be a mechanism to check this. This could include things like having a panel of business experts, having open and transparent debates before making the rules and so on.

    The recent crisis has given rise to phrases like "too big to fail" or "too big to manage". It was lack of rules that allowed banks to become so big that they could not be allowed to fail. They are bailed out by taxpayers' money, even though they operated like gamblers in a casino. One of the main reasons for this was lack of adequate rules.

    Business is a part of society. We have rules for civilized living, the same should go for businesses.
    • Steve Hyde
    • President, Hyde Rx
    I consider myself a practicing lower-case libertarian, but rarely use the term "free markets." The term too often connotes an assumption that free markets operate in the absence of government regulation. That's not the way it works, because even the freest markets require the rule of law to function properly at anything more than the most simplistic, elementary level.

    Without a basis in law--read regulation--truly free markets may still exist, but only in the primitive forms of informal and black markets or of illegal piracy and criminal enterprises in which property rights, contracts, protection from theft, and other essential elements are enforced, often arbitrarily, by violence, corruption, and, by definition, lawlessness.

    Legitimate markets of the complexity necessary to sustain major economies cannot exist without law and regulation to ensure property rights, enforceability of contracts, rights of (at least) commercial speech and assembly, a sound currency, public infrastructure, a stable banking system, orderly bankruptcy procedures, national defense, social and economic safety nets, domestic and international trade policies, efficient capital formation, prevention of corruption and criminality, protection from unacceptable negative externalities (e.g., environmental damage), and resolution of significant market failures (e.g., health care). These and other government functions are the desiderata of "free markets." Economists Charles Kindleberger and Robert Aliber have suggested that such regulation originally arose as a means to reduce the costs of doing business, not to impede business.

    The trick, though, is for regulation to permit markets to function without unnecessarily interfering with the free exchange of information and value that makes markets more effective than any other known method for creating and distributing economic goods.
    (Adapted from my book, "Cured! The Insider's Handbook for Health Care Reform.")
    • Marios Christou
    • Head, Centre of Economic Studies, University of Nicosia, Cyprus
    Capitalism and free market require a framework within which to operate efficiently. This framework consisting of rules and regulations is needed in the same way that democracy needs its laws which set its own framework. Without a set of laws a democracy becomes an anarchy. In an analogy, a free market without an operating framework it can also become an anarchy.

    The politicians are responsible to set this efficient framework. however what they fail to do is to follow the developments of the market. Markets develop quickly with new products offerred to their participants. Politicians fail to respond with an equal speed to set the required framewok. As result, a gap is created which produces the "irregularities" in the market leading to a degree of anarchy.

    What politicians need is a system by which they will respond on time to regulate the framework within which markets will operate efficintly and effectively without leaving the gap (empty space) to create the anarchy.
    • Anonymous
    Countries can have a variety of economical and political theories applied to the way they operate.
    The economist can inform the politician about the probable effects of implementing new economic theories and the additional implications of giving complete freedom or constraining/regulating in the chosen model.
    It is the job of the politicians we elect to act, on out behalf, to decide which of these effects are desirable and fair and legislate accordingly.
    • Rob
    • Software Development Manager, Fortune 500 firm
    The needs of a country and the needs of a corporation may be on the opposite sides of the equation. Take outsourcing for example, decreasing cost (intelligent outsourcing) will always help increase profit or make you more competitive by decreasing your price. But if you keep outsourcing your lower end jobs, what do people in the country who need the lower end jobs do . . emigrate . . that may be the ultimate globalization induced by capitalism. Or will there always be low end jobs in every governed nation? Will the marked itself produce low end and high end jobs to satisfy a nation's needs without government intervention. I am not sure.

    I think the market can govern itself, but will the results be what a country can handle, . maybe not . . Governments interfere to ensure the best for its contingency - which sometimes means controls on free markets. . .
    • Brian Hoffman
    "Capitalism rewards risk taking abilities of individuals and organizations..."

    While that may be true in, it must be added that capitalism should similarly penalize those same individuals and organizations when the risks do not pan out.

    Wall Street, however, has been clever enough to make sure that that did not happen. Between the truism of 'IBG' (I'll be gone) and 'sophisticated' financial instruments that were sold as safe, certified as safe by rating agencies, and consumed as safe by investors, yet fully understood by no-one, turned out to be anything but safe. Wall Street was able to reap tremendous rewards for those 'risks' over the past eight or so years while the economy as a whole and the government have paid the penalties.

    While I feel that recent legislative proposals have gone too far in trying to micromanage business activity, there is a political obligation to ensure that not only the rewards but also the penalties of risk-taking remain with the risk taker, and not be handed off to those who never knew about the risk and never had a chance of benefitting by the upside.

    Unfortunately, all this is going to be forgotten before we have another similar crisis, and by that time the reasons for any political change enacted now will have faded and the change will be rolled back - like Glass-Steagal and other post-depression acts that helped the economy remain relatively stable for over 70 years yet were either repealed or emasculated during the Bush years.
    • Dinakar. R
    • Architect, StoQ
    It is just crony capitalism. The rich,powerful and the politicians are making other classes look stupid. There will be a Tipping point where this system will be wiped out by the other classes.

    Let me put across a simple question. Has anyone (so called elite politicians + Economists) come up with a new model to prevent this crisis in the future. Taleb is right ... we are giving the steering wheel of the bus to the same folks who caused the accident earlier.
    • Doug Elliott
    • CEO, TEQ Development
    Scott is of course right that economy and government are the two great organizing forces of human society. So it comes as no surprise that they both influence and seek to influence each other with respects to the human condition. In Western culture, given the choices of form and the consequences of history, we arrived at capitalism and democracy as the respective best choices (or the least evil) for economy and government.

    In a perfect world, capitalism and democracy should be both cooperative and antagonistic with respects to each other. Cooperation should stem from respect of each institution's exclusive franchise. For economy, it is the means of human sustenance and well-being. For government, it's the monopoly of force and rule of law.

    Antagonism is necessary when each institution, by itself, cannot establish best practices for its continued existence. That balance is lost when the same leadership controls both institutions and that is the situation we face today in the US.

    In a down economy with high unemployment, personal income and job creation are the highest priority of government because without them, public assistance funded by public debt is necessary. Yet, for capitalism to achieve this effect, owners of capital must forego current accumulation of wealth in favor of the expense of wages and job creation. This is opposite the mantra of capitalism where maximizing wealth is a moral imperative. Yet, a game theory view would suggest that if all owners of capital did this simultaneously, the resulting increasing in consumer demand would greatly outweigh the short term decrease in accumulation. But the competing nature of individual capitalists will never permit this.

    An independent government, acting on the capital markets could achieve the necessary and temporary change in rules of capitalism in a variety of ways. For example, it could promote and coerce cash dividends to be paid by businesses by simultaneously increasing business tax rates and giving businesses a complete tax credit on dividends paid. Since the largest US companies are now sitting on a US $1 trillion in cash, such a dividend program is highly feasible. The resulting distribution of cash to shareholders would have a direct and highly distributed stimulus effect on demand and capital formation. Because the condition is imposed on all capitalists, all can benefit from the resultant stimulus according to ability.

    But this is opposite of what is actually occurring. Major businesses would much rather keep the cash and increase M&A activities, which in a down economy requires no growth of revenues to achieve a growth of the merged business. The motivation to M&A is the opportunity to decrease duplicate costs, especially labor, to increase profits. Even though decrease in employment must decrease demand, including for merged business, the short term gain can enhance the income potential of leadership.

    We have come to believe that leadership in economy is the 'right stuff' for leadership in government (and vice versa). The incestuous pool of leadership is degrading the independence of institutions to act in the separate best interests of each. Scott's sports analogy is appropriate here. Rules and rule-making promote safety and fairness in the game but only if referees manage the rules by which players play the game. Interchangeability of each is a false hypothesis and needs to stop if capitalism and democracy intend to thrive side by side.
    • Fidel M. Arcenas
    • PTA
    Government and capitalism, within the context of a market driven economy, are interdependent and must therefore co-exist as harmoniously as circumstances require. There is ample research to prove that only when government authority asserts its role that a country's economy began to improve and flourish. Government, through laws, rules, and regulations lay down the ground rules and level the playing field. There is much truth to what Albert Camus said that if "the center cannot hold, anarchy will reign."

    The problem, however, arises when government's bureaucratic apparatus fail to cope with the pace of global economy. The technological revolution that drives the economy to a frenetic pace has left the bureaucratic machinery behind. This failure of government to track up-to-the minute major business transactions makes it impossible for the government to determine what measures are necessary to protect the economy. A bureaucratic apparatus that's way off the pace of the the market forces is useless.
    • Anonymous
    Government should only act upon markets as an arbiter of disputes. Regulating the markets is not unlike suppressing wildfire. Perhaps justifiable from an aesthetic perspective but tampering with the natural order made things much worse. Like wildfire suppression market regulation, for lack of a better term, should only be considered when there is a public risk of catastrophic loss and then only in a very limited fashion. Most homes lost to wildfire are lost because the homeowners knew the risk of building where they did. Investors in the market must take on the risks inherent in the market in order to reap any rewards.
    By attempting to reduce or eliminate failure in industry government will also reduce or eliminate any rewards. Without risk of failure there is no meaning to success.
    • Harley Farmer
    • CPA
    We definitely need some rules of the road. On the other hand, it is a fallacy to assume government will set rules and enforce them even handly. Whenever the government is involved there are winners and losers, which in turn engenders corruption and market maninpulators.
    • Fidel M. Arcenas
    • PTA-Philippines
    About two decades ago, Francis Fukuyama declared the end of history. With fall of the Berlin Wall and the collapse of the USSR, he observed the universalization of liberal democracy and, therefore, capitalism.

    Almost simultaneously, the position that government must stay out of business became fashionable. With government giving business a free rein, unbridled capitalism spread like wild fire throughout the richest countries of the Western Hemisphere.

    But somewhere in Southeast Asia, Singapore's Lee Kuan Yew forewarned that such a model was not suited for most countries in Asia. His thought, which ran along the communitarian line in contrast with the western concept of liberalism, stressed that the collective welfare of the people ranks higher than that of an individual's uncontrolled right to enjoy the fruits of the economy.

    His position, strengthened by Singapore's and China's success, eventually started a fresh round of debate between liberalism and communitarianism, proving wrong Fukuyama's pronouncement of the end of history.

    As the debate raged on, the Enron then Madoff scandals (to name a few) blew up. Then Wall Street came crashing down resulting in global economic crisis.

    Ironically, corporate giants like GM turned, nay, begged for government to come to the rescue, threatening that millions will be out of jobs if the US government fails to act.

    Now we ask: What is the role of government vis a vis capitalism?

    Need we say more?
    • Anonymous
    From the recent stimulus injected by the government to provide 'life support' to large capitalist institutions to the creation of the institution of Social security post 1930s economic depression, and also, the regulatory authority the government enforces either in the form of Federal Reserve to control the amount of liquidity in the Capitalist system or in the form of Securities Exchange
    Commission to ensure "trust" at the heart of Capitalism i.e. Capital markets, Government (with a capital G) has been called many a times to fix or regulate the otherwise crumbling Capitalist institutions.

    Hence, I feel the right question is either:
    What should be the 'scope' of the role of the government to sustain the Capitalist system? Or,
    Can Capitalism sustain itself sans any government support (like belief in the invisible hand by Free market Capitalists)?

    And, I will attempt to answer in the context of the above two questions.

    First we will start with the second question. The minimum support that such a free market Capitalist institution needs is the support of an arbitrator whose jurisprudence can be enforced on either parties in case of a conflict. The question then is the acceptance of such an arbitrator, who/ which is un-biased and should objectively judge the conflict. Given the very evolution of man based on local or subjective conditionings, it is highly impossible to find such an un-biased arbitrator who commands a universal acceptance of his/ it's judgments.
    Even the applicability of international standards and rules to objectively resolve conflicts is never a final means of resolving the conflict. Proof of this can be found in the ongoing conflicts globally!
    Hence, the system of participative governance with local authority to enact necessary laws, and, where the participants are elected by the respective peoples, is the best "known means" to act as an arbitrator. This brings us to the first question: What should be the scope of such participative governance?

    In finding the 'scope' of the role of government, we have created a new system of totalitarian regimes under the governance of dictatorship of the proletariat, where the scope is complete.

    Contrarily, on the other extreme, the scope is being diminished by free market capitalists by pushing for unified access not only to the capital markets, but, also free/ liberal access to agri and non-agri commodity markets.

    And, in between these two extremities, we have a middle path being pursued by Keynesian economists, who get continually challenged to quantify the scope of the role of the government, based on the stage of the Capitalist economic cycle!

    Looking at all these at the micro level of a human being, it seems to be the standard dualistic struggle that man is grappling with since ages, and, all the attempts to define the scope is just a projection of his dualistic struggle at all the institutional levels, incl. social, political and economical.

    The question thus is, can man mature beyond this dualistic struggle for expression or forming organizations to institutionalize his expressions or his way of life?

    I do not have an answer yet. But, it could be something when man knows how to build 'de-organized' organizations.
    • Tom Dolembo
    • Consultant, Disaster Planning Assoc.
    Perhaps the problem is not democracy versus capitalism, but the post capitalism USA. In the US, what commands our markets is not capital formation, but massive derivative (and often vaporous) debt instruments and onerous traded hedge positions. We have a republic, and the representatives we elect have been, by and large uniformly rich and members of the debt managing and debt creating classes public and private. The government is now principal private debt manager through the Fed and former IB's, Goldman etc are banks, managed by Washington, FDIC etc. Rules to restrict formation of overpriced and too often worthless debt instruments issued by our IB's should not be confused with rules to restrict formation of capital in legitimate world capital markets. Free Market Capitalism is alive and well. if not here in the USA. Can non-democratic and highly restrictive governments be excellent capitalists?

    China, who it might be argued actually has free capital, and vast dollar hoards (and subsequent calls on US assets) is not a republic. China, among others, has a direct call on Washington in the form of dollar assets. China has massive restrictions on formation and use of capital and currency (and profit), and it might be argued is better at capital formation and use that we are. If concentration and growth of capital is among Friedman's free market objectives, the Chinese government has done well enough managing dollars and accumulating dollar capital.

    The US is a debt forming and debt marketing entity at every level, not a capital building or capital concentrating nation. The issue of successful capital formation has been settled, actually, by a government so dedicated in the past to the destruction of capitalism that it should give us genuine pause. What has brought us low is toxic debt and worship of its purveyors, not errant capital formation.
    • Jacoline Loewen
    • Managing Director, Loewen & Partners Private Equity
    Private equity is a fast emerging industry due to business owners needing to take risks with money which banks could not and should not lend. With technology democratizing, small firms could handle sophisticated, complex financings which used to only be possible for large institutions or the public market. Owners are psychologically very motivated as they can lose all their money. That drive is very important to understand when it comes to the role of the State and how their government officials are motivated. Do they like the sports teams? Do they respect them? Do they see their role as enabler? This impact on the psychology of business owners will grow or stifle owners taking risks - see India versus Silicon Valley.
    Yes, the government always has a role and I like the sports idea as to how this best works.

    First, the governing body has to make sure the players are not going to get hurt or killed. Competence in keeping people, property, patents and legal agreements secure is why the Western world still is the best place to do business.

    Second, the Government does not share the same motivation of a team owner which is to get, keep and delight a paying customer. The spread of State reach into actually telling how to do the business in the US is highly worrisome. Even telling banks which customers to lend to put pressure on - to use the sports image - the good teams and players. This type of State interference is more akin to giving steroids to poor players and forcing owners to add them to the team. The other owners had to keep up with their competitors who were being boosted by artificial means.
    That is not a fair market.

    Government is about setting the rules and boundaries but also reminding us about the nobleness of the game - that psychology again. (Thomas Jefferson really did that well). The Government's motives are different from owners of business who are ruled by the paying customer, keeping the players strong and secure and making the game tremendous.
    We are right to question Government doing the actual product or service such as tax payers owning GM. Britain already showed this is not a win/win situation. We all know GM is really a pension plan and social services program and Russia showed that government officials end up with too much power around their own interests and not around a customer's interests. Peter Drucker reminded us that business is for the customer. Keeps a tight fiscal discipline or else you are out of the game.
    • Fernando das Neves Gomes
    • Consultant, independent
    I'm sure this is one of the most important discussions to have these days. To understand what we are talking about we have to know a little about the foundations of capitalism, even the foundations of democracy (one hand the political system, in the other hand economical system). To go deep we have a lot to consider. Just to make a position I think that the big crises we deal today it's about the government, global rolls, of economics. Something that grows by adjustment and not by concept. What we have today its a lot of political power adjustments based in a lot o concepts without a vision, a goal conception and global articulation to a desired world. Grabbing the basis, the democracy appears has the present concept to the government, the political system exist to represent and develop the mutual things, to serve the people. At this point the economy it's the freedom of people to make transactions. The politics in economy appear to make adjustments on bad behaves, to protect people abuses, to define taxes as the first financial interest in transactions, to make rolls as you say (FIFA example). But something happen to the world, the best and bigger entrepreneur its the state, at present days nothing it's more interesting then build countries, army supply, improve knowledge without private investment, like sciences, etc. what make a distortion to economy, the real capitalism lose to a state ownership.

    Instead of having big capitalism and economy relations and transactions, we have a political system capable or not to influence economy. We see countries, particularly in Europe, developing everything with state intervention retiring any private capacity, as investing directly with self resources instead going to the market. This particular relation build the country deficit, debt, world debt, because the monetary chain wasn't adjusted, the first thing to be reconsider. At this point we can lose democracy, we lose capitalism. I hope not.
    • Dr. Martin Reinhardt
    • Sociology Instructor, Mid-State Technical College
    I am both a citizen of my Tribe, the Sault Ste. Marie Tribe of Chippewa Indians, and a citizen of the United States of America. In a pre-colonial context, our Tribe might have been classified as egalitarian with a spiritual ecological base to our governance and our economy. Reciprocity between humans and other humans, and between humans and other parts of nature, was a defining feature of our economic system. Our Tribe was forced to adapt to significant changes in our environment shaped largely by the forces of US politics and capitalism.

    What we have today is a Tribe that spans at least two forms of government, and two approaches to economy. We now have a constitutional government where our officials are democratically elected to form a Tribal Board. This Board represents our Tribe in dealings with the US and the States that surround us. We also maintain a traditional form of government, albeit a neglected form quite often, that interacts with the newer form and with other traditional tribal governments. It is ironic that this traditional form of government is similar to the Iroquois Confederacy structure that the US was in many ways modeled after.

    Our traditional tribal economy still influences our contemporary tribal community. It is common to see our people redistributing wealth that may be accumulated by participating in a capitalist economy that surrounds us. This brand of capitalism has been called "tribal capitalism". It treats participation in capitalism as an external activity, while working to revitalize our traditional tribal economy as an internal function. As in any society, we have those who would push for going completely one way or the other, but for the moment we seem to have a blended economy.
    • Richard
    • CEO, Social Entrepreneurship Non-Profit
    Appropriate Government regulation can greatly benefit capitalism and assist capitalism to deliver a value proposition to the citizens.

    Australia has been an excellent example of this in the recent "global financial crisis". For example, Australian banks typically have higher levels of regulation than US banks, and Australian citizens are generally more tolerant of such regulation.

    Partly as a result of this, no Australian banks failed in 2007-9, there was only marginal decrease in employment, there was only temporary and minor asset price deflation (house prices are now rising steeply), and consumer and business confidence is high. Australia has not been in recession at all.

    A non-laissez-faire Government approach has resulted in better - not worse - business outcomes.
    • Shann Turnbull
    • Principal, International Institute for Self-governance
    The command and control structure of either the institutions of capitalism or government undermines the integrity and effectiveness of both democracy and the operations of markets. Hierarchical power structures also inhibit the use of alternative more congenial social co-ordinating mechanism based on family, friends, clans and common interests.

    The role of government of the people, by the people for the people requires decentralisation of both government and business organisations so that no higher level of either undertakes tasks that are better managed at a lower level. This arrangement is found in self-governing biota but has not yet been significantly adopted by society to provide the greatest benefits for the greatest number as explained in my booklet "A New Way to Govern: Organisations and Society after Enron" at http://ssrn.com/abstract_id=319867.

    The role of a government is not then one of direct intervention in the institutions of capitalism but indirectly to insure that organisations can maximise their ability to be self-governing to minimize the need for government laws, regulators or the use of legal proceedings. In this way the cost, size and influence of governments can be minimized for the greater good of all citizens.

    This approach was proposed by US Vice President Al Gore on February 12, 1996 where he proposed that the role of government was "more on imprinting the DNA" of institutions to make them self-regulating. Operationally this means the role of government is to require that the constitutions of organisations in the public or private sector minimises excessive power and share power with the citizens whose lives they affect to further their self-governance. Evidence of the operational advantages of this approach is provided in my PhD thesis at http://ssrn.com/abstract=858244.
    • Jay Somasundaram
    • Systems Analyst
    The discussion is about two dominant ideologies, with apriori assumptions about their rightness. A number of comments correctly challenge the 'rightness' of capitalism. However, we also need to ask whether 'democracy' is 'right'. Do we currently have democracy? Is it working well? Are there better alternatives? (And what do we mean by better?)
    • Ben Hedenberg
    • Managing Director, Big Ben Venture Partner Inc.
    The role of a government vis-a-vis a free market system should only be related to minimizing corruption and to provide a healthy non-toxic environment for free enterprise to grow and prosper in. Any aspiration by a government to control and regulate the market will only put strains on the entrepreneurs and limit the growth of wealth. The Socialist Kingdom of Sweden has vividly practiced a regulated society since the 1960s . The result has been devastating. From 1870 to 1970 Sweden was beside Japan the fastest growing economy in the world due to an extensive freedom for capitalists. From the 1970:ties SAP (the Swedish Workers Party) has worked through the political institutions of legislatures for shaping the society. In thirty years Sweden has fallen from a top position being among the richest countries to a second-rater position. Today Sweden has a toxic environment limiting free enterprise to grow in. The wealthy individuals have emigrated.

    In contrast to Sweden, Switzerland has managed to keep a relatively free market system and managed to keep its top position in the league of the wealthiest nations of the world.

    Wealth is always related to how toxic the regulations are for market. The more pesticides used in the garden of growth the less growth.
    • Philip Ejiofor
    • Managing Partner, Bridgewater & Associates
    It is my view and should be universally accepted that in as much as capitalism is practised within the confines of a state, government has a responsibility to interfere one way or the other in order to protect the interest of the weak. In fact that is the essence of any good government.

    In extreme right-wing capitalist states, the pressure is for government to keep a low profile and not interfere in the business of business. Such pressures forget the fact that without the infrastructure and regulatory guidelines, which government must provide, business without regulation will become a wolf unto man.
    • Michael
    • Director, Citizen of Denmark
    A capitalist free market seems only to work perfectly if all the players are playing fair and square - but only very few organizations does whether private, public or government based. There are countless examples of secret pricing agreements etc. proving this postulate I believe.

    I'm living in a social liberal democracy where I'm paying +50% in income taxes to the public government - and with pleasure. You might ask why so?

    Because the public sector (or government) secures the basic needs for any individual - like free healthcare service, (almost) free education, housing and basic economical funding for those that needs it ....and much more.
    But most importantly because it provides structure, security and enforcement of a set of rules for how all members of the society shall act (and react) - both individuals, organizations, corporations and the government itself.

    All this couldn't function without a very strong and independent Ombudsman function - which is a crucial element to secure a well functioning public sector and elected government.

    Despite all this I would never say above system is better than e.g. the one in China, in US, in France or elsewhere.

    I can only say that I'm very pleased by living in a country where I can go buy something knowing that it's not entirely up to the market forces to decide e.g. warranty periods, return rights, interest/fee structure as well as how any complaints/wrongdoings shall be handled.
    • Edward Hare
    • Retired Director, Strategy and Planning, Fortune 250 Mfr'r
    This is an incredibly important topic and the last several decades prove that we've been regressing on the subject of the role of "government", the effects of the "political" system on priority setting, and the human behaviors/expectations exhibited in market forces ... aka, capitalism.

    The more we seem to try to "reform" things, the worse they're getting. What "government" is good at, what it can do or should do, and it's limits is pretty complex. One school of thought seems to be that more, and larger,
    government is the answer. Others, including Alan Greenspan, feel market forces and deregulation are to be favored. Neither simplistic view is right.

    I believe America long ago lost sight of what government should be primarily responsible for. Markets work ... except for when they don't. Monopoly power, irresponsibility to the public good, lack of protection of assets, and unwarranted favoritism corrode free market forces. Examples abound.

    Well intentioned (sometimes), government steps in to set rules and boudaries. But public officials often do a horrible job at it. Think the federal tax code.....a mess that never gets attention. Congress seems blissfully ignorant that any rules they set will result in tens of thoudands of people trying their best to game the system. Against a handful of regulators who lack the resources and/or will to enforce those who fail to follow them. Think SEC....and Bernie Madoff. Or derivatives ... and a failure to insist on transparency that the financial industry found to its liking.

    Government's role should be to set the conditions for capitalism, practiced fairly and responsibly, to flourish. And to make the punishments for not doing so appropriately threatening and onerous for those who don't. At present, the potential rewards for gaming a system, for bending if not breaking the rules, far outweigh the risk of getting caught. And that's unhealthy.

    When market forces fail, when impacts threaten the public good, when criminal conduct undermines a system....then government has to intevene. Quickly and decisively (neither is a core competency of government however). Beyond that......government is wholly responsible for protecting the value of the medium that capitalism rests upon....our currency. Which it doesn't seem to have much of a track record of success for either.
    • Paul Sweeney
    • Magazine writer, Freelance business writer
    It's a good article. What strikes me about the comments is how many people in business are in deep denial right now.
    Business interests have pretty much taken over government by paying for the candidates' elections and then paying lobbyist to maintain influence after they're elected.

    Business interests have also captured the Supreme Court and most governmental agencies (there's a report today that OSHA can't count the number of workers injured because employees are afraid of retribution), and have persuaded journalists to treat them worshipfully.

    Yet we keep hearing capitalists fret that they face ruination because government impedes the business system.
    We just saw what happens, however, when the Federal Reserve, SEC, Courts, Congress all collaborate to give business what it wants. 1929 all over again. Let's let history & not ideology govern our actions.
    • Phil Clark
    • Clark & Associates
    Let's take a step back. It seems that the "government is bad" vs "capitalism is good" mantra persists in our country today. Where is the real discussion of the middle space? Therein lies our solutions for the future.

    Second, if capitalism is always good...why depressions and economic swings throughout history? The real issue is that with all our "knowledge" man does not learn from mistakes. We keep repeating them.

    Government should be in place to promote...repeat promote...sound policies to benefit its people. This isn't about control and punishment. It is about setting up a framework to assure prosperity and the creativity of its people. Unfortunately, the modern polititian cannot fulfull that demand. The modern polititian relies on "old money"...that made under the current rules...to gain position. They are not put there to promote the future but to ensure the past. Sadly, that is where we found ourselves in this last ecomomic crisis.

    I fear we cannot break the chain of human behavior. History is not on our side. If we could somehow infuse our government with 20 to 30 year olds that have not been polluted with old ideas we might have a chance. The rules are stacked against them.

    As to the continual harrange of government waste and inefficiency. I am sick and tired of the blame. Medicare is wrought with fraud. Who is defrauding the government? Private enterprise! The latest bailouts were for whom? Private enterprise ran to the evil government with their hands out. The illusive example of the $500 hammer or $300 dollar toilet seat is always held out as government waste. The contracts went to the lowest private company bid. Blame the companies who had the "capitalistic spirit" to charge that price. Private companies are making the swine flu vaccine. Why don't people blame them for the lack of foresight and speed to protect the public.

    My point is that it is time for everyone to get in the game and work to solve problems instead of blaming and fighting over old, trite philosophies. It's a new day. It's time to build a new future. That will require both government and private interprise to bring their best to the table.
    • V P Kochikar
    As the "Government vs. Free Market" saga plays out, the regulatory landscape is being reshaped. This debate makes constructive contributions towards redrawing the lines between governnemnt and free markets.

    Good regulation should follow two principles:

    First, it should ensure that financial institutions have their risks in plain sight. If exposure to "hidden" risk must exist there should be good - preferably quantitative - estimates of that risk. In other words, a financial institution should be required to know what it does NOT know about its business and its environment. One test of whether excessive complexity is creating intolerable risk is the "12-year old test": if you can't explain a particular financial instrument to a 12-year old, it's probably too complex (can you explain to a 12-year old what a 'collateralized debt obligation' is ?!).

    Second, there should be mechanisms to ensure that financial institutions do not exit their business in a catastrophic or otherwise unexpected manner.
    • A former EAM student
    • France
    I think Professor Bruce Scott's analogy with Soccer is excellent, and that he is 99% right. (It remembers me his excellent "EAM" teaching thirty years ago ...)
    We (market players, as well as citizens) need:

    1. a well defined field(s)
    2. a simple, efficient and if possible "ethical" set of rules
    3. an efficient and "recognized and controlled by the people" referee.

    Caveat : I won't comment on the issue of cooperating/competing with autocratic countries, where "democracy", human rights..have , to say the least, a different definition than the one most democracies have , eventhough I think it is a major issue for the future of world wide capitalism).

    So what have we been seeing in the last decade?
    Businesses went to the places with the lowest, cheapest set of rules. It is positive when it punishes complexity, outrageous taxes to feed fat and inefficient bureaucracies... But it allowed also governments and regulators to be blackmailed on critical issues.Examples abound, one of the most important being european regulators (very intelligent and hard working guys with good intentions "for" the people", and I mean it) letting European big banks buying, making and selling to the public ultra-toxic products.

    The real power was (still is?) in the hands of the CEOs of Big Banks, who don't have any real shareholders. Chief regulators knew that it would finish in a blood bath, but they didn't dare going against institutions who wanted to keep pace with the big international competition."You cannot forbid this, Mr Chief Regulator, they do it in London, my main competitors do it everywhere, they make a lot of money. Our country cannot afford to stay behind. Our country, our businesses need strong and innovative Banks. We just cannot afford to miss this (juicy) modern game...." It was also kind of "This guy makes 100 times more money than I make.He is a very successfull International Banker. He knows a lot more than I do, he has very competent staff and access to superior technology. He must be right. "..How sad... In a sense, Governments and Regulators were ashamed of themselves, afraid of not understanding all this financial innovation, afraid of preventing the Banks to keep up....

    To summarize my thoughts and feelings , I would say that:
    -we need a common set of rules( about products, services , competition, anti-trust, transparency.etc..), internationally. The G20 cooperation is absolutly crucial. Businesses , technologies, etc.. know no boundaries.The soccer field is the world... That is "challenge n?1"
    -Challenge no. 2: Strong, efficient Referee (Government(s), Regulator(s)..).

    This has nothing to do with big and inefficient bureaucracies.Few bureaucrats, but powerful and respected ones (with adequate democratic control). Few rules, but simple and healthy ones, and a big big cost when you don(t play by the rules (1: yellow card. 2: Red card)

    In a sense, the crisis we are living through is a chance for "revisiting" Capitalism.... Let's hope that it will be for the better.
    • Santiago
    • Director, Nobiles Agropecuaria
    the option is not whatever the goverment is going to control the market or not....the main point is that "the goverment" works as a big player in a capitalist world....the government is a company itself that the main objective to maintain its credibility so the citizens keep paying their managers......why is an institution like the government run by people more fair than another company run by people? Money & power control the world and it doesn't matter if you are on a goverment or in a company, it is the same!
    • Ajay Kumar Gupta
    • Faculty, IBSAR School of Management, Belapur,Navi Mumbai
    It is true that two form of governance exist in the world today i.e. Democracy and Capitalism, and both can influence and impact each other. The impact may be positive and negative. When capitalists focus only on profitability rather than on social responsibility and don't serve the people especially in busts period; it creates a negative impact on democracy and society. The impact depends upon the role, responsibility and relationship of democracy and capitalists with each other. In a democracy the role of government is more than the capitalism, and it goes beyond serving the people in boom and bust cycles.

    It is the responsibility of the government to provide opportunities and social cover to all its citizens, whereas capitalist concerns more about their profitability. And in such situations, it is more important for Government (democracy) to create a mechanism where capitalism can operate effectively and efficiently and benefit
    both i.e. democracy and capitalism. The mechanism should be win-win for both the forces. It can be done by creating a platform, an environment or a regulation where both the forces can complement and substitute each other. It is the responsibility of the democracy to establish institutions, infrastructures and regulations that create "formal markets" that foster competition.

    In addition to create a mechanism, Government can collaborate with capitalists to serve the people more effectively. By collaboration, I intend to focus on public private partnership, joint ventures enterprises, involving capitalist in policy formulation and execution by inviting them to join politics. It is the responsibility of the government to establish norms that is promising and encouraging for capitalism. By doing this, government will be in better and strong position to serve its people especially in the time of busts cycles and to compete globally in the international market. The Government can also collaborate with capitalists to fight with global problems and social issues. Since government has more power to create mechanism and systems to deal with national and international issues.

    And where it is not possible to collaborate with the capitalists, the government can compete with the capitalists. It can be done by providing better education, services and employment at affordable cost. It can be done by providing better social security cover to its people. At the same time, it can also make provision for unemployment pay in order to serve its people and earn loyalty and faith of its people.

    In my opinion, the sports analogy i.e. free for all may not apply here because only capable ones will join and incapable will never get an opportunity. And consequently Riches will become richer and poor will poorer day by day. This may eventually turn democracy into pure capitalist country. The role and responsibility of the government is to provide opportunity to all sections of the society especially to those who are underprivileged and unequipped with tools and facilities. Government should train and facilitate them to compete with privileged ones. In a democracy, the role of government is to uplift underprivileged and poor section along with taking care of those in creamy layer.

    Finally, I am in the opinion that democracy is more responsible in serving the people. To do this, it has to create a regulatory mechanism under which capitalists will operate. It has to collaborate to become more strong nationally and more competitive globally. It has to compete to provide better opportunities, education, employment and social security to its people. At last but not the least, more than framing rules and regulations; effective and timely execution is paramount.
    • Kapil Kumar Sopory
    • Company Secretary, SMEC (India) Private Limited
    Capitalism represents an economic system in which the production and distribution of goods depend on invested private capital and profit making. The emphasis is on possessin of caital or wealth. This system results in the dominamce of capital and production for profit. Emphasis, therefore, is on making rich richer and cosequently the overall economy to flourish.

    While this is a good system as it involves hard work to produce wealth, the basic responsibility of the government to ensure equitable distribution of resources for the good of the common man get somewhat relegated downwards. It is here that governments need to take steps and strict measures, as necessary, to see that the capitalists do take care of their responsibilities towards the needy who cannot be ignored. We do not advocate socialism as such for an entirely socialistic pattern also has some shortcomings. Therefore, it has to be a balanced blend of the two and who but the goverment would be in a position to let this happen.