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Capitalism: Doomed To Fail?

Sunday December 18th, 2011   •   Posted by Emily Skarbek at 7:22am PST   •  

Over at Project Syndicate, Kenneth Rogoff answers the question: “Is Modern Capitalism Sustainable?” Rogoff starts by saying that if what you mean by capitalism is the European model of a welfare state, the answer is no.

Continental European capitalism, which combines generous health and social benefits with reasonable working hours, long vacation periods, early retirement, and relatively equal income distributions, would seem to have everything to recommend it – except sustainability.

Rogoff then goes on to term China’s system as “Darwinian capitalism” (which I find unhelpful at best and downright confusing at worst) before coming to his real point:

…In the broad sweep of history, all current forms of capitalism are ultimately transitional. Modern-day capitalism has had an extraordinary run since the start of the Industrial Revolution two centuries ago, lifting billions of ordinary people out of abject poverty. Marxism and heavy-handed socialism have disastrous records by comparison.

Here I agree with Mr. Rogoff. But the reason why current forms of capitalism are “transitional” is because of the ability of special interest groups to use government to create interventions that secure private benefits at the cost of consumers. The inability to create a system of limited government has led to capitalism’s “transitional” form, not an inherent feature of a market economy. The problem is that a government strong enough to bind itself from intervention is also strong enough to break those binds. The incentives for special interests to capture the state and use the coercive power it entails to secure private benefits are exceptionally strong. This process of capture by private interest and increasing interventions into the market economy is F. A. Hayek’s message in The Road to Serfdom.

In the same paragraph, Rogoff goes on to say that as “as industrialization and technological progress spread to Asia (and now to Africa), someday the struggle for subsistence will no longer be a primary imperative, and contemporary capitalism’s numerous flaws may loom larger.” But I would argue that industrialization and technological process will not come to the bottom billion until the conditions under which markets flourish are able to grow in those regions. This is THE biggest problem facing the world today. It seems silly to parade out the flaws of capitalism until the miracle of what capitalism has done for the West is feasible for the rest.

Finally, in discussing the flaws of capitalism (pricing public goods, health care, the environment, financial markets, inequality, etc.) Rogoff offers the solution of economists as experts. I am skeptical. First, Rogoff seems to think there is a strong consensus on what is wrong and how to fix it. Second, even if that were the case, the “solutions” economists impose will create their own sets of unintended consequences. Even if we had the right solutions to the problems, implementing those solutions requires doing so through a political process that will corrupt those solutions. Finally, economists themselves are a special-interest group, that will behave similar to other interest groups in positions of power.

Let me be clear. Mr. Rogoff is a very intelligent scholar whom I perhaps agree with in the broad scheme of political economy. More scope for markets is preferred to less. Equally important to me however, is the idea that markets are robust without experts to guide them and are solutions cannot be considered outside of the political process that implements those solutions. The central problem of political economy is not how to design the best quasi-market for pricing public goods. The central problem is one of how to constrain the state such that entrepreneurs can have the widest scope possible to discover solutions under competitive conditions.

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December 2011