Deficiencies of Capitalism and Central Planning

One of the deficiencies of a pure market system is the tendency towards a boom and bust cycle. Examples of that include the U.S. real-estate bubble in the 1980s which led to the collapse of the U.S. savings and loan associations, costing the American taxpayer more than $100 billion [2]. Another example is the telecommunication bubble which went from boom to bust in just nine years, from 1992 to 2001. Even the power market in California had experienced a cyclic phenomenon where the power shortage in the summer of 2000 led to a burst of power plant construction which subsequently slowed because of the ensuing drop in electricity prices [3]. Joseph Stiglitz, a Nobel economist, believes that his research on the consequences of imperfect and asymmetric information (where different individuals know different things) has shown that one of the reasons that the “invisible hand” economists associate with Adam Smith may be invisible is that it is simply not there.
In the book “20:21 Vision”, Bill Emmott, the Editor in Chief of The Economist, noted the failures of capitalistic markets to address environmental problems and their undesirable effects of increasing the income disparity between the rich and the poor within a country and between the rich nations and the poor nations [4].
In human history, two economic systems have been put to practice. Central planning (as implemented in Communism) and capitalistic market system engaged in a global competition during the twentieth century. Central planning proved to be stable but not conducive to innovation and economic efficiency. In comparison, the capitalistic market system has flourished. However, recent history has shown that there are deficiencies in the capitalistic market system. In the opinion of this author, some of these deficiencies are as follows:
· Self interest of corporate executives, unchecked sufficiently by investors and customers or their representative government leads to unbalanced management decisions.
· Financial incentives for corporate executives are mostly short term and measured by numbers some of which can be manipulated through creative accounting.
· There are insufficient management incentives to provide public good at the expense of corporate profits.
· Global corporations may have greater power than nation states.
· Globalization may override local interests of weak nation states.
· Consumers, even though they provide 100% of the revenue to corporations at the base of the business chains, have little power over the conduct of corporations.
· Workers, even though they provide the majority of the productive labor to corporations, have little power over corporate decisions, except where unions exist. (Corporations are not democracies.)
· There is a lack of global democratic institutions to balance the power of global corporations.
In the Central Planning economies, there were different problems and deficiencies, such as:
· Equal pay for different capabilities discourages high performance and provides little incentive for innovation.
· Central planning cannot adequately handle a complex economy.
· Power is concentrated on a ruling class with lack of diversity in ideas or views.
· It trails Capitalism in productivity and improvement of living standard.
· Reliance on information suppression to maintain political control leads to further economic inefficiencies.
· Comparison with Capitalism’s prosperity leads to political instability.
In reviewing these two lists of deficiencies, it can be observed that they are all about the creative power of diversity, the providing and balancing of incentives, and the balance of power among those actors with different incentives. If power is not balanced, people with differing incentives will behave in ways that produce results undesirable to others. If incentives are distorted or incomplete, even properly balanced power structure could result in undesirable consequences. It is postulated that when public goals are blended with self goals through UDI-ism, the hybrid system will provide the damping on the boom and bust tendency of the capitalistic market, as illustrated conceptually below.