Bad arguments against capitalism, vol. 1

Most of us have probably heard, over the years, an enormous number of arguments against capitalism. This is not all that surprising. Looking around, it’s easy to find irrationality and waste in the way that our economy is organized. But turning this into an argument for wholesale change in the system – as opposed to just an argument for regulation and readjustment – is much more difficult. Because in order to argue that “the system” needs to go, you need to be able to provide at least some reason to think that some imagined alternative system is going to be better.

And yet lots of people ignore this obligation. There are many egregious examples of this, with Naomi Klein’s recent book being a typical example. (It’s a 500+ page denunciation of capitalism, without any serious attempt to explain what the alternative is supposed to look like.)

On the other hand, the way that economists have presented the basic argument for capitalism, over the past half century, has tended to invite this style of criticism. That’s because they start with an extremely idealized conception of a “perfectly competitive” market, then show how this ideal arrangement achieves a reconciliation of private interests with the public good. Since this idealization is one that could never be achieved in reality, without violating multiple laws of both physics and common sense, a lot of people feel free to dismiss the result as being simply inapplicable to the real world.

For a long time, I’ve argued that the standard economist’s approach goes about things the wrong way. Rather than starting with a general equilibrium of the whole system, under idealized conditions, one should start with individual exchanges, under real-world conditions, and show how they improve the welfare of both parties. Then show how expanding the network of exchanges continues to generate mutual benefit, then show that there is no limit in principle to the exhaustion of all such potential exchanges.

In any case, a while ago I came across a different approach, which I also quite like. It was in an old collection of papers by Charles Lindblom, Politics and Markets. (Some people will know Lindblom as the author of the classic paper in public administration, “The Science of Muddling Through.”) In keeping with his extreme normative minimalism, Lindblom proposes the following as a sort of minimal test on the desirability of an economic system. Fiddling around a bit with the formulation, I’ll present it as follows.

Lindblom’s minimal adequacy criterion:

If a particular action is beneficial to society, then the economic system should, in general and on the whole, tend to encourage individuals to act that way; and if a particular action is harmful to society, then the system should, in general and on the whole, tend to discourage individuals from acting that way.

I love this. Basically what it says is that the system should be able to align incentives, not so that it gets the numbers right, but just so that it gets the signs right. If a particular action imposes significant net costs (-) on others, then we should try to organize things so that individuals are not systematically encouraged (+) to act that way, etc.

This is an incredibly minimal criterion. Lindblom’s argument for markets, however, is that no other economic system can credibly claim to satisfy it. Central planning certainly did not. One of the standard arguments against an economy organized around workers’ cooperatives (gated, here) is, in effect, that it doesn’t satisfy it either. Now of course there will be imperfections in any system (such as externalities under capitalism), which will lead to violations of Lindblom’s criterion. The point is that these violations should be the result of flaws in the system, not the core set of incentives that the system itself supplies.

Incidentally, the fact that Lindblom’s criterion rules out every economic system save capitalism should provide some sense of just how far we are from having anything like a plausible alternative to markets, and therefore, how pointless it is to discuss doing away with them. We can’t even figure out how to design institutional alternatives that get the signs right on the basic feedback relations! That’s a fancy of way of saying that no one who has thought seriously about the question has any clue how to organize things without markets (with the one exception being those who want to run a giant computer simulation of a market).

Lindblom’s criterion also sets aside as irrelevant a lot of the cavils that one hears about capitalism. For example, people will often point out that prices are never exactly right, since they never reflect true social cost. The response is just to point out that at least prices by and large move in the right direction, so that if we need less of something, they will tend to encourage people to produce less of it. What other economic system can make that claim? Or it sets aside the argument about inequality, where people argue that because the rich have more money, their needs count for more than the needs of others, and so “demand” is an imperfect measure of social welfare. The response, again, is that, even though inequality creates this imperfection, at least prices, and hence incentives, move in the right direction with changes in need, which again, is not something that any other economic system can claim.

Just to be clear: these “problems” with markets are huge problems. There is no question that we need to do what we can do fix them. It’s just that no matter how huge they are, they never add up to an argument against capitalism, because all of the alternatives to capitalism have even huger problems. Lindblom’s minimal adequacy criterion provides a useful sense of just how huge those problems are.

This is why I find critics of capitalism who refuse to engage seriously with socialist economics to be so frustrating. We are so far from having any sort of a workable, non-market based socialist alternative that it is, quite literally, a waste of everyone’s time to be talking about doing away with the present system. The fact that we can’t describe an alternative that satisfies even Lindblom’s minimal adequacy criterion provides a good sense of just how far we have to go, before anyone can claim to have a plan that deserves to be taken seriously at all.


Bad arguments against capitalism, vol. 1 — 6 Comments

  1. Serious question:

    Lindblom’s “minimal adequacy criterion” is that “action[s]” that are “beneficial to society” should be “encourage[d]”, while “action[s]” that are “harmful to society” should be “discourage[d]”.

    You elaborate this by saying that capitalism uniquely provides “the core set of incentives” for making changes in the right direction.

    My difficulty here is that your examples seem to come down to issues of the dynamics of supply and demand are produced. But is this approach capable of addressing what should be demanded or supplied (in other words, of defining Lindblom’s “beneficial” versus “harmful”). So wouldn’t someone like Klein partly be saying “well, environmental degradation benefits certain interests but harms others, and I want the latter to trump the former”? And the argument over the Conservatives’ income-splitting is less about how to produce incentives than it is about what kinds of incentives should be produced (which involves a disagreement about what sort of family structures are most beneficial to society).

    In other words: there should be no question that capitalism provides the most effective incentives for changing behaviour, but is there anything intrinsic to capitalism that helps us to understand what direction those changes should take – or which reliably produces those changes once they have been identified?

    And if the answer is “no”, then aren’t critiques like Klein’s inevitable and partly understandable (even if futile and utopian)?

    (Of course I should look up Lindblom’s article, which may have a simple answer to these questions.)

  2. Should read:

    “your examples seem to come down to issues of HOW the dynamics of supply and demand are produced.”

  3. I find it difficult to engage in this type of conversation when what exactly the critic means by “capitalism” is so unclear? Do they mean completely unregulated, free-market capitalism? Do they simply mean a market-based system? Or do they mean something else entirely?

    It’s hard to fight against an ill-defined concept.

  4. When I use the terms, it is usually as follows. A “market” economy refers to any economic system in which the primary decisions about the allocation of resources and goods are made in a decentralized fashion by private actors, whose interactions are coordinated using a set of competitively determined prices.

    A market economy can, in principle, be either capitalist or socialist. “Capitalism” refers to a market economy in which the preponderance of wealth is held in the form of private property, and most firms are owned by investors of capital. A “market socialist” economy is one where the price system is preserved, along with decentralized decision-making, but where ownership of property is socialized and/or firms are not owned by investors.

    I was being a bit loose above: it’s very difficult to imagine a non-market economy that meets Lindblom’s criterion, much easier (although not trivial) to imagine a non-capitalist but market economy that does satisfy it.

  5. That is a very important clarification.

    Most critics of the current system that I encounter in bars are opposed to Capitalism not to markets. That may be a product of the bars I go to (I haven’t run into Naomi Klein lately), but I still think that a large proportion of even the radical critics don’t mind the idea of replacing the current system with one that also relies on markets. After all, some of these people think that ultra-market solutions like Uber and AirBnB are great for sticking it to ‘Capitalism’. (though as your piece a while back about the backlash against Uber showed, not everyone is happy with a pure price system).

  6. Hasko: you’re right. In the background though, I’m thinking about the debate over climate change. Once you admit that we are going to need coordination through prices, and decentralized determination of prices, then you’re going to have externalities, and so climate change is still going to be a problem. So then the debate about what to do about climate change becomes identical to the debate that we’re having right now, and the only plausible solution is carbon pricing. Unless you’re willing to abolish the price system entirely, all the radical posturing doesn’t really change anything — climate change is a technical problem that must be solved through a targeted intervention in the price level. It’s actually a plain-vanilla externality problem, of the sort that is endemic in any market system. (Which I know you know, I’m just elaborating on the reasoning underlying the post.)