Wednesday, March 20, 2013

Capitalism and Freedom - Separate Concepts

I concur with the other correspondent that capitalism and freedom are separate concepts. There are capitalist countries that are not free.  On the other hand, I grant that no non-capitalist country can be called free (Viet Nam, China, Cuba ...). However this is a bit of a red herring because the term "capitalism" embraces so many different systems, running the gamut from Haiti to Sweden. I think we can safely state that any well-run society must prominently feature the market (more or less free) as a central reference point for allocation of most goods and services.

However this does not mean "the freer the better", or at least not beyond a certain point. The state is the guarantor of freedom, including freedom of the market. The state must intervene, on the market and elsewhere, to prevent deceit, injustice and gross economic inefficiency.

An example of wasteful insistence on free markets, to the great detriment of society as a whole, is the health insurance “system” in the US. It has been conclusively demonstrated that negative selection, moral hazard and other factors necessarily occur on a massive scale in any free market in health care, and that socialized medicine is the optimal solution. Proportionately to its health care budget, Canada spends only one third as much as the US on administrative tasks, and Canadians enjoy better health than Americans. In other words, in this case the socialist solution is far more efficient than the free market solution. I shall spell it out: “In some sectors, Socialism=Efficiency & Free Market = Inefficiency”.

Regarding the popular platitude that health care must be rationed in a socialized system, I reply that in a capitalist system it must also be rationed. However this rationing is conducted on the basis of the patient’s purchasing power. I don't see what's so wonderful about that.

In other words free-market enthusiasts are proponents of junk [social] science. Their belief in unrestricted free markets is of a religious nature, and is not based on evidence or reason.

Just to clarify, when I wrote “a greedier, more sordid kind of capitalism” I did not mean to imply that all capitalism is necessarily greedy and sordid.

[On the other hand, to the extent that capitalism as such can be called greedy, this should be seen in the light of Adam Smith’s concept of individual agents pursuing their own economic interests, who nonetheless work for the benefit of society as a whole. Consequently it is a controlled and constructive greed. And since we haven’t yet come up with any reasonable alternative to capitalism, we’re just going to have to live with it.]

Financialized/neoliberal capitalism is greedier than its predecessor manufacturing/Keynesian capitalism in the sense that for example a manufacturing corporation is now considered a mere portfolio of assets that can be spun off whenever convenient, instead of as a productive unit with long-term goals on the market for actual goods. Corporate executives are motivated to maximize stock value at the end of each quarter, disregarding any long-term corporate objectives.

The deregulation inspired by neoliberalism and the reduction of state power it propounds have placed society at the mercy of financial pirates who produce a world-wide economic crisis on the average once every three years, for the last 15 years. Despite their ostensible insistence on reducing state power, whenever the Wall Street crocodiles lose their shirts as a result of their reckless gambles, the Fed steps in to rescue them. On the other hand the individual enjoys less and less security, and is increasingly exposed to the vagaries of a market place that is more erratic than ever before. Neolib capitalism, by discouraging productive investment in favor of speculation, has reduced worldwide economic growth rates compared to the Keynesian period from 1945 to 1973.  Read all about it in “Off Center” by Paul Pierson & Jacob Hacker (a Yale professor) and Hacker’s other books, like “The Great Risk Shift”.

Rinaldo, I think you mean "it's more relevant than ever" ("actual" is not synonymous with Ital "attuale").  I suppose you mean that free-market fundamentalism is still a defensible concept. I'd be interested in knowing your reasons for saying so.

I think it is generally acknowledged that free markets are generally the best solution only if certain micro-economic conditions are fulfilled. These conditions are for example (1) Many buyers & sellers; (2) Market participants are well-informed about the goods they trade; (3) The production function does not have any non-convexities, which implies that there is only one maximum value, not 2 or 3; (4)  There are no increasing returns to scale in production; (5) No (or few) externalities; (6) The good in question is not a public good; etc.

Adam Smith doesn't expressly list these conditions, but they are implied.  Consequently, if for a given market these conditions are not substantially fulfilled, you cannot assume that a free market is optimal in that market.

Free-market fundamentalism on the other hand claims that free markets are Pareto-optimal even in situations in which the pre-conditions for their proper operation are lacking. This is what I mean when I say that free-market fundamentalism is not based on reason, but on faith.

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