Sunday, April 12, 2015

Economic Systems: Mixed Beats Pure

Economics pretends to be a science, but more than most sciences it tends to be driven by ideology.

In ideologies the answers are given. Facts are fit into theoretical frameworks. Facts that don't fit in are denied or even falsified, and at best are explained away. Just as with religions.

In the United States and much of the globe there are two major economic ideologies to choose from: free market capitalism, and socialism. Both camps look back at the 20th century and pull facts (or pseudo facts) from the economic trajectories of various nations to justify their current policy prescriptions.

I believe they are both wrong, to the extent they demand pure systems. I believe the historical record shows that they are both wrong. I believe that in the United States and elsewhere we need to build up a popular culture, science of economics, and political system that understands that mixed systems (involving both free and regulated markets, and the control of capital at times by capitalists, and at times by government) can work better than pure systems.

Ideologists are people who insist on using the same tool set for every job, even when a better (often just bigger) tool set is available.

To keep this essay short, I will focus on one ideology, free-market capitalism. This ideology is being pushed heavily in the United States by capitalists, their media voices, their academic establishment, their religious establishment, and their politicians. However, let me make it clear that I am not in favor of a centrally-planned socialist system where the government owns everything (though its claim would be that it holds everything in common for the people). I am in favor of a mixed system. I am just coming at it from the free-market side.

If you think free markets are sacred, then of course whatever comes out of them is wonderful. The Great Depression was created by free markets, so it must have been wonderful.

I don't believe the Great Depression was wonderful.

So assuming I can demonstrate that mixed systems can be superior to pure free market capitalist systems, what would be the goal? I am willing to go with the classic: the greatest good for the greatest number. It should be clear that by choosing different goals you can skew the debate towards pure systems, or even within the range of mixed systems.

If you make either Socialism or Capitalism the goal, then you have self-proving economics. Some more reasonable goals might be: maximizing GDP (gross domestic product) over the long run; minimizing unemployment, crime and hunger; sustainability (environmental and human); profit maximization for business owners; stability; political consequences like democracy (or control of it by an elite); and so on. The ideal economic system would depend on the goals you choose.

I would say a knowledgeable human being would want a mixture of weighted goals, and the flexibility to change the goals themselves, if the experience of reality warrants that.

Some goals many Americans share are: minimizing bubble/bust cycles; maximizing GDP growth over time; distributing GDP adequately so that every American has a good chance of having a good economic life, or minimizing poverty. Minimizing poverty would include protection for children, seniors, and disabled persons.

Many free market ideologists would not like that list of goals, since it almost implies some elements of socialism need to be applied. Some free-marketers would argue that their system is so wonderful that it actually does maximize GDP growth without cycles of busts or creating masses of poor people and criminals.

I would argue that you can't achieve those goals without a Federal Reserve trying to keep a rein on the money supply; mandatory Social Security; mandatory unemployment insurance; and programs for children.

That said, economies are complicated, and they change. Our data-driven economy of today is as different from the factory-led U.S. economy of the late 1940s (when every other nation's factories were still in splinters from World War II bombing campaigns) was from the mainly agricultural economy of the U.S. in the first half of the 1800's.

Long ago the world learned that free markets don't work in certain situations; the ideologists want us to forget the lessons of history. Industrial monopolies (as during the 1800's after the Civil War) tend to concentrate wealth in a few hands, but stifle growth of the economy as a whole. They stifle competition, which is supposed to be the engine of free-market economies. The monopolies were created naturally through competition, but once created they had a word for competition: "Ruinous." In the process of enriching a few capitalists they drain the resources of smaller businesses and consumers, leading to economic stagnation and recessions.

But suppose that you want long-term GDP growth, and don't care if a few people starve or die young from lack of medical care. Would that not then favor a pure free enterprise system, with government relegated to military matter and punishing anyone who dared to steal a loaf of bread?

Yes, according the the free market ideologists. But they ignore history. In the U.S. we mainly had free-market capitalism until 1933. The results should be examined in detail. There was GDP progress, but it came mostly in booms and busts. By 1933 most of the centuries' earlier gains were gone, down the drain because because there was nothing in place to put breaks on the downward plunge that started in 1929.

The New Deal did not work out all that well at first, either. It was war (selling to nations already at war until Pearl Harbor, then vast levels of deficit spending on our own war machine until we emerged as the leading world superpower) that got us out of the Depression. After that, however, some of the New Deal, let's call them what they are, Socialist, programs did dampen the boom and bust cycle. There were cycles, but on the whole I would argue that having a mixed system worked better than either pure free-market capitalism or pure socialism would have.

The question should not be whether we should have a capitalist or a socialist economic system. The question should be: which elements of each, working together, create the overall strongest economy?

But for voters, judging politicians, that would demand something that has often proven beyond their ken. It requires understanding complexity. It requires something more than regurgitating campaign ads. It requires independent thinking.

The same for economists. When an American economist reveals himself (or herself) as a pure free-market exponent, know you are dealing with a priest, not a scientist.

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