Posted this at Law of Markets – a site to keep an eye on.

The problem is how to embed these in a democratic framework. Politicians have incentives to break these rules in order to buy votes from their vested interests/supporters. They may also tend to have a natural instinct to want to “do something” (or simply think doing something will increase the chance of more votes later).

Capitalism works because it accepts people as they are “warts and all” and creates a system in which people improve their wellbeing through improving that of others, rather than at their expense.

However, modern western democracies seem to be undermining this life enhancing core of capitalism. In a world of government regulations, bailouts and other subsidies the path with the best expected return for individuals and entities is increasingly through the political/regulatory market rather than the commercial one. Thus talent and energy are directed at grabbing more of the existing cake via the political marketplace, rather than creating new cake in the commercial one. Eventually the amount of cake shrinks – someone has to actually produce stuff of “market value”.

I suspect democracies are compatible with capitalism over time, but only if people have appropriate value systems. There are a range of value combinations compatible with the with persistent productivity gains. But the Western educational system and its “cultural leaders” are not disseminating one of them. Our societies will therefore fail to sustain their level of wealth through time. Basically not enough people recoil at measures which will undermine the life enhancing capitalist core of our societies.

We and our children will be the poorer for this failure to sustain life enhancing values. Without broadly held life enhancing values we will lose our wealth, security and liberty. Poverty, despotism and tyranny will reign in the lands of the formally wealthy and free. Can we turn it around? Can we create a culture which will recoil at suggested breaches of your formula?