Last night, I spoke to the student Economic Club at Ball State. Since numbers aren’t my thing, I focused on theory….Here (slightly condensed)are my remarks.
Terms like conservative, liberal, socialist, progressive get used these days as accusations and insults rather than ways of defining a political or economic philosophy.
On today’s political spectrum, I consider myself liberal, but given the state of current discourse, it might be worth explaining what I mean by that term—and why my kind of liberalism is compatible with genuine market capitalism, although not necessarily with what passes for capitalism in today’s America.
I am basically an 18th Century liberal, by which I mean a product of Enlightenment values like empirical inquiry, science, and the importance of facts—including facts I may find inconvenient.
It also means I place a high value on both individual autonomy and the common good. And that means I tend to analyze government’s activities through the hypothetical of Locke’s Social Contract.
The United States’ Constitution was crafted by men heavily influenced by Enlightenment ideas. Their belief in protecting a marketplace of ideas owed a debt to Adam Smith’s description of economic markets, a description supported by the experience of the colonists, many of whom were small merchants. Good ideas would win out over bad, in much the same way as that better mousetrap would win market share.
I believe market principles remain sound, but they have to be applied to “facts on the ground” that the Founders could never have anticipated.
There were around 4 million people scattered along the east coast when America won independence; there are now over 300 million. Technology, diversity, and globalization have changed the national landscape. Our job is to craft policies that protect the essential values of the Constitution and Bill Of Rights in new and very different environments. People of good will can disagree about how to do that –but I would argue that in order to disagree productively and civilly, we have to begin with a common basis in fact and history, and we have to agree on the definitions of the words we use.
For example, I consider myself a capitalist; I believe in markets—in those areas where markets can work properly.
Economists often define a free trade as a transaction between a willing buyer and a willing seller, both of whom are in possession of all information relevant to that transaction.
Understanding how markets work is important, because it defines the proper role of government in a capitalist system—as an “umpire” or referee, ensuring that everyone plays by the rules.
Teddy Roosevelt reminded us that monopolies distort markets; if one company can dominate a market, that company can dictate prices and other terms with the result that transactions will no longer be truly voluntary. There are other behaviors that undermine markets: If Manufacturer A can avoid the cost of disposing of the waste produced by his factory by dumping it into the nearest river, he will be able to compete unfairly with Manufacturer B, who is following the rules governing proper waste disposal. If Chicken Farmer A is able to control his costs and gain market share by failing to keep his coops clean and his chickens free of disease, unwary consumers will become ill.
Most economists agree that in order for markets to operate properly, government must act as an “umpire,” assuring a level playing field.
Government also responds to what economists call “market failure.” There are three situations in which Adam Smith’s “invisible hand” simply doesn’t work: when monopolies or corrupt practices replace competition; when so-called “externalities” like pollution harm people who aren’t party to the transaction (who are neither buyer nor seller); and when there are “information asymmetries,” that is, when buyers don’t have access to information they need to bargain in their own interest. (Health care is an example.)
Since markets don’t have built-in mechanisms for dealing with these situations, most economists argue that regulation is needed.
Economists and policymakers can and do disagree about the need for particular regulations, but they agree that the absence of appropriate regulatory activity undermines capitalism. Unregulated markets lead to corporatism, where special interests can “buy” government regulations favoring them. You might think of it as a football game where one side has paid the umpire to make calls favorable to that team.
Socialism refers to the collective provision of goods and services, usually through government. There are some goods that free markets cannot or will not produce. Economists call them public goods, and define them as both “non-excludable” –meaning that individuals who haven’t paid for them cannot be effectively kept from using them—and “non-rivalrous,” meaning that use by one person does not reduce the availability of that good to others. Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems and street lighting. If we are to have these things, they must be supplied or protected by the whole society, usually through government.
Obviously, not all goods and services that we socialize meet the definition of public goods. We socialize police and fire protection because doing so is generally more efficient and cost-effective, and because most of us believe that limiting such services to people who can afford to pay for them would be immoral. We socialize garbage collection in more densely populated urban areas in order to enhance the livability of our cities and to prevent disease transmission.
Getting the “mix” right between goods that we provide collectively and those we leave to the free market is important, because too much socialism hampers economic health. Just as unrestrained capitalism can turn into corporatism, socializing the provision of goods that the market can supply can reduce innovation and incentives to produce. During the 20th Century, many countries experimented with efforts to socialize major areas of their economies, and even implement socialism’s extreme, communism, with uniformly poor results. Not only did economic productivity suffer, so did political freedom. (When governments have too much control over the means of production and distribution, they tend to become authoritarian.)
Virtually all countries today have mixed economies. The challenge is getting the right balance between socialized and free market provision of goods and services.
There’s lots of room for disagreement about things like how much regulation is too much, what level of national debt slows economic growth, what the tax burden should be and who should pay what. But in today’s America, these discussions tend to be all ideology and no understanding—all heat, no light. I wish I had a dollar for every TV pundit who clearly did not understand the difference between the deficit and the debt, or the difference between marginal and effective tax rates. We have people in Congress who quite obviously don’t understand what the debt ceiling is and isn’t.
It’s actually a good thing that Americans disagree—thoughtful disagreements often lead to better results. But it is really, really important that parties to a debate know what they are talking about. That is a lot harder today, thanks to the Internet and the collapse of that quaint exercise we used to call journalism. We live in an era of cherry-picking and confirmation bias—and our preferred realities are only a click away.
At the end of the day, policies based on ideology or wishful thinking just make things worse. And arguing about economics without agreeing on the meanings of the words we use is worse than useless.