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Debate about Professor Bruce Scott's Seminal Work
on Capitalism as a System of Governance
to Advance Democracy

Reference:
My comments on Amazon.com about Bruce Scott's The Concept of Capitalism

Understanding the Essence of Capitalism. No Maths Required. No Jargon in Sight! by Alain Paul Martin, October 13, 2009

I read this thought-provoking book on the essence of capitalism in three hours and went for an encore! This coherent and solid research is packed in 75 pages on the most pressing, polarizing and challenging issues of our times. Thanks to powerful analogies from the governance of organized sports, anyone can now understand capitalism. I particularly found the practical examples from the worlds of professional baseball, football and soccer helpful to examine how capitalism can serve or impede democracy. Capitalism, like organized sport, must be regulated to secure sustainable and impartial competition. Milton Friedman and other neoclassical economists thought one level self-regulation system should do it. Friedman relied heavily on the purely private means of the price mechanism and trust between the players, be they individuals or corporations. He stated that "most of the general conditions of [capitalism] are the unintended outcome of custom, accepted unthinkingly"; thus, ignoring the unequal distribution of power among firms and actors that can cultivate oligarchy and even corrupt authority. His one-level free-market ideology inspired Alan Greenspan, who was at the helm of the Federal Reserve for 16 years, among countless policy makers from Washington to as far as Reykjavík and Buenos Aires. That flawed theory partly accounts for the underlying and neglected causes that left unregulated merchant banks, derivatives, hyper-leverage and abuse of economic power by a few. The resulting policies unintentionally led to alarming bubbles and to a worldwide trail of economic-value destruction and disasters that have impoverishing billions of human beings, as collateral damage.

Rather than using mathematical arabesques, Bruce Scott makes his point by cautiously borrowing from organized sports, where an indirect three-level governance is visible and vigilant through a governing organization (NBA, NFL, MLB, FIFA) at the apex of the system. This political authority has "the power to decide on the rules, e.g. who is eligible to compete, the time and location of the games, and technologies that may be used." Furthermore, to limit severe income disparities between teams, some governing organizations, have the power to redistribute revenue (e.g. TV revenues in the case of the National Football League). The second level of the governance system serves to "organize and legitimate the competition and ensure that it is carried out on a level playing field, with no fair advantage permitted". More specifically, institutions, regulations and referees "demarcate and indeed maintain the field, specify the rules of play and the scoring system, and monitor the play." "The players, coaches and other team personnel comprise the [lowest] level of the system."

In a parallel context, Bruce Scott defines capitalism as an "indirect, three level system of governance for economic relationships". At the apex of this system, the government, represented by the executive and legislative branches, crafts policy and "oversees and shapes the operations" and corridor of navigation of the next two levels. On the second level, regulators, judges and other agents of the state enforce the rules including safety (environment, transportation, food, drugs and workplace) and the integrity of the securities market (investor protection), among others. On the lowest level, "firms compete to secure their labor and capital as well as to serve their customers". Unlike the neoclassical myopic theory of "the market of pure economics", Scott's ground-breaking definition of capitalism reflects the reality in most advanced countries and recognizes the important role played not only by economics, but also sociology, political science and the law, in shaping the future of capitalism and strengthening democracy.

This accessible and timely gem is an essential reading for presidents, law makers and policy strategists worldwide, both in government and business. Its content is simple, concise and systematic. No technical jargon in sight and no maths required! Once you read the book, you will think about sound capitalism anytime you watch your favorite sport.

Alain Paul Martin
Author, Harnessing the Power of Intelligence
Chief Architect, Harvard University Global SystemT

Initial post: Nov 18, 2009 6:54 PM PST
Last edited by the author on Nov 18, 2009 6:56 PM PST
Stergios D. Marangos says:

Great review. However, the issue is, and seems always to have been, that those who hold the reins of what is and is not 'considered' economics have always been hostile to the widening of the discipline. This is then compounded by the fact that economists have never treated political scientists or sociologists who specialize in economic questions seriously whatsoever. The main struggle I am having at the moment is reflective of this - I have an almost unhealthy passion for economics and am preparing to enter into a PhD program once I finish my final degree in mathematics, however if I attend the universities that 'matter' in terms of recognition and acceptance in the discipline - i.e. Harvard, Columbia, U of Michigan, ect... - I will be forced into the study of markets independent of social and political relations, whereas if I attend, for example, the New School's PhD program - which I am drawn to because of its insistence on both the history of economic thought and the multi dimensional approach toward economic phenomona - my chances of having any effect or even being listened to in the wider discipline are almost nil.

Marx attempted to widen the discipline - all that he accomplished was a further closing of the discipline in response. Even Keynes, who by no means was radical and stuck to fundamental neoclassical lines, is demonized and contributed to the rise of monetarism, poster child of which was Milton Friedman...

I would love to hear your thoughts on this.

Stergios D. Marangos

From Alain Paul Martin to Stergios D. Marangos

You have nicely summarized the status quo which dates back to the beginning of last century when, unfortunately, economics was divorced from social sciences and particularly political economy. Much of the refereed literature on the subject is stuck in a paradigm trap which treats economics pre-dominantly from a quantitative perspective, akin to physics or biology, an utterly perverse situation disconnected with the reality of everyday life. Prior to Bruce Scott's book "The Concept of Capitalism", we did not have even a working definition of capitalism as a system of governance, much less an awareness of the mission, the scope or the kernel of value of the system i.e. to serve democracy.

I studied quantitative methods in my undergraduate studies, was a member of the Society of Mathematics of France and the Operations Research Society, and used Monte Carlo simulation extensively at work. I believe mathematics and quantitative methods have an important role in economics. But, a framework for thinking about capitalism with clarity, sound logic and meaning in a broader context and perspective is long overdue. With "The Concept of Capitalism", Bruce Scott offers the seeds for creating a new field, called the study of capitalism, a way to provoke and sustain the incubation of a better paradigm.

There is a parallel between Bruce Scott and Charles Darwin, "whose theory of evolution was too explosive and revolutionary for Victorian England. Darwin kept his theory from the establishment and the public for twenty years until he built a critical mass by converting his professor and fewer than ten other leading scientists, transforming fence-sitters and foes among them into allies. Then, he wrote thousands of letters to gain a constituency - a journey that took another twenty years, during which he was ridiculed by the Church, Cambridge (his Alma Mater) and the press!"

Unlike Darwin's era, today, time is of the essence for the economy and democracy, both under siege by special interests. Opening the education of economics as you suggested and reforming the regulatory systems cannot wait. For capitalism to advance and serve democracy, international policy debates similar to the Rio and Kyoto conferences on the environment would be required. But, the journey to anchor Scott's paradigm in the minds of policy makers is long and perilous, in this age of ideologically-charged debate and short attention span. This is far from a fait accompli in our times! Fortunately, President Obama has demonstrated the value of the Internet and virtual communities to build a wide constituency much faster than at Darwin's time.

In October 2009, George Soros launched the Institute for New Economic Thinking (iNET), a new foundation to study capitalism (www.iNETeconomics.org). He has several Nobel Laureates on his advisory board, like Joseph Stiglitz, who can add invaluable depth and credibility to iNET. Stiglitz has called for a national debate to recognize and address the fundamental misconceptions and deeply-held convictions that induced the grave mistakes and ultimately led to the worst socioeconomic crisis, since the Great Depression.

iNET Executive Director, Dr. Robert A. Johnson, understands Soros' vision and cares about the hardships in society with deep honesty. Given his experience in Congress, the United Nations and Wall Street, Johnson has also the proven wisdom and selfless courage to navigate the uncharted ground ahead and is no stranger to coalition-building and consensus making, among the critical success factors for iNET. He indeed has the track record and collaborative leadership skills to mobilize and bring together the scarce talent of staunchly independent thinkers like Professor Scott.

Soros delivered remarkable lectures in October 2009, including one on the extension of market-based economics beyond its proper sphere. The Financial Times of London turned the lectures into videos, available for free, either from the Times (www.ft.com/indepth/soros-lectures) or the Open Society Institute (www.soros.org/resources/multimedia/sorosceu_20091112).

I have also lectured on the paradigm-incubation cycle in economics and other sciences, as illustrated in www.executive.org/Paradigm-Incubation.pdf. My focus is on implementing large-scale change or bringing a new paradigm, like, Professor Scott's, beyond the point of no return. Your feedback is most welcome.

Alain Paul Martin
Author, Harnessing the Power of Intelligence
Chief Architect, Harvard University Global SystemT<

Skysi says, in reply to your post on Jan. 22, 2010 6:05 PM PST:

My dear Keynesians,
What you all call capitalism is in fact a mixed economy with elements of capitalism. But just because an economy has a few elements of socialism, it does not automatically become capitalism. Capitalism was meant to be a free market unregulated system. As we see now all attempts to effectively regulate economy have failed. The FDR's humongous Ponzi scheme that's been dragging its feet for so many decades is now officially over.

Skysi says, in reply to your post on Jan. 22, 2010 10:19 PM PST:

Capitalism has been studied ad nauseam. What many do not understand or refuse to understand is that capitalism is not just a economic system divorced from the human factor. Capitalism should be viewed as a part of philosophy: primarily the ideology/ethics that it's based on. The philosophy is Objectivism (worked out by Ayn Rand). This philosophy is fundamental for free market economical relationships. The ideology and ethics of Individualism (individual rights) and nonacceptance of use of physical force against an individual by state or other individuals can make free market economy/capitalism what it should be.

No amount of economical studies and inventions to improve a regulated mixed economy will help to make capitalism "better" and put a human face on it. The more intricate regulations you come up with to control business, the more intricate ways to circumvent those regulations will oppose you on the other side. All you do is create a bad environment for ethics. Nobody has the right to dictate to an entrepreneur what and how he/she to sell their product or services. The customer decides that by purchasing those products and services or ignoring them. All governments have to do is serve as arbiters in disputes and protects individuals and organizations and their property from use of physical force.

From Alain Paul Martin to Skysi , in reply to an earlier post on Feb. 26, 2010 10:49 PM PST

From Alain Paul Martin to Skysi,

Without an accountable democratic public sector and the three-level governance advocated by Professor Bruce Scott, powerful lobbies pursuing their own agendas would dwarf government and Congress. Limiting government solely to deal with sheer physical force is a bit naïve - a recipe for corruption to flourish with white-collar crime, predatory practices, negligence and misuse of power.

The issue is not to dictate to entrepreneurs what or how to sell, but to make sure each business is accountable for its systemic risk and externalities; i.e. it faces its obligations in labor, public health and carbon neutrality. It's also to prevent the private-gain/public-loss scenarios; and to ensure the players are not cheating, i.e. the competition game is transparent and as fair as in football or baseball. Capitalism, like organized sport, must be regulated to secure sustainable and impartial competition, prevent alarming bubbles, and break entrenched monopolies. Last but not the least, business must pay its fair share of government cost, from justice, policing and defense to public health and education.

The lack of careful regulatory oversight is not only at the expense of the public good but also against the interests of firms competing with high ethical standards. In the February 26, 2010 edition of The New York Times titled "Let the S.E.C. Help Itself", Op-Ed Contributor Joel Seligan wrote that, "[f]rom 1993 to 2000, the S.E.C. staff grew by about 1 percent per year, even though the value of securities traded on all exchanges tripled and initial public offerings approximately doubled. The result? According to a 2002 Senate report, between 1999 and 2002 the commission's Division of Corporate Finance had failed to review 53 percent of Form 10-K annual reports - the single most important disclosure document for both investors and markets. The last full review of Enron's Form 10-K was in 1991 - ten years before the company collapsed. The Obama administration has requested long overdue increases in both budget and staff for the S.E.C., and has plans to add as many as 374 employees. Those increases are vital, but because they're dependent on Congress, there is no guarantee that they will be sustained."

You refer to Ayn Rand, a popular fiction writer, whose superficial exposure to economics was neither by education nor experience. Her closest encounters with government were in the Soviet Union prior to 1926; then, in cinematic mock roles in Hollywood, notwithstanding a brief detour to Washington, as a witness of the House Committee on Un-American Activities, during the Second Red Scare in 1947.

Ideology and oppressive autocratic regimes strangled and ultimately disintegrated communism. On the opposite end of the spectrum, Ayn Rand's brand of laissez-faire economic creationism is a toxic ideology that glorifies unbridled greed without regard to systemic risk and other adverse consequences. By the same token, neoclassical economics of self-regulating markets perceive people as individual economic robots. As indicated in my review of "The Concept of Capitalism", the policies resulting from neoclassical economics unintentionally led to alarming bubbles and to a worldwide trail of economic-value destruction and disasters that have impoverishing billions of human beings, as a collateral damage.

Without a strong democracy, capitalism would be at risk and may ultimately perish. Democracy and capitalism are not two solitudes but symbiotic social systems of governance. Neither should let the other fail. Like Darwin in evolutionary biology, Harvard Emeritus Professor Bruce Scott takes us from the dark era of economic creationism to the evolutionary economics of the 21st century that will strengthen the essence of capitalism and democracy.

Alain Paul Martin
Author, Harnessing the Power of Intelligence
Chief Architect, Harvard University Global SystemT

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