Different Ideas of Capitalism

[scrapinpeg]

I just read a good article in today's paper by Edmind Phelps, who was awarded the Nobel Prize for economics this week. In the article, he explains different approaches to capitalism in the West. Made me go "aha!" more than once, as he explained how continental Europeans use the same words, but have significantly different meanings. I see now that, in some of my arguments with others on this forum, we have been talking past each other because we give different meanings to what I thought were well-defined concepts.

Too long to cite here, but a good read. Follow the link to http://www.opinionjournal.com/editor...l?id=110009068

[TrainingDummy]

A good read, but I disagreed with alot. I can't type an Inquartata-like post, but my favorite part was

"The U.S. economy might be said to suffer from incomplete inclusion of the disadvantaged. But that is less a fault of capitalism than of electoral politics. The U.S. economy is not unambiguously worse than the Continental ones in this regard: Low-wage workers at least have access to jobs, which is of huge value to them in their efforts to be role models in their family and community. In any case, we can fix the problem."

He then proceeds to ponder why European countries "revile capitalism" instead of explaining how to "fix the problem."

Part of the disagreement I had with his essay was philosophical. He points out that he admires Kant, where I put much more stock in Mill's utilitarianism. For example,

"So if the increased dynamism created by liberating private entrepreneurs and financiers tends to raise productivity, as I argue--and if that in turn pulls up those bottom wages, or at any rate does not lower them--it is not unjust. Does anyone doubt that the past two centuries of commercial innovations have pulled up wage rates at the low end and everywhere else in the distribution?"

A classic Mill utilitarian seeks to "maximize the good." The last sentence, while it raises a good point, does not prove to me that his idea of "dynamism" is the BEST solution, rather, it is a GOOD solution. I ague that from a utilitarian standpoint if it is POSSIBLE to raise productivity without raising wages then it is unjust not to, barring outside sources of error which are, of course, what make philosophy and utilitarian theory in particular so damn confounding. As far as...

"It would be unhistorical to say that capitalism in my textbook sense of the term does not and cannot exist. Tocqueville marveled at the relatively pure capitalism he found in America. The greater involvement of Americans in governing themselves, their broader education and their wider equality of opportunity, all encourage the emergence of the 'man of action' with the 'skill' to 'grasp the chance of the moment.' "

Two words: INDUSTRIAL REVOLUTION. I can only imagine what Tocqueville would have said had he visited America a century later, but I can bet it wouldn't be "capitalism is fine and dandy!" Once the revolution hit, it is impossible to go back. Well, unless we had some sort of nuclear holocaust. Using Tocqueville to argue for capitalism is pretty lame and, as some better portions of the essay prove, he can do better.

While his Nobel prize is quite impressive, I still see alot of problems with his assertions. And, I admit, Nobels have always been bit tainted for me due to certain recipients. Those are mainly the Peace Prizes, to be fair. Unlike Henry Kissinger I didn't push for the secret bombing of Cambodia, authorize a bloody coup of the democratically-elected president of Chile, or support brutal fascists and wanton violators of human rights in Pakistan and Indonesia. Where's my prize?

Sorry about the Nobel rant. If I get some time later, I'll analyze the article some more.

[jeff]

Peace prizes to Kissinger and Arafat, but not Gandhi... Makes you wonder. Some of the Nobel prizes in literature are pretty dicey too: some politically motivated, and some for authors that have fallen into (deserved) obscurity.

OTOH, the prize in Economics isn't really a Nobel Prize - the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is funded by the Bank of Sweden and awarded by the same process as the "real" Nobel, but is a later add-on, and separately funded. Interesting, in Wikipedia "In February 1995, it was decided that the economics prize be essentially defined as a prize in social sciences, opening the Nobel Prize to great contributions in fields like political science, psychology, and sociology. Also, the Economics Prize Committee was changed to require two non-economists to decide the prize each year, whereas previously the prize committee had consisted of five economists."

I await the responses of the Swedish contingent, and, since the "e-word" was used, Inq, too.

[PeterGustafsson]

Hi!

OTOH, the prize in Economics isn't really a Nobel Prize - the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is funded by the Bank of Sweden and awarded by the same process as the "real" Nobel, but is a later add-on, and separately funded. Interesting, in Wikipedia "In February 1995, it was decided that the economics prize be essentially defined as a prize in social sciences, opening the Nobel Prize to great contributions in fields like political science, psychology, and sociology. Also, the Economics Prize Committee was changed to require two non-economists to decide the prize each year, whereas previously the prize committee had consisted of five economists."

I await the responses of the Swedish contingent, and, since the "e-word" was used, Inq, too.

You called?

Well, those of us that know the nature of that prize (most Swedes don´t) generally are quite pleased with our National Reserve Bank being able to pull off that stunt. Even more publicity for the nation, for a relatively small cost.

Oh, about peace prize: Don´t shoot us Swedes for that! We are not involved at all with it! The peace prize is one of the original prizes put up by Alfred Nobel himself, but it has never been handled by Sweden. In his will, he specified that the other prizes would be decided upon by various institutes of learning in Sweden, but that the Peace prize would be decided by the Norwegian parliament (or some committee thereof, can´t remember). He wanted both countries in the double monarchy to get something, and that was his way of doing it. He died in 1900, and could not predict that the double monarchy would split up in 1904.


Have a nice time!

Peter Gustafsson

[Zilverzmurfen]

He died in 1900, and could not predict that the double monarchy would split up in 1904.

Or 1905, even...

[Inquartata]

Well, finally a real economist gets the prize again, instead of "game theorists" or whatever. ( Even if it IS a neo-Keynesian economist. )

Interesting BTW that despite all the whinging about how the rest of the world is superceding the US in science and the keening about our poor school system vis-a-vis the sciences, it's Americans who have won all of the Nobel science prizes this year...

[jeff]

Gee. Inq - in other threads you broaden the definition of "economics" to include almost every other human activity. You shouldn't quibble when not-really-economists win the prize (which is not-really-Nobel) when you've tried to extend economics to not-really-economics issues

[PeterGustafsson]

Hi!

Interesting BTW that despite all the whinging about how the rest of the world is superceding the US in science and the keening about our poor school system vis-a-vis the sciences, it's Americans who have won all of the Nobel science prizes this year...

A bad school system, if it indeed is worse than those of other 1st-world countries, will affect who gets Nobel prizes from 2040 (or so) and onwards. Not now. Those that got Nobel prizes this year probably went to school in the 60-70ies, so you should compare the school systems in different countries at that time.


Have a nice time!

Peter Gustafsson

[Inquartata]

Gee. Inq - in other threads you broaden the definition of "economics" to include almost every other human activity. You shouldn't quibble when not-really-economists win the prize (which is not-really-Nobel) when you've tried to extend economics to not-really-economics issues

Nah. I say that economic theory affects all areas of human activity, not vice versa. Much less that every discipline influenced by or influencing economics IS economics...

BTW, I see that the winner of the Peace Prize is also an economist. Hurrah!
And unlike a lot of the political choices of years past, this fellow has actually played a large role in an economic policy which is both effective in alleviating poverty and not does not have obvious deleterious consequences in other areas. Excellent choice!

[scrapinpeg]

I found another article by Mr. Phelps that I found intriguing. Here's an excerpt, wonder what you think:

As is increasingly admitted, the economic performance in nearly every Continental country is generally poor compared to the U.S. and a few other countries that share the U.S.'s characteristics. Productivity in the Continental Big Three--Germany, France and Italy--stopped gaining ground on the U.S. in the early 1990s, then lost ground as a result of recent slowdowns and the U.S. speed-up. Unemployment rates are generally far higher than those in the U.S., U.K., Canada and Ireland. And labor force participation rates have been lower for decades. Relatedly, the employee engagement and job satisfaction reported in surveys are mostly lower, too.

It is reasonable to infer that the economic systems on the Continent are not well structured for high performance.

. . .

What could be the origins of such underperformance? It may be that the relatively poor job satisfaction and employee engagement on the Continent are a proximate cause--though not the underlying cause --of the poorer participation and unemployment rates. And high unemployment could lead to a mismatch of worker to job, causing job dissatisfaction and employee disengagement. The task is to find the underlying cause, or causes, of the entire syndrome of poorer employment, productivity, employee engagement and job satisfaction.

Many economists attribute the Continent's higher unemployment and lower participation, if not also its lower productivity, to the Continent's social model--in particular, the plethora of social insurance entitlements and the taxes to pay for them. The standard argument is fallacious, though. The consequent reduction of after-tax wage rates is unlikely to be an enduring disincentive to work, for reduced earnings will bring reduced saving; and once private wealth has fallen to its former ratio to after-tax wages, people will be as motivated to work as before.

An indictment of entitlements has to focus on the huge "social wealth" that the welfare state creates at the stroke of the pen. Yet statistical tests of the effects of welfare spending on employment yield erratic results. In any case, it is hard to see that scaling down entitlements would be transformative for economic performance. (Indeed, some economists see increased wealth, social plus private, as raising the population's willingness to weather market shocks and helping entrepreneurs to finance innovation. I am skeptical.)

In my thesis, the Continental economies' root problem is a dearth of economic dynamism--loosely, the rate of commercially successful innovation. A country's dynamism, being slow to change, is not measured by the growth rate over any short- or medium-length span. The level of dynamism is a matter of how fertile the country is in coming up with innovative ideas having prospects of profitability, how adept it is at identifying and nourishing the ideas with the best prospects, and how prepared it is in evaluating and trying out the new products and methods that are launched onto the market.

There is evidence of such a dearth. Germany, Italy and France appear to possess less dynamism than do the U.S. and the others. Far fewer firms break into the top ranks in the former, and fewer employees are reported to have jobs with extensive freedom in decision-making--which is essential at companies engaged in novel, and thus creative, activity.

Further, I argue that the cause of that dearth of dynamism lies in the sort of "economic model" found in most, if not all, of the Continental countries. A country's economic model determines its economic dynamism. The dynamism that the economic model possesses is in turn a crucial determinant of the country's economic performance: Where there is more entrepreneurial activity--and thus more innovation, as well as all the financial and managerial activity it leads to-- there are more jobs to fill, and those added jobs are relatively engaging and fulfilling. Participation rises accordingly and productivity climbs to a higher path. Thus I see the sort of economic model operating in the Continental countries to be a major cause-- perhaps the largest cause--of their lackluster performance characteristics.

There are two dimensions to a country's economic model. One part consists of its economic institutions. These institutions on the Continent do not look to be good for dynamism. They typically exhibit a Balkanized/segmented financial sector favoring insiders, myriad impediments and penalties placed before outsider entrepreneurs, a consumer sector not venturesome about new products or short of the needed education, union voting (not just advice) in management decisions, and state interventionism. Some studies of mine on what attributes determine which of the advanced economies are the least vibrant--or the least responsive to the stimulus of a technological revolution--pointed to the strength in the less vibrant economies of inhibiting institutions such as employment protection legislation and red tape, and to the weakness of enabling institutions, such as a well-functioning stock market and ample liberal-arts education.

The other part of the economic model consists of various elements of the country's economic culture. Some cultural attributes in a country may have direct effects on performance--on top of their indirect effects through the institutions they foster. Values and attitudes are analogous to institutions--some impede, others enable. They are as much a part of the "economy," and possibly as important for how well it functions, as the institutions are. Clearly, any study of the sources of poor performance on the Continent that omits that part of the system can yield results only of unknown reliability.

Of course, people may at bottom all want the same things. Yet not all people may have the instinct to demand and seek the things that best serve their ultimate goals. There is evidence from University of Michigan "values surveys" that working-age people in the Continent's Big Three differ somewhat from those in the U.S. and the other comparator countries in the number of them expressing various "values" in the workplace.

The values that might impact dynamism are of special interest here. Relatively few in the Big Three report that they want jobs offering opportunities for achievement (42% in France and 54% in Italy, versus an average of 73% in Canada and the U.S.); chances for initiative in the job (38% in France and 47% in Italy, as against an average of 53% in Canada and the U.S.), and even interesting work (59% in France and Italy, versus an average of 71.5% in Canada and the U.K). Relatively few are keen on taking responsibility, or freedom (57% in Germany and 58% in France as against 61% in the U.S. and 65% in Canada), and relatively few are happy about taking orders (Italy 1.03, of a possible 3.0, and Germany 1.13, as against 1.34 in Canada and 1.47 in the U.S.).

Perhaps many would be willing to take it for granted that the spirit of stimulation, problem-solving, mastery and discovery has impacts on a country's dynamism and thus on its economic performance. In countries where that spirit is weak, an entrepreneurial type contemplating a start-up might be scared off by the prospect of having employees with little zest for any of those experiences. And there might be few entrepreneurial types to begin with. As luck would have it, a study of 18 advanced countries I conducted last summer found that inter-country differences in each of the performance indicators are significantly explained by the intercountry differences in the above cultural values. (Nearly all those values have significant influence on most of the indicators.)

The weakness of these values on the Continent is not the only impediment to a revival of dynamism there. There is the solidarist aim of protecting the "social partners"--communities and regions, business owners, organized labor and the professions--from disruptive market forces. There is also the consensualist aim of blocking business initiatives that lack the consent of the "stakeholders"--those, such as employees, customers and rival companies, thought to have a stake besides the owners. There is an intellectual current elevating community and society over individual engagement and personal growth, which springs from antimaterialist and egalitarian strains in Western culture. There is also the "scientism" that holds that state-directed research is the key to higher productivity. Equally, there is the tradition of hierarchical organization in Continental countries. Lastly, there a strain of anti-commercialism. "A German would rather say he had inherited his fortune than say he made it himself," the economist Hans-Werner Sinn once remarked to me.

. . .

It may be that the Continentals finding, over the 19th and early 20th century, that there was little opportunity or reward to exercise freedom and responsibility, learned not to care much about those values. Similarly, it may be that Americans, having assimilated large doses of freedom and initiative for generations, take those things for granted. That appears to be what Tocqueville thought: "The greater involvement of Americans in governing themselves, their relatively broad education and their wider equality of opportunity all encourage the emergence of the 'man of action' with the 'skill' to 'grasp the chance of the moment.'"

The most basic point to carry away is that the empirical results related here lend support to the Enlightenment theme that a nation's culture ultimately makes a difference for the nation's economic performance in all its aspects--productivity, prosperity and personal growth.

. . .

[TrainingDummy]

"There is an intellectual current elevating community and society over individual engagement and personal growth, which springs from antimaterialist and egalitarian strains in Western culture."

I like how he assumes that one can only reach "individual engagement and personal growth" solely through one's career and, based on his next point, implies that materialism and inegalitarianism (a real word? I say yes!) will let one reach that growth. What's wrong with having a crappy job and going home to do something fulfilling like, say, fencing? Seriously, the average blue-collar American is probably not happy with their "individual engagement and personal growth" in their career or at home anyway.

Where's the land of milk and honey? I want some!

[jeff]

How about the land of beer and pretzels?

A lot of Phelps' points have been made before. I think two things are omissions: first, I think it a mistake to bluntly label "Continental" economics as being uniform. There's a big difference, even in the Euro zone in attitudes and employment rates. Or, look at Denmark, which (IIRC - I just read this a few days ago) runs 5% unemployment and has a larger safety network than the US. It's not an undifferentiated, uniform, mass. The other issue that comes to mind is adding up all the benefits and losses. Yes, we have lower unemployment in the US - but that's not always been true. On the other hand, we don't have the health and social benefits that are universal in most of those European environments. If the question is "how good is it there compared to here", just %unemployment can't be the only metric.

[Have At You]

Where's the land of milk and honey? I want some!

That sounds too sticky for my taste.

[Inquartata]

How about the land of beer and pretzels?

Hie thee over to the Cocktail Party thread.

Beer and pretzels were one of my econ professor's favorite examples of complementary goods, BTW. Who said all academics were ivory-tower aesthetes?

[jeff]

Yeah, they have to have a little fun too. The tenured professors get the better beer!

[epeeocolpyse_later]

I sensed that Mill was waning so in order to stand up for the guy: why not think of ways to blend the ideas of Utilitarianism and Luxury. That is supposed to be the correct formula to describe democracy and capitalism, but it doesn't really work very well. I believe it can be done and include beer, pretzels, great housing for all, and so forth. We are only limited by lack of imagination, determination and the stupid people who still go to universities believing that they will get a 'good job' when they graduate. No matter how many times I see it or say it: universities are to improve our ability to think not necessarily to make money. Money makers can come from any area. A person going to a 2 year or 1 year school studying something like Radiology, is going to make money - buy a house - and pay their bills. They will be able to most likely, buy a car, go on vacation and send their 2.5 kids off to school to do the same thing. Four year schools with Liberal Arts programs only provides "education" not a job. Higher education makes a John Stuart Mill, not the X-ray tech with a great little house in the suburbs. Does anyone watch the horrible program about Orange County - did you see those stupid women? It is unbelieveable, I feel sorry for some of them. they have great houses but it is wasted on very dumb people. They have no class whatsoever - it's almost pitiful. Did anyone listen to President Bushs' speech on President's day almost sneering to the masses that we should 'revolt'?
p.s. the its question. There should have been an apostrophe after the last its' in one of the choices - as the apostrophe adds possession.

[Inquartata]

Has Mango cloned again?

[Capt. Slo-mo]

Mango has many faces...

apparently all of them have a unique e-mail address.

[epeeocolpyse_later]

You know, some people would have done something completely evil by now, but not me, not.....epee.....apocotips..later. When I think of all the garbage I've been through though, I can't help but become - but then compare it to the garbage others have gone through, I can only be thankful - except I really want my apartment - please - someone send me my apartment back - I really need it. [then I read about the flood in Indonesia, should I complain?] Thanks though, Craig has done an outstanding job over the years, I don't know how he does it, we have driven him mad, most likely, but he's a fencer - and it's part of the deal.