A lot of confusion in policy debate today surrounds the use of the terms ‘capitalism’ and ‘socialism’. Although there are a lot of different abstract definitions of these terms, a reasonably neutral pair is (Definition 1)
‘Capitalism is a system where economic decisions are made in response to individual preferences as expressed through markets.’
‘Socialism is a system where economic decisions are made in response to judgements about social need expressed through democratic politicial processes.’
The problem with definitions like these is that they aren’t really operational. That is, it’s hard to look at some particular economic system and say whether it’s capitalist or socialist. So it’s useful to look at some simplifications that lend themselves to easy tests. The most straightforward (Definition 2)
Capitalism is a system where goods and services are produced and distributed through markets
Socialism is a system where goods and services are produced and distributed by governments.
Finally, there is a pair of very simple and widely used definitions based on official ideology (Definition 3)
Capitalism is the economic system prevailing in developed Western countries
Socialism is the economic system that prevailed in the former Soviet Union
Now let’s look at a couple of statements that are commonly made about capitalism and socialism. Statement 1
‘ The battle between capitalism and socialism is over. Capitalism won’
This is obviously true in relation to Definition 3, but clearly false in relation to Definition 2. The ratio of government expenditure to GDP is at or near its all-time high in most countries and is reasonably close to 50 per cent. That is, the actual economic system in Western countries is a ‘mixed economy’. So, on Definition 2, we could reasonably say
‘So far, the battle between capitalism and socialism looks like a draw’
It’s a bit harder to assess specific statements in relation to Definition 1. Even though government didn’t shrink much in the 1980s and 1990s, the role of markets relative to governments was clearly enhanced. So, on Definition 1 we might say
‘Capitalism has won most rounds in the past twenty years, but is a long way from scoring a knockout.
Now lets look at a second statement (2)
‘In a capitalist system, governments don’t make investment decisions. That’s the job of markets’.
This claim is clearly true on Definitions 1 and 2, but clearly false on Definition 3. In all OECD countries, governments have a big say in a wide range of investment decisions.
Unfortunately, a lot of people on the right try to argue from statements like 1 to statements like 2. The typical argument (with internal contradictions exposed) runs like this. ‘The relative success of Western economies proves that capitalism (Definition 3) is the best economic system. Therefore we should replace the economic system in Western countries with capitalism (Definition 1 or 2).’
Similar contradictions can be found on the left, and were particularly prevalent when the Soviet Union was still around. A typical version runs something like this.
‘ Socialism (Definition 1) is more morally attractive than capitalism. Therefore, we should support socialism (Definition 3) as represented by the government of the Soviet Union.’
Admittedly, it’s The Guardian But I don’t think the trickiest polling techniques could have elicited strong public support for strikes 20 or even 10 years ago.
“The survey shows that 59% of voters, including 61% of Labour supporters, believe the strikes earlier this month and those scheduled for next month are justified, with opposition from only 29% of voters. ”
“Some 37% of voters say they believe Tony Blair pays too much attention to business while only 14% say he pays too much attention to the trade unions and not enough to business.”
Just as unions abused their power in the 1970s, employers have been abusing theirs for the past decade, and the public mood reflects this.
Another excellent piece from Ross Gittins notes The end of the world as we knew it for 20 years, and attacks ‘rationalism’s bastard child, the Cult of Shareholder Value’. It’s interesting to speculate what kind of response a headline like this would receive from right-wing blogdom if it appeared over, say, Margo Kingston’s byline.
Treasury Secretary Paul O’Neill joins the attack on Citigroup and Paul Rubin. I thought this kind of thing would be confine to the Andrew Sullivans, but the administration is getting in on the act. If Citigroup runs into a crisis of confidence, it will be interesting to see how O’Neill reassures the markets.
As I predicted, Mickey Kaus has come back at the NYT report on no-parent families. Let’s see how I scored. I said:
I await Mickey Kaus’ response proving that
(i) the numbers are wrong
Kaus obviously doesn’t believe them, but admits this “needs further study”
“I need to make some calls before deciding if she’s stumbled on to a small, troubling trend in a positive overall picture — or if there’s even less to her story than that.”
(ii) the NYT has misinterpreted them
He argues this on everything from the data itself to the expert responses cited in the report
(iii) in any case, it’s a good thing for children to be separated from welfare-dependent parents.
“”No parent household” or “urban children living without a parent” makes you think these children are running around in empty houses without adult supervision, which they aren’t. They’re typically raised by their grandparents, which (as Wendell Primus notes) can be a good thing — if, say, their mother is a crackhead whose problems were only smoked out when she was required to seek work.”
My score 2.5 out of 3. I confidently expect quibbles about the numbers to make it 3 out of 3 within the week.
The outcome of the NZ election is certainly worth two cheers. Labour was deservedly returned. The much-maligned multi-member proportional (MMP) system worked well, producing an outcome that reflects the wishesof voters. Finally, New Zealand has clearly put the era of radical free-market reform behind it. The National Party vote plummeted to a historic low of 21 per cent. Despite the collapse of the National vote, and the opportunistic adoption of a law-and-order platform, the true heirs of the free-market radicalism of the 1980s and 1990s, ACT NZ, went nowhere, getting only 7 per cent. This has led to suggestions from within the party that its leader, Richard Prebble is a liability, because ‘many would-be voters associate him with the Rogernomics policies of the 1980s.’ Presumably the suggestion is that ACT NZ should dump its economic line and stick to law-and-order .
The potential gains from this approach can be seen in one of the more negative outcomes of the election, the resurgence of anti-immigrant demagogue Winston Peters and his NZ First party. This is part of a more general shift where the political right is downplaying economic policy in favor of appeals to racial and cultural prejudice. In some cases, the same free-market policies are pursued but more cautiously. However the natural outcome is an economic policy based on opportunistic handouts. This shift has been made successfully by John Howard, and is also evident in the right wing of the Australian blog world.
Finally, what are the prospects for NZ Labour’s second term? Tim Colebatch sees Clark as leading a directionless, though competent, managerial government similar to that of Steve Bracks, and he’s not alone in this view. I’m currently reviewing a book by NZ academic Jane Kelsey who takes much the same line. But there’s a difference between caution and aimlessness. With the opposition in tatters, and evidence of pressing need everywhere, I think Labour will have little alternative but to spend more in areas like health and education. The model for all of this is the Blair government, which, like Clark, began by claiming to represent the ‘Third Way’, but has been mugged by reality, which dictates that the only way to substantially improve public services is old-fashioned ‘tax and spend’. My impression is that, despite its caution, NZ Labour is aware of this, and will take the necessary steps.
The outlines of the US election in November are now clear, at least in relation to domestic issues. The Democrats will try to tie the Bush administration to corporate corruption, focusing on the administration’s obvious links to criminal or dubious energy enterprises like Enron, Halliburton and Harkon. Meanwhile, a Republican counterattack will focus on the Clinton administration’s ties to Wall Street. The principal target here is Robert Rubin, and his employer Citigroup,, but inevitable collateral damage extends in one direction to Greenspan and the Fed (charged with inflating the bubble) and to other big Wall St firms like JP Morgan Chase, who assisted Citigroup as Enron enablers. Andrew Sullivan is leading the charge, but there are plenty of others following. In the spirt of bipartisanship, I propose a compromise. Why don’t we just agree that corruption is endemic and that both parties are guilty.
A great piece from Benjamin Barber (Jihad vs McWorld) who argues that “Capitalism is not too strong; democracy is too weak’.
‘Business malfeasance is the consequence neither of systemic capitalist contradictions nor private sin, which are endemic to capitalism and, indeed, to humanity. It arises from a failure of the instruments of democracy, which have been weakened by three decades of market fundamentalism, privatization ideology and resentment of government.’
According to the NYT, a previously unnoticed side effect of welfare reform is the No-Parent Family, that is, children living without either parent. I await Mickey Kaus’ response proving that
(i) the numbers are wrong
(ii) the NYT has misinterpreted them
(iii) in any case, it’s a good thing for children to be separated from welfare-dependent parents.
Thomas C Greene in The Register has the most interesting take yet on the Berman cyber-vigilante bill currently before the US congress at the behest of the RIAA and MPAA. As he points out, all bloggers are publishers, and this will license us to hack the sites of anyone we ‘reasonably suspect’ of violating our copyrights.
My response to an interesting piece by David McKnight on the future of Labor, originally published in the SMH. David’s piece broadly “Third Way” in tone, and relies heavily on the resilience and dynamism of ‘capitalism’ (I plan to explore this ambiguous term in later postings. The big problem is that sometimes capitalism is used in a way that includes ‘mixed economies’ where the goverment may control 50 or 60 per cent of GDP and at other times used to exclude them. The piece is in the form of a Word document Here’s my reply.
It seems to me that it is social democracy, rather than capitalism, that has displayed remarkable resilience over the past two decades. The obituaries have been read by Thatcher, Keating, Roger Douglas and many others, but they are gone and the welfare state remains largely intact. In quantitative terms, the ratio of public expenditure to GDP is at or near its all-time high in most OECD countries.
Moreover, in the countries where free-market liberalism had its biggest successes, the UK and New Zealand, it is now in retreat. The conservative parties, and their records in office, are discredited and Labour governments are raising taxes and increasing public spending. This is much against the inclination of people like Tony Blair, but it is happening nonetheless. Observers on all sides in the UK agree that the Third Way is dead and that New Labour has reverted to old-style social democracy.
Privatisation is the one policy where Thatcherism had a lasting impact. But the tide has already turned against privatisation. Renationalisation, which was unthinkable five years ago, is now on the agenda in many countries. Similarly, deregulation is being replaced by reregulation.
The big exception to all this has been the US, which apparently prospered by pursuing free-market policies including big cuts in welfare. But it is now clear that much of this prosperity was illusory. As the boom unravels, the real weaknesses of the US economy will emerge, much as they have done in Japan over the last decade. At the same time, the massive growth in inequality there reinforces the relevance of the old-style Left-Right division.
Nice Work by David Lodge. As usual with Lodge, its a comedy of juxtaposition, a la Changing Places. A radical feminist/postmodernist English lecturer, specialising in ’19th century industrial novels’ becomes the ‘shadow’ of the managing director of an engineering firm.
More on AOL, this time a critique of the once-fashionable notions of ‘synergy ‘ and ‘convergence’. As I observed recently about ‘financial market discipline’, Rob Walker says ‘it will probably be a long time before we hear anybody boasting about “synergy” again.’
Still, I’m going to try for a little bit of synergy and link to my website where I discussed the merger when it took place
The Cato Institute ‘Project on Social Security Choice’ reports that most Americans still want to entrust their retirement to the stock market. They say:
‘When posed with the statement, “There are some in government who advocate changing the Social Security system to give younger workers the choice to invest a portion of their Social Security taxes through individual accounts similar to IRAs or 401(K) plans,” 68 percent of voters indicated support, 29 percent opposed and 3 percent weren’t sure.’
This sounds like the kind of ‘free lunch’ those terrible liberals like to offer. If the Cato Institute really wanted to gauge public opinion, why didn’t they add ‘in return for a reduction in guaranteed benefits’ at the end of their question ?
But the really interesting thing is that The Cato Institute Project on Social Security Choice was, until quite recently, The Cato Institute Project on Social Security Privatization. Apparently, even in the US, ‘Privatization’, is a dirty word (Meg Lees, take note). It’s also interesting that the supposedly independent Cato Institute is dancing to the tune of Republican spin-doctors who have decreed a ban on the term.
According to the Nerd Test, ‘You got an extra 25 points because you are using a Mac! “
in The Guardian says AOL was doomed from the start “AOL was a training ground: an introduction to the internet for people who didn’t know how to deal with FTP. None of us thought it could last, because once the technological barriers to entry for the internet had been lowered, no one would need AOL’s simplistic interface or it’s child-safe, digital content wading pools. People would want to get on the “real” internet, using real browsers and email programs. ”
Looking at the prospects for electronic commerce a few years ago, I agreed, citing “a bleak outlook for the owners of portals and search engines. Portal services are of most benefit to ‘newbies’ (new users). They rely on the fact that because of inertia, people are slow to change their start page. Eventually, though most people stop surfing the Web and go directly to the sites that interest them. The whole idea of a portal as a ‘one-stop shop’ is the antithesis of the limitless variety that makes the Internet so appealing.”
But it’s really taken the rise of blogging to spell the final doom of portals. Who wants their internet experience selected by some sort of one-size-fits-all CMS software when like-minded (or opposite-minded) people are daily trawling the Web for interesting titbits. The imminent closure of Yahoo Internet Life is, I think, a sign of the times.
Dave Winer notes that Hollywood wants the right to hack your computer in order to protect its (asserted but not proven) intellectual property rights.
On the Australian scene, Kim Weatherall discusses how a sovereign nation should respond to criminal attacks from foreign countries where the rule of law is only for the rich.
The obvious question is: why haven’t fire-breathing defenders of national sovereignty like Janet Albrechtsen woken up to this threat ?
The NYT notes that people (starting with the government of California) have suddenly noticed that it’s not a good idea to do business with a corporation that would relocate in Bermuda to dodge taxes. “A company that would deliberately do a sham relocation offshore to escape taxes,” Mr. Angelides said, “would also look to bend environmental rules, shortchange workers or even stick it to their shareholders” (emphasis added).
Jason Soon picks me up on my excessively broad conclusions regarding the end of free-market reforms, noting that there’s a big distinction between financial markets and real world economies.
I’ll begin by conceding that when I said “it will be a great many years before anybody can use a phrase like “market discipline” with a straight face.”, I should really have said “financial market discipline”. (BTW, what’s the blogging etiquette on making ex post corrections in cases like this?). As Jason says, the bubble and bust of the last five years or so have discredited financial markets, not markets in general. There are no direct implications for issues like education vouchers.
That said, there are still plenty of implications. Among the policies discredited by the exposure of endemic crony capitalism on Wall Street are:
Financial deregulation (obviously)
Privatisation (particularly in the case of firms that remain as regulated monopolies, the case for privatisation rests primarily on the idea that financial markets exert beneficial discipline)
Support for income inequality, based on the idea that market outcomes reflect inherent merit, or, alternatively are necessary to the achievement of efficient outcomes.
Social security/superannuation reform
More generally, there is what might be called ‘free market triumphalism’. This is evident, for example, in the editorial pages of the Oz. No serious argument is ever made in favour of particular free-market policies. Instead, the assumption is that, if it’s the free-market policy, it must be right.
As a supporter of a mixed economy, I believe that some things are best dealt with by markets and others are not. I’m happy to argue about, say, educational vouchers, on the merits.
What I was reacting to is what I call the “argument from fashion”, which suggests that government intervention was all very well thirty or forty years ago, but is now out of step with the times. (The opposite argument was made in favour of government intervention for much of the 20th century, and was equally invalid).
Tom V, the “incredulous reader” I referred to a little while a ago now has his own blog, entitled bad analysis
Gareth Parker detects a timewarp, saying, “I INCREASINGLY feel that Robert Corr was born three or four decades too late.”
But it’s becoming more and more obvious that the ideas that have dominated the last three decades or so have run out of steam. For example, it will be a great many years before anybody can use a phrase like “market discipline” with a straight face. I don’t suppose that the replacement for market liberalism will be a direct return to the social-democratic and socialist ideas that dominated policy from World War Ii to the 1970s, but it will be more like them than like the 1980s ideology that is still driving John Howard.
The Australian editorial column is still pushing the free-market reform line, as if unaware that the ground has been cut from under its feet. But the message is starting to sink in. In the same paper, : George Megalogenis argues that the “Cronies’ boom is phony “. Megalogenis goes for a cyclical theory and argues that a big swing away from the free-market is already under way.
Brad DeLong has a great piece on Vulgar Monetarism. He makes a good case that money supply measures aren’t any use as a guide to the stance of monetary policy. I must say, though, that when I look at those graphs of M2 and M3, I wonder if the inflationary consequences of monetary expansion can be staved off forever.
Gareth Parker nails me on my embarrassing habit of giving fellow-bloggers surnames belonging to others. First, I called him Gareth Powell, then Heath Gibson became “Heath Ledger”. I should stop 6am blogging. In the meantime, look out “Weary” Dunlop , “Orville” Wright and “King” Arthur
Today’s Economist quotes the conventional wisdom on telecommunications from a year ago, noting:
TODAY, there is no economy but the global economy, no Internet but the global Internet, and no network but the global network,” wrote George Gilder, a technology guru, in February 2001. He predicted that two telecoms firms, Global Crossing and 360networks, “will battle for worldwide supremacy, but in a trillion-dollar market, there will be no loser.
At exactly the same time, I was writing
“The last few months have not been a good time for economic miracles. As late as November last year, we were still being told how the miraculous ‘New Economy’ had put an end to the business cycle in the United States. By Christmas, however, the Internet shakeout had turned into a full-scale collapse, with dozens of failures and downsizings every weak. Moreover, the downturn has spread from the flashy but economically inconsequential dotcoms to the large, and massively indebted, telecom sector”
Why was I right, and Gilder, along with most other commentators, wrong. Because I paid attention to the reality of natural monopoly
Throughout the last decade, wishful thinking about the benefits of competition has led to bad economic analysis. The costs have mounted from the billions to the trillions. Both the potential growth of the telecom sector and the strength of the US economy have been massively overestimated, because of the belief that competition is some sort of magic elixir.
There are real benefits from increasing competition where artificial barriers to entry have monopolised naturally competitive industries. But there are equally large costs in failing to take account of natural monopoly, externalities and all the other reasons why not all aspects of life are organised through competitive markets.
In response to my piece on the mismeasurement of productivity, I was asked by a slightly incredulous reader “Does this mean that the quality of peoples working lives is a fundamental value in economics?”
The answer, which may surprise both non-economists and those who get their economics from the business pages is “Yes!”
The basic assumption of (mainstream/neoclassical) economics is that the cost of labour is the disutility associated with it. The more unpleasant the work, the greater its economic cost.
The idea that gains produced by people working harder are ‘free’ to the economy is, in economic terms, a fallacy (unless people enjoy working harder). A lot of self-proclaimed economic rationalists don’t realise this, but this just shows they are neither rational nor good economists.
A clever piece of economic analysis from Alan Krueger concludes that, as far as the market is concerned, accounts certified by Arthur Andersen are still as good (or bad) as any others.
The imminent arrival of a US recession has led Republican sympathisers to intensify their efforts to pin the blame on the outgoing administration and its Wall Street allies, most notably Citibank, which employs former Treasurer Robert Rubin. The strategy is to paint Rubin as a latter-day Andrew Mellon (see below), the roaring 90s as a repeat of the roaring 20s and Clinton as Calvin Coolidge. The problem is to avoid the obvious corollary that Bush is Herbert Hoover and that we’re in for a repeat of the 1930s. The Republicans would prefer another identification, but, to paraphrase Lloyd Bentsen, “He’s no FDR”.
AndrewSullivan presents THE CASE AGAINST RUBIN, saying ” I can’t do better than reprint this email from highly astute reader and financial analyst:
You’re right. Rubin’s nefarious role in Enron and his overall responsibility in helping to create the bubble (along with Greenspan) has not received proper attention. In my opinion, Rubin is even worse than Greenspan. If you recall, he was the one who initially dismissed Greenspan’s “irrational exuberance” comments, and I believe he virtually created government for and by Goldman Sachs during his tenure in office. He frustrated the development of legislation to make the derivatives market more transparent (along with Phil Gramm), which could have prevented the Enron bankruptcy, and managed to get Brooksley Borne of the CFTC sacked when she pressed for such derivatives to be regulated by the Comex. He also cut the SEC’s budget by 60% when he was in office, which frustrated the fine work of Arthur Levitt and enabled many of the unsavoury practices now coming to light to be perpetuated. He was the architect of the strong dollar policy which helped to create such huge imbalances in the US current account in order to attract more money into the US capital markets and thereby create a hugely destabilising bubble. I suspect that Rubin will ultimately undergo a historical revision in reputation comparable to Andrew Mellon (who in 1928 was viewed as the greatest Treasury Secretary since Alexander Hamilton and left office in disgrace in 1932). Rubin was smart enough to get out before things got really messy, but he is even more culpable than Mellon.
I think we’re due for a major re-evaluation of the Clinton-Rubin-Greenspan legacy, don’t you?”
Jason Soon follows Heath Ledger (sorry! Heath Gibson) in pointing out the danger of comparing apples and oranges, but misses the biggest example of such a comparison, and the central point of Ross Gittins’ article. The big story from supporters of microeconomic reform has been the growth in labour productivity over the last decade (there’s also something called multifactor productivity, which is supposed to take account of capital, but the real action is in labour).
Labour productivity is the ratio of total output to labor input. Gittins starts off with the point that, in important respects, the quality of output, particularly in relation to services delivered by human beings, has declined.
But the really important point is in the denominator. Labour input is measured in hours, but the increase in the intensity and pace of work over the last decade means that there is an ‘apples and oranges’ problem with productivity measures. People produce more in an hour than they used to, but an hour of work is more stressful and tiring than it used to be. To the extent that the two cancel out, there is no real gain in productivity in an economic sense.
According to Forbes.com IBM is making big use of an instant messaging system. Also, Apple has just released its own contender, called iChat, which I guess I will be buying as part of my next OS X upgrade. As with SMS (but even more so) I’ve never seen the appeal of this kind of technology. Used for two-person chat, it seems like an inferior substitute for a voice call. Used for multi-person chat it’s like talking in a crowded bar (as far as I can see most chat rooms are online versions of pickup joints, which fits with this view). And used for exchanging messages, it seems like a cut-rate version of email, with the checking frequency turned up to the max.
The article doesn’t enlighten me – the only stated benefit is a reduction in the load on the email servers. I thought the servers were supposed to reduce the load on us, not the other way around.