Monday, January 16, 2017

Setting the stage

Two students of mine are doing an internship at Atlas Network, where they've been encouraged to read The morality of capitalism: what your professors won't tell you, [link fixed, 1/23/17] a collection of essays by various authors. In order to be able to discuss the book with them, I've been making my way through it, and found myself jotting notes at such a rate that it seemed there was a short essay lurking in the margins of each chapter.

The title has some ambiguity: Will the argument be that capitalism is moral and your professors are unfairly blackening its name? Or that the morality of capitalism is bad, and your professors have been painting too rosy a picture?

Let me not keep you in suspense: the book's contributions are dedicated to showing that capitalism is good, despite what college may have tried to teach you to the contrary.

The introductory chapter by the editor, Tom G. Palmer, sets the stage by laying out pieces of the argument for how capitalism is moral. But based on the five essays I've read so far, it also prepares us for what's to come in other ways. The essay makes some valid points touching on facts that may be overlooked by critics of how markets work, things that are worth keeping in mind in your view of reality. But then it weakens itself with a black-and-white view of "capitalism" vs. anything that deviates from it, overly broad generalizations drawn from excessively simplified historical narratives, logical leaps, and use of words with strong emotive power while avoiding any specification of what is meant by them.

As an example of a point that may be ignored by critics of capitalism, consider the potential openness to people, regardless of their background:

The waves of change that free-market capitalism creates are often resented by entrenched elites. As they see the world, minorities become uppity and the lower classes no longer know their place. More shocking, from their perspective, is that under free-market capitalism women assert their own worth. Status is undermined. People create relationships based on choice and consent, rather than birth or status. (pp. 10-11)
As the saying goes, "Money doesn't stink." If you have money, I'm happy to work with you. And, by extension, if you have useful abilities, I'm also happy to work with you, because that can help me earn money.

And if we look at the social systems that capitalism replaced (feudalism, to simplify), we do see a great deal more openness in capitalism than in its predecessors, so there's something to be said for capitalism's influence in breaking down barriers, though I'll revisit the question toward the end of this essay.

Along another tack, Palmer brings up the well-known point that our prosperity is worlds ahead of what earlier generations had:
Consider what the economist and historian Deirdre McCloskey calls “The Great Fact”: “Real income per head nowadays exceeds that around 1700 or 1800 in, say, Britain and other countries that have experienced modern economic growth by such a large factor as sixteen, at least.” That is unprecedented in all of human history. McCloskey’s estimate is, in fact, quite conservative. It doesn’t take into effect [sic] the amazing advances in science and technology that have put the cultures of the world at our fingertips. (p. 2)
Palmer's explanation for this is that:
Capitalism puts human creativity to the service of humanity by respecting and encouraging entrepreneurial innovation, that elusive factor that explains the difference between the way we live now and how generation after generation after generation of our ancestors lived prior to the nineteenth century. The innovations that have transformed human life for the better are not merely scientific and technological, but institutional, as well. (p. 2)
There's substantial merit in this argument, though it could be more nuanced. For example, while it's true that average people in the USSR were materially worse off than average people in the West, it's also true that they were materially better off - by a lot - than most people throughout history. What we have in common is that we are (were) both industrial societies, with access to the technology that harnesses fossil fuels and puts their incredible power at our disposal.

That doesn't necessarily throw out a major role for capitalism, because it was capitalist societies that developed the bulk of those technologies, so you could make a claim that capitalism was the midwife - perhaps the necessary midwife - of the technological revolution which other systems could then adopt.

The argument from material prosperity is more substantially weakened by looking at the range of societies that could reasonably be categorized as "capitalist," from the relatively laissez-faire approach of the U.S. and Britain through the dirigisme of France to the Scandinavian social model. By many indicators, countries in western and northern Europe provide a higher standard of living than the U.S. - not higher GDP per capita, but equal or higher output per hour of labor input, combined with more vacation and wider access to "social" goods such as quality education.

"Well, those West European models are all various forms of capitalism."

That's a statement I would agree with, but Palmer is playing with definitions of "liberty" and "freedom" that are meant to exclude social democracy from the capitalist canon, as evidenced by his remarks on progressive taxation of income. If "capitalism" is restricted to mean something with the bare minimum involvement of the government, then not even the U.S. qualifies, though we're arguably closer than most other capitalist societies. But if you narrow your definition of "capitalism" so tightly, it's hard to make the case that "capitalism" leads to more prosperity than some of its alternatives.

But what was that about progressive taxation? Let's start with what is probably a good piece of scholarly work, nailing someone apparently misquoting or misattributing:
Sandel also states that "In The Constitution of Liberty (1960), the Austrian-born economist philosopher Friedrich A. Hayek (1899-1992) argued that 'any attempt to bring about greater economic equality was bound to be coercive and destructive of a free society'" - a claim that Hayek does not, in fact, make; (p. 12)
I looked online for the quote that Sandel says he got from Hayek, and the only instances I found were references back to Sandel quoting Hayek, which doesn't do much to support Sandel's version of events.

A more thorough test would be to  reread The Constitution of Liberty, looking for that phrase, in order to find it or determine that it's not there. I admit I haven't taken the time to do that. As far as I can tell, there's good reason to believe that Palmer is right: Sandel is "quoting" words of Hayek's that aren't actually written by Hayek, in which case the most kind interpretation is that Sandel was sloppy, and the less kind is that he consciously made it up.

If Palmer is right and Sandel misquoted Hayek, I suspect the explanation was sloppiness rather than intent. I haven't read The Constitution of Liberty, but I did read Hayek's The Road to Serfdom about 20 years ago, and if you asked me for a summary of the book's main idea, I would probably have come up with something like, "Any attempt to bring about greater economic equality was bound to be coercive and destructive of a free society." Maybe it's just Sandel and me, or maybe that is an idea that Hayek was trying to convey, even if he didn't use exactly those words.

Still, if he didn't actually write them, it's bad practice to put them in quotation marks, rather than presenting it as your own paraphrase of the argument.

Having established what Hayek didn't say, Palmer immediately proceeds to set the record straight:
he does argue that "progressive income taxation" (in which the rates of tax increase with income) is incompatible with the rule of law, for "unlike proportionality, progression provides no principle which tells us what the relative burden of different persons ought to be." (p. 12) [Palmer provides a footnote with a specific page reference for the quotation he's entered, so I'm confident he's done his homework here and the quote is authentic]
Palmer doesn't explicitly say he agrees with Hayek's statement, but the context of the passage, and the larger evidence of the book, both suggest strongly that he does agree.

The question of progressive taxation deserves an entire post of its own. For now let me just say that it is fair, it is macroeconomically efficient, and it is necessary to support the range of government activity that most people in rich countries want in practice, even when they agree in the abstract with arguments for smaller government.

No, you can't derive the proper degree of progressivity from first principles, but human life is full of things that can't be derived cleanly from principles. Principle can tell you that egalitarian taxation (everyone ends up with the same amount) is a bad idea, and it can tell you that proportional taxation (everyone pays the same percentage) is a bad idea. So you know that the best answer is somewhere in the middle, but you have to just find your way, thinking through the consequences with other people. It's sad, but sometimes life is like that, rather than an elegant exercise in geometric proofs from Euclidian axioms.

As I said, I think Palmer agrees with Hayek on the insupportability of progressive taxation, but it's only by implication, rather than him coming out and saying it.

A related problem comes with the use of emotive words without defining what you mean by them. Palmer identifies a key element of "free-market capitalism" as:
the right to enjoy the fruits of one’s labors, of one’s savings, of one’s investments, without fearing confiscation or restriction from those who have invested, not in production of wealth, but in political power. (p. 9)
We're clearly meant to react in a negative way to the idea of "confiscation," but Palmer doesn't clarify. Presumably it refers to taxes, but of what type of structure. Is it what I called above "egalitarian taxation," where everyone has an equal slice of the pie when we're all done? Even I would call that "confiscation" and would think it was a horrible idea.

But given the overall trend of Palmer's essay (and some of the other contributions in the book), I think he would include progressive taxation under the label "confiscation," on principle. But he doesn't say.

When you use an emotive word like that without clarifying your meaning, you're attempting to borrow people's negative reaction to the word and apply it to your agenda, without fully revealing that agenda.

A similar thing happens with the word "socialist":
In contrast, it is unusual to find critics of free-market capitalism who have read more than one author who dared to offer a defense of free-market capitalism. The one author who is most commonly cited, at least in the modern Anglo-Saxon intellectual world, is Robert Nozick, and even then it becomes clear that only one chapter of one book was read, the one in which he offered a challenging hypothetical thought experiment to test enemies of free-market capitalism. Most socialists think it sufficient to read one essay and rebut one thought experiment. (p. 11)
Is a "socialist" anyone who disagrees with a position of extremely limited government? Based on having read both of Palmer's essays in this book and about half the other contributions, I think that is how Palmer means the word, but again, he doesn't make himself plain.

Which brings to mind someone else who is sometimes called a "socialist" by people who aren't being precise in their use of words.

Just before the end, Palmer makes a commendable call for people to read a variety of perspectives on the economy:
I strongly encourage you, the reader of this essay and this book, to do better. Read the best criticisms of free-market capitalism. Read Marx. Read Sombart. Read Rawls. Read Sandel. Understand them. Be open to being convinced by them. Think about them. (p. 12)
An excellent idea. But there was one name I was surprised to see he left off the list: John Maynard Keynes. The name seems to figure only once in the entire book, coming up in the interview with John Mackey that makes up the next chapter. But he's a troublesome figure for advocates of hard-line "free-market capitalism."

Leave aside for the moment the question of whether his analysis was more or less accurate (I think it was; I would be shocked if Palmer agreed with me). The point of his approach, ameliorating the flaws in the market through judicious use of monetary and/or fiscal policy, is that he is such an admirer of what the market does well.

He doesn't think the government should tell everyone who should do what. He doesn't want the government leaving people with no gain for having been innovative or hard-working. He's not interested in freezing society in some unknowable perfect form, preventing social evolution. He is in these ways every bit as much an admirer of the market as is Palmer.

It's just that he can also see the flaws in capitalism, and so he designed a program that he thought constituted the minimum level of intervention necessary to fix capitalism's greatest flaw, while leaving it generally free to work its magic.

But if you're trying to establish a black-and-white distinction between "capitalism," which is good, and everything else, which is bad, Keynes's argument is troublesome. Best to leave him alone.

And come back instead to the first argument I cited, about how capitalism is open to all based on merit, rather than one's status in society. As I said earlier, if we look at the social systems that capitalism replaced (feudalism, to simplify), we do see a great deal more openness in capitalism than in its predecessors. It doesn't necessarily follow, however, that capitalism on its own frees us entirely from constraints based on our attributes that should be irrelevant.

For instance, there's an argument that racism is uneconomic and therefore it would eventually undermine itself in an unregulated market. Assume that diligence and intelligence are distributed equally across races and genders. A racist or sexist employer is then depriving himself of access to a significant portion of the labor pool, a portion that contains a great many talented people, whereas the unbiased employer has access to all the talented individuals. The unbiased employer will enjoy greater productivity and thus outcompete the bigot. The market rewards virtue.

But what if your customer base has deep-seated bigotry and doesn't like to do business with companies employing the "wrong sort" of people? There goes your economic advantage from doing the right thing.

The disruptive force of capitalism is real, and where that force disrupts a status-bound society and makes room for "outsiders," it's a good thing. But the goal of capitalism isn't to let the outsiders in; in some circumstances, capitalism will reinforce the lines keeping the outsiders out.

And let's also come back to the idea of us living better than our ancestors.

We can divide socio-economic systems into three broad categories:
  • central planning, like what was done in the Soviet Union and its satellites;
  • laissez-faire (never fully achieved, but relatively close in late 19th century U.S., U.K.);
  • the mixed economy with private ownership of capital and many important production decisions made by private entities interacting in markets, but significant government action as well [Scandinavian social democracy on one end, U.S. under Reagan, U.K. under Thatcher at the other].
From the late 19th century to the post-World-War-II era, the U.S. moved from nearly laissez-faire to a mixed economy - not as extensive a government role as Scandinavia or even Western Europe, but far more involvement than in the late 19th century. And what do we find?

The difference in wealth wasn't as stunning as if you compare modern U.S. to the pre-industrial world, but it's still vast: electricity, telephones, and indoor plumbing as nearly universal conveniences; a standard 40-hour work week, complete with a weekend; unheard-of flexible mobility for a large portion of the population, through widespread car ownership and cheap gasoline; radio; TV; movies; we could extend the list. All those things characterized the post-war era - some of them even came to fruition then - and it was decidedly an era of a mixed economy, the greatest peacetime extent of government involvement in the economy in U.S. history.

Post-war prosperity of the 1950's made the average standard of living in the Gilded Age of the late 19th century look like poverty. By Palmer's logic, we should attribute that increased prosperity to the change from the Gilded Age's laissez-faire to the post-war period's mixed economy (Palmer might even call it "socialism").

For 500 years, humanity has been advancing in technological prowess, leading to astonishing increases in average wealth over time. This increase has coincided with an increased role for markets and a paring back of the mercantilist impulses of the ancien régime, and those changes deserve a significant share of the credit for the economic progress.

The progress also coincided with the scientific revolution, the spread of the idea that principles by which nature operates are knowable, and that they can be found through careful observation and rigorous experimentation.

And the progress has continued through a variety of levels of government involvement.

In his use of the word "confiscation," Palmer was setting us up to recoil from the word, in the expectation that we would recoil into the warm embrace of the unfettered market. In this case he is eliciting our delight with material progress, and while we gaze on our works in awe, he tries to attach our emotions to his specific program of free-market capitalism. But if you look closely at the evidence, the attachment doesn't hold.

I have other notes on this chapter I could explore, but I suppose by now I've said enough. Besides, there are 13 more chapters to get through, and I probably can't sustain this level of detail.

Good night.

(The next installment is here.)

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