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Free market capitalism vs socialism a simple analogy


free market capitalism vs socialism a simple analogy

1. Democrats vs. · 2. Political infographic featuring cows · 3. Liberals vs. · 4. Capitalism, Socialism and Communism comparison infographic · 5. The first essay, on defining capitalism and socialism, and non-rivalrous goods) will, on the free market, be underproduced. Finance is of course a basic part of capitalism, providing it with dynamism, manage economic relations more, leaving less to “free” markets.

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Socialism and Free-Market Capitalism - The Human Prosperity Project

ENTREPRENEURSHIP AND THE THEORY OF FREE MARKET ENVIRONMENTALISM

Introduction.

Free market environmentalism(1) is a new discipline which began to emerge incipiently at the boks tv online of the last decade and which today, little more than ten years later, has reached a remarkable level of development.(2)

In the final analysis, what has been developed by the theorists of free market environmentalism is a theory of the intimate relations which exist between economics and environmentalism. These relations, moreover, are obvious, above all taking into account that the most modern definition of economic science is the theoretical study of the dynamic processes of interaction which take place between human beings (3), while environmentalism could be defined as “the science which studies the relations of human beings with each other and with their environment.”(4)

It becomes evident, therefore, that the conception of the two disciplines is absolutely parallel, as are the subjects they study, the subject of economics being based on the analysis of the market understood as a decentralized spontaneous order and that of environmentalism on the study and monitoring of ecosystems conceived, like the market, as evolutionary decentralized processes in which the different species undergo spontaneous adaptations and modifications in accordance with a multitude of specific circumstances of time and place which nobody is capable of fully predicting or knowing.(5)

The most significant discovery of the free market environmentalism theorists is that there exist spontaneous processes impelled by the creative force of human entrepreneurship which assist the economic and social development of the human race to efficiently and respectfully coordinate with and adjust to the rest of the species and elements of the natural environment. It has been discovered, in short, that the most important aggressions against the natural environment, the problems of pollution, the threat of the extinction of many species, the deterioration of natural resources and of the environment in general, far from being an inevitable result of economic development, the operation of the market and the spontaneous system of social organization based on free enterprise, appear when the State intervenes systematically, institutionally and coercively and, to a greater or lesser extent, impedes the spontaneous process of coordination and adjustment which arises from the market and from the free practice of entrepreneurship in all the areas in which human beings relate to each other and to other species and natural resources.

Coercion, property rights and the environment.

It should be emphasized that the problems of environmental deterioration constitute, from this point of view, one of the most typical examples of the perverse effects of the systematic practice of institutional coercion or aggression against human action or entrepreneurship.(6) The non-intervened and uncoerced practice of entrepreneurship spontaneously gives rise to the emergence of a series of institutions, understood as established schemes of behaviour which emerge from the entrepreneurial process itself and, at the same time, make it possible.(7) Among these social institutions which, like ecosystems, emerge and develop in an evolutionary, decentralized and adaptive way, perhaps one of the most important, together with language and money, is that which is constituted by private law in general and, specifically, by contracts and property rights. In fact, few human actions would be carried out if the creative result thereof, instead of being appropriated by the actors themselves, were coercively expropriated by a third party (i.e., by someone whose action was not in accordance with the law) or if other persons could be attacked or harmed by such actions, as happens when the cost of opportunity incurred on acting is not duly taken into account. It is, therefore, essential, and this constitutes one of the fundamental bases of the institutional network of the free enterprise system, to establish the necessary property rights, with regard to all those items which may in some sense, under each historical circumstance, become scarce in relation to the attainment of any end. This property rights, firstly, allow the external costs incurred on acting to be internalized (8) and, secondly, guarantee to each entrepreneurial actor the attainment, within the framework of the rules established by property law, of the corresponding ends discovered, created and achieved entrepreneurially.(9)

It is easy to realise, looking at the situation of the natural environment which surrounds us, that it is precisely in the areas where the definition and/or defence of the corresponding property rights and, therefore, the free practice of entrepreneurship subject to the traditional principles of private law, are prevented where the tragic effects of deterioration and expoliation of the environment, so often criticized by nature lovers, occur most virulently. In fact, if we had to give a theoretical definition of deteriorated or threatened natural environment, we would say that it is a combination of the following two types of species bmo harris wire transfer routing number natural resources: in the first place, those resources which were extremely abundant up to know in relative terms but, due to circumstances, are now becoming scarce, to a greater or lesser extent, from the point of view of certain specific actions. They are, for example, the resources which are on the border between what we could call “free goods” and the resources which are scarce in relative terms with regard to the satisfaction of human needs and which, obligatorily, must be allocated in economic terms. The fact is that, inasmuch as the definition of property rights in relation to these “border resources” is prevented, as has occurred frequently with regard to traditionally free resources which have become scarce (as happened, for example, with the prairies of the American West in the 19th century), there is a liberty national bank des moines effect of over-exploitation or deterioration, which Garrett Hardin describes with the now generally-accepted expression of “tragedy of the commons”.(10) The second type of resources in constituted by all those species and resources which are, in fact, already scarce, but to which the State has, for certain reasons, prevented the extension of private contractual law and property rights and, in consequence, they are considered as “public property” from a legal and administrative point of view.

The origin of these two types of resources, which inexorably cause the over?exploitation of the natural environment, may be found either in the granting of a privilege by the State to certain private entities, enabling them to violate the property rights of others with impunity (such is the case of many industrial polluters who are protected from the consequences of their aggression in the interests of an incorrectly understood defence of industrial progress), or in the development of an erroneous doctrine of “public goods” (11) with regard to certain scarce resources, which is used to justify the brake on their spontaneous privatization, blocking the entrepreneurial spirit necessary to use them appropriately and thus making it impossible to discover and introduce the technological innovations necessary to correctly define and defend the corresponding property rights.

Environmentalism and the impossibility of economic calculation under socialism.

In this way the force of entrepreneurship is destroyed and its impetus and creative spirit is perversely diverted. Moreover, it is clear that environmental problems constitute a special case which illustrates the theory of the impossibility of socialist economic calculation to perfection, socialism being defined, as we have seen, as a coercive system which, to a greater or lesser extent, systematically impedes the free practice of entrepreneurship. In fact, the existence of areas reserved as public or communal property prevents, in the first place, the economic calculation necessary to assign resources with full knowledge of the facts.(12) We should understand economic calculation to be any estimate of on the value of different courses of action. Thus, when the free market is prevented from operating and property rights are not assigned, the information necessary to act rationally cannot be created and not even the most radical environmentalists can be sure that the specific measures they advocate do not provoke even greater environmental damage than that which they are intended to avoid. How can we, for example, be certain that the obligatory establishment of SO2 purifiers for factories which use coal will not produce secondary and indirect effects which have a higher environmental cost? It may be the case that the cost of installing the purifiers, in kay jewelers comenity bank number of economic and environmental resources, is much higher than that of other alternatives which could be discovered entrepreneurially if entrepreneurship was allowed to experiment in an environment of well-defined and protected property rights (for example, instead of installing purifiers, coal with a lower sulphide content could be used).

In the second place, the extension of the legal concept of public property to natural resources does not only prevent, as we have seen, rational economic calculation, but also perversely diverts the practice of entrepreneurship, as it modifies in general the incentives which stimulate entrepreneurs. It is clear that, if the air is declared public property, the definition of property rights over it is prevented and anyone can pollute it as much as they like. Thus the incentive for all entrepreneurs to pollute it emerges, as those with a more environmentalist conscience who decide to install a purifier will increase their costs and will not be able to compete with others who merely dirty the air, meaning that the former will be expelled from their business. Therefore, the phenomenon of the “tragedy of the commons”, which threatens all the areas in which the practice of entrepreneurship is not allowed, where property rights are not appropriately defined or defended or where the free operation of the market is coercively intervened, is again explained to perfection.

The fact is that, in the case of any area declared to be publicly-owned, each actor internalizes all the profits derived from its use, without assuming or being responsible for all the costs incurred, which are not even seen or discovered and which are diluted over all the present and future potential users, meaning that there will always be an incentive to damage or over-exploit. As the saying goes, “what belongs to everybody belongs to nobody” and, effectively, for example, if the poacher does not kill the buffalo or the elephant today to remove its skin or its tusk, he knows that another poacher will very probably do so tomorrow. The inexorable result of public ownership is the disappearance of the elephant, the buffalo, the whale or the publicly-owned natural resource in question.

Moreover, it is of little use to try to uphold the publicly-owned or communal nature of the resource without defining private property rights over it, while establishing the conditions governing its use through State regulations. This is due to the fact that the operation of political systems is highly inefficient, as the theoretical analysis of the School walking the west highland way in 4 days Public Choice has rightly demonstrated in detail.

Governmental decisions substitute the free network of voluntary contracts in which all the parties gain (because if not, they would not be made) by the political struggle between interest groups, in which some gain and some lose (“zero sum games”). Public management is composed by an incomprehensible legislative network or tangle which makes the management of resources tremendously inefficient, not only because it is the result of a political consensus, but also because of its arbitrary nature and, above all, due to the position of ineradicable ignorance in which, in the final analysis, the legislator or bureaucrat is always situated with regard to individual actors. In fact, the information relative to any phenomenon of society, in particular to natural species and resources, is information which is exclusive, dispersed, subjective and difficult to articulate and which varies at each specific coordinate of time and place and can only be known, that is to say, discovered and interpreted, by each individual entrepreneur in the context of his action. Therefore, not only is it impossible to transfer such information to the controlling governmental organ, but, moreover, the coercive intervention of the Administration prevents the practice of entrepreneurship, thus blocking the emergence of the information necessary to allocate and manage natural resources appropriately. How can we know, for example, what type and composition of babies’ diapers are the most suitable from an environmentalist viewpoint? Given that the collection and treatment of garbage is a government responsibility financed through taxes, there is no way in which the consumers can internalize the costs of processing the different types of rubbish, meaning that diaper manufacturers do not have any incentive to consider the environmental aspects of their product. The same thing occurs in all the fields where the State intervenes, although in most cases we do not realize it.(13)
The entrepreneurial solution to environmental problems.

How, then, could the environmental problems which threaten us today be solved? One of the most notable virtues of the free market environmentalist theorists is that they reiteratedly insist that the only real and definitive solutions which may be provided to the environmental problems are institutional solutions. Or, in other words, that what is really important is to put the entrepreneurial processes tending to solve the problems into operation. This means that no specific technical recipes can be given, as they will have to be discovered, taking into account the specific circumstances of time and place of each environmental problem, by the force of entrepreneurship, within a context of free enterprise and the correct definition and defence of property rights.(14) The fact is that only entrepreneurial creativity will be able to find solutions to introduce the technological innovations necessary to make the definition and defence of property rights possible in areas where this has not been possible so far. Thus, for example, perhaps the mention of private roads will surprise many people, but it is a perfectly viable possibility from technical point of view and would mean an enormous increase not only in the safety of the roads, but also in their atmospheric cleanliness. And, in the same way, the problems posed by the different natural resources may be systematically analyzed, ranging from those related to the natural parks to those posed by water, air, garbage, pollution and species threatened by extinction. The dynamic theory of processes based on entrepreneurship may be applied to all these areas and indications given of the possible solutions which, by analogy to what has already been created entrepreneurially in other similar areas, or because they have already begun to be timidly conceived, the entrepreneurs would be able to develop and implement to solve effectively the problems which threaten us today.(15)

Therefore, the practical strategy to defend the natural environment is based, above all, on the privatization of public property and a redefinition of the role of the State, which should devote all its efforts to fomenting and favouring the definition and defence of property rights over both publicly-owned scarce resources and the “border resources” which have been free so far, but which now are beginning to become scarce (16). Making possible the definition of property rights, establishing an effective legal system and defending appropriately the correctly defined property rights are the most important and urgent measures which the government should take if it wishes to conserve and improve the natural environment.(17) In short, the new theory of free market environmentalism has shown that, theoretically, public ownership of the natural environment is unjustified. The problems which may supposedly justify its existence create an extremely strong incentive for their solution through entrepreneurial creativity. In this dynamic perspective, therefore, whenever the circumstances which give rise to so-called communal property arise, the spontaneous forces which tend to eliminate them come into operation, meaning that this kind of public property as a whole also becomes empty of content.(18)

I am writing the last lines of this article in Formentor, one of the most beautiful ecosystems of the Spanish geography. Observing the reality which surrounds me, the over-exploitation of the bay by the boats, forest fires which place the existence of millions of pine trees in danger, the crowded beaches and water which, although they are still clean, are increasingly threatened, I realize, when I apply the free market environmentalism theory, that this privileged natural environment of Mallorca can only be conserved for future generations, free from abuses and increasingly cared-for and pure, if its exploitation in accordance with the typical criteria of the free market is permitted and all the natural resources involved are completely privatized, in such a way that they become property

rights which are well defined and defended by the public organisms. And we are sure that all well-intentioned nature lovers who read the present article with an open mind will reach the same conclusion as I have reached in agreement with the free market environmentalism theorists.

Formentor, 8 August 1994


Jesús Huerta de Soto
Professor of Political Economy
King Juan Carlos University of Madrid, Spain

“No part of this work may be reprinted or reproduced or utilized in any form
or by any electronic, mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any information
storage or retrieval system, without citing the name of the author and the
source from which it has been taken.”

______________________________________

(1) Corresponds to the original title of the work on this subject by Anderson and Leal (Terry L. Anderson and Donald R. Leal, Free Market Environmentalism, Pacific Research Institute for Public Policy, San Francisco 1991). These authors consider free market environmentalism as a “new sociopolitical movement which advocates the defence of nature” through the market and free enterprise .

(2) In fact, as Richard Stroup rightly points out, the intellectual movement in favour of free market environmentalism starts to be conceived in the second half of the 1970’s by a group of young nature-loving economists concerned about the environment, grouped around the University of Montana, the University of California in Los Angeles (U.C.L.A.) and the Public Choice Center. This group of economists gradually gave rise to a new discipline which, under the name of “New Natural Resource Economics” is based on three theoretical bodies which are different but complementary: first, the theory of the Austrian School of Economics based on the study of the processes of social interaction which result from the creative force of entrepreneurship; second, the School of Public Choice, which makes theoretical analyses of the incentives, conditioning factors and results of the combined action of politicians, bureaucrats and voters; and third, the evolution, development and basis of the economic theory of property rights. See Richard Stroup’s work “Natural Resource Scarcity and the Economics of Hope”, published in Economics and the Environment: A Reconciliation, edited by Walter E. Block, The Fraser Institute, Canada 990, page 132. These ideas reached Europe at the now historic seminar organized by Liberty Fund in Aix-en-Provence in September 1985, which was attended by, apart from professors John Baden and Richard Stroup of the University of Montana, the author of this article and other prestigious European economists and nature lovers. One of the fruits of this seminar was my work in Spain on the subject, published in 1986 under the title “Derechos de propiedad y gestión privada de los recursos de la naturaleza” (“Property rights and private management of natural resources”), Cuadernos de Pensamiento Liberal, No. 2, Unión Editorial, Madrid 1986, pages 13-30, republished in Volume III of my Lecturas de Economía Política, Unión Editorial, Madrid 1987, pages 25-43.

(3) See my Socialismo, Cálculo Económico y Función Empresarial, Unión Editorial, Madrid, pages 45, 54 and, above all, 84-85.

(4) First definition of the term “ecología” in the Diccionario of the Royal Academy, Espasa Calpe, Madrid, 1992 edition, page 555.

(5) What is more, walmart eye center mexico mo Walter Block correctly states, it is not that there is a simple analogy between the market and the ecosystems, but that the laws of evolution and interaction in the two processes are very similar and, therefore, it could be said that environmentalism is simply a part of economic science (giving rise to the term free market environmentalism), or, if one prefers, that economics itself would be a discipline included in another broader discipline, environmentalism. See Walter Block’s article “Environmental Problems, Private Rights Solutions”, in Economics and the Environment: A Reconciliation, op. cit. page 289.

(6) Elsewhere I have defended the thesis that socialism should be defined as “any system of institutional aggression against the free practice of entrepreneurship” and have tried to demonstrate that such an aggression has the effect of preventing the creation and discovery of the practical information necessary to adjust and coordinate the behaviour of human beings, thus making the development of civilisation impossible. When, in any social area, specifically in those related to the natural environment, freedom of human action is prevented, there is the paradoxical result that human beings are unable to realize that they are acting inefficiently and uncoordinatedly, meaning that numerous social adjustments are not discovered and the most flagrant cases of environmental aggression are neither discovered nor remedied. In this respect, see my Socialismo, Cálculo Económico y Función Empresarial, op. cit., Chapters II and III, especially pages 117-118.

(7) The theory of the evolutionary development of institutions originates from Carl Menger, Untersuchungen über die Methode der Socialwissenschaften und der Polistichen ökonomie insbesondere, Duncker Humblot, Leipzig 1883, page 182, and my Socialism, Cálculo Económico y Función Empresarial, op. cit., pages 68-73.

(8) See, especially, Ludwig von Mises’ judicious pioneer considerations in this respect in “The Limits of Property Rights and the Problem of External Costs and External Economies”, heading 6 of chapter XXIII of Human Action: A Treatise on Economics, Henry Regnery, Chicago, 3rd Edition, 1966, (the 1st edition was published in 1949), pages 614-663.

(9) With regard to the basic principles of property law which are necessary for a free enterprise economy to function and their specific application to the case of environmental problems, see Murray N. Rothbard’s thought-provoking article entitled “Law, Property Rights and Air Pollution”, included in Economics and the Environment: A Reconciliation, Walter Block (editor), op. cit., pages 233-179. In this interesting article Rothbard defends and develops the application of the traditional principles of property law, which emerged through evolution and entrepreneurship in the way explained in the main text, to the new circumstances which unpredictably arise, refining their historical impurities and logical errors and proposing their application to the new allied savings bank contact number which emerge as a result of the evolution of civilisation. In this way, Rothbard explains the great advantages of, for example, the privatization of roads, air corridors, the different uses of the sea, air and subsoil, also indicating, with a great deal of ingenuity and imagination, how this could and should be put into practice technically and legally.

(10) Although the literal expression was created by Garrett Hardin, the first analysis of the “tragedy of the commons” was made by Mises in 1940 in his “Die Grenzen des Sondereigentums und das Problem der external costs und external economies”, heading VI of Chapter 10 of Part IV of Nationalökonomie:Theorie des Handelns und Wirtschaftens, Editions Union, Geneva 1940, 2nd edition Philosophia Verlag, Munich 1980, pages 599-605. Garrett Hardin’s contribution, “The Tragedy of the Commons” was published almost 30 years later, Science, December 1968, republished on pages 16-30 of the book Managing the Commons, Garrett Hardin and John Baden (editors), Freeman & Co., San Francisco 1970. Hardin’s analysis offers little more than Mises’ and, moreover, reaches certain neo-Malthusian conclusions which we cannot share and which show that Hardin is a biologist rather than an economist. In particular, Hardin ignores the fact that having more children does imply a cost which is discounted a priori by the parents more or less explicitly. Moreover I have defended elsewhere that the increase in the population is a necessary condition chime direct deposit not early all economic and social development and that the problem of the current underdeveloped societies is derived, rather than from the population, from the coercive imposition of institutions and economic systems which do not permit the creative practice of entrepreneurial capacity or the coordinated development of free and efficient markets (socialism and interventionism). See my Socialismo, Cálculo Económico y Función Empresarial, op. cit., pages 80-83.

(11) As Mises rightly points out (Human Action, op. cit., page 917), the problem of public goods emerges from the existence of external positive effects with regard to the resources where there is a joint offer and no rivalry in their consumption and has, therefore, an intrinsic entity, completely different from the cases of external costs which arise whenever the definition and/or defence of property rights over natural resources is prevented, giving rise to the “tragedy of the commons”. It is, therefore, analytically erroneous to apply the concept of “public good” to the problem of the deterioration of the environment with which we are dealing. Incidentally, I have argued elsewhere that public goods as a whole tends to become empty of content in a non-intervened economy and that, therefore, the static analysis of its supposed existence cannot be used to justify the existence of the State. See Socialismo, Cálculo Económico y Función Empresarial, op. cit., pages 36-37.

(12) “It is true that where a considerable part of the costs incurred are external costs from the point of view of the acting individuals or firms, the economic calculation established by them is manifestly defective and their results deceptive. But this is not the outcome trico onyx premium beam wiper blade 22 inch alleged deficiencies inherent in the system of private ownership of the means of production. It is on the contrary a consequence of loopholes left in this system. It could be removed by a reform of the laws concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private ownership.” Ludwig von Mises, Human Action: A Treatise on Economics, op. cit., pages 657-658.

(13) Moreover, those who defend the theory of public property commit an irresolvable logical contradiction when they try to resolve the management thereof through the democratic political system. This is the case because they try to solve a problem of “external effects” by creating another similar problem which is much greater. In fact, given that the effort of obtaining information on political matters and acting and voting thereon on the basis of sound knowledge benefits the whole community, implying a high individual cost for each actor, a typical case of positive external effects is generated, which leads human beings to, in general, ignore the democratic processes, tending not to obtain adequate information or participate. How will the democrats resolve this contradiction inherent to their system? By justifying institutional coercion on the citizens so that they obtain the information necessary and vote in the democratic system? Would this not mean the death of the democratic system and the emergence of an iron dictatorship? It is evident, therefore, that the attempt to define and manage public property through political processes generates a much greater public good problem, which cannot be solved by political means.

(14) Effectively, according to Israel M. Kirzner, we cannot have today the knowledge which will only be created tomorrow by entrepreneurs acting in an appropriate institutional environment and trying to solve the problems and face the challenges related to the environment. But precisely what prevents us from knowing the specific solutions to be adopted (entrepreneurship) is what paradoxically allows us to feel secure and confident that the most appropriate solutions to the environmental problems will be adopted at any given moment. See Israel M. Kirzner, Discovery and the Capitalist Process, The University of Chicago Press, Chicago 1985, page 168.

(15) Second-best solutions, of a temporary and subsidiary nature, may also be considered for the areas in which the immediate privatization appears less viable and which, in general, are based on the creation of markets of permits or rights to pollute, capture certain species, etc. This system would be much more efficient than those currently employed, although it is true that it leaves a great weight on bureaucratic intervention to fix, for example, the total amount of pollution or fishing which can be carried out. In any case, it should be reiterated that second-best solutions must always be put into practice on a temporary and subsidiary basis, without losing sight of the fact that the fundamental objective must be to make the free practice of entrepreneurship possible and that the latter should creatively discover the technical innovations and solutions which are necessary to define and defend appropriately the corresponding property rights.

(16) It is disheartening that, up to now, the tendency in Spain has been the exact opposite of the tendency indicated by the conclusions of free market environmentalism. It is enough to remember the Water Act promulgated by the socialist government which eliminated the existing property rights over subsoil water. We hope that this tendency will change in the future, above all in the non-socialist local or regional Administrations which study the environmental problems less dogmatically. Thus, it would be very easy to start by privatizing numerous items of public property (zoos, natural parks, garbage collection services, etc.) and equally easy, in relative terms, to introduce second-best solutions in relation, for example, to the pollution rights of heating fuelled by coal and gas-oil in the buildings of the major Spanish cities, specifically Madrid. They are measures with a low political cost which could be taken quickly, the benefits of which would make it easier to take the subsequent steps ahead in the reform process tending towards the privatization of other natural resources and environmental areas which, today, appear more problematic.

(17) The essential political principle which must be defended is not, therefore, “he who pollutes pays”, as has been clumsily established in the political programs of the Spanish centre-right politicians, but rather the principle that “he who pollutes indemnifies those who are polluted and, possibly, is penalized through a criminal process if there is culpability or negligence in the damage and no voluntary agreement is reached with the prejudiced parties”.

(18) Another of the great advantages of the free market environmentalism theory is that it demolishes the entire analysis based on sustained development, which has been prevalent to date due to the support of many ingenuous environmentalists and natural scientists who are not familiar with economic theory.

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The Left-Right Political Spectrum Is Bogus

Politics

It might be a division between social identities based on class or region or race or gender, but it is certainly not a clash between different ideas.

By Crispin Sartwell

Americans are more divided than ever by political ideology, as a recent Pew Research Center study makes clear. About a third of people on each side say of the other that its proponents "are so misguided that they threaten the nation’s well-being." They're both right about that.

My prescription isn't civility or dialogue, which though admirable are boring and in this case evidently impossible. Rather, my approach is “philosophical”: to try to confront both sides with the fact that their positions are incoherent. The left-right divide might be a division between social identities based on class or region or race or gender, but it is certainly not a clash between different political ideas.

The arrangement of positions along the left-right axis—progressive to reactionary, or conservative to liberal, communist to fascist, socialist to capitalist, or Democrat to Republican—is conceptually confused, ideologically tendentious, and historically contingent. And any position anywhere along it is infested by contradictions.

Transcending partisanship is going to require what seems beyond the capacities of either side: thinking about the left-right spectrum rather than from it. The terminology arose free market capitalism vs socialism a simple analogy revolutionary France in 1789, where it referred to the seating of royalists and anti-royalists in the Assembly. It is plausible to think of the concept (if not the vocabulary) as emerging in pre-revolutionary figures such as Rousseau and Burke. The Oxford English Dictionary’s first citation of “left” and “right” used in the political sense in English is in Thomas Carlyle's French Revolution in 1837, but the idea only crystallized fully with the emergence and under the aegis of Marxism, in the middle of the 19th century. It was not fully current in English-speaking countries until early in the 20th.

Transcending partisanship is going to require what seems beyond the capacities of either side: Thinking about the left-right spectrum rather than from it.

Before that, and outside of the West, there have been many intellectual structures for defining and arranging political positions. To take one example, the radical and egalitarian reform movements of the early and mid-19th century in the U.S.—such as abolitionism, feminism, and pacifism—were by and large evangelical Christian, and were radically individualist and anti-statist. I have in mind such figures as Lucretia Mott, Henry David Thoreau, and William Lloyd Garrison, who articulated perfectly coherent positions that cannot possibly be characterized as on the left or the right.

The most common way that the left-right spectrum is conceived—and the basic way it is characterized in the Pew survey—is as state against capital.* Democrats insist that government makes many positive contributions to our lives, while Republicans argue that it is a barrier to the prosperity created by free markets. On the outer ends we might pit Chairman Mao against Ayn Rand in a cage match of state communism against laissez-faire capitalism.

The basic set of distinctions on both sides rests on the idea that state and corporation, or political and economic power, can be pulled apart and set against each other. This is, I propose, obviously false, because hierarchies tend to coincide. Let's call that PHC, or Principle of Hierarchical Coincidence. A corollary of PHC is that resources flow toward political power, and political power flows toward resources; or, the power of state and of capital typically appear in conjunction and are mutually reinforcing.

I'd say it's obvious that PHC is true, and that everyone knows it to be true. A white-supremacist polity in which black people were wealthier than white people, for example, would be extremely surprising. It would be no less surprising if regulatory capture were not pervasive. You could keep trying to institute reforms to pull economic and political power apart, but this would be counter-productive, because when you beef up the state to control capital, you only succeed in making capital more monolithic, more concentrated, and more able to exercise a wider variety of powers. (Consider the relation of Goldman Sachs to the Treasury Department over the last several decades, or Halliburton and the Pentagon, or various communications and Internet concerns and NSA. The distinction between "public" and "private" is rather abstract in relation to the on-the-ground overlap.)

State and economy are merged in different permutations in Iran and Egypt, in China and Russia, in the U.S. and the E.U. We might say that the current Chinese state combines the most salient features of Maoism and corporate capitalism: It's all devoted to generating maximum cash and putting it on a barge—destination: the very top of the hierarchy. And yet it also attempts to bestride the earth with the iron boot of collectivist totalitarianism. Now, that appears incoherent if you are trapped in the spectrum. A conventional political scientist associates capitalism with John Locke and Adam Smith and democracy (“liberalism,” I suppose). On the other hand, since socialists reject free enterprise and propose grand redistributionist schemes, they require a big, powerful state. For a long time, people thought of the Chinese system as combining opposed or contradictory elements.

I'd say no one is so sure anymore. We should think instead of the Chinese state as a provisional culmination of both state socialism and corporate capitalism. In ideology, they are opposites. But we don't live in the textbook on political ideologies. We live in a world where corporate capitalism has always completely depended on state power, and the basic practical thrust of left statism has always been annexation of the economy. The Soviet Union was a variety of monopoly capitalism, and the modern American state is a variety of state socialism.

Corporate capitalism has always completely depended on state power, and the basic thrust of left statism has always been annexation of the economy.

Our mistake was that we believed the account these ideologies gave of themselves. But that scrim was always thin. There are capitalist theoreticians who have fantasized and recommended stateless free markets, and there are communist theorists who have fantasized no markets at all, always glossing over the fact that what they actually meant was the permeation of every aspect of life, including markets, by the state. These were fantasies. What these people wanted appeared to be entirely opposed, but they were each devoted to their own sort of hierarchy, and hierarchies tend to coincide.

The familiar notion is that when you reduce the power of the state, you increase the power of capital, and vice versa. To put it mildly, this claim is non-empirical. The rise of capital, its consolidation into a few hands, and the enduring structures of monopoly or gigantism to which it gives rise are inconceivable without the state.

Michel Beaud, in his History of Capitalism, is one of many historians who have found the state connection criterial: "What one in any case should remember is the importance of the state in the birth, the first beginnings of capitalism . The primary transforming factor is the state. National unity, currency standardization, juridical coherence, military strength and the beginnings of a national economy: all these were created and developed by the state, or with the state as organizing principle."

Capital accumulations on the vast scales we see today are not possible in the absence of pervasive domestic policing and the ability to project military power. The British colonial economy—one capitalist apogee—would have been impossible without a huge state. The American robber-baron period is often held to have been to have led to hyper-concentration of wealth in a few private hands and to have been constrained ultimately by the state. If you look at the actual procedures employed by a Vanderbilt, a Rockefeller, a Carnegie, you see that they depended fundamentally on state sponsorship and state violence, which such men were in a position to command in virtue of their wealth. This underwent various adjustments in the so-called Progressive Era, but though specific cartels and fortunes were compromised, the consolidation in the long run continued, as the government became the central bank (more or less merging with J.P. Morgan) and the modern bureaucratic corporation emerged.

Consider by way of comparison the Soviet system. Nationalizing industry and imposing five-year plans didn’t make society more equal; it just made the Communist Party a committee of capitalists. Communist totalitarianism was a particular and particularly extreme form of the merger of state and capital, but that merger is everywhere. If one thought a bit, for example, about the way that government energy policies and private energy concerns are interlocked, one would see less and less sense of distinction. Regulators and corporate lobbyists and congressional staffers are all the same people.

The idea that free markets are historically distinguished from large, powerful states is an ahistorical ideology shared by the capitalist right and the communist left. We might think of the left-right spectrum as a single ideology rather than a taxonomy of opposites. Thus, the left/right or Democrat/Republican split—which turns American politics into a hyper-repetitive, mechanical set of partisan bromides about free markets versus government programs with egalitarian results—depends on a historical mistake.

The left-right spectrum is often characterized in terms of two extreme poles. One way to see that this is incoherent is that these poles can be defined in mutually incompatible ways. It’s awfully strange that Rand Paul and John McCain belong to the same political party and are generally held to be on the same end of the political spectrum. I'd say they each disagree more profoundly and substantially with the other than either disagrees with Barack Obama, for example. Some of the most historically salient “right-wing” movements are monarchism, fascism, fundamentalism, and libertarianism, which have nothing in common except that they all have reasons to oppose Marxist communism, and vice versa. Yet they also all have similar first interstate bank billings mt hours to oppose one another. Toss in David Brooks Burkeans, security-state neocons, and so on, and you have a miscellany of unrelated positions.

The left holds up “equality” as a fundamental value, but the means leftists propose to increase economic equality almost always increase political inequality.

The left pole, meanwhile, could be a stateless society of barter and localism; or a world of equality in which people are not subordinated by race, gender, and sexuality; or a pervasive welfare state; or a Khmer Rouge reeducation regime. The Nazi Party, Catholic Church, hereditary aristocracy, Ayn Rand capitalists, and redneck gun enthusiasts are all on the same side of the left-right spectrum. So are hacktivists, food-stamp officials, anti-globalization activists, anarcho-primitivists, and advocates of a world government. It would be hard to come up with a less coherent or less useful way of thinking about politics.

Examining another familiar opposition, between “equality” and “liberty,” produces another cluster of contradictions. The left holds up “equality” as a fundamental value. The means leftists propose to increase economic equality almost always increase political inequality, because these means consist of larger state programs: more resources and rules, coercion and surveillance in the hands of officials or state contractors, including in welfare-type programs. The welfare state is more pervasive now than it was a century ago, and we now have institutions like compulsory public education. These are achievements of the left, programs they are still trying enhance, but have they actually resulted in more equal societies? Quite the contrary, I believe: They have led to ever-more-frozen hierarchies. The mainstream left is a technocratic elite, with a cult of science and expertise and an ear for the unanimous catchphrase. This is anything but a meritocracy; it an entrenched intergenerational class hierarchy.

Whatever the right is, it runs aground in contradiction similarly in its treatment of its own sacred concept “liberty,” which is hard to hold in solution with opposing gay marriage or marijuana legalization, or with a thousand dimensions of the contemporary surveillance/security state.

Milton Friedman and Vlad Lenin, Ho Chi Minh and Barry Goldwater, Barack Obama and Rand Paul, Francois Mitterrand and Margaret Thatcher, Ronald Reagan and Fidel Castro, Friedrich Hayek and Thomas Piketty, Paul Krugman and Augusto Pinochet: They may well have disagreed about this and that. But they have agreed, or said they did, that the state was a force that was historically pitted against private capital. To reduce one was to increase the other and vice versa. They vary inversely and the balance between them that you recommend constitutes the fundamental way of characterizing your political position.

This spectrum stretches from authoritarianism on the one end to authoritarianism on the other, with authoritarianism in between. It makes anything that is not that incomprehensible. It narrows all alternatives to variations on hierarchy, structures of inequality, or profoundly unjust distributions of power and wealth. There are alternatives, and the one I would suggest is this: We should arrange political positions according to whether they propose to increase hierarchy or to dismantle it. Instead of left and right, we should be thinking about vertical versus horizontal arrangements of power and wealth.


* Another way people talk about left and right is in terms of time. Progressives want time to continue to move forward or even want to accelerate it, taking us into a future bright with promise, while conservatives want time to stand still or even run backward to a golden age. Either approach appears to depend on a conception of time as extremely malleable, its pace and direction depending on the outcome of the next election. Putting it gently, the idea that one can retard or accelerate time has a certain . psychotic quality. Ted Cruz and Rafael Correa, the Taliban and Beyoncé, the “Stone Age” Suruwaha people of the Amazon, and the primetime hosts of MSNBC coincide in time, all moving temporally in the same direction at the same rate, contemporaneously. Among others, they all exist precisely at this moment.

Perhaps progressives (and real reactionaries, if there are any) would say that the idea of halting or hastening time is a sort of shorthand or metaphor. But I think the matter is more complicated. Both sides of the American political spectrum are continuously appealing to American traditions and principles. And one typically "makes progress," to whatever extent one does, by revivifying or reinterpreting existing traditions. Barack Obama engages in this rhetoric no less than Rand Paul. It's never a matter of simply starting afresh, employing no assumptions; both sides are engaged in interpreting and re-applying existing traditions, and both sides are doing that under constantly mutating conditions, so that each reapplication is a new and potentially controversial interpretation. Time is relentless in that sense too.

Источник: https://www.theatlantic.com/politics/archive/2014/06/the-left-right-political-spectrum-is-bogus/373139/

Why has pencil making proved a seductive metaphor for spontaneous order?

“’I want to mark!’ cries the child, demanding the pencil. He does not want to eat. He wants to mark. He is not seeking to get something into himself, but to put something out of himself.”

—Charlotte Perkins Gilman, Women and Economics

In 1980, Milton Friedman presented his vision of how the free market might bring about world peace in a 10-hour PBS broadcast series called Free to Choose. In a clip from the show (several versions are available on YouTube alone, totaling over 200,000 views, not counting multiple tribute videos), Friedman distills his argument into a two-minute-and-forty-one-second parable about a common household object:

Look at this lead pencil. There’s not a single person in the world who could make this pencil. Remarkable statement? Not at all. The wood from which it is made, for all I know, comes from a tree that was cut down in the state of Washington. To cut down that tree, it took a saw. To make the saw, it took steel. To make steel, it took iron ore. This black center—we call it lead but it’s really graphite, compressed graphite—I’m not sure where it comes from, but I think it comes from some mines in South America. This red top up here, this eraser, a bit of rubber, probably comes from Malaya, where the rubber tree isn’t even native! It was imported from South America by some businessmen with the help of the British government. This brass ferrule? [Self-effacing laughter.] I haven’t the slightest idea where it came from. Or the yellow paint! Or the paint that made the black lines. Or the glue that holds it together. Literally thousands of people co-operated to make this pencil. People who don’t speak the same language, who practice different religions, who might hate one another if they ever met! When you go down to the store and buy this pencil, you are in effect trading a few minutes of your time for a few seconds of the time of all those thousands of people. What brought them together and induced them to cooperate to make this pencil? There was no commissar sending … out orders from some central office. It was the magic of the price system: the impersonal operation of prices that brought them together and got them to cooperate, to make this pencil, so you could have it for a trifling sum.

That is why the operation of the free market is so essential. Not only to promote productive efficiency, but even more to foster harmony and peace among the peoples of the world.

Friedman chose the pencil as an homage to a colleague and mentor, although his name doesn’t come up in Free to Choose. Both the metaphor and its quasi-religious tone originate in a 1958 text called “I, Pencil,” by Leonard Read, who is sometimes referred to as a poet or a fiction writer, when he is acknowledged. In fact, he was an economist, a close compatriot of Ayn Rand’s, who founded the Foundation for Economic Education, a think tank devoted to preserving economic license in the U.S.

With its series of minor to downright false epiphanies pleasantly told, bank of america student benefits, Pencil” is the progenitor of TED Talks and This American Life. Quick and clever narratives, sprinkled with down-home-isms, certainly come off as common sensical, unless you look more closely at what is said. (Indeed, more than one of the former directly references Friedman/Read.) Like Friedman’s, Read’s pencil backstory is an uplifting conflation of domestic factory production, social justice, and right Christian thinking—all told from the point of view of the poor, neglected pencil:

I am a mystery—more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me … This is a species of the grievous error in which mankind cannot too long persist without peril …

It has been said that “only God can make a tree” … Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

Production becomes mystery becomes proof of the Almighty: an assembly line so complex even God may not understand it. What Friedman presented as humble begins to lose a certain humility under Read. At one point, his pencil becomes downright self-aggrandizing. “Simple?” The writing implement retorts.

Not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? … There is a fact still more astounding: the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

If I, Pencil, were the only item that could offer testimony on what men and women can accomplish when free to try, then those with little faith would have a fair case. However, there is testimony galore; it’s all about us and on every hand.

On everyhand. Get it? While Adam Smith’s Invisible Hand here is essentially attached to God’s arm, Read lists a plethora of other righteous phenomena—mail service, automobile manufacture, grain combines, milling machines, telephone lines, television broadcasts, gas and oil pipelines. All are proof that unregulated markets naturally foster the best possible outcome for individuals. But only one fits comfortably in everyhand.

Are we, then, to simply overlay the script of the free market atop a Christian worldview and equate market regulation and its inevitable endgame, socialism, with Hell? Unclear. Unimportant. Heed. “The lesson I have to teach is this,” Read’s pencil concludes. “Leave all creative energies uninhibited. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.”

***

Little wonder that pencils have proven such a popular tool of Christian conversion around the world. I was shocked, recently, to hear such a tale first-hand, from a friend in Cambodia. Sochea had been born a year before I was, which means that when she was 6 she watched the Khmer Rouge lead an extremely bloody revolution to try to turn her country into an agrarian utopia and permanently stamp out Western capitalism—an effort commemorated by starting the clock over. Year Zero followed several years of illegal American carpet bombings that wiped out livestock in mass numbers, contributing to a starvation that lead, some say, to nearly as many deaths as did the bloody regime. Under the Khmer Rouge, between 1.7 million and 2.2 million people died within four years, and with them perished the remaining intellectual, educational, and governmental infrastructure of Cambodia. When the Vietnamese invaded in 1979 and ousted the regime, little changed. Civil war continued for 19 years. Resources remained scarce when available at all. There wasn’t even, for example, money. Like: currency. When the Cambodian government began to rebuild in the early 1980s, it offered bags of rice as payment.

By 1980, Sochea was 11. She’d had no formal education for four years but was eager to pick up where she left off, once schools reopened. It was awkward: she was the tallest girl in her second-grade class by far. But she loved going to school and learning to read. Slowly, too, she was learning to write. Then she met some Christian missionaries.

Like her father, a monk, Sochea was a Buddhist. All of Cambodia, more or less, was too. Buddhism, she says, kept her alive under the Khmer Rouge and through the civil war. She’s still a Buddhist today: she organizes nuns in her day job, meditates twice daily in temples, gives alms to wandering monks. But the missionaries she met in 1980 wanted her to convert to Christianity, offering her the one thing she needed and that she couldn’t get anywhere else in exchange: a pencil. It’s true that she’s still a Buddhist, but she’ll admit if you ask that the pencil also made her Christian.

We could end the story there, with Sochea’s miraculous conversion, and certainly neither Friedman nor Read would see the need to press any further: shortly thereafter, Cambodia took to the unofficial but widespread use of the U.S. dollar. Beefed up amenities for American tourists. Created a garment industry largely focused on exporting to the U.S. (Regulations exist, but rampant corruption in the country means they are not routinely followed.) Began adopting policies to allow for U.S.-owned business to operate locally, again without much oversight. Turned a blind eye to foreign sex tourism, which, alongside the garment trade, are the only viable industries that offer women work in large numbers. Advertising, entirely absent until after the Vietnamese left power, grew rapidly in 30 years. Young urban Cambodians now see almost as many ads daily as American youth do; the difference is that almost none of the products Cambodians are primed to want are Cambodian-produced. Free-market paradise. Friedman and Read might call it “Heaven.”

But Sochea’s story didn’t end there, because shortly after she got her hands on that pencil, she was given a writing assignment: Why women should not be allowed to attend school. There is no dissent in a Cambodian classroom, no arguing with your teacher. There is only the dissemination of unquestionable knowledge. It is true that young women in Cambodia are increasingly pressured to drop out of school after the third grade, even today. By the time Sochea graduated high school and went on to college, she was one of only a handful of female students in the country. Upon graduation, the free market wonderland—foretold by Christian charity, organized partially in response to the after-effects of U.S. military destruction—had left little room for her.

At least she had a pencil.

***

“Why the pencil?” asked a student the other day. At an art school, I teach a course called Milton Friedman’s Pencil. The question made me panic, so like any halfway decent professor, I deflected it.

“Good question. Why the pencil?” I repeated to the rest of the group, thinking: please, someone tell me why you signed up for a class exploring 1st grade math curriculum homeschool metaphor for free market fundamentalism in an art school when you could have sat around all day in a roomful of naked ladies and called that work.

Of course, they had answers. We live in a digital age, they noted, where kids will soon grow up without having to use a pencil at all, without having to work through a math problem on their own, without learning to spell. But the computers that increasingly make up our world churned through bazillions of pencils in their creation, each fundamental tool an element toward a larger more significant milestone, much as several words make up a sentence and several numbers can form an equation, each of which may eventually lead to an answer, a theory, or a new set of questions about the world.

It was an appropriate art-school response. At the base of the production line sits one pure object, a tool that cannot be further distilled without eliminating usefulness. It also unconsciously reflects the inherently productive nature of what we usually label “art.” You can’t take a course in looking at naked ladies in an art school, remember: you have to draw or write about them.

***

Read died in 1983, and I’ve found no evidence to suggest he felt slighted by Friedman’s use of his story. (Friedman has elsewhere acknowledged his mentor’s contribution, although it must be noted that the major theme of Friedman’s version, in both content and form, is that no single person deserves credit for either the story or the pencil.) Yet the difference between the two pencils is vast.

Comparatively, Read’s self-aware and somewhat self-important household writing implement is kind of small potatoes, limited as it is to U.S. soil. Read’s references are domestic, save for a wax from Free market capitalism vs socialism a simple analogy, a coffee bean from Brazil, and oil from the Persian Gulf—each carefully articulated as aids to American production. His late-1950s audience is clearly American, and his metaphor works because he assumes a homogeneity in his readers. “I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write,” goes an early line. The literate population would have been 97.6% of the country by 1960, according to the U.S. Census.

Friedman’s version, however, contains direct references to three named continents, implied input of unnamable other countries, and a distinct, repeated address to “the world.” Read may have come up with the perfect metaphor for globalization, but Friedman made it global.

In fact, his PBS series Free to Choose reportedly attracted a larger audience than Masterpiece Theater, with 3 million domestic viewers per episode, and global audiences in several major countries (although not France). A book based on the transcripts, also called Free to Choose, was the top-selling non-fiction title in the U.S. for 1980, and translated (according to Friedman’s biography) into 17 languages. Although video, and later DVD, sales of the original remained healthy, PBS rebroadcast the series in 1990, with a slew of celebrity guest stars.

Free to Choose Media, the production company behind the series, has since expanded into an entire 501(c)(3) business that offers hundreds of programs, free market capitalism vs socialism a simple analogy both versions of Free to Choose, streaming for free online, and Izzit.org, described as “a not-for-profit providing more than 300,000 teachers with engaging educational videos and materials promoting critical-thinking and thoughtful discussion among students.” There you can order—pretty cheap, too—gems like The Price System, described thusly: “Friedman uses I, Pencil, a short story by Leonard Read, to explain how a free market economy operates … Milton concludes that in this way, millions of people are able to cooperate peacefully on a daily basis.” The blatant propaganda embedded in Sochea’s first writing assignment almost pales in comparison to what the kids watching these videos must be asked to write about.

On a national scope, the story of the pencil Friedman first broadcast on PBS has also begun to shift what we think of as “educational.” Free to Choose came about when an Erie, Pennsylvania, PBS station asked Friedman to tape a counterpoint to liberal economist John Kenneth Galbraith’s series then airing. It was financed privately by PepsiCo, General Motors, Bechtel, and others,offering “a clear starting point for the so-called Reagan revolution,” as Salon’s Andrew Leonard wrote when Milton Friedman died a few years ago. Political leaders in Estonia, Poland, and California at one point all credited the series with sparking foundational ideas in their political development.

Yet offscreen, in Chile, Milton Friedman and his associates had been advising on and helped put in place a rapid mode of privatization with military backing. “Literally killing off increasing numbers of the Chilean population and choking off increasing numbers of Chilean businesses,” wrote Friedman’s former student Andre Gunder Frank in “Economic Genocide in Chile: An Open Letter to Milton Friedman and Arnold Harberger,” published in Economic and Political Weekly in 1976. Naomi Klein’s Shock Doctrine roots Friedman’s economic policies in crises, but in that it overlooks something even more disturbing about the spread of global capitalism. These were not plans prepared in secret, behind closed doors, and unleashed upon an ill-prepared world. Free-market fundamentalism was all spelled out, right there on PBS, as educational programming.

As handy and common as pencils themselves.

***

Thirty years later, the pencil is not what is used to be. It’s been replaced by the calculator, the smartphone, the search engine—machines that hide labor from users, allowing them to presume vaster skills than they, in fact, possess. My students complain that forcing them to use a pencil makes them spell poorly. In fact they cannot spell regardless of the machine they use to write with; software steps in to spell for them on a computer. Elsewhere, students complained recently that hand-writing a statement in cursive, a prelude to the PSAT, was the most difficult part of the exam. Of course, they took to Twitter to voice their concerns. Others have claimed that using a pencil causes them to lose concentration, what with all the sharpening breaks and muscle strain. The pencil is a deep inconvenience. Electrical outlets are plentiful in school classrooms and coffee shops; pencil sharpeners have all been removed. (David Rees’s exploration of the artisanal art of pencil-sharpening only underscores nostalgia for the underused instrument.)

Using one is even considered dangerous. I tried to board a plane last month with a dull pencil, but the TSA agent scolded me fffcu locations trying to sneak weapons onto my flight. I had no idea what he was referring to until he pulled the sharpener out of my bag and held it out accusatorily. It could easily be broken, the razor blade removed and wielded, the plane hijacked. He tilted his head, as if to say, “Come now, little missy. You know better than that.”

***

What the stories of the pencil we’ve looked at leave out are any of the voices of the humans that actually had hands in its creation. Noninvisible hands.

Several such folks used to work not too far away from my house in Chicago, on the other side of the city from where Friedman shot much of Free to Choose. In 1988, an old pencil factory was parceled into condominiums now known as the Pencil Factory Lofts. Terra cotta pencil-tips now decorate the facade, but the building was once the Eversharp Pencil Factory, later the Wahl-Eversharp Pencil Factory, a 240,000 square-foot facility that employed 1,800 workers in two shifts at the company’s peak. A Chicago Tribune article covered the conversion, and briefly, a remarkable event in the building’s past: In 1937 it held one of the first industrial sit-down strikes—in which workers cease labor but stay on site—in U.S. history.

It wasn’t the first: Sit-down strikes had been held domestically and known under that name since at least 1933. They make sense: workers are protected from violence by management’s own desire to keep equipment safe from harm. A sit-down strike’s Achilles’ heel is chiefly that people get hungry and bored, so unions’ primary responsibility is to organize food and entertainment to keep morale up and commitment strong. In his pamphlet on the practice Sit-Down, published shortly after the pencil factory strike, Joel Seidman notes that most strikes didn’t last more than a day or so. They are efficient and effective.

Details on the Wahl-Eversharp strike in the 1988 Trib story are thin, but a 1937 article in the same paper explains that, on Valentine’s Day eve, “75 girls and young married women and 50 men” sat down on the job to demand the right to negotiate for a wage increase. Female employees had been earning 27 cents an hour and male employees 33 cents; respectively, they wanted raises to 35 and 43 cents per hour. The tone of the 1937 Trib was as dismissive as the Friedman-era one. Contemporary stories complain workers danced, sang, and gambled into the night while friends and family members brought food and blankets. When liquor was discovered under the blankets, deliveries were no longer allowed.

Of course management gave a dispersal order, and of course strikers refused to budge. The management plan may have been to starve the strikers out by ceasing deliveries, but that failed: While a bastion of lady strikers flirted with cops the next morning, the menfolk jerry-rigged a breakfast delivery from the roof of the bakery next door. By noon that day, management caved, and reading between the lines of the Trib it becomes clear: The strikers had won.

My students and I went to visit the Pencil Factory Lofts, but like the strikers’ liquor-laden pals, weren’t able to gain entry into the building. A sweet professional young woman with a giant dog approached the entryway, and we asked if she could let us in to the lobby to check out the historic site. “We’re really into pencils,” I told her, which was not untrue.

“No,” she said. “I can’t do that. For security reasons. You understand. These are people’s private homes.” She had no idea anything historic had happened there at all, but she didn’t particularly care.

The Pencil Factory Lofts, as they stand, have scrubbed away all traces of the Wahl-Eversharp Factory workers and their historic victory, replaced with picture windows, high-speed Internet, and an exercise room. It’s a pencil story written by Friedman himself, devoid of everyone except the consumer: this woman and her massive dog.

***

What is the takeaway, then, the final thing to remember about the squirreled-away but damaging truths Milton Friedman failed to account for when constructing his beloved, Read-inspired, and oft-repeated metaphor for the power of unregulated markets (the same one on which this new film series from the Competitive Enterprise Institute was launched last month)? In other words: Why, really, the pencil?

Well, one of my students made one. A thoughtful undergrad with an intuitive sense, he proposed to make a pencil for his final project. Then, a couple weeks before it was due, he brought in a prototype. School-provided clay, with a store-purchased graphite “lead”, it’s actually quite comfortable to write with. Finding clay will take a bit more doing, as will properly compressing the charcoal into a workable form. We can work out the eraser later. Breadcrumbs have been used in years past. And it’s a tad fragile. (Pencil fragility is actually a big issue in public education debates, which largely hinge on shoddy, Chinese-made no. 2s that are imported under enormous tax breaks and in mass quantities in a situation known as “pencil dumping.” In addition to disrupting the classroom with breakage, U.S. pencil manufacturers claim these imports cut their business in half between 2004 and 2008.)

My student is not the first to attempt to make a pencil. Others have tried such projects, or publicly proclaimed themselves to be trying, like this guy. He appears to have given up without even having put, as they say, pencil to paper. Die-hard free-market fundamentalists tend toward a slightly more aggressive stance on such endeavors, arguing that Doing It Yourself instead of purchasing the cheapest available product is unethical and, by occasionally unstated extension, a crime against God. Many may claim that a pencil is, by definition, wood-encased, and perhaps also mass-produced, a tautology that seems perfectly in keeping with an argument that seems to run: “You all own pencils. Now, what if I told you the Good Lord himself created them? Unregulate the markets!” And then the arguer runs screaming from the room.

Still, my student’s hand-made pencil works. “Check this out!!!” I wrote when I tested it, and then a smiley face, sadly bypassing the chance to write, “Suck it, Milton Friedman” with a homemade pencil. But it does write. And any video, allegory, news article, film, or metaphor for economics you come across founded on the idea that a single person can’t make a pencil, can’t go to college, or can’t strike for better pay, is wrong.

Источник: https://thenewinquiry.com/milton-friedmans-pencil/

Unit 1 The capitalist revolution

Themes and capstone units

History, instability, and growthGlobal economyInequalityInnovation

How capitalism revolutionized the way we live, and how economics attempts to understand this and other economic systems

  • Since the 1700s, increases in average living standards became a permanent feature of economic life in many countries.
  • This was associated with the emergence of a new economic system called capitalism, in which private property, markets and firms play a major role.
  • Under this new way of organizing the economy, advances in technology and specialization in products and tasks raised the amount that could be produced in a day’s work.
  • This process, which we call the capitalist revolution, has been accompanied by growing threats to our natural environment, and by unprecedented global economic inequalities.
  • Economics is the study of how people interact with each other, and with the natural environment, in producing their livelihoods.

In the fourteenth century, the Moroccan scholar Ibn Battuta described Bengal in India as ‘A country of great extent, and one in which rice is extremely abundant. Indeed, I have seen no region of the earth in which provisions are so plentiful.’

And he had seen much of the world, having travelled to China, west Africa, the Middle East and Europe. Three centuries later, the same sentiment was expressed by the seventeenth century French diamond merchant Jean Baptiste Tavernier who wrote of the country:

Even in the smallest villages, rice, flour, butter, milk, beans and other vegetables, sugar and sweetmeats, dry and liquid, can be procured in abundance.1

At the time of Ibn Battuta’s travels, India was not richer than the other parts of the world. But India was not much poorer, either. An observer at the time would have noticed that people, on average, were better off in Italy, China and England than in Japan or India. But the vast differences between the rich and the poor, which the traveller would have noted wherever he went, were much more striking than these differences across regions. Rich and poor would often have different titles: in some places they would be feudal lords and serfs, in others royalty and their subjects, slave owners and slaves, or merchants and the sailors who transported their goods. Then—as now—your prospects depended on where your parents were on the economic ladder and whether you were male or female. The difference in the fourteenth century, compared with today, was that back then the part of the world in which you were born mattered much less.

Fast forward to today. The people of India are far better off than they were seven centuries ago if we think about their access to food, medical care, shelter and the necessities of life, but by world standards today most are poor.

Figure 1.1a tells some of the story. To compare living standards in each country, we use a measure called GDP per capita. People obtain their incomes by producing and selling goods and services. GDP (gross domestic product) is the total value of everything produced in a given period such as a year, so Walmart eye center mexico mo per capita corresponds here to average annual income. GDP is also referred to as gross domestic income. In Figure 1.1a the height of each line is an estimate of average income at the date on the horizontal axis.

On average, people are six times better off in Britain than in India by this measure. Japanese people are as rich as the British, just as they were in the fourteenth century, but now Americans are even better off than the Japanese, and Norwegians are better off still.

We can draw the graph in Figure 1.1a because of the work of Angus Maddison who dedicated his working life to finding the scarce data needed to make useful comparisons of how people lived across more than 1,000 years (his work is continuing in the Maddison Project). In this course you will see that data like this about regions of the world, and the people in it, is the starting point of all economics. In our video, the economists James Heckman and Thomas Piketty explain how collecting data has been fundamental to their work on inequality and the policies to reduce it.

Global economyInequality

1.1 Income inequality

A thousand years ago the world was flat, economically speaking. There were differences in income between the regions of the world; but as you can see from Figure 1.1a, the differences were small compared to what was to follow.

Nobody thinks the world is flat today, when it comes to income.

Figure 1.2 shows the distribution of income across and within countries. Countries are arranged according to GDP per capita from the poorest on the left of the diagram (Liberia), to the richest on the right (Singapore). The width of each country’s bars represents its population.

For every country there are ten bars, corresponding to the ten deciles of income. The height of each bar is the average income of 10% of the population, ranging from the poorest 10% of people at the front of the diagram to the richest 10% at the back, measured in 2005 US dollars. Note that this doesn’t mean ‘the richest 10% of income earners’. It is the richest 10% of people, where each person in a household, including children, is assumed to have an equal share of the household’s income.

The skyscrapers (the highest columns) at the back of the right-hand side of the figure represent the income of the richest 10% in the richest countries. The tallest skyscraper is the richest 10% of people in Singapore. In 2014, this exclusive group had an income per capita of more than $67,000. Norway, the country with the second highest GDP per capita, does not have a particularly tall skyscraper (it is hidden between the skyscrapers for Singapore and the third wells fargo how to order new debit card country, the US) because income is more evenly distributed in Norway than in some other rich countries.

The analysis in Figure 1.2 shows how the distribution of income has changed since 1980.

World income distribution in 2014 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of the bottom and top income deciles of all countries of the world, ordered from poorer to richer ones by GDP. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway. World income distribution in 2014 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of the bottom and top income deciles of all countries of the world, ordered from poorer to richer ones by GDP. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway. World income distribution in 2014 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of the bottom and top income deciles of all countries of the world, ordered from poorer to richer ones by GDP. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway.

World income distribution in 2014

Figure 1.2 Countries are ranked by GDP per capita from left to right. For each country the heights of the bars show average income for deciles of the population, from the poorest 10% at the front to the richest 10% at the back. The width of the bar indicates the country’s population. Figure 1.2 is available as an interactive visualization, with an accompanying dataset.

The richest and poorest : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distributions of Liberia, which is the poorest country, and Singapore, which is the richest country. Average incomes in Liberia are much lower than in Singapore.

The richest and poorest

In Singapore, the richest country on the furthest right, the average incomes of the richest and poorest 10% are $67,436 and $3,652 respectively. In Liberia, the furthest left, the corresponding incomes are $994 and $17.

World income distribution in 1980 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 1980. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of all countries of the world, ordered from poorer to richer ones by GDP per capita. The countries labelled on the chart are, from poorer to richer: China, Indonesia, India, Nigeria, Botswana, Brazil, Japan, UK, Norway, US.

World income distribution in 1980

In 1980 the ranking of countries by GDP was different. The poorest countries, coloured darkest red, were Lesotho and China. The richest (darkest green) were Switzerland, Finland and then the US. At that time the skyscrapers were not as tall: the differences between the richest 10% and the rest of a country’s population were not as pronounced.

World income distribution in 1990 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 1990. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of all countries of the world, ordered from poorer to richer ones by GDP per capita. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway.

World income distribution in 1990

You can see from the colours that some countries changed their ranking between 1980 and 1990. China (dark red) is now richer; Uganda, also red, is in the middle of the distribution amongst countries coloured yellow. Some taller skyscrapers have appeared: inequality increased in many countries during the 1980s.

World income distribution in 2014 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of all countries of the world, ordered from poorer to richer ones by GDP per capita. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway.

World income distribution in 2014

By 2014, many countries have changed their ranking. China has grown rapidly since 1990. But the countries that were richest in 1980 (darkest green) are still near the top in 2014.

Inequality within countries has risen : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of the bottom and top income deciles of all countries of the world, ordered from poorer to richer ones by GDP. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway.

Inequality within countries has risen

Income distributions have become more unequal in many of the richer countries: some very tall skyscrapers have appeared. In the middle-income countries, too, there is a big step up at the back of the figure: the incomes of the richest 10% are now high relative to the rest of the population.

Two things are clear from the 2014 distribution. First, in every country, the rich have much more than the poor. We can use the ratio between the heights of the front and back bars as one measure of inequality in a country. We will call it the rich/poor ratio, for obvious reasons. Even in a relatively equal country such as Norway, the rich/poor ratio is 5.4; in the US it is 16 and in Botswana in southern Africa it is 145. Inequality within the very poorest countries is difficult to see in the graph, but it is definitely there: the rich/poor ratio is 22 in Nigeria, and 20 in India.

The second thing that jumps out from Figure 1.2 is the huge difference in income between countries. Average income in Norway is 19 times the average income in Nigeria. And the poorest 10% in Norway receive almost twice the income of the richest 10% in Nigeria.

Imagine the traveller Ibn Battuta’s journey across regions of the world in the fourteenth century and think of how this would have looked in a diagram like Figure 1.2. He would of course notice that everywhere he went there were differences between the richest and poorest groups in the popu­lation of each region. He would report back that the differences in income between the countries of the world were relatively minor by comparison.

In this line chart, shown as a thumbnail of the original Figure 1.1a, the horizontal axis shows years from 1000 to 2015. The vertical axis shows GDP per capita in US dollars and ranges from 0 to 30,000. GDP per capita for Britain, Japan, Italy, China, and India are shown. GDP per capita was below 2500 dollars for all countries until the 18th century. In Britain, GDP per capita took off during the 18th century, and increased to 25,000 dollars in 2015. In the rest of the countries, it took off between the 19th and 20th centuries, reaching in 2015 approximately 22,500 dollars in Japan, 17,500 dollars in Italy, 12,000 dollars in China and 5,000 dollars in India.

Countries that took off economically before 1900 (Figure 1.1a) are in the ‘skyscraper’ part of Figure 1.2.

The vast differences in income between the countries of the world today take us back to Figure 1.1a, where we can begin to understand how this came about. The countries that took off economically before 1900—UK, Japan, Italy—are now rich. They (and countries like them) are in the skyscraper part of Figure 1.2. The countries that took off only recently, or not at all, are in the free market capitalism vs socialism a simple analogy 1.1 Inequality in the fourteenth century

What do you think a ‘skyscraper’ figure like Figure 1.2 would have looked like at the time of Ibn Battuta (early to mid-fourteenth century)?

Exercise 1.2 Working with income data

You can see the interactive graph and download the spreadsheet data that we used to create Figure 1.2. Choose five countries that you are interested in.

  1. For each one calculate the rich/poor ratio in 1980, 1990 and 2014.
  2. Describe the differences between countries and the changes over time that you find.
  3. Can you think of any explanations for them?

1.2 Measuring income and living standards

gross domestic product (GDP)
A measure of the market value of the output of final goods and services in the economy in a given period. Output of intermediate goods that are inputs to final production is excluded to prevent double counting.

The estimate of living standards that we used in Figure 1.1a (GDP per capita) is a measure of the total goods and services produced in a country (called gross domestic product, or GDP), which is then divided by the country’s population.

GDP measures the market value of the output of final goods and services in the economy in a given period, such as a year. Diane Coyle, an economist, says it ‘adds up everything from nails to toothbrushes, tractors, shoes, haircuts, management consultancy, street cleaning, yoga teaching, plates, bandages, books, and the millions of other services and products in the economy’.2

Adding up these millions of services and products requires finding some measure of how much a yoga class is worth compared to a toothbrush. Economists must first decide what should be included, but also how to give a value to each of these things. In practice, the easiest way to do this is by using their prices. When we do this, the value of GDP corresponds to the total income of everyone in the country.

Dividing by the population gives GDP per capita—the average income of people in a country. But is that the right way to measure their living standards, or wellbeing?

Disposable income

disposable income
Income available after paying taxes and receiving transfers from the government.

GDP per capita measures average income, but that is not the same as the disposable income of a typical person.

Disposable income is the amount of wages or salaries, profit, rent, interest and transfer payments from the government (such as unemployment or disability benefits) or from others (for example, gifts) received over a given period such as a year, minus any transfers the individual made to others (including taxes paid to the government). Disposable income is thought to be a good measure of living standards because it is the maximum amount of food, housing, clothing and other goods and services that the person can buy without having to borrow—that is, without going into debt or selling possessions.

Is our disposable income a good measure of our wellbeing?

Income is a major influence on wellbeing because it allows us to buy the goods and services that we need or enjoy. But it is insufficient, because many aspects of our wellbeing are not related to what we can buy.3

For example, disposable income leaves out:

  • The quality of our social and physical environment such as friendships and clean air.
  • The amount of free time we have to relax or spend time with friends and family.
  • Goods and services that we do not buy, such as healthcare and education, if they are provided by a government.
  • Goods and services that are produced within the household, such as meals or childcare (predominantly provided by women).

Average disposable income and average wellbeing

When we’re part of a group of people (a nation for example, or an ethnic group) is the average disposable income a good measure of how well off the group is? Consider a group in which each person initially has a disposable income of $5,000 a month, and imagine that, with no change in prices, income has risen for every individual in the group. Then we would say that average or typical wellbeing had risen.

But now think about a different comparison. In a second group, the monthly disposable income of half the people is $10,000. The other half has just $500 to spend every month. The average income in the second group ($5,250) is higher than in the first (which was $5,000 before incomes rose). But would we say that the second group’s wellbeing is greater than that of the first group, in which everyone has $5,000 a month? The additional income in the second group is unlikely to matter much to the rich people, but the poor half would think their poverty was a serious deprivation.

Absolute income matters for wellbeing, but we also know from research that people care about their relative position in the income distribution. They report lower wellbeing if they find they earn less than others in their group.

Since income distribution affects wellbeing, and because the same average income may result from very different distributions of income between rich and poor within a group, average income may fail to reflect how well off a group of people is by comparison to some other group.

Valuing government goods and services

GDP includes the goods and services produced by the government, such as schooling, national defence, and law enforcement. They contribute to wellbeing but are not included in disposable income. In this respect, GDP per capita is a better measure of living standards than disposable income.

But government services are difficult to value, even more so than services such as haircuts and yoga lessons. For goods and services that people buy we take their price as a rough measure of their value (if you valued the haircut less than its price, you would have just let your hair grow). But the goods and services produced by government are typically not sold, and the only measure of their value to us is how much it cost to produce them.

The gaps between what we mean by wellbeing, and what GDP per capita measures, should make us cautious about the literal use of GDP per capita to measure how well off people are.4

But when the changes over time or differences among countries in this indicator are as great as those in Figure 1.1a (and in Figures 1.1b, 1.8 and 1.9 later in this unit), GDP per capita is undoubtedly telling us something about the differences in the availability of goods and services.

In the Einstein at the end of this section, we look in more detail at how GDP is calculated so that we can compare it through time and make comparisons between countries. (Many of the units have Einsteins. You don’t have to use them, but they will show you how to calculate and understand many of the statistics that we employ.) Using these methods, we can use GDP per capita to unambiguously communicate ideas such as ‘people in Japan are on average a lot richer than they were 200 years ago, and a lot richer than the people of India today.’

Exercise 1.3 What should we measure?

While campaigning for the US chase bank locations and hours on 18 March 1968, Senator Robert Kennedy gave a famous speech questioning ‘the mere accumulation of material things’ in American society, and why, among other things, air pollution, cigarette advertising and jails were counted when the US measured its living standards, but health, education or devotion to your country were not. He argued that ‘it measures everything, in short, except that which makes life worthwhile.’

Read his speech in full or listen to a sound recording of it.

  1. In the full text, which goods does he list as being included in a measure of GDP?
  2. Do you think these should be included in such a measure, and why?
  3. Which goods does he list in the full text as missing from the measure?
  4. Do you think they should be included, and why?

Question 1.1 Choose the correct answer(s)

What does UK GDP per capita measure?

  • the total output of London’s economy
  • the average disposable income of a UK resident
  • the total output of the UK residents, divided by the number of the residents
  • the total output of the UK’s economy, divided by the country’s population
  • ‘Per capita’ means per person, and not in the capital city!
  • Disposable income is a person’s income (for example wages, interests on savings, benefits) minus any transfers (for example tax). GDP includes the goods and services produced by the government, such as schooling, national defence and law enforcement, which are not included in disposable income.
  • This is called the GNP (Gross National Product) per capita. GNP adds the output produced abroad attributable to UK residents, and subtracts UK output attributable to residents abroad.
  • This is the correct definition of GDP per capita as defined in Section 1.2.

Einstein Comparing income at different times, and across different countries

The United Nations collects and publishes estimates of GDP from statistical agencies around the world. These estimates, along with those made by economic historians, allow us to construct charts like Figure 1.1a, comparing living standards across countries and at different time periods, and looking at whether the gap between rich and poor countries has narrowed or widened over time. Before we can make a statement like: ‘On average, people in Italy are richer than people in China, but the gap between them is narrowing,’ statisticians and economists must try to solve three problems:

  • We need to separate the thing we want to measure—changes or differences in amounts of goods and services—from things that are not relevant to the comparison, especially changes or differences in the prices of the goods and services.
  • When comparing output in one country at two points in time, it is necessary to take into account differences in prices between the two points in time.
  • When comparing output between two countries at a point in time, it is necessary to take into account differences in prices between the two countries.

Notice how similar the last two statements are. Measuring changes in output at different points in time presents the same challenges as we face when we try to compare countries by measuring differences in their output at the same time. The challenge is to find a set of prices to use in this calculation that will allow us to identify changes or differences in outputs, without making the mistake of assuming that if the price of something rises in a country, but not in another, then the amount of output has increased in the country.

The starting point: Nominal GDP

When estimating the market value of output in the economy as a whole for a given period, such as a year, statisticians use the prices at which goods and services are sold in the market. By multiplying the quantities of the vast array of different goods and services by their prices, they can be converted into money, or nominal, terms. With everything in the common unit of nominal (or money) terms, they can be added together. Nominal GDP is written like this:

In general, we write that:

Where pi is the price of good i, qi is the quantity of good i, and ∑ indicates the sum of price times quantity for all the goods and services that we count.

Taking account of price changes over time: Real GDP

To gauge whether the economy is growing or shrinking, we need a measure of the quantity of goods and services purchased. This is called real GDP. If we compare the economy in two different years, and if all the quantities stay the same but the prices is there a home remedy for dog ear yeast infection by, say, 2% from one year to the next, then nominal GDP rises by 2%, but real GDP is unchanged. The economy has not grown.

Because we cannot add together the number of computers, shoes, restaurant meals, flights, fork-lift trucks, and so on, it is not possible to measure real GDP directly. Instead, to get an estimate of real GDP, we have to begin with nominal GDP as defined above.

On the right-hand side of the equation for nominal GDP are the prices of each item of final sales multiplied by the quantity.

To track what is happening to real GDP, we begin by selecting a base year: for example, the year 2010. We then define real GDP using 2010 prices as equal to nominal GDP that year. The following year, nominal GDP for 2011 is calculated as usual using the prices prevailing in 2011. Next, we can see what has happened to real GDP by multiplying the 2011 quantities by the 2010 prices. If, using the base year prices, GDP has gone up, we can infer that real GDP has increased.

constant prices
Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time. See also: purchasing power parity.

If this method produces the result that, when computed using 2010 prices, GDP in 2011 is the same as in 2010, we can infer that although there might have been a change in the composition of output (fewer flights taken but more computers sold, for example), the overall quantity of output of goods and services has not changed. The conclusion would be that real GDP, which is also called GDP at constant prices, is unchanged. The growth rate of the economy in real terms is zero.

Taking account of price differences among countries: International prices and purchasing power

To compare countries, we need to choose a set of prices and apply it to both countries.

To begin with, imagine a simple economy which produces only one product. As an example, we choose a regular cappuccino because we can easily find out the price of this standard product in different parts of the world. And we choose two economies that are very different in their level of development: Sweden and Indonesia.

At the time we wrote this, when prices are converted into US dollars using current exchange rates, a regular cappuccino costs $3.90 in Stockholm and $2.63 in Jakarta.

But simply expressing the two cappuccinos in a common currency is not enough, because the international current exchange rate that we used to get these numbers is not a very good measure of how much a rupiah will buy in Jakarta and how much a krona will get you in Stockholm.

purchasing power parity (PPP)
A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies. See also: constant prices.

This is why when comparing living standards across countries, we use estimates of GDP per capita in a common set of prices known as purchasing power parity (PPP) prices. As the name suggests, the idea is to achieve parity (equality) in the real purchasing power.

Prices are typically higher in richer countries—as in our example. One reason for this is that wages are higher, which translates into higher prices. Because prices of cappuccinos, restaurant meals, haircuts, most types of food, transport, rents and most other goods and services are more expensive in Sweden than in Indonesia, once a common set of prices is applied, the difference between GDP per capita in Sweden and Indonesia measured at PPP is smaller than it is if the comparison is made at current exchange rates.

At current exchange rates, GDP per capita in Indonesia is only 6% of the level of Sweden; at PPP where the comparison uses international prices, GDP per capita in Indonesia is 21% of the level of Sweden.

What this comparison shows is that the buying power of the Indonesian rupiah compared to the Swedish krona is more than three times greater than would be indicated by the current exchange rate between the two currencies.

We will examine the measurement of GDP (and other measures of the whole economy) in more detail in Unit 13.

History, instability, and growthGlobal economyInequalityInnovation

1.3 History’s hockey stick: Growth in income

A different way of looking at the data in Figure 1.1a is to use a scale that shows GDP per capita doubling as we move up the vertical axis (from $250 per capita per year to $500, then to $1,000, and so on). This is called a ratio scale and is shown in Figure 1.1b. The ratio scale is used for comparing growth rates.

By the growth rate of income or of any other quantity, for example population, we mean the rate of change:

If the level of GDP per capita in the year 2000 is $21,046, as it was in Britain in the data shown in Figure 1.1a, and $21,567 in 2001, then we can calculate the growth rate:

Whether we want to compare levels or growth rates depends on the question we are asking. Figure 1.1a makes it easy to compare the levels of GDP per capita across countries, and at different times in history. Figure 1.1b uses a ratio scale, which makes it possible to compare growth rates across countries and at different periods. When a ratio scale is used, a series that grows at a constant rate looks like a straight line. This is because the percentage (or proportional growth rate) is constant. A steeper line in the ratio scale chart means a faster growth rate.

To see this, think of a growth rate of 100%: that means the level doubles. In Figure 1.1b, with the ratio scale, you can check that if GDP per capita doubled over 100 years from a level of $500 to $1,000, the line would have the same slope as a doubling from $2,000 to $4,000 dollars, or from $16,000 to $32,000 over 100 years. If, instead of doubling, the level quadrupled (from say, $500 to $2,000 over 100 years), the line would be twice as steep, reflecting a growth rate that was twice as high.

In some economies, substantial improvements in people’s living standards did not occur until they gained independence from colonial rule or interference by European nations:

  • India: According to Angus Deaton, an economist who specializes in the analysis of poverty, when 300 years of British rule of India ended in 1947: ‘It is possible that the deprivation in childhood of Indians … was as severe as that of any large group in history’. In the closing years of British rule, a child born in India could expect to live for 27 years. Fifty years on, life expectancy at birth in India had risen to 65 years.
  • China: It had once been richer than Britain, but by the middle of the twentieth century GDP per capita in China was one-fifteenth that of Britain.
  • Latin America: Neither Spanish colonial rule, nor its aftermath following the independence of most Latin American nations early in the nineteenth century, saw anything resembling the hockey-stick upturn in living standards experienced by the countries in Figures 1.1a and 1.1b.

We learn two things from Figures 1.1a and 1.1b:

  • For a very long time, living standards did not grow in any sustained way.
  • When sustained growth occurred, it began at different times in different countries, leading to vast differences in living standards around the world.

Understanding how this occurred has been one of the most important questions that economists have asked, starting with a founder of the field, Adam Smith, who gave his most important book the title An Inquiry into the Nature and Causes of the Wealth of Nations.5

Great economists Adam Smith

Adam Smith Adam Smith (1723–1790) is considered by many to be the founder of modern economics. Raised by a widowed mother in Scotland, he went on to study philosophy at the University of Glasgow and later at Oxford, where he wrote: ‘the greater part of the … professors have … given up altogether even the pretence of teaching.’

He travelled throughout Europe, visiting Toulouse, France where he claimed to have ‘very little to do’ and thus began ‘to write a book in order to pass away the time.’ This was to become the most famous book in economics.

In An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, Smith asked: how can society coordinate the independent activities of large numbers of economic actors—producers, transporters, sellers, consumers—often unknown to each other and widely scattered across the world? His radical claim was that coordination among all of these actors might spontaneously arise, without any person or institution consciously attempting to create or maintain it. This challenged previous notions of political and economic organization, in which rulers imposed order on their subjects.

Even more radical was his idea that this could take place as a result of individuals pursuing their self-interest: ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest,’ he wrote.

Elsewhere in the Wealth of Nations, Smith introduced one of the most enduring metaphors in the history of economics, that of the invisible hand. The businessman, he wrote: ‘intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.’

Among Smith’s insights is the idea that a significant source of prosperity is the division of labour or specialization, and that this in turn is constrained by the ‘extent of the market.’ Smith illustrated this idea in a famous passage on the pin factory by observing that ten men, each fully specialized in one or two of 18 distinct operations, could produce close to 50,000 pins a day. But ‘if they had all wrought [pins] separately and independently … they certainly could not each of them have made twenty, perhaps not one pin in a day.’

But such an enormous number of pins could only find buyers if they were sold far from their point of production. Hence specialization was fostered by the construction of navigable canals and the expansion of foreign trade. And the resulting prosperity itself expanded the ‘extent of the market’, pnc bank personal account a virtuous cycle of economic expansion.

Smith did not think that people were guided entirely by self-interest. Seventeen years before The Wealth of Nations, he had published a book about ethical behaviour called The Theory of Moral Sentiments.6

He also understood that the market system had some failings, especially if sellers banded together so as to avoid competing with each other. ‘People in the same trade seldom meet together,’ he wrote, ‘even for merriment and diversion, but the conversation ends in a conspiracy against the public; or in some contrivance to raise prices.’

He specifically targeted monopolies that were protected by governments, such as the British East India Company that not only controlled trade between India and Britain, but also administered much of the British colony there.

He agreed with his contemporaries that a government should protect its nation from external enemies, and ensure justice through the police and the court system. He also advocated government investment in education, and in public works such as bridges, roads, and canals.

Smith is often associated with the idea that prosperity arises from the pursuit of self-interest under free market conditions. However, his thinking on these issues was far more nuanced than he is given credit for.

Exercise 1.4 The advantages of ratio scales

Figure 1.1a used a conventional scale for the vertical axis, and Figure 1.1b used a ratio scale.

  1. For Britain, identify a period of time when its growth rate was increasing and another period in which its growth rate was roughly constant. Which figure did you use, and why?
  2. Identify a period during which GDP per capita was shrinking (a negative growth rate) faster in Britain than in India. Which figure did you use and why?

Question 1.2 Choose the correct answer(s)

The GDP per capita of Greece was $22,494 in 2012 and $21,966 in 2013. Based on these figures, the growth rate of GDP between 2012 and 2013 (to two decimal places) was:

  • –2.40%
  • 2.35%
  • –2.35%
  • –0.24%
  • The GDP per capita decreased by $528. To find the growth rate divide by the 2012 GDP per capita $22,494 (and not the 2013 GDP per capita $21,966).
  • Greece’s GDP per capita decreased between 2012 and 2013, resulting in a negative growth rate.
  • The GDP per capita changed by $21,966 − $22,494 = −$528. The growth rate of GDP per capita is given by this change as a percentage of the 2012 figure: −$528/$22,494 = −2.35%.
  • The decrease in the GDP per capita of $528 is 2.35% of $22,494 and not 0.235%.

Question 1.3 Choose the correct answer(s)

Imagine that the GDP per capita of a country had doubled every 100 years. You are asked to draw both linear and ratio scale graphs that plot GDP on the vertical axis, and the year on the horizontal axis. What will be the shapes of the curves?

Linear scale graphRatio scale graph
  • An upward-sloping curve with increasing slope (called convex shape)An upward-sloping straight line
  • An upward-sloping straight lineA straight horizontal line
  • An upward-sloping straight lineAn upward-sloping curve with decreasing slope (called concave shape)
  • An upward-sloping convex curveAn upward-sloping convex curve

Note: Linear scale graphs are ‘normal’ graphs in which the difference in height between 1 and 2, and the difference between 2 and 3, would be the same on the vertical axis.

  • An upward-sloping straight line on a ratio scale graph means that the growth rate of the GDP per capita is constant. An upward-sloping convex curve on a linear scale graph means that the GDP per capita increases by a greater and greater amount in absolute terms over time, consistent with a positive constant growth rate.
  • An upward-sloping straight line on farmers state bank cedar rapids linear scale graph means that the GDP per capita increases by the same amount every year. A straight horizontal line on a ratio scale graph means that the GDP per capita is constant over the years.
  • An upward-sloping straight line on a linear scale graph means that the GDP per capita increases by the same amount every year. An upward-sloping concave curve on a ratio scale graph means that the growth rate decreases each year. Here the growth rate is constant.
  • An upward-sloping convex curve on a ratio scale graph means that the growth rate increases each year. Here the growth rate is constant.

History, instability, and growthInnovation

1.4 The permanent technological revolution

The science fiction show Star Trek is set in the year 2264, when humans travel the galaxy with friendly aliens aided by intelligent computers, faster-than-light propulsion, and replicators that create food and medicine on demand. Whether we find the stories silly or inspiring, most of us, in optimistic moods, can entertain the idea that the future will be transformed morally, socially, and materially by technological progress.

No Star Trek future awaited the peasant’s grandchildren of 1250. The next 500 years would pass without any measurable change in the standard of living of an ordinary working person. While science fiction began to appear in the seventeenth century (Francis Bacon’s New Atlantis being one of the first, in 1627), it was not until the eighteenth century that each new generation could look forward to a different life that was shaped by new technology.

Remarkable scientific and technological advances occurred more or less at the same time as the upward kink in the hockey stick in Britain in the middle of the eighteenth century.

Industrial Revolution
A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy.

Important new technologies were introduced in textiles, energy and transportation. Its cumulative character led to it being called the Industrial Revolution. As late as 1800, traditional craft-based techniques, using skills that had been handed down from one generation to the next, were still used in most production processes. The new era brought new ideas, new discoveries, new methods and new machines, making old ideas and old tools obsolete. These new ways were, in turn, made obsolete by even newer ones.

technology
The description of a process using a set of materials and other inputs, including the work of people and machines, to produce an output.

In everyday usage, ‘technology’ refers to machinery, equipment and devices developed using scientific knowledge. In economics, technology is a process that takes a set of materials and other inputs—including the work of people and machines—and creates an output. For example, a technology for making a cake can be described by the recipe that specifies the combination of inputs (ingredients such as flour, and labour activities such as stirring) needed to create the output (the cake). Another technology for making cakes uses large-scale machinery, ingredients and labour (machine operators).

technological progress
A change in technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of the output.

Until the Industrial Revolution, the economy’s technology, like the skills needed to follow its recipes, was updated only slowly and passed from generation to generation. As technological progress revolutionized production, the time required to make a pair of shoes fell by half in only a few decades; the same was true of spinning and weaving, and of making cakes in a factory. This marked the beginning of a permanent technological revolution because the amount of time required for producing most products fell generation after generation.

Technological change in lighting

To get some idea of the unprecedented pace of change, consider the way we produce light. For most of human history technological progress in lighting was slow. Our distant ancestors typically had nothing brighter than a campfire at night. The recipe for producing light (had it existed) would have said: gather lots of firewood, borrow a lighting stick from some other place where a fire is maintained, suddenlink russellville ar start and maintain a fire.

The first great technological breakthrough in lighting came 40,000 years ago, with the use of lamps that burned animal or vegetable oils. We measure technological progress in lighting by how many units of brightness called lumens could be generated by an hour of work. One lumen is approximately the amount of brightness in a square metre of moonlight. One lumen-hour (lm-hr) is this amount of brightness lasting an hour. For example, creating light by a campfire took about 1 hour of labour to produce 17 lm-hr, but animal fat lamps produced 20 lm-hr for the same amount of work. In Babylonian times (1750 BC) the invention of an improved lamp using sesame oil meant that an hour of labour produced 24 lm-hr. Technological progress was slow: this modest improvement took 7,000 years.

Three thousand years later, in the early 1800s, the most efficient forms of lighting (using tallow candles) provided about nine times as much light for an hour of labour as had the animal fat lamps of the past. Since then lighting has become more and more efficient with the development of town gas lamps, kerosene lamps, filament bulbs, fluorescent bulbs and other forms of lighting. Compact fluorescent bulbs introduced in 1992 are about 45,000 times more efficient, in terms of labour time expended, than lights were 200 years ago. Today the productivity of labour in producing light is half a million times greater than it was among our ancestors around their campfire.

Figure 1.3 charts this remarkable hockey-stick growth in efficiency in lighting using the ratio scale we introduced in Figure 1.1b.

The process of innovation did not end with the Industrial Revolution, as the case of labour productivity in lighting shows. It has continued with the application of new technologies in many industries, such as the steam engine, electricity, transportation (canals, railroads, farmers state bank cedar rapids, and most recently, the revolution in information processing and communication. These broadly applicable technological innovations give a particularly strong impetus to growth in living standards because they change the way that large parts of the economy work.

By reducing the amount of work-time it takes to produce the things we need, technological changes allowed significant increases in living standards. David Landes, an economic historian, wrote that the Industrial Revolution was ‘an interrelated succession of technological changes’ that transformed the societies in which these changes took place.7

A connected world

In July 2012, the Korean hit ‘Gangnam Style’ was released. By the end of 2012 it had become the best-selling song in 33 countries, including Australia, Russia, Canada, France, Spain and the UK. With 2 billion views by the middle of 2014, ‘Gangnam Style’ also became the most watched video on YouTube. The permanent technological revolution has produced a connected world.

Everyone is part of it. The materials making up this introduction to economics were written by teams of economists, designers, programmers and editors, working together—often simultaneously—at computers in the UK, India, the US, Russia, Colombia, South Africa, Chile, Turkey, France and many other countries. If you are online, some of the transmission of information occurs at close to the speed of light. While most of the commodities traded around the globe still move at the pace of an ocean freighter, about 21 miles (33 km) per hour, international financial transactions are implemented in less time than it took you to read this sentence.

The speed at which information travels provides more evidence of the novelty of the permanent technological revolution. By comparing the known date of a historical event with the date at which the event was first noted in other locations (in diaries, journals or newspapers) we can determine the speed at which news travelled. When Abraham Lincoln was elected US president in 1860, for example, the word was spread by telegraph from Washington to Fort Kearny, which was at the western end of the telegraph line. From there the news was carried by a relay of riders on horseback called the Pony Express, covering 1,260 miles (2,030 km) to Fort Churchill in Nevada, from where it was transmitted to California by telegraph. The process took seven days and 17 hours. Over the Pony Express segment of the route, the news travelled at 7 miles (11 km) per hour. A half-ounce (14 gram) letter carried over this route cost $5, or the equivalent of five days’ wages.

From similar calculations we know that news travelled between ancient Rome and Egypt at about 1 mile (1.6 km) per hour, and 1,500 years later between Venice and other cities around the Mediterranean it was, if anything, slightly slower. But, a few centuries later, as Figure 1.4 shows, the pace began to quicken. It took ‘only’ 46 days for the news of a mutiny of Indian troops against British rule in 1857 to reach London, and readers of the Times of London knew of Lincoln’s assassination only 13 days after the event. One year after Lincoln’s death a transatlantic cable cut the time for news to travel between New York and London to a matter of minutes.

In this line chart, the horizontal axis shows years from 1000 to 1900. The vertical axis shows the speed of news in miles per hour, and ranges from 0 to 12. The chart shows that the speed of news travelling between Egypt and Italy between 50 and 222, or travelling between Venice and Damascus, Alexandria, Lisbon and Palermo in 1500 was approximately 1 mile per hour until 1800. In 1805, the news of the battle of Trafalgar travelled from Spain to London at 2.7 miles per hour. In 1857, the news of the Indian mutiny travelled from Delhi to London at 3.7 miles per hour. In 1860, the news of Lincoln’s election travelled from Washington DC to the US west coast at 7 miles per hour. In 1865, the news of Lincoln’s assassination travelled across the US at 12 miles per hour.

Figure 1.4 The speed at which information travelled (1000–1865).

Tables 15.2 and 15.3 from Gregory Clark. 2007. A Farewell to Alms: A Brief Economic History of the World. Princeton, NJ: Princeton University Press.

Environment

1.5 The economy and the environment

Humans have always relied on their environment for the resources they need to live and produce their livelihoods: the physical environment and the biosphere, which is the collection of all forms of life on earth, provide essentials for life such as air, water and food. The environment also provides the raw materials that we use in the production of other goods—such as wood, metals, and oil.

Figure 1.5 shows one way of thinking about the economy: it is part of a larger social system, which is itself part of the biosphere. People interact with each other, and also with nature, in producing their livelihood.

This diagram shows that the economy is a part of society, which is in turn a part of the biosphere, which is in turn part of the physical environment.

Figure 1.5 The economy is part of society, which is part of the biosphere.

Through most of their history, humans have regarded natural resources as freely available in unlimited quantities (except for the costs of extracting them). But as production has soared (see Figures 1.1a and 1.1b), so too have the use of our natural resources and degradation of our natural environment. Elements of the ecological system such as air, water, soil, and weather have been altered by humans more radically than ever before.

The most striking effect is climate change. Figures 1.6a and 1.6b present evidence that our use of fossil fuels—coal, oil, and natural gas—has profoundly affected the natural environment. After having remained relatively unchanged for many centuries, increasing emissions of carbon dioxide (CO2) into the air during the twentieth century have resulted in measurably larger amounts of CO2 in the earth’s atmosphere (Figure 1.6a) and brought about perceptible increases in the northern hemisphere’s average temperatures (Figure 1.6b). Figure 1.6a also shows that CO2 emissions from fossil fuel consumption have risen dramatically since 1800.

Exercise 1.5 How much difference does a couple of degrees warmer or colder make?

Between 1300 and 1850 there were a number of exceptionally cold periods as you can see from Figure 1.6b. Research this so-called ‘little ice age’ in Europe and answer the following.

  1. Describe the effects of these exceptionally cold periods on the economies of these countries.
  2. Within a country or region, some groups of people were exceptionally hard hit by the climate change while others were less affected. Provide examples.
  3. How ‘extreme’ were these cold periods compared to the temperature increases since the mid-twentieth century and those projected for the future?

Figure 1.6b shows that the average temperature of the earth fluctuates from decade to decade. Many factors cause these fluctuations, including volcanic events such as the 1815 Mount Tambora eruption in Indonesia. Mount Tambora spewed so much ash that the earth’s temperature was reduced by the cooling effect of these fine particles in the atmosphere, and 1816 became known as the ‘year without a summer’.

In this line chart, the horizontal axis shows years from 1000 to 2010. The vertical axis shows two measures: atmospheric CO2 in parts per millions, which ranges from 200 to 400; and carbon emissions in millions of metric tonnes, which range from 0 to 10,000. The chart shows that atmospheric CO2 was approximately 275 parts per million until 1800, and increased to almost 400 parts per million by the year 2010. The series for carbon emissions starts at 0 approximately in 1750. From 1850, carbon emissions increased to almost 10,000 million metric tonnes by the year 2010.

Figure 1.6a Carbon dioxide in the atmosphere (1010–2010) and global carbon emissions from burning fossil fuels (1750–2010).

Years 1010–1975: David M. Etheridge, L. Paul Steele, Roger J. Francey, and Ray L. Langenfelds. 2012. ‘Historical Record from the Law Dome DE08, DE08-2, and DSS Xcel energy amarillo tx bill pay Cores’. Division of Atmospheric Research, CSIRO, Aspendale, Victoria, Australia. Years 1976–2010: Data from Mauna Loa observatory. T. A. Boden, G. Marland, and Robert J. Andres. 2010. ‘Global, Regional and National Fossil-Fuel CO2 Emissions’. Carbon Dioxide Information Analysis Center (CDIAC) Datasets.

Since 1900, average temperatures have risen in response to increasingly high levels of greenhouse gas concentrations. These have mostly resulted from the CO2 emissions associated with the burning of fossil fuels.

The human causes and the reality of climate change are no longer widely disputed in the scientific community. The likely consequences of global warming are far-reaching: melting of the polar ice caps, rising sea levels that may put large coastal areas under water, and potential changes in climate and rain patterns that may destroy the world’s food-growing areas. The long-term physical and economic consequences of these changes, and the appropriate policies that governments could adopt as a result, are discussed in detail in Unit 20 (Economics of the environment).

Climate change is a global change. But many of the environmental impacts of burning fossil fuels are local, as residents of cities suffer respiratory and other illnesses as a result of high levels of harmful emissions from power plants, vehicles, and other sources. Rural communities, too, are impacted by deforestation (another cause of climate change) and the depletion of the supply of clean water and fishing stocks.

From global climate change to local resource exhaustion, these effects are results of both the expansion of the economy (illustrated by the growth in total output) and the way the economy is organized (what kinds of things are valued and conserved, for example). The relationship between the economy and the environment shown in Figure 1.5 is two-way: we use natural resources in production, which may in turn affect the environment we live in and its capacity to support future production.

But the permanent technological revolution—which brought about dependence on fossil fuels—may also be part of the solution to today’s environmental problems.

Look back at Figure 1.3, which showed the productivity of labour in producing light. The vast increases shown over the course of history and especially since the mid-nineteenth century occurred largely because the amount of light produced per unit of heat (for example from a campfire, candle, or light bulb) increased dramatically.

In lighting, the permanent technological revolution brought us more light for less heat, which conserved natural resources—from firewood to fossil fuels—used in generating the heat. Advances in technology today may allow greater reliance on wind, solar and other renewable sources of energy.

Question 1.4 Choose the correct answer(s)

Which of the following variables have followed the so-called ‘hockey-stick’ trajectory—that is, little to no growth for most of history followed by a sudden and sharp change to a positive growth rate?

  • GDP per capita
  • labour productivity
  • inequality
  • atmospheric CO2
  • GDP per capita grows slowly or not at all in economies prior to industrialization, whereupon it begins to grow at an ever-increasing rate.
  • Labour productivity grows slowly or not at all in economies prior to industrialization, whereupon it begins to grow at an ever-increasing rate.
  • There is no unidirectional trend in inequality over time. While early hunter-gatherer tribes were undoubtedly almost perfectly equal, economies in the modern era have varied from highly equal to highly unequal.
  • See Figure 1.6a. The growth in atmospheric CO2 began from the mid-nineteenth century as a consequence of the burning of fossil fuels as the technologies introduced in the Industrial Revolution spread.

History, instability, and growth

1.6 Capitalism defined: Private property, markets, and firms

Looking back over the data in Figures 1.1a, 1.1b, 1.3, 1.4 and 1.6 we see an upward turn, like the kink in our hockey stick, repeated for:

  • gross domestic product per capita
  • productivity of labour (light per hour of work)
  • connectivity of the various parts of the world (the speed at which news travels)
  • impact of the economy on the global environment (carbon emissions and climate change)

How can we explain the change from a world in which living conditions changed little unless there was an epidemic or a war, to one in which each generation is noticeably, and predictably, better off than the previous one?

An important part of our answer will be what we call the capitalist revolution: the emergence in the eighteenth century and eventual global spread of a way of organizing the economy that we now call capitalism. The term ‘capitalism’—which we will define shortly—was barely heard of a century ago, but as you can see from Figure 1.7, its use has skyrocketed since then. The figure shows the fraction of all articles in the New York Times (excluding the sports section) that include the term ‘capitalism.’

capitalism
An economic system in which the main form of economic organization is the firm, in which the private owners of capital goods hire labour to produce goods and services for sale on markets with the intent of making a profit. The main economic institutions in a capitalist economic system, then, are private property, markets, and firms.
economic system
A way of organizing the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning (e.g. the Soviet Union in the twentieth century), feudalism (e.g. much of Europe in the early Middle Ages), slave economy (e.g. the US South and the Caribbean plantation economies prior to the abolition of slavery in the nineteenth century), and capitalism (most of the world’s economies today).
institution
The laws and informal rules that regulate social interactions among people and between people and the biosphere, sometimes also termed the rules of the game.

Capitalism is an economic system characterized by a particular combination of institutions. An economic system is a way of organizing the production and distribution of goods and services in an entire economy. And by institutions, we mean the different sets of laws and social customs regulating production and distribution in different ways in families, private businesses, and government bodies.

Private property

This means that you can:

  • enjoy your possessions in a way that you choose
  • exclude others from their use if you wish
  • dispose of them by gift or sale to someone else …
  • … who becomes their owner

In some economies in the past, the key economic institutions were private property (people owning things), markets (where goods could be bought and sold) and families. Goods were usually produced by families working together, rather than by firms with owners and employees.

In other societies, the government has been the institution controlling production, and deciding how goods should be distributed, and to whom. This is called a centrally planned economic system. It existed, for example, in the Soviet Union, East Germany and many other eastern European countries prior to the end of Communist Party rule in the early 1990s.

Though governments and families are essential parts of the workings of every economy, most economies today are capitalist. Since most of us live in capitalist economies, it is easy to overlook the importance of institutions that are fundamental for capitalism to work well. They are so familiar, we hardly ever notice them. Before seeing how private property, markets and firms combine in the capitalist economic system, we need to define them.

Over the course of human history, the extent of private property has varied. In some societies, such as the hunters and gatherers who are our distant ancestors, almost nothing except personal ornaments and clothing was owned by individuals. In others, crops and animals were private property, but land was not. The right to use the land was granted to families by consensus among members of a group, or by a chief, without allowing the family to sell the plot.

In other economic systems some human beings—slaves—were private property.

capital goods
The durable and costly non-labour inputs used in production (machinery, buildings) not including some essential inputs, e.g. air, water, knowledge that are used in production at zero cost to the user.

In a capitalist economy, an important type of private property is the equipment, buildings, and other durable inputs used in producing goods and services. These are called capital goods.

Private property may be owned by an individual, a family, a business, or some entity other than the government. Some things that we value are not private property: for example, the air we breathe and most of the knowledge we use cannot be owned or bought and sold.

Question 1.5 Choose the correct answer(s)

Which of the following are examples of private property?

  • computers belonging to your college
  • a farmer’s land in Soviet Russia
  • shares in a company
  • a worker’s skills
  • Although computers owned by the college may be used by many students, they are still property of the college, which requires payment (tuition) for access and can exclude their use by non-students.
  • In the Soviet era Russia your land could be transferred to others by the state and hence was not private property.
  • Shares in a company represent a claim to that company’s future profits; this claim can be sold, gifted, or realized as the owner wishes and represents income to which non-shareholders are not entitled.
  • While intellectual property is private property (of your company, your university or yourself), your skills in general are not disposable to others for them to become the owners.

Markets

Markets are:

  • a way of connecting people who may mutually benefit
  • by exchanging goods and services
  • through a process of buying and selling

Markets are a means of transferring goods or services from one person to another. There are other ways, such as by theft, a gift, or a government order. Markets differ from these in three respects:

They are reciprocated: unlike gifts and theft, one person’s transfer of a good or service to another is directly reciprocated by a transfer in the other direction (either of another good or service as in barter exchange, or money, or a promise of a later transfer when one buys on credit). They are voluntary: Both transfers—by the buyer and the seller—are voluntary because the things being exchanged are private property. So the exchange must be beneficial in the opinion of both parties. In this, markets differ from theft, and also from the transfers of goods and services in a centrally planned economy.

In most markets there is competition. A seller charging a high price, for example, will find that buyers prefer to buy from other competing sellers.

Exercise 1.6 The poorest man’s cottage

‘The poorest man may in his cottage bid defiance to all the forces of the Crown. It may be frail, its roof may shake; the wind may blow through it; the storms may enter, the rain may enter—but the King of England cannot enter; all his forces dare not cross the threshold of the ruined tenement.’ – William Pitt, 1st Earl of Chatham, speech in the British Parliament (1763).

  1. What does this tell us about the meaning of private property?
  2. Does it apply to people’s homes in your country?

Exercise 1.7 Markets and social networks

Think about a social networking site that you use, for example Facebook. Now look at our definition of a market.

What are the similarities and differences between that social networking site and a market?

Question 1.6 Choose the correct answer(s)

Which of the following are examples of markets?

  • wartime food rationing
  • auction websites such as eBay
  • touts selling tickets outside concert halls
  • sale of illegal arms
  • The transfer of goods and services that occur in a centrally planned economy as a result of government orders is not a market.
  • An auction-based market is still a market, just one in which the pricing mechanism works through bidding as opposed to a negotiated or listed price.
  • A resale market is still a market, even though the goods in question have already been sold once before.
  • An illegal market is still a market in the economic sense.

Firm

A firm is a way of organizing production with the following characteristics:

  • One or more individuals own a set of capital goods that are used in production.
  • They pay wages and salaries to employees.
  • They direct the employees (through the managers they also employ) in the production of goods and services.
  • The goods and services are the property of the owners.
  • The owners sell the goods and services on markets with the intention of making a profit.

But private property and markets alone do not define capitalism. In many places they were important institutions long before capitalism. The most recent of the three components making up the capitalist economy is the firm.

The kinds of firms that make up a capitalist economy include restaurants, banks, large farms that pay others to work there, industrial establishments, supermarkets, and internet service providers. Other productive organizations that are not firms and which play a lesser role in a capitalist economy include family businesses, in which most or all of the people working are family members, non-profit organizations, employee-owned cooperatives, and government-owned entities (such as railways and power or water companies). These are not firms, either because they do not make a profit, or because the owners are not private individuals who own the assets of the firm and employ others to work there. Note: a firm pays wages or salaries to employees but, if it takes on unpaid student interns, it is still a firm.

labour market
In this market, employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side. See also: labour force.

Firms existed, playing a minor role, in many economies long before they became the predominant organizations for the production of goods and services, as in a capitalist economy. The expanded role of firms created a boom in another kind of market that had played a limited role in earlier economic systems: the labour market. Firm owners (or their managers) offer jobs at wages or salaries that are high enough to attract people who are looking for work.

demand side
The side of a market on which those participating are offering money in return for some other good or service (for example, those purchasing bread). See also: supply side.
supply side
The side of a market on which those participating are offering something in return for money (for example, those selling bread). See also: demand side.

In economic language, the employers are the demand side of the labour market (they ‘demand’ employees), while the workers are the supply side, offering to work under the direction of the owners and managers who hire them.

A striking characteristic of firms, distinguishing them from families and governments, is how quickly they can be born, expand, contract and die. A successful firm can grow from just a few employees to a global company with hundreds of thousands of customers, employing thousands of people, in a few years. Firms can do this because they are able to hire additional employees on the labour market, and attract funds to finance the purchase of the capital goods they need to expand production.

Firms can die in a few years too. This is because a firm that does not make profits will not have enough money (and will not be able to borrow money) to continue employing and producing. The firm shrinks, and some of the people who work there lose their jobs.

Contrast this with a successful family farm. The family will be better off than its neighbours; but unless it turns the family farm into a firm, and employs other people to work on it, expansion will be limited. If, instead, the family is not very good at farming, then it will simply be less well off than its neighbours. The family head cannot dismiss the children as a firm might get rid of unproductive workers. As long as the family can feed itself there is no equivalent mechanism to a firm’s failure that will automatically put it out of business.

Government bodies also tend to be more limited in their capacity to expand if successful, and are usually protected from failure if they perform poorly.

Defining capitalism precisely

In everyday language, the word ‘capitalism’ is used in different ways, in part because people have strong feelings about it. In the language of economics, we use the term in a precise way because that helps us to communicate: we define capitalism as an economic system combining three institutions, each of which we need in turn to define.

‘Capitalism’ refers not to a specific economic system, but to a class of systems sharing these characteristics. How the institutions of capitalism—private property, markets, and firms—combine with each other and with families, governments, and other institutions differs greatly across countries. Just as ice and steam are both ‘water’ (defined chemically as a compound of two hydrogen old national bank kalamazoo bonded with one oxygen atom), China and the US are both capitalist economies. But they differ in the extent to which the government influences economic affairs, and in many other ways. As this demonstrates, definitions in the social sciences often cannot be as precise as they are in the natural sciences.

Some people might say that ‘ice is not really water’, and object that the definition is not the ‘true meaning’ of the word. But debates about the ‘true’ meaning (especially when referring to complex abstract ideas like capitalism, or democracy) forget why definitions are valuable. Think of the definition of water, or of capitalism, not as capturing some true meaning—but rather as a device that is valuable because it makes it easier to communicate.

Definitions in the social sciences often cannot be as precise as they are in the natural sciences. Unlike water, we cannot identify a capitalist economic system using easy-to-measure physical characteristics.

History, instability, and growth

1.7 Capitalism as an economic system

Figure 1.8 shows that the three parts of the definition of a capitalist economic system are nested concepts. The left-hand circle describes an economy of isolated families who own their capital goods and the goods they produce, but have little or no exchange with others.

This diagram shows how private property, markets, and firms are related to one other in a capitalist economic system: firms are parts of markets, which in turn are part of an economic system with private property.

Figure 1.8 Capitalism: Private property, markets and firms.

In a capitalist system, production takes place in firms. Markets and private property are essential parts of how firms function for two reasons:

  • Inputs and outputs are private property: The firm’s buildings, equipment, patents, and other inputs into production, as well as the resulting outputs, belong to the owners.
  • Firms use markets to sell outputs: The owners’ profits depend on markets in which customers may willingly purchase the products at a price that will more than cover production costs.8

Historically, economies like the left-hand circle have existed, but have been much less important than a system in which markets and private property are combined (the middle circle). Private property is an essential condition for the operation of markets: buyers will not want to pay for goods unless they can have the right to own them. In the middle circle most production is done either by individuals (shoemakers or blacksmiths, for example) or in families (for example, on a farm). Prior to 1600 a great many of the economies of the world were like this.

ownership
The right to use and exclude others from the use of something, and the right to sell the thing that is owned.

A distinctive aspect of the definition of capitalism as an economic system is that under it most production takes place using privately ownedcapital goods that are operated by workers who are paid wages. This contrasts with government ownership of capital goods in a centrally planned economy, where private firms and markets are relatively unimportant.

Another contrast is with an economic system defined as a slave economy, where most of the work is done by people who are not hired for wages but, instead, like the land on which they work, are the property of another person. Going beyond these definitions, capitalist economic systems also include work done by government officials and unpaid work in the home, and, historically, by slaves.

Capitalism is an economic system that combines centralization with decentralization. It concentrates power in the hands of owners and managers of firms who are then able to secure the cooperation of large numbers of employees in the production process. But it limits the powers of owners and of other individuals, because they face competition to buy and sell in markets.

So when the owner of a firm interacts with an employee, he or she is ‘the boss’. But when the same owner interacts with a potential customer he or she is simply another person trying to make a sale, in competition with other firms. It is this unusual combination of competition among firms, and concentration of power and cooperation within them, that accounts for capitalism’s success as an economic system.

How could capitalism lead to growth in living standards?

Two major changes accompanied the emergence of capitalism, both of which enhanced the productivity of individual workers:

Technology

As we have seen, the permanent technological revolution coincided with the transition to firms as the predominant means of organizing production. This does not mean that firms necessarily caused technological change. But firms competing with each other chevy chase bank near me markets had strong incentives to adopt and develop new and more productive technologies, and to invest in capital goods that would have been beyond the reach of small-scale family enterprises.

Specialization

The growth of firms employing large numbers of workers—and the expansion of markets linking the entire world in a process of exchange—allowed historically unprecedented specialization in diy home remedy for poison ivy tasks and products on which people worked. In the next section, we will see how this specialization can raise labour productivity and living allied savings bank contact number 1.9 Firm or not?

Using our definition, explain whether each of the following entities is a firm by investigating if it satisfies the characteristics that define a firm. Research the entity online if you are stuck.

  1. John Lewis Partnership pnc online banking login pnc family farm in Vietnam
  2. your current family doctor’s office or practice
  3. Walmart (US)
  4. an eighteenth-century pirate ship (see our description of The Royal Rover in Unit 5)
  5. Google (US)
  6. Manchester United plc (UK)
  7. Wikipedia

History, instability, and growthGlobal economy

1.8 The gains from specialization

Capitalism and specialization

Look around at the objects in your workspace. Do you know the person who made them? What about your clothing? Or anything else in sight from where you are sitting?

Now imagine that it is 1776, the year that Adam Smith wrote The Wealth of Nations. The same questions, asked anywhere in the world, would have had a different answer.

At that time many families produced a wide array of goods for their own use, including crops, meat, clothing, even tools. Many of the things that you might have spotted in Adam Smith’s day would have been made by a member of the family, or of the village. You would have made some objects yourself; others would have been made locally and purchased from the village market.

economies of scale
These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. Also known as: increasing returns to scale. See also: diseconomies of scale.

One of the changes that was underway during Adam Smith’s life, but has greatly accelerated since, is specialization in the production of goods and services. As Smith explained, we become better at producing things when we each focus on a limited range of activities. This is true for three reasons:

  • Learning by doing: We acquire skills as we produce things.
  • Difference in ability: For reasons of skill, or natural surroundings such as the quality of the soil, some people are better at producing some things than others.
  • economies of scale: Producing a large number of units of some good is often more cost-effective than producing a smaller number. We investigate this in more detail in Unit 7.

These are the advantages of working on a limited number of tasks or products. People do not typically produce the full range of goods and services that they use or consume in their daily life. Instead we specialize, some producing one good, others producing other goods, some working as welders, others as teachers or farmers.

But people will not specialize unless they have a way to acquire the other goods they need.

For this reason, specialization—called the division of labour—poses a problem for society: how are the goods and services to be distributed from the producer to the final user? In the course of history, this has happened in a number of distinct ways, from direct government requisitioning and distribution as was done in the US and many economies during the Second World War, to gifts and voluntary sharing as we do in families today and as practiced among even unrelated members of a community by our hunting and gathering ancestors. Capitalism enhanced our opportunities for specialization by expanding the economic importance of both markets and firms.

Specialization exists within governments and also in families, where who does which household chore is often associated with age and gender. Here we look at the division of labour in firms and in markets.

The division of labour in firms

Adam Smith begins The Wealth of Nations with the following sentence:

The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.

He went on to describe a pin factory in which the specialization of tasks among the working men allowed a level of productivity—pins produced per day—that seemed to him extraordinary. Firms may employ thousands or even hundreds of thousands pnc online banking login pnc individuals, most of them working at specialized tasks under the direction of the owners or manager of the firm.

This description of the firm stresses its hierarchical nature from top to bottom. But you can also think of the firm as a means by which large numbers of people, each with distinct skills and capacities, contribute to a common outcome, the product. The firm thus facilitates a kind of cooperation among specialized producers that increases productivity.

We return to the question of who does what within the firm and why in Unit 6.

Markets, specialization, and comparative advantage

Chapter 3 in The Wealth of Nations is titled: ‘That the Division of Labour is Limited by the Extent of the Market’, in which Smith explains:

When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.

When you hear the word ‘market’ what word do you think of? ‘Competition’ probably is what came to mind. And you would how do i find my victoria secret credit card number right to associate the two words.

But you might have also come up with ‘cooperation’. Why? Because markets allow each of us pursuing our private objectives to work together, producing and distributing goods and services in a way that, while far from perfect, is in many cases better than the alternatives.

Markets accomplish an extraordinary result: unintended cooperation on a global scale. The people who produced the phone on your desk did not know or care about you; they produced it rather than you because they are better at producing phones than you are, and you ended up with it because you paid them, allowing them to buy goods that they need, also produced by total strangers to them.

A simple example illustrates how, when people differ in their ability to produce different goods, markets allow them to specialize. It shows something surprising: all producers can benefit by specializing and trading goods, even when this means that one producer specializes in a good that another could produce at lower cost.

Imagine a world of just two individuals (Greta and Carlos) who each need both of free market capitalism vs socialism a simple analogy goods, apples and wheat, to survive. They differ in how productive they are in growing apples and wheat. If Greta spent all her time, say, 2,000 hours in a year, producing apples, she would produce 1,250. If she only produced wheat, she would produce 50 tonnes per annum. Carlos has less fertile land than Greta for producing both crops: if he devoted all his time (the same amount as Greta) to apple growing, he would produce 1,000 per year, and if he produced only wheat he would produce 20 tonnes. See Figure 1.9a for a summary.

Production if 100% of time is spent on one good
Greta1,250 apples or 50 tonnes of wheat
Carlos1,000 apples or 20 tonnes of wheat

Figure 1.9a Absolute and comparative advantage in the production of apples and wheat.

absolute advantage
A person or country has this in the production of a good if the inputs it uses to produce this good are less than in some other person or country. See also: comparative advantage.

Although Carlos’ land is worse for producing both crops, his disadvantage is less, relative to Greta, in apples than in wheat. Greta can produce two and a half times more wheat as he can but only 25% more apples.

Economists distinguish who is better at producing what in two ways: absolute advantage and comparative advantage.

Greta has an absolute advantage in both crops. Carlos has an absolute disadvantage. She can produce more of either crop than he can.

comparative advantage
A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods. See also: absolute advantage.

Greta has a comparative advantage in wheat; Carlos has a comparative advantage in apples. Although she is better, Carlos is least disadvantaged in producing apples. Greta has a comparative advantage in producing wheat.

Initially, Carlos and Greta are not able to trade with each other. Both must be self-sufficient, consuming exactly what they produce, so they will each produce both goods in order to survive. Greta chooses to use 40% of her time in apple production, and the rest producing wheat. Column 1 of Figure 1.9b shows that she produces and consumes 500 apples and 30 tonnes of wheat. Carlos’ consumption is also shown: he spends 30% of his time producing apples, and 70% producing wheat.

Now suppose that there are markets where apples and wheat may be bought and sold, and that 40 apples can be bought for the price of 1 tonne of wheat. If Greta specializes in growing wheat only, producing 50 tonnes of wheat and no apples, while Carlos specializes in apples, total production of both crops will be higher than it was under self-sufficiency (column 2). Then they can each sell some of their own crop in the market, and buy some of the good that the other produced.

For example, if Greta sells 15 tonnes of wheat (column 3) in order to buy 600 apples, she can now consume more apples and more wheat than before (column 4). And the table shows that buying the 15 tonnes of wheat produced by Greta, in return for 600 apples, similarly enables Carlos to consume more of both goods than was possible in the absence of specialization and trade.

Self-sufficiencyComplete specialization and trade
ProductionTradeConsumption
1234
GretaApples5000600
Wheat3050=15+35
CarlosApples3001,000=600+400
Wheat14015

Figure 1.9b Comparing self-sufficiency and specialization. Under self-sufficiency, both consume exactly what they produce. Under complete specialization, Greta produces only wheat; Carlos produces only apples; and they trade the surplus of their production above what they consume.

In constructing this example we assumed market prices are such that a tonne of wheat could be exchanged for 40 apples. We will return to how markets work in Units 7 to 12, but Exercise 1.10 shows that this assumption was not critical. There are other prices at which both Greta and Carlos would benefit from trading with each other.

The opportunity to trade—that is, the existence of an apple market and a wheat market—has benefited both Greta and Carlos. This was possible because specializing in the production of a single good increased the total amount of each good produced, from 800 to 1,000 apples and from 44 to 50 tonnes of wheat. The surprising thing mentioned above is that Greta ended up buying 600 apples from Carlos even though she could have produced those apples at a lower cost herself (in terms of labour time). This was a better way to spend their time because while Greta had an absolute advantage in producing both goods, Carlos had a comparative advantage in producing apples.

Markets contribute to increasing the productivity of labour—and can therefore help to explain the hockey stick of history—by allowing people to specialize in the production of goods for which they have a comparative advantage, that is the things at which they are—relatively speaking—least bad!

Exercise 1.10 Apples and wheat

Suppose that market prices were such that 35 apples could be bought for 1 tonne of wheat.

  1. If Greta sold 16 tonnes of wheat, would both she and Carlos still be better off?
  2. What would happen if only 20 apples could be bought for the price of a tonne of wheat?

History, instability, and growthGlobal economyInnovation

1.9 Capitalism, causation and history’s hockey stick

We have seen that the institutions associated with capitalism have the potential to make people better off, through opportunities for both specialization and the introduction of new technologies, and that the permanent technological revolution coincided with the emergence of capitalism. But can we conclude that capitalism caused the upward kink in the hockey stick?

We should be sceptical when anyone claims that something complex (capitalism) ‘causes’ something else (increased living standards, technological improvement, a networked world, or environmental challenges).

In science, we support the statement that X causes Y by understanding the relationship between cause (X) and effect (Y) and performing experiments to gather evidence by measuring X and Y.

causality
A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept. See also: natural experiment, correlation.

We want to make causal statements in economics—to understand why things happen, or to devise ways of changing something so that the economy works better. This means making a causal statement that policy X is likely to cause change Y. For example, an economist might claim that: ‘If the central bank lowers the interest rate, more people will buy homes and cars.’

But an economy is made up of the interactions of millions of people. We cannot measure and understand them all, and it is rarely possible to gather evidence by conducting experiments (though in Unit 4 we will give examples of the use of conventional experiments in one area of economics). So how can economists do science? This example shows how the things we observe in the world can help us investigate causes and effects.

How economists learn from facts Do institutions matter for growth in income?

natural experiment
An empirical study exploiting naturally occurring statistical controls in which researchers do not have the ability to assign participants to treatment and control groups, as is the case in conventional experiments. Instead, differences in law, policy, weather, or other events can offer the opportunity to analyse populations as if they had been part of an experiment. The validity of such studies depends on the premise that the assignment of subjects to the naturally occurring treatment and control groups can be plausibly argued to be random.

We can observe that capitalism emerged at the same time as, or just before, both the Industrial Revolution and the upward turn in our hockey sticks. This would be consistent with the hypothesis that capitalist institutions were among the causes of the era of continuous productivity growth. But the emergence of a free-thinking cultural environment known as ‘The Enlightenment’ also predated or coincided with the upturn in the hockey sticks. So was it institutions, or culture, both, or some other set of causes? Economists and historians disagree, as you will see in Unit 2, when we ask ‘What were the causes of the Industrial Revolution?’

Scholars in all fields try to narrow the range of things on which they disagree by using facts. For complicated economic questions, like ‘Do institutions matter economically?’, facts may provide enough information to reach a conclusion.

A method for doing this is called a natural experiment. It is a situation in which there are differences in something of interest—a change in institutions for example—that are not associated with differences in other possible causes.

The division of Germany at the end of the Second World War into two separate economic systems—centrally planned in the east, capitalist in the west—provided a natural experiment. During this time a political ‘Iron Curtain’, as the British Prime Minister Winston Churchill described it, divided the country. It separated two populations that until then had shared the same language, culture, and capitalist economy.9

In 1936, before the Second World War, living standards in what later became East and West Germany were the same. This is a suitable setting for using the natural experiment method. Before the war, firms in Saxony and Thuringia were world leaders in automobile and aircraft production, chemicals, optical equipment and precision engineering.

With the introduction of centralized planning in East Germany, private property, markets and firms virtually disappeared. Decisions about what to produce, how much and in which plants, offices, mines and farms were taken not by private individuals, but by government officials. The officials managing these economic organizations did not need to follow the principle of capitalism and produce goods and services that customers would buy at a price above their cost of manufacture.

West Germany remained a capitalist economy.

The East German Communist Party forecast in 1958 that material wellbeing would exceed the level of West Germany by 1961. The failure of this prediction was one of the reasons the Berlin Wall separating East from West Germany was built in 1961. By the time the Berlin Wall fell in 1989, and East Germany abandoned central planning, its GDP per capita was less than half of that of capitalist West Germany. Figure 1.10 shows the different paths taken by these and two other economies from 1950. It uses the ratio scale.

In this line chart, the horizontal axis shows years from 1950 to 1989. The vertical axis displays GDP per capita in 1990 US dollars. It is in ratio scale, so each step on the scale is twice the previous step, and ranges from 1,500 to 24,000 US dollars. GDP per capita for West Germany, Japan, Spain and East Germany are shown. GDP per capita increases over time for all countries. West and East Germany’s GDP increases at roughly the same rate, but West Germany’s GDP is at a higher level than East Germany’s. Japan’s and Spain’s GDP is below that of West and East Germany in 1950, but increases at a faster rate, so Japan and Spain’s GDP reaches the same level of East Germany’s GDP in the early 1960s, and approaches that of West Germany by 1989.

Figure 1.10 The two Germanies: Planning and capitalism (1950–89).

Notice from Figure 1.10 that West Germany started from a more favourable position in 1950 than East Germany. Yet in 1936, before the war began, the two parts of Germany had virtually identical living standards. Both regions had achieved successful industrialization. East Germany’s relative weakness in 1950 was not mainly because union savings bank mt washington differences in the amount of capital equipment or skills available per head of the population, but because the structure of industries in East Germany was more disrupted by splitting the country than was the case in West Germany.10

Unlike some capitalist economies that had even lower per capita incomes in 1950, East Germany’s planned economy did not catch up to the world leaders, which included West Germany. By 1989, the Japanese economy (which had also suffered war damage) had, with its own particular combination of private property, markets, and firms, along with a strong government coordinating role, caught up to West Germany, and Spain had closed part of the gap.

We cannot conclude from the German natural experiment that capitalism always promotes rapid economic growth while central planning is a recipe for relative stagnation. Instead what we can infer is more limited: during the second half of the twentieth century, the divergence of economic institutions mattered for the livelihoods of the German people.

History, instability, and growthGlobal economyPolitics and policy

1.10 Varieties of capitalism: Institutions, government, and the economy

Not every capitalist country is the kind of economic success story exemplified in Figure 1.1a by Britain, later Japan, walking the west highland way in 4 days the other countries that caught up. Figure 1.11 tracks the fortunes of a selection of countries across the world during the twentieth century. It shows for example that in Africa the success of Botswana in achieving sustained growth contrasts sharply with Nigeria’s relative failure. Both are rich in natural resources (diamonds in Botswana, oil in Nigeria), but differences in the quality of their institutions—the extent of corruption and misdirection of government funds, for example—may help explain their contrasting trajectories.

The star performer in Figure 1.11 is South Korea. In 1950 its GDP per capita was places with free food today same as Nigeria’s. By 2013 it was ten times richer by this measure.

developmental state
A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education and other public policies.

South Korea’s take-off occurred under institutions and policies sharply different from those prevailing in Britain in the eighteenth and nineteenth centuries. The most important difference is that the government of South Korea (along with a few very large corporations) played a leading role in directing the process of development, explicitly promoting some industries, requiring firms to compete in foreign markets and also providing high quality education for its workforce. The term developmental state has been applied to the leading role of the South Korean government in its economic take-off and now refers to any government playing this part in the economy. Japan and China are other examples of developmental states.11

From Figure 1.11 we also see that in 1928, when the Soviet Union’s first five-year economic plan was introduced, GDP per capita was one-tenth of the level in Argentina, similar to Brazil, and considerably higher than in South Korea. Central planning in the Soviet Union produced steady but unspectacular growth for nearly 50 years. GDP per capita in the Soviet Union outstripped Brazil by a wide margin and even overtook Argentina briefly just before Communist Party rule there ended in 1990.

The contrast between West and East Germany demonstrates that one reason central planning was abandoned as an economic system was its failure, in the last quarter of the twentieth century, to deliver the improvements in living standards achieved by some capitalist economies. Yet the varieties of capitalism that replaced central planning in the countries that had once made up the Soviet Union did not work so well either. This is evident from the pronounced dip in GDP per capita for the former Soviet Union after 1990. Economist Lisa Cook of Michigan State University asks why the transition to capitalism in Russia in the 1990s did not spark a wave of innovation. She documents the late 19th century inventions contributed by African American inventors, including gas masks, traffic lights, and light bulb technology and how this burst of innovations was cut short by a wave of attacks and anti-black mob violence. Her insights on the political and economic conditions under which innovation will flourish are relevant to understanding the vast differences across the world today in the extent of innovation.

When is capitalism dynamic?

The lagging performances of some of the economies in Figure 1.11 demonstrate that the existence of capitalist institutions is not enough, in itself, to create a dynamic economy—that is, an economy bringing sustained growth in living standards. Two sets of conditions contribute to the dynamism of the capitalist economic system. One set is economic; the other is political, and it concerns the government and the way it functions.

Economic conditions

Where capitalism is less dynamic, the explanation might be that:1213

  • Private property is not secure: There is weak enforcement of the rule of law and of contracts, or expropriation either by criminal elements or by government bodies.
  • Markets are not competitive: They fail to offer the carrots and wield the sticks that make a capitalist economy dynamic.
  • Firms are owned and managed by people who survive because of their connections to government or their privileged birth: They did not become owners or managers because they were good at delivering high-quality goods and services at a competitive price. The other two failures would make this more likely to occur.

Combinations of failures of the three basic institutions of capitalism mean that individuals and groups often have more to gain by spending time and resources in lobbying, criminal activity, and other ways of shifting the distribution of income in their favour. They have less to gain from the direct creation of economic value.14

Capitalism is the first economic system in human history in which membership of the elite often depends on a high level of economic performance. As a firm owner, if you fail, you are no longer part of the club. Nobody kicks you out, because that is not necessary: you simply go bankrupt. An important feature of the discipline of the market—produce good products profitably or fail—is that where it works well it is automatic, because having a friend in power is no guarantee that you could remain in business. The same discipline applies to firms and to individuals in firms: losers lose. Market competition provides a mechanism for weeding out those who underperform.

Think of how different this is from other economic systems. A feudal lord who managed his estate poorly was just a shabby lord. But the owner of a firm that could not produce goods that people would buy, at prices that more than covered the cost, is bankrupt—and a bankrupt owner is an ex-owner.

Of course, if they are initially very wealthy or very well connected politically, owners and managers of capitalist firms survive, and firms may stay in business despite their failures, sometimes for long periods or even over generations. Losers sometimes survive. But there are no guarantees: staying ahead of the competition means constantly innovating.

Political conditions

Government is also important. We have seen that in some economies—South Korea, for example—governments have played a leading role in the capitalist revolution. And in virtually every modern capitalist economy, governments are a large part of the economy, accounting in some for more than half of GDP. But even where government’s role is more limited, as in Britain at the time of its take-off, governments still establish, enforce and change the laws and regulations that influence how the economy works. Markets, private property and firms are all regulated by laws and policies.

For innovators to take the risk of introducing a new product or production process, their ownership of the resulting profits must be protected from theft by a well-functioning legal system. Governments also adjudicate disputes over ownership and enforce the property rights necessary for markets to work.

monopoly
A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller. See also: monopoly power, natural monopoly.
too big to fail
Said to be a characteristic of large banks, whose central importance in the economy ensures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks. See also: moral hazard.

As Adam Smith warned, by creating or allowing monopolies such as the East India Company, governments may also take the teeth out of competition. If a large firm is able to establish a monopoly by excluding all competitors, or a group of firms is able to collude to keep the price high, the incentives for innovation and the discipline of prospective failure will be dulled. The same is true in modern economies when some banks or free market capitalism vs socialism a simple analogy firms are considered to be too big to fail and instead are bailed out by governments when they might otherwise have failed.

In addition to supporting the institutions of the capitalist economic system, the government provides essential goods and services such as physical infrastructure, education and national defence. In subsequent units we investigate why government policies in such areas as sustaining competition, taxing and subsidizing to protect the environment, influencing the distribution of income, the creation of wealth, and the level of employment and inflation may also make good economic sense.

In a nutshell, capitalism can be a dynamic economic system when it combines:

  • Private incentives for cost-reducing innovation: These are derived from market competition and secure private property.
  • Firms led by those with proven ability to produce goods at low cost.
  • Public policy supporting these conditions: Public policy also supplies essential goods and services that would not be provided by private firms.
  • A stable society, biophysical environment and resource base: As in Figures 1.5 and 1.12.
capitalist revolution
Rapid improvements in technology combined with the emergence of a new economic system.

These are the conditions that together make up what we term the capitalist revolution that, first in Britain and then in some other economies, transformed the way that people interact with each other and with nature in producing their livelihoods.

Political systems

political system
A political free market capitalism vs socialism a simple analogy determines how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population.
democracy
A political system, that ideally gives equal political power to all citizens, defined by individual rights such as freedom of speech, assembly, and the press; fair elections in which virtually all adults are eligible to vote; and in which the government leaves office if it loses.

One of the reasons why capitalism comes in so many forms is that over the course of history and today, capitalist economies have coexisted with many political systems. A political system, such as democracy or dictatorship, determines how governments will be selected, and how those governments will make and implement decisions that affect the population.

Capitalism emerged in Britain, the Netherlands, and in most of today’s high-income countries long before democracy. In no country were most adults eligible to vote prior to the end of the nineteenth century (New Zealand was the first). Even in the recent past, capitalism has coexisted with undemocratic forms of rule, as in Chile from 1973 to 1990, in Brazil from 1964 to 1985, and in Japan until 1945. Contemporary China has a variant of the capitalist economic system, but its system of government is home remedies for burns from hot pan a democracy by our definition. In most countries today, however, capitalism and democracy coexist, each system influencing how the other works.

Like capitalism, democracy comes in many forms. In some, the head of state is elected directly by the voters; in others it is an elected body, such as a parliament, that elects the head of state. In some democracies there are strict limits on the ways in which individuals can influence elections or public policy through their financial contributions; in others private money has great influence through contributions to electoral campaigns, lobbying, and even illicit contributions such as bribery.

These differences even among democracies are part of the explanation of why the government’s importance in the capitalist economy differs so much among nations. In Japan and South Korea, for example, governments play an important role in setting the direction of their economies. But the total amount of taxes collected by government (both local and national) is low compared with some rich countries in northern Europe, where it is almost half of GDP. We shall see in Unit 19 that in Sweden and Denmark, inequality in disposable income (by one of the most commonly used measures) is just half of the level of income inequality before the payment of taxes and receipt of transfers. In Japan and South Korea, government taxes and transfers also reduce inequality in disposable income, but to a far lesser degree.

Question 1.7 Choose the correct answer(s)

Look again at Figure 1.10, which shows a graph stubhub canada contact number GDP per capita for West and East Germany, Japan and Spain between 1950 and 1990. Which of the following statements is correct?

  • Having a much lower starting point in 1950 was the main reason for East Germany’s poor performance compared to West Germany.
  • The fact that Japan and West Germany have the highest GDP per capita in 1990 implies that they found the optimal economic system.
  • Spain was able to grow at a higher growth rate than Germany between 1950 and 1990.
  • The difference in East and West Germany’s performance proves that capitalism always promotes rapid economic growth while central planning is a recipe for stagnation.
  • Japan had even lower starting point than East Germany and yet was able to catch up with West Germany by 1990.
  • Different economic systems can be successful. The Japanese economy had its own particular combination of private property, markets and firms along with a strong government coordinating role, which was different to the West Germany system.
  • The growth rate of an economy’s GDP per capita can be inferred from the steepness of its curve when plotted on a ratio scale graph, as done here. The fact that the slope of Spain’s curve is greater than that of either West or East Germany from 1950 to 1990 indicates that it grew at a faster rate.
  • In economics one cannot use only one piece of evidence to ‘prove’ a theory. What we can infer here is that during the second half of the twentieth century, the divergence of economic institutions mattered for the livelihoods of the German people.

Question 1.8 Choose the correct answer(s)

Look again at Figure 1.11. Which of these conclusions is suggested by the graph?

  • The Communist Party rule in the former Soviet Union before 1990 was a complete failure.
  • The contrasting performances of Botswana and Nigeria illustrate that rich natural resources alone do not guarantee higher economic growth, but that higher quality institutions (government, markets and firms) may also be necessary.
  • The impressive performance of South Korea’s economy implies that other countries should copy their economic system.
  • The evidence from the Russian Federation and the former Soviet Union after 1990 shows that the replacement of central planning by capitalism led to immediate economic growth.
  • The former Soviet Union actually had much higher growth rates than Brazil, and its GDP per capita even briefly overtook Argentina’s just before the Communist Party rule ended in 1990.
  • Both Nigeria and Botswana are rich in natural resources; however, Nigeria’s growth is hindered by pervasive corruption and illegal business practices, whereas Botswana is often described as the least corrupt country in Africa and boasts one of the world’s highest average GDP growth rates.
  • South Korea was a developmental state where the government and a few very large corporations played a leading role in directing the process of development. This does not necessarily mean that this system is optimal for all countries.
  • GDP per capita of both countries fell after 1990. This is due to their private property not being secure, the markets not being competitive and their firms not operating competitively in their newly capitalist economy. This abrupt transition from a distinctly non-capitalist economy to a capitalist system is often referred to as ‘shock therapy’.

1.11 Economics and the economy

economics
The study of how people interact with each other and with their natural surroundings in providing their livelihoods, and how this changes over time.

Economics is the study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time. Therefore it is about:

  • How we come to acquire the things that make up our livelihood: Things like food, clothing, shelter, or free time.
  • How we interact with each other: Either as buyers and sellers, employees or employers, citizens and public officials, parents, children and other family members.
  • How we interact with our natural environment: From breathing, to extracting raw materials from the earth.
  • How each of these changes over time.

In Figure 1.5 we showed that farmers state bank cedar rapids economy is part of society, which in turn is part of the biosphere. Figure 1.12 shows the position of firms and families in the economy, and the flows that occur within the economy and between the economy and the biosphere. Firms combine labour with structures and equipment, and produce goods and services that are used by households and other firms.

The economy of households and firms depends on a healthy biosphere and stable physical environment.

Figure 1.12 A model of the economy: Households and firms.

Production of goods and services also takes place within households, although unlike firms, households may not sell their outputs in the market.

Источник: https://www.core-econ.org/the-economy/book/text/01.html

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Author: Thomas Metcalf
Category: Social and Political Philosophy
Wordcount: 993

Editor’s Note: This essay is the second in a two-part series authored by Tom on the topic of capitalism and socialism. The first essay, on defining capitalism and socialism, can be viewed here.

Suppose I had a magic wand that allowed one to produce 500 donuts per hour. I say to you, “Let’s make a deal. You use this wand to produce donuts, and then sell those donuts for $500 and give me the proceeds. I’ll give you $10 for every hour you spend doing this. I’ll spend that time playing video games.”

My activity—playing video games—seems pretty easy. Your job requires much more effort. And I might end up with a lot more money than $10 for every hour you work. How is that fair?

In the story, the magic wand is analogous to capital goods: assets (typically machinery and buildings, such as robots, sewing machines, computers, and factories) that make labor, or providing goods and services, more productive. Standard definitions of ‘capitalism’ and ‘socialism’ indicate that, in general, capitalist systems permit people to privately own and control capital goods, whereas socialist systems do not. And capitalist systems tend to contain widespread wage labor, absentee ownership, and property income; socialist systems generally don’t.[1]

Capital goods are morally interesting. As in the case of the magic wand, ownership of capital goods can allow one to make lots of money without working. In contrast, other people have to work for a living. This might be unfair or harmful. This essay surveys and explains the main arguments in this debate.[2]

Commercial donut manufacturing.

1. Capitalism

Arguments for capitalism tend to hold that it’s beneficial to society for there to be incentives to produce, own, and use capital goods like the magic wand, or that it’s wrong to forcibly prevent people from doing so. Here are four arguments for capitalism, stated briefly:

(1) Competition: ‘When individuals compete with each other for profits, this benefits the consumer.’[3]

Critique: Competition also may encourage selfish and predatory behavior. Competition can also occur in some socialist systems.[4]

(2) Freedom: ‘Preventing people from owning capital restricts their freedom. Seizing their income in the form of taxes may constitute theft.’[5]

Critiques: Maybe owning property, itself, restricts freedom, by excluding others from using it.[6] If I announce that I own something, I may be thereby announcing that I will force you not to use it. And maybe “freedom” requires the ability to pursue one’s own goals, which in turn requires some amount of wealth.[7] Further, if people must choose between work and starvation, then their choice to work may not be really “free” anyway.[8] And the general distribution of wealth is arguably the result of a morally arbitrary “natural lottery,”[9] which may not actually confer strict property-rights over one’s holdings.[10] I didn’t choose where I was born, nor my parents’ wealth, nor my natural talents, which allow me to acquire wealth. So perhaps it’s not a violation of my rights to take some of that property from me.

(3) Public Goods:[11] ‘When objects, including capital, must be shared with others, then no one is strongly motivated to produce them. In turn, society is poorer and labor is more difficult because production is inefficient.’[12]

Critique: People might be motivated to produce capital for altruistic reasons,[13] or may be coerced in some socialist systems to do so. Some putatively socialist systems allow for profitable production of capital goods.[14]

(4) Tragedy of the Commons: ‘When capital, natural resources, or the environment are publicly controlled, no one is strongly motivated to protect them.’[15]

Critique: As before, people might be motivated by altruism.[16] Some systems with partially-private control of capital may nevertheless qualify as socialist.[17]

2. Socialism

Arguments for socialism tend to hold that it’s unfair or harmful to have a system like in the story of the magic wand, a system with widespread wage labor and property income. Here are four arguments for socialism, stated briefly:

(1) Fairness: ‘It’s unfair to make money just by owning capital, as is possible only in a capitalist system.’[18]

Critique: Perhaps fairness isn’t as morally important as consent, freedom, property rights, or beneficial consequences. And perhaps wage laborers consent to work, and capital owners have property rights over their capital.[19]

(2) Inequality: ‘When people can privately own capital, they can use it to get even richer relative to the poor, and the wage laborers are left poorer and poorer relative to the rich, thereby worsening the inequality that already exists between capital-owners and wage-laborers.’[20]

Critiques: This is a disputable empirical claim.[21] And perhaps the ability to privately own capital encourages people to invest in building capital goods, thereby making goods and services cheaper. Further, perhaps monopolies commonly granted by social control over capital are “captured” by wealthy special-interests,[22] which harm the poor by enacting regressive laws.[23]

(3) Labor: ‘Wage laborers are alienated from their labor, exploited, and unfree because they must obey their bosses’ https www suntrust online banking If this alienation and exploitation are net-harmful to workers, then why do workers consent to work? If the answer is ‘because they’ll suffer severe hardship otherwise,’ then strictly speaking, this is a critique of allowing poverty, not a critique of allowing wage labor.

(4) Selfishness: ‘When people can privately own capital, they selfishly pursue profit above all else, which leads to further inequality, environmental degradation, non-productive industries, economic instability, colonialism, mass murder, and slavery.’

Critique: These are also disputable empirical claims. Maybe when people are given control over socially-owned capital, they selfishly extract personal wealth free market capitalism vs socialism a simple analogy it.[25] Maybe when the environment is socially controlled, everyone is individually motivated to over-harvest and pollute.[26] State intervention in the economy may be a major cause of the existence of non-productive industry, pollution, and economic instability.[27] Last, some of the worst perpetrators of historical evils are governments, not private corporations.[28]

3. Conclusion

It is difficult to justifiably draw general conclusions about what a pure capitalism or socialism would be like in practice.[29] But an examination of the merits and demerits of each system gives us some guidance about whether we should move a society in either direction.

Notes

[1] See my Defining Capitalism and Socialism for an explanation of how to define these systems.

[2] For much-more-extensive surveys, see Gilabert and O’Neill n.d. and Arnold n.d.

[3] By analogy, different people might try to construct even better magic wands, or use them for better purposes. Typically the benefits are thought to include lower prices, increased equality, innovation, and more options. See Smith 2003 [1776]: bk. 1, ch. 2 and Friedman and Friedman 1979: ch. 1.

[4] Schweickart 2011 presents an outline of a market socialism comprising much competition.

[5] By analogy, if I legitimately own the magic wand, then what gives you the right to threaten violence against me if I don’t give it to you? Nozick 1974: ch. 7 presents a general discussion of how socialism might restrict freedom and how taxation may be akin to theft or forced labor.

[6] Spencer 1995 [1871]: 103-4 and Zwolinski 2015 discuss how property might require coercion. See also Scott 2011: 32-33. Indeed, property in general may essentially be theft (Proudhon 1994 [1840]).

[7] See Rawls (1999: 176-7) for this sort of argument. See John Rawls’ ‘A Theory of Justice’ by Ben Davies for an introduction.

[8] See e.g. Burawoy 1979 for a discussion of whether workers consent to work. See also Marx 2004 (1867): vol. IV, ch. VII.

[9] Rawls 1999: 62 ff.

[10] Relatedly, while one may currently hold capital, one may greatly owe the existence of that product to many other people or to society in general. See e.g. Kropotkin 2015 [1913]: chs. 1-3 and Murphy and Nagel 2002.

[11] A public good is a good that is non-excludable (roughly, it is expensive to prevent people from using it) and non-rivalrously consumed (roughly, preventing people from using it causes harm without benefiting anyone) (Cowen 2008).

[12] By analogy, why bother building magic wands at all if someone else is immediately going to take it from me and start using it? Standard economic theory holds that public goods (non-excludable and non-rivalrous goods) will, on the free market, be underproduced. This is normally taken to be an argument for government to produce public goods. See e.g. Gaus 2008: 84 ff.

[13] For example, according to Marxist communism, the ideal socialist society would comprise production for use, not for profit. See e.g. Marx 2004 [1867]: vol. 1 ch. 7. See also Kropotkin 1902, which is a defense of the general claim that humans will tend to be altruistic, at least in anarcho-communist systems.

[14] In a market-socialist system (cf. Schweickart 2011), it is possible to make capital goods and sell them at a profit that gets distributed to the laborers.

[15] By analogy, if I know that anyone in the neighborhood can use the magic wand, I might not invest my own time and money to maintain it. But if it’s mine alone, I care a lot more about maintaining it. This is the basis of the well-known ‘Tragedy of the Commons’ alleged problem. See, e.g., Hardin 1968.

[16] Kropotkin 1902.

[17] As before, in Schweickart’s (2011) system, firms will be motivated to protect capital if they must pay for capital’s deprecation, even though the capital is owned by society.

[18] By analogy, as noted, the wand-owner might make lots of money for basically doing no work. Sherman 1995: 130; Schweickart 2011: § 3.2.

[19] See e.g. Friedman 2002 for a collection of consequentialist arguments for capitalism, and Nozick 1974: chs. 3 and 7 for some arguments concerning freedom and capitalist systems.

[20] By analogy, the wand-owner might accumulate so much money as to start buying other magic wands and renting those out as well. See e.g. Piketty 2014.

[21] Taking the world as a whole, wealth in absolute terms has been increasing greatly, and global poverty has been decreasing steeply, including in countries that have moved in mostly capitalist directions. See e.g. World Bank Group 2016: 3. Friedman 1989: ch. 5 argues that capitalism is responsible for the improved position of the poor today compared to the past.

[22] See e.g. Friedman 1989: ch. 7 for a discussion of regulatory capture.

[23] Friedman 2002: chs. IV and IX; Friedman 1989: ch. 4.

[24] By analogy, the person I’ve hired to use the wand might need to obey my orders, because they don’t have a wand of their own to rent out, and they might starve without the job I’ve offered them. Marx 2009 [1932] introduces and develops this concept of alienation. See Dan Lowe’s 2015 Karl Marx’s Conception of Alienation for an overview. See also Anderson 2015 for an argument that private corporations coercively violate their workers’ freedom.

[25] See n. 21 above. This result is most-obvious in countries in which dictators enrich themselves, but there is nothing in principle preventing rulers of ostensibly democratic countries from doing so as well. Presumably this worry explains the presence of the Emoluments Clause in the U. S. Constitution.

[26] See n. 14.

[27] See e.g. Friedman 2002: chs. III and V and the example of compliance costs for regulations.

[28] See Huemer 2013: ch. 6 ff.

[29] All or nearly all large-scale economies have been mixed economies. In contrast, a pure capitalism would be an anarcho-capitalism (see e.g. Gaus 2010: 75 ff. and Huemer 2013), and a pure socialism wouldn’t permit people to privately own scissors. See also the entry “Defining Capitalism and Socialism.”

References

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Arnold, Samuel. N. d. “Socialism.” In The Internet Encyclopedia of Philosophy (ed.), The Internet Encyclopedia of Philosophy, URL = <https://www.iep.utm.edu/socialis/>

Burawoy, Michael. 1979. Manufacturing Consent: Changes in the Labor Process under Monopoly Capitalism. Chicago, IL and London, UK: The University of Chicago Press.

Cohen, G. A. 2009. Why Not Socialism? Princeton, NJ: Princeton University Press.

Cowen, Tyler. 2008. “Public Goods.” In David R. Henderson (ed.), The Concise Encyclopedia of Economics. Indianapolis, IN: Liberty Fund.

Dagger, Richard and Terence Ball. 2019. “Socialism.” In Encyclopædia Britannica, inc. (ed.), Encyclopædia Britannica. Retrieved from https://www.britannica.com/topic/socialism

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Related Essays

Defining Capitalism and Socialism by Tom Metcalf

Marx’s Conception of Alienation by Dan Lowe

John Rawls’ ‘A Theory of Justice’ by Ben Davies

Social Contract Theory by David Antonini

Reparations for Historic Injustice by Joseph Frigault 

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About the Author

Tom is an associate professor at Spring Hill College in Mobile, AL. He received his PhD in philosophy from the University of Colorado, Boulder. He specializes in ethics, metaethics, epistemology, and the philosophy of religion. Tom has two cats whose names are Hesperus and Phosphorus. http://shc.academia.edu/ThomasMetcalf

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Источник: https://1000wordphilosophy.com/2019/09/17/arguments-for-capitalism-and-socialism/

Free market capitalism vs socialism a simple analogy -

Recent debate on economics and politics has been framing recent events in terms of socialism and capitalism. Is this warranted or a sign of hyperbolic rhetoric?

That question was posed this week to the Camera’s editorial advisory board and virtual editorial board.

One way to think about the “socialism v. capitalismâ debate without hyperbole is to examine the economics of discrete market segments. In America, health care, which is inherently demand “inelasticâ (if you need it, you’ll pay nearly any price to get it) continues to be distributed via our relatively unfettered “freeâ market system. Admittedly, there are very few markets anywhere that are truly “freeâ – health care is replete with subsidies and shifted costs – but the bottom line is that the provision of health care is uniquely susceptible to supply/demand distortions that place patients at a competitive disadvantage in the medical marketplace.

The collateral impact on others of almost anyone’s disease may warrant a more communal (“socialist?â ) solution. For example, keeping people “wellâ costs far less than treating preventable illnesses, but there are very few market incentives, from a health care provider’s perspective, that promote wellness. A new strategy that lowers the barriers to preventive health care may also shine a bright light on the fundamental flaw in the “invisible handâ approach to America’s current, more-or-less “capitalistâ medical care delivery system. Is the reason preventive health care is hard to find here that we are much more willing to part with our hard-earned cash to get well than to stay well? If so, a “we’re all in this togetherâ universal health care solution is certainly worth a try. The savings could be substantial from cradle to workplace to old age. It’s not “socialism,â it’s a “market correction.â

Ed Byrne

If one good thing could be said about communist ideology, it is that in the early 20th century it scared world capitalists in adopting a number of concessions that they might otherwise not have undertaken. Gains such as the 40-hour week, social security, unemployment insurance and labor unions were direct and indirect gains that resulted from the threat posed by communism.

But now that bugaboo is gone, defeated, nearly forgotten. Some believe it is time to go back to the “good old days.â They are primarily the folks on Wall Street who believe in globalization, an unregulated, “freeâ market system.

Unfortunately, we learn this system was built on a “fragileâ house of cards, most of it based on greed.

Those affected by this fragility, the folks who will lose their homes or go on unemployment, have reason to question which economic system is best. That is behind the emerging discussion of merits of capitalism vs. socialism, conservative vs. liberal, free market vs. regulation. While folks do care for labels, who favors them, and what is attached to them, they are primarily interested in which system offers the best, fairest, freest, most equitable system to their entire community. Whoever can prove to have such a system will eventually carry the day.

Marc Raizman

Debating political issues in terms of socialism and capitalism helps address a fundamental question: Who owns you? Who has a claim on your time and the products of your physical and mental efforts?

Under capitalism, you do. Consenting adults have the right to voluntarily associate with each other – in personal relationships or for-profit and non-profit ventures. Others have no right to interfere by mandating or prohibiting such relationships. The purpose of government is to protect our individual rights to freely cooperate and pursue our values.

Under socialism, everyone else owns a piece of you. They use the political process to stake a claim on your time, life, and property, whether or not you consent. In this sense, Socialism is anti-social. Under socialism, you are a means to other people’s ends.

Consider Barack Obama on health care: “If I were designing a system from scratch, I would probably go ahead with a single-payer system.â This “systemâ refers to people: patients, doctors, actuaries, scientists, etc. For Obama, we are like ingredients and politicians (“designersâ ) are the chefs.

As French economist Frederic Bastiat wrote in The Law back in 1850, “Socialists look upon people as raw material to be formed into social combinations. … To these intellectuals and writers, the relationship between persons and the legislator appears to be the same as the relationship between the clay and the potter.â

Sadly, John McCain’s world view differs little from Obama’s. Rather than offering a principled alternative, it’s closer to an echo.

Brian Schwartz

Both McCain and Obama support the government bailout and temporary control of the private investment banking system. McCain goes so far as to suggest the government should purchase troubled mortgages to save families from foreclosure. Obama offers an array of entitlement programs the likes of which we’ve not seen since FDR’s New Deal.

It’s astounding how similar this pattern is to Herbert Hoover’s deregulation of the market until it crashed under mounting debt – and how FDR and Truman had to pick up the pieces by, yes, spreading wealth more equitably around. Truth is, all taxes spread wealth around. But over the last 30 years, the U.S. system has taxed the working class payroll at a much higher rate than capital gains- especially over the last seven years. The top one percent has more wealth than the bottom 90 percent. And a new study of 30 nations out this week shows the United States with the highest rate of inequality with the highest poverty rate after Mexico and Turkey.

The American political pendulum swings back and forth between deregulation and re-regulation. And as it turns out, the New Deal worked. It brought us out of the Great Depression, creating what economists refer to as the Great Compression of wealth toward the middle classes, enabling single-income blue-collar families to achieve the American Dream. It gave Americans financial security and the equal opportunity great public schools afford.

What we need now is more of the same: A fairer tax structure, reinvestment in public schools, infrastructure, and green technology, universal access to affordable healthcare and tighter regulations on high finance. These are foundations on which to build a sound and sustainable economy that won’t grow too fast for its britches. One might call that socialistic. But there’s really nothing more conservative.

Julian Friedland

The term socialism has reared its head thanks to our choice, through congress, to give a $700 billion bailout of the banking and insurance industries. As we shore up these industries we partly nationalize them. It’s controversial – but not as controversial as the practices which led to the bailout: subprime lending, bundling and securitizing the bad loans, etc. that nearly melted down our economy.

Want socialism? Under regulate for long enough that denial and greed can do real damage.

However, socialism is not today’s hot topic because the American public got excited at the musings of Milton Friedman. The debate spiked because Gov. Sarah Palin, who has never given a clear explanation when name-calling could get her a buzz, used the S- word to vilify the economic musings of presidential opponent Barack Obama – who did outline a vision of “spreading wealth around.â

But again this is a matter of choices leading to consequences.

Want wealth spread around? Permit lawmakers to be cowed by special interests for long enough to allow gross inequities in wealth which promise more disruptions.

The wealth spreading that we may face soon, should, if we do our work right, be as temporary as our nation’s ownership position in Wall Street.

Anne B. Butterfield

Americans have always grappled with the notion of socialism mixed with capitalism. We are told that we can harness capitalism and create a better society by compulsory goodness. Unfortunately, we must consider these individuals no more benevolent than the rest of us especially as they promote force, dominion, and compulsion as a means to an end.

It is sad but true, that it is the disposition of almost all governments, parties, or collectives that once they gain enough authority, as they think is needed, they will begin to reign with impunity and complete disregard for our inalienable rights. We have seen that with the Republican Party in Washington, we are seeing that with the Democratic Party in Colorado, and we have seen it throughout the history of mankind.

That is why our founders fought for a land that was free from tyranny and dominion. That is why they fought to protect the freedom of mutual association and commerce. That is why they limited the role of government to protecting the rights of life, liberty and the pursuit of happiness. The American form of capitalism is a system of freedom not one of compulsion. Socialism has no place in our land of liberty. We will only accomplish a great society when we ourselves act without compulsion to improve the lives of those around us.

Brian C. Lewis

Our discussing capitalism vs. socialism in the presidential election is essential to understanding which direction the candidates want to take the country. The United States has rejected outright the socialism of Europe, Canada, Cuba and elsewhere seeking to redistribute wealth. Americans have shown they want individual property rights and the rewards of their own work. Then, in what appears to be a dichotomy in their values, they also have accepted some government regulations and assistance for those failing in a capitalistic society.

Sen. Obama’s statement is germane to the discussion. Do we agree with him that if the economy is good for the bottom, it will be good for everybody and that we’ve got to “spread the wealth around?â

Let me pose the question in terms of students taking a difficult exam where some excelled and others nearly failed. How do you suppose students would react to an instructor announcing those who did well will share their points with those who didn’t?

Obama’s direction could very well be the tipping point toward full-blown socialism in our country. Then, again, it may not. That’s partly up to us and our value of the discussion.

Shirley Scoville

Mr. Obama is being criticized from the right wing about wanting to “spread the wealth around.â But John McCain said, “Redistribution of the wealth, I don’t believe in it.””In a healthy society, economic wealth is constantly being re-distributed.

To say you don’t believe in it is like saying you don’t believe in America.

John McCain and Sarah Palin represent the right-wing extremists that have brought our country to near economic ruin. Things have been going very well for the super rich, and they don’t want to see anything change. This is not surprising, it is self serving.

Our society determines the best economic system that works for all the people through the great representative democracy that we call America. It is a best of breed mixture of economic theories and best practices. There is no need to try to align America with some extreme economic theory, such as the current rabid form of free market capitalism. A mix of socialism, or other economic theory, is needed to help balance our societies needs. After all, we are a compassionate people.

Paul Campos summed it up pretty well in his statement:”the most radical redistribution of income has been at the very top of the economic pyramid. The top 0.1 percent now enjoys a wage ratio about 70 times that of the bottom 90 percent – an astounding generational transfer of literally trillions of dollars from nine out of 10 Americans to the superrich.â

Rick Beaufait

(The Camera’s editorial advisory board members are: Rick Beaufait, Anne B. Butterfield, Adam Bliwas, Jimmy Calano, Ed Byrne, Clay Evans, Julian Friedland, Brian Lewis, Steve Pomerance, Marc Raizman, Brian T. Schwartz and Shirley Scoville.)

Источник: https://www.dailycamera.com/ci_13105414/

Why has pencil making proved a seductive metaphor for spontaneous order?

“’I want to mark!’ cries the child, demanding the pencil. He does not want to eat. He wants to mark. He is not seeking to get something into himself, but to put something out of himself.”

—Charlotte Perkins Gilman, Women and Economics

In 1980, Milton Friedman presented his vision of how the free market might bring about world peace in a 10-hour PBS broadcast series called Free to Choose. In a clip from the show (several versions are available on YouTube alone, totaling over 200,000 views, not counting multiple tribute videos), Friedman distills his argument into a two-minute-and-forty-one-second parable about a common household object:

Look at this lead pencil. There’s not a single person in the world who could make this pencil. Remarkable statement? Not at all. The wood from which it is made, for all I know, comes from a tree that was cut down in the state of Washington. To cut down that tree, it took a saw. To make the saw, it took steel. To make steel, it took iron ore. This black center—we call it lead but it’s really graphite, compressed graphite—I’m not sure where it comes from, but I think it comes from some mines in South America. This red top up here, this eraser, a bit of rubber, probably comes from Malaya, where the rubber tree isn’t even native! It was imported from South America by some businessmen with the help of the British government. This brass ferrule? [Self-effacing laughter.] I haven’t the slightest idea where it came from. Or the yellow paint! Or the paint that made the black lines. Or the glue that holds it together. Literally thousands of people co-operated to make this pencil. People who don’t speak the same language, who practice different religions, who might hate one another if they ever met! When you go down to the store and buy this pencil, you are in effect trading a few minutes of your time for a few seconds of the time of all those thousands of people. What brought them together and induced them to cooperate to make this pencil? There was no commissar sending … out orders from some central office. It was the magic of the price system: the impersonal operation of prices that brought them together and got them to cooperate, to make this pencil, so you could have it for a trifling sum.

That is why the operation of the free market is so essential. Not only to promote productive efficiency, but even more to foster harmony and peace among the peoples of the world.

Friedman chose the pencil as an homage to a colleague and mentor, although his name doesn’t come up in Free to Choose. Both the metaphor and its quasi-religious tone originate in a 1958 text called “I, Pencil,” by Leonard Read, who is sometimes referred to as a poet or a fiction writer, when he is acknowledged. In fact, he was an economist, a close compatriot of Ayn Rand’s, who founded the Foundation for Economic Education, a think tank devoted to preserving economic license in the U.S.

With its series of minor to downright false epiphanies pleasantly told, “I, Pencil” is the progenitor of TED Talks and This American Life. Quick and clever narratives, sprinkled with down-home-isms, certainly come off as common sensical, unless you look more closely at what is said. (Indeed, more than one of the former directly references Friedman/Read.) Like Friedman’s, Read’s pencil backstory is an uplifting conflation of domestic factory production, social justice, and right Christian thinking—all told from the point of view of the poor, neglected pencil:

I am a mystery—more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me … This is a species of the grievous error in which mankind cannot too long persist without peril …

It has been said that “only God can make a tree” … Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

Production becomes mystery becomes proof of the Almighty: an assembly line so complex even God may not understand it. What Friedman presented as humble begins to lose a certain humility under Read. At one point, his pencil becomes downright self-aggrandizing. “Simple?” The writing implement retorts.

Not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? … There is a fact still more astounding: the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

If I, Pencil, were the only item that could offer testimony on what men and women can accomplish when free to try, then those with little faith would have a fair case. However, there is testimony galore; it’s all about us and on every hand.

On everyhand. Get it? While Adam Smith’s Invisible Hand here is essentially attached to God’s arm, Read lists a plethora of other righteous phenomena—mail service, automobile manufacture, grain combines, milling machines, telephone lines, television broadcasts, gas and oil pipelines. All are proof that unregulated markets naturally foster the best possible outcome for individuals. But only one fits comfortably in everyhand.

Are we, then, to simply overlay the script of the free market atop a Christian worldview and equate market regulation and its inevitable endgame, socialism, with Hell? Unclear. Unimportant. Heed. “The lesson I have to teach is this,” Read’s pencil concludes. “Leave all creative energies uninhibited. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.”

***

Little wonder that pencils have proven such a popular tool of Christian conversion around the world. I was shocked, recently, to hear such a tale first-hand, from a friend in Cambodia. Sochea had been born a year before I was, which means that when she was 6 she watched the Khmer Rouge lead an extremely bloody revolution to try to turn her country into an agrarian utopia and permanently stamp out Western capitalism—an effort commemorated by starting the clock over. Year Zero followed several years of illegal American carpet bombings that wiped out livestock in mass numbers, contributing to a starvation that lead, some say, to nearly as many deaths as did the bloody regime. Under the Khmer Rouge, between 1.7 million and 2.2 million people died within four years, and with them perished the remaining intellectual, educational, and governmental infrastructure of Cambodia. When the Vietnamese invaded in 1979 and ousted the regime, little changed. Civil war continued for 19 years. Resources remained scarce when available at all. There wasn’t even, for example, money. Like: currency. When the Cambodian government began to rebuild in the early 1980s, it offered bags of rice as payment.

By 1980, Sochea was 11. She’d had no formal education for four years but was eager to pick up where she left off, once schools reopened. It was awkward: she was the tallest girl in her second-grade class by far. But she loved going to school and learning to read. Slowly, too, she was learning to write. Then she met some Christian missionaries.

Like her father, a monk, Sochea was a Buddhist. All of Cambodia, more or less, was too. Buddhism, she says, kept her alive under the Khmer Rouge and through the civil war. She’s still a Buddhist today: she organizes nuns in her day job, meditates twice daily in temples, gives alms to wandering monks. But the missionaries she met in 1980 wanted her to convert to Christianity, offering her the one thing she needed and that she couldn’t get anywhere else in exchange: a pencil. It’s true that she’s still a Buddhist, but she’ll admit if you ask that the pencil also made her Christian.

We could end the story there, with Sochea’s miraculous conversion, and certainly neither Friedman nor Read would see the need to press any further: shortly thereafter, Cambodia took to the unofficial but widespread use of the U.S. dollar. Beefed up amenities for American tourists. Created a garment industry largely focused on exporting to the U.S. (Regulations exist, but rampant corruption in the country means they are not routinely followed.) Began adopting policies to allow for U.S.-owned business to operate locally, again without much oversight. Turned a blind eye to foreign sex tourism, which, alongside the garment trade, are the only viable industries that offer women work in large numbers. Advertising, entirely absent until after the Vietnamese left power, grew rapidly in 30 years. Young urban Cambodians now see almost as many ads daily as American youth do; the difference is that almost none of the products Cambodians are primed to want are Cambodian-produced. Free-market paradise. Friedman and Read might call it “Heaven.”

But Sochea’s story didn’t end there, because shortly after she got her hands on that pencil, she was given a writing assignment: Why women should not be allowed to attend school. There is no dissent in a Cambodian classroom, no arguing with your teacher. There is only the dissemination of unquestionable knowledge. It is true that young women in Cambodia are increasingly pressured to drop out of school after the third grade, even today. By the time Sochea graduated high school and went on to college, she was one of only a handful of female students in the country. Upon graduation, the free market wonderland—foretold by Christian charity, organized partially in response to the after-effects of U.S. military destruction—had left little room for her.

At least she had a pencil.

***

“Why the pencil?” asked a student the other day. At an art school, I teach a course called Milton Friedman’s Pencil. The question made me panic, so like any halfway decent professor, I deflected it.

“Good question. Why the pencil?” I repeated to the rest of the group, thinking: please, someone tell me why you signed up for a class exploring a metaphor for free market fundamentalism in an art school when you could have sat around all day in a roomful of naked ladies and called that work.

Of course, they had answers. We live in a digital age, they noted, where kids will soon grow up without having to use a pencil at all, without having to work through a math problem on their own, without learning to spell. But the computers that increasingly make up our world churned through bazillions of pencils in their creation, each fundamental tool an element toward a larger more significant milestone, much as several words make up a sentence and several numbers can form an equation, each of which may eventually lead to an answer, a theory, or a new set of questions about the world.

It was an appropriate art-school response. At the base of the production line sits one pure object, a tool that cannot be further distilled without eliminating usefulness. It also unconsciously reflects the inherently productive nature of what we usually label “art.” You can’t take a course in looking at naked ladies in an art school, remember: you have to draw or write about them.

***

Read died in 1983, and I’ve found no evidence to suggest he felt slighted by Friedman’s use of his story. (Friedman has elsewhere acknowledged his mentor’s contribution, although it must be noted that the major theme of Friedman’s version, in both content and form, is that no single person deserves credit for either the story or the pencil.) Yet the difference between the two pencils is vast.

Comparatively, Read’s self-aware and somewhat self-important household writing implement is kind of small potatoes, limited as it is to U.S. soil. Read’s references are domestic, save for a wax from Mexico, a coffee bean from Brazil, and oil from the Persian Gulf—each carefully articulated as aids to American production. His late-1950s audience is clearly American, and his metaphor works because he assumes a homogeneity in his readers. “I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write,” goes an early line. The literate population would have been 97.6% of the country by 1960, according to the U.S. Census.

Friedman’s version, however, contains direct references to three named continents, implied input of unnamable other countries, and a distinct, repeated address to “the world.” Read may have come up with the perfect metaphor for globalization, but Friedman made it global.

In fact, his PBS series Free to Choose reportedly attracted a larger audience than Masterpiece Theater, with 3 million domestic viewers per episode, and global audiences in several major countries (although not France). A book based on the transcripts, also called Free to Choose, was the top-selling non-fiction title in the U.S. for 1980, and translated (according to Friedman’s biography) into 17 languages. Although video, and later DVD, sales of the original remained healthy, PBS rebroadcast the series in 1990, with a slew of celebrity guest stars.

Free to Choose Media, the production company behind the series, has since expanded into an entire 501(c)(3) business that offers hundreds of programs, including both versions of Free to Choose, streaming for free online, and Izzit.org, described as “a not-for-profit providing more than 300,000 teachers with engaging educational videos and materials promoting critical-thinking and thoughtful discussion among students.” There you can order—pretty cheap, too—gems like The Price System, described thusly: “Friedman uses I, Pencil, a short story by Leonard Read, to explain how a free market economy operates … Milton concludes that in this way, millions of people are able to cooperate peacefully on a daily basis.” The blatant propaganda embedded in Sochea’s first writing assignment almost pales in comparison to what the kids watching these videos must be asked to write about.

On a national scope, the story of the pencil Friedman first broadcast on PBS has also begun to shift what we think of as “educational.” Free to Choose came about when an Erie, Pennsylvania, PBS station asked Friedman to tape a counterpoint to liberal economist John Kenneth Galbraith’s series then airing. It was financed privately by PepsiCo, General Motors, Bechtel, and others,offering “a clear starting point for the so-called Reagan revolution,” as Salon’s Andrew Leonard wrote when Milton Friedman died a few years ago. Political leaders in Estonia, Poland, and California at one point all credited the series with sparking foundational ideas in their political development.

Yet offscreen, in Chile, Milton Friedman and his associates had been advising on and helped put in place a rapid mode of privatization with military backing. “Literally killing off increasing numbers of the Chilean population and choking off increasing numbers of Chilean businesses,” wrote Friedman’s former student Andre Gunder Frank in “Economic Genocide in Chile: An Open Letter to Milton Friedman and Arnold Harberger,” published in Economic and Political Weekly in 1976. Naomi Klein’s Shock Doctrine roots Friedman’s economic policies in crises, but in that it overlooks something even more disturbing about the spread of global capitalism. These were not plans prepared in secret, behind closed doors, and unleashed upon an ill-prepared world. Free-market fundamentalism was all spelled out, right there on PBS, as educational programming.

As handy and common as pencils themselves.

***

Thirty years later, the pencil is not what is used to be. It’s been replaced by the calculator, the smartphone, the search engine—machines that hide labor from users, allowing them to presume vaster skills than they, in fact, possess. My students complain that forcing them to use a pencil makes them spell poorly. In fact they cannot spell regardless of the machine they use to write with; software steps in to spell for them on a computer. Elsewhere, students complained recently that hand-writing a statement in cursive, a prelude to the PSAT, was the most difficult part of the exam. Of course, they took to Twitter to voice their concerns. Others have claimed that using a pencil causes them to lose concentration, what with all the sharpening breaks and muscle strain. The pencil is a deep inconvenience. Electrical outlets are plentiful in school classrooms and coffee shops; pencil sharpeners have all been removed. (David Rees’s exploration of the artisanal art of pencil-sharpening only underscores nostalgia for the underused instrument.)

Using one is even considered dangerous. I tried to board a plane last month with a dull pencil, but the TSA agent scolded me for trying to sneak weapons onto my flight. I had no idea what he was referring to until he pulled the sharpener out of my bag and held it out accusatorily. It could easily be broken, the razor blade removed and wielded, the plane hijacked. He tilted his head, as if to say, “Come now, little missy. You know better than that.”

***

What the stories of the pencil we’ve looked at leave out are any of the voices of the humans that actually had hands in its creation. Noninvisible hands.

Several such folks used to work not too far away from my house in Chicago, on the other side of the city from where Friedman shot much of Free to Choose. In 1988, an old pencil factory was parceled into condominiums now known as the Pencil Factory Lofts. Terra cotta pencil-tips now decorate the facade, but the building was once the Eversharp Pencil Factory, later the Wahl-Eversharp Pencil Factory, a 240,000 square-foot facility that employed 1,800 workers in two shifts at the company’s peak. A Chicago Tribune article covered the conversion, and briefly, a remarkable event in the building’s past: In 1937 it held one of the first industrial sit-down strikes—in which workers cease labor but stay on site—in U.S. history.

It wasn’t the first: Sit-down strikes had been held domestically and known under that name since at least 1933. They make sense: workers are protected from violence by management’s own desire to keep equipment safe from harm. A sit-down strike’s Achilles’ heel is chiefly that people get hungry and bored, so unions’ primary responsibility is to organize food and entertainment to keep morale up and commitment strong. In his pamphlet on the practice Sit-Down, published shortly after the pencil factory strike, Joel Seidman notes that most strikes didn’t last more than a day or so. They are efficient and effective.

Details on the Wahl-Eversharp strike in the 1988 Trib story are thin, but a 1937 article in the same paper explains that, on Valentine’s Day eve, “75 girls and young married women and 50 men” sat down on the job to demand the right to negotiate for a wage increase. Female employees had been earning 27 cents an hour and male employees 33 cents; respectively, they wanted raises to 35 and 43 cents per hour. The tone of the 1937 Trib was as dismissive as the Friedman-era one. Contemporary stories complain workers danced, sang, and gambled into the night while friends and family members brought food and blankets. When liquor was discovered under the blankets, deliveries were no longer allowed.

Of course management gave a dispersal order, and of course strikers refused to budge. The management plan may have been to starve the strikers out by ceasing deliveries, but that failed: While a bastion of lady strikers flirted with cops the next morning, the menfolk jerry-rigged a breakfast delivery from the roof of the bakery next door. By noon that day, management caved, and reading between the lines of the Trib it becomes clear: The strikers had won.

My students and I went to visit the Pencil Factory Lofts, but like the strikers’ liquor-laden pals, weren’t able to gain entry into the building. A sweet professional young woman with a giant dog approached the entryway, and we asked if she could let us in to the lobby to check out the historic site. “We’re really into pencils,” I told her, which was not untrue.

“No,” she said. “I can’t do that. For security reasons. You understand. These are people’s private homes.” She had no idea anything historic had happened there at all, but she didn’t particularly care.

The Pencil Factory Lofts, as they stand, have scrubbed away all traces of the Wahl-Eversharp Factory workers and their historic victory, replaced with picture windows, high-speed Internet, and an exercise room. It’s a pencil story written by Friedman himself, devoid of everyone except the consumer: this woman and her massive dog.

***

What is the takeaway, then, the final thing to remember about the squirreled-away but damaging truths Milton Friedman failed to account for when constructing his beloved, Read-inspired, and oft-repeated metaphor for the power of unregulated markets (the same one on which this new film series from the Competitive Enterprise Institute was launched last month)? In other words: Why, really, the pencil?

Well, one of my students made one. A thoughtful undergrad with an intuitive sense, he proposed to make a pencil for his final project. Then, a couple weeks before it was due, he brought in a prototype. School-provided clay, with a store-purchased graphite “lead”, it’s actually quite comfortable to write with. Finding clay will take a bit more doing, as will properly compressing the charcoal into a workable form. We can work out the eraser later. Breadcrumbs have been used in years past. And it’s a tad fragile. (Pencil fragility is actually a big issue in public education debates, which largely hinge on shoddy, Chinese-made no. 2s that are imported under enormous tax breaks and in mass quantities in a situation known as “pencil dumping.” In addition to disrupting the classroom with breakage, U.S. pencil manufacturers claim these imports cut their business in half between 2004 and 2008.)

My student is not the first to attempt to make a pencil. Others have tried such projects, or publicly proclaimed themselves to be trying, like this guy. He appears to have given up without even having put, as they say, pencil to paper. Die-hard free-market fundamentalists tend toward a slightly more aggressive stance on such endeavors, arguing that Doing It Yourself instead of purchasing the cheapest available product is unethical and, by occasionally unstated extension, a crime against God. Many may claim that a pencil is, by definition, wood-encased, and perhaps also mass-produced, a tautology that seems perfectly in keeping with an argument that seems to run: “You all own pencils. Now, what if I told you the Good Lord himself created them? Unregulate the markets!” And then the arguer runs screaming from the room.

Still, my student’s hand-made pencil works. “Check this out!!!” I wrote when I tested it, and then a smiley face, sadly bypassing the chance to write, “Suck it, Milton Friedman” with a homemade pencil. But it does write. And any video, allegory, news article, film, or metaphor for economics you come across founded on the idea that a single person can’t make a pencil, can’t go to college, or can’t strike for better pay, is wrong.

Источник: https://thenewinquiry.com/milton-friedmans-pencil/

Unit 1 The capitalist revolution

Themes and capstone units

History, instability, and growthGlobal economyInequalityInnovation

How capitalism revolutionized the way we live, and how economics attempts to understand this and other economic systems

  • Since the 1700s, increases in average living standards became a permanent feature of economic life in many countries.
  • This was associated with the emergence of a new economic system called capitalism, in which private property, markets and firms play a major role.
  • Under this new way of organizing the economy, advances in technology and specialization in products and tasks raised the amount that could be produced in a day’s work.
  • This process, which we call the capitalist revolution, has been accompanied by growing threats to our natural environment, and by unprecedented global economic inequalities.
  • Economics is the study of how people interact with each other, and with the natural environment, in producing their livelihoods.

In the fourteenth century, the Moroccan scholar Ibn Battuta described Bengal in India as ‘A country of great extent, and one in which rice is extremely abundant. Indeed, I have seen no region of the earth in which provisions are so plentiful.’

And he had seen much of the world, having travelled to China, west Africa, the Middle East and Europe. Three centuries later, the same sentiment was expressed by the seventeenth century French diamond merchant Jean Baptiste Tavernier who wrote of the country:

Even in the smallest villages, rice, flour, butter, milk, beans and other vegetables, sugar and sweetmeats, dry and liquid, can be procured in abundance.1

At the time of Ibn Battuta’s travels, India was not richer than the other parts of the world. But India was not much poorer, either. An observer at the time would have noticed that people, on average, were better off in Italy, China and England than in Japan or India. But the vast differences between the rich and the poor, which the traveller would have noted wherever he went, were much more striking than these differences across regions. Rich and poor would often have different titles: in some places they would be feudal lords and serfs, in others royalty and their subjects, slave owners and slaves, or merchants and the sailors who transported their goods. Then—as now—your prospects depended on where your parents were on the economic ladder and whether you were male or female. The difference in the fourteenth century, compared with today, was that back then the part of the world in which you were born mattered much less.

Fast forward to today. The people of India are far better off than they were seven centuries ago if we think about their access to food, medical care, shelter and the necessities of life, but by world standards today most are poor.

Figure 1.1a tells some of the story. To compare living standards in each country, we use a measure called GDP per capita. People obtain their incomes by producing and selling goods and services. GDP (gross domestic product) is the total value of everything produced in a given period such as a year, so GDP per capita corresponds here to average annual income. GDP is also referred to as gross domestic income. In Figure 1.1a the height of each line is an estimate of average income at the date on the horizontal axis.

On average, people are six times better off in Britain than in India by this measure. Japanese people are as rich as the British, just as they were in the fourteenth century, but now Americans are even better off than the Japanese, and Norwegians are better off still.

We can draw the graph in Figure 1.1a because of the work of Angus Maddison who dedicated his working life to finding the scarce data needed to make useful comparisons of how people lived across more than 1,000 years (his work is continuing in the Maddison Project). In this course you will see that data like this about regions of the world, and the people in it, is the starting point of all economics. In our video, the economists James Heckman and Thomas Piketty explain how collecting data has been fundamental to their work on inequality and the policies to reduce it.

Global economyInequality

1.1 Income inequality

A thousand years ago the world was flat, economically speaking. There were differences in income between the regions of the world; but as you can see from Figure 1.1a, the differences were small compared to what was to follow.

Nobody thinks the world is flat today, when it comes to income.

Figure 1.2 shows the distribution of income across and within countries. Countries are arranged according to GDP per capita from the poorest on the left of the diagram (Liberia), to the richest on the right (Singapore). The width of each country’s bars represents its population.

For every country there are ten bars, corresponding to the ten deciles of income. The height of each bar is the average income of 10% of the population, ranging from the poorest 10% of people at the front of the diagram to the richest 10% at the back, measured in 2005 US dollars. Note that this doesn’t mean ‘the richest 10% of income earners’. It is the richest 10% of people, where each person in a household, including children, is assumed to have an equal share of the household’s income.

The skyscrapers (the highest columns) at the back of the right-hand side of the figure represent the income of the richest 10% in the richest countries. The tallest skyscraper is the richest 10% of people in Singapore. In 2014, this exclusive group had an income per capita of more than $67,000. Norway, the country with the second highest GDP per capita, does not have a particularly tall skyscraper (it is hidden between the skyscrapers for Singapore and the third richest country, the US) because income is more evenly distributed in Norway than in some other rich countries.

The analysis in Figure 1.2 shows how the distribution of income has changed since 1980.

World income distribution in 2014 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of the bottom and top income deciles of all countries of the world, ordered from poorer to richer ones by GDP. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway. World income distribution in 2014 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of the bottom and top income deciles of all countries of the world, ordered from poorer to richer ones by GDP. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway. World income distribution in 2014 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of the bottom and top income deciles of all countries of the world, ordered from poorer to richer ones by GDP. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway.

World income distribution in 2014

Figure 1.2 Countries are ranked by GDP per capita from left to right. For each country the heights of the bars show average income for deciles of the population, from the poorest 10% at the front to the richest 10% at the back. The width of the bar indicates the country’s population. Figure 1.2 is available as an interactive visualization, with an accompanying dataset.

The richest and poorest : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distributions of Liberia, which is the poorest country, and Singapore, which is the richest country. Average incomes in Liberia are much lower than in Singapore.

The richest and poorest

In Singapore, the richest country on the furthest right, the average incomes of the richest and poorest 10% are $67,436 and $3,652 respectively. In Liberia, the furthest left, the corresponding incomes are $994 and $17.

World income distribution in 1980 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 1980. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of all countries of the world, ordered from poorer to richer ones by GDP per capita. The countries labelled on the chart are, from poorer to richer: China, Indonesia, India, Nigeria, Botswana, Brazil, Japan, UK, Norway, US.

World income distribution in 1980

In 1980 the ranking of countries by GDP was different. The poorest countries, coloured darkest red, were Lesotho and China. The richest (darkest green) were Switzerland, Finland and then the US. At that time the skyscrapers were not as tall: the differences between the richest 10% and the rest of a country’s population were not as pronounced.

World income distribution in 1990 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 1990. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of all countries of the world, ordered from poorer to richer ones by GDP per capita. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway.

World income distribution in 1990

You can see from the colours that some countries changed their ranking between 1980 and 1990. China (dark red) is now richer; Uganda, also red, is in the middle of the distribution amongst countries coloured yellow. Some taller skyscrapers have appeared: inequality increased in many countries during the 1980s.

World income distribution in 2014 : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of all countries of the world, ordered from poorer to richer ones by GDP per capita. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway.

World income distribution in 2014

By 2014, many countries have changed their ranking. China has grown rapidly since 1990. But the countries that were richest in 1980 (darkest green) are still near the top in 2014.

Inequality within countries has risen : This is a 3-dimensional bar chart with three axes. A first axis lists countries from poorer to richer ones by GDP per capita in 2014. A second axis shows annual income in 2005 purchasing power parity dollars, and ranges from 0 to 80,000. A third axis shows the ten deciles of the income distribution of the population. The bar chart shows the income distribution of the bottom and top income deciles of all countries of the world, ordered from poorer to richer ones by GDP. The countries labelled on the chart are, from poorer to richer: India, Nigeria, Indonesia, China, Botswana, Brazil, UK, Japan, US, Norway.

Inequality within countries has risen

Income distributions have become more unequal in many of the richer countries: some very tall skyscrapers have appeared. In the middle-income countries, too, there is a big step up at the back of the figure: the incomes of the richest 10% are now high relative to the rest of the population.

Two things are clear from the 2014 distribution. First, in every country, the rich have much more than the poor. We can use the ratio between the heights of the front and back bars as one measure of inequality in a country. We will call it the rich/poor ratio, for obvious reasons. Even in a relatively equal country such as Norway, the rich/poor ratio is 5.4; in the US it is 16 and in Botswana in southern Africa it is 145. Inequality within the very poorest countries is difficult to see in the graph, but it is definitely there: the rich/poor ratio is 22 in Nigeria, and 20 in India.

The second thing that jumps out from Figure 1.2 is the huge difference in income between countries. Average income in Norway is 19 times the average income in Nigeria. And the poorest 10% in Norway receive almost twice the income of the richest 10% in Nigeria.

Imagine the traveller Ibn Battuta’s journey across regions of the world in the fourteenth century and think of how this would have looked in a diagram like Figure 1.2. He would of course notice that everywhere he went there were differences between the richest and poorest groups in the popu­lation of each region. He would report back that the differences in income between the countries of the world were relatively minor by comparison.

In this line chart, shown as a thumbnail of the original Figure 1.1a, the horizontal axis shows years from 1000 to 2015. The vertical axis shows GDP per capita in US dollars and ranges from 0 to 30,000. GDP per capita for Britain, Japan, Italy, China, and India are shown. GDP per capita was below 2500 dollars for all countries until the 18th century. In Britain, GDP per capita took off during the 18th century, and increased to 25,000 dollars in 2015. In the rest of the countries, it took off between the 19th and 20th centuries, reaching in 2015 approximately 22,500 dollars in Japan, 17,500 dollars in Italy, 12,000 dollars in China and 5,000 dollars in India.

Countries that took off economically before 1900 (Figure 1.1a) are in the ‘skyscraper’ part of Figure 1.2.

The vast differences in income between the countries of the world today take us back to Figure 1.1a, where we can begin to understand how this came about. The countries that took off economically before 1900—UK, Japan, Italy—are now rich. They (and countries like them) are in the skyscraper part of Figure 1.2. The countries that took off only recently, or not at all, are in the flatlands.

Exercise 1.1 Inequality in the fourteenth century

What do you think a ‘skyscraper’ figure like Figure 1.2 would have looked like at the time of Ibn Battuta (early to mid-fourteenth century)?

Exercise 1.2 Working with income data

You can see the interactive graph and download the spreadsheet data that we used to create Figure 1.2. Choose five countries that you are interested in.

  1. For each one calculate the rich/poor ratio in 1980, 1990 and 2014.
  2. Describe the differences between countries and the changes over time that you find.
  3. Can you think of any explanations for them?

1.2 Measuring income and living standards

gross domestic product (GDP)
A measure of the market value of the output of final goods and services in the economy in a given period. Output of intermediate goods that are inputs to final production is excluded to prevent double counting.

The estimate of living standards that we used in Figure 1.1a (GDP per capita) is a measure of the total goods and services produced in a country (called gross domestic product, or GDP), which is then divided by the country’s population.

GDP measures the market value of the output of final goods and services in the economy in a given period, such as a year. Diane Coyle, an economist, says it ‘adds up everything from nails to toothbrushes, tractors, shoes, haircuts, management consultancy, street cleaning, yoga teaching, plates, bandages, books, and the millions of other services and products in the economy’.2

Adding up these millions of services and products requires finding some measure of how much a yoga class is worth compared to a toothbrush. Economists must first decide what should be included, but also how to give a value to each of these things. In practice, the easiest way to do this is by using their prices. When we do this, the value of GDP corresponds to the total income of everyone in the country.

Dividing by the population gives GDP per capita—the average income of people in a country. But is that the right way to measure their living standards, or wellbeing?

Disposable income

disposable income
Income available after paying taxes and receiving transfers from the government.

GDP per capita measures average income, but that is not the same as the disposable income of a typical person.

Disposable income is the amount of wages or salaries, profit, rent, interest and transfer payments from the government (such as unemployment or disability benefits) or from others (for example, gifts) received over a given period such as a year, minus any transfers the individual made to others (including taxes paid to the government). Disposable income is thought to be a good measure of living standards because it is the maximum amount of food, housing, clothing and other goods and services that the person can buy without having to borrow—that is, without going into debt or selling possessions.

Is our disposable income a good measure of our wellbeing?

Income is a major influence on wellbeing because it allows us to buy the goods and services that we need or enjoy. But it is insufficient, because many aspects of our wellbeing are not related to what we can buy.3

For example, disposable income leaves out:

  • The quality of our social and physical environment such as friendships and clean air.
  • The amount of free time we have to relax or spend time with friends and family.
  • Goods and services that we do not buy, such as healthcare and education, if they are provided by a government.
  • Goods and services that are produced within the household, such as meals or childcare (predominantly provided by women).

Average disposable income and average wellbeing

When we’re part of a group of people (a nation for example, or an ethnic group) is the average disposable income a good measure of how well off the group is? Consider a group in which each person initially has a disposable income of $5,000 a month, and imagine that, with no change in prices, income has risen for every individual in the group. Then we would say that average or typical wellbeing had risen.

But now think about a different comparison. In a second group, the monthly disposable income of half the people is $10,000. The other half has just $500 to spend every month. The average income in the second group ($5,250) is higher than in the first (which was $5,000 before incomes rose). But would we say that the second group’s wellbeing is greater than that of the first group, in which everyone has $5,000 a month? The additional income in the second group is unlikely to matter much to the rich people, but the poor half would think their poverty was a serious deprivation.

Absolute income matters for wellbeing, but we also know from research that people care about their relative position in the income distribution. They report lower wellbeing if they find they earn less than others in their group.

Since income distribution affects wellbeing, and because the same average income may result from very different distributions of income between rich and poor within a group, average income may fail to reflect how well off a group of people is by comparison to some other group.

Valuing government goods and services

GDP includes the goods and services produced by the government, such as schooling, national defence, and law enforcement. They contribute to wellbeing but are not included in disposable income. In this respect, GDP per capita is a better measure of living standards than disposable income.

But government services are difficult to value, even more so than services such as haircuts and yoga lessons. For goods and services that people buy we take their price as a rough measure of their value (if you valued the haircut less than its price, you would have just let your hair grow). But the goods and services produced by government are typically not sold, and the only measure of their value to us is how much it cost to produce them.

The gaps between what we mean by wellbeing, and what GDP per capita measures, should make us cautious about the literal use of GDP per capita to measure how well off people are.4

But when the changes over time or differences among countries in this indicator are as great as those in Figure 1.1a (and in Figures 1.1b, 1.8 and 1.9 later in this unit), GDP per capita is undoubtedly telling us something about the differences in the availability of goods and services.

In the Einstein at the end of this section, we look in more detail at how GDP is calculated so that we can compare it through time and make comparisons between countries. (Many of the units have Einsteins. You don’t have to use them, but they will show you how to calculate and understand many of the statistics that we employ.) Using these methods, we can use GDP per capita to unambiguously communicate ideas such as ‘people in Japan are on average a lot richer than they were 200 years ago, and a lot richer than the people of India today.’

Exercise 1.3 What should we measure?

While campaigning for the US presidency on 18 March 1968, Senator Robert Kennedy gave a famous speech questioning ‘the mere accumulation of material things’ in American society, and why, among other things, air pollution, cigarette advertising and jails were counted when the US measured its living standards, but health, education or devotion to your country were not. He argued that ‘it measures everything, in short, except that which makes life worthwhile.’

Read his speech in full or listen to a sound recording of it.

  1. In the full text, which goods does he list as being included in a measure of GDP?
  2. Do you think these should be included in such a measure, and why?
  3. Which goods does he list in the full text as missing from the measure?
  4. Do you think they should be included, and why?

Question 1.1 Choose the correct answer(s)

What does UK GDP per capita measure?

  • the total output of London’s economy
  • the average disposable income of a UK resident
  • the total output of the UK residents, divided by the number of the residents
  • the total output of the UK’s economy, divided by the country’s population
  • ‘Per capita’ means per person, and not in the capital city!
  • Disposable income is a person’s income (for example wages, interests on savings, benefits) minus any transfers (for example tax). GDP includes the goods and services produced by the government, such as schooling, national defence and law enforcement, which are not included in disposable income.
  • This is called the GNP (Gross National Product) per capita. GNP adds the output produced abroad attributable to UK residents, and subtracts UK output attributable to residents abroad.
  • This is the correct definition of GDP per capita as defined in Section 1.2.

Einstein Comparing income at different times, and across different countries

The United Nations collects and publishes estimates of GDP from statistical agencies around the world. These estimates, along with those made by economic historians, allow us to construct charts like Figure 1.1a, comparing living standards across countries and at different time periods, and looking at whether the gap between rich and poor countries has narrowed or widened over time. Before we can make a statement like: ‘On average, people in Italy are richer than people in China, but the gap between them is narrowing,’ statisticians and economists must try to solve three problems:

  • We need to separate the thing we want to measure—changes or differences in amounts of goods and services—from things that are not relevant to the comparison, especially changes or differences in the prices of the goods and services.
  • When comparing output in one country at two points in time, it is necessary to take into account differences in prices between the two points in time.
  • When comparing output between two countries at a point in time, it is necessary to take into account differences in prices between the two countries.

Notice how similar the last two statements are. Measuring changes in output at different points in time presents the same challenges as we face when we try to compare countries by measuring differences in their output at the same time. The challenge is to find a set of prices to use in this calculation that will allow us to identify changes or differences in outputs, without making the mistake of assuming that if the price of something rises in a country, but not in another, then the amount of output has increased in the country.

The starting point: Nominal GDP

When estimating the market value of output in the economy as a whole for a given period, such as a year, statisticians use the prices at which goods and services are sold in the market. By multiplying the quantities of the vast array of different goods and services by their prices, they can be converted into money, or nominal, terms. With everything in the common unit of nominal (or money) terms, they can be added together. Nominal GDP is written like this:

In general, we write that:

Where pi is the price of good i, qi is the quantity of good i, and ∑ indicates the sum of price times quantity for all the goods and services that we count.

Taking account of price changes over time: Real GDP

To gauge whether the economy is growing or shrinking, we need a measure of the quantity of goods and services purchased. This is called real GDP. If we compare the economy in two different years, and if all the quantities stay the same but the prices increase by, say, 2% from one year to the next, then nominal GDP rises by 2%, but real GDP is unchanged. The economy has not grown.

Because we cannot add together the number of computers, shoes, restaurant meals, flights, fork-lift trucks, and so on, it is not possible to measure real GDP directly. Instead, to get an estimate of real GDP, we have to begin with nominal GDP as defined above.

On the right-hand side of the equation for nominal GDP are the prices of each item of final sales multiplied by the quantity.

To track what is happening to real GDP, we begin by selecting a base year: for example, the year 2010. We then define real GDP using 2010 prices as equal to nominal GDP that year. The following year, nominal GDP for 2011 is calculated as usual using the prices prevailing in 2011. Next, we can see what has happened to real GDP by multiplying the 2011 quantities by the 2010 prices. If, using the base year prices, GDP has gone up, we can infer that real GDP has increased.

constant prices
Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time. See also: purchasing power parity.

If this method produces the result that, when computed using 2010 prices, GDP in 2011 is the same as in 2010, we can infer that although there might have been a change in the composition of output (fewer flights taken but more computers sold, for example), the overall quantity of output of goods and services has not changed. The conclusion would be that real GDP, which is also called GDP at constant prices, is unchanged. The growth rate of the economy in real terms is zero.

Taking account of price differences among countries: International prices and purchasing power

To compare countries, we need to choose a set of prices and apply it to both countries.

To begin with, imagine a simple economy which produces only one product. As an example, we choose a regular cappuccino because we can easily find out the price of this standard product in different parts of the world. And we choose two economies that are very different in their level of development: Sweden and Indonesia.

At the time we wrote this, when prices are converted into US dollars using current exchange rates, a regular cappuccino costs $3.90 in Stockholm and $2.63 in Jakarta.

But simply expressing the two cappuccinos in a common currency is not enough, because the international current exchange rate that we used to get these numbers is not a very good measure of how much a rupiah will buy in Jakarta and how much a krona will get you in Stockholm.

purchasing power parity (PPP)
A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies. See also: constant prices.

This is why when comparing living standards across countries, we use estimates of GDP per capita in a common set of prices known as purchasing power parity (PPP) prices. As the name suggests, the idea is to achieve parity (equality) in the real purchasing power.

Prices are typically higher in richer countries—as in our example. One reason for this is that wages are higher, which translates into higher prices. Because prices of cappuccinos, restaurant meals, haircuts, most types of food, transport, rents and most other goods and services are more expensive in Sweden than in Indonesia, once a common set of prices is applied, the difference between GDP per capita in Sweden and Indonesia measured at PPP is smaller than it is if the comparison is made at current exchange rates.

At current exchange rates, GDP per capita in Indonesia is only 6% of the level of Sweden; at PPP where the comparison uses international prices, GDP per capita in Indonesia is 21% of the level of Sweden.

What this comparison shows is that the buying power of the Indonesian rupiah compared to the Swedish krona is more than three times greater than would be indicated by the current exchange rate between the two currencies.

We will examine the measurement of GDP (and other measures of the whole economy) in more detail in Unit 13.

History, instability, and growthGlobal economyInequalityInnovation

1.3 History’s hockey stick: Growth in income

A different way of looking at the data in Figure 1.1a is to use a scale that shows GDP per capita doubling as we move up the vertical axis (from $250 per capita per year to $500, then to $1,000, and so on). This is called a ratio scale and is shown in Figure 1.1b. The ratio scale is used for comparing growth rates.

By the growth rate of income or of any other quantity, for example population, we mean the rate of change:

If the level of GDP per capita in the year 2000 is $21,046, as it was in Britain in the data shown in Figure 1.1a, and $21,567 in 2001, then we can calculate the growth rate:

Whether we want to compare levels or growth rates depends on the question we are asking. Figure 1.1a makes it easy to compare the levels of GDP per capita across countries, and at different times in history. Figure 1.1b uses a ratio scale, which makes it possible to compare growth rates across countries and at different periods. When a ratio scale is used, a series that grows at a constant rate looks like a straight line. This is because the percentage (or proportional growth rate) is constant. A steeper line in the ratio scale chart means a faster growth rate.

To see this, think of a growth rate of 100%: that means the level doubles. In Figure 1.1b, with the ratio scale, you can check that if GDP per capita doubled over 100 years from a level of $500 to $1,000, the line would have the same slope as a doubling from $2,000 to $4,000 dollars, or from $16,000 to $32,000 over 100 years. If, instead of doubling, the level quadrupled (from say, $500 to $2,000 over 100 years), the line would be twice as steep, reflecting a growth rate that was twice as high.

In some economies, substantial improvements in people’s living standards did not occur until they gained independence from colonial rule or interference by European nations:

  • India: According to Angus Deaton, an economist who specializes in the analysis of poverty, when 300 years of British rule of India ended in 1947: ‘It is possible that the deprivation in childhood of Indians … was as severe as that of any large group in history’. In the closing years of British rule, a child born in India could expect to live for 27 years. Fifty years on, life expectancy at birth in India had risen to 65 years.
  • China: It had once been richer than Britain, but by the middle of the twentieth century GDP per capita in China was one-fifteenth that of Britain.
  • Latin America: Neither Spanish colonial rule, nor its aftermath following the independence of most Latin American nations early in the nineteenth century, saw anything resembling the hockey-stick upturn in living standards experienced by the countries in Figures 1.1a and 1.1b.

We learn two things from Figures 1.1a and 1.1b:

  • For a very long time, living standards did not grow in any sustained way.
  • When sustained growth occurred, it began at different times in different countries, leading to vast differences in living standards around the world.

Understanding how this occurred has been one of the most important questions that economists have asked, starting with a founder of the field, Adam Smith, who gave his most important book the title An Inquiry into the Nature and Causes of the Wealth of Nations.5

Great economists Adam Smith

Adam Smith Adam Smith (1723–1790) is considered by many to be the founder of modern economics. Raised by a widowed mother in Scotland, he went on to study philosophy at the University of Glasgow and later at Oxford, where he wrote: ‘the greater part of the … professors have … given up altogether even the pretence of teaching.’

He travelled throughout Europe, visiting Toulouse, France where he claimed to have ‘very little to do’ and thus began ‘to write a book in order to pass away the time.’ This was to become the most famous book in economics.

In An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, Smith asked: how can society coordinate the independent activities of large numbers of economic actors—producers, transporters, sellers, consumers—often unknown to each other and widely scattered across the world? His radical claim was that coordination among all of these actors might spontaneously arise, without any person or institution consciously attempting to create or maintain it. This challenged previous notions of political and economic organization, in which rulers imposed order on their subjects.

Even more radical was his idea that this could take place as a result of individuals pursuing their self-interest: ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest,’ he wrote.

Elsewhere in the Wealth of Nations, Smith introduced one of the most enduring metaphors in the history of economics, that of the invisible hand. The businessman, he wrote: ‘intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.’

Among Smith’s insights is the idea that a significant source of prosperity is the division of labour or specialization, and that this in turn is constrained by the ‘extent of the market.’ Smith illustrated this idea in a famous passage on the pin factory by observing that ten men, each fully specialized in one or two of 18 distinct operations, could produce close to 50,000 pins a day. But ‘if they had all wrought [pins] separately and independently … they certainly could not each of them have made twenty, perhaps not one pin in a day.’

But such an enormous number of pins could only find buyers if they were sold far from their point of production. Hence specialization was fostered by the construction of navigable canals and the expansion of foreign trade. And the resulting prosperity itself expanded the ‘extent of the market’, in a virtuous cycle of economic expansion.

Smith did not think that people were guided entirely by self-interest. Seventeen years before The Wealth of Nations, he had published a book about ethical behaviour called The Theory of Moral Sentiments.6

He also understood that the market system had some failings, especially if sellers banded together so as to avoid competing with each other. ‘People in the same trade seldom meet together,’ he wrote, ‘even for merriment and diversion, but the conversation ends in a conspiracy against the public; or in some contrivance to raise prices.’

He specifically targeted monopolies that were protected by governments, such as the British East India Company that not only controlled trade between India and Britain, but also administered much of the British colony there.

He agreed with his contemporaries that a government should protect its nation from external enemies, and ensure justice through the police and the court system. He also advocated government investment in education, and in public works such as bridges, roads, and canals.

Smith is often associated with the idea that prosperity arises from the pursuit of self-interest under free market conditions. However, his thinking on these issues was far more nuanced than he is given credit for.

Exercise 1.4 The advantages of ratio scales

Figure 1.1a used a conventional scale for the vertical axis, and Figure 1.1b used a ratio scale.

  1. For Britain, identify a period of time when its growth rate was increasing and another period in which its growth rate was roughly constant. Which figure did you use, and why?
  2. Identify a period during which GDP per capita was shrinking (a negative growth rate) faster in Britain than in India. Which figure did you use and why?

Question 1.2 Choose the correct answer(s)

The GDP per capita of Greece was $22,494 in 2012 and $21,966 in 2013. Based on these figures, the growth rate of GDP between 2012 and 2013 (to two decimal places) was:

  • –2.40%
  • 2.35%
  • –2.35%
  • –0.24%
  • The GDP per capita decreased by $528. To find the growth rate divide by the 2012 GDP per capita $22,494 (and not the 2013 GDP per capita $21,966).
  • Greece’s GDP per capita decreased between 2012 and 2013, resulting in a negative growth rate.
  • The GDP per capita changed by $21,966 − $22,494 = −$528. The growth rate of GDP per capita is given by this change as a percentage of the 2012 figure: −$528/$22,494 = −2.35%.
  • The decrease in the GDP per capita of $528 is 2.35% of $22,494 and not 0.235%.

Question 1.3 Choose the correct answer(s)

Imagine that the GDP per capita of a country had doubled every 100 years. You are asked to draw both linear and ratio scale graphs that plot GDP on the vertical axis, and the year on the horizontal axis. What will be the shapes of the curves?

Linear scale graphRatio scale graph
  • An upward-sloping curve with increasing slope (called convex shape)An upward-sloping straight line
  • An upward-sloping straight lineA straight horizontal line
  • An upward-sloping straight lineAn upward-sloping curve with decreasing slope (called concave shape)
  • An upward-sloping convex curveAn upward-sloping convex curve

Note: Linear scale graphs are ‘normal’ graphs in which the difference in height between 1 and 2, and the difference between 2 and 3, would be the same on the vertical axis.

  • An upward-sloping straight line on a ratio scale graph means that the growth rate of the GDP per capita is constant. An upward-sloping convex curve on a linear scale graph means that the GDP per capita increases by a greater and greater amount in absolute terms over time, consistent with a positive constant growth rate.
  • An upward-sloping straight line on a linear scale graph means that the GDP per capita increases by the same amount every year. A straight horizontal line on a ratio scale graph means that the GDP per capita is constant over the years.
  • An upward-sloping straight line on a linear scale graph means that the GDP per capita increases by the same amount every year. An upward-sloping concave curve on a ratio scale graph means that the growth rate decreases each year. Here the growth rate is constant.
  • An upward-sloping convex curve on a ratio scale graph means that the growth rate increases each year. Here the growth rate is constant.

History, instability, and growthInnovation

1.4 The permanent technological revolution

The science fiction show Star Trek is set in the year 2264, when humans travel the galaxy with friendly aliens aided by intelligent computers, faster-than-light propulsion, and replicators that create food and medicine on demand. Whether we find the stories silly or inspiring, most of us, in optimistic moods, can entertain the idea that the future will be transformed morally, socially, and materially by technological progress.

No Star Trek future awaited the peasant’s grandchildren of 1250. The next 500 years would pass without any measurable change in the standard of living of an ordinary working person. While science fiction began to appear in the seventeenth century (Francis Bacon’s New Atlantis being one of the first, in 1627), it was not until the eighteenth century that each new generation could look forward to a different life that was shaped by new technology.

Remarkable scientific and technological advances occurred more or less at the same time as the upward kink in the hockey stick in Britain in the middle of the eighteenth century.

Industrial Revolution
A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy.

Important new technologies were introduced in textiles, energy and transportation. Its cumulative character led to it being called the Industrial Revolution. As late as 1800, traditional craft-based techniques, using skills that had been handed down from one generation to the next, were still used in most production processes. The new era brought new ideas, new discoveries, new methods and new machines, making old ideas and old tools obsolete. These new ways were, in turn, made obsolete by even newer ones.

technology
The description of a process using a set of materials and other inputs, including the work of people and machines, to produce an output.

In everyday usage, ‘technology’ refers to machinery, equipment and devices developed using scientific knowledge. In economics, technology is a process that takes a set of materials and other inputs—including the work of people and machines—and creates an output. For example, a technology for making a cake can be described by the recipe that specifies the combination of inputs (ingredients such as flour, and labour activities such as stirring) needed to create the output (the cake). Another technology for making cakes uses large-scale machinery, ingredients and labour (machine operators).

technological progress
A change in technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of the output.

Until the Industrial Revolution, the economy’s technology, like the skills needed to follow its recipes, was updated only slowly and passed from generation to generation. As technological progress revolutionized production, the time required to make a pair of shoes fell by half in only a few decades; the same was true of spinning and weaving, and of making cakes in a factory. This marked the beginning of a permanent technological revolution because the amount of time required for producing most products fell generation after generation.

Technological change in lighting

To get some idea of the unprecedented pace of change, consider the way we produce light. For most of human history technological progress in lighting was slow. Our distant ancestors typically had nothing brighter than a campfire at night. The recipe for producing light (had it existed) would have said: gather lots of firewood, borrow a lighting stick from some other place where a fire is maintained, and start and maintain a fire.

The first great technological breakthrough in lighting came 40,000 years ago, with the use of lamps that burned animal or vegetable oils. We measure technological progress in lighting by how many units of brightness called lumens could be generated by an hour of work. One lumen is approximately the amount of brightness in a square metre of moonlight. One lumen-hour (lm-hr) is this amount of brightness lasting an hour. For example, creating light by a campfire took about 1 hour of labour to produce 17 lm-hr, but animal fat lamps produced 20 lm-hr for the same amount of work. In Babylonian times (1750 BC) the invention of an improved lamp using sesame oil meant that an hour of labour produced 24 lm-hr. Technological progress was slow: this modest improvement took 7,000 years.

Three thousand years later, in the early 1800s, the most efficient forms of lighting (using tallow candles) provided about nine times as much light for an hour of labour as had the animal fat lamps of the past. Since then lighting has become more and more efficient with the development of town gas lamps, kerosene lamps, filament bulbs, fluorescent bulbs and other forms of lighting. Compact fluorescent bulbs introduced in 1992 are about 45,000 times more efficient, in terms of labour time expended, than lights were 200 years ago. Today the productivity of labour in producing light is half a million times greater than it was among our ancestors around their campfire.

Figure 1.3 charts this remarkable hockey-stick growth in efficiency in lighting using the ratio scale we introduced in Figure 1.1b.

The process of innovation did not end with the Industrial Revolution, as the case of labour productivity in lighting shows. It has continued with the application of new technologies in many industries, such as the steam engine, electricity, transportation (canals, railroads, automobiles), and most recently, the revolution in information processing and communication. These broadly applicable technological innovations give a particularly strong impetus to growth in living standards because they change the way that large parts of the economy work.

By reducing the amount of work-time it takes to produce the things we need, technological changes allowed significant increases in living standards. David Landes, an economic historian, wrote that the Industrial Revolution was ‘an interrelated succession of technological changes’ that transformed the societies in which these changes took place.7

A connected world

In July 2012, the Korean hit ‘Gangnam Style’ was released. By the end of 2012 it had become the best-selling song in 33 countries, including Australia, Russia, Canada, France, Spain and the UK. With 2 billion views by the middle of 2014, ‘Gangnam Style’ also became the most watched video on YouTube. The permanent technological revolution has produced a connected world.

Everyone is part of it. The materials making up this introduction to economics were written by teams of economists, designers, programmers and editors, working together—often simultaneously—at computers in the UK, India, the US, Russia, Colombia, South Africa, Chile, Turkey, France and many other countries. If you are online, some of the transmission of information occurs at close to the speed of light. While most of the commodities traded around the globe still move at the pace of an ocean freighter, about 21 miles (33 km) per hour, international financial transactions are implemented in less time than it took you to read this sentence.

The speed at which information travels provides more evidence of the novelty of the permanent technological revolution. By comparing the known date of a historical event with the date at which the event was first noted in other locations (in diaries, journals or newspapers) we can determine the speed at which news travelled. When Abraham Lincoln was elected US president in 1860, for example, the word was spread by telegraph from Washington to Fort Kearny, which was at the western end of the telegraph line. From there the news was carried by a relay of riders on horseback called the Pony Express, covering 1,260 miles (2,030 km) to Fort Churchill in Nevada, from where it was transmitted to California by telegraph. The process took seven days and 17 hours. Over the Pony Express segment of the route, the news travelled at 7 miles (11 km) per hour. A half-ounce (14 gram) letter carried over this route cost $5, or the equivalent of five days’ wages.

From similar calculations we know that news travelled between ancient Rome and Egypt at about 1 mile (1.6 km) per hour, and 1,500 years later between Venice and other cities around the Mediterranean it was, if anything, slightly slower. But, a few centuries later, as Figure 1.4 shows, the pace began to quicken. It took ‘only’ 46 days for the news of a mutiny of Indian troops against British rule in 1857 to reach London, and readers of the Times of London knew of Lincoln’s assassination only 13 days after the event. One year after Lincoln’s death a transatlantic cable cut the time for news to travel between New York and London to a matter of minutes.

In this line chart, the horizontal axis shows years from 1000 to 1900. The vertical axis shows the speed of news in miles per hour, and ranges from 0 to 12. The chart shows that the speed of news travelling between Egypt and Italy between 50 and 222, or travelling between Venice and Damascus, Alexandria, Lisbon and Palermo in 1500 was approximately 1 mile per hour until 1800. In 1805, the news of the battle of Trafalgar travelled from Spain to London at 2.7 miles per hour. In 1857, the news of the Indian mutiny travelled from Delhi to London at 3.7 miles per hour. In 1860, the news of Lincoln’s election travelled from Washington DC to the US west coast at 7 miles per hour. In 1865, the news of Lincoln’s assassination travelled across the US at 12 miles per hour.

Figure 1.4 The speed at which information travelled (1000–1865).

Tables 15.2 and 15.3 from Gregory Clark. 2007. A Farewell to Alms: A Brief Economic History of the World. Princeton, NJ: Princeton University Press.

Environment

1.5 The economy and the environment

Humans have always relied on their environment for the resources they need to live and produce their livelihoods: the physical environment and the biosphere, which is the collection of all forms of life on earth, provide essentials for life such as air, water and food. The environment also provides the raw materials that we use in the production of other goods—such as wood, metals, and oil.

Figure 1.5 shows one way of thinking about the economy: it is part of a larger social system, which is itself part of the biosphere. People interact with each other, and also with nature, in producing their livelihood.

This diagram shows that the economy is a part of society, which is in turn a part of the biosphere, which is in turn part of the physical environment.

Figure 1.5 The economy is part of society, which is part of the biosphere.

Through most of their history, humans have regarded natural resources as freely available in unlimited quantities (except for the costs of extracting them). But as production has soared (see Figures 1.1a and 1.1b), so too have the use of our natural resources and degradation of our natural environment. Elements of the ecological system such as air, water, soil, and weather have been altered by humans more radically than ever before.

The most striking effect is climate change. Figures 1.6a and 1.6b present evidence that our use of fossil fuels—coal, oil, and natural gas—has profoundly affected the natural environment. After having remained relatively unchanged for many centuries, increasing emissions of carbon dioxide (CO2) into the air during the twentieth century have resulted in measurably larger amounts of CO2 in the earth’s atmosphere (Figure 1.6a) and brought about perceptible increases in the northern hemisphere’s average temperatures (Figure 1.6b). Figure 1.6a also shows that CO2 emissions from fossil fuel consumption have risen dramatically since 1800.

Exercise 1.5 How much difference does a couple of degrees warmer or colder make?

Between 1300 and 1850 there were a number of exceptionally cold periods as you can see from Figure 1.6b. Research this so-called ‘little ice age’ in Europe and answer the following.

  1. Describe the effects of these exceptionally cold periods on the economies of these countries.
  2. Within a country or region, some groups of people were exceptionally hard hit by the climate change while others were less affected. Provide examples.
  3. How ‘extreme’ were these cold periods compared to the temperature increases since the mid-twentieth century and those projected for the future?

Figure 1.6b shows that the average temperature of the earth fluctuates from decade to decade. Many factors cause these fluctuations, including volcanic events such as the 1815 Mount Tambora eruption in Indonesia. Mount Tambora spewed so much ash that the earth’s temperature was reduced by the cooling effect of these fine particles in the atmosphere, and 1816 became known as the ‘year without a summer’.

In this line chart, the horizontal axis shows years from 1000 to 2010. The vertical axis shows two measures: atmospheric CO2 in parts per millions, which ranges from 200 to 400; and carbon emissions in millions of metric tonnes, which range from 0 to 10,000. The chart shows that atmospheric CO2 was approximately 275 parts per million until 1800, and increased to almost 400 parts per million by the year 2010. The series for carbon emissions starts at 0 approximately in 1750. From 1850, carbon emissions increased to almost 10,000 million metric tonnes by the year 2010.

Figure 1.6a Carbon dioxide in the atmosphere (1010–2010) and global carbon emissions from burning fossil fuels (1750–2010).

Years 1010–1975: David M. Etheridge, L. Paul Steele, Roger J. Francey, and Ray L. Langenfelds. 2012. ‘Historical Record from the Law Dome DE08, DE08-2, and DSS Ice Cores’. Division of Atmospheric Research, CSIRO, Aspendale, Victoria, Australia. Years 1976–2010: Data from Mauna Loa observatory. T. A. Boden, G. Marland, and Robert J. Andres. 2010. ‘Global, Regional and National Fossil-Fuel CO2 Emissions’. Carbon Dioxide Information Analysis Center (CDIAC) Datasets.

Since 1900, average temperatures have risen in response to increasingly high levels of greenhouse gas concentrations. These have mostly resulted from the CO2 emissions associated with the burning of fossil fuels.

The human causes and the reality of climate change are no longer widely disputed in the scientific community. The likely consequences of global warming are far-reaching: melting of the polar ice caps, rising sea levels that may put large coastal areas under water, and potential changes in climate and rain patterns that may destroy the world’s food-growing areas. The long-term physical and economic consequences of these changes, and the appropriate policies that governments could adopt as a result, are discussed in detail in Unit 20 (Economics of the environment).

Climate change is a global change. But many of the environmental impacts of burning fossil fuels are local, as residents of cities suffer respiratory and other illnesses as a result of high levels of harmful emissions from power plants, vehicles, and other sources. Rural communities, too, are impacted by deforestation (another cause of climate change) and the depletion of the supply of clean water and fishing stocks.

From global climate change to local resource exhaustion, these effects are results of both the expansion of the economy (illustrated by the growth in total output) and the way the economy is organized (what kinds of things are valued and conserved, for example). The relationship between the economy and the environment shown in Figure 1.5 is two-way: we use natural resources in production, which may in turn affect the environment we live in and its capacity to support future production.

But the permanent technological revolution—which brought about dependence on fossil fuels—may also be part of the solution to today’s environmental problems.

Look back at Figure 1.3, which showed the productivity of labour in producing light. The vast increases shown over the course of history and especially since the mid-nineteenth century occurred largely because the amount of light produced per unit of heat (for example from a campfire, candle, or light bulb) increased dramatically.

In lighting, the permanent technological revolution brought us more light for less heat, which conserved natural resources—from firewood to fossil fuels—used in generating the heat. Advances in technology today may allow greater reliance on wind, solar and other renewable sources of energy.

Question 1.4 Choose the correct answer(s)

Which of the following variables have followed the so-called ‘hockey-stick’ trajectory—that is, little to no growth for most of history followed by a sudden and sharp change to a positive growth rate?

  • GDP per capita
  • labour productivity
  • inequality
  • atmospheric CO2
  • GDP per capita grows slowly or not at all in economies prior to industrialization, whereupon it begins to grow at an ever-increasing rate.
  • Labour productivity grows slowly or not at all in economies prior to industrialization, whereupon it begins to grow at an ever-increasing rate.
  • There is no unidirectional trend in inequality over time. While early hunter-gatherer tribes were undoubtedly almost perfectly equal, economies in the modern era have varied from highly equal to highly unequal.
  • See Figure 1.6a. The growth in atmospheric CO2 began from the mid-nineteenth century as a consequence of the burning of fossil fuels as the technologies introduced in the Industrial Revolution spread.

History, instability, and growth

1.6 Capitalism defined: Private property, markets, and firms

Looking back over the data in Figures 1.1a, 1.1b, 1.3, 1.4 and 1.6 we see an upward turn, like the kink in our hockey stick, repeated for:

  • gross domestic product per capita
  • productivity of labour (light per hour of work)
  • connectivity of the various parts of the world (the speed at which news travels)
  • impact of the economy on the global environment (carbon emissions and climate change)

How can we explain the change from a world in which living conditions changed little unless there was an epidemic or a war, to one in which each generation is noticeably, and predictably, better off than the previous one?

An important part of our answer will be what we call the capitalist revolution: the emergence in the eighteenth century and eventual global spread of a way of organizing the economy that we now call capitalism. The term ‘capitalism’—which we will define shortly—was barely heard of a century ago, but as you can see from Figure 1.7, its use has skyrocketed since then. The figure shows the fraction of all articles in the New York Times (excluding the sports section) that include the term ‘capitalism.’

capitalism
An economic system in which the main form of economic organization is the firm, in which the private owners of capital goods hire labour to produce goods and services for sale on markets with the intent of making a profit. The main economic institutions in a capitalist economic system, then, are private property, markets, and firms.
economic system
A way of organizing the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning (e.g. the Soviet Union in the twentieth century), feudalism (e.g. much of Europe in the early Middle Ages), slave economy (e.g. the US South and the Caribbean plantation economies prior to the abolition of slavery in the nineteenth century), and capitalism (most of the world’s economies today).
institution
The laws and informal rules that regulate social interactions among people and between people and the biosphere, sometimes also termed the rules of the game.

Capitalism is an economic system characterized by a particular combination of institutions. An economic system is a way of organizing the production and distribution of goods and services in an entire economy. And by institutions, we mean the different sets of laws and social customs regulating production and distribution in different ways in families, private businesses, and government bodies.

Private property

This means that you can:

  • enjoy your possessions in a way that you choose
  • exclude others from their use if you wish
  • dispose of them by gift or sale to someone else …
  • … who becomes their owner

In some economies in the past, the key economic institutions were private property (people owning things), markets (where goods could be bought and sold) and families. Goods were usually produced by families working together, rather than by firms with owners and employees.

In other societies, the government has been the institution controlling production, and deciding how goods should be distributed, and to whom. This is called a centrally planned economic system. It existed, for example, in the Soviet Union, East Germany and many other eastern European countries prior to the end of Communist Party rule in the early 1990s.

Though governments and families are essential parts of the workings of every economy, most economies today are capitalist. Since most of us live in capitalist economies, it is easy to overlook the importance of institutions that are fundamental for capitalism to work well. They are so familiar, we hardly ever notice them. Before seeing how private property, markets and firms combine in the capitalist economic system, we need to define them.

Over the course of human history, the extent of private property has varied. In some societies, such as the hunters and gatherers who are our distant ancestors, almost nothing except personal ornaments and clothing was owned by individuals. In others, crops and animals were private property, but land was not. The right to use the land was granted to families by consensus among members of a group, or by a chief, without allowing the family to sell the plot.

In other economic systems some human beings—slaves—were private property.

capital goods
The durable and costly non-labour inputs used in production (machinery, buildings) not including some essential inputs, e.g. air, water, knowledge that are used in production at zero cost to the user.

In a capitalist economy, an important type of private property is the equipment, buildings, and other durable inputs used in producing goods and services. These are called capital goods.

Private property may be owned by an individual, a family, a business, or some entity other than the government. Some things that we value are not private property: for example, the air we breathe and most of the knowledge we use cannot be owned or bought and sold.

Question 1.5 Choose the correct answer(s)

Which of the following are examples of private property?

  • computers belonging to your college
  • a farmer’s land in Soviet Russia
  • shares in a company
  • a worker’s skills
  • Although computers owned by the college may be used by many students, they are still property of the college, which requires payment (tuition) for access and can exclude their use by non-students.
  • In the Soviet era Russia your land could be transferred to others by the state and hence was not private property.
  • Shares in a company represent a claim to that company’s future profits; this claim can be sold, gifted, or realized as the owner wishes and represents income to which non-shareholders are not entitled.
  • While intellectual property is private property (of your company, your university or yourself), your skills in general are not disposable to others for them to become the owners.

Markets

Markets are:

  • a way of connecting people who may mutually benefit
  • by exchanging goods and services
  • through a process of buying and selling

Markets are a means of transferring goods or services from one person to another. There are other ways, such as by theft, a gift, or a government order. Markets differ from these in three respects:

They are reciprocated: unlike gifts and theft, one person’s transfer of a good or service to another is directly reciprocated by a transfer in the other direction (either of another good or service as in barter exchange, or money, or a promise of a later transfer when one buys on credit). They are voluntary: Both transfers—by the buyer and the seller—are voluntary because the things being exchanged are private property. So the exchange must be beneficial in the opinion of both parties. In this, markets differ from theft, and also from the transfers of goods and services in a centrally planned economy.

In most markets there is competition. A seller charging a high price, for example, will find that buyers prefer to buy from other competing sellers.

Exercise 1.6 The poorest man’s cottage

‘The poorest man may in his cottage bid defiance to all the forces of the Crown. It may be frail, its roof may shake; the wind may blow through it; the storms may enter, the rain may enter—but the King of England cannot enter; all his forces dare not cross the threshold of the ruined tenement.’ – William Pitt, 1st Earl of Chatham, speech in the British Parliament (1763).

  1. What does this tell us about the meaning of private property?
  2. Does it apply to people’s homes in your country?

Exercise 1.7 Markets and social networks

Think about a social networking site that you use, for example Facebook. Now look at our definition of a market.

What are the similarities and differences between that social networking site and a market?

Question 1.6 Choose the correct answer(s)

Which of the following are examples of markets?

  • wartime food rationing
  • auction websites such as eBay
  • touts selling tickets outside concert halls
  • sale of illegal arms
  • The transfer of goods and services that occur in a centrally planned economy as a result of government orders is not a market.
  • An auction-based market is still a market, just one in which the pricing mechanism works through bidding as opposed to a negotiated or listed price.
  • A resale market is still a market, even though the goods in question have already been sold once before.
  • An illegal market is still a market in the economic sense.

Firm

A firm is a way of organizing production with the following characteristics:

  • One or more individuals own a set of capital goods that are used in production.
  • They pay wages and salaries to employees.
  • They direct the employees (through the managers they also employ) in the production of goods and services.
  • The goods and services are the property of the owners.
  • The owners sell the goods and services on markets with the intention of making a profit.

But private property and markets alone do not define capitalism. In many places they were important institutions long before capitalism. The most recent of the three components making up the capitalist economy is the firm.

The kinds of firms that make up a capitalist economy include restaurants, banks, large farms that pay others to work there, industrial establishments, supermarkets, and internet service providers. Other productive organizations that are not firms and which play a lesser role in a capitalist economy include family businesses, in which most or all of the people working are family members, non-profit organizations, employee-owned cooperatives, and government-owned entities (such as railways and power or water companies). These are not firms, either because they do not make a profit, or because the owners are not private individuals who own the assets of the firm and employ others to work there. Note: a firm pays wages or salaries to employees but, if it takes on unpaid student interns, it is still a firm.

labour market
In this market, employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side. See also: labour force.

Firms existed, playing a minor role, in many economies long before they became the predominant organizations for the production of goods and services, as in a capitalist economy. The expanded role of firms created a boom in another kind of market that had played a limited role in earlier economic systems: the labour market. Firm owners (or their managers) offer jobs at wages or salaries that are high enough to attract people who are looking for work.

demand side
The side of a market on which those participating are offering money in return for some other good or service (for example, those purchasing bread). See also: supply side.
supply side
The side of a market on which those participating are offering something in return for money (for example, those selling bread). See also: demand side.

In economic language, the employers are the demand side of the labour market (they ‘demand’ employees), while the workers are the supply side, offering to work under the direction of the owners and managers who hire them.

A striking characteristic of firms, distinguishing them from families and governments, is how quickly they can be born, expand, contract and die. A successful firm can grow from just a few employees to a global company with hundreds of thousands of customers, employing thousands of people, in a few years. Firms can do this because they are able to hire additional employees on the labour market, and attract funds to finance the purchase of the capital goods they need to expand production.

Firms can die in a few years too. This is because a firm that does not make profits will not have enough money (and will not be able to borrow money) to continue employing and producing. The firm shrinks, and some of the people who work there lose their jobs.

Contrast this with a successful family farm. The family will be better off than its neighbours; but unless it turns the family farm into a firm, and employs other people to work on it, expansion will be limited. If, instead, the family is not very good at farming, then it will simply be less well off than its neighbours. The family head cannot dismiss the children as a firm might get rid of unproductive workers. As long as the family can feed itself there is no equivalent mechanism to a firm’s failure that will automatically put it out of business.

Government bodies also tend to be more limited in their capacity to expand if successful, and are usually protected from failure if they perform poorly.

Defining capitalism precisely

In everyday language, the word ‘capitalism’ is used in different ways, in part because people have strong feelings about it. In the language of economics, we use the term in a precise way because that helps us to communicate: we define capitalism as an economic system combining three institutions, each of which we need in turn to define.

‘Capitalism’ refers not to a specific economic system, but to a class of systems sharing these characteristics. How the institutions of capitalism—private property, markets, and firms—combine with each other and with families, governments, and other institutions differs greatly across countries. Just as ice and steam are both ‘water’ (defined chemically as a compound of two hydrogen atoms bonded with one oxygen atom), China and the US are both capitalist economies. But they differ in the extent to which the government influences economic affairs, and in many other ways. As this demonstrates, definitions in the social sciences often cannot be as precise as they are in the natural sciences.

Some people might say that ‘ice is not really water’, and object that the definition is not the ‘true meaning’ of the word. But debates about the ‘true’ meaning (especially when referring to complex abstract ideas like capitalism, or democracy) forget why definitions are valuable. Think of the definition of water, or of capitalism, not as capturing some true meaning—but rather as a device that is valuable because it makes it easier to communicate.

Definitions in the social sciences often cannot be as precise as they are in the natural sciences. Unlike water, we cannot identify a capitalist economic system using easy-to-measure physical characteristics.

History, instability, and growth

1.7 Capitalism as an economic system

Figure 1.8 shows that the three parts of the definition of a capitalist economic system are nested concepts. The left-hand circle describes an economy of isolated families who own their capital goods and the goods they produce, but have little or no exchange with others.

This diagram shows how private property, markets, and firms are related to one other in a capitalist economic system: firms are parts of markets, which in turn are part of an economic system with private property.

Figure 1.8 Capitalism: Private property, markets and firms.

In a capitalist system, production takes place in firms. Markets and private property are essential parts of how firms function for two reasons:

  • Inputs and outputs are private property: The firm’s buildings, equipment, patents, and other inputs into production, as well as the resulting outputs, belong to the owners.
  • Firms use markets to sell outputs: The owners’ profits depend on markets in which customers may willingly purchase the products at a price that will more than cover production costs.8

Historically, economies like the left-hand circle have existed, but have been much less important than a system in which markets and private property are combined (the middle circle). Private property is an essential condition for the operation of markets: buyers will not want to pay for goods unless they can have the right to own them. In the middle circle most production is done either by individuals (shoemakers or blacksmiths, for example) or in families (for example, on a farm). Prior to 1600 a great many of the economies of the world were like this.

ownership
The right to use and exclude others from the use of something, and the right to sell the thing that is owned.

A distinctive aspect of the definition of capitalism as an economic system is that under it most production takes place using privately ownedcapital goods that are operated by workers who are paid wages. This contrasts with government ownership of capital goods in a centrally planned economy, where private firms and markets are relatively unimportant.

Another contrast is with an economic system defined as a slave economy, where most of the work is done by people who are not hired for wages but, instead, like the land on which they work, are the property of another person. Going beyond these definitions, capitalist economic systems also include work done by government officials and unpaid work in the home, and, historically, by slaves.

Capitalism is an economic system that combines centralization with decentralization. It concentrates power in the hands of owners and managers of firms who are then able to secure the cooperation of large numbers of employees in the production process. But it limits the powers of owners and of other individuals, because they face competition to buy and sell in markets.

So when the owner of a firm interacts with an employee, he or she is ‘the boss’. But when the same owner interacts with a potential customer he or she is simply another person trying to make a sale, in competition with other firms. It is this unusual combination of competition among firms, and concentration of power and cooperation within them, that accounts for capitalism’s success as an economic system.

How could capitalism lead to growth in living standards?

Two major changes accompanied the emergence of capitalism, both of which enhanced the productivity of individual workers:

Technology

As we have seen, the permanent technological revolution coincided with the transition to firms as the predominant means of organizing production. This does not mean that firms necessarily caused technological change. But firms competing with each other in markets had strong incentives to adopt and develop new and more productive technologies, and to invest in capital goods that would have been beyond the reach of small-scale family enterprises.

Specialization

The growth of firms employing large numbers of workers—and the expansion of markets linking the entire world in a process of exchange—allowed historically unprecedented specialization in the tasks and products on which people worked. In the next section, we will see how this specialization can raise labour productivity and living standards.

Exercise 1.9 Firm or not?

Using our definition, explain whether each of the following entities is a firm by investigating if it satisfies the characteristics that define a firm. Research the entity online if you are stuck.

  1. John Lewis Partnership (UK)
  2. a family farm in Vietnam
  3. your current family doctor’s office or practice
  4. Walmart (US)
  5. an eighteenth-century pirate ship (see our description of The Royal Rover in Unit 5)
  6. Google (US)
  7. Manchester United plc (UK)
  8. Wikipedia

History, instability, and growthGlobal economy

1.8 The gains from specialization

Capitalism and specialization

Look around at the objects in your workspace. Do you know the person who made them? What about your clothing? Or anything else in sight from where you are sitting?

Now imagine that it is 1776, the year that Adam Smith wrote The Wealth of Nations. The same questions, asked anywhere in the world, would have had a different answer.

At that time many families produced a wide array of goods for their own use, including crops, meat, clothing, even tools. Many of the things that you might have spotted in Adam Smith’s day would have been made by a member of the family, or of the village. You would have made some objects yourself; others would have been made locally and purchased from the village market.

economies of scale
These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. Also known as: increasing returns to scale. See also: diseconomies of scale.

One of the changes that was underway during Adam Smith’s life, but has greatly accelerated since, is specialization in the production of goods and services. As Smith explained, we become better at producing things when we each focus on a limited range of activities. This is true for three reasons:

  • Learning by doing: We acquire skills as we produce things.
  • Difference in ability: For reasons of skill, or natural surroundings such as the quality of the soil, some people are better at producing some things than others.
  • economies of scale: Producing a large number of units of some good is often more cost-effective than producing a smaller number. We investigate this in more detail in Unit 7.

These are the advantages of working on a limited number of tasks or products. People do not typically produce the full range of goods and services that they use or consume in their daily life. Instead we specialize, some producing one good, others producing other goods, some working as welders, others as teachers or farmers.

But people will not specialize unless they have a way to acquire the other goods they need.

For this reason, specialization—called the division of labour—poses a problem for society: how are the goods and services to be distributed from the producer to the final user? In the course of history, this has happened in a number of distinct ways, from direct government requisitioning and distribution as was done in the US and many economies during the Second World War, to gifts and voluntary sharing as we do in families today and as practiced among even unrelated members of a community by our hunting and gathering ancestors. Capitalism enhanced our opportunities for specialization by expanding the economic importance of both markets and firms.

Specialization exists within governments and also in families, where who does which household chore is often associated with age and gender. Here we look at the division of labour in firms and in markets.

The division of labour in firms

Adam Smith begins The Wealth of Nations with the following sentence:

The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.

He went on to describe a pin factory in which the specialization of tasks among the working men allowed a level of productivity—pins produced per day—that seemed to him extraordinary. Firms may employ thousands or even hundreds of thousands of individuals, most of them working at specialized tasks under the direction of the owners or manager of the firm.

This description of the firm stresses its hierarchical nature from top to bottom. But you can also think of the firm as a means by which large numbers of people, each with distinct skills and capacities, contribute to a common outcome, the product. The firm thus facilitates a kind of cooperation among specialized producers that increases productivity.

We return to the question of who does what within the firm and why in Unit 6.

Markets, specialization, and comparative advantage

Chapter 3 in The Wealth of Nations is titled: ‘That the Division of Labour is Limited by the Extent of the Market’, in which Smith explains:

When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.

When you hear the word ‘market’ what word do you think of? ‘Competition’ probably is what came to mind. And you would be right to associate the two words.

But you might have also come up with ‘cooperation’. Why? Because markets allow each of us pursuing our private objectives to work together, producing and distributing goods and services in a way that, while far from perfect, is in many cases better than the alternatives.

Markets accomplish an extraordinary result: unintended cooperation on a global scale. The people who produced the phone on your desk did not know or care about you; they produced it rather than you because they are better at producing phones than you are, and you ended up with it because you paid them, allowing them to buy goods that they need, also produced by total strangers to them.

A simple example illustrates how, when people differ in their ability to produce different goods, markets allow them to specialize. It shows something surprising: all producers can benefit by specializing and trading goods, even when this means that one producer specializes in a good that another could produce at lower cost.

Imagine a world of just two individuals (Greta and Carlos) who each need both of two goods, apples and wheat, to survive. They differ in how productive they are in growing apples and wheat. If Greta spent all her time, say, 2,000 hours in a year, producing apples, she would produce 1,250. If she only produced wheat, she would produce 50 tonnes per annum. Carlos has less fertile land than Greta for producing both crops: if he devoted all his time (the same amount as Greta) to apple growing, he would produce 1,000 per year, and if he produced only wheat he would produce 20 tonnes. See Figure 1.9a for a summary.

Production if 100% of time is spent on one good
Greta1,250 apples or 50 tonnes of wheat
Carlos1,000 apples or 20 tonnes of wheat

Figure 1.9a Absolute and comparative advantage in the production of apples and wheat.

absolute advantage
A person or country has this in the production of a good if the inputs it uses to produce this good are less than in some other person or country. See also: comparative advantage.

Although Carlos’ land is worse for producing both crops, his disadvantage is less, relative to Greta, in apples than in wheat. Greta can produce two and a half times more wheat as he can but only 25% more apples.

Economists distinguish who is better at producing what in two ways: absolute advantage and comparative advantage.

Greta has an absolute advantage in both crops. Carlos has an absolute disadvantage. She can produce more of either crop than he can.

comparative advantage
A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods. See also: absolute advantage.

Greta has a comparative advantage in wheat; Carlos has a comparative advantage in apples. Although she is better, Carlos is least disadvantaged in producing apples. Greta has a comparative advantage in producing wheat.

Initially, Carlos and Greta are not able to trade with each other. Both must be self-sufficient, consuming exactly what they produce, so they will each produce both goods in order to survive. Greta chooses to use 40% of her time in apple production, and the rest producing wheat. Column 1 of Figure 1.9b shows that she produces and consumes 500 apples and 30 tonnes of wheat. Carlos’ consumption is also shown: he spends 30% of his time producing apples, and 70% producing wheat.

Now suppose that there are markets where apples and wheat may be bought and sold, and that 40 apples can be bought for the price of 1 tonne of wheat. If Greta specializes in growing wheat only, producing 50 tonnes of wheat and no apples, while Carlos specializes in apples, total production of both crops will be higher than it was under self-sufficiency (column 2). Then they can each sell some of their own crop in the market, and buy some of the good that the other produced.

For example, if Greta sells 15 tonnes of wheat (column 3) in order to buy 600 apples, she can now consume more apples and more wheat than before (column 4). And the table shows that buying the 15 tonnes of wheat produced by Greta, in return for 600 apples, similarly enables Carlos to consume more of both goods than was possible in the absence of specialization and trade.

Self-sufficiencyComplete specialization and trade
ProductionTradeConsumption
1234
GretaApples5000600
Wheat3050=15+35
CarlosApples3001,000=600+400
Wheat14015

Figure 1.9b Comparing self-sufficiency and specialization. Under self-sufficiency, both consume exactly what they produce. Under complete specialization, Greta produces only wheat; Carlos produces only apples; and they trade the surplus of their production above what they consume.

In constructing this example we assumed market prices are such that a tonne of wheat could be exchanged for 40 apples. We will return to how markets work in Units 7 to 12, but Exercise 1.10 shows that this assumption was not critical. There are other prices at which both Greta and Carlos would benefit from trading with each other.

The opportunity to trade—that is, the existence of an apple market and a wheat market—has benefited both Greta and Carlos. This was possible because specializing in the production of a single good increased the total amount of each good produced, from 800 to 1,000 apples and from 44 to 50 tonnes of wheat. The surprising thing mentioned above is that Greta ended up buying 600 apples from Carlos even though she could have produced those apples at a lower cost herself (in terms of labour time). This was a better way to spend their time because while Greta had an absolute advantage in producing both goods, Carlos had a comparative advantage in producing apples.

Markets contribute to increasing the productivity of labour—and can therefore help to explain the hockey stick of history—by allowing people to specialize in the production of goods for which they have a comparative advantage, that is the things at which they are—relatively speaking—least bad!

Exercise 1.10 Apples and wheat

Suppose that market prices were such that 35 apples could be bought for 1 tonne of wheat.

  1. If Greta sold 16 tonnes of wheat, would both she and Carlos still be better off?
  2. What would happen if only 20 apples could be bought for the price of a tonne of wheat?

History, instability, and growthGlobal economyInnovation

1.9 Capitalism, causation and history’s hockey stick

We have seen that the institutions associated with capitalism have the potential to make people better off, through opportunities for both specialization and the introduction of new technologies, and that the permanent technological revolution coincided with the emergence of capitalism. But can we conclude that capitalism caused the upward kink in the hockey stick?

We should be sceptical when anyone claims that something complex (capitalism) ‘causes’ something else (increased living standards, technological improvement, a networked world, or environmental challenges).

In science, we support the statement that X causes Y by understanding the relationship between cause (X) and effect (Y) and performing experiments to gather evidence by measuring X and Y.

causality
A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept. See also: natural experiment, correlation.

We want to make causal statements in economics—to understand why things happen, or to devise ways of changing something so that the economy works better. This means making a causal statement that policy X is likely to cause change Y. For example, an economist might claim that: ‘If the central bank lowers the interest rate, more people will buy homes and cars.’

But an economy is made up of the interactions of millions of people. We cannot measure and understand them all, and it is rarely possible to gather evidence by conducting experiments (though in Unit 4 we will give examples of the use of conventional experiments in one area of economics). So how can economists do science? This example shows how the things we observe in the world can help us investigate causes and effects.

How economists learn from facts Do institutions matter for growth in income?

natural experiment
An empirical study exploiting naturally occurring statistical controls in which researchers do not have the ability to assign participants to treatment and control groups, as is the case in conventional experiments. Instead, differences in law, policy, weather, or other events can offer the opportunity to analyse populations as if they had been part of an experiment. The validity of such studies depends on the premise that the assignment of subjects to the naturally occurring treatment and control groups can be plausibly argued to be random.

We can observe that capitalism emerged at the same time as, or just before, both the Industrial Revolution and the upward turn in our hockey sticks. This would be consistent with the hypothesis that capitalist institutions were among the causes of the era of continuous productivity growth. But the emergence of a free-thinking cultural environment known as ‘The Enlightenment’ also predated or coincided with the upturn in the hockey sticks. So was it institutions, or culture, both, or some other set of causes? Economists and historians disagree, as you will see in Unit 2, when we ask ‘What were the causes of the Industrial Revolution?’

Scholars in all fields try to narrow the range of things on which they disagree by using facts. For complicated economic questions, like ‘Do institutions matter economically?’, facts may provide enough information to reach a conclusion.

A method for doing this is called a natural experiment. It is a situation in which there are differences in something of interest—a change in institutions for example—that are not associated with differences in other possible causes.

The division of Germany at the end of the Second World War into two separate economic systems—centrally planned in the east, capitalist in the west—provided a natural experiment. During this time a political ‘Iron Curtain’, as the British Prime Minister Winston Churchill described it, divided the country. It separated two populations that until then had shared the same language, culture, and capitalist economy.9

In 1936, before the Second World War, living standards in what later became East and West Germany were the same. This is a suitable setting for using the natural experiment method. Before the war, firms in Saxony and Thuringia were world leaders in automobile and aircraft production, chemicals, optical equipment and precision engineering.

With the introduction of centralized planning in East Germany, private property, markets and firms virtually disappeared. Decisions about what to produce, how much and in which plants, offices, mines and farms were taken not by private individuals, but by government officials. The officials managing these economic organizations did not need to follow the principle of capitalism and produce goods and services that customers would buy at a price above their cost of manufacture.

West Germany remained a capitalist economy.

The East German Communist Party forecast in 1958 that material wellbeing would exceed the level of West Germany by 1961. The failure of this prediction was one of the reasons the Berlin Wall separating East from West Germany was built in 1961. By the time the Berlin Wall fell in 1989, and East Germany abandoned central planning, its GDP per capita was less than half of that of capitalist West Germany. Figure 1.10 shows the different paths taken by these and two other economies from 1950. It uses the ratio scale.

In this line chart, the horizontal axis shows years from 1950 to 1989. The vertical axis displays GDP per capita in 1990 US dollars. It is in ratio scale, so each step on the scale is twice the previous step, and ranges from 1,500 to 24,000 US dollars. GDP per capita for West Germany, Japan, Spain and East Germany are shown. GDP per capita increases over time for all countries. West and East Germany’s GDP increases at roughly the same rate, but West Germany’s GDP is at a higher level than East Germany’s. Japan’s and Spain’s GDP is below that of West and East Germany in 1950, but increases at a faster rate, so Japan and Spain’s GDP reaches the same level of East Germany’s GDP in the early 1960s, and approaches that of West Germany by 1989.

Figure 1.10 The two Germanies: Planning and capitalism (1950–89).

Notice from Figure 1.10 that West Germany started from a more favourable position in 1950 than East Germany. Yet in 1936, before the war began, the two parts of Germany had virtually identical living standards. Both regions had achieved successful industrialization. East Germany’s relative weakness in 1950 was not mainly because of differences in the amount of capital equipment or skills available per head of the population, but because the structure of industries in East Germany was more disrupted by splitting the country than was the case in West Germany.10

Unlike some capitalist economies that had even lower per capita incomes in 1950, East Germany’s planned economy did not catch up to the world leaders, which included West Germany. By 1989, the Japanese economy (which had also suffered war damage) had, with its own particular combination of private property, markets, and firms, along with a strong government coordinating role, caught up to West Germany, and Spain had closed part of the gap.

We cannot conclude from the German natural experiment that capitalism always promotes rapid economic growth while central planning is a recipe for relative stagnation. Instead what we can infer is more limited: during the second half of the twentieth century, the divergence of economic institutions mattered for the livelihoods of the German people.

History, instability, and growthGlobal economyPolitics and policy

1.10 Varieties of capitalism: Institutions, government, and the economy

Not every capitalist country is the kind of economic success story exemplified in Figure 1.1a by Britain, later Japan, and the other countries that caught up. Figure 1.11 tracks the fortunes of a selection of countries across the world during the twentieth century. It shows for example that in Africa the success of Botswana in achieving sustained growth contrasts sharply with Nigeria’s relative failure. Both are rich in natural resources (diamonds in Botswana, oil in Nigeria), but differences in the quality of their institutions—the extent of corruption and misdirection of government funds, for example—may help explain their contrasting trajectories.

The star performer in Figure 1.11 is South Korea. In 1950 its GDP per capita was the same as Nigeria’s. By 2013 it was ten times richer by this measure.

developmental state
A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education and other public policies.

South Korea’s take-off occurred under institutions and policies sharply different from those prevailing in Britain in the eighteenth and nineteenth centuries. The most important difference is that the government of South Korea (along with a few very large corporations) played a leading role in directing the process of development, explicitly promoting some industries, requiring firms to compete in foreign markets and also providing high quality education for its workforce. The term developmental state has been applied to the leading role of the South Korean government in its economic take-off and now refers to any government playing this part in the economy. Japan and China are other examples of developmental states.11

From Figure 1.11 we also see that in 1928, when the Soviet Union’s first five-year economic plan was introduced, GDP per capita was one-tenth of the level in Argentina, similar to Brazil, and considerably higher than in South Korea. Central planning in the Soviet Union produced steady but unspectacular growth for nearly 50 years. GDP per capita in the Soviet Union outstripped Brazil by a wide margin and even overtook Argentina briefly just before Communist Party rule there ended in 1990.

The contrast between West and East Germany demonstrates that one reason central planning was abandoned as an economic system was its failure, in the last quarter of the twentieth century, to deliver the improvements in living standards achieved by some capitalist economies. Yet the varieties of capitalism that replaced central planning in the countries that had once made up the Soviet Union did not work so well either. This is evident from the pronounced dip in GDP per capita for the former Soviet Union after 1990. Economist Lisa Cook of Michigan State University asks why the transition to capitalism in Russia in the 1990s did not spark a wave of innovation. She documents the late 19th century inventions contributed by African American inventors, including gas masks, traffic lights, and light bulb technology and how this burst of innovations was cut short by a wave of attacks and anti-black mob violence. Her insights on the political and economic conditions under which innovation will flourish are relevant to understanding the vast differences across the world today in the extent of innovation.

When is capitalism dynamic?

The lagging performances of some of the economies in Figure 1.11 demonstrate that the existence of capitalist institutions is not enough, in itself, to create a dynamic economy—that is, an economy bringing sustained growth in living standards. Two sets of conditions contribute to the dynamism of the capitalist economic system. One set is economic; the other is political, and it concerns the government and the way it functions.

Economic conditions

Where capitalism is less dynamic, the explanation might be that:1213

  • Private property is not secure: There is weak enforcement of the rule of law and of contracts, or expropriation either by criminal elements or by government bodies.
  • Markets are not competitive: They fail to offer the carrots and wield the sticks that make a capitalist economy dynamic.
  • Firms are owned and managed by people who survive because of their connections to government or their privileged birth: They did not become owners or managers because they were good at delivering high-quality goods and services at a competitive price. The other two failures would make this more likely to occur.

Combinations of failures of the three basic institutions of capitalism mean that individuals and groups often have more to gain by spending time and resources in lobbying, criminal activity, and other ways of shifting the distribution of income in their favour. They have less to gain from the direct creation of economic value.14

Capitalism is the first economic system in human history in which membership of the elite often depends on a high level of economic performance. As a firm owner, if you fail, you are no longer part of the club. Nobody kicks you out, because that is not necessary: you simply go bankrupt. An important feature of the discipline of the market—produce good products profitably or fail—is that where it works well it is automatic, because having a friend in power is no guarantee that you could remain in business. The same discipline applies to firms and to individuals in firms: losers lose. Market competition provides a mechanism for weeding out those who underperform.

Think of how different this is from other economic systems. A feudal lord who managed his estate poorly was just a shabby lord. But the owner of a firm that could not produce goods that people would buy, at prices that more than covered the cost, is bankrupt—and a bankrupt owner is an ex-owner.

Of course, if they are initially very wealthy or very well connected politically, owners and managers of capitalist firms survive, and firms may stay in business despite their failures, sometimes for long periods or even over generations. Losers sometimes survive. But there are no guarantees: staying ahead of the competition means constantly innovating.

Political conditions

Government is also important. We have seen that in some economies—South Korea, for example—governments have played a leading role in the capitalist revolution. And in virtually every modern capitalist economy, governments are a large part of the economy, accounting in some for more than half of GDP. But even where government’s role is more limited, as in Britain at the time of its take-off, governments still establish, enforce and change the laws and regulations that influence how the economy works. Markets, private property and firms are all regulated by laws and policies.

For innovators to take the risk of introducing a new product or production process, their ownership of the resulting profits must be protected from theft by a well-functioning legal system. Governments also adjudicate disputes over ownership and enforce the property rights necessary for markets to work.

monopoly
A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller. See also: monopoly power, natural monopoly.
too big to fail
Said to be a characteristic of large banks, whose central importance in the economy ensures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks. See also: moral hazard.

As Adam Smith warned, by creating or allowing monopolies such as the East India Company, governments may also take the teeth out of competition. If a large firm is able to establish a monopoly by excluding all competitors, or a group of firms is able to collude to keep the price high, the incentives for innovation and the discipline of prospective failure will be dulled. The same is true in modern economies when some banks or other firms are considered to be too big to fail and instead are bailed out by governments when they might otherwise have failed.

In addition to supporting the institutions of the capitalist economic system, the government provides essential goods and services such as physical infrastructure, education and national defence. In subsequent units we investigate why government policies in such areas as sustaining competition, taxing and subsidizing to protect the environment, influencing the distribution of income, the creation of wealth, and the level of employment and inflation may also make good economic sense.

In a nutshell, capitalism can be a dynamic economic system when it combines:

  • Private incentives for cost-reducing innovation: These are derived from market competition and secure private property.
  • Firms led by those with proven ability to produce goods at low cost.
  • Public policy supporting these conditions: Public policy also supplies essential goods and services that would not be provided by private firms.
  • A stable society, biophysical environment and resource base: As in Figures 1.5 and 1.12.
capitalist revolution
Rapid improvements in technology combined with the emergence of a new economic system.

These are the conditions that together make up what we term the capitalist revolution that, first in Britain and then in some other economies, transformed the way that people interact with each other and with nature in producing their livelihoods.

Political systems

political system
A political system determines how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population.
democracy
A political system, that ideally gives equal political power to all citizens, defined by individual rights such as freedom of speech, assembly, and the press; fair elections in which virtually all adults are eligible to vote; and in which the government leaves office if it loses.

One of the reasons why capitalism comes in so many forms is that over the course of history and today, capitalist economies have coexisted with many political systems. A political system, such as democracy or dictatorship, determines how governments will be selected, and how those governments will make and implement decisions that affect the population.

Capitalism emerged in Britain, the Netherlands, and in most of today’s high-income countries long before democracy. In no country were most adults eligible to vote prior to the end of the nineteenth century (New Zealand was the first). Even in the recent past, capitalism has coexisted with undemocratic forms of rule, as in Chile from 1973 to 1990, in Brazil from 1964 to 1985, and in Japan until 1945. Contemporary China has a variant of the capitalist economic system, but its system of government is not a democracy by our definition. In most countries today, however, capitalism and democracy coexist, each system influencing how the other works.

Like capitalism, democracy comes in many forms. In some, the head of state is elected directly by the voters; in others it is an elected body, such as a parliament, that elects the head of state. In some democracies there are strict limits on the ways in which individuals can influence elections or public policy through their financial contributions; in others private money has great influence through contributions to electoral campaigns, lobbying, and even illicit contributions such as bribery.

These differences even among democracies are part of the explanation of why the government’s importance in the capitalist economy differs so much among nations. In Japan and South Korea, for example, governments play an important role in setting the direction of their economies. But the total amount of taxes collected by government (both local and national) is low compared with some rich countries in northern Europe, where it is almost half of GDP. We shall see in Unit 19 that in Sweden and Denmark, inequality in disposable income (by one of the most commonly used measures) is just half of the level of income inequality before the payment of taxes and receipt of transfers. In Japan and South Korea, government taxes and transfers also reduce inequality in disposable income, but to a far lesser degree.

Question 1.7 Choose the correct answer(s)

Look again at Figure 1.10, which shows a graph of GDP per capita for West and East Germany, Japan and Spain between 1950 and 1990. Which of the following statements is correct?

  • Having a much lower starting point in 1950 was the main reason for East Germany’s poor performance compared to West Germany.
  • The fact that Japan and West Germany have the highest GDP per capita in 1990 implies that they found the optimal economic system.
  • Spain was able to grow at a higher growth rate than Germany between 1950 and 1990.
  • The difference in East and West Germany’s performance proves that capitalism always promotes rapid economic growth while central planning is a recipe for stagnation.
  • Japan had even lower starting point than East Germany and yet was able to catch up with West Germany by 1990.
  • Different economic systems can be successful. The Japanese economy had its own particular combination of private property, markets and firms along with a strong government coordinating role, which was different to the West Germany system.
  • The growth rate of an economy’s GDP per capita can be inferred from the steepness of its curve when plotted on a ratio scale graph, as done here. The fact that the slope of Spain’s curve is greater than that of either West or East Germany from 1950 to 1990 indicates that it grew at a faster rate.
  • In economics one cannot use only one piece of evidence to ‘prove’ a theory. What we can infer here is that during the second half of the twentieth century, the divergence of economic institutions mattered for the livelihoods of the German people.

Question 1.8 Choose the correct answer(s)

Look again at Figure 1.11. Which of these conclusions is suggested by the graph?

  • The Communist Party rule in the former Soviet Union before 1990 was a complete failure.
  • The contrasting performances of Botswana and Nigeria illustrate that rich natural resources alone do not guarantee higher economic growth, but that higher quality institutions (government, markets and firms) may also be necessary.
  • The impressive performance of South Korea’s economy implies that other countries should copy their economic system.
  • The evidence from the Russian Federation and the former Soviet Union after 1990 shows that the replacement of central planning by capitalism led to immediate economic growth.
  • The former Soviet Union actually had much higher growth rates than Brazil, and its GDP per capita even briefly overtook Argentina’s just before the Communist Party rule ended in 1990.
  • Both Nigeria and Botswana are rich in natural resources; however, Nigeria’s growth is hindered by pervasive corruption and illegal business practices, whereas Botswana is often described as the least corrupt country in Africa and boasts one of the world’s highest average GDP growth rates.
  • South Korea was a developmental state where the government and a few very large corporations played a leading role in directing the process of development. This does not necessarily mean that this system is optimal for all countries.
  • GDP per capita of both countries fell after 1990. This is due to their private property not being secure, the markets not being competitive and their firms not operating competitively in their newly capitalist economy. This abrupt transition from a distinctly non-capitalist economy to a capitalist system is often referred to as ‘shock therapy’.

1.11 Economics and the economy

economics
The study of how people interact with each other and with their natural surroundings in providing their livelihoods, and how this changes over time.

Economics is the study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time. Therefore it is about:

  • How we come to acquire the things that make up our livelihood: Things like food, clothing, shelter, or free time.
  • How we interact with each other: Either as buyers and sellers, employees or employers, citizens and public officials, parents, children and other family members.
  • How we interact with our natural environment: From breathing, to extracting raw materials from the earth.
  • How each of these changes over time.

In Figure 1.5 we showed that the economy is part of society, which in turn is part of the biosphere. Figure 1.12 shows the position of firms and families in the economy, and the flows that occur within the economy and between the economy and the biosphere. Firms combine labour with structures and equipment, and produce goods and services that are used by households and other firms.

The economy of households and firms depends on a healthy biosphere and stable physical environment.

Figure 1.12 A model of the economy: Households and firms.

Production of goods and services also takes place within households, although unlike firms, households may not sell their outputs in the market.

Источник: https://www.core-econ.org/the-economy/book/text/01.html

Suddenly there’s a lively debate on both the left and the right about the specter of socialism in America. According to Gallup, Democrats now view socialism in a more positive light than capitalism. And Alexandria Ocasio-Cortez, a card-carrying member of the Democratic Socialists of America, became an instant political star after she clinched the Democratic Party’s nomination for the New York 14th District’s House seat.

Some conservatives, brought up declaiming, “Better dead than red,” are understandably in a bit of a tizzy. In a fiery peroration on The View, Meghan McCain warned of the peril of going the way of socialist Venezuela, where, she says, people are “starving to death.”

In National Review, Kevin Williamson offers a rather more measured and illuminating conservative perspective. He argues that the vogue of “socialism,” embodied in the rise of Ocasio-Cortez, and the intemperate right-wing reaction to it, is mostly semantic — a matter of “words about words,” as he puts it, freighted with polarized sentiment and little definite meaning.

“All this talk about socialism isn’t about socialism,” Williamson writes. “It’s about the status quo.” The idea that “capitalism” has failed us and that “socialism” is the answer relies on a cartoonish oversimplification of reality. Current economic arrangements in the US, and throughout the developed world, involve a complex mix of “capitalist” market institutions and “socialist” regulatory and redistributive institutions.

If our mixed system is failing many of us, it’s highly unlikely that the blame can be assigned exclusively to either its “capitalist” or “socialist” components, or to the fact that the system is mixed rather than purely one thing or the other. The real debate, as Williamson goes on to suggest, concerns the structure, balance, and integration of the elements that make up our political economy.

This gets lost when the debate is framed as a binary choice between “capitalism” — which the left blames for all contemporary ills — and “socialism.”

The polarized ideological charge around these hazily conceived rival ideals leaves both left and right with a dangerous blind spot. As Williamson argues, the left needs to better appreciate the role of capitalism in producing abundance. For its part, he says, the right needs to square up to the unyielding fact of human “risk aversion” and the indispensable role safety nets in placating this deep-seated distaste for feelings of uncertainty and insecurity by insuring us against the turbulence of capitalist dynamism.

Even if “socialism” isn’t really “what anxious young Americans are looking for,” Williamson says, conservatives need to “be honest with the fact that they aren’t buying what we’re selling, and do the hard work of understanding why and what to do about it.”

He’s right on all counts. I’d like to lend a hand and help the right better grasp why it’s bleeding market share, and why the “socialist” brand has caught fire with the “anxious young American” demographic.

The free market welfare state: how to make capitalism and socialism friends

Williamson is right that the new democratic socialists running for office aren’t calling for nationalization of industry or the abolition of private property (though some of their cheerleaders are). They’re calling for an extravagantly beefed-up welfare state, and a shift toward stronger governmental regulation of various industries. These are questionable ideas, but they won’t turn America into Venezuela.

Still, there’s a big difference between real, existing social democracy — of the sort on display in Denmark or Sweden —and the Christmas list exorbitance of the DSA platform. (If you’re confused by the difference between “social democracy” and “democratic socialism,” Sheri Berman is indispensable.) As Williamson observes, progressives in the mold of Bernie Sanders and Ocasio-Cortez seem not to know or care that today’s model social democracies also boast model capitalist economies that are in many ways more economically laissez-fairethan the wickedly capitalist American system.

According to the conservative Heritage Foundation’s Index of Economic Freedom, for instance, Denmark and Sweden — where taxes are high and welfare spending is lavish — outscore the United States in the security of property rights, ease of starting a business, openness to trade, and monetary freedom (a measure of inflation and price controls). Both narrowly beat the US in overall “capitalist” economic freedom, despite receiving a stiff penalty from Heritage for their big-spending ways.

Heritage Foundation 2018 Index of Economic Freedom

As I’ve argued ad nauseam, go-go capitalism is how you pay for safety-net soft socialism. Ocasio-Cortez has so far flailed pretty badly on the “how would you pay for all this stuff?” question. She seems not to grasp that you can’t do so just by reallocating the Navy’s budget (though that would help). In the real world, you finance soft-socialist guarantees with a level of tax revenue and borrowing you can only sustain through capitalist innovation, competition, efficiency, trade, and growth. That’s the lesson of the Nordic social democracies.

The other side of the equation, the part the right often misses, is that insuring folks against bad luck and the downside risks of capitalist disruption is how you maintain political support for “neoliberal” market dynamism — and mute democratic demand for reactionary economic nationalism. (It’s also how you ensure that prosperity is broadly shared.)

On this score, Williamson insightfully chalks up the current appeal of both socialism and Trump’s mercantilism to the urgent human desire to be insulated from the anxiety of uncertainty, and suggests that the libertarian idea that “The free market will take care of it, or private charity will” is the right-wing analogue to socialist wishcasting about bottomless budgets and technocratic omnicompetence. It is a fantasy vision incapable of answering deep-seated anxieties about dislocation and loss that inevitably shape democratic politics. I wholly agree.

Instability and uncertainty are nerve-racking. The market competition that drives innovation and efficiency is a wrecking ball that leaves some among us sifting through the rubble, all the time. For those of us living paycheck to paycheck, and that’s most of us, it’s scary. Capitalism creates wealth by setting up a contest for profits that necessarily creates a steady stream of losers.

The fact that capitalism also creates a steady stream of opportunities does not, by itself, make the risk of losing tolerable. If rough seas keep tossing folks overboard, and people are barely keeping their heads above water (“Just keep paddling, Aunt Andrea!”), it’s not enough to be told that there’s usually a boat to swim to. We’re more willing to risk storm-tossed seas when the ship of state is bristling with lifeboats and manned by a competent crew.

That’s a key insight of “the free market welfare state.” Call it “lifeboat laissez-faire.” I’m glad to see Williamson sticking up for lifeboats. But I also don’t think risk aversion is the whole story behind the recent attraction to social democracy.

Rigged American capitalism is a big part of the problem

I disagree with Elizabeth Warren on a slew of policy particulars — on the minimum wage, single-payer health care, and the Trans-Pacific Partnership, for example — but I think her recent affirmation of the progressive power of capitalist dynamism gets the bigger picture basically right:

I am a capitalist. ... I believe in markets. What I don’t believe in is theft, what I don’t believe in is cheating. That’s where the difference is. I love what markets can do, I love what functioning economies can do. They are what make us rich, they are what create opportunity. But only fair markets, markets with rules. Markets without rules is about the rich take it all, it’s about the powerful get all of it. And that’s what’s gone wrong in America.

She’s right. We need markets to make us richer. But we also need them to make all of us richer, and that’s not just about making sure that we’re indemnified against the risks of wrecking-ball competition. It’s also about making sure the basic rules of the game aren’t rigged to favor people who already won, locking the rest of us into a lower tier of possibility. Warren is a free-market social democrat in the Nordic mold. Her vision is a far cry from the anti-capitalist agenda of the Ocasia-Cortez and the DSA.

Now, the problem isn’t exactly “markets without rules.” The problem is that markets are defined by an incomprehensible jumble of regulatory kludges — an accumulation of individually reasonable but cumulatively stifling technocratic fixes — that strangle economic freedom for ordinary people, allowing the powerful to capture the economy by writing and selectively enforcing the rules to their advantage.

Warren pretty clearly gets this too. For example, she led the charge to deregulate the over-the-counter sale of hearing aids, against the objections of state-licensed audiologists and incumbent medical device manufacturers, promoting market competition that raises the quality and reduces the cost of a critical life-enhancing technology.

Ocasio-Cortez should take a page from Warren and learn to love markets. As should Republicans, who might come to grasp the appeal of combining sturdier safety nets with freer, fairer markets.

The GOP’s market rigging and rejection of the social safety net drives voters toward “socialism”

No less a classical liberal than F.A. Hayek supported a robust safety net capable of “providing for those common hazards of life against which few can make adequate provision.” It’s true, as Williamson says, that “There isn’t any obvious and non-arbitrary place to draw the line on those common hazards of life.” But he’s wrong that “the fundamental difference between Right and Left is where to draw that line (or those lines) and how to go about helping those we decide to help.”

A Republican Party that remains doggedly devoted to Grover Norquist’s goal of shrinking government until it’s small enough to drown in a bathtub isn’t pro-lifeboat. It’s pro-drowning. Moreover, cannibalizing Obamacare, setting public assistanceever further out of reach, and exploding the deficit with massive tax cuts doesn’t make the ruling political right a friend of free markets. Trump’s tariff-hiking, winner-picking economic nationalism, which looks to communist China as a model, is an immiseratingmorass of rank corruption. But that’s what the GOP currently stands for, whether conservative thinkers like it or not.

The right’s Pavlovian reaction to Ocasio-Cortez’s budget-busting democratic socialism has trapped it in a comforting haze of commie-fighting nostalgia. It leaves Republicans blind to the electoral threat posed by Warren’s Nordic-style social democracy, because they can’t see the difference; they can only see reds. Warren’s coalescing vision of the market-friendly welfare state doesn’t exactly amount to the second coming of Milton Friedman, but it’s far more intellectually sound and politically attractive than anything Republicans currently have on offer.

If the governing GOP is unable to hear what Hayekian conservatives like Williamson are saying and just keep on smashing the lifeboats, and fail to offer a compelling alternative to Warren’s vision for unrigging the economy, not only will they be totally overwhelmed on their left flank on social insurance, they might also find themselves outflanked on the issue of fair, open, competitive markets. They’ll get routed by the left on capitalism, still screeching about Venezuelan bread lines.

Will Wilkinson is the vice president for research at the Niskanen Center, and a Vox columnist.


The Big Idea is Vox’s home for smart discussion of the most important issues and ideas in politics, science, and culture — typically by outside contributors. If you have an idea for a piece, pitch us at [email protected]

Источник: https://www.vox.com/the-big-idea/2018/8/16/17698602/socialism-capitalism-false-dichotomy-kevin-williamson-column-republican-ocasio-cortez

What principle of difference for a truly egalitarian social democracy? Rereading Rawls after social democracy’s failures

Abstract

Social democracy based on welfare and the redistribution of social contributions is failing. The accumulation of wealth and the increase in inequalities are the two faces of Janus that social democracy has not been able to contain over the recent decades. In this context, it matters to discuss John Rawls’s influential difference principle. According to the maximin criterion put forth by Rawls, it does not suffice that no one becomes worse off; those who are worse off must also become better off than they are. Here, we note that the existence and growth of inequality find no opposition in the maximin rule. Despite appearances, strictly speaking it merely introduces a factor of social compensation, a sort of “assistencialism” to the victims of the greatest inequality. Even the most robust formulation of the principle of difference, according to which the greatest advantage to the less advantaged is indispensable, does not per se preclude an aggregate growth of inequalities. It seems clear that it was an egalitarian goal what Rawls had in mind in A Theory of Justice. Rawls’s critical comments on welfare capitalism must indeed not be forgotten—especially in his further explanations about the application of the principles of justice in a property-owning democracy. Here, as in liberal socialism, the dispersion of property, capital and resources prevents economic and political powers from being concentrated into the hands of a minority. However, the egalitarian aim does not strictly follow from the difference principle as stated, whether taken literally as an application of the maximin rule or inferring from its strongest formulation. A reformulation that does justice to the egalitarian aim of the principle of difference is, however, possible: namely, a degrowthist reformulation, truly requiring a degrowth in accumulation and inequalities, making explicit a brake clause that hinders the aggregate growth of inequalities. Such a degrowthist conception of the difference principle may justify some concrete rules that are able to enforce the egalitarian commitments of social democracy.

The difficulties facing social democracy today and the debate on Rawls’s difference principle

There is no doubt today that social democracy based on the welfare state and on the redistributive social transfers is failing. On this topic, data found in Overview of Inequality Trends, Key Findings and Policy Directions (2015) is particularly enlightening. It indicates a significant increase in inequalities in OECD countries based on a comparison of data from the mid-1980s with data from 2013 or more recent years. It is important to monitor the evolution of inequalities in OECD countries because there has been, until the most recent years, a pattern of correcting inequalities by way of redistribution policies. In fact, such policies in these countries have been getting weaker, and the capacity for correcting inequalities diminishing. Therefore, notable increases in Gini coefficients have been recorded in countries subject to severe tax consolidation policies (as a result of the debt crisis), but also in countries such as Sweden and New Zealand (OECD, 2015, p. 24).

Inequalities are increasing, as is the concentration of wealth, despite traditional social transfers. This follows a trend dating back to the end of the 1970s in English-speaking countries such as the USA and the UK. The trend spread to other OECD member countries in the 1980s, and has had a significant effect since the turn of the millennium in OECD states with the lowest levels of income inequality, such as the Scandinavian countries.

In fact, the accumulation of wealth and the escalation in inequalities are two faces of Janus that social democracy has been unable to contain. Perhaps simply under an illusion, we are driven to say that real social democracy has been failing for decades in the face of an increasingly unequal world. Perhaps, taking advantage of the ambivalence between egalitarianism and welfare capitalism, social democracy has leaned towards the latter. The idea of social democracy’s ambivalence should be taken seriously. Indeed, it is symptomatic that John Rawls himself recognises, in Justice as Fairness (2001), as a serious failing of A Theory of Justice (1971), that it did not sufficiently underscore the contrast between welfare capitalism and property-owning democracy. Without going too far in our interpretation, we can say that the risks of ambivalence in the understanding of Rawls’s A Theory of Justice (TJ), identified by the author himself, are equivalent to the risks of ambivalence in social democracy roughly since the 1970s.

In terms of emphasis, it is necessary to acknowledge dangers such as those recently raised by Walter Scheidel in The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century (2017). Its primary and controversial thesis is that over time the greatest social levelers, which have actually corrected accumulated inequalities, have always been one of four: great epidemics, state collapses, wars that involve mass mobilisation, and revolutionary movements that change social order. Scheidel’s thesis should concern us. The conditions that make it possible for inequalities to grow are largely the result of accumulation processes at times of economic growth and peace. They involve stable periods that run smoothly, protected by laws that guarantee continuity and the rights that this continuity produces. The violence of wars or revolutions, or even a massive natural disaster, interrupts that continuity. The bitter irony is that these “great levelers” that are increasingly within the reach of human hands are, although destructive, desires; and the greater the inequalities, the more such desires there will be. This was the case in the early decades of the 20th century and it is crucial for us to understand that the same thing will happen again if we continue to widen the opportunity gap in contemporary societies. What is important to retain here is not so much that violence has historically been a great leveler but that significant unevenness has been the source and stage for mass violence. There is no alternative between evils, but rather two evils that mutually feed each other in a cycle that, with enough historical retrospection, reveals itself to be truly infernal. The alternative must therefore be an alternative to past history. Piketty (2013) has also given historical evidence that the periods of the 20th century when there were reversals in the accumulation of inequalities in Europe were during the two great wars.

Within this theoretical and historical framework that forms an indisputable trend towards greater inequalities in places where social democratic models have taken precedence, we propose revisiting and returning to the discussion of the concept of social justice, which has become more precious to social democracy and progressivism in general. In particular, returning to a discussion of John Rawls’s famous difference principle (DP) within the framework of principles that form the concept of justice proposed by the philosopher in the hope that overcoming its ambivalence could be the key to overcoming the corresponding ambivalence of social democracy itself.

According to the DP, inequalities are not fair from a utilitarian viewpoint, which aims for the greatest good for the greatest number. Rightly so, since this means it is unacceptable to sacrifice minorities and individuals. Neither are inequalities acceptable under a criterion that complies with Pareto optimality, in which inequalities are acceptable until someone is harmed. This would make anything licit, as long as the condition that no one is harmed is completely satisfied; as though there were nothing wrong with inequality in itself—inequality being, by very definition, relative to others. In the debate with rivals in the field of rational choice theory, the maximin criterion put forth by Rawls is more exacting: it does not suffice that no one becomes worse off; also those who are worse off must become better off than they are. Put simply, this criterion precludes objection to Pareto optimality. With barely more than a few crumbs, the maximin rule can be met. And while, with greater conviction, this strategy can counter and indeed diminish the most extreme poverty, it is no less true that it allows for a boundless growth of inequalities. The existence and growth of inequality find no opposition in the maximin rule, which, despite appearances, merely introduces a factor of social compensation, a sort of “assistencialism” to the victims of the greatest inequality.

What would it take, then? Starting with a negative: that those in the worst conditions might see their circumstances somewhat improved is not enough to justify allowing inequalities to increase. The inequalities that are inevitable in any free, non-totalitarian society become acceptable when, and only when, inequalities are not allowed to increase. Most likely this was what Rawls had in mind in TJ, though it does not necessarily follow from the explicit outline of his principles of justice, namely his difference principle, particularly if taken literally as an application of the maximin rule.

A maximin strategy without assistencialism should not circumvent the demand to not increase the curve of inequality. But how to ensure that it does not allow it? Considerations outside the formulation of his own principles of justice are not enough, however explicit they may be, such as when Rawls says: “The even larger difference between classes violates the principle of mutual advantage as well as democratic equality” (TJ, revised edition, p. 68s).

Van Parijs has expressed similar dissatisfaction, as well as noted a significant variation in how the DP is formulated, concluding that the last of such formulations would be immune to ambivalence. We shall briefly go over the three outlines that Van Parijs presents, but keeping the doubts that we have presented, and then we shall move on with a different strategy: no longer finding a satisfactory Rawlsian version of the difference principle, but another, still Rawlsian grounding for a more solid egalitarian formulation of the difference principle.

The first version of the DP in TJ establishes that “social and economic inequalities are to be arranged so that they are both (a) reasonably expected to be to everyone’s advantage” (TJ, revised edition, p. 53). Following Rawls, Parijs identifies ambiguities in this formulation, requiring a more unequivocal version according to which the DP would be as follows:

Assuming the framework of institutions required by equal liberty and fair equality of opportunity, the higher expectations of those better situated are just if and only if they work as part of a scheme which improves the expectations of the least advantaged members of society. The intuitive idea is that the social order is not to establish and secure the more attractive prospects of those better off unless doing so is to the advantage of those less fortunate. (TJ, revised edition, p. 65)

So, Parijs concludes from this second formulation, apparently free from ambiguities highlighted by Rawls himself, exactly the same thing we generally suggested above regarding his DP. In other words, it allows for very non-egalitarian interpretations to be made of it: “all that is needed to justify an inequality, however large, is some improvement, however tiny, for the worse off, relative to the conceivably very depressed counterfactual situation of total equality between the expectations of the more fortunate and the less fortunate.” (Parijs, 2003, p. 204)

Simply, Parijs finds in the third formulation of the DP, which Rawls presents as the simplest, an egalitarian commitment of a higher order, free of ambiguities. The formulation is:

Social and economic inequalities are to be arranged so that they are both (a) to the greatest benefit of the least advantaged and (b) attached to offices and positions open to all under conditions of equality of opportunity. (TJ, 83/72 revised edition)

Parijs consider this a “far more demanding formulation” (Parijs, 2003, p. 204) and, within it, highlights the expression “to the greatest benefit”. Only clause (a) relates to the DP and nothing more is said other than that inequalities have to be of the greatest benefit of the least advantaged. Is this enough? Rather than some benefit to the least advantaged, however small the crumbs, Rawls does in fact raise the stakes to the greatest benefit of those least advantaged people. But the greatest benefit relative to what came prior or the greatest benefit compared to all other beneficiaries of that inequality? If it is the former, the meaning of this formulation would end up being exactly the same as the previous one. If it is the latter, we would in fact be rejecting that there is any greater benefit for the most advantaged than the benefit achieved by the least advantaged. But can we be certain that this leads to less inequality? If the greatest benefit for the least advantaged is an aggregate benefit, it is not hard to imagine situations in which inequality would still grow extensively, particularly if inequality is already quite serious. Let us suppose, for example, that there are a million least advantaged people and only 10 most advantaged people. A million crumbs may satisfy the criterion of the greatest benefit for the least advantaged if the benefit for the most advantaged is “only” half a million crumbs. If these are distributed among only the 10 most advantaged, then inequality will increase drastically. Furthermore, if the interpretation is the strictest possible—according to which none of the most advantaged may obtain a greater benefit than any of the least advantaged—we can easily conclude that this is an excessive version that will certainly conflict with hierarchically superior principles of justice, starting with those pertaining to liberties. But neither of these is the interpretation we should make within the Rawlsian system of the “greatest benefit” for the least advantaged. As Rawls makes very clear in the outlines he makes before the third formulation of the DP, “the greatest benefit” does not refer to a comparison with either the previous situation or an absolute comparison with the benefit of the most advantaged, but to a comparison with the benefits that the least advantaged could have under the circumstances. This consideration, although indisputable, is not explicitly contained in any formulation of the DP, which means ambivalent interpretations may remain.

Although the democratic equality contained in the principles of justice has been the target of political criticisms as much from the right as from the left, we believe that Norman Daniels’ reasoning remains extremely justified:

A society conforming to its three principles would probably assure people more equality than is provided in any society we see around us today—even the most egalitarian social welfare states. (Daniels, 2003, p. 243)

The challenge we are embracing is, then, within a Rawlsian grounding, and informed by his political thought in Justice as Fairness (JF), to propose another formulation of the DP immune to ambivalent interpretations that make growth in inequalities acceptable, even if against the more accurate interpretation of Rawls position in TJ.

Deepening attention to the principle of fair equality of opportunity and the difference principle

Next, will deepen attention to the relationship between the second principle of justice (and the two components thereof—the principle of fair equality of opportunity (FEO) and the difference principle) and the problem of promoting egalitarianism.

The second principle of justice regulates social and economic inequalities and makes them subordinate to the first, and they cannot restrict it. This means that basic liberties cannot become contingencies dependent on any considerations related to society’s economic order. Furthermore, Rawls adds that the unconditional nature of basic liberties is found in a society that is not in a situation of either extreme abundance or extreme scarcity, therefore guaranteeing enough means for the normal functioning of the basic structure regulated by a political notion of justice.

The definitive formulation of the second principle is as follows:

Social and economic inequalities are to be arranged so that they are both:

(a) to the greatest benefit of the least advantaged, consistent with the just savings principle, and

(b) attached to offices and positions open to all under conditions of fair equality of opportunity. (TJ, revised edition, p. 266)

The two subprinciples—DP and FEO—establish regulatory conditions for social and economic inequalities and therefore implement distributive justice as a central feature of justice as fairness. In fact, the way Rawls justifies the existence of distributive policies goes back to the need to determine, in the basic structure of a well-ordered society, procedures that ensure the preservation of a fair social cooperation system from generation to generation. In other words, distributive justice can be justified by a procedural background justice that ensures conditions are preserved to sustain society itself in the very terms in which it has been regulated by a certain notion of justice. As explained in “The Basic Structure as Subject” (1977), a fair basic structure guarantees “background justice” (Rawls, 1977, p. 160) based on which the justice or fairness of agreements among individuals and associations can be assessed from a social standpoint.

On the one hand, (b) is a principle of equality of opportunities that cannot be reduced equal treatment of all before the law–isonomy. It is more than that: an equality of opportunities that reaches down to the crucial material conditions needed to provide real, and not merely virtual, equality of opportunities. Rawls argues that those who have the same innate qualities and share the same level of motivation should have the same opportunities for success, regardless of their natural or social condition. This principle is different from the meritocratic principle, according to which the most talented people, or those that are more socially advantaged, have greater and better opportunities.

On the other hand, as already discussed, (a) is called DP and has a criterion for use in the maximin, although it is not necessarily a single criterion or even a necessary one. As a heuristic instrument, it is useful to consider the two principles of justice as the maximin solution to the issue of social justice. In the same way that, in accordance with the maximin rule, subjects choose the option in which the worst result is better than the worst results of the others, the choice of principles of justice such as fairness is made under the assumption that individuals are in the lowest social position, since their real social situation is unknown. This relationship comes from the fact that the two principles are those that any subject would choose for a notion of a society in which he or she was assigned his or her position by a “malevolent opponent” (TJ, revised edition, p. 132s). Despite this analogy, the two principles that govern basic institutions should not be confused with the rule underlying the choice to follow them. Rawls, then, avoids using the name maximin criterion of fairness for the DP and highlights a distinction between the two—while the maximin rule concerns rules for making choices in uncertain situations, the DP is a special criterion applicable, in the first place, to the basic structure of society through representative subjects whose expectations should be assessed using a list of primary social goods (Idem, p. 72s). Notwithstanding the practical validity of the maximin rule, its application as a moral principle for assigning social benefits is unacceptable (see Harsanyi, 1975), since it would lead society towards widespread impoverishment.

It is therefore important to shed light on the merely analogical relationship between the maximin rule and the DP—both favour the worst situations—and untangle the reasoning that governs calculations for a principle for allocation purposes. Solving practical problems using the maximin rule leads to absurd results. For example, if medicines are scarce and the government decides to give them to terminally ill patients, it would end up making the situation worse for patients who would actually benefit from taking them. This decision collides with the inherent requirement of the DP which states that the situation of the least advantaged should be improved without making the social situation of all the others worse. In this specific case, it is not acceptable to refuse a cure to all those who have a chance at being cured.

Rawls acknowledges the irrational consequences of applying the maximin rule to real-world needs; especially because “(…) it seems extraordinary that the justice of increasing the expectations of the better placed by a billion dollars, say, should turn on whether the prospects of the least favoured increase or decrease by a penny” (TJ, revised edition, p. 136). This difficulty is also similar to applying the DP to the hypothesis illustrated by the following objection: since it aims to maximise long-term expectations of the least advantaged, the fairness of large increases or reductions in the expectations of the most advantaged may depend on small changes to the expectations of the others. This hypothesis is abstract and forgets that i) the notion of justice as fairness, inherent to both principles, applies to the basic structure of society as a whole; and ii) the occurrence of such contingencies is avoided at the outset by applying the principle of equal liberties and the FEO. Similarly, and more clearly, in “Some Reasons for the Maximin Criterion” (1974), Rawls clarifies that the maximin rule does not influence the direct allocation of goods. Although suitable for the choice of principles for the basic structure of society— macro contexts—it is not suitable for micro contexts. It cannot be adapted, for example, “to how a doctor should treat his patients or a university its students” (Rawls, 1974a, p. 226). The principles of social justice are macro principles, therefore they cannot be tested or contradicted by “micro” applications (Rawls, 1974b, p. 235).

Against those who believe a very large aversion to risk to be the main reason for choosing the DP, Rawls demonstrates that adoption of the maximin strategy arises not from this but from a desire for stability in the social justice system introduced. This is also true because aversion to risk by parties in the original position is no less than the aversion felt by any normal person (Rawls, 1974a, p. 228) and aversion to risk alone is a no more decisive reason than the others underlying the choice of the DP over other alternatives: the fact that its application requires “much less information”, its greater capacity as a “public principle,” and “the strains of commitment” (Idem, p. 229).

The Rawlsian maximin strategy is not, therefore, so much a foundation of the DP as an argumentative strategy of justice as fairness against utilitarianism. But this is the first stage of the argument, in which principles of justice are chosen for how much they protect basic liberties and the FEO of risks arising from utilitarian social calculation, avoiding sacrifices of well-being for some people to maximise overall or average utility (Shenoy and Martin, 1982/3, p. 132s). This is followed by a second stage, in which there is a search to find out if the distribution of income, wealth and social and economic opportunities should be governed by the DP or by a principle that maximises average utility (Rawls, 1974a, p. 238–242; p. 245–249). In other words, there is a survey on how economic and social advantages should be distributed in order to respect relations among free, equal citizens. Once the priority principles have been accepted, Rawlsian strategy emphasises the notion of “collective asset” in the tenet of mutual advantage implicit in the DP; according to this, no-one should make gains at the cost of depriving others.

With the aim of providing essential conditions for a more dignified life to the least advantaged, the second principle of justice aims to restore the principle of equal liberty—which eliminates the influence of social eventualities but approves a distribution of wealth and income according to the natural lottery (TJ, revised edition, p. 63s). Consider, for example, the FEO. It demands that job candidates are considered for their relevant talents and abilities while, at the same time, institutional measures are introduced to avoid incidental factors (class, race, gender, etc.) interfering in the normal development of potential. In turn, the DPl restricts inequalities to those that work to the greatest advantage of the group in the worst situation (Daniels, 2003: p. 241). With an egalitarian objective in sight, the latter principle establishes that inequalities due to birth and natural ability, because they are undeserved, require reparation—the “redress principle”. So, “in order to treat all persons equally, to provide genuine equality of opportunity, society must give more attention to those with fewer native assets and those born into less favourable social positions” (TJ, revised edition, p. 86).

The DP is a principle of mutual benefit, in other words, it involves a situation of reciprocity. If we consider the existence of only two social groups—the most advantaged and the least advantaged—a society subordinated to the limits defined by the lexical priority of the equal liberties principle and the FEO can maximise the expectations of only one of the two groups. If the DP is accepted, the system will maximise the expectations of the less advantaged group. If it is not, it is preferable to maximise a weighted average of both groups. Nonetheless, this maximisation is doubly beneficial for the most fortunate: it compensates them for something that does not justify any prior right to benefits, natural and social features that are neither fair nor unfair; and for the importance it assigns to their expectations. The most advantaged therefore recognise that the well-being of each person depends on a scheme of social cooperation. And that the voluntary cooperation of all in a social system requires reasonable rules and particular care in improving the situation of the least advantaged. As a result, “they forego the idea of maximising a weighted mean and regard the difference principle as a fair basis for regulating the basic structure” (TJ, revised edition, p. 88).

A situation in which there are more than two social groups is more complex. Rawls treats this as a “chain connection”: if the expectations of the least advantaged improve as a result of an increase in the expectations of the most advantaged, the same would happen for those in a medium position (TJ, revised edition, pp. 70–73). He shows how common it is when other principles of justice such as fairness are properly applied. In other words, in a perfectly fair organisation, contributions by those who are in the best situation spread throughout the social fabric. In such circumstances, the practical consequences of the DP approach those of the principles of efficiency and average utility, when measured by primary goods. Nevertheless, these principles do not lead to a continuation of expectations among subjects representing the n groups of a society, for which the DP presents a solution. It tells us that

in a basic structure with n relevant representatives, first maximise the welfare of the worst off representative man; second, for the equal welfare of the worst-off representative, maximise the welfare of the second worst-off representative man, and so on until the last case which is, for the equal welfare of all the preceding n−1 representatives, maximise the welfare of the best-off representative man. (Idem, p. 72)

As well as these benefits, the DP also encourages an interpretation of the principle of fraternity (Rawls, 1968, p. 166s; TJ, revised edition, 90s). A fraternal society is a social union of social unions and does not foresee equality of conditions as a prerequisite (and this is, furthermore, not acceptable under the DP). By joining an association whose members share the same notion of justice, each individual guarantees the means crucial to pursuing their life plans—the principles of justice and fairness provide more favourable conditions to pursuing individual notions of good. Demonstration of stability reveals that individuals have a moral motivation in the first place, a sense of justice, that they are able to act accordingly and that this is not obstructed by any barrier from the theory of human nature. Egalitarian liberalism therefore seeks to show that, on the one hand, the sense of justice is realistic in psychological terms and dominates over the impulses of certain psychological tendencies (such as envy). On the other hand, it shows that fairness and goodness are compatible.

The question remains: are the inequalities permitted by the difference principle enough to incentivise social progress? If we believe, as Rawls did, that they are an incentive to the middle class’ commitment to productive forms of work and to investment by capitalists in equipment and improving productivity, then we can believe that they are. This progress translates into gains in production, beneficial for the least advantaged group in the form of a supplement to income or wealth. The difference principle stipulates maximising the combination of this material gain with the social bases of self-respect, which in Rawlsian terms is the most important primary social good.

In a certain way, what happens with the growth of the difference principle in a rule of three that is the maximin criterion is the same as what happens with Adam Smith’s argument in the analogy of the invisible hand. Although it is John Rawls himself, in Political Liberalism, who realises this and takes responsibility for the excessive emphasis on rational choice theory in TJ:

Here I correct a remark in Theory, p. 16, where it is said that the theory of justice is a part of the theory of rational decision. From what we have just said, this is simply incorrect. What should have been said is that the account of the parties, and of their reasoning, uses the theory of rational decision, though only in an intuitive way. The theory is itself part of a political conception of justice, one that tries to give an account of reasonable principles of justice. There is no thought of deriving those principles from the concept of rationality as the sole normative concept. I believe that the text of Theory as a whole supports this interpretation. (Rawls 1993, II n. 7, p. 53)

For an advanced social democracy: property-owning democracy

It is interesting to see that in the possible variations of the principles of justice—equal liberties, FEO and DP—most of the options at stake are notions of social justice that cover the contemporary ideological spectrum. We shall seek to explore how these differences can be identified through variation exercises. We will then enter into a discussion about the reasons that lead Rawls to argue for a notion of property-owning democracy (POD) and that place it on a much more egalitarian footing than welfare capitalism.

Heuristically, it is interesting to note the possibility of differentiating between the great ideological choices of the more contemporary party political framework by observing only its variations in behaviour when dealing with the three components of the Rawlsian principles of justice.

Libertarianism will commit to the principle of liberties and a merely formal principle of equal opportunities that essentially corresponds to isonomy, that is, equality before the law. Its defence is limited to the minimal state, in charge of security and organising the three sovereign powers: legislative, executive and judiciary. But without a social state to guarantee actual equality of opportunities, and even less so redistributive policies. Under libertarianism, support for the poorest springs from the will of philanthropists. This is largely the regime that Rawls calls laissez-faire capitalism.

Liberalism is committed to the principle of liberties and the FEO but not to the DP. Nonetheless, these commitments are enough for, further to the minimum functions of the state, there to be a social state that promotes the empowerment of citizens to access opportunities, one that guarantees, for example, a universal right to education. The fundamental reason why genuine liberalism involves accepting the demand for actual equality of opportunities relates to the central role played by the idea of universality of opportunities in it. It would clearly be illiberal for a society that professed to have freedom of opportunities—classic laissez-faire—while at the same time accepting opportunities to be removed by society.

Rawls’s egalitarian liberalism is committed to the three components of the principles of justice and it is hard to find a closer ideological choice in the European political party tradition than classical social democracy. In fact, the state’s intervention in this is restricted to guaranteeing the FEO as far as possible. It also implements redistributive policies that can be justified in several ways, including the fact that the FEO itself cannot be guaranteed without a policy, at a particular time, to allow and restrain inequalities. In the light of this, we shall analyse how close it is to property-owning democracy (POD) and liberal socialism (LS), as defined by Rawls, in contrast with welfare state capitalism (WSC).

Provided that it is democratic in the sense that it has representative democracy, with a separation of sovereign powers and the rule of law, it undertakes these principles of justice and adds to them another function of the state. As well as guaranteeing fair equality of opportunity and redistributive policies, it considers that the state should have the power to intervene in the economy, limiting the market economy in several ways. For example, by removing its sphere of influence in particularly sensitive fields, such as areas inherent to the welfare state, public health and education, or strategic production sectors on which the country is especially dependent.

Rawls appeals to rational judgement, but he does so within a framework that favours liberal economic rationality based on individual choices that maximise one’s own interests. Particularly in the political liberalism stage, where the parties of the contract are representatives of democratic citizens, people who are free and equal with an extensive interest in exercising their capacities of rationality (to develop a notion of good) and fairness (sense of justice).

Rawls, despite concluding on the advantages of a certain egalitarianism with a liberal slant, does so under terms that are debatable in the eyes of anyone who does not identify with that framework. As if egalitarianism were accidental in a liberal-defensive line of thought (Mouffe, 1993). However, it is important to clarify something at this point. In the contemporary debate on social justice, the meaning of the term “equality” cannot be reduced to a description of people as equal beings or egalitarian conditions; it is used, on the other hand, to justify a more equal distribution of goods, services and opportunities among people. It is in accordance with this second meaning that the Rawlsian principles of distributive justice take on egalitarian characteristics (see Gutmann, 1980, p. 2). By connecting the idea of justice to an egalitarian allocation of social goods, Rawls introduces an important restriction: individuals are treated as equals by eliminating not all inequalities, but only those that favour certain people. An inequality that is beneficial for any individual, in that it deals with socially useful skills and energies, will be accepted by all. The idea that inequalities that broaden our initial fair share are acceptable and inequalities that hinder it are not is the core of the theory of justice as fairness. Rawlsian egalitarianism therefore demonstrates the social relativity of natural differences between individuals (see Cabrita, 2007, p. 252).

Can applying the Rawlsian principles of justice overcome the failings of the social democratic welfare state—the accumulation of wealth and worsening inequalities? At first glance, we could say that Rawls’s egalitarian liberalism, with its defence of justice as fairness (with an emphasis on reciprocity) opens a path to building a more egalitarian society. Although institutionally harmful to welfare state capitalism (WSC), which encourages social polarisation between the rich and poor and assigns a determining role to “intermediaries” in the redistribution of social assets (dualist model of the welfare state), Rawlsian liberalism, especially through the debate it triggered regarding the DP, seems to shed light on the possibility of regenerating the full model of the welfare state. This model, which has been most extensively perfected in the social democratic systems of the Scandinavian countries and corroded by the imperatives of globalisation since the last decades of the 20th century, took on a much more demanding social programme than the dualist model.

Presumably, and given the familial association between social democracy and social liberalism in European political language, the attempt to restructure this welfare state model in light of the POD may seem paradoxical. In this sense, it is worth reminding that this regime was idealised by economist James Meade in the 1960s, with the aim of reconciling the diffusion and equalisation of ownership of private property with the growth of state property in the British economy as a whole. In these terms, the POD represents not so much an alternative to LS (as it does to WSC) as a supplement to it. Rawls closely follows Meade’s understanding of the POD (see Rawls, 2001, p. 135, note 1), and subsequently invites a reading that the delay in the analysis of this regime cloaks a leaning towards a LS (see Edmundson, 2017, p. 76s), “a regime was envisaged by the English Labour Party and the German Social Democrats (Rawls, 2008, p. 150, note 12).

On the other hand, in the strictly economic sense and in light of the republican liberal theory of justice (Thomas, 2017), Meade’s model of the POD may also be interpreted as a form for individuals to safeguard their liberties in face of the dangers of oligarchical drift and domination.

Without lingering on the recent debate on which of the two ideal regimes—the POD or SL—is the most apt for implementing the principles of justice as fairness (Edmundson, 2017; Thomas, 2017), we will focus our analysis on Rawls, who, while not stating preference for one regime over another, puts emphasis on the POD.

In TJ, Rawls identifies the most suitable ideal regimes for applying the principles of justice as fairness—POD and LS regimes—and he made a vague distinction between POD and WSC—a small gesture that stimulated the erroneous reading of his theory as a “defence” of WSC. As a result of this misunderstanding, at the end of the 1980s, the philosopher went into more detail about the characteristics of POD that set it apart from WSC (see Rawls, 2001, p. 135–179). The conclusion of his reflections on this theme in JF support the proposal made in TJ on the most suitable democratic regimes for applying his principles of justice. Rawls writes:

Both a property-owning democracy and a liberal socialist regime set up a constitutional framework for democratic politics, guarantee the basic liberties with the fair value of the political liberties and fair equality of opportunity, and regulate economic and social inequalities by a principle of mutuality, if not by the difference principle. (2001, p. 138)

Due to the dispersion of ownership of capital and resources, both regimes stop economic and political powers from being concentrated into the hands of a minority. The political side of LS is characteristically pluralist, and its economic side is co-inhabited by a range of independent companies operating in a free market. But, because the means of production and natural resources in this regime are public property, its distributive function is highly limited; on the other hand, the private property system uses prices in different ways to achieve both objectives. The choice of one of these two regimes is due to a society’s historical circumstances, its tradition of political thought and practice.

However, Rawls did not focus so much on the differences between POD and LS (the issue of property in the means of production) as on the differences between POD and CWS. Unlike LS, both the latter regimes allow the means of production to be privately owned, which is more favourable for implementing the DP (see Freeman, 2007, p. 226). Rawls’s focus on POD and the influence of Krouse and McPherson’s (1988) interpretation can be seen. According to this analysis, what as at the heart of the disparities between the two regimes is the difference in strategy in the provision of justice in the political economy: while WSC accepts a substantial inequality in the initial distribution of property and natural talents as a given and, therefore, seeks to redistribute income ex post, POD searches for greater equality in the distribution of property and natural talent ex ante, with less emphasis on subsequent redistribution measures.

It is indeed against the backlight of WSC, especially the focus on its shortcomings, that Rawls describes POD. Following the list presented by Freeman (2007, p. 226–231), we highlight the most relevant for our goal:

  1. 1.

    While WSC allows monopolies of the means of production by a small class, POD promotes wider ownership of the means of production so that workers can control the real capital and their working conditions as private owners, members of trade unions or worker cooperatives (see Rawls, 2001, p. 139). Lying between trade unionism and WSC, POD includes several business management models—from the traditional one, controlled by owners, to the model common in some social democratic European countries (such as Germany), co-led by management and workers, and models controlled by workers, such as self-managed cooperatives (Freeman, 2007, p. 220);

  2. 2.

    In POD there are no colossal disparities in income and wealth between the most and least advantaged, as there are in WSC. So, adding to the effects of the DP, protection of the fair value of political liberty and the FEO require a reduction in gross inequalities. In POD, great disparity in wealth is discouraged by taxes on assets, inheritance and gifts. A “progressive inheritance tax” aims to avoid extensive concentrations of wealth passing from generation to generation (see Rawls, 2001, p. 161);

  3. 3.

    By assuming the fair value of political liberty, POD, unlike WSC, supplies public funding for electoral campaigns, restricting private funding, and provides public forums for debate among alternative political agendas;

  4. 4.

    POD provides a greater FEO than WSC. For example, workers not only have the chance to control the capital used in the performance of their duties but have greater control and protection in their workplaces. In other words, POD inhibits relations of domination and degradation in the division of labour. While it does not remove the division of labour in a general sense, POD eliminates its worst aspects: “no one be servilely dependent on others and made to choose between monotonous and routine occupations which are deadening to human thought and sensibility” (TJ, revised edition, p. 464);

  5. 5.

    The social minimum is higher in POD than in WSC, since it is established at the point where, taking salaries into account, it maximises the expectations of the least advantaged group (Idem, p. 252). In other words, its aim is not to maximise the total amount of domestic wealth (as in WSC) or the average level of income and wealth. And this is guaranteed by family and special allowances in the event of illness or unemployment and by mechanisms such as gradual supplements to income—negative income tax (Idem, p. 243);

  6. 6.

    Rather than income tax, which discourages from work (people’s contributions to the production of goods and services), POD applies a proportional expenditure tax. This is a tax that applies only when a certain level of consumption is reached, as Rawls highlights, “by taxing only total expenditures above a certain income, the tax can be adjusted to allow for an appropriate social minimum” (ibidem);

  7. 7.

    In POD, all physically able people are encouraged to work. The state’s stabilisation sector has the task of reasonably maintaining full employment—when the economic system fails to provide full employment, the state takes on the role of “employer of last resort” (civil service, national services, etc.). WSC provides a social minimum to all citizens, even when they can work but prefer not to, and makes citizens dependent on its social system. In contrast, POD citizens, who are committed to fair and equal cooperation, should contribute with their part and not take advantage of the efforts of others— this is an application of the principle of fairness (see TJ, revised edition, p. 95) and reflects its underlying moral commitment. In POD, the social minimum “is rather a payment that democratic citizens are due, as a matter of right, for their taking part in an complying with just terms of social cooperation” (Freeman, 2007, p. 230);

  8. 8.

    While under WSC, the least advantaged employment is remunerated with a minimum fixed salary paid by the employer and aims to discourage the creation of new jobs, under POD, those who have a low income in the labour market are supported by public income supplements. This measure is in accordance with the difference principle, since its aim is to bring the least advantaged up to the reasonable social minimum it requires;

  9. 9.

    Finally, in order to meet the requirements necessary for FEO among free and equal citizens, POD provides universal health care and universal education by applying public funds. The expectations that ensure provision of health care at a certain level are included as part of the social minimum. The state is responsible for providing equal opportunities of education and culture to people with similar abilities and motivations, through funding for private schools and by setting up a public education system.

Rather than the simple redistribution of income in favour of those who, due to misfortune or accident, find themselves with a less than decent standard of living, POD’s social justice goes beyond CWS’s, leaving citizens with suitable means to properly deal with their matters and take part in social cooperation. In these cases, the state not only democratises wealth but empowers the group targeted by social policies—the vision of a citizen-owner in the POD’s social programme works against the negative effects on self-respect and mutual respect in the individual-customer vision of CWS’s social assistance.

For an advanced social democracy: degrowthist formulation of the principle of justice and framework rules

In our understanding and, we are persuaded, in John Rawls’s, as we have sought to demonstrate, it is not the application of a maximin criterion that should be at stake in this discussion, but rather the intentions of the DP and what it should serve. Inequality does not have to pay a tax to equality, it has to be a contribution to equality of opportunities. If it is not, we eventually accept paying tax as being egalitarian, but we are wrong, because that payment in truth buys an unlimited right to inequality. A DP should stipulate that a new inequality can be accepted not because it leaves the least advantaged better off than they were, but simply because that new inequality leads to greater equality of opportunities for the social system.

It is important to make some clarifications about using this notion of inequality. Inequality is not good or bad in itself, and the same is true for equality. A glaring inequality or an equality without liberty are both ways of reducing the horizon of opportunities for many in favour of others. For that reason, we should aim for, as a valuable part of the rules, the widest horizon of opportunities possible, fairly distributed among all. In a Rawlsian context, we can call this FEO.

Faced with this framework, we propose formulating a more robust version of the DP that hinders new inequalities via an explicit regulation clause prohibiting an aggregate rise in inequality. Thus, something in the style of the clause proposed by Cohen (1988/1989), according to which a factor should be taken into consideration that reflects the degree to which income is concentrated, using the Gini coefficient. Furthermore, talking about a liberal-egalitarian notion of justice would be at best unclear and at worst a falsehood.

Unlike a strict principle of equality, an egalitarian principle concludes that normative equality of liberties and opportunities, which is contained in the first and second principles of justice, requires substantial material equality. The DP, although lexically subordinate to the remaining principles, is a condition that, if not met, leaves the others oppressed and under siege. What general formulation can we propose, then, for a DP free from ambivalences, indisputably beyond the commitments of welfare capitalism and social liberalism, to match the commitments of POD or LS? A formulation that, in short, is explicitly compatible with a non-assistencialist perspective, that does not focus on the most vulnerable but also pursues a universal perspective, as in fact happens with the other principles of justice proposed by Rawls.

On the positive side, a fairer formulation of the DP should be degrowthist, actually demanding that the accumulation of inequalities degrow. The formulation could be as follows:

New, discrete inequalities are only permissible if, as well as meeting the maximin criterion, they degrow social inequalities overall.

But how could such an abstract DP be implemented? The egalitarian DP merely provides a criterion to fairly regulate the practice of inequality. This was the case with Rawls’s DP and it is the case for this reformulation. The difference lies in the fact that this formulation intends to preserve and encourage equality. But it does not differ from the first in the need for implementations, which we could call rules.

For these rules, we propose the following:

  1. 1.

    Rule on the prevention of intergenerational inequality: reduction in accumulation through inheritance taxes, tax on large fortunes.

  2. 2.

    Rule on egalitarian impact assessment studies.

  3. 3.

    Rule on regulating the range of salaries.

Reduction in intergenerational inequality

The accumulation of inequalities is not only the result of a notion of social justice that, interpreted ambivalently, may not be as egalitarian as it appeared. It is also the result of conditions, which apparently come before political considerations, that organise the social experience into a continuum over time in which nothing is lost. This is the only way accumulation can be enabled that, without explicit action, will not stop growing. Building that artificial “spontaneity” induces, as if it were natural, the production and preservation of inequalities and leads to the belief that reducing it is not, on the other hand, natural. This is a political construction and is, of course, politically debatable.

It is therefore necessary to rebuild a legal translation of our relations with time to introduce more ways of reducing accumulation, one that values it as a reduction in inequality: the two faces of Janus, one of which, symbolically, in the original myth, looked to the past and the other to the future. It involves replacing one artificial construction with another, but the second is more ecological, through legislation, public policies, collective human will and action. And there are several lines of action that can reintroduce entropy and balance in the socio-economic process of time.

The idea of intergenerational justice takes root in the demand for previous generations to leave following generations with the same conditions they enjoyed, not depleting resources or causing a lack of environmental sustainability. But in a society that accumulates and concentrates wealth and increases inequalities, reproducing them and amplifying them from generation to generation, it is imperative to broaden the concept of intergenerational justice to include regulation of inequalities. Broader intergenerational justice should commit preceding generations to not transmitting more inequalities to future generations than the ones they encountered. Not leaving our children more inequalities than we received involves a new notion of legacy, but one that is shared socially. Established in that way, intergenerational equality of opportunities must limit the right to transmit acquired and accumulated privileges, even if they were acquired and accumulated fairly, deservedly and as the result of hard work. In order to do this, inheritance taxes must be established, along with other policies that ensure the generations that come after us are not condemned to face greater inequalities than we were. The price to pay for a society of inheritors is a society of debtors and the memory of debts. The Biblical pardon every seven years already understood the need to dilute the memory of egoism into social act of forgetting.

Rather differently, Rawls justifies the need for the practice of intergenerational justice as a condition needed to guarantee the bases of society itself. If society is seen as a fair association of cooperation that spans generations, then each generation must ensure that it leaves behind the fair basic structure of society for those that come after it. That guarantee is made by respecting the just savings principle, which works diachronically across generations as the DP does synchronically for each generation. Naturally, the two coincide in each present time, making it a clause included in the formulation of the DP.

Egalitarian impact assessment

A second framework rule that structures the permissibility of inequality should restrict government activity, introducing, based on the contract that brings citizens together in a political community, an obligation to accompany the country’s economic governance with an egalitarian impact assessment.

This obligation should be grounded in the constitution and its concrete result would be prior scrutiny of draft state budgets, as well as any possible amending budgets, by a competent (and independent) authority, with all measures that affect the state’s income and expenditure being submitted to an egalitarian impact assessment. This scrutiny may be included in the functions of the Court of Auditors. In Portugal, for example, “the Court of Auditors is the senior organ for the scrutiny of the legality of public expenditure and for judging the accounts which the law requires to be submitted to it” (Art. 214 of the Portuguese Constitution). For this, proposed budgets should be submitted to the Parliament together with a study regarding their impact on equality, overseen beforehand by the Court of Auditors, and with an explicit reference to the forecast evolution in social inequality indicators.

Range of salaries

The third structuring rule should establish a maximum range of salaries by setting salary limits when public money is involved, limiting the right to a maximum income through a reasonable comparison, in terms of dignity and social justice, with the minimum income. This should apply to public services and private services that involve some type of public support, whether in the form of direct funding or exemptions and other tax benefits. And if there is no public involvement in remuneration, there should still be a demand for robust progressive taxation that is truly able to counteract the marked trend towards increases in wage ratios; for example, the more than 1000% increase in the CEO-to-worker pay ratio since the 1950s reported by Bloomberg in 2013. A degrowth perspective, or at least a non-growth perspective, of inequalities should also involve the degrowth or non-growth of wage ratios, of which the CEO-to-worker pay ratio is a clear indicator.

The commitment to a degrowthist difference principle formulated generally but that can be implemented in rules is possible at the different scales involved in a society’s life, whether in terms of intergenerational justice or in democratically chosen public finances and a fair distribution of wages. With this general formulation and a set of concrete implementation rules, we can find social democracy’s commitment to egalitarianism, extensively justified by a Rawlsian base, is better grounded and free from ambivalences. And it allows us to bring the principle of difference into the emerging degrowth paradigm, which urgently seeks to configure inequality as one dimension among several whose growth is problematic in a context of global interdependence and scarcity of resources.

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    1. Praxis–Centre of Philosophy, Politics and Culture, University of Beira Interior, Covilha, Portugal

      André Barata & Maria João Cabrita

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    Barata, A., Cabrita, M.J. What principle of difference for a truly egalitarian social democracy? Rereading Rawls after social democracy’s failures. Palgrave Commun5, 69 (2019). https://doi.org/10.1057/s41599-019-0270-5

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