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.


Marcio Cardoso

Interesting article and discussion. My position is "balance".

Words such as capitalism, communism and other "isms" are just that... words. While free-market worshippers and marxists have proselitezed their own utopias, what we have in the real world are societies organized according to certain basic shared ideas and notions of justice, morality and harmony. Markets are a simple by-product of human interactions, and (relatively) free and efficient markets naturally arise in societies that value individual rights such as property rights and the right of individual lifestyle choices, assisted by a functional law enforcement system. The rewards to society that can be reaped supporting active players in markets (job market, stock market, real estate, etc) are an important incentive for creation of technological and social innovation that leads to increasing standards of living over time. But there is nothing sacred about markets. what is unduly governmental intervention in a market and what is simply the society norms? Forbidding child labor, slavery and discrimination in the workplace is clearly intervening in the free functioning of the labor markets, but I guess the society reached a consensus that such practices are morally unnaceptable. On a much less extreme case, I do not care if bailing out banks (or punishing them) fits into a free market framework or is moral hazard or not, the society must exercise judgment to decide what is the most cost-effective way to deal with a financial crisis that affect the livelihoods the millions.

In any case, collective goods and institutions will always be of enourmous importance and scope (military, law enforcement, environmental regulation, infrastructure) in a modern and complex society.

Instead of ideological discussion about applying more or less "isms", let's use common sense and strive to maintain and improve a society comprised of well-educated citizens who have a say on their destiny. I think the key values to promote here are those of a "liberal democracy"... free markets and reasonable governmental responsibilies and regulation will follow.

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Simon

Proof that capitalism isn't real: The New York Times actually paid you to write that mediocre little nugget there.

S. Rieling

Capitalism in its truest form is not a license to steal. What we are living through at the moment is the US taxpayer being forced to fund a massive bailout of the banking system while the ceo's who made incredibly bad business decisions will walk away without feeling the true brunt of their bumbling. (Can anyone say, "Ken Thompson?")

We have watched this cycle of "capitalism without responsibility" for years. The early forms of it were, "health insurance for those who can afford it,", "Health insurance for the healthy ONLY," and the ever-popular, "come fly insert airline name here, after all, you bailed us out...again."

The underlying answer to everything is always that this is the best system available. I disagree. It is maintaining the status quo. We are supposed to be the innovators that changed the way the world sees their governments. Perhaps it's time for a new system that takes the lessons we have learned and incorporates more responsibility into the system. Then the "broken eggs" analogy could be retired and replaced with an honest description.

Let's try on the phrase, "The working poor who will become poorer in the near future."

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Marilyn Delson

We are in a totally new phase of capitalism: "crisis capitalism."

Bush & Co. used our shock during 9/11 to remake our system so now all functions of government are outsourced to corporations such as Halliburton, Bechtel, Blackwater, Pizza Hut & Burger King (U.S. mess in Iraq). Bush and McCain want to privatize (corporatize) Social Security, Medicare, end public education through charter vouchers, on and on with no end in sight. Iraq just lost a huge portion of its oil reserves to four oil corporation giants who were providing "consultation services" during the war.

The Trojan Horse entered on little cat feet after 9/11, and no one noticed.

Zoltan from Hungary

It is always fun to read people who lived all their life in free and capitalist society yearning for " a little bit of planning". As someone born in Eastern Europe, who "enjoyed" the marvels of a centrally planned economy, I have only one advice: go and live in North Korea, if you need "stability and predictability". I guarantee you that the only things stable and predictable will be a lack of even the most basic products. Why on earth do you think that a benevolent bureaucrat will know how much bread or butter or gas or diapers will you consume 6 months or 5 years from now?

Actually you don't have to go there just ask the first person you see on the street to shop for you fro two months without giving them a shopping list. And when it comes to pay let them take away as much money as they wish. Oh and never ever try complaining if you don't get the things you got or how much you got charged for.

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Glen

It seems people only believe there are two forms of economic systems: capitalism and a centrally planned economy.

There is, however, a third option: participatory economics (i.e. worker's self management)

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 landlord paying the bill for heat.

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

Kirilius

To #59 ("People are not ready to throw out capitalism just yet because there is no alternative at this moment.") -

quite the opposite! The wealthy social democracies in Northern and Western Europe were given as an alternative example several times in this discussion.

Matt H., Chicago

There are several interesting comments here. A couple themes that stand out are:

1) The US relies more and more on the government to drive and regulate the economy and when we were more lassaiz faire, conditions were horrible except for an elite few.

2) There are some countries in Europe that have managed to appropriately-regulate their markets and provide the right social services.

3) Capitalism is driven by greed and it would be nice to have a system driven by something else.

Concerning the first theme, I agree that the US is already socialized in many ways. However, I disagree with the idea that we could not have developed the robust, advanced economy we have today without government innovation and further disagree that we have government regulation to thank for "saving Capitalism from itself." In fact, I would argue that if the government less, our economy would be more prosperous. (A recent Gallup Poll, by the way, found that a slight majority of Americans agree the government tries to do too much.)

The Internet was given as an example of a technology for which we have the government (military) to thank. While it is true that ARPANET was a military project initially, it remained a closed network available to a limited number of Universities and Labs for years. It did not come anywhere close to reshaping the marketplace and indeed our very lifestyles until it was opened up into a vast infrastructure built by the private sector. From a software standpoint, the Internet stagnated in its early years only to literally explode with new capabilities and uses once given over to the free market. The few relics of its government roots that do remain are just that - relics - which the free market is struggling to replace and would probably have avoided in the first place. (I'm thinking here of the IPv4 system with its insufficient capacity.) Just because the Government monopolized so much talent while it conducted the World Wars does not mean that same talent would not have had an even greater benefit if applied in the free market.

To touch briefly on security, it is interesting to note that the relative decline in crime rates in the late Nineties and since coincides with proliferation of gated communities, huge expenditures on home security systems, a boom in private security guards, and a sizable increase in individual gun ownership. I guess you could say that "without government involvement" the security industry "would never had gotten off the ground" if by government involvement you mean a persistent and demonstrated incompetence towards keeping the peace.

Moving on to the second theme, that we should look to countries in Europe as a model for regulation and socialism, I wonder if such a suggestion fully accounts for the impossible fiscal situations faced in those countries. (See Alan Greenspan's Age of Turbulence) I wonder if we would accept unemployment rates 2-3 times higher as they are through most of Europe. I suppose if there is one thing to envy about those countries, it is that they have to spend so little on their military. They are virtually guaranteed protection by the world's super power against any serious threat, while the citizens of that super power break their backs to pay their high taxes.

At the same time, regulation everywhere cripples innovation. The most advanced and prosperous sector of our economy, high technology, is so prosperous precisely because of its relative lack of regulations. The elite class of leaders in this sector are the least government-connected in our nation's history. Our political class is completely unequipped to even understand, much less effect regulation of this industry. There will of course continue to be efforts by the threatened old guard, such as newspapers and the recording industry, to use the government to outlaw those innovations that most threaten their existence, but consumers will continue to oppose it.

Concerning the first theme, I think a better way to think of Capitalism is that it isn't so much driven by greed as that it can accommodate and survive greedy people. I think what generally drives free markets is a human desire to be productive and exchange goods and services with other people. Certainly there are some people who are greedy beyond this and driven to maximize their power and riches. But that kind of person has existed in all kinds of societies, even tribal ones, and so the question is how do the societies deal with them. In a free market where property is secured, that greedy person would have to provide an exceptional level of productivity or creative insight to the marketplace in order to be rewarded. But what is important is that there is an outlet, a legitimate means by which a greedy person can pursue their ends. One concern with a centrally-planned egalitarian economy has to do with limited options for those who seek to increase their wealth and influence. What options are there other than to insert themselves in the corrupt ranks of bureaucracies and try to achieve their ends illegitimately?

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Mike M

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.

Tom

Let's not confuse things. How we got in our current mess is not due to capitalism per se.

Lenders, with the collusion of the large financial institutions and rating agencies, were able to make billions by transferring (knowingly) the risk of bad debt to unsuspecting investors ...and probably taxpayers too. This is the not the result of free market capitalism, it's the result of fraud driven by greed.

Capitalism works, but only when there is transparency...which can only be enforced by strict regulation.

steve

its because markets tend to be "overeffecient". they over react to information so rather than being perfect people over react to the information and therefore push prices too far in each direction.

people are allowed to over react because they know others will over react. accentuating that, people don't know the value implications of the information they have and so don't necessarily realise the implications of their over reaction.

Jagdish Collins

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

The question is not whether capitalism is better than other systems; how could such an evaluation even be made? The question is can we correct the extreme socio-economic stratification that has been the net result of subordinating humanistic concerns to profit-making? Most of us are aware of the staggering statistics that inform us of the inordinate disparities in distribution of wealth and income in this country. Few however, are willing to address the problem. Instead, the standard response is to claim that an unprovable superiority of our own system to all others exempts us from having to consider our shortcomings.

Bohdan

It seems to me that the fantasy of Capitalistic free markets is exactly equal to the earlier fantasy of Communistic equality.

There exist in the literature descriptions of truly free markets, where no monopoly distorted markets and was able to maintain its distortions. The reality is far different. Collusion, fraud, and crime permeate markets such as telecomm in the US, the diamond trade (DeBeers for at least the last 150 years), and the criminal quotas for food coming from the Third World come to mind.

We should disabuse ourselves of the notion that there ever will be free markets. My sense is some people believe, given enough time, all the monopolies will collapse of their own weight. I don't see it.

To my mind the issue is that Capitalism bases itself upon greed and fear as the basic motivations of economic behavior. There might someday be a system that is reliably based on other human emotions, that is my hope anyways.

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Nate

Much like communism, objectivism, and most other "isms", capitalism is most palatable only when tempered with common sense, flexibility, reasonable constraints and an understanding of the human spirit. Hard core versions of most systems are likely too extreme.

Robin Reeves

Central planning doesn't always get it wrong, from a subjective perspective of course. However, government is a monopoly and as the public we must be very careful what powers we allow it to have. I think it is hard to argue that our government hasn't overstepped the bounds set forth in the Constitution.

In my opinion, the problem is consolidation of power, which pure capitalism does not address. In a perfect market all consumers would be aware of what they are buying and how that affects the economy as a whole, but this condition will never exist. My feeling is the best form of government is capitalism with limited government intervention. Unfortunatly, governmental agencies love concentrating power as much as independent capitalists.

Sometimes the government must step in to help, but as the public we must be sure to beat it back once the problem has been addressed. It is hard to cut spending once it is in place. The worst possibly version of capitalism is the one where private capitalists and the government work together to concentrate power. Sadly, I fear this is the form we've decided to move towards.

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Matthew

Brian at 17:

...and your criticism of my post misses the mark. ;)

I never said "no capitalism whatsoever exists in the U.S.," and I think my post made it clear that I understand diverse forms of capitalism exist (hence the term "state capitalism").

Dubner's post suggests 1) capitalism, despite some flaws, is still the best thing available (but never defines capitalism, except in the sense that people will be harmed by it); he then 2) defends this by comparing this theoritical up-in-the-sky capitalism to the Soviet Union at its end (not a very convincing argument if you've read anything other than the Wall Stree Journal editorial page).

Dubner is basically saying that the "breaking of eggs" is a good thing, and since we aren't as bad as the U.S.S.R., we should remember how good we've got it. I'm sorry, but this kind of comment is typical of the elite who aren't suffering or being "broken."

It's ironic that he brings up the Soviet Union; they had kommissars offering intellectual arguments in defense of the state. I would call Dubner a Kommisar for U.S. capitalism.

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Johnny E

Back in 1983 I got sent to China for 3 months when I worked for a US company selling oil exploration equipment. The year before Chinese peasants were finally allowed to own a private plot of land to grow their own crops, the Responsibility System. The markets were full and peasants were busy building new houses. Private people still couldn't own their own vehicles so there was a reasonably good public transportation network. They could have built on that situation by not making the same mistakes we did, but instead they embraced private cars and polluting factories instead of moving straight to the next generation of technology.

But unregulated Capitalism can be just as bad. It becomes Darwinian. Squeezing extra pennies of profits destroys our social fabric when factories shutdown for greener pastures. Not paying a living wage, or cutting health and retirement benefits has life & death consequences. Workers become just another unit of production, just like in Communism. They're not humans.

Maybe that's what real Socialism is all about. Governments need to temper the social consquences of economic systems, no matter what kind is in favor. In unregulated Capitalism power accumulates to the few and free markets change into monopolies. The big question is how the fruits of the economy should be distributed and who decides, without killing the goose that laid the Golden Egg. Can a Democratic society survive in a system with a few mega-rich and the rest in a peasant class? We can see now how trickle-down economics doesn't work. Maybe trickle-up would. Give people a living wage and they'll be able to afford to buy stuff so the producers will get their bonusses.

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KMarx

It really enrages me when someone who has a secure livelihood, e.g. in journalism, tells us that though our system is not perfect, it’s the best yet! Well perhaps it’s about time to create another one. The present system of concentrating money and power in the hands of a few is not acceptable.

The nonsense of comparing our economic system with others is absurd. Do we set the limits of our ethical standards by those of other societies? Do we set the limits of our medical standards of care by those of other societies? Do we set the standards of our legal system by those of other societies? NO! At one time in this has-been nation we set our standards well beyond those of others!

Our present situation is one sold to the public by the Reagan and subsequent regimes. They preached that the “invisible hand” of the market would by magic police that market. What nonsense! Since humans crawled out of the primordial slime, they tried to gain power over others. This is why we need strong market and economic regulation, but how can we when Wall Street and Corporate America have bought Washington? Obama is the latest casualty. McCain has been a servant of his benefactors since he entered politics.

Welcome aboard the USS Titanic, a ship with too few lifeboats, a broken rudder, a gash in its hull, a ship headed for an iceberg in the dark of night with no captain at the helm, a ship fueled by insatiable and unbridled greed! Fasten your safety belts.

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James Charles Wilson

Not helpful.

We know that we live in a mixed economy and that it is not going away. One of the organizing principles of our politics is that the parties differ on the magnitude and nature of the role of government in the mixed economy. People need to understand concepts like externalities and common goods when considering issues like climate change, energy policy and tax breaks for mortgages.

I want to read interchanges on the proper role of government in an economy that requires serious input from science on climate change and energy, from government on home ownership and from the American people who own the resources on government land.

It seems to me that the following model: China makes cheap goods and sells them to Americans who buy them with money that china lends to the us in support of an engineeered housing bubble is both corrupt and doomed. Take names and send people to the Bighouse.

But the conversation is not advanced by Leninists, Maoists or RushLimbaughists. the ideologues pose the largest threat to our civilization. (Note that only 25% of Republicans say that climate is warming and that it is caused by human activity. This is quite possibly one of the most harmful opinions that one can hold - up there with War Communism.) We need a school of thought that is empirical, pragmatic and non-ideological. Is there such a thing?

Chuck

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