Capitalism Loses Against Chimera

by Chidem Kurdas

Gripes about capitalism go back 150 years and more. In the Communist Manifesto of 1848 Marx and Engels thundered that the specter of revolution haunted Europe, that the periodic reappearance of commercial crises “put on its trial, each time more threateningly, the existence of the entire bourgeois society.” They were not the first to assail the system and were followed by numerous others spanning the political spectrum.

Thus the Financial Times recently started a series on  “The Crisis of Capitalism.”  Europe suffers from a sovereign debt crisis due to over-spending by governments—why is that the crisis of capitalism? But one should not quibble. It is an old tradition. In the 1998 turmoil brought on by Russia’s default on its bonds and the failure of a large hedge fund, commentaries appeared bearing titles such as The Crisis in Global Capitalism, Global Capitalism RIP, Collapse of Capitalism, Who Lost Capitalism? and The Free Market’s Crisis of Faith.

I’ve taken those titles from a response by Michael Boskin, “Capitalism and its Discontents,” a classic that rings true 14 years later and merits re-reading.  It makes one realize how very persistent and impervious the attacks are. No matter how well the case is made for capitalism on economic and moral grounds, no matter how clearly the argument is presented (Boskin makes an eminently persuasive and readable case), as soon as a problem arises many voices will condemn the system.

Of course it was communism that in fact collapsed in the late 20th century, but because humans beings are fallible, all political-economic systems are apt to run into some problem, and so pundits continue to write tombstone epitaphs for capitalism.

Boskin’s 1998 speech contains an anecdote illustrating a certain mindset. In 1989 President George H.W. Bush sent Boskin, then Chairman of the Council of Economic Advisers, to Moscow to help Gorbachev with Soviet economic reform. There he met, among others, the head of Gosplan, the government planning agency. The man asked: “Who sets the prices in your economy?” Boskin explained that most prices arise from the decisions of buyers and sellers.

The Gosplan chief asked again: “So who sets the prices in your economy?” Again Boskin explained. No effect. The stolid Soviet bureaucrat took out a giant computer printout containing the official prices of all products in the Soviet Union. Unable to conceive of markets working without government price setting, he may have thought of “reform” as central planners using a different technique for determining prices, perhaps a different computer model that Americans could provide.

I imagine Gosplan honchos’ education did not include reading Hayek, who explained why no central planning technique can work—some half-century before the frustrating meeting in Moscow. Today’s protestors do not call for central planning but do favor more government, whether in the form of greater regulation or measures to equalize income distribution. There is little evidence that these work any better than central planning; interventions like welfare programs are notable for their bad unintended consequences.

Nevertheless, like the Soviet planner Western statists can’t conceive of the possibility that non-intervention is better in most areas. There is a powerful myth that if some government is good, more government is even better and by intervening in everything that we don’t like, we’ll achieve egalitarian Nirvana with no crises.

Meanwhile we’ve been very fortunate. Despite a variety of destructive public policies and the limits to individuals’ wisdom whether in market or government,  capitalism has brought about an immense growth in income and numerous innovations that make life easier and more enjoyable. As a result we’re all better off than the authors of the Communist Manifesto 164 years ago.

Engels was a rich industrialist and supported Marx, who wasted a small fortune inherited from his family. They were obviously members of the bourgeois class they condemned, but compared to us their entire bourgeoisie was worse off. We have more food and clothing and better housing, are healthier and live longer. There is no alternative to capitalism because nothing else has worked as well, crises and all.

That’s the reality but we keep hoping we’ll find some government intervention that will take us to Nirvana.

23 thoughts on “Capitalism Loses Against Chimera

  1. As I recall, the Soviet planners’ prices, at least for capital goods so they could calculate, were actually taken from Western market economies. In the absence of that information, the system couldn’t have kept going as long as it did. So the question is: if capitalism died, to what do its critics imagine would we turn?

  2. Scott Rasmussen has polled on attitudes toward “capitalism.” It isn’t very popular. To the general population it s government and business hand-in-hand,” what I would call “crony capitalism.”

    When he polls on attitudes toward free markets, the responses are highly favorable. Ordinary people know the difference.

    Unlike liberalism, it’s not our term that has been appropriated by our adversaries. It was coined by critics of free markets.

    The blog is ThinkMarkets, not ThinkMachines.

  3. Jerry is right on reported perceptions of “capitalism” vs. “free markets.” Unfortunately, the latter is…too wordy?
    What to replace it with? (Only half joking.)

  4. Well, the truth is that over the last 100 years in America, our firm capitalist foundation, on which prosperity was built for the first 300 years after 1620, has gradually been transformed into more and more “crony capitalism.” Some combination of campaign finance realities, mass media, and the expansion of government has led to an unholy alliance between big business and politicians.

    Business is not the main culprit–they start lobbying to avoid punitive laws and once ensnared, look to gain advantages. Today, they have a dual purpose in buying politicians–one, to get favors; and two, to deter crushing regulations. The politicians have close to absolute power over regulating and taxing the marketplace, and absolute power leads inevitably to abuse and corruption. It is all a direct result of an excessiverly intrusive big government.

    Karl Popper had a better name for the free market we once had–(see “The Open Society and its Enemies.” PUPress). He celebrates the many unknown individuals who assumed responsibility and helped to achieve freedom, human rights, and an open society. Those common people gave history meaning by bequeathing to us the legacy of free institutions that they so persistently pursued. The more correct term may be to champion a “free economy.” –that means one that is open to all, with minimal regulation and licensing obstacles, and no special, advantages granted to any.

    The enemies of open and free economiies are those individuals who will not and cannot compete in the open marketplace. They abhor a level playing field and seek special comfy advisory roles at the top. The major appeal of socialist schemes is to the abstract thinking elites that see it as a way to keep their hands clean and uncalloused. Some have squishy idealistic motives, thinking they are actually helping the common people, because their own motives are pure. But in the end, they all want centralized power so they can manipulate the free market “and make it better.”

    Once the central planners’ manipulation commences, corruption is an inevitable result. The recent mortgage and real estate collapse was the result of such manipulation but its perps found refuge in blaming the free market–Wall Street–and are now calling for more regulation. The downward spiral is obvious, and that may be why democracies are called “temporary states.”

  5. Alan Walstad–
    Good question. Of course, a world completely ruled by a communist regime would be such a horror story that the lack of accurate prices & the inefficiencies that creates would be the least of it. I’d think the whole economic issue would be secondary to the wholesale destruction of liberty.

  6. Jerry O’Driscoll–
    You’re right, capitalism is not a good term. It was coined by critics who were contrasting the “ism” of capital to the “ism” of the collective. In reality the latter was no such thing but rather the “ism” of apparatchiks.

    But “free markets” is too narrow. The system we’re discussing is more than just markets, to work well it has to include other institutions and a set of values.

  7. Bill Greene–
    Karl Popper’s term “Open Society” includes free markets but also other institutions, so it is better. So far it has not replaced “capitalism” in public discourse but probably it should.

  8. To paraphrase Churchill: Capitalism is the worst economic system, except for all the others that have been tried. Free Markets are like an ecosystem. Individual participants make choices that are good for them and overall it results in a very good outcome. However, some people lose out and others are too lazy or lacking in skills to succeed.

    Hence, we get bleeding heart liberals who want to bring us all down to the level of the least competent. The liberals feel good about themselves and act like anyone who has common sense is evil. This is human nature. It will always be this way. On rare occasions we get an Athens, Rome or USA — but eventually the liberals will send us back into the dark ages.

  9. Pavan–
    As far its economy goes, the US is not like ancient Athens or Rome. Their economies were stagnant, whatever the glories of their culture.

  10. For a graduate class in global crime in 2010, I wrote my term paper on the future of capitalism. I began with the citation to Mark Twain who noted that reports of his death were exaggerated.

  11. Twain referred to Congress as “America’s only native criminal class.” That would be a good place to start an investigation of global crime.
    Betcha your teacher didn’t start there, or even go there for that matter.

  12. The Mark Twain quote on his death being exaggerated crossed my mind as I pondered the vast “crisis of capitalism” literature. Twain is remarkable, isn’t he. That one on Congress is truly prescient.

  13. Chidem– You say that Athens and Rome were stagnant and America is not, but I would suggest there is a rise and fall of all great civilizations, and one must look at the particulars over several or more centuries. Academics love Athenian culture when Plato and Socrates were having their dialogues, around 380-420 BC, but that was the high point before the Fall– the country had become “stagnant.” But, its vital period occurred centuries earlier when the foundations of success were built– 700 BC Hesiod; 600 BC Lycurgus wrote the Spartan Constutution; Solon initiated Athenian democracy; 550 BC Pythagorus and math; 450 BC Sophocles writes plays; 475-480 BC victorious battles of Thermopolae and Salamis.

    Victor Davis Hanson has written in “The Other Greeks” how the yeoman independent farmers in 800BC Greece laid the foundation for Greek freedom and the empowerment of human action. Homer at that same early time gave us heroic human action. Their descendants took Greek merchant shipping all over the known world, displacing the Phoenicians, and created a world power and great affluence. That period I liken to America’s first 300 years–from 1620-1920.

    As a mature nation, by 350-400BC, Greece had lost its mojo, philosophers took over, skeptics challenged religious beliefs, Plato’s wealthy family undermined the democracy, the more educated elites opposed wars, and the once great Athenians’ forces lost the Peloponesian Wars and Athens gradually slid into obscurity. Two millennia later they have never recovered! America today may be at the stage Greece was when it all went fooey! Is it not a sign of stagnant leadership when we won’t build a pipeline to supply us energy, or allow Boeing to create jobs in Carolina, or allow Lockheed to manufacture planes for Taiwan, or end gridlock in Congress to balance the budget and end crony capitalism and stop subsidies to inept organizations??

    The Roman Republics were vibrant economies from 200BC on. They grew from nothing to rule the known Western world. It took 400 plus years to grow old, allow immigrants to swell the cities, enact price controls, tolerate the Nero and Caligula leadership, drive the farmers away, and eventually lose it all–sacked and burned by the Barbarians. Does any of that ending phase sound like Washinton today?

    The “real” glories of Greek and Roman culture were the heroic actions of those who built the success over 400 years–Lycurgus the Constitution writer, etc. The “alleged” glories trumpeted by today’s academics, such as Plato’s musings, were the first sign that an intellectual elite had taken over leadership and the nation was destined for a downward slide to oblivion. And, the fine sculpture and achitecture had been the work of skilled ordinary citizens, financed by the prior wealth accumulated from merchants and vibrant trade.

    Thus, I think Pavan has a point that rarely “we get an Athens, Rome or USA — but eventually the liberals will send us back into the dark ages.” The very fact that we are debating socialist planned economies vs free and open economies is a sign that we have not learned anything from the reality we can all see, and the lessons that history has taught us.

  14. Bill Greene–
    I was making a distinction between the political and economic spheres. Your rise and decline of empire argument has some plausibility in the political area, as do imperial overreach arguments. But as far as the private economy goes, the American economy bears no comparison in its dynamism to these ancient systems. It remains an innovative place with a high level of productivity.

  15. To add a qualification: Yes, the ever-growing government and declining empire may drag down the economy as well. But this is such a productive and in the long run resilient economy, it would take a lot to bring it down permanently. Granted, public policies have done a lot of damage. But at this stage that damage looks reversible. However, I would agree with you that at some level of political intervention & rent seeking the damage may become massive and irreversible.

  16. Chidem–The absolute level of “dynamism” in an economy can vary, and certainly the rapid advance of technology in the 21st century dwarfs the innovations of the ancient economies. Nevertheless, there was an innovative moment or two in all start up nations, whether we refer to Phoenicia at 1200BC, the Greek traders of 600BC, the Venetian merchants of 1300 AD, or the Dutch sea men of the 1600’s.

    Those were the “rare occasions we got an Athens, Rome or USA” that I believe Pavan was referring to, and my point is that those rare occasions, that built the record of success for free and open economies, occurred only where the citizens of a nation had the economic freedom to participate in the market place with a minimum of regulation. Thus the historical record shows that economic freedom has always been the foundation of the most prosperous societies–and that such economic freedom can be more critical than political freedom.

    I think we are actually in full agreement that, as you write, “There is no alternative to capitalism because nothing else has worked as well, crises and all.” My intent is simply to show the historical evidence for that truism. And, to point out that most successful and dynamic economies eventually matured and declined when their societies became corrupt, their bureaucracies bloated, and their governments too large and cumbersome. Since the latter debilitating conditions are a fair definition of socialism and communism, there is an argument to be made against socialism, not based on theory, but on a demonstrated real world record.

    America may still have an edge in innovation and a somewhat dynamic economy, but the political gridlock, expanding government, and corrupt dealings between Washington and corporate interests, will increasingly depress that dynamism. Thus, when “politics” creates burdens on the economy, the efficiency and innovation suffers. That is what is happening in the USA, and any straight line projection of this 100 year trend indicates we are doomed–by socialist theory.

  17. Wow! Our last two posts crossed in ther mail! The two big questions seem to be: How far have we slid down the slippery road to a stagnant socialist future?? ; and How can this national suicide from the inside be reversed??

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  19. It is useful to separate the discussion of economic systems from political systems. And the result is that history reveals that free economies are the more important in providing security and prosperity to the citizenry of a country. From Phoenicia, to Athens, Rome, Venice, Florence, England, Hong Kong, Singapore, Taiwan, Chile, and The Emirates, it has always been the free economies that flourished, regardless of democratic vs authoritarian rule.

    Free markets often lead to a rising middle class and democratic reform, but not always. As long as the rulers leave the free market alone, minimize regulation, and protect private property, the people will prosper, and enjoy their prosperity. Having a vote does not help if you cannot enjoy the fruits of one’s labor!

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