Capitalism’s lost social capital

A few years ago Francis Fukuyama wrote Trust: The Social Virtues and The Creation of Prosperity. The short of it is that modern economies tend to be “high trust,” you can rely on more than simply your family to get by in life because institutions are transparent and laws are honored more than breached. The System works, it is not something that exists to be worked. Americans have their own spin on the System, exemplified by the Horatio Alger stories. With hard work, perseverance and a little luck anyone could make it big. In contrast in non-modern economies it is more a matter of to whom you are born and who you know. Success is the outcome not of non-zero sum wealth creation through frugality, thrift and productivity, but taking the largest slice of the zero sum pie possible through connections.

You have probably read Simon Johnson’s The Quiet Coup, where he argues that governmental institutions have now been captured by private actors in the developed world, just as they have long been in the developing world. For me the turning point in the drift toward paranoia was this summer when I listened to an interview with Charles Ellis, author of The Partnership: The Making of Goldman Sachs. What disturbed and alarmed me was Ellis’ undisguised contempt for the radio host and the callers. Granted, it is generally frustrating for intelligent people to come on these shows where they are asked to hold forth for 30 minutes and engage with dull interlocutors. But Ellis’ own attitude to the whole affair suggested an angel come down from on high, he made no effort at all, and refused to hide his lack of effort. What he thought of everyone else was clear, mortals were beneath his consideration. When he did deign to speak Ellis calmly would assert that Goldman Sachs was insured and protected no matter what happened to the economy, specifically, even if AIG collapsed. Now, to some extent public relations people will say the same thing, but there’s a particular false tone these types exhibit which gives you a clear indication that they’re being paid to say what they’re saying. Charles Ellis did not have the tone, he stated it in a calm and matter of fact manner. He contended that the banks were saving Main Street, which was the root of the problem, and that Goldman in particular was an organization of such competence and efficiency that it could weather any storm.

To some extent this is a confidence game. The financial sector deals in trust. But Ellis unnerved me with his calm, assured and superior attitude. Today we are hearing that the Treasury Secretary, Goldman alum Hank Paulson, gave his old firm a heads up on government policy. A part of me wondered listening to Ellis if he knew much more than he could say. One year ago I would not have entertained the possibility of secret cabals and conspiracies at the highest levels of government. Now I’m not as confident.

I began thinking of this as I read this post over at Marginal Revolution where Alex Tabarrok bemoans the counter-productive effect of pay caps on large corporations. What is striking is the vociferous tone of the comments which Alex has been receiving: if the readers of MR react this way it makes me highly skeptical that the public has any trust in the system at all.

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