Don't Throw Away Your Capitalism Just Yet

The turbulence of the U.S. economy has lots of people railing against capitalism itself, and with good reason: capitalism is inherently turbulent. That’s why the legendary economist Joseph Schumpeter called it “creative destruction.” Not only must eggs be broken to make an omelet, but sometimes people may decide they want their omelets made with no eggs at all.

That said, a lot of people (myself included) nevertheless regard capitalism as the best economic system yet invented. Is it perfect? Hardly. Are there all sorts of flaws, blind spots, unfortunate losers, and undeserving winners? Of course. When I think of capitalism in toto, I think of what Churchill once said about democracy in toto: “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.”

A good way to appreciate your own good but imperfect system is to visit another country’s worse and more imperfect system.

Here’s an example from an interesting book I’m reading, The Gridlock Economy, by Michael Heller, a professor of real-estate law at Columbia:

Nowhere has gridlock been more costly than in countries that banished markets. The Soviet Union had a rich endowment of natural resources and human abilities, but an inside-out economy. In late 1991, as the USSR was crumbling, I traveled to Moscow as part of a World Bank team. Boris Yeltsin‘s new government wanted to know what it would take to create a market economy in a country with no living memory of capitalism.

I was impressed at how socialism got things backward. In the Moscow winter, my friends left their windows open so apartments wouldn’t overheat. Why? Energy was not priced, so there were no thermostats. Everyone commuted long distances to work. Why? Land and transport were not priced, so Moscow had cottages close to the city center and towering apartment buildings in the distant suburbs. Millions were stuck in obsolete housing blocks, but there was no way to redevelop close-in land. These costs became visible as soon as the Russians started pricing land, energy, and other resources at the world market value. Transition was wrenching.

So we would probably all do well to realize that the current noise over rising energy, food, and other prices in the U.S. is in fact the sound of a lot of eggs being broken. Which, in moderation, may turn out to be a good thing for many people. The pain of the moment is real but so too is the strength of the system.

An aside: it used to be customary (and perhaps still is) for Russian parents to put their babies out on the balcony for naps in the wintertime. I was always told this was because of a belief that very cold air is good for a baby. Reading Heller above, it makes me wonder if perhaps those parents were just trying to keep their kids from broiling.

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  1. Mike B says:

    In theory wouldn’t an all powerful command and control economy hooked up to a perfect information machine be the best possible economic system?

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  2. Gary says:

    Theory has its limitations.

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  3. Eli Bildirici says:

    …not capitalism, but unbridled, unregulated capitalism, of the sort that has emerged in the past couple of years. The idea that markets always self-regulate has time and time again been challenged by our own experiences. Prices are going up, yes: as a result, people all over the world are dying in food riots because of a lack of basic entitlement to food. If you really claim to be good friends with Amartya Sen you would take that into account instead of describing the situation so dispassionately as that of ‘eggs being broken’.

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  4. Mike M says:

    It’s what we do about the ‘broken lives’ that matters.

    People are not china.

    Easy to look upon the masses in pain from the quiet of the veranda while sipping coffee.

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  5. dp says:

    Open windows during the winter time…. Yes anyone who has visited the housing projects in the united states will notice the same thing.

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  6. jonathan says:

    I’ve wondered if there is work comparing the Japanese approach to ours. They had a massive credit overhang and it stuck around for a decade while we wiped out bad debts in the S&L crisis – and now again, as shown by Wachovia’s massive write-down. Which was the better strategy? Ten years of slower growth or the sharp pain of excising the problem now?

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  7. Steve E says:

    “lots of people railing against capitalism”? Is this a quantifiable amount? Or is it akin to the made up “some liberals” straw man favored by your colleague Mr. Brooks?

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  8. Matthew says:

    This post would mean something if we had any capitalism to talk about. There is no capitalism in the United States, except maybe ticket scalping in a parking lot at a game.

    We have always had what economists call “state capitalism.” Look at the most dynamic sectors of our economy – computers, tourism, technology, security, pharmaceuticals, shipping, etc. – and you see that without government involvement from the beginning, these industries would never had gotten off the ground.

    Boeing wouldn’t exist for five minutes without its government contracts and research/development. The pharmaceutical industry wouldn’t exist without billions in publicly-funded research and its ability to write its own legislation. The oil industry wouldn’t exist without worldwide military protection and massive public subsidies. The Internet, in case you didn’t know, was created by the Pentagon.

    You might as well be writing about the tooth fairy.

    The only question in the U.S. economy is not whether the government will be involved, but on whose behalf? Except for a brief period from the late 30s until the 1960s, it has been overwhelmingly on behalf of the wealthy and the investor class.

    You decry communism (and conveniently pick the Soviet Union on the verge of collapse as an example – would you pick a Klansman as an example of a Christian?) yet ignore that we have socialism in the U.S. Our socialism, however, is for the top 5-10%.

    Find an example of a truly free-market economy and I’ll show you either a lie or a disaster.

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