Economic Extremism – Too Much of a Good Thing

Allow me to juxtapose two viewpoints for a moment. First – what I perceive to be a fairly common view amongst neo-liberal economists:

The huge improvement in people’s standard of living over the last hundred years has been one of the biggest successes of Capitalism.  The ability of capitalists to offer loans allowed entrepreneurs to generate improved growth and employment.  With money from investors, companies have been able to achieve enormous technological advances, resulting in leaps in quality of life for many people.  The improved efficiencies of competitive industry have lowered prices of many goods, lifting millions out of poverty. 

The main thing standing in the way of even greater improvements in people’s happiness and standard of living, is that the markets are still not yet free enough.  Government is stifling the markets with regulation that raises the costs of doing business and discourages investment.  State benefits discourage workers from finding more enriching jobs, instead encouraging reliance and stagnation.

Despite the US’s historic progress in the direction of free markets, true libertarianism, in which the government is small enough to completely free the market from interference has never truly been attempted.  All of the economic and societal failings of the US can be traced back to the government interfering with the free market – whenever a problem arose, the US government attempted to introduce legislation to resolve it, rather than allowing the market to resolve it naturally. This exacerbates the problem rather than resolving it, so we should instead strive to further reduce the size of government, until true free-market libertarianism can be achieved.

Second – an alternative, equally extreme view:

The huge improvement in people’s standard of living over the last hundred years has been one of the biggest successes of Socialism.  The ability of labour to form unions allowed workers to negotiate improved wages and working conditions.  With revenue from taxes, governments have been able to achieve enormous technological advances, resulting in leaps in quality of life for many people.  The social security programs of compassionate governments have raised incomes of the poorest, lifting millions out of poverty. 

The main thing standing in the way of even greater improvements in people’s happiness and standard of living, is that the government is still not yet powerful enough.  Companies are manipulating the government with lobbying that reduces the spending on social programs and cuts taxes.  Stock markets discourage companies from paying workers a fair wage, instead encouraging exploitation and inequality.

Despite the USSR’s historic progress in the direction of social welfare, true communism, in which the workers control the capital enough to completely free the populace from servitude has never truly been attempted.  All of the economic and societal failings of the USSR can be traced back to powerful individuals interfering with the will of the people – whenever a problem arose, the USSR government attempted to divert attention away from it, rather than allowing the workers to resolve it naturally. This exacerbates the problem rather than resolving it, so we should instead strive to further increase the workers’ control of capital, until true democratic communism can be achieved.

You hopefully see what I did there.  I have written the same passage, about the same thing, changing as few words as I can: 

The huge improvement in people’s standard of living over the last hundred years has been one of the biggest successes of ___.  The ability of ___ to ___ ___ allowed ___ to ___ improved ___ and ___.  With ___ from ___, ___ have been able to achieve enormous technological advances, resulting in leaps in quality of life for many people.  The ___ ___ of ___ ___ have ___ ___ of ___ ___, lifting millions out of poverty. 

The main thing standing in the way of even greater improvements in people’s happiness and standard of living, is that the ___ ___ still not yet ___ enough.  ___ ___ ___ the ___ with ___ that ___ the ___ ___ ___ and ___ ___.  ___ ___ discourage ___ from ___ ___ ___, instead encouraging ___ and ___.

Despite the ___’s historic progress in the direction of ___ ___, true ___, in which the ___ ___ ___ enough to completely free the ___ from ___ has never truly been attempted.  All of the economic and societal failings of the ___ can be traced back to ___ ___ interfering with the ___ ___ – whenever a problem arose, the ___ government attempted to ___ ___ ___ it, rather than allowing the ___ to resolve it naturally. This exacerbates the problem rather than resolving it, so we should instead strive to further ___ the ___ ___ ___, until true ___ ___ can be achieved. 

Both give plausible explanations of why the positive outcomes we see are a consequence of adherence to their particular pet theory, and both explain away the counterexamples as simply being a result of inadequately strict adherence.  A lot of what both views say sounds plausible, but successive paragraphs make much stronger and more questionable claims.

The first paragraph of each is quite reasonable – I can happily agree with both of them, and they do not contradict each other.  Both capitalism and socialism have in part been hugely beneficial to the modern world, in very different (and quite likely complimentary) ways.

The second and third paragraphs of each however go too far – there are elements of truth (some regulations can be bad, Stalin hijacked the communist agenda), but they claim too much, accepting none of the responsibility for failures, and instead advocating for “too much of a good thing”.

The second and third paragraphs of each are both examples of “Hedgehog thinking” – there is one overarching idea, and all data must support it, because it is the correct idea.  Seemingly contradictory data is actually supporting data; you just need the right way to phrase it.  Fox thinking, on the contrary, is that there could be multiple things going on at once – reality is complex, and a theory that explains many things well can still have blind spots.

I am not claiming here that capitalism or free markets are fundamentally bad – far from it, however I often encounter arguments that they are fundamentally good and infallible.  Capitalism (just like Socialism) is a useful tool for humanity’s development, but it has blind spots, and may not produce the optimal outcome in all cases.

More than this though – I think these kind of views demonstrate the ease with which socialism gets conflated with repressive command-economy communism, and capitalism gets conflated with laissez-faire free-market libertarianism. I roll my eyes every time I hear someone on an American news network using the word socialist to imply that some sort of Stalinist purge is imminent. Equally though, I find myself almost as frustrated when I hear protesters denouncing capitalism in its entirety, when their issue is with consumerism/rentier landlords/monopolistic practices.

To claim that capitalism is synonymous with consumerism, destroying the environment, big business monopolies and shafting the poor is just as dogmatic and unhelpful as claiming that socialism is synonymous with nationalised industry, gulags and food shortages.

Blindly taking either philosophy to the extremes demonstrated in the second and third paragraphs is likely to have some pretty serious negative consequences, but the trick is to not be blind to these things. Capitalism and socialism have both made enormous positive contributions to human wellbeing in the last century and a half, but both have led to some outcomes that have not been so great.

We shouldn’t shy away from addressing the issues that arise – it is not anti-capitalist to criticize a business for polluting the environment, just as it is not anti-socialist to criticize a union for opposing the introduction of a new technology. If you can’t criticize, you can’t optimize.