Capitalism, More Or Less
Capitalism, More or Less
Prime Minister Tony Blair of England, at the recent World Economic Forum in Davos, Switzerland, reiterated his call for a “Third Way” between Capitalism and Socialism/Communism. His aim, and that of German Chancellor Gerhard Schroeder and even US President Bill Clinton, to a lesser degree, is to find an economic model that is as productive as laissez faire Capitalism yet provides for those who suffer from Capitalism’s “excesses.” It is an appealing argument and one that is embraced by many who fear the power of unbridled Capitalism and the totalitarian aspects of Socialism. They feel that there must be a better system because they reject all the others. The focus now is primarily on displacing Capitalism since Socialism has been thoroughly discredited for the moment and Capitalism is ascendant. The degree of fear concerning Capitalism was clearly evident at the recent World Trade Organization meeting in Seattle. What form a Third Way would take has not yet been defined, but the search is on.
Unfortunately, it is not likely to ever be defined, since no Third Way exists. For that matter, no Second Way exists, either. In reality, only one economic system exists, encompassing the fundamental laws of economics, which for want of a better word I’ll refer to as Capitalism. All other economic models exist only as a negation of certain features of the Capitalist model. There are no fundamental economic laws that underlie Socialism, Communism, Third Way, Feudalism, or any other economic system that has been tried, such as support Capitalism. These other systems are predicated on the negation of one or more principles of the Capitalist model, and not on any laws of their own. They are constructs, also, of additional precepts that are created to make the systems work rather than form their foundations. It is as if someone is trying to replace Economics with a second kind of economics as some try to replace Science with creation science. They are trying to replace the invisible hand of the market with the invisible hand of God. Or the all too visible hand of man. There is only more Capitalism or less Capitalism, not anti-Capitalism.
The fundamental laws underpinning Capitalism are not numerous in any case. Once past Supply and Demand, Marginal Cost, and a few other laws, the principles that underlie Capitalism are largely expressions of these fundamental laws and not laws in themselves, as so often seems to be assumed. Some of the problems with how Capitalism impacts society stems from the mistaken view that observed relationships somehow constitute a “law” of economics, such as the Phillips Curve, and not an expression of the underlying fundamental laws. Relationships among economic factors are mistaken for “truth” and policies are based on those perceived truths when in fact these “laws” will change as relationships and economic factors change. This approach too often narrows policy choices unnecessarily and precludes actions that might be more sound economically and more acceptable socially. As in science, it is best to reduce theories and laws to their most basic levels, but it seems sometimes as if economists are intent on creating a superstructure rather than a foundation.
Economic theory tells us that an economy will move to the most efficient allocation of resources with a given set of resources and parameters, such as legal and social structures. This is often misconstrued as the most efficient economy is the one with the least restrictions, when any set of parameters will, given time, lead to an efficient economy, given those parameters. The economy will move toward equilibrium and tend to stay there in the absence of any significant exogenous or endogenous changes. We are today witnessing the results of such a scenario as the stable monetary and fiscal policies of the last few years, combined with relatively minor changes in resources and interrelationships, have allowed the US economy to move toward its most efficient allocation given the current parameters. A stable tax system, prudent monetary policy, controlled government spending, and relatively smooth commodity price changes have given us one of the best economies of our history. Milton Friedman’s call for a computer to replace the Federal Reserve may not be that far off the mark. Even the various economic crises of the past few years have had muted effects because of prudent responses to those crises. A major tax cut, significant interest rate change, or massive spending increase will throw this system into disequilibrium and lead not to prosperity, but to a recession.
To say that there is only Capitalism does not mean that we are condemned to the impersonal, unfeeling marketplace. To a world where only the strong survive and the weak suffer as is their due. Unfettered Capitalism is only maximally efficient in a closed system. When circumstances change or externalities such as pollution become problems, Capitalism has a difficult time addressing these matters. Laissez faire Capitalism also has trouble moving to the next level. It underinvests in areas such as education, infrastructure, and research that are needed to transform an economy. Eventually the investments will be made, but at a pace far too slow and in a manner that does not benefit the losers from the last level.
This flaw is only becoming more evident as the complexity of our economy increases. No longer is there such a dichotomy between capital and labor since a large portion of capital is now resident in people’s minds and not just machinery. The old tradeoff between capital and labor as competing, interchangeable factors becomes increasingly complex as labor becomes more heterogeneous. In a world where what people know is the critical variable in determining success, investment in this area is vital to keep an economy moving forward. If there is not sufficient investment in this area, then that economy will not achieve its potential and fall behind other economies that are investing in education.
This holds true as well in the other areas of the economy that are slow to be invested in. Choices must be made to invest in these areas to keep the economy growing. Choices incur costs, however, and there should be no illusion that choices made in these areas will have costs. That, however, is the hang-up that many free marketers have in making the decisions to intervene. To a free marketer, any restriction distorts the most efficient allocation of resources so they must be eliminated. They prefer minimal intervention to allow the market to work. That will work, but the associated costs may be more than a society wishes to bear. Under this view, only a complete, unfettered economy will be truly efficient. The reality is that some restrictions are necessary to raise us beyond the survival of the fittest and, given time, will result in an “efficient” economy. It is arguable that such restrictions may result in a more rather than a less productive economy than a completely free one.
This is where choice becomes paramount. A society needs to choose what kind of economy it wishes to have and how it will get there. The choices must be made with conscious deliberation and a recognition of the costs these choices involve. A choice between greater social welfare and rugged individualism can be made, but with respect to the costs associated with each. The greater the degree of intervention, the greater the costs and the fewer the benefits. There may be an optimal amount of intervention that has initially greater benefits than costs, but where that is has to be closely examined.
Other forms of economy, then, are political constructs rather than economic models based on fundamental economic principles. We need to understand that, in order to achieve the type of world we seek, choices must be made, tradeoffs have to be accepted, and it takes time to accomplish. There is no mythical Third Way to run an economy because there are no foundations on which to build such a structure. There is no kinder, gentler economic system that will cure the world’s ills. As distasteful to many as it may be, we are forced to work within the Capitalist framework to develop our economy. There are choices that can be made within that framework, but they should be made consciously and in full recognition of the costs and benefits. Otherwise we get a system of haphazard construction and one less than fully endorsed by the whole society. Asian economies did very well the past few decades because everyone accepted the structures set up and they were able to close off their economies to a large degree. They are doing less well now as interests have diverged and there are conflicting demands on those economies. They are also less protected from the outside system that was more Capitalist. They need to once again build a consensus to get their economies back on track.
We do not need to copy their model, it would not work in any case, but we do need to make a more deliberate effort to define the economy we wish to have and to set forth the path to accomplish that goal. We are no longer fighting over ideology – Capitalism versus Communism – but over how best to reach our goals within the Capitalist framework. If we do not, we will continue to fall short of our potential and increase the level of dissension among those not benefiting. It is especially critical to do so now as the world moves ever closer to the pure form of Capitalism and those affected by the change increase.
Prime Minister Tony Blair of England, at the recent World Economic Forum in Davos, Switzerland, reiterated his call for a “Third Way” between Capitalism and Socialism/Communism. His aim, and that of German Chancellor Gerhard Schroeder and even US President Bill Clinton, to a lesser degree, is to find an economic model that is as productive as laissez faire Capitalism yet provides for those who suffer from Capitalism’s “excesses.” It is an appealing argument and one that is embraced by many who fear the power of unbridled Capitalism and the totalitarian aspects of Socialism. They feel that there must be a better system because they reject all the others. The focus now is primarily on displacing Capitalism since Socialism has been thoroughly discredited for the moment and Capitalism is ascendant. The degree of fear concerning Capitalism was clearly evident at the recent World Trade Organization meeting in Seattle. What form a Third Way would take has not yet been defined, but the search is on.
Unfortunately, it is not likely to ever be defined, since no Third Way exists. For that matter, no Second Way exists, either. In reality, only one economic system exists, encompassing the fundamental laws of economics, which for want of a better word I’ll refer to as Capitalism. All other economic models exist only as a negation of certain features of the Capitalist model. There are no fundamental economic laws that underlie Socialism, Communism, Third Way, Feudalism, or any other economic system that has been tried, such as support Capitalism. These other systems are predicated on the negation of one or more principles of the Capitalist model, and not on any laws of their own. They are constructs, also, of additional precepts that are created to make the systems work rather than form their foundations. It is as if someone is trying to replace Economics with a second kind of economics as some try to replace Science with creation science. They are trying to replace the invisible hand of the market with the invisible hand of God. Or the all too visible hand of man. There is only more Capitalism or less Capitalism, not anti-Capitalism.
The fundamental laws underpinning Capitalism are not numerous in any case. Once past Supply and Demand, Marginal Cost, and a few other laws, the principles that underlie Capitalism are largely expressions of these fundamental laws and not laws in themselves, as so often seems to be assumed. Some of the problems with how Capitalism impacts society stems from the mistaken view that observed relationships somehow constitute a “law” of economics, such as the Phillips Curve, and not an expression of the underlying fundamental laws. Relationships among economic factors are mistaken for “truth” and policies are based on those perceived truths when in fact these “laws” will change as relationships and economic factors change. This approach too often narrows policy choices unnecessarily and precludes actions that might be more sound economically and more acceptable socially. As in science, it is best to reduce theories and laws to their most basic levels, but it seems sometimes as if economists are intent on creating a superstructure rather than a foundation.
Economic theory tells us that an economy will move to the most efficient allocation of resources with a given set of resources and parameters, such as legal and social structures. This is often misconstrued as the most efficient economy is the one with the least restrictions, when any set of parameters will, given time, lead to an efficient economy, given those parameters. The economy will move toward equilibrium and tend to stay there in the absence of any significant exogenous or endogenous changes. We are today witnessing the results of such a scenario as the stable monetary and fiscal policies of the last few years, combined with relatively minor changes in resources and interrelationships, have allowed the US economy to move toward its most efficient allocation given the current parameters. A stable tax system, prudent monetary policy, controlled government spending, and relatively smooth commodity price changes have given us one of the best economies of our history. Milton Friedman’s call for a computer to replace the Federal Reserve may not be that far off the mark. Even the various economic crises of the past few years have had muted effects because of prudent responses to those crises. A major tax cut, significant interest rate change, or massive spending increase will throw this system into disequilibrium and lead not to prosperity, but to a recession.
To say that there is only Capitalism does not mean that we are condemned to the impersonal, unfeeling marketplace. To a world where only the strong survive and the weak suffer as is their due. Unfettered Capitalism is only maximally efficient in a closed system. When circumstances change or externalities such as pollution become problems, Capitalism has a difficult time addressing these matters. Laissez faire Capitalism also has trouble moving to the next level. It underinvests in areas such as education, infrastructure, and research that are needed to transform an economy. Eventually the investments will be made, but at a pace far too slow and in a manner that does not benefit the losers from the last level.
This flaw is only becoming more evident as the complexity of our economy increases. No longer is there such a dichotomy between capital and labor since a large portion of capital is now resident in people’s minds and not just machinery. The old tradeoff between capital and labor as competing, interchangeable factors becomes increasingly complex as labor becomes more heterogeneous. In a world where what people know is the critical variable in determining success, investment in this area is vital to keep an economy moving forward. If there is not sufficient investment in this area, then that economy will not achieve its potential and fall behind other economies that are investing in education.
This holds true as well in the other areas of the economy that are slow to be invested in. Choices must be made to invest in these areas to keep the economy growing. Choices incur costs, however, and there should be no illusion that choices made in these areas will have costs. That, however, is the hang-up that many free marketers have in making the decisions to intervene. To a free marketer, any restriction distorts the most efficient allocation of resources so they must be eliminated. They prefer minimal intervention to allow the market to work. That will work, but the associated costs may be more than a society wishes to bear. Under this view, only a complete, unfettered economy will be truly efficient. The reality is that some restrictions are necessary to raise us beyond the survival of the fittest and, given time, will result in an “efficient” economy. It is arguable that such restrictions may result in a more rather than a less productive economy than a completely free one.
This is where choice becomes paramount. A society needs to choose what kind of economy it wishes to have and how it will get there. The choices must be made with conscious deliberation and a recognition of the costs these choices involve. A choice between greater social welfare and rugged individualism can be made, but with respect to the costs associated with each. The greater the degree of intervention, the greater the costs and the fewer the benefits. There may be an optimal amount of intervention that has initially greater benefits than costs, but where that is has to be closely examined.
Other forms of economy, then, are political constructs rather than economic models based on fundamental economic principles. We need to understand that, in order to achieve the type of world we seek, choices must be made, tradeoffs have to be accepted, and it takes time to accomplish. There is no mythical Third Way to run an economy because there are no foundations on which to build such a structure. There is no kinder, gentler economic system that will cure the world’s ills. As distasteful to many as it may be, we are forced to work within the Capitalist framework to develop our economy. There are choices that can be made within that framework, but they should be made consciously and in full recognition of the costs and benefits. Otherwise we get a system of haphazard construction and one less than fully endorsed by the whole society. Asian economies did very well the past few decades because everyone accepted the structures set up and they were able to close off their economies to a large degree. They are doing less well now as interests have diverged and there are conflicting demands on those economies. They are also less protected from the outside system that was more Capitalist. They need to once again build a consensus to get their economies back on track.
We do not need to copy their model, it would not work in any case, but we do need to make a more deliberate effort to define the economy we wish to have and to set forth the path to accomplish that goal. We are no longer fighting over ideology – Capitalism versus Communism – but over how best to reach our goals within the Capitalist framework. If we do not, we will continue to fall short of our potential and increase the level of dissension among those not benefiting. It is especially critical to do so now as the world moves ever closer to the pure form of Capitalism and those affected by the change increase.
posted by BNitemoves at 4:34 PM
0 Comments:
Post a Comment
<< Home