Sunday, August 5, 2007

Good Versus Bad Capitalism

A book has just come out with the above title, and it has sparked an interesting conversation on the different forms that capitalism can take and the proper balance between unfettered markets and state intervention. I would like to discuss this issue from a slightly different angle, drawing on some unscientific observations between the capitalism that predominates in Northern California (where I currently reside) and New York City (where I grew up and am now vacationing).

The economic engines in Silicon Valley (SV) are responsible for some of the most important and productive advances in history. Not only is SV still the driver of the computer industry, but it has been branching out into biotechnology and renewable energy; the next generation of technological innovations in these fields is likely to originate in this tiny space between Santa Cruz and San Francisco.

Bottom line: the people getting rich in SV are by and large getting rich by producing products that have tremendous benefits to people not only in America but all over the world. This is why I don’t feel so bad that I have been priced out of the housing market; even my own job is vastly easier because of the developments made by this generation of entrepreneurs, some of whom are my neighbors.

Contrast this form of capitalism with the industry that generates the most wealth in New York City: financial services and marketing. While Wall Street and the banking sector provide crucial services to the economy, including investment capital, risk management, retirement investing, and a host of other indispensable services, there are just as many brokers and financiers in the Big Apple whose main concern is finding ways for the rich to avoid taxes and looking for ways to “game the system”. Over the last decades the compensation for many top fund managers has grown out of all proportion to the risks they take and the returns they bring in.

In addition, Los Angeles aside, New York City is the center of the image industry. Here anorexic women who are famous for being famous are paid tens of thousands to show up at clubs, bars, and restaurants; at the same time, and unknown to most people, men are paid by companies that make alcoholic products to cavort with these women, litter tables with bottles bearing their corporate logos, and entice people to pick their brands. In New York City the art of media manipulation and spin is elevated to a science and everyone who lives and visits here are the guinea pigs. So it’s difficult not to feel a tinge of resentment that people such as this are turning New York City into little more than a playground for the rich and connected.

On top of all of this, in Northern California the standard of living is not as directly tied to income as it is in New York City. Of course money matters a lot; but California’s riches are mostly nature-based and there is a tremendous amount of public access, so even the less than well-off can enjoy a pretty nice life. In New York City it’s the opposite: little money means no air conditioning on hot summer days, long commutes from the boroughs, little or no vacation, and limited access to the city’s restaurants, theaters, and museums.

While there is no doubt that capitalism has its good and bad sides, public policy and our own choices can influence the relative weights of each. For example, if we moved to a simpler tax system that was largely devoid of deductions there would be fewer ways for the rich to both avoid and evade taxes. And if people stopped being swayed by mindless advertising, maybe Madison Avenue execs could turn their attention to improving America’s image in the world.

Now that would a great service to society, and might begin to rival Silicon Valley’s.

Jason Scorse

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