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Friday, February 08, 2008

Denying what works

Bill Easterly has some thoughts abouts recent statements made by Bill Gates:

Profit-motivated capitalism, on the other hand, has done wonders for poor workers. Self-interested capitalist factory owners buy machines that increase production, and thus profits. Capitalists search for technological breakthroughs that make it possible to get more output for the same amount of input. Working with more machinery and better technology, workers produce more output per hour. In a competitive labor market, the demand for these more productive workers increases, driving up their wages. The steady increase in wages for unskilled labor lifts the workers out of poverty.

The number of poor people who can't afford food for their children is a lot smaller than it used to be -- thanks to capitalism. Capitalism didn't create malnutrition, it reduced it. The globalization of capitalism from 1950 to the present has increased annual average income in the world to $7,000 from $2,000. Contrary to popular legend, poor countries grew at about the same rate as the rich ones. This growth gave us the greatest mass exit from poverty in world history.

The parts of the world that are still poor are suffering from too little capitalism. Foreign direct investment in Africa today, although rising, amounts to only 1% of global flows. That's because the environment for private business in Africa is still hostile. There are some industry and country success stories in Africa, but not enough.

Mr. Gates also announced his foundation is starting "a partnership that gives African farmers access to the premium coffee market, with the goal of doubling their income from their coffee crops." This is fine as a modest endeavor to help a few Rwandan and Kenyan coffee farmers, but it's hardly going to remake capitalism. The main obstacles to exports in poor countries are domestic ones like corruption and political strife, not lack of interest from rich-country buyers for premium coffee.

Moreover, how do philanthropists choose just which product is going to be the growth engine of a country? Much research suggests that "picking winners" through government industrial policy hasn't worked. Winners are too unpredictable to be discovered by government bureaucrats, much less by outside philanthropists. Why did Egypt capture 94% of Italy's import market for bathroom ceramics? Why did India, an economy with scarce skilled labor, become a giant in skill-intensive IT and outsourcing? Why did Kenya capture 39% of the European market in cut flowers? Why did tiny Lesotho become a major textile exporter to the U.S.? Why did the Philippines take over 72% of the world market in electronic integrated circuits? Because for-profit capitalists embarked on a decentralized search for success.

Sure, let those who have become rich under capitalism try to do good things for those who are still poor, as Mr. Gates has admirably chosen to do. But a New-Age blend of market incentives and feel-good recognition will not end poverty. History has shown that profit-motivated capitalism is still the best hope for the poor.

Points worth reemphasizing:

The main obstacles to exports in poor countries are domestic ones like corruption and political strife.

Much research suggests that "picking winners" through government industrial policy hasn't worked. Winners are too unpredictable to be discovered by government bureaucrats, much less by outside philanthropists.

...for-profit capitalists embarked on a decentralized search for success.

History has shown that profit-motivated capitalism is still the best hope for the poor.
Help and encourage institutional reform consistent with local culture and then see what happens.


erp said...

At least Gates is moving in the right direction. Great post.

Harry Eagar said...

There are plenty of poor people in Bolivia, but one thing they are not short of is capitalism.

erp said...

Pobres today, prosperous maƱana.

Harry Eagar said...

They've been poor under capitalism for centuries. When did you say it starts getting better?

erp said...

Let's just say they'll be far worse off under socialism.

Sorry, I don't know enough about Bolivia specifically, but find it hard to believe they've escaped the scourge of leftist politics that has devastated the rest of South America.

Harry Eagar said...

They enjoyed both and now are also enjoying the benefits of a crazed nationalism.

But you emphasize my point: You don't know about Bolivia but you are certain that capitalism would be good for it.

Well, I do know about Bolivia and I know capitalism has not been good for the campesinos.

You don't have to go to Bolivia to observe the disasters of market capitalism. Open your daily newspaper and read about mortgages.

erp said...

Harry, pls define what you mean by capitalism as it refers to Bolivian campesinos who logic tells us can't be much different from the campesinos in the rest of Latin America or Africa or Asia and while you're at it, pls tell us which impoverished peasants anywhere in the world benefited by socialism.

Mortgage defaults? Brought on by unbridled greed coupled with do-gooders who pushed lenders to make home buying available to those who clearly couldn't afford it. Not to worry, Uncle Sap will make it all better.

Capitalism isn’t perfect, but it’s a lot more perfect and offers a lot better chance of raising the standard of living around the globe than any of the other systems the world has seen lo these thousands of years.

aog said...

The mortgage defaults? You mean the current ones where average citizens are fleecing rich, multinational banks by borrowing lots of money and then sticking those banks with inadequate collateral? While your heart may bleed for those executives denied their multi-million dollar bonuses, I think they should have been smart enough to look out for themselves.

Harry Eagar said...

Me, too, but it's a perfect paradigm of how free market capitalism works:

The winners (the brokers) foist off the losses on the losers (the lenders) by criminous acts, and the correction comes too late for everybody.

Meanwhile, millions of non-participants on either side of the nonsense get whacked.


erp, why do you think socialism is the only alternative to capitalism?

There is capital in Bolivia. The campesinos don't have it. Somebody else does. The campesinos dump their babies in the squares. (I know some of them, adopted into the United States until the nationalist/capitalist government stopped it in the '80s. Now they just let 'em die.)

Why am I supposed to admire this system?

erp said...

We need to define our terms. Of course the ruling class always has capital no matter the system.

What's the other alternative, slavery and feudalism?

aog said...

Mr. Eager;

Better to correct late than not at all, the latter being the almost inevitable result of government intervention. And the millions of non-participants experience non-optimal growth (which is just a tad different than "whacked").

joe shropshire said...

A podcast with Easterly and Russ Roberts is here, if anyone is interested. It's probably best to think of the Bill and Melinda Gates foundation as a $20 billion hair shirt: in other words, a status symbol your average dot-com millionaire can't even begin to afford. Plus it gets you invited to Warren Buffett's cocktail parties. It wouldn't be anywhere near as hairy or as shirty, though, if Bill was just to shut up and write the checks.

Harry Eagar said...

Actually, we are already getting hit, the whacking (I predict) will show up later this year.

Contraction is not 'suboptimal growth.'

And we are completely innocent bystanders, who did not participate in funny mortgages at all. The foreclosure rate here is 0.02 percent -- that's right, 1 in 5,000.

It will be higher by late 2008, but the mortgages still won't be funny.

It took me a couple days to respond because my landline was out. Two days of the last three and three of the last six.

Thanks to deregulation. It never happened under telecom regulation.

erp said...

You didn't have "funny" mortgages because in Hawaii everything is tightly regulated. Is that plus?

Harry Eagar said...

Whether it's a 'plus' or not, it's not a 'fact.'

Hawaii does not regulate mortgage lending. Funny mortgages were on offer, not many people were stupid enough to bite.

So we're being punished for being smart and moral.

Explain to me again why I am supposed to admire this system.

erp said...

Truly, Hawaii is blessed. A climate to die for and smart moral people.

Does your media bleat about redlining and how the poor downtrodden are refused mortgages?

Howard said...

Explain to me again why I am supposed to admire this system.

Yeah, I know what you mean Harry. After all, in all other economic systems and all other areas of human endeavor people conduct themselves with utmost integrity. LOL

Harry Eagar said...

It would be hard to redline in "the most successful multiethnic society in history." (Gavan Daws, Australian historian of Hawaii.)

The poor cannot afford houses which start at around $500,000, unless they club together in a hui (Chinese for association), which is what they do.

They are smart enough not to mind proving income, unlike some people I know.

Howard, the thrust of your remark escapes me.

erp said...

It has nothing to do with affording. Wanting is all that is required.

Howard doesn't need me to translate for him, but I believe he's being ironic.

Harry Eagar said...

That's just silly.

The median family income in my county is around $60,000, which means half the families have less.

For ordinary working people, a lot less, since the average wage is under $30,000.

I don't care how much you want a $500,000 house, on $25,000 a year, you're not going to get it.

Not under free market capitalism, anyway.

erp said...

There are no 500K houses available to working stiffs in any system other than capitalism where there’s no limit on one's potential income.

I’m surprised there are people who only make $25,000 annually in Hawaii.

However, there's so much bleeding heart (BTW -- Happy Valentine's Day) bleating on the left about the wretched downtrodden being denied mortgages that banks/mortgage companies are being strong-armed into giving loans to those patently unqualified. The short fall, as usual, to made up by the rest of us.

Harry, you never said, what other economic systems besides, capitalism, socialism or slavery/feudalism are there? Hunter/gathering being a bit difficult in most parts of the world today.

Harry Eagar said...

You're surprised? What, never heard of David Ricardo?

Welcome to the famous service economy that the Chicago Schoolboys and Reaganomics told us would be good for America. Well, it was good for some Americans, but it wasn't good for America.

I'm a New Deal Democrat. Mixed economy is fine with me.

Howard said...


As erp understood, I was being ironic regarding your tendency to attribute all evils of human behavior to capitalism.

As for some abandoned halcyon past, I beg to differ. Things continue to improve for most though not all people. If your longing is for the post WWII period, you might want to keep this in mind(from economist Todd Buchholz):

The post – WWII years looked golden for American business. During the Eisenhower years, U.S. automobile and manufacturing firms flattened competitors in Europe and Japan. Why did they succeed so mightily? Because Generals Patton and MacArthur had flattened their factories. When I served in the White House in the early 1990s, doom and gloomers were always harping that we had lost our lead and that blue-collar wages were not holding up compared with the gains of the 1950s and 1960s. Well, it’s no great trick to look impressive when the rest of the industrialized world is rolling in rubble. American unions could win huge wage gains without always delivering higher productivity. As the decades wore on though, international competition picked up and now Americans must fight for every job, every slice of market share and every dime of wage gain.

The world as you may have imagined it was unsustainable.

Harry Eagar said...

Why do you think I was talking about the 1950s? I was talking about the 1920s.

As was understood at the time, the problem of the American economy was to insulate it and its $50 a week workers and consmers from the rest of the world and its 3-cents-day workers and subsistence consumers.

Neither free-market nor mercantilist approaches worked, and the economy crashed.

Buchholz is jousting at strawmen.

The problem with the American economy today, as far as it relates to the people who work in it, which is the only reason to anybody should care, is that people like Buchholz in the '80s decided that the answer to the 1920s conundrum was not to insulate American consumers from the rest of the world but to reduce them to world levels.

Since capital was expanding tremendously, this created some huge winners, but orders of magnitude more losers.

(There are some related factors that would have to be parsed out, like borrowing against the future, to assess the damages, but you get my drift.)

Howard said...

Welcome to the famous service economy that the Chicago Schoolboys and Reaganomics told us would be good for America. Well, it was good for some Americans, but it wasn't good for America.

The comment above bemoaning present circumstances made me think you were longing for a previous period. Perhaps one with less foreign competition.

Harry Eagar said...

It's a problem, ain't it?

If everybody gets wealthy, where will the rich get the saffron for their saffron chicken?

Getting a guy with $10 million up to $20 million is not my highest aspiration.

Peter Burnet said...

Sounds like Harry is planning a run for the presidency as the populist candidate. Harry, old pal, "A Chicken in Every Pot!" won't work anymore because everyone can afford chickens these days. But you could try "A Beemer in every driveway!".

Harry Eagar said...

Don't get too caught up by American exceptionalism. We're the only society with a permanent labor shortage, but that, obviously, has to do with something else then mere capitalism.

There's a story -- supposed to be a true one -- I like to tell:

An Irishman emigrated to America in the 1830s and found work. He showed his employer a letter he was sending back to his family:

'I am well and have work. We get meat three times a week.'

'Pat, you know very well you get meat three times a day.'

'Och! They'll never believe it.'

Harry Eagar said...

I forgot to add, in America 'a chicken in every pot' (and 'a car in every garage') was the slogan not of a populist but of a laissez-faire Republican candidate.

Peter Burnet said...

Yes, I was confusing that slogan with "Every Man a King". But, Harry, the fact that the poor can't afford to buy houses in Hawaii is a function of capialism's success, not it's failure. The world is awash with more wealthy and sorta wealthy people than at any time in history, and they all want homes by the sea and on exotic islands. Minimum wage workers in Aspen have a similar problem, so they rent or move to Iowa. Just what do you find so tragic about that and what would you do about it? House-with-a-view stamps?

Also, what inspiration do you think we could take from your beloved New Deal? Whatever the rhetoric, that was all about using the state to stimulate demand. You want more demand for housing in Hawaii? Whatever the problems were facing FDR in that sorry decade, soaring real estate prices wasn't one of them.

Bret said...

harry eagar wrote: "There are plenty of poor people in Bolivia, but one thing they are not short of is capitalism. ... They've been poor under capitalism for centuries. When did you say it starts getting better?"

I'm joining this discussion a little late since I just got back from a little vacation in Hawaii (Big Island).

First, Harry's definition of capitalism is a little different than mine and Howard's and perhaps a bit different from some of the rest of you. From what I can tell, Harry's definition of capitalism is pretty much any system without significant active redistribution. Thus most feudal and other oppressive systems qualify.

In my definition of capitalism, redistribution is a minor and unimportant point. What is required includes the following:

o Political stability
o Rule of law (equality before the law)
o Strong and freely transferable property rights
o Reasonably low taxation of people's economic activities
o Reasonably little regulation of people's economic activities
o Reasonably little corruption

The United States, in my opinion, clearly qualifies.

Does Bolivia, either now or in the past?


For example, let's take political stability. From
"Bolivia, named after independence fighter Simon BOLIVAR, broke away from Spanish rule in 1825; much of its subsequent history has consisted of a series of nearly 200 coups and countercoups."

200 coups in less than 200 years? That's pretty impressive, but definitely doesn't count as political stability.

How about some of the other things important for capitalism (my definition) above? According to
"Bolivia's investment freedom, property rights, labor freedom, and freedom from corruption scores are low. Pervasive corruption and significant regulation are major hurdles for foreign investment, as is possible nationalization of the energy sector. Rule of law is weak, and private property can be subject to bureaucratic interference, forced transactions, and expropriation. Restrictive labor laws further cloud the business climate."

So, while Bolivia's economic system is capitalism to Harry, their system doesn't qualify as capitalism in my book.

The people of Bolivia are not economically free, and that's why they are, and will remain, mired in poverty.

Harry Eagar said...

We could start with not allowing capitalists to shift off their unwanted trash onto weak people.

The housing crisis in Hawaii is largely government created, through restrictive zoning.

The fact is, though, that there was a time when the government didn't get involved -- barely existed, in fact -- and the housing situation then was even worse.

In Aspen, business can shift off its housing costs because there will be a supply of workers who will commute a very long way.

In Maui, that doesn't work.

You end up getting what the free market always delivers -- whatever returns the highest margin -- and not what any sensible person wants delivered. For example, there was not a pediatrician on Maui until 1962.

Bret said...

harry eagar wrote: "The poor cannot afford houses which start at around $500,000, unless they club together in a hui (Chinese for association), which is what they do."

I was just in Hawaii yesterday, and I struck a conversation with a native who told me that any person who could prove they had a least 50% Hawaiin ancestry could get free land. It didn't sound like they had to put a $500,000 house on it - something cheaper would do. So, what's the problem?

Harry Eagar said...

To begin with, out of 1.3 million people, only around 50K are half-Hawaiian.

It isn't free land, either, it's a 99-year lease, renewable for one 99-year term. The land cannot be alienated. There goes yer property rights.

Most of the land available is in remote, undesirable areas with no public services, not even roads.

It's true. You don't gave to build a very fancy house. Without running water, electricity or sewage service, it would not likely be anyhow.

Harry Eagar said...

Bret, that is merely the 'No true Scotsman . . .' defense.

You have not purged capitalism of its discontents, simply defined the parts no one likes as 'not capitalism.'

However, those are the parts that most people in most places most of the time have had to cope with.

Nor is the United States such an all-fired great example of capitalism purged of its offensive features.

Right from the start, when a coterie of summer soldiers and sunshine patriots used economic power to flimflam the patriot soldiers out of their bonuses, American capitalism has been a system for using political and economic power to rob the poor to feed the rich.

Bret said...

harry eagar wrote: "You have not purged capitalism of its discontents, simply defined the parts no one likes as 'not capitalism.'"

I was not expecting to purge capitalism of its discontents. I was only pointing out that what you and I consider to be capitalism are entirely different animals, with your definition being way overly inclusive in my opinion. Very few people have thought that Bolivia's economic system(s) have been good for the reasons I mentioned above.

Indeed, I'll agree with you that if you're gonna be stuck with a wildly corrupt, unstable, unfree, pecking order style system, it probably won't hurt too much more to add some sort of collectivist ideology on top of it. However, that'd be just one more thing to unwind if the system were to ever be reworked to create prosperity for anybody.

Nonetheless, to hold up Bolivia as an example to show how capitalism doesn't work seems pretty weak to me.

harry eagar wrote: "American capitalism has been a system for using political and economic power to rob the poor to feed the rich."

What exactly did the poor have that the rich robbed (or continue to rob)? Treasure chests full of gold? I thought the definition of "poor" was having not much that could be stolen.

Harry Eagar said...

Land warrants. Better than gold for an exapnsionist American.

They wuz robbed.

Bret said...

You mean in the 1800s? Can you find a somewhat more modern example?

Harry Eagar said...

I sure can, but my point was that it's been that way since the very first step.

Your argument about the beauties of capitalism reminds me of a Lenny Bruce routine about white racists.

I cannot recall the exact words, but the white man is being given a choice of one of women to bed: Kate Smith or Lena Horne.

Replace with Bolivia and Sweden.

Peter Burnet said...

Congrats, Harry, that wins this year's award for the most opaque, inscrutable comment in the blogosphere.

All that practice has paid off.

Harry Eagar said...

'one of two women'


Howard said... point was that it's been that way since the very first step.

Yes, unequal economic power is somewhat of a reflection of unequal social status and political power. That condition predates any capitalist or pre-capitalist society. You seem to willfully hold a blind spot to that idea.

Evolution of ideas and institutions supporting liberty and equal treatment under law lead to the development freer more prosperous societies.

Bret said...

harry eagar wrote in an award winning comment: "...but my point was that it's been that way since the very first step."

I'm having a lot of trouble finding the connection between the unfair use of land warrants 150 years ago and the free market economic system of capitalism today for several reasons:

1. The economic system is only one leg of the table supporting human civilization. The other two legs are the political and cultural legs. Unfortunately, in the real world, political systems are very susceptible to corruption and unfairness. The land warrant thing was a political intrusion upon the economic system and therefore doesn't taint capitalism by itself.

2. Who exactly was the land stolen from? I'm assuming you're referring to the various land warrants for railroads and other industries. Nobody (other than maybe the Indians) was on that land before that, were they?

3. I question whether or not the concept of lack of land is vaguely responsible for anybody poor today. My ancestors arrived near the beginning of last century with nothing but the clothes they were wearing, not speaking the language, were part of a non-privileged group (jewish), and were not given any land, yet they all did quite well. The concept of the rich stealing from the poor goes so against the experience of my ancestors that I'm strongly convinced you've got that wrong. They were all able to find plenty of opportunity and the rich didn't steal from them.

Harry Eagar said...

This is what happens when ideology substitutes for knowledge. Clearly, you guys have never heard of the great capitalist debate that the country started with -- 220 years ago, not 150.

The states, with no money, paid soldier bonuses with land warrants to be redeemed in the land west of the Appalachians -- that's what the Western Reserve was reserved for.

However, the veterans could not engross their lands, so most of them sold their warrants for a couple of worthless continentals.

It was a pure capitalist market operation -- speculators with money (rich) taking advantage of cashless subsistence farmers (poor).

Along came Hamilton, who argued that in order to 'instill business confidence' (transfer assets from the lowly to the mighty), the new nation had to redeem all the soldier certificates from the holders in due course -- those summer soldiers and sunshine patriots I referred to.

Few or none of the men who got the land had endured Valley Forge.

So the United States started out, as I said, in a naked market operation that transferred millions of acres from the men who had earned it, by blood, to men who had done nothing, the bloodsuckers.

Yes, there could be much said about railroad subsidies later on, but the point was, the United States began with a naked capitalist operation designed to rob the poor of assets valued, even then, in millions, to the advantage of the already rich.

The contribution of the already rich to enhancing the value of those wild lands (by transferring sovereignty from the king to the people) was nil.

Explain to me why I am supposed to admire a system that enriches the rich for doing nothing and steps on the poor for serving the society.

You know, this isn't secret history. You have to work a bit to swot it up, but it's there. Hacks like Amity Shlaes and con artists like Milton Friedman can sell their snake oil because they can be confident that almost no one knows economic history.

It's my job to know it and, like Dr. Jowett, I know it.

aog said...

Hernando De Soto develops your point (1) in his book, pointing out that much of what we view as modern capitalism is relatively recent, even in the USA, and developed (ala Hayek) incrementally over the last couple of centuries.

Bret said...

harry eagar wrote: "So the United States started out, as I said, in a naked market operation that transferred millions of acres from the men who had earned it, by blood, to men who had done nothing, the bloodsuckers."

That was a political operation, not a free market operation. It wasn't the first time a government screwed some of its constituents and it won't be the last. But it has nothing to do with whether or not the economic system was socialist, capitalist, or something more primitive.

Harry Eagar said...

Are you saying it wasn't a pure market operation?

Or that you approve of the land intended for the vets going to speculators?

Everytime I point out the despicable results of market operations, you say, 'that's not capitalism.'

Of course it's capitalism.

You just don't like having it pointed out.

Harry Eagar said...

I have not read de Soto, but Im skeptical. I know of only one innovation in capitalism in the past 600 years.

For example, at the time the American capitalists were robbing the vets, there was already a 300-year-old example of a different way to go about it. One full of republican virtue, too.

The U.S. could have copied the example of the Venetian Republic's redemption of its montes di pieta (mountains of piety).

These were bonds exchanged for forced capital levies to pay for war against the Turks.

No one expected them to be redeemed, just like the soldier warrants, but about a century later la Serenissima decided to do so.

Few of the bonds had devolved to heirs of those mulcted originally, but some had.

When the Republic bought the bonds back, it paid 2 (par 100) to speculators, 8 to holders who had held the bonds continuously.

That's the sort of thing you can do if you do not treat property claims as superior to any and every other variety of social good.

The story is told in F.C. Lane's 'Venice: a Maritime Republic.'

aog said...

Mr. Eager;

It's very hard to argue with since no one else here seems to grasp what you mean by "capitalism". Your example seems to be that of the sort of government intervention in markets you favor, i.e. changing laws to achieve political goals. What is "instill business confidence" except Eager-style market intervention? The entire operation was, start to finish, the government.

If in your view "capitalism" is the action of private markets and any action of government intervening in markets, what isn't capitalism?

Bret said...


As I mentioned above, I think Harry's definition of capitalism includes any transaction that does not result in sufficient redistribution.


If the government is involved, it's not capitalism. The government's incentives are inherently antithetical to free-markets and capitalism. The fact that the government paid the soldiers with worthless land is therefore not an indictment of capitalism.

Peter Burnet said...


You are on a roll. Your problem seems to be that you are mightily offended that people sold their land warrants because they either couldn't or didn't want to access the land. I could understand it if you were complaining they had been sold land fraudulently, but they sold it fraudulently? Why do I have this feeling that if the vets had been paid in money, you would be railing at the perfidy of capitalism for letting bloodthirsty tavern-owners take it in exchange for beer?

Why don't you just come clean and admit you think people are too stupid to be allowed to manage their own wealth?

Howard said...


No notion about the powers of a free market system as a discovery process, as an information generator, coordinator of economic activity of millions even billions of people and as a wealth generator? Miraculous! You attribute ugly aspects of the past that were as much political as anything solely to the economic system. Yes, perhaps if I were so clueless, I would feel the same...

Harry Eagar said...

Peter, you're the lawyer. Didn't you notice I said they could not engross their warrants?

It doesn't take a very conspiratorial theorist to guess why that was. The distinction between economic and political seldom illustrates a genuine difference. Certainly not in any of the examples I've used.

I don't have any difficulty defining capitalism: It is the political/economic system that elevates the rights of property superior to any and all other rights.

In the currently fashionable approach, it grants complete freedom of decision to the market, no matter how disgusting, absurd or harmful that turns out to be.

Nobody really believes that. They don't allocate their 401-k money by throwing darts at a board. But they advocate policies on the pretension that that's how things are done.

Here's an metaphor that might resonate with some: Imagining that markets perfectly allocate resources is like expecting that when a hurricane sweeps through a junkyard, a shiny 747 will be left behind.

If the social goal was to get vets on the Western Reserve, then it failed. We can argue why or how it failed. We cannot pretend it didn't fail.

Peter Burnet said...

Harry, I defend traditional marriage too, but surely I would be a fool if I said I do so because it makes everybody everywhere superhappy. Your leftist (and also Catholic)critique assumes there is something called a "fair" price for things and a "perfect" allocation of resources that floats out there independently of what individuals actually do. There isn't, there's only beuraucrats with their own agendas. In the dying days of the Soviet Union, I once had a huge and quite good hotel breakfast for thirteen cents. Of course, I thought that was perfectly fair and for all I know, so did the hotel, but the hungry folks outside willing to pay sixteen barred by the thugs at the door didn't.

Let's take an example of your best case--an elderly widow who sells her home far below market because she is so isolated she hasn't a clue what it is worth. That's unjust and one hopes the civil law can afford her some relief, but you seem to think it calls for the establishment of a Home Sale Review and Approval Board.

Your argument isn't really with the market, it's with human scumminess, which you wrongly assume only manifests itself in the private sphere and never with the benevolent state.

Peter Burnet said...

Harry, something else that makes these arguments with you a little like trying to squeeze mercury. You are on record over at the DD as being a firm anti-platonist and anti-idealist, especially about anything to do with religion or morality. Yet your posts on the evils of capitalism are replete with abstract notions like fairness and perfect allocation, etc. that seem not to be defined by actual human behaviour or even by what folks say they want at the moment. You seem to hold that there is something called economic justice that transcends statistical prosperity that we should be striving for collectively. I think the Church would be proud of you.

aog said...

— Imagining that markets perfectly allocate resources is like expecting that when a hurricane sweeps through a junkyard, a shiny 747 will be left behind. —

No, it's like imagining that a productive, stable ecosystem can exist without a gardener.

I must say, I think Mr. Burnet is correct, as your analogy here is remarkably similar to creationism, i.e. the implausibility of "random" events creating organization like, say, humans evolving from one celled creatures.

Harry Eagar said...

It isn't remarkably similar to creationism, it is creationism.

But recall, evolution does not produce an efficient system, just one that works. It might be made to work better.

Not by us, we don't live long enough, but in principle it might.

Peter is ready to accept whatever price the market sets, including -- if the market chooses not to deliver -- an infinite price for an unavailable but (it might be) lifesaving drug.

Anybody who thinks markets efficiently allocate resources hasn't studied the pharmaceutical business, especially vaccines.

From time to time, in my column I hand out the Red Cellophane Award for people who do something beneficial even though capital markets do not reward them.

The name goes back almost 40 years ago. In those days, pathologists used a red-filter microscope, which cost $5K.

A physician where I lived thought he could get the same result with a piece of red cellophane.

The cardboard holders cost about 50 cents and wrecked the market for $5K red light microscopes. uut they didn't make any money for him.

A pure market failure, from the viewpoint of the Chicago Schoolboys.

It would have been better for him to have kept quiet and invested in Bausch & Lomb, and capitalism provided him no incentive whatever not to.

This has nothing to do with fair prices but with humane judgment. If you want to get vets on the land in the Western Reserve, making the warrants fungible turns out not to be the way to do it.

What's so hard to understand about that?

aog said...

I don't see the market failure. Because it was a capitalist system, the red cellophane guy

1) Had red cellophane masks available.
2) Could free disseminate the information
3) Nobody was forced to buy the red-light microscopes by government fiat.

So, the market worked. In a government interventionist scenario, he would have been prevented from making the improvement to avoid damaging the red light microscope manufacturers and the workers who made them. It is what you call the hearlessness and uncaring of capitalism that enabled that guy to destroy those jobs. How can you hold him up as a hero?

Harry Eagar said...

I agree that the reallocation of resources was advantageous, but there was no market incentive to do it.

If the innovation had cut the cost to $2,500, the market would still have worked.

When you go to zero, the market becomes irrelevant, and the inventor must have been inspired by something other than capitalism.

A friend of mine who reads science fiction calls this situations a 'Selden crise,' and his prime example is the insolvency of Long-term Capital Management.

There are enough of them to raise questions about the blind faith in markets that is the religion of Chicago.

aog said...

You are making a common but fundamental error, that advocates of market economies consider monetary rewards the only valid type of reward. It is, in fact, exactly the opposite — one of the primary and best features of capitalism is the ability of an individual to make his own value judgments. You see this, by noting that property is primary in capitalism, but you don't understand the implications, one big one being that money is just a mechanism to reduce property transaction costs, it's not fundamental.

Peter Burnet said...

What's so hard to understand about that?

Nothing, Harry. What is hard to understand is why you are attacking capitalism for failing to deliver what it never promised to deliver and calling for it to be fettered from what it does deliver. Adam Smith simply said that free markets are the best way to deliver prosperity and, contra leftism, surely history has shown that prosperity will be spread widely. But he never said it would be spread evenly across the board or that the market would delver justice, morality, compassion, civility, order, etc. In fact, he actually said it wouldn't and that the material profit motive was not enough to give society resiliency and strength by itself. That's why the Catholic Church has always been leery of giving it free rein. We all understand the fatal lure of Mammon.

I think you fight is with a certain strain of libertarian thinking that sees, or talks as if it sees, the "invisible hand" extending beyond the economic sphere. You know, the kind of folks who argue that if government completely withdrew from the economy, husbands would be more faithful, children more obedient, artists more creative and the poor would all shed their pathologies and dedicate their lives to becoming Wal-Mart mangers. It's a silly argument, but no reason to respond to it by making us all poorer through statist economies, which don't deliver any of those things either but do deliver things much worse.

And, BTW, can we at least stop talking about capitalism as if it were a classic "ism', i.e. the top down imposition of an economic and social theory. You don't "implement" capitalism, you just stop telling people what they can and can't do with their property. And besides, we are so far away from classic 19th century limited government today that these debates, fun as they are, are almost surreal.

Harry, have you seen "There Will be Blood" yet? Talk about a movie for you. It features an ongoing battle between a thoroughly dislikeable, corrupted Holy Roller and a thouroughly, dislikable secular capitalist who eventually destroy each other dramatically. It's a bit of a downer, and I remember thinking that if you had directed it, it would end with a New Deal bureaucrat played by John Wayne riding in at the last minute to save everybody.

Harry Eagar said...

Never even heard of that movie.

Yes, my argument is with a kind of libertarian captialism that asserts that markets are the answer to everything. You go to war against the kind of capitalism you've got.

The Glass-Steagall Act was a good idea because it did control some of the worst excesses of Mammon, while allowing the Mammonists to do very well indeed.

Is everybody happy that it's gone and now we get full-blown Mammonism? The New Deal really did rescue capitalism from itself, but the capitalists were too stupid to appreciate it.

Bret said...

harry eagar wrote: "It isn't remarkably similar to creationism, it is creationism."

Harry, you've finally explained something I've been wondering about for a long time. Before now, I've never understood why those that are the most fervent believers of evolution in ecosystems were the most intense collectivists. It seemed inconsistent.

But, as you explained, it's not inconsistent. Yes, evolution explains how the species were created, but if only there was a Creator, it would've been oh so much better with the lion being a vegan and laying down with the lamb, etc. So in all cases, a central authority would be or is always better, one just doesn't happen to be available for the ecosystem. What could be more consistent than that?

Thanks for the explanation.

Peter Burnet said...


Yes, surely after all this time it is clear that the main thesis of our resident secularists is not that He does not exist, but that He blew it.

Harry Eagar said...

Since biological evolution is not telelogical, we cannot define 'better.'

No doubt the beetles think evolution is developing just fine, the pterodactyls not so much.

We humans certainly can and have redirected evolution to our own ends, by, for example, making the common hen the most numerous of the birds. That's something that never would have happened if we had let well enough alone.

Economic systems, on the other hand, are telelogical. We can readily define goals, and it makes a difference what you want.

If your only criterion is maximum expansion, there are ways to go about that. If your criterion takes account of Harry Hopkins' observation that people don't eat in the long run, they eat everyday, then your method will differ.

It is an article of faith -- not analysis -- here that any concession toward Hopkinsism means a lessening of gross growth, and therefore is bad.

This may not be true, though. It is true that the periods of fastest American expansion were not periods of free market capitalism.

Economic historians all know that, but the news hasn't filtered through to Chicago yet.

Susan's Husband said...

"We can readily define goals"

Can we? Even among us, I don't see that happening.

Moreover, there is the level of abstraction problem, in that the goals can be very different types of things, e.g. "a right to private property" vs. "a minimum wage of at least $7.35 / hour". Frankly, I doubt we could even agree on the correct level of abstraction, much less on specific goals at that level.

Harry Eagar said...

How about, everybody eats?

That's doable. Been done, in fact.

Not, notably, in free market economies, but it works well in mixed economies.

Bret said...


In which modern free-market economies with...
o Political stability
o Rule of law (equality before the law)
o Strong and freely transferable property rights
o Reasonably low taxation of people's economic activities
o Reasonably little regulation of people's economic activities
o Reasonably little corruption

...have a significant number of people not eaten?

Harry Eagar said...

The one you live in.

Sen. Billy Spong showed that conclusively in his tour of eastern North Carolina in 1966.

I could go on, but that one was right under everybody's noses.

Bret said...

I hadn't heard of billy spong. Do you have a link so I could learn more about it?

Harry Eagar said...

Sorry, that was pre-Internet.

Spong was a one-term senator from Virginia. One big reason he was a one-termer was that nobody wanted to hear that Americans were starving.

But here's another example, more accessible by one-clicks: South Africa under white rule. It fulfilled most of your hedges, or all of them.

Your list tends to confirm my view that politics and economic systems are not really distinguishable.

White-ruled South Africa used to brag about its free-market policies.

Bret said...

harry eagar wrote: "But here's another example, more accessible by one-clicks: South Africa under white rule. It fulfilled most of your hedges, or all of them."

So, everybody had equality before the law (hedge #2) in white-ruled South Africa? That's news to me.

Susan's Husband said...

The former South African government used to brag about its free markets the way the GDR bragged about being democratic. It was, in fact, a highly interventionist / socialist government, to the left of most modern European states.

Harry Eagar said...

By bret's standard 2, the US wasn't capitalist until after 1965, even theoretically.

As a practical matter, its status is questionable in 2008, since a sizable fraction of the labor force -- our 10 million or so wetbacks -- enjoys equal standing in law but is disadvantaged by it.

My Bircher uncles spent a lot of effort expanding their business to S. Africa in the '60s. They were never shy about condemning socialism in the United States, but I never heard a word out of them about socialism in S. Africa.

As businessmen and racists, they considered it a capitalism paradise, and they accepted warmly the government's description of itself as the continent's bastion against socialism.

Peter Burnet said...

Hey, everybody, never mind what Smith, Hayek, Oakeshott, Friedman, Buckley, Reagan, Thatcher, et. al. said about what capitalism is. The reality was defined by Harry's Bircher uncles.

Sort of like looking to Beria to explain FDR, no Harry?

Harry Eagar said...

No, they were putting their money where their mouth was.

If the South Africans thought they were capitalists (deBeers is, of course, history's most wonderful example of free market capitalism in action), and outsiders thought they were, why would anybody doubt it?

I am not a big admirer of academic economists, having had to deal with them professionally for almost 40 years. Academic economic historians, on the other hand, have many valuable things to say.

Howard said...

If the South Africans thought they were capitalists (deBeers is, of course, history's most wonderful example of free market capitalism in action), and outsiders thought they were, why would anybody doubt it?

Were you a wiseguy as a child? That's garbage as a piece of logic.

I am not a big admirer of academic economists, having had to deal with them professionally for almost 40 years. Academic economic historians, on the other hand, have many valuable things to say.

If you want a sense of the wrongheaded methodological detour of academic economist see this, there is a difference. If you're willing to read economic historians you might disagree with see this.

Harry Eagar said...

Seems to me I already gave an example of disgusting capitalism in action -- the veteran bonuses.

You guys had, first of all, no knowledge of it; and, second, couldn't see anything wrong with it.

I don't think I need any instruction from you guys in economic history. You've never seen me refer to Josephson, because I know what's wrong with him.

The idea that ramshackle housing was put up by the 'homeless' is too funny. If you knew anything about the history of builders, you would know that it was one of the closest things to free-market capitalism going.

If you are ever in Manhattan, you must go see the East Side Tenement Museum.

In one sense, it will reinforce your views, because as you progress in time through tenements, you will see improvements.

On the other hand, the improvements were driven both by increasing wealth and by state power (light regulations, etc.) that was fiercely resisted by working capitalists (builders).

As for academic economists, it wasn't a twelvemonth ago that they were wringing their hands over the threat of deflation. Suckers.