Jeune Street

Amartya Sen -- perhaps our most interesting contemporary economist -- reminds us that the foundations of a market economy are laid by values, not interests. He revisits the thought of Adam Smith, widely considered to be the intellectual father of capitalism:

Smith never used the term capitalism (at least, so far as I have been able to trace), and it would also be hard to carve out from his works any theory of the sufficiency of the market economy, or of the need to accept the dominance of capital. He talked about the important role of broader values for the choice of behaviour, as well as the importance of institutions, in The Wealth of Nations ; but it was in his first book, The Theory of Moral Sentiments, published exactly 250 years ago, that he extensively investigated the powerful role of non-profit values. While stating that "prudence" was "of all virtues that which is most helpful to the individual", Smith went on to argue that "humanity, justice, generosity, and public spirit, are the qualities most useful to others".

Sen goes on to argue that a market economy requires institutional support, that capitalism cannot function autonomously. It relies upon rising standards of education, welfare support, and other goods that the market will not necessarily provide. It is worth noting, however, that neither the cumbersome state nor the chaotic market effectively spread those values (the moral sentiments) that make an economy work. In fact, both the state and the market rely upon values and norms that they cannot produce themselves. Writing in the middle of another (far worse) economic crisis in the early 20th century, Shoghi Effendi wrote:

Religion alone can, in the last analysis, bring in man's nature such a fundamental change as to enable him to adjust the economic relationships of society. It is only in this that man can control the economic forces that threaten to disrupt the foundations of existence.

Echoing the sentiments of Shoghi Effendi, the great economic historian Karl Polanyi insisted that the reformation of capitalism required not only institutional reform, but moral and spiritual reform. The economy, he famously argued, is embedded within non-economic institutions, and religion is as important as government and monetary institutions for structure and functioning of the economy.

No mere reversion to the ideals of the past century can show us the way.... The search for industrial democracy is not merely the search for a solution to the problems of capitalism.... It is a search for an answer to industry itself...Such a new dispensation requires an inner freedom for which we are ill-equipped.

Indeed.

UPDATE:

The Financial Times (of all newspapers) now has a 'future of capitalism' feature on their website. One of their editorials is quite striking. It calls for new models of education for our children as the key to solving the economic crisis. The author is Lord Layard, based at the London School of Economics:

Accelerated economic growth is not a goal for which we should make large sacrifices. In particular, we should not sacrifice the most important source of happiness, which is the quality of human relationships - at home, at work and in the community. We have sacrificed too many of these in the name of efficiency and productivity growth.

Most of all we have sacrificed our values. In the 1960s, 60 per cent of adults said they believed "most people can be trusted". Today the figure is 30 per cent, in both Britain and the US. The fall in trustworthy behaviour is clear in the banking sector but can also be seen in family life (more break-ups), in the playground (fewer friends you can trust) and in the workplace (growing competition between colleagues).

Increasingly, we treat private interest as the only motivation on which we can rely and competition between individuals as the way to get the most out of them. This is often counterproductive and does not generally produce a happy workplace since competition for status is a zero-sum game. Instead, we need a society based on positive-sum activities. Humans are a mix of selfishness and altruism but generally feel better working to help each other rather than to do each other down...

Values matter and they are affected by our theories. We do not need a society based on Darwinian competition between individuals. Beyond subsistence, the best experience any society can provide is the feeling that other people are on your side. That is the kind of capitalism we want.