Two Views of Capitalism

Why are you and I enjoying the bounty of the richest country in the history of the world instead of grubbing around in the forest for roots and berries the way our ancestors did?

It turns out people appear to have two very different answers to that question. And it’s not just ordinary people who disagree. Even the experts—economists and historians—disagree. That’s the view of Johnathan Haidt, a social psychologist at New York University’s Stern School of Business. (HT: Tyler Cowan)

Haidt says problems that are “tame problems” can be solved by experts. These are problems like: How can we prevent Cholera? They are “definable, understandable and consensual.” Scientists can converge on a solution. But problems that are “wicked problems” cannot be solved by experts. These are problems like poverty, racism and education. Our approach to these problems is “shaped by moral and political values,” he says, and that is true even of the experts.

Haidt implies that our approach to wicked problems is hardwired (although he doesn’t say it’s in the genes). And he argues that you can’t dislodge even the experts from their views with facts. To make his point, he has created two video stories about capitalism.

In Capitalism is Exploitation people initially are portrayed as happily producing in idyllic surroundings, at peace with their environment. Then capitalism comes along. It turns people into wage slaves, spoils the environment and lets the rich get richer by exploiting everyone else.

In Capitalism is Liberation people are initially portrayed as slaves or serfs or peasants—exploited by kings and feudal lords. Then capitalism comes along and liberates them. It allows ordinary people to own property and freely trade in the marketplace. Those countries that systematically suppressed capitalism (the Soviet Union, Cuba, North Korea, etc.) suffered shortages, impoverished their citizens and despoiled the environment along the way. Countries that protected individual rights and allowed economic freedom grew and prospered.

Now I would argue that one of these views of capitalism is factually incorrect. It’s not just a matter of “political and moral values.” In fact, in a video presentation of his theory, Haidt shows a chart mapping per capita income throughout all of human history. The chart shows (and this should be well known to all economists) that up until the last few hundred years the average human lived on about a dollar a day—in modern terms. At times and places, they might have enjoyed two dollars a day. If they were really, really lucky they might have hit three dollars a day. But that was it. (See numbers here and Brad De Long’s paper and graphs.)

In other words, for 100,000 years our ancestors lived at the subsistence level. And then (about two centuries ago in the West) we got capitalism. By that I mean not just free exchange, but the also the institutions of capitalisms, including enforceable property rights, the common law, etc.

Case closed? You would think it would be. But in column after column New York Times writer Paul Krugman gives evidence that the Haidt theory is right and Goodman is wrong.

In all its guises the exploitation theory has one central message: the reason why some people are poor is because other people are rich. Here is Paul Krugman explaining why middle income families don’t have higher incomes. After acknowledging some international factors, he writes:

More important, soaring incomes at the top were achieved, in large part, by squeezing those below: by cutting wages, slashing benefits, crushing unions, and diverting a rising share of national resources to financial wheeling and dealing.

Perhaps more important still, the wealthy exert a vastly disproportionate effect on policy. And elite priorities—obsessive concern with budget deficits, with the supposed need to slash social programs—have done a lot to deepen the valley of despond.

Really? J K Rowling (author of the Harry Potter series) is the richest woman in the world. Did she get rich by “cutting wages, slashing benefits, crushing unions,” etc.? I thought she got rich by writing books. How about Oprah? Has she “slashed” any benefits lately? What about Bill Gates and Warren Buffett? When is the last time they were out there encouraging scabs to cross a picket line?

Krugman’s point about political influence is almost as silly as his view of the economy. Earth to Krugman: the real base of the Democratic Party (the party of the left) has become the ultra-wealthy. And their political goals are harmful to the middle class, but not in the way that Krugman imagines. As I wrote in a previous post:

The problem for Democrats is that the party is increasingly ruled by the “new oligarchs.” In his review of The New Class Conflict, by Joel Kotkin, a lifelong Democrat, George Will explains that there is a “growing alliance between the ultra-wealthy and the instruments of state power. In 2012, Barack Obama carried eight of Americas 10 wealthiest counties.”

Unfortunately for party harmony, the oligarchs are basically anti-job creation and anti-economic growth—which they see both as a threat to the environment and a threat to their life style. This puts them squarely at odds with the working class voters who used to be the backbone of the Democratic Party.

In his review of what happened in the recent Colorado senate race, Nate Cohn described the Democratic vote there as an upscale/downscale coalition. In other words, the Democratic Party is the party of the poor and the rich. It’s the middle class that is bolting and voting Republican. And what do the rich want from Democrats? Contra Krugman, they’re not demanding smaller deficits or smaller social programs or even lower taxes. What they want—in addition to looney environmentalism—is for government to protect their life style.

As I explained in “How Liberals Live,” once the plutocrats settle in a community they become fiercely anti-development and shape their communities in ways that price the middle class out of the housing market. As a result, wherever wealthy liberals tend to congregate, housing is more expensive and there is more inequality. Consider that:

• Housing costs almost twice as much in deep-blue markets ($227 per square foot) than in red markets ($119).
• In 2013 Houston had more housing starts than all of California.

Limousine liberals are a threat to the average worker. But not because they are wage-suppressing, union-busting, exploiters. It’s because their anti-capitalist goals are at odds with the aspirations of ordinary Americans.