A nice pro-capitalism rant against a naive faith in
Capitalism. Work for you, DRB?
I agree wholeheartedly with Becker that capitalism is a
superior
economic system to any other that has been tried, the others
being
mainly socialism and communism. The best evidence for this
is that
out of the 194 countries in the world, I can think of only
two that
are not capitalist—Cuba, which however is moving slowly in
the capitalist direction, and North Korea, the greatest
economic
failure on the planet.
But this statistic indicates that capitalism is a necessary
condition of economic success rather than a sufficient
condition.
Many of the world’s countries, though capitalist, are basket
cases—not as badly off as North Korea, but plenty badly off.
Per capita incomes in rich capitalist countries such as the
United
States, Canada, Germany, Britain, and Japan greatly exceed
per
capita incomes in poor capitalist countries, which are the
majority
of countries.
So the big question is, given capitalism, what else does a
country need in order to prosper? We know that it doesn’t
need abundant natural resources or a large population. But
it needs
a legal and political system that protects property rights,
allows
a large degree of economic freedom, minimizes corruption,
controls
harmful externalities (like pollution) and subsidizes
beneficial
ones (like education), distinguishes between equality of
opportunity (which it promotes) and equality of incomes
(which it
promotes only to the extent of combating poverty), welcomes
and
assimilates skilled and wealthy immigrants, and (related to
protecting economic freedom) avoids public ownership or
control of
economic enterprises. To create and maintain such a legal
and
political system a country also requires a culture of
respect for
business success, of competition and risk-taking, and of
consumerism—since, as Keynes argued, consumption drives
production.
Such a combination is difficult to achieve; no nation has
achieved it. The variance across nations in culture and in
institutional structure is very great, and determines the
relative
economic success of the different nations.
Since there is so much variance across capitalist
countries—so much that can go wrong with a capitalist system
because of the complex institutional structure and social
culture
that capitalism requires if it is to be maximally successful
in
contributing to social welfare—we need to avoid complacency.
Complacency was a major factor in the surprising economic
collapse
that began in September 2008, a collapse the consequences of
which
are still very much with us.
When I started teaching in the late 1960s, the economist
Harold
Demsetz was talking about the “Nirvana Fallacy.” He
defined that as the belief of many economists that any
market
failure, such as monopolization or pollution or
underproduction of
public goods, could be rectified at little cost by
government
intervention. If that were true, it would indeed enable
“Nirvana” (in the sense of heaven—which
isn’t actually what the word means; it’s nearer to
“oblivion”) to be attained. But as Demsetz pointed out,
it isn’t true. There are government failures as well as
market failures, and they have to be taken into account in
deciding
whether and what the government should be asked to do about
market
failures.
Over time, however, a reverse Nirvana Fallacy took hold of
many
economists, most famously Alan Greenspan. This was the idea
that
capitalism was a self-regulating system; market failures
were, with
few exceptions, either self-correcting, or less harmful than
regulation aimed at eliminating them. Such thinking
influenced the
regulatory laxity that contributed (decisively in my view)
to the
financial collapse of September 2008 and the ensuing
worldwide
depression, and to the disbelief until then of many
economists that
there would ever again be a major depression. Greenspan and
other
like-minded economists and political leaders were wrong to
think
capitalism self-regulating; they neglected the need for an
institutional structure, and a culture, that differentiate
successful from unsuccessful capitalist economies.
The institutional structure of the United States is under
stress. We might be in dangerous economic straits if the
dollar
were not the principal international reserve currency and
the
eurozone in deep fiscal trouble. We have a huge public debt,
dangerously neglected infrastructure, a greatly overextended
system
of criminal punishment, a seeming inability to come to grips
with
grave environmental problems such as global warming, a very
costly
but inadequate educational system, unsound immigration
policies, an
embarrassing obesity epidemic, an excessively costly health
care
system, a possible rise in structural unemployment, fiscal
crises
in state and local governments, a screwed-up tax system, a
dysfunctional patent system, and growing economic inequality
that
may soon create serious social tensions. Our capitalist
system
needs a lot of work to achieve proper capitalist goals.
