Markets, State, and Utopia
In thinking about capitalism, it's important to keep in mind what we mean. Capitalism could mean a system in which many economic decisions are made by individuals and resources are generally allocated by a market system based on prices. Almost everyone would agree that capitalism in this sense is a good thing. Most "anti-capitalists" want to work to improve outcomes within such a system, rather than replacing the system with a command economy (or something else). So I take it the question is, do anti-capitalists have good points to make about the distribution of wealth, the effects of consumerism, and other alleged pathologies of the market system?
The answer is almost indisputably that they do. Economists have identified countless ways in which markets malfunction. The mere fact that we take for granted that the state will provide national defense shows how deeply ingrained "anti-capitalist" ideas have become.
There's something else going on here, though. The moment philosophy does something useful, it's re-labeled. This is how we got psychology and astronomy. Similarly, anti-capitalist arguments tend to start out on the margins, make their way into mainstream economics, and cease to be called anti-capitalism. So for instance, I take it as uncontroversial that the market messes things up when there are externalities, when monopoly power is exercised, when fixed costs are high and marginal costs are negligible, etc.
I'll note a few of the arguments I've heard from modern "anti-capitalists" and argue that, while of course they might be wrong, they deserve consideration.
Rampant consumerism makes us worse off
One argument is that we're not really better off as a result of the much greater wealth we enjoy relative to our ancestors. This argument goes too far, I think, even if it is hard to show that we're actually happier. A similar argument has more traction, though: consumption spending might not be as high if people weren't using it as a way to signal wealth and status. "Positional goods" have been part of economic theory for over a century, but they don't seem to have entered the public consciousness. One example strikes me as especially salient: housing, which is literally a positional good. Some suburbs near NYC (and I'm sure elsewhere) have minimum lot sizes to keep poor people out. To live there, you're forced to have a yard that might be much bigger than you want. This happens to be enacted through a local ordinance, but I'm fairly certain there's a lot of inefficient consumption of housing tied to the desire to avoid poor people (and, in fairness, the associated crime). Once you start thinking about this dynamic, it's hard to stick with a presumption of efficiency.
Wall Street
Undoubtedly capital markets are important. We need to send the right signals about saving and investment, and we need to connect savers to investors. The question is whether it makes sense to spend as much as we do on our capital markets. To put this another way, the quest for information about the value of assets is like the search for treasure. It's likely to draw super-optimal resources. To see this, picture getting information about a corporation one minute before everyone else. I take it this would be highly valuable, and (so long as people would trade with you) you could make a fortune. However, what is the social value of this information? True, the stock price will reflect information more quickly, but only by a minute. When the private reward is so much higher than the public gain, we should see individuals spending too much for information. In fact, the market for prompt information about asset values is immense. Again, we want some resources devoted to this task, the question is whether the unregulated market provides the right amount.
NPR
This isn't really a critique of capitalism, but it's worth noting that by far the best radio is noncommercial. This should at least make us less rigid in our insistence that markets have an edge over non-market institutions. In general the advertiser-supported content market is dysfunctional, and there are good theoretical explanations for this. In practice, NPR and HBO are vastly superior to their advertiser-supported competitors.
Implications
The fact that I used HBO and NPR as examples should point the way to the real issue. NPR is a non-profit supported by a variety of foundations and by listener contributions. HBO is a for-profit corporation. Just because we have identified a problem with the market doesn't mean that the market can't provide solutions. Furthermore, even if the market is fundamentally flawed, it may be the best we can do. Our real task is not to figure out what approach is best on a system-wide level, but to tailor our approach to the case at hand. In the examples above, I think the market is probably best for capital, non-profits and the market together seem to provide good radio and TV, and the state might need to get involved to prevent some of the wasteful over-consumption and self-segregation that's going on in real estate (or, if you like, the state needs to stop zoning for over-consumption).
This is why so much of the debate is misplaced: our tools are not so blunt that we have to figure out whether capitalism or something else is better in general. "Anti-capitalists" are surely wrong about many things, but they're not wrong that the world is complicated and markets aren't the only, or always the best, way to fulfill our desires. It is inappropriate to dismiss them, particularly when their arguments are economically sophisticated and empirically supported.
The answer is almost indisputably that they do. Economists have identified countless ways in which markets malfunction. The mere fact that we take for granted that the state will provide national defense shows how deeply ingrained "anti-capitalist" ideas have become.
There's something else going on here, though. The moment philosophy does something useful, it's re-labeled. This is how we got psychology and astronomy. Similarly, anti-capitalist arguments tend to start out on the margins, make their way into mainstream economics, and cease to be called anti-capitalism. So for instance, I take it as uncontroversial that the market messes things up when there are externalities, when monopoly power is exercised, when fixed costs are high and marginal costs are negligible, etc.
I'll note a few of the arguments I've heard from modern "anti-capitalists" and argue that, while of course they might be wrong, they deserve consideration.
Rampant consumerism makes us worse off
One argument is that we're not really better off as a result of the much greater wealth we enjoy relative to our ancestors. This argument goes too far, I think, even if it is hard to show that we're actually happier. A similar argument has more traction, though: consumption spending might not be as high if people weren't using it as a way to signal wealth and status. "Positional goods" have been part of economic theory for over a century, but they don't seem to have entered the public consciousness. One example strikes me as especially salient: housing, which is literally a positional good. Some suburbs near NYC (and I'm sure elsewhere) have minimum lot sizes to keep poor people out. To live there, you're forced to have a yard that might be much bigger than you want. This happens to be enacted through a local ordinance, but I'm fairly certain there's a lot of inefficient consumption of housing tied to the desire to avoid poor people (and, in fairness, the associated crime). Once you start thinking about this dynamic, it's hard to stick with a presumption of efficiency.
Wall Street
Undoubtedly capital markets are important. We need to send the right signals about saving and investment, and we need to connect savers to investors. The question is whether it makes sense to spend as much as we do on our capital markets. To put this another way, the quest for information about the value of assets is like the search for treasure. It's likely to draw super-optimal resources. To see this, picture getting information about a corporation one minute before everyone else. I take it this would be highly valuable, and (so long as people would trade with you) you could make a fortune. However, what is the social value of this information? True, the stock price will reflect information more quickly, but only by a minute. When the private reward is so much higher than the public gain, we should see individuals spending too much for information. In fact, the market for prompt information about asset values is immense. Again, we want some resources devoted to this task, the question is whether the unregulated market provides the right amount.
NPR
This isn't really a critique of capitalism, but it's worth noting that by far the best radio is noncommercial. This should at least make us less rigid in our insistence that markets have an edge over non-market institutions. In general the advertiser-supported content market is dysfunctional, and there are good theoretical explanations for this. In practice, NPR and HBO are vastly superior to their advertiser-supported competitors.
Implications
The fact that I used HBO and NPR as examples should point the way to the real issue. NPR is a non-profit supported by a variety of foundations and by listener contributions. HBO is a for-profit corporation. Just because we have identified a problem with the market doesn't mean that the market can't provide solutions. Furthermore, even if the market is fundamentally flawed, it may be the best we can do. Our real task is not to figure out what approach is best on a system-wide level, but to tailor our approach to the case at hand. In the examples above, I think the market is probably best for capital, non-profits and the market together seem to provide good radio and TV, and the state might need to get involved to prevent some of the wasteful over-consumption and self-segregation that's going on in real estate (or, if you like, the state needs to stop zoning for over-consumption).
This is why so much of the debate is misplaced: our tools are not so blunt that we have to figure out whether capitalism or something else is better in general. "Anti-capitalists" are surely wrong about many things, but they're not wrong that the world is complicated and markets aren't the only, or always the best, way to fulfill our desires. It is inappropriate to dismiss them, particularly when their arguments are economically sophisticated and empirically supported.
posted by James | 2:21 PM
3 Comments:
On the second section: so you're saying Bloomberg terminals shouldn't be $20,000 a month. I agree, but the solution isn't going to come from more regulation. Your point about the 1-minute advance isn't particular meaningful. What if it were one hour, one day, or one week?
And implicit in this argument is the idea that "social value" is just as (or more important) than private rewards, which is a moral stance. Why should we prefer one over the other? The fundamental premise of the system is that people are driven to maximize personal gain, right?
While I'm an avid listener of NPR and don't like commercial radio, "better" is completely relative. There is no discerning among tastes, etc. Most people prefer pop music stations to NPR; if people liked NPR, it wouldn't need to beg for funding. You see where I'm going? This is a critique more of the tastes and intelligence of the general population, and not of the system. Capitalism tends toward a debasement of art, like Marx said.
I don't know about HBO. Don't watch much TV.
Nobody is denying that "anti-capitalists" don't have reasonable arguments, but you're limiting yourself to the subset of people who do. If you watch any public debate about globalization, immigration, free trade, etc., you will quickly notice that 90% of the people have no clue what they're talking about.
$2,000 a month, I mean. Haha.
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