Edmund Phelps on Capitalism

Terrific essay. I am constantly reminded in my conversations with run-of-the-mill folks I know that their opinions are more balanced than those I read in the papers. While I do not always agree, I generally get the impression that they are trying hard to weigh the facts on their merits. http://commonsenseliberty.wordpress.com

The U.S. Postal Service was established in 1775, and after two centuries trying to get it right, it is broke. Social Security was established in 1935 and after 74 years it too is broke. Fannie Mae was started in 1938 and after 71 years it is broke. The War on Poverty began in 1964 and after 45 years it is lost and a trillion dollars of our money is given "the poor" and they only want more. Medicare and Medicaid started in 1965, only 44 years ago and they are broke. Freddie Mac began in 1970, only 39 years ago and it is too broke. The Department of Energy, created in 1977 to decrease our use of foreign oil, has 16,000 employees and a budget of $24 billion a year, yet we import more oil than ever before. After 32 years it is an abysmal failure. Who, then, could ever believe Government can do it right operating close to 20% of our GDP? They cannot operate a bank, a car company or a railroad as could private people trying to make a profit. But, who really cares when it is simply community they work with and support, never the free individual who, alone, can straighten out the whole mess. Claysamerica.com

Clay,

Great little historical summary!

Awesome post.

What do you think, muirgoo? Tell us about all the good stuff the government has done with taxpayer money. I'm sure it will bring tears to our eyes!

Phelps wrote,

"First of all, Europeans think of capitalism as the “free market” – laissez-faire. But capitalism means openness to bottom-up innovation. Capitalism does not per se threaten anyone’s welfare benefits. "

It seems to me that he's trying to free capitalism of the stigma of laissez faire, good capitalism from bad old laissez faire. But they're inseparable. Capitalism had better threaten welfare benefits, for they certainly threaten capitalism.

Switch thinking! Capitalism is Marx's term describing European mercantilism, the union of a fewl elite governors with a few elite businessmen, all ruling the many. What we have in America is individual freedom which led to enough innovation to make a free market and a lot of prosperity never experienced under capitalism. America's free market differs from Marx's capitalism. Marx never experienced America, though invited and admired by Lincoln who also wanted to establish American mercantilism, as did Hamilton and Henry Clay before him. claysamerica.com

Clay,

The next time I see Marx, I'll bear that in mind.

A lot of people want capitalism without any risk; but that isn't capitalism - it is nanny-statism.

BTW, if you're interested in more of Michael Strong's thoughts, please come visit our blog, Let a Thousand Nations Bloom. Michael posts there regularly.

I'm not so thrilled by Phelps' essay.

He says that innovation will save capitalism from its alleged tendency toward unemployment. But there is no such tendency. With or without innovation, the market tends toward equilibrium between the supply of and demand for labor, as for anything else.

He says that most people aren't bothered by inequality. That's whistling in the dark, and misses the point that they can't do anything about it, except make it worse.

He grants that capitalism creates disruption and uncertainty. Again that misses the point that life creates disruption and uncertainty, and that capitalism is life, socialism death, and, the middle way, cancer.

When someone said that increased productivity is inconsistent with more employment, I am tempted to respond:

It can be demonstrated, and tested empirically, that productivity is the fundamental source of income and wealth. How?. With or without mathematics. You must first understand that the productivity of a factor is identical to their real remuneration. For this, higher labor productivity corresponds to a higher real wage. But that effect is just the price dimension of the phenomenon. The quantity dimension is the other side of the coin. For example, given a real wage w / p, then an increase in productivity corresponds to an increase in production, and this also happens because labor productivity is identical to the real wage. The resultant of these two combined effects is as a kind of vector addition in the plane, which means that there is an increase in both dimensions: price and quantity, wage and employment.

But it is more elegant to say:

I understand that there can be a very unproductive country with full employment. My point is not that. My observation is that there is no "reason" to reject the hypothesis of consistency between more jobs and more productivity, just as there is no "evidence" for reject the hypothesis of consistency between more jobs and less productivity.

And more:

The enterpreneur spirit is a kind of means to create and increase productivity. The productive enterprises have a better chance to succeed. This is the link that I rescued between productivity and employment of a factor.

Great selection - I always love listening to or reading Phelps.

This was a good line too: "The “dark Satanic mills” of Marx’s era are gone thanks to greater productivity, not greater state regulation."

It reminds me of your "cleaned by capitalism" posts. People dismiss the early socialists too easily. The fact is, life was very hard and the socialists' compassion was genuine. But their conclusions were misplaced. Marx's concern is laudable in light of the "best of all possible worlds" view of some of his classical contemporaries, but he nevertheless had it dead wrong - it was the market that would lead people to prosperity. It is now and it always was.

To a certain extent I think Phelps is battling a straw man. Of course the world has its Naomi Kleins and its Michael Moores. But few serious people make the mistakes that he points out. But it's still always a good thing to review.

"But few serious people make the mistakes that he points out. But it's still always a good thing to review."

Of course, those "few" include the President of the United States and numerous members of Congress.

In order for the 19th century socialists to come to their conclusions they had to romanticize what came before. 19th century socialism and romanticism - the sylvan idyll, the happy peasant, etc. - go hand in hand.

Marx's concern is laudable in light of the "best of all possible worlds" view of some of his classical contemporaries, but he nevertheless had it dead wrong - it was the market that would lead people to prosperity.

Well, Marx lavished praise on capitalism to some degree.

Hmmmm... I'm not so sure about that, Mommsen1625. I suppose some socialists might have held that ideal, but the one bone that Marx does decisively throw to capitalism is that it did do away with the distinctly "un"happy peasant. I don't think he held any sylvan idyll up for praise.

I know it's tempting to think that leftists hate cars and inventions and want to run away and live in a tree, but I'm not sure how true that actually is.

Many socialists did, as did Marx. How much of Das Kapital have you read? I've read a fair amount of it and it is replete with references to returning to an idealized past. The irony of course being that Marx disliked romanticism and tried cast himself as an uber-rational figure above emotion, sentiment, etc.

I'm very sure. leftist lemmings do want to live in trees, their bleeding heart leaders who are leading them off the cliff ( with their golden parachutes) don't. They just want to keep proles out of their homes on 100 acre woods.

RE: "They just want to keep proles out of their homes on 100 acre woods."

MASSIVE sidebar alert - but this comment just reminded me of something about the Soviet adaptation of Winnie the Pooh (http://www.youtube.com/watch?v=EuBzKV6XgvA). My wife works on issues dealing with U.S.-Russian relations, and she's told me that the reason why the Soviets had no Christopher Robin in their adaptation was that they didn't approve of his superior, dismissive, bourgeois way of dealing with Pooh (i.e. - "silly old bear"). It was decidedly non-egalitarian, so he was cut. I always thought that was interesting. The songs in the Russian version are fun to listen to, even if I don't understand a word they're saying.

All you need to understand is "Mishka".

Ironically, Pooh is just as dismissive of Piglet. I wonder why they never cut him.

Also, for some real soviet fan and to check out cartoons teaching the children how to be good soviet citizens, check out Cheburashka. He's still my hands down favourite.

http://www.youtube.com/watch?v=G9ZRcgRm4ds

Yes! She brought back a Cheburashka doll once :)

Kind of an ugly little guy.

Ugly! WHAT!!! How dare you!! That's still my favourite childhood toy (we share a love of oranges). He's now the Russian olympic team mascot. Although a completely soviet creation, he looks like Japanese amine and and is now produced almost exclusively by the Japanese - a massive improvement for Cheburashka. Perhaps you saw an old Soviet version. My husband ordered a soviet era Cheburashka on Ebay in a misguided effort to connect me to my childhood and the thing was hideous. Looking at something the Soviets produced is like looking at props for horror flicks.

Kinda reminiscent of Stewie, isn't he?

NOOOOO!!!!!

On the Marx quote... I'm having second thoughts because there have been occupational safety laws, etc. As Phelps implores - we need evidence before making these declarations, and Phelps's own declarations are no exception.

However - I'm guessing the occupational safety regulations largely just ratified the improvements that were happening anyway because of productivity improvements. That, and perhaps targeting egregious foot-draggers that still ran dangerous operations. Anyway - it's just a short article by Phelps. That's not a major qualifier, particularly since the regulations probably aren't primarily responsible for the improvement in work environments.

Thanks for helping us understand. Couldn't live without you Dan. That was a very interesting discussion you had with yourself, more informative than the original post. Bravo!

Apparently if we just sit back and wait, Daniel will back off from his opinions all by himself. What a time-saver.

I want him to split more hairs with himself. Should be fun!

True, capitalism creates disruption and uncertainty.

As if political control of resources produces stability and certainty.