Capitalism is in serious crisis. Even so, no one is calling for it to be abandoned in favor of some other system, such as socialism, because everybody is convinced that, with all its faults, capitalism is still the best economic system known to humanity. As every student knows, Adam Smith provided the conceptual framework of capitalism. It has been improved and elaborated throughout its long history, and though the world has changed enormously, the fundamentals described by Smith have remained largely intact.
The need for reviewing the basic structure of capitalism has seemed appropriate on many occasions, but never so clearly as it is today. Indeed, in light of the current global economic crisis, there is strong support for a major overhaul of the system. In my view, one major change in the theoretical framework of capitalism is necessary--a change that will allow individuals to express themselves in multi-dimensional ways and address the problems left unsolved or even intensified by the existing conceptual framework. And although my proposal may be viewed as a significant change in the structure of capitalism, it is actually very consistent with what Adam Smith elaborated so brilliantly in his Theory of Moral Sentiments in 1759. Some 250 years later, however, some of Smith's lessons still have not been learned adequately.
Until the current economic crisis, observers around the world shared a remarkably optimistic view of the future of civilization. In the early years of the twenty-first century, we were living in a time of unparalleled prosperity, fueled in part by revolutions in knowledge, science, and technology. This prosperity had dramatically improved the lives of many; yet billions of people still suffered from poverty, hunger, and disease. In the developed world, a handful of economists and social scientists had been clamoring to draw attention to their plight. Many people, however, took a complacent view, assuming that the spread of free markets would bring eventual prosperity even to the world's poorest peoples.
The twenty-first century began with high hopes and idealistic dreams, encapsulated in the United Nations initiative known as the Millennium Development Goals. These eight goals, to which the international community pledged its support, included several economic objectives (such as eradicating extreme poverty and developing a global partnership for development) as well as other humanitarian objectives (such as reducing gender inequality and achieving universal primary education). Taken together, these goals would carry us a long way toward the broader objective of greatly reducing the gulf between the rich nations of the global North and the poor nations of the global South. Many of us were convinced that the coming decades would bring unprecedented wealth and prosperity, not just for a few, but for all people on this planet.
Now the mood of optimism has changed. Several major crises that few people foresaw--the financial crisis, the ever-worsening environmental crisis, and crises over food and oil prices--have converged to bring even greater misery and frustration to the world's bottom three billion people. And these crises have also driven many in the developed world to question the solidity of the foundations on which they had assumed their future security and prosperity were being built.
A Rude Awakening
The crises we face in food, energy, and the environment have a host of immediate economic and physical causes. But they all have one thing in common. They all reflect the inadequacy of the current economic system. In each case, we confront social problems that cannot be solved solely by the free market as it is traditionally understood.
On top of all this has come the biggest crisis of all. In the past few months, we've witnessed perhaps the greatest evaporation of wealth in history. The crushing collapse of large sectors of the global financial system, first in the United States, then in other nations of the developed world has doomed giant financial institutions, bankrupted major manufacturing firms, and nearly shuttered entire domestic industries, now kept alive only with unprecedented government bailout packages. Many reasons have been suggested for this historic economic collapse: excessive greed in the marketplace, the transformation of investment markets into gambling casinos, and the failure of regulatory institutions. But one thing is clear. The financial system has broken down because of a fundamental distortion of its basic purpose.
Credit markets were originally created to serve human needs--to provide business people with capital to start or expand companies. In return for these services, bankers and other lenders earned a reasonable profit. Everyone benefited. In recent years, however, the credit markets have been distorted by a relative handful of individuals and companies with a different goal in mind--to earn unrealistically high rates of return through clever feats of financial engineering. They repackaged mortgages and other loans into sophisticated instruments whose risk levels and other characteristics were hidden or disguised. Then they sold and resold these instruments, earning a slice of profit on every transaction. All the while, investors eagerly...