What must any system accomplish? At the core, it must provide a method by which its smallest constituent unit, a household, can save the surplus of its day’s work for the day when it cannot work. This is because the highest priority of any unit of political economy is self-survival. The risks to survival are reduced by agreements among separate units to pool their resources. This enables those with a temporary surplus to share with those in temporary deficit. The family unit itself is such a system, which enables the young to draw upon the productive resources of their parents, returning the resources when their parents are too old to be productive. Civilization began with speech that enabled neighboring families and neighboring clans to contract with each other through verbal IOUs. "Money," as a palpable medium of exchange, soon followed as an extended form of commercial speech.

It is only in the last four centuries, though, that money began to overtake verbal transactions or the bartering of goods as the primary means of exchange. In earlier epochs, through the Middle Ages, only a minority of people ever saw money. And then, it was employed almost exclusively as a means of exchanging one set of goods for another -- not for developing longer term contracts between people who normally would not come into physical contact with one another. In these earlier epochs, such "bond transactions" were generally limited to government finance of war or public works or church finance of cathedrals. Capitalism is a system by which ordinary people can exchange their daily surplus time, energy or talent (their capital) for claims on the future production of others. Its viability rests on its internal mechanisms for assessing the risks attendant to such exchanges of goods for promises. Even in the most primitive forms of political economy at the dawn of civilization, a family that pooled its resources with its neighbors had to be adept at assessing the reliability of its neighbors in holding up their end.

Modern capitalism has evolved to a level of sophistication that permits the largest and most liquid pools of capital. It is held together by a vast and elaborate mechanism for assessing risks and creditworthiness -- a mechanism that is known as the free market. The modern mechanism is so close to perfection that it is a waste of time for any of us to devote resources to getting it closer to perfection. That is, the broad U.S. marketplace itself is 99% as good as it can possibly get, in terms of pricing goods and assets and assessing risks and return on investment. Information on every industry and enterprise is readily available and already flows at lightning speed. The financial service industry will continue to evolve in one direction or another, but it will have to do that just to stay at 99% efficiency. Its limits are not in its structure, but in the quality of analysts available to correctly assess and price information. At the other extreme, Reuven Brenner points out, are the new financial markets in China, which must traffic in information about industry and enterprise that is always suspect -- there being no tradition of open communication of bad news and good. It is, after all, the political marketplace that is still far short of its optimum levels of efficiency, in China at a maximum, or in the United States, at a minimum. As just one example, the entire U.S. economy could only perform better if the regular meetings of the Federal Reserve Board were open to the public.

Capitalism, we must always remind ourselves, is not a political system, but an economic one. The distinction is extremely important, for it frees supporters of capitalism from having to defend it as a caring or compassionate institution, which it is not. It is coldly mechanical. Capitalism in and of itself functions according to the law of the jungle, as amended by the laws of man. At the margin, capitalists will do anything the law allows in seeking profit. If 999,999 capitalists leave something on the table, at its legal and moral edge, there will be one to take it up, especially if it means survival. And why not? A letter to The New York Times on this subject caught my eye on March 14, "What Capitalism Means," by Eli Zaretsky, a visiting professor at New York’s New School: "Capitalism by itself produces only greed and exploitation. The great successes of the modern epoch are due to social movements like populism, progressivism, new deal liberalism, socialism, feminism, movements for racial equality and even communism, that have insisted that profit be tempered with social concerns." This sounds harsh, but it is not an unreasonable position. By itself, capitalism could be as savage and Darwinian as Marx supposed it would become.

In this country, however, capitalism is not by itself, but is twinned with the kind of active democracy that even Marx allowed could save it from extinction. Democracy does so by tempering profit with social concerns, although Prof. Zaretsky would have to agree that profit can be tempered to death, and that profit occurs only by putting capital at risk. Marx himself understood that it would be silly for a capitalist to buy "C" commodities for an "M" amount of money, as he put it in Capital, with the object of then selling them for the same "M" amount. The capitalist buys "C" commodities -- including labor as a commodity -- hoping to sell the new product for "M + 20%," Marx suggested. If he has guessed wrong or the market has shifted, the capitalist may be forced to sell at "M - 50%." There is no doubt that Marx, as a classical economist, understood that the capitalist must be rewarded for putting capital at risk. Unless there is risk-taking, there can be no growth. "M" will remain "M."

Now carry the impressions forward to the modern mechanisms of the market-- the banks, credit unions, insurance companies, stock and bond markets, and all other market elements that can extend or withhold capital. They absorb the total mass of capital, assess myriad demands upon it and dispense it in little bits and pieces according to a schedule of likely returns on investment. In aggregate, the mechanisms are necessarily cold and mechanical, though within the mechanism there are kindly and generous country bankers making bets on unlikely credit applicants. The mechanism of the market, of course, sorts out those kindly and generous country bankers who make bad bets, for the highest priority of an institution is self-survival. In the same way, the mechanism of the market will reward those icy, gimlet-eyed investment bankers who bet on only sure things that turn out to be sure things. In between, there is a Bell Curve of some incompetents and many competents who comprise the market mechanisms, reckoning with varying degrees of precision the return-on-investment (ROI) for the organic mass of a nation’s capital.

This mechanism will calculate ROI just as precisely when the central government imposes confiscatory taxes on capital at risk as it does when it absolves it of any tax. The market does not care. It is cold and mechanical, in the end as automatic as the tote board at a race track. It grinds out its dispensation of the bits and pieces of capital it absorbs as long as it calculates positive odds for ROI. When the odds turn negative, it stops accepting capital that it cannot dispense. Even kind and gentle country bankers will hesitate and retreat when they confront an obvious bad credit. We frequently encounter kind and gentle investors who tell us they do not care that their investment income is heavily taxed. They will invest anyway. We are sure they are telling us the honest truth, but they are not on the margin. The cold and mechanical market is absorbing their gifts of capital along with all others who casually contribute capital. The greater returns go to those who are not so casual, just as serious horseplayers over time will outperform the casual bettor. The nation as a whole benefits by having its capital -- the surplus time, energy and talent of all its members -- wisely invested.

It is when a nation’s political system fails its economic system -- when the market mechanism must refuse to finance unemployed resources because of a persistent negative ROI -- that the masses have little choice but to turn to socialism. The body politic will permit the capitalist ruling class some reasonable margin for error, but it cannot permit either mass unemployment or a persistent decline in living standards that threaten the basic family unit. As they did in the 1930s, ordinary people will use the democratic political system to force socialist policies into play when capitalism fails. The social safety net we now have is the refined product of the American electorate of the 1930s. Without having the benefit of a democratic political system, the people of Russia in 1917 produced a much less refined safety net.

Capitalism did not fail in the Great Depression because profit was burdened with social concerns. It failed because the capitalist ruling class saw an opportunity to increase its profits by an increase in the protective tariff -- using its political muscle to push Smoot-Hawley through the Republican Congress and persuade President Hoover to sign the legislation. This was a blatant intervention in the market, not for the usual purpose of increasing government revenues, but to engineer a social outcome desired by Big Business. Instead of producing the desired effect, the big tote board on Wall Street crashed as ROI suddenly went negative on a host of capital investment dependent upon international trade. Capitalists had only themselves to blame for the New Deal that followed, with its myriad market interventions on behalf of the working class -- the labor legislation, minimum-wage mandates, farm programs, social security and public power programs that offended the sensibilities of laissez-faire advocates. Once the capitalist Ruling Class uses the tax system to redistribute income instead of raising revenues, how can it complain when populists appear with demands that the tax system be used simply to soak the rich? Because they had no better choice, the masses accepted the diminution of personal freedoms that government market intervention inevitably entails.