a huge social insurance system, with resulting high taxes, low take-home pay and low wealth, may not hurt capitalism

TO BE NOTED: From the FT:

"Uncertainty bedevils the best system

By Edmund Phelps

Published: April 14 2009 19:50 | Last updated: April 14 2009 23:50

In countries operating a largely capitalist system, there does not appear to be a wide understanding among its actors and overseers of either its advantages or its hazards. Ignorance of what it can contribute has in the past led some countries to throw out the system or clip its wings. Ignor­ance of the hazards has made imprudence in markets and policy neglect all the more likely. Regaining a well-functioning capitalism will require re-education and deep reform.

Capitalism is not the “free market” or laisser faire – a system of zero government “plus the constable”. Capitalist systems function less well without state protection of investors, lenders and companies against monopoly, deception and fraud. These systems may lack the requisite political support and cause social stresses without subsidies to stimulate inclusion of the less advantaged in society’s formal business economy. Last, a huge social insurance system, with resulting high taxes, low take-home pay and low wealth, may not hurt capitalism.

In essence, capitalist systems are a mechanism by which economies may generate growth in knowledge – with much uncertainty in the process, owing to the incompleteness of knowledge. Growth in knowledge leads to income growth and job satisfaction; uncertainty makes the economy prone to sudden swings – all phenomena noted by Marx in 1848. Understanding was slow to come, though.

Well into the 20th century, scholars viewed economic advances as resulting from commercial innovations enabled by the discoveries of scientists – discoveries that come from outside the economy and out of the blue. Why then did capitalist economies benefit more than others? Joseph Schumpeter’s early theory proposed that a capitalist economy is quicker to seize sudden opportunities and thus has higher productivity, thanks to capitalist culture: the zeal of capable entrepreneurs and diligence of expert bankers. But the idea of all-knowing bankers and unerring entrepreneurs is laughable. Scholars now find that most growth in knowledge is not science-driven. Schumpeterian ­economics – Adam Smith plus sociology – captures very little.

Friedrich Hayek offered another view in the 1930s. Any modern economy, capitalist or state-run, is a great soup of private “know-how” dispersed among the specialised participants. No one, he said, not even a state agency, could amass all the knowledge that each participant “on the spot” inevitably acquires. The state would have no idea where to invest. Only capitalism solves this “knowledge problem”.

Later, Hayek fleshed out a theory of how capitalism makes “discoveries” on its own. He had no problem with the concept of an innovative idea, for he understood that, even among experts, knowledge is incomplete about most things not yet tried. So he felt free to suppose that, thanks to the specialised insights each acquires, a manager or employee may one day “imagine” (as Hayek’s hero, David Hume, would have put it) a commercial departure – one that could not be inferred or envisioned by people outside the individual’s line of work. Then he portrays a well-functioning capitalist system as a broad-based, bottom-up organism that gives diverse new ideas opportunities to compete for development and, with luck, adoption in the marketplace. That “discovery procedure” makes it far more innovative than the top-down systems of socialism or corporatism. The latter are too bureaucratic to learn about ideas from below and unlikely to obtain approval from all the social partners of the ideas that do get through.

Well-functioning capitalist economies, with their high propensity to innovate, could arise only when serviceable institutions were in place. The freedoms borne by England’s Glorious Revolution of 1688 and the “commercial society” of the Scots were not enough. There had to be financial institutions where there would be disinterested financiers, each trying to make the best investment, and – importantly – a plurality of views among them, so financiers funded a diversity of projects. There also had to be limited liability for companies and a market enabling their takeover. Such institutions had to wait for demand by wide numbers of business people wanting to build a new product or new market or new business model. Rudimentary institutions began to emerge early in the 19th century, from company law and stock ex­changes to joint-stock banks and “merchant” banks lending to industry.

Unprecedented rewards soon followed in Europe and America: new cities rising, unbroken productivity growth, steadily climbing wages and generally high employment. Lifetime prospects improved for all or nearly all participants. Less measurable but ultimately fundamental, growing numbers of people in capitalist economies had engaging careers and were energised by their challenges and explorations. Capitalism was a godsend for them.

From the outset, the biggest downside was that creative ventures caused uncertainty not only for the entrepreneurs themselves but also for everyone else in the global economy. Swings in venture activity created a fluctuating economic environment. Frank Knight, observing US capitalism in his 1921 book, said that a company, in all of its decisions aside from the handful of routine ones, faces what is now called “Knightian uncertainty”. In an innovative economy there are not enough precedents to be able to estimate the probability of this or that outcome. John Maynard Keynes in 1936 insisted on the “precariousness” of much of the “knowledge” used to value an investment – thus the “flimsiness” of investors’ beliefs. (Yet now he is seen as “Smith plus psychological swings”.)

No coherent moral justification was ever suggested for throwing out a system providing invaluable and irreplaceable novelty, problem-solving and exploration, thus personal growth. On the contrary, humanist philosophy has continued since ancient times to hold up such experience as the “good life”. Socialists and corporatists never offered an alternative good life. They simply claimed that the system they advocated could out-do capitalism: wider prosperity, or more jobs, or greater job satisfaction. Unfortunately, there is still no wide understanding among the public of the benefits that can fairly be credited to capitalism and why these benefits have costs. This intellectual failure has left capitalism vulnerable to opponents and to ignorance within the system.

Capitalism lost much of its standing in the interwar period, when many countries in western continental Europe shifted to corporatist systems. This was a low point in the public’s grasp of political economy. In the end, the promises of greater prosperity and lesser swings could not be delivered. The nations that kept capitalism while making reforms, some good and others maybe not, ultimately performed well again – until now. Those that broke from capitalism were less innovative. After the disturbances of the 1970s, they saw unemployment rise far more than the capitalist nations did. They were worse on economic inclusion too.

Now capitalism is in the midst of its second crisis. An explanation offered is that the bankers, whatever they knew about capitalism, knew that to keep their jobs and their bonuses they would have to borrow more and more to lend more and more, in order to meet profit targets and hold up share prices. The implication was that the crisis flowed from a failure of corporate governance to curb bonuses and of regulation to rein in leveraging of bank capital to levels that made the banks vulnerable to a break in housing prices.

But why did big shareholders not move to stop over-leveraging before it reached dangerous levels? Why did legislators not demand regulatory intervention? The answer, I believe, is that they had no sense of the existing Knightian uncertainty. So they had no sense of the possibility of a huge break in housing prices and no sense of the fundamental inapplicability of the risk management models used in the banks. “Risk” came to mean volatility over some recent past. The volatility of the price as it vibrates around some path was considered but not the uncertainty of the path itself: the risk that it would shift down. The banks’ chief executives, too, had little grasp of uncertainty. Some had the instinct to buy insurance but did not see the uncertainty of the insurer’s solvency.

Much is dysfunctional in the US and the UK: a financial sector that turned away from the business sector, then caused its self-destruction, and a business sector beset by short-termism. If we still have our humanist values we will try to restructure these sectors to make capitalism work well again – to guard better against reckless disregard of uncertainty in the financial sector while reviving innovativeness in business. We will not close the door on systems that gave growing numbers rewarding lives.

The writer is director of the Center on Capitalism and Society, Columbia University, and winner of the 2006 Nobel Prize in Economics. To join the debate go to www.ft.com/capitalismblog"

So, has the nation really drifted that far to the left, or are we simply struggling with our semantics?

From the NY Times:

"Weekend Opinionator: A Different Sort of Red America

By Tobin Harshaw

Perhaps the most telling line in the Oxford English Dictionary’s definition of “socialism” is this one: “The range of application of the term is broad.” That’s something to bear in mind as we consider a much-discussed poll, released by Rasmussen on Thursday, that found that “Only 53% of American adults believe capitalism is better than socialism.” For the record, here is the primary O.E.D. definition:

A theory or system of social organization based on state or collective ownership and regulation of the means of production, distribution, and exchange for the common benefit of all members of society; advocacy or practice of such a system, esp. as a political movement. Now also: any of various systems of liberal social democracy which retain a commitment to social justice and social reform, or feature some degree of state intervention in the running of the economy.

As for Rasmussen’s definition, well, there isn’t one: “The question posed by Rasmussen Reports did not define either capitalism or socialism.”

‘Socialism’ rises in the polls — but do Americans even know what it means?

But the pollsters did point out an anomaly: “It is interesting to compare the new results to an earlier survey in which 70% of Americans prefer a free-market economy. The fact that a ‘free-market economy’ attracts substantially more support than ‘capitalism’ may suggest some skepticism about whether capitalism in the United States today relies on free markets.”

So, has the nation really drifted that far to the left, or are we simply struggling with our semantics? Plenty of folks in the blogosphere were happy to answer that question.

Steve Benen, the Political Animal, is pleased, but also sees a shifting in the lexicon.

In terms of interpreting these results, the numbers certainly aren’t what I expected, and it’s hard to know why respondents answered as they did. Perhaps “capitalism” lost some of its appeal when our economy collapsed. Maybe a lot of people heard the media connect Obama and “socialism,” and since they like the president, they figure socialism can’t be that bad. In a similar vein, if right-wing blowhards like Limbaugh keep screaming that socialism is manifestly evil, there may be some who assume the economic model must have merit.

But I was especially intrigued by the 27% who weren’t sure which was better. Talk about a sign of the times — more than one in four aren’t quite sure whether capitalism or socialism is the superior system.

Mark Thompson at the League of Ordinary Gentlemen feels his fellow conservatives have nobody to blame but themselves. “When you falsely complain that every single thing your opponents try to do is socialism and absurdly hold your bloviating, unpopular selves up as bastions of capitalism, you probably shouldn’t be surprised when people start thinking socialism doesn’t look so bad, and capitalism doesn’t look so good,” he writes. “Let the record also reflect that I, personally, remain firmly with the 53 percent; I just don’t blame the other 47 percent for thinking otherwise.”

Matt Yglesias of Think Progress feels that times have changed enough that “socialism” is “good branding”:

The whole idea is that we should put society first rather than capital, or money. That sounds good! But in the United States we never had a Socialist Party so “socialism” was primarily associated with the Union of Soviet Socialist Republics which was not at all good. But to people under 30, there’s less of that old resonance. And saying that Obama, who’s popular, is a “socialist” may simply tend to make people have warmer feelings toward the word “socialism.”

The New Republic’s John Judis seems to think the poll’s younger respondents have a better fix on things than the O.E.D.:

According to the poll, 53 percent of Americans think capitalism is preferable to socialism, while 20 percent say socialism is preferable. And among those trustworthy adults under thirty, 37 percent prefer capitalism, 33 percent socialism, and 30 percent are weighing the alternatives. What, you might ask, does this all mean? I don’t think it’s a vote for Soviet-style socialism. While Cold War conservatives did their best to identify socialism, and European social democracy, with Soviet or Cuban communism, the identification doesn’t seem to have survived the Cold War itself.

Instead, what those 30 percent of under-thirties probably mean by “socialism” is a much greater degree of government–and public–control of private corporations and of the market. That would put the United States closer, say, to Sweden, France, or Germany, but would not put it anywhere near the old Soviet Union, which tried to abolish the market itself. Most of all, I imagine, it’s an expression of extreme disillusionment with the magic of the market as preached by Republicans and some Democrats as well.

It’s also, I think, not an incorrect understanding of socialism. As a political philosophy, socialism predated Marx as any reader of “The Communist Manifesto” or of “Socialism: Utopian and Scientific” is aware. In America, too, there were Christian socialists like Walter Rauschenbusch, who was an important influence on Martin Luther King, and prairie socialists in Kansas or Oklahoma who never envisioned giving up their farms for socialism. The point that runs through all these many varieties was not collectivism, but instead the subjection of large banks and businesses to social priorities: “people before profits,” as Bill Clinton said in 1992. And that’s what those 20 percent of Americans in the Rasmussen Poll seem to be opting for.

McQ at QandO, however, sees this youthful exuberance as little more than naïveté:

As you’ll note, the older someone is, the more likely they are to understand what socialism is and how it is inferior to captialism. The under 30 crowd, with no wisdom and little practical experience outside of academia - not to mention having not yet [completely] traded their utopian fantasies for the best practical system which has been shown to work - have a large group who either believe socialism is better or just aren’t with it enough to have an opinion.

Once past 30, and having put a few years under their belt in the real world, suddenly the utopian scales begin to fall from their eyes and they have a bit of an epiphany. As for those over 40 being so strongly for capitalism, most of them remember the old USSR and how well socialism worked there.

While Dr. Steven Taylor at PoliBlog thinks we should ignore the whole thing: “Given that it is manifestly clear from recent political rhetoric that people in general have no idea what an appropriate definition of either of these terms is, it is impossible to ably interpret these results. Further, if we assume that part of the question did include the issue of which is ‘better’ we would have to know what that meant to the respondents as well. ‘Better’ at doing what?”

Others on the right, however, are alarmed. TigerHawk blames the tax code:

The percentage who approve of capitalism in this poll (53%) is very close to the percentage of the population that pays (or belongs to a family that pays) any federal income tax (as of 2006, 59%). Indeed, since the top 50% paid more than 97% of all federal income collected in 2006, it is safe to say that the proportion who support capitalism, as opposed to socialism, is almost identical in size to the percentage of Americans who earn enough actual income to pay material income taxes. While the correlation between the two groups is not perfect — no doubt there are Hollywood types, professors, and United States Representatives who both pay income taxes and profess to be socialists — it is almost certainly high. Again, it should not surprise us that the beneficiaries of socialism would support it, and the people who pay for it would prefer a system that allows them to keep more of what they produce.

And, as Kathy at Comments From Left Field points out, steveegg at Sister Toldjah blames the schools: “The worse news is that those under 30 are almost evenly divided, with 37% saying capitalism is better, 33% saying socialism is better, and 30% unsure of what they think. It is not a coincidence that the radicals of the late 1960s were entering the decision-level positions of the education establishment 30 years ago.”

Susan Duclos of Wake Up America, however, urges her compatriots to see the glass as 53 percent full:

Rasmussen headlines with “Just 53% Say Capitalism Better Than Socialism.”

In that results piece it shows that 53 percent of American’s prefer capitalism over socialism, with only 20 percent thinking socialism is preferable and 27 percent that are not sure what they believe.

Amazing they would headline with the word “just” in there when it clearly shows the majority, 53 percent, favors capitalism with a 33 percent different between the two opposite ends of the spectrum.

I don’t even count the “unsure” totals because even if you divide it straight down the middle you still have 33 percent more favoring capitalism …

Many think 53 percent is not a large enough number, but considering socialism only gets a solid 20 percent support, I say the numbers are very good indeed and people shouldn’t focus on those who are “unsure” because when capitalism is called “free market economy” that 53 percent rises considerably to 70 percent.

Dr. Helen Smith, a.k.a. Mrs. Instapundit, manages to agree with both Duclos and steveegg: “Frankly, I am amazed that so many people think that capitalism is better. That’s a good sign. Also, I wonder if most Americans, especially the younger ones could even give an adequate definition of socialism and capitalism. Perhaps they just hear the buzzword, Socialism, and say that is better, like some kind of trained parrot. No surprise there, with what they learn in many schools.”

But Jesse Taylor at Pandagon thinks that while education is a red herring, one of the right’s favorite events of the last half-century actually kicked off the trend:

What element of modern primary and secondary pedagogy over the past, say, 20 years has led our youth to believe that socialism is awesome? Actually, nothing. The real secret is that the Berlin Wall fell, which paved the way for conservatives to call everything Democrats have proposed in the interim socialism (this isn’t to say that they weren’t doing that before, but it became much easier for them to say it without the Giant Socialist Enemy Beast forcing us to duck and cover under our desks every day). I came up in a world where “socialism” was defined in popular parlance as “liberalism”. Bill Clinton, effectively a liberal Republican, was a socialist. Barack Obama, a moderate Democrat, is a socialist. There’s an actual socialist in the Senate, and yet all the Democrats in the Senate (except Ben Nelson and Evan Bayh)? Socialists.

The main people responsible for the embrace of “socialism” are the pro-capitalist conservatives who’ve so diluted its meaning that it’s okay to embrace socialism, because the majority party in the country and our tremendously popular president are socialists.

So, amid all this partisan bickering and sophistic solipsism, enter the éminence grise of Marxist historians. Writing at The Guardian (and commenting on a real crisis rather than a methodically questionable poll), Eric Hobsbawm raises a question: “Socialism has failed. Now capitalism is bankrupt. So what comes next?”

The basic idea that dominated economics and politics in the last century has patently disappeared down the plughole of history. This was the way of thinking about modern industrial economies, or for that matter any economies, in terms of two mutually exclusive opposites: capitalism or socialism.

We have lived through two practical attempts to realise these in their pure form: the centrally state-planned economies of the Soviet type and the totally unrestricted and uncontrolled free-market capitalist economy. The first broke down in the 1980s, and the European communist political systems with it. The second is breaking down before our eyes in the greatest crisis of global capitalism since the 1930s …

Impotence therefore faces both those who believe in what amounts to a pure, stateless, market capitalism, a sort of international bourgeois anarchism, and those who believe in a planned socialism uncontaminated by private profit-seeking. Both are bankrupt. The future, like the present and the past, belongs to mixed economies in which public and private are braided together in one way or another. But how? That is the problem for everybody today, but especially for people on the left.

Nobody seriously thinks of returning to the socialist systems of the Soviet type - not only because of their political faults, but also because of the increasing sluggishness and inefficiency of their economies - though this should not lead us to underestimate their impressive social and educational achievements. On the other hand, until the global free market imploded last year, even the social-democratic or other moderate left parties in the rich countries of northern capitalism and Australasia had committed themselves more and more to the success of free-market capitalism. Indeed, between the fall of the USSR and now I can think of no such party or leader denouncing capitalism as unacceptable. None were more committed to it than New Labour. In their economic policies both Tony Blair and (until October 2008) Gordon Brown could be described without real exaggeration as Thatcher in trousers. The same is true of the Democratic party in the US.

Well, that’s not very cheery. And why is it a problem primarily for the left?

You may say that’s all over now. We’re free to return to the mixed economy. The old toolbox of Labour is available again - everything up to nationalisation - so let’s just go and use the tools once again, which Labour should never have put away. But that suggests we know what to do with them. We don’t. For one thing, we don’t know how to overcome the present crisis. None of the world’s governments, central banks or international financial institutions know: they are all like a blind man trying to get out of a maze by tapping the walls with different kinds of sticks in the hope of finding the way out. For another, we underestimate how addicted governments and decision-makers still are to the free-market snorts that have made them feel so good for decades …

A progressive policy needs more than just a bigger break with the economic and moral assumptions of the past 30 years. It needs a return to the conviction that economic growth and the affluence it brings is a means and not an end.

Lovely thought, that, but it does bring up the question of what “end” we’re looking for, and we’re hardly likely to find social consensus there — call it a contradiction of Marxism. In any case, Barbara O’Brien of the Mahablog anticipates a few other criticisms Hobsbawm is likely to engender and attempts to nip them in the bud.

The True Believers of both sides will argue no, no, no, pure Marxism/Free Market Capitalism has never been tried. But “pure” anything has never been tried. That’s the reality of our human condition. Any endeavor that requires human input is never pure. It will suffer some degree of corruption. Put together people, money, and power, and corruption is a certainty. That’s why any workable, sustainable model factors in corruption and makes some provision to keep it to a minimum.

That’s what the Marxists and the Ayn Rand culties cannot understand… There has to be a way to reign in the power, to diffuse it, to oversee it and make it accountable to other power. That’s one reason the public and private sector need each other — to keep each other semi-honest.

Nicholas John Mead has similar predictions on how Hobsbawm will be received: “Many of the comments that follow his piece however take issue with his assertion that socialism has failed. The communist brand of ’socialism’ practiced in Russia wasn’t socialism at all - more a vicious state centralised authoritarianism that had little to do with true socialist ideals. The same could be said however for the type of neo-liberal capitalism we have today which has strayed so far from the principles and ideals of pure capitalism as outlined by founders such as Adam Smith that it’s almost unfair to say that capitalism has failed also.”

Another British blogger, Karl Naylor, thinks Britain might be primed for the revolution.

In many ways, Britain under New Labour has been a feeble old body politic artificially hooked up to a life support machine through the injection of capital, migrants, indeed of life from elsewhere whilst its internal organs have started to pack up.

The cosmetic changes after 1997 did nothing to reform what had been going wrong with Britain: relying on London as the dynamo sucking international capital and injecting it back out across the rest of a lame deindustrialised candyfloss economy and listless acres of legoland …

The way in which Britain has deluded itself that even if it is not an economic and political powerhouse of the global economy it can be a Global Player, with Lilliputan figures like [Foreign Secretary David] Miliband ‘positively’ demanding NATO expansion into Eastern Europe in the face of Big Bully Russia.

Where New Labour commissars, Liberal mandarins and the British Council have desperately sought to emphasise that Britain’s “cultural power” makes it fit to strut about on the World Stage and pontificate about how great it is and why the world should buy into its stupid universe of pop royalty dreck and BBC costume dramas.

The harder the crash, the better it might be for Britain. It might finally wake up to the reality of its shrunken economy, decaying political system, and overextended strategical posture and try to live within its means, as well as to just stop pontificating about the superiority of its supposedly higher ‘values’.

And O’Brien, for her part, thinks that liberals in the United States might be in a stronger position than their British counterparts.

Hobsbawm talks about recent British history, New Labour and Thatcherism. But similar things go on here (is it the almost-common language?). Our Right has effectively taken itself out of the conversation (even though it won’t shut up) because it can’t let go of its old ideologies and aphorisms that don’t work any more. I’m not sure if what passes for a “Left” here is fully cognizant of the new reality, either.

But unlike the Right, the current Left has no one economic model that we all put on an altar and worship. At least some among us are looking hard at the current reality and thinking through solutions that might work in the real world, as opposed to solutions that make good sound bites and look good on a bumper sticker.

So there you have it: the worse the crash the better off we are, good riddance to the altar of free-market capitalism, and we’re now following blind men in mazes. The stock market may be rallying, but it doesn’t seem helping us shape the economy, or the socio-economic ideologies of tomorrow."

Me:

From Milton Friedman:

“The collapse of the Soviet Union in 1989 delivered the final blow to the belief in socialism. Hardly anyone today, from the far left to the far right, regards socialism in the traditional sense of government ownership and operation of the means of production as either feasible or desirable. Those who profess socialism today mean by it a welfare state. ”

I think that this is still true.

— Don the libertarian Democrat