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.


mom

ladies, where are ya in this conversation? Marx may be a good place to start, but I will take Weber as the place to continue it. Have not read all your comments yet, but one struck me. ya'all tend to speak of "free market" as if freedom has no price tag attached to it. That's not freedom, but anarchy.

A E Pfeiffer

Planned economies illustrate that we're just not very good at planning. On the other hand, the "freer" capitalist economies are, the more they're exposed to the periodic risks of greed-is-good bubbles - welcome to the boom-and-bust rollercoaster.

Is the capitalist market "the best economic system yet invented"? That's a qualitative question, but economics (as currently concieved) is really only suited to quantitative measurements. The market can't handle things like freedom, equality, health or happiness unless it can put a price on them, which is difficult to do reliably. So if you're aiming to create a fair, free, healthy, happy society the free market can't provide the complete answer.

Hence the need for laws and regulations, etc. - the whole range of "government interference" that advocates of the free market like to rail against. But they needn't worry too much. Market forces apply to politics as much as to everything else. After all, governments only get into power because corporations fund their election campaigns. He who pays the piper...

So it's not so much "Don't throw away your capitalism just yet"; it's more - even if we wanted to, we couldn't.

Read more...

Finnegan Calder

If capitalism is so good, why is it that there is only one truly capitalist economy in the whole of the developed world .. and why is it that even that economy, the US economy, is festering and sliding rapidly backwards into the grips of a mercantile system, protectionism and gunboat diplomacy?

Are you really trying to gloss over the fact that there is a thriving world of middle road mixed economies – combining elements of both capitalism and socialism – that are consistently outperforming this beloved capitalism .. and that there isn't a single country on this lonely planet of ours, other than the United States, that aspires to this “best economic system yet invented”, in preference to the Swedish model of a market driven economy interlarded with generous welfare elements, higher wages, higher standards of living, more generous holidays and higher productivity?

“Best economic system yet invented” isn't just freakonomics - it is FRAUDONOMICS.

Read more...

Jim

"The moral justification of capitalism does not lie in the altruist claim that it represents the best way to achieve 'the common good.' It is true that capitalism does—if that catch-phrase has any meaning—but this is merely a secondary consequence. The moral justification of capitalism lies in the fact that it is the only system consonant with man’s rational nature, that it protects man’s survival qua man, and that its ruling principle is: justice."

Ayn Rand, “What Is Capitalism?”, "Capitalism: The Unknown Ideal," 20.

a

this is so lazy. nobody wants to go back to communism; why not compare the us to a heavily regulated welfare state like sweden, which is the real alternative.

paul hutchinson

I liked the comment by Winston Churchill but remember he was talking about a democracy where it is illegal for a politician to receive campaign cintributions from "special interests", unlike the USA where every politician is bought and paid for by special interests. Also a leader of the conservative party in the same country, Edward Heath, also coined the phrase "the unacceptable face of capitalism" referring to corrupt and excessive practices of certain business leaders in the late 60's and early 70's. Capitalism is the best economic system but it must have some sort of oversight for the sake of society as a whole.

benefits manager (so-called)

Dear Alex B;

Not political (other than in the sense of political science), but scientific and shared burden. I am looking forward to sharing it with you.

el pollo

Well, Tom, capitalism can be cozy if you're married into a multibillionaire family. Please pick veggies for da man in CA for a couple years and report back again.

moom

PS - on building heights, doesn't sound much different to most European cities. Maybe they wanted to preserve the historic architecture in the city centre. See the outcry about China now redeveloping old neighborhoods in Beijing etc.

moom

At the private university in upstate NY I used to work at we had to do the same thing. No effective thermostats in most classrooms.

albert

Whenever unbridled capitalism makes a boo-boo, free markets nuts (and The Economist) usually say that failure is not due to the free market system itself but rather with it not being implemented properly, or it not being given enough time to work. Why do we keep listening to these fundamentalists who, like the communist of yore, are married to their ideology, despite the evidence?

Also, why is the comparison always between American capitalism and USSR-style communism? Why not compare ourselves with West European-style capitalism with common sense and citizen's oversight?

Clayton

Unbridled capitalism and free markets is dangerous and immoral. In totally free market health poor people with expensive diseases wouldn't be treated becuase it isn't cost effective. Is it better to have many people with not quite the best health care? Its better than having only those who can afford it live. This is just one, and honestly extreme example. So is the credit, mortage, and housing crisis.

joel kollin

The open windows thing is familiar to anyone who's lived in an old rickety steam-heated building. While there are sometimes valves in the pipes leading to the radiators, I've had landlords tell me NOT to adjust them as it messes up the heat for other people in the building, and they aren't willing to redo the whole system. Hence the open windows, even with the lardlord paying the bill for heat.

There's an analogy for state capitalism in there somewhere, but I'll let you all find it.

Steve

People today seem to confuse 'free' markets with unregulated markets, which is actually anarchy. Business relies on laws and regulation. What the US seems to have today is lots of malfunctioning regulations, and our leaders seem to have little interest in fixing these problems.

Mo

"Everyone commuted long distances to work. Why? Land and transport were not priced," - Is not this the case in many cities across US where markets are free.

Kimball Corson

On the question of do markets work, I believe so, most of the time. They work as long as those participating in them do not cheat, behave unfairly or get government to interfere in those markets on their behalf by special legislation or regulations that tamper with the market's results. Unfortunately, there is much too much cheating, unfair behavior and interference in too many markets in America today.

Before people hastily decide markets don't work, they need to identify the markets they are thinking about and then check to see whether those markets and those closely collateral to them that effect them have been devoid of rules which prevent cheating or unfair competition and/or have been seriously compromised by one or more special interests operating through governmental interference in such market(s). Every market I am aware of that doesn't work well has been so tampered with.

If that is so, little can remedy the result, given the powers that be, except for more and better interference. But understand that is not a failure of the market mechanism itself. The market then becomes the subject of a political struggle, such as health care in America. Everyone seems to want a rigged result and is willing to cheat, be unfair and use government to get it, but they simply cannot agree upon which result is best. Doctors want one thing. Insurance companies, another. And patients something else altogether. None can agree and all cheat and interfere in that market(s) in the ensuing political struggle. The market all but ceases to function as such. We should not in those circumstances blame the market mechanism. Hobbled horses don't run very fast.

Read more...

Diana

One could just as easily point to the inefficiencies of market-based health care in the US and come to the conclusion that capitalism produces the most extreme inefficiency. It seems like what should be taken from both examples is the importance of constant oversight and regulation of any system.

Also: I live in Crown Heights, Brooklyn, where I also open the windows in the winter because the heat is too high and I have no thermostat. It's not just Russia. It's a renter's dilemma.

ryan

it's funny, i heard heller on NPR yesterday, and all the examples of gridlock he brought up came from the U.S. (capitalist) experience. For instance, he mentioned a scientist that couldn't develop his cure for Alzheimer's because of all the patent holders he'd have to find a way to compensate. As a result, he abandoned the potential cure. In a command economy, someone would say, "hey, doc, develop that cure" and we wouldnt' have Alzheimer's anymore.

Granted, this is a fanciful example, but it just shows that mechanisms we use to protect capitalism can have unintended consequences, just as the mechanisms the soviets used to maintain communism did. It's worth pointing out that the subtitle of heller's book is "How too much ownership wrecks markets." Not exactly a (blindly) pro-capitalist sentiment.

BJohnson

Much like Democracy its easy to point out the failings of the existing system. The more difficult task is to point out the superior alternative.

Brad

Walt Disney World For Grownups

Don Black

Free and unfettered markets are wonderful at efficiently allocating scarce resources, but they are often not fair. That is, they do not care, who gets what and how much. And often, markets left alone or not provided sufficient supervision sometimes become dysfunctional, a result of information asymmetries. This is where government has a role that is most important. It is not to take the place of free markets, which often meets with disaster, but to fix broken market and more importantly prevent markets from breaking in the first place.

We see glaring examples of dysfunctional or” unraveled” markets all around us. The market in the United States for health insurance, for example, is a market that because of information asymmetries, no longer functions appropriately. Those who want health insurance often can not find it at any price. Why? We have a system currently where (outside of employer sponsored plans) only the sickest or those likely to really need health care actually seek it out. Often, healthy individuals forgo it as an unnecessary expense, spending their resources on other things instead. The result is that we have health insurance providers faced with the classic information asymmetry of adverse selection, that is they have precisely the wrong segment of the population wanting to do business with them. In response they charge higher rates, attempt to cherry pick customers, deny claims etc. This is a rational response of a service provider faced with such a market. The, unfortunate, result for all of us is a health insurance market that doesn’t function properly.

It is important to realize that we have chosen, in our society, to assign the free markets the task of allocating, through private health insurance, our scarce healthcare resources under the belief that government allocation of such resources would not be as efficient, though perhaps more equitable (often a matter of debate as well). However, eliminating a free market solution and replacing it with a government scheme, is different from government stepping in and fixing a free market solution that is in a state of dysfunction. We often blur this distinction in our public discourse. It is unfortunate that we do so.

There are things that our government can do today to help restore balance to the health insurance market. The first question we have to ask ourselves though is: How truly free is this market? It doesn’t help that, according to Health Plan Week, the top 15 health plan operators paid Washington D.C. lobbyists nearly $22 million in 2007. Especially when you take into consideration that that as according to HPW, the looming prospects of health care reform if there is a Democratic administration in Washington is “…the biggest issue for health insures.” There in lies the real problem. Our government can fix this dysfunctional market, and others like it, but to do so it must fix a system that is not so efficient or equitable and that is government itself.

Read more...