My long-promised post on capitalism and socialism

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

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.

Kaus predictability ranking 2.5/3

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.

News from across the Tasman

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.

Republicans attack Wall Street

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.