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Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts



In 1947, Churchill said, ‘“democracy is the worst form of government, except for all those others that have been tried.”’ When quoted, people often leave off “that have been tried.” In subsequent years, this has been corrupted and paraphrased into, “capitalism is the worst economic system, except for all the others.”

I wish I knew who it was that first turned Churchill’s statement about government into one about economics. I have heard or read this statement repeatedly through my life, and have always assumed that it was coined by one of the world’s great quotable thinkers – Lincoln, Churchill, Confucius, Edison, Einstein… As a quote, it’s great – it hits all the best qualities of a quotable quote. It is pithy, humorous, self-effacing (for capitalists), and seems to evoke a deep truth. In addition to assuming it was created by a great thinker, I have always taken it to be true. However, I now believe that it may be one of the most destructive utterances of modern times.

[Side Note: I have tried to find the original source of that quote without success. Thus, it is possible that the capitalism quote predates Churchill’s quote about democracy, and Churchill converted a statement about economics into one about government. However, I doubt that. The democracy quote sounds so Churchillian. Also, every reference to the capitalism quote says that it comes from Churchill’s. Further, it is possible that the capitalism quote is relatively new and that I have not heard it all my life, but rather conflated it with Churchill’s quote.]

Granting to the maxim, “capitalism is the worst economic system, except for all the others”, the weight of a great orator, and easy care-free believability, allows a capitalist like myself the opportunity to ignore the possibility that another economic system, tried or not, might, indeed, be superior.

I believe that all but the staunchest Libertarian or Anarchist will agree that selfishness is part of human nature. I might give generously to the welfare of others, but only after I have secured the wellbeing of myself and my family (or tribe, or race, or nation.) Further, I fully believe that, for whatever reasons, some people are vastly more self-interested than others. Indeed, some people appear to feel that they must diminish the welfare of others in order make themselves greater. Sociopathy exists. It is a given that humans lie, cheat, and steal. We know there are people that will work for their own interests without a care for the cost to others, present or future. We also know that there those who will actively work against the interests of others.

Given these truths, modern capitalists admit that there needs to be some regulation of business to keep things tolerable (even if it might be a façade to simply make us feel like we are doing something noble.) Capitalists tend to believe that there is a dark side to monopoly power; that there are some industries (e.g. water distribution infrastructure) that are “natural monopolies”, and thus can be given into the hands of government or forced to endure greater regulation; and so forth.

The trick, the capitalist would say, is finding the right balance between regulation that constrains the evils that lurk in the hearts of men, and regulations that put an excessive burden on free markets. If capitalism is failing in any way, it is not because it is fundamentally flawed, but rather that we haven’t correctly balanced regulation with laissez faire.

I have basically believed this my whole life, bolstered by that pithy maxim that capitalism is less bad than any other system. But I have changed my mind. Maybe capitalism isn’t the worst except for all the others. Maybe there is a system that is less bad than capitalism. Maybe it is socialism, or (shudder) communism, or maybe it is a system that has not yet been tried.

I don’t know how to change our economic system(s) to create a better, more caring, less harmful social framework. But I do know that we must expel the terrible notion that is embodied in the quotation, “capitalism is the worst economic system, except for all the others.”
I took Introduction to Macroeconomics at the University of Massachusetts at Amherst over 25 years ago. More importantly, the class was offered at 8AM. That meant that I slept through most of the lectures. So I was more than a little nervous that I may have made some embarrassing errors in yesterday's blog. I asked a friend of mine who is a professor of economics at a major university to read the posting and let me know if I had gotten it right. Turns out I did. I guess somnambulistic learning actually works.

 His message, in addition to confirming my analysis, added some valuable insights. Though he has asked to remain anonymous, he has given me permission to publish his reply here. It follows:
[Your blog entry] is well written and economically sound. Your discussion of the marginal propensity to consume (MPC) is exactly on point. Of course, it is not the preferred option to raise taxes in a deep recession; ideally, we want all citizens to spend more money to get things moving again. But we also have public debts to pay, and we might even want to tax one group to redistribute to another (i.e., taxing a group with low MPC to redistribute to a group with higher MPC). If our fiscal health were otherwise robust, however, it would have been reasonable to extend the Bush tax cuts for another year or two. 

But our fiscal health is anything but robust. We have a large structural deficit at the moment, in substantial part (but not entirely) due to the Bush tax cuts, enacted as we commenced a full decade of war. Even with the economy going full bore, current tax rates are not sufficiently high to cover government obligations. 

Surely our successful friends, who no doubt made their money in business, understand that a business cannot continue to run negative balance sheets forever; eventually it will feel the icy fingers of the invisible hand clutching at its throat. Why don't these individuals want to apply similar logic to government spending? Sure, the U.S. Government won't go out of business. But some years from now, it will be forced to pay off its debt by heavily taxing younger workers, slashing promised benefits, and/or running high rates of inflation to reduce its real debt. All of these are less palatable and more painful than raising taxes a bit now on citizens with low MPC and low marginal utility of income. 

Editorially speaking, my strong impression is that the key political advocates for cutting taxes (e.g., House and Senate Republicans and the think tanks that supply their talking points) understand all of the above; they don't for the most part genuinely believe that cutting taxes for top earners raises net tax revenue or greatly stimulates the economy. Their goal, rather, is to keep the government in a perpetual state of deficit so that it's almost impossible to expand the scope of government. This is the so called "starve the beast" strategy. Well-meaning people can certainly have a principled argument about whether the government is too big, too small, or just the right size. But using disingenuous arguments that “taxing the rich hurts all of us” to keep the beast in a perpetual state of starvation is not a principled way to have this discussion.