Skip to comments.The Great (and Continuing) Economic Debate of the 20th Century
Posted on 03/21/2006 11:37:40 PM PST by Nasty McPhilthy
The great economic debate of the twentieth century was between collectivists and free-marketers. In one sense, the free-marketers won: When the Berlin Wall fell in 1989, it was widely acknowledged that Soviet socialism had been a catastrophic, not to say murderous, failure. But in another sense, the debate continues. Democratic capitalism still has not vanquished the idea of collectivism. Far from it.
At the beginning of the last century, free markets seemed to be on the ascendancy everywhere. But two events gave collectivism its lease on life. The first was World War I. In addition to the slaughterand to breeding the ideologies of communism, state fascism, Nazism, and even the Islamic fascism we are battling todayWorld War I served as an intoxicating drug to those in the West who believed that a handful of people in government could manage affairs better than the messy way in which free peoples tend to do so. Massive increases in government powers, coupled with massive increases in taxation, gave many the idea that you can achieve massive increases in production by commandeering the financial resources of society.
The second event that served as a boon to collectivism was the Great Depression, which was widely seen as a free-market failure. This view was false. Misguided government policies were at faultthe Smoot-Hawley Tariff, for instance, which dried up the flow of capital in and out of the country. If you track the stock market crash of 1929, it parallels the course of this tariff bill through Congress. When Smoot-Hawley arose in the fall of 1929, the markets fell; when it looked like the tariff bill was sidetracked in late 1929, the markets revived (the Dow Jones went up 50 percent from its lows in November); in the spring of 1930 it was signed into law, and the rest is history. There were other factors at work in the Great Depression, of course, such as President Hoovers gigantic tax increases of 1931. But despite the fact that these also involved bad policies, the lesson taken away by many was that economies will implode unless the government manages them. John Maynard Keynes, the intellectual guiding light behind New Deal economics, believed that an economy was like a machine: If you put doses of money into it or pull money out at the right times, he thought, you can achieve an equilibrium. This idea that government can drive an economy as if it were an automobile has had baleful consequences.
Other leading economists at the time, such as Joseph Schumpeter, recognized that an economy is an aggregate of disparate activitiesthus that the idea of achieving equilibrium, while it makes for a neat theory, is nonsense in the real world. A vibrant economy is full of constant disequilibria: New enterprises rise up, old ones decline, etc. Snapshots of such economies mean very little. In the real world, therefore, free markets operate rationally and efficiently in a way that government regulators simply cant. Here in America we came to this realization at the end of the 1970s. Following World War II, we largely bought into the idea that government must play an active role to prevent the economy from going off the cliff. But in the late 1970s, the devastation of inflation and high taxes brought about a reassessment. With the election of Ronald Reagan, the U.S. took a step back from Keynesian economics. Since then, as Western Europe has stagnatedcreating, for instance, only a fraction of the private sector jobs that the U.S. has createdour country has undergone an economic revival.
Nonetheless, democratic capitalism often still seems on the defensive. Why?
Is Democratic Capitalism Good?
One of the great vulnerabilities of capitalism is the perception that it is somehow less than moral, if not positively amoral. A common view of business was depicted in the movie Wall Street, in which Michael Douglass character made famous the phrase, Greed is good. Capitalism is widely seen as promoting selfishness. We tolerate it because it gives us jobs and prosperity, but many look on this as a Faustian bargain. Charity and capitalism are seen as polar opposites. Thus theres a phrase thats often used todayI myself use it from time to time without thinkingwhich is giving back. If youve succeeded in business, its counted a good thing if you give back to the community. And charity is, of course, a good thing. The problem with this phrase is its implication that by succeeding, we have taken something that wasnt ours. The same idea is summed up in the cynical saying, Behind every great fortune lies a great crime. This way of thinking about democratic capitalism is wrong.
In fact, philanthropy and capitalism are two sides of the same coin. To succeed in business in a free-market economy, one must meet the needs and wants of others. Even someone who makes babies cry is not going to succeed unless he or she provides a product or a service that people want. This system weaves intricate webs of cooperation that we dont even think about. Take a restaurant: Someone who opens a restaurant assumes that farmers will provide the food and that someone else will process and package it and that someone else will deliver it, having been supplied the fuel to do so by yet someone else, etc. These marvelous webs of cooperation happen every day throughout a free economy. No one is commanding it. It occurs spontaneously in a way that economists like Schumpeter understood.
Free markets also force people to look to the future and take risks. Misers do not found companies like Microsoft. Nor should we look on it as immoral for people to work for the betterment of themselves and their families. We are all born with God-given talents, and it is right to develop them to the fullest. The great virtue of democratic capitalism is that it guarantees that as we develop our talents, were contributing to the public good. Statistics show that the U.S. is both the most commercial nation and the most philanthropic nation in human history. And this is no paradox. The two go hand-in-hand.
Another vulnerability of democratic capitalism is that although it leads to progress and to an increase in our societal standard of living, progress is usually disruptive. This allows collectivists to play on peoples natural fear of change. We saw this with the rise of industrialism in the 19th century. We had paintings and writings depicting a pastoral agricultural past. Then railroads came along to disrupt the canals, and cars came along to disrupt the railroads. Buggy-whip makers and blacksmiths were done for. One can imagine what 60 Minutes would have been investigating 100 years ago: the poor blacksmiths being put out of work by Henry Ford. Likewise, when TV came along in the late 1940s and early 1950s, most movie theaters in the country went broke. Now the Internet is disrupting newspapers and Craigs List is disrupting classified advertising. Disruptions are inevitable in a free-market system. The political challenge is to allow these disruptions to take placethey are ultimately constructive, after allrather than reacting in a way that stymies progress.
In recent decades, collectivists have also hijacked the cause of environmentalism to promote their agenda. Im not talking about the desire to have clean water; were all in favor of that. Or clean air; one of the great things weve done in the last century is getting lead out of the air. Saving tigers and elephants is also a good thing. Im talking about those who use the mantra of environmentalism to try to control the economy the way the old-time socialists wanted to, breathing hellfire and damnation on those who dont subscribe to their new, post-Christian religion. The fact is, if our goal is to improve the environment, increasing government regulation and destroying manufacturing is counterproductive. Affluence is the friend, not the enemy, of the environment. As people become better off, they want a higher quality of life, including environmental improvements. And new technology drives such improvements. Consider the east coast of the U.S. Even though its population has more than doubledin some areas, its tripledand even though there are more developments, malls, and urban sprawl, there are more trees today than there were 80 years ago. Why? Because of technology that allows us to grow more food on less land. Technology is a friend of the environment.
Additional Collectivist Myths
Let me mention three additional myths that are used to promote collectivism. One is the idea that demand is the key to economic growth. Collectivist economists often talk about means to increase aggregate demand, as if that would ensure that the economy will grow. Following Keynes, they assume that the economy is like a machine. But again, the economy is an aggregate of tens of millions of people, millions of businesses, millions of technologies. We dont know how it interacts on a day-to-day basis. We dont know whats going to work or not work. Who could have conceived of eBay ten to twelve years ago? But today, 400,000 people make their livings on eBay. When Google was launched, there were ten other search engines. Who would have thought another one was needed? Isnt that how you get so-called bubbles? But Google found a way to do it better and ended up on top. Innovation is the key. Whether its railroads, cars, computers, the Internet, or iPods, risk-taking is messy. It is often irrational, and seemingly wasteful. But its the only way to determine what works best and what doesnt.
Another collectivist myth concerns trade. If I were dictator of the worldeven though I believe in the First AmendmentI would ban trade numbers, especially merchandise trade numbers. They just lead to mischief. We are given the impression that a trade surplus is like a profit and a trade deficit is like a loss. But trade is not a transaction between countries. It takes place between parties. For example, Forbes magazine buys paper. For all of the 88 years that weve been in existence, weve run a trade deficit with our paper suppliers. If you look just at that trade deficit, you might think we are doing poorly. But if you look at the two parties involved, that turns out to be an illusion. The paper supplier thinks hes going to make money selling his paper. We think were going to make money by taking the paper and putting print on it, with value added. So its a mutually profitable transaction, even if it looks like a trade deficit. Or consider a book printed in Taiwan. Looking at the trade number alone, it appears there is a two dollar trade deficit with Taiwan. Yet the book comes back here and retails for $24.95. The value added is in the U.S. The author gets a cut, the publisher gets a cut, booksellers get a cut, distributors get a cut, and remainder stores get a cut. Something similar happened with iPods: A lot of its parts are made overseas, but where is most of the value added? Here in the United States. North America has had a merchandise trade deficit for 350 out of the last 400 years, and we have done very well, thank you.
The final myth Ill mention concerns budget deficits. Milton Friedman said several years ago that if he had a choice between a federal budget of $1 trillion that was in the red and a federal budget of $2 trillion that was balanced, he would take the former. Deficits, in and of themselves, are not evil. Deficits must be put in context, because Washingtons inability to curb spending is often used as an excuse to raise taxes.
Principles of Prosperity
Now let me turn to five basic principles of economic growth. First and foremost is the rule of law: Without individual equality before the law, entrepreneurs cannot challenge already existing businesses. Alliances between the latter and government regulators who place barriers before entrepreneurs must be guarded against.
The second essential principle is property rights. We take it for granted in this country that if you buy a piece of property, everyone acknowledges that you own it. Most countries dont have that kind of uniform property system. A few years ago, Hernando DeSoto, a great economist from Peru, saw that in countries like his, although there is entrepreneurial activity, there isnt the corresponding prosperity found in the U.S. And he wondered why. In his recent bookThe Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Elseone of the key factors he cites is the absence in so many other countries of a legal foundation for property rights. In Brazils shanty towns, an individual may know that he owns the house in which he lives, and his neighbors may know it, but the fact is not recognized elsewhere.
Mr. DeSoto was asked by the Egyptian government a few years ago to determine who owns the businesses and residences in Egypt. His finding was that 88 percent of the businesses in Egypt are illegal. Why is that? Here in the U.S., it is possible to set up a business legally in a matter of days. In Egypt, it takes a couple of years. It requires going through numerous bureaucracies, doling out numerous bribes, etc. So it makes sense to proceed informally. On the other hand, running a business outside the law limits its growth. Most informal enterprises never grow beyond the level of family enterprises, because if they get too big, they might attract the attention of the tax collector. DeSotos group also reported that 92 percent of Egyptian housing is illegal. People living in residences may have deeds; but only a few miles away, those deeds are not recognized. In Egypt, as in so many other places, there is no uniform system of establishing and protecting property rights. As a result, four billion people around the world own $9 trillion of assets that amount to dead capital.
What do I mean by dead capital? Remember that here in the U.S., the most important source of capital for new ventures is not Wall Street, the local banker or the venture capitalist. It is the mortgage market. People either increase their mortgage or take out a second mortgage in order to start businesses. This is not possible in countries like Egypt. Understanding this was the key to Japans post-World War II economic boom. General MacArthur reformed a feudalistic property system, in which the peasants had only an informal system of property exchange, into a system with formalized property rights. Immediately, the Japanese economy took off. The importance of property rights is not sufficiently recognized by those of us who take them for granted.
The third principle of economic prosperity is low taxes. Taxes are not just a means of raising revenue for the government. They are also a price. Income taxes are a price paid for working; taxes on profits are the price paid for being successful in business; taxes on capital gains are the price paid for taking risks. In light of this, the importance of low taxes is easy to see: When you lower the price of good thingsthings like work, success and risk-takingyou tend to get more of them. Raise the price of these good things and you get less. In 2003, we lowered tax rates in the U.S. and the economy started to grow again. As weve seen time and again, tax cuts do not mean a loss of tax revenue. By increasing incentives, the government comes out ahead. Washingtons revenues in the last fiscal year were up 15 percent$100 billion above expectations. Washingtons problem is not revenue, but spending.
The fourth principle I would mention is making it simpler to launch legal businesses. Getting bureaucracy out of the way will inject a new vibrancy into the economy. The fifth and final principle is free trade. Expanding markets and creating greater opportunity for trade benefits us all.
In closing, I will remind you of a point I made earlier: The reason that the great economic debate continues into the 21st century, despite the proven superiority of free markets in terms of delivering prosperity, is because of the misperceptions that keep democratic capitalism from capturing the moral high ground. Dispelling these misperceptions should be our priority as we carry on that debate in the years ahead.
"Reprinted by permission from IMPRIMIS, the national speech digest of Hillsdale College, www.hillsdale.edu."
simple clean and the commicrats will hate it
thanks for posting
The modern multi-national corporation is a form of collectivism. My personal belief is that this form of collectivism has removed the philanthropic nature of pure capitalism. Adam Smith's 'invisible hand' no longer applies as CEO's of multi-nationals seek to build no long-term value in the company, its' employees, communities, or nations. These corporations are now run for the sole benefit of market speculators (as opposed to those seeking long-term investment). They have taken on a destructive force in society, and present an obstacle, rather than an aid to the entrepreneurial spirit that built this country.
Our country's markets experienced a similar degradation in ethics prior to the 1929 market crash, and subsequent Great Depression.
I voted for the man. He would have made a fine President.
The nature of capitalism is productivity, not philanthropy.
...the philanthropic nature of pure capitalism.
I'd like to see an example of this. England had something close to "pure capitalism" in the Victorian era. And if my reading is correct, it was anything but philanthropic.
Well said. The author had a slight hiccup there. But otherwise an excellent piece
Bump for a good read.
You write as if the laws of economic survival can be suspended by an evil cabal of greedy corporate CEOs.
I think you have missed the point of this article entirely.
People like you, who learn the phrases but never grasp what they mean, are part of the problem. You honestly have no clue what Forbes is even talking about. Every single "multinational" company is managed to maximise the company's stock value, which is what it is, for both speculators and long-term investors. Capitalism itself purifies the ranks of CEO's perpetually because capital is mobile, and it is more mobile the less regulation and the more technology we have.
Wow! Steve Forbes proves himself to be a great writer as well as a great economist. I knew he was smart, just never knew how smart.
Furthermore, it is very desirable to have centers of power that can challenge the egotistical, power hungry national governments which most certainly do the most harm of all.
The Rise and Decline of the State
by Martin van Creveld
We are losing our property rights via unelected tyrants - judges and bureaucrats illegally writing law.
Kelo, the endangered species act, and the fascist Environmental Protection Agency all work to dispossess us of birthright to lawfully use our property as we wish. And the gutless congress sits back and does nothing.
On the state level, land planning commissions, infested with UN NGO Marxists and insane utopians, work to destroy property at the local level.
I was never arguing the nature of capitalism. Neither do I rail against it. There's a distinction to be made between capitalism and corporatism. Capitalism is an individual activity; corporatism is a form of collectivism.
The outcomes of individual capitalism are generally philanthropic, and beneficial to the welfare of societies that engage in it. The outcome of collectivist global corporatism is not. The purpose, and result, of incorporation is to produce an entity with greater influence than the sum of its' constituent shareholders.
That entity serves only itself, and it will over time become predatory and or/parasitic in nature as a corporate entitiy is incapable of human conscience. Shareholders bear no legal liability to society beyond their financial holdings in the company, so personal responsibility is removed also. The corporate entity becomes perfectly sociopathic, in that it lacks conscience to prevent wrong-doings, and feels no responsibility for retribution.
Please note the difference between entrepreneurial capitalism and global corporatism explained in my previous post. CEO's become more ruthless in time. They serve only the corporation, which by nature will seek to maximize profits to, and often beyond, the limits of the law. The corporate entity in many cases engages in behavior damaging even to its' own shareholders (Enron).
So we should shoot for the average, or should we try to exceed it?
I concede your apparent point that even under capitalism fraud happens. I even concede your implied point that under capitalism wealth increases, which breeds greed, which prompts selfish actions. Nobody is arguing that capitalism makes bad people good.
Enron's officers are going to jail.
Of course. So what? Actors in a capitalistic system need have no conscience and may be predatory as much as they wish. They (whether they are individuals or legal fictions) must still satisfy a buyer's need in order to make a profit. The bounds of acceptable actions are defined by law, not by conscience. The invisible hand orders goods and services irrespective of whether the economic actors are people, horses, or giant corporations. In fact, said hand is blind, and that is why the system works.
Your paragraph betrays a PROFOUND failure to grasp the economics of capitalism 101.
You are also destroying a perfectly good political term ("collectivist") by misusing it like an impressionist uses mauve paint. Something big and comprised of many parts is not, by that, a collectivist entity.
Corporatism is a different animal. It serves the corporate entity, not the individual. By theory, those corporations which best serve their own needs at society's expense, or which best serve other corporations will thrive. The individual becomes prey. Society, sensing a threat, seeks protection through socialistic legislation. The corporate animal either seeks a way around this legislation or flees to somewhere beyond its jurisdiction. Corporations also use their weight to insulate themselves against honest competition by exerting influence upon government. That's right! Corporations also seek to expand the reach and size of government for their own benefit.
Well, a couple of things. Spencer, who coined the phrase "survival of the fittest," pre-dated Dawrin. He was talking about corporations.
The other thing is that you're judging business morality and benefit to society only by size. Seems a little arbitrary and tough to prove. There were few giant corporations in the victorian era in London, yet it was a hugely brutal time.
Lastly, your thesis seems to be:
Big corporations = bad
Mitigating force of government = bad
The only good business entity is a small business entity.
In truth, small business entities are incapable of doing certain things. For instance, a hundred years ago they couldn't build a railroad. Today, they can't do nanotech...these are both enterprises that need specific skill sets, capital and manpower.
"...the philanthropic nature of pure capitalism."
Your average sole-proprietor in America is a perfect example. Those who benefit their communities or society thrive. Those who do not are either jailed or go bankrupt in fairly short order.
Who benefits from Americans buying goods with low tariffs. Hmmmmmmmmm.......could it be the Americans who buy goods with low tariffs?
We are all sole proprietors, it's just that most people don't realize it.
We are sole proprietors over our expertise. Some of us sell that expertise by the hour, some by the year. Some at home and some in cubicles.
If you don't look at yourself as a sole proprietor, even if you work in a mega-giant-super-sized corporation, then you're done for...
Not by the CEO's. By the corporate entity that they serve. I don't blame the CEO's. Hiring practices will of necessity favor the most ruthless to better serve the corporate animal that is their master.
Nonsense. Ruthless organizations tend to hire ruthless people. Ethical organizations tend to hire ethical people.
Hence the necessity for business regulation in the era of corporatism. An individual doing harm to society will eventually be processed out by being driven out or imprisoned. Corporations are powerful enough to insulate themselves against such action.
"You are also destroying a perfectly good political term ("collectivist") by misusing it like an impressionist uses mauve paint."
Nope. Shareholders are engaging in collectivism. The collective entity becomes master rather than servant. Very similar in dynamic to statist political systems.
Over time, a corporate entity will become as ruthless as it is allowed to be by society. Its' only interest is self-preservation.
England had something close to "pure capitalism" in the Victorian era. And if my reading is correct, it was anything but philanthropic.
Critics of capitalism often compare the Victorian era to what came after it. They should really compare the industrail era to what came before. Conditions in industrial England may seem horrible compared to those of a modern economy, but the were far better than the (barely) subsidence living of the prior agrarian economy.
Exactly. Just look at Arthur Anderson. They were able to insulate themselves......
So your problem is with society, not the corporate entity.
I not only look upon myself as a sole-proprietor, I AM a sole-proprietor. Your decision can be superceded at any time by a hostile takeover. What then? Our decision in who we are able to sell our expertise to is becoming increasingly more limited by corporatism. Those corporations able to provide the most compensation to their employees will be those who act in the most ruthless fashion towards society as a whole. When just that isn't enough, they will turn inwards and become belligerent towards their own employees (outsourcing, downsizing, et c.).
"Critics of capitalism often compare the Victorian era to what came after it. They should really compare the industrail era to what came before."
Exactly. Pure capitalism creates value and worth in society by generating value and worth in the individual. Corporatism serves only the corporation, and its' collectivist share-holders (sometimes the corporation actually cannibalizes its' own in regards to the latter).
"So your problem is with society, not the corporate entity."
Nope. Corporatism and socialism are two sides to the same coin, and both minted of the collectivist alloy. Both are equally damaging to individual liberty and society as a whole. I detest both equally.
I view it as more of a yin-yang relationship. Rampant corporatism will produce a societal reacion of further socialist legislation. Socialist legislation produces belligerent action towards society on the part of the corporation. Tit-for-tat until societal decline ensues.
Interesting. A fine argument to reinstitute the barter system.
Great comments. These egotistical, power-hungry collectivist corporate entities have effectively placed themselves above the law at this point.
Did you study economics at Berkeley? This is the kind of leftists nonsense I'd expect to hear from a left wing professor, with no real world experience, at a leftist university.
Milton Friedman had this to say:
There is no differences between corporatism and capitalism. Yours is a feeble attempt to fool us by making a distinction without a difference.
What you're really condemning here is the profit motive. You call it greed but we really know what you're referring to. Whenever the profit incentive is missing, the probability that people's wants can be safely ignored is the greatest. In a free economy, the pursuit of profits and serving the people are one in the same.
My guess is this stems from the truism that without the accumulation of (excess) capital there can be no philanthropy.
Arthur Anderson's wrongs were only investigated and prosecuted after it did damage to another corporate entity (Enron).
Not at all.
Currency and employment within pure capitalism make it more efficient.
So they weren't are powerful enough to insulate themselves against such action? Thanks for admitting your earlier assertion was in error.
My views come from first-hand experience in international trade, sole-proprietorship, and executive-level employment in the corporate world. Where do you pull your expertise from?
Moreover, their shareholders didn't face prosecution for the wrongs commited on their behalf.
Arthur Anderson was prosecuted. They were not powerful enough to insulate themselves against such action. You were wrong.
Moreover, their shareholders didn't face prosecution for the wrongs commited on their behalf.
And you think shareholders should face prosecution?
Arthur Anderson was a partnership, and its partners were liable (or not, depending on the trial outcome) for the harm it caused. If you did not know that simple fact, how can you bring up the subject of "expertise?"
Moreover, you should do a web search on "piercing the corporate veil." After that, do one on "Sarbanes-Oxley."