Is Capitalism Sustainable?
About the Author
Michael Munger is a Professor of Political Science, Economics, and Public Policy at Duke University and Senior Fellow of the American Institute for Economic Research.
His research interests include regulation, political institutions, and political economy. Much of his recent work has been in philosophy, examining the concept of truly voluntary exchange, a concept for which he coined the term “euvoluntary.” His newest book addresses the sharing economy, and is entitled “Tomorrow 3.0.”
1-Page Summary — Is Capitalism Sustainable?
In, Is Capitalism Sustainable? Senior Fellow at the American Institute of Economic Research, Michael Munger, explains the benefits, and in fact the necessity, of capitalism in organizing human cooperation at scale, and urges the consideration of some problems inherent in capitalism.
Karl Marx called some of these problems “contradictions,” and while he was wrong about many things, including a value theory based on embodied labor, his perceptions of capitalism were very accurate.
The problem for Marxists is simple, Munger says: every flaw in markets is worse under socialism. At the micro level, every flaw in consumers is worse, and in fact much worse, in voters. Unless you are willing to advocate monarchism, or actual communist dictatorship, markets and democracy are the only two mechanisms we have for organizing society.
So while Marx’s theory about the flaws of capitalism has some merit, he was utterly blind to the problems of democracy. Looking back now, with the benefit of the contributions of the Public Choice branch of political economy, we are in a position to evaluate markets and democracy on an even playing field.
And most of the time, for most purposes, capitalism wins.
The book calls many of the sacred cows of the free market crowd into question — asking whether real capitalism is even a stable equilibrium, or if it always morphs into its ugly twin: cronyism.
While public choice is best known for its analysis of the rational, self-interested behavior of so-called “public servants”, Munger steps back and examines when the rational interest of CEOs and corporate boards might also betray free market principles. In other words, does competitive rent-seeking become the norm in a world where executives are expected to get the sweetest deal possible from the government?
Is Capitalism Sustainable? is a collection of essays that will provoke central planners and free-marketeers alike to consider how real-world frictions, ethical norms, and those pesky transaction costs muddy the waters of pure economic theory.
The first section of the book is an overview of capitalism, and the potential problem of the sustainability of capitalism in a democracy. This was, and is, the most important Marxist or leftist critique of capitalism, and it is important to address it at the outset.
The second section takes a step back and looks at the problem of rules, and the way groups of people organize themselves. There are two very different conceptions of rules: those that emerge from practice and experience (like language) and those that are the product of conscious choice and intentional wording (like constitutions). Both have their place. But it turns out that the transaction costs of getting rules right is very high, and “paving the muddy paths” that have emerged over time is more useful than you might think.
The third section makes the argument for capitalism.
The Pretty Pig Problem
A parable for capitalism’s superiority to the even uglier alternative of not allowing markets to operate:
The snag is that while some pigs may be less ugly than others, no adult pigs are pretty. Nonetheless, imagine that there is a beauty contest of adult pigs. The judges were ready, and the first pig was brought out. “Holy smokes! What an ugly pig!” The judges gag in disgust. The old boar is muddy, smelly, fat, and hairy; it grunts and blows snot as it walks. The judges conferred, and announce their decision: That first pig is so ugly that they will simply give the second pig the prize. Members of the audience protest, saying that they hadn’t even seen the second pig. “Yes, that’s true. But we have seen the first pig. And it is not pretty. The second pig wins!” …
People on the left note the problems with market processes, and then conclude “therefore the state should step in.” But that’s not obvious, unless the actual actions of the state are an improvement. The reverse is also true: highlighting (legitimate) problems with democracy or the state does not automatically imply “and therefore the market is the best option.”
The inevitability of Capitalism
More millennials support capitalism than socialism, although neither percentage is greater than 50% — thus you have the headline “a majority of millennials ‘oppose’ capitalism” when in fact, an even greater number of millennials (⅔) ‘oppose socialism’.
Munger makes the point that markets happen regardless of what the official system is. What makes capitalism happen? Mutually beneficial exchange.
How Capitalism saved Sweden
Munger debunks the idea that Sweden/Denmark are socialist countries:
I will leave aside the question of whether the U.S. should try to “be like” Sweden; they are very different countries, with different histories and different institutions. But it is important to refute, using simple and widely available empirical evidence, the claim that Sweden is “socialist.” It is not. In fact, Sweden is one of the most robustly capitalist nations on earth. By socialism, I mean a system that relies on state ownership and control of the means of production, state direction of production decisions, and direct state control of education and employment decisions of individuals. If one does not mean those things, then that would require a little more thinking about what “socialism” means. If by “socialism” you mean prosperity and rule of law, then you are confused. (p. 329)
Sweden has defined contribution pension plans, robust private property and business freedom, ranks 18th in list of most capitalist countries.
How Transaction Costs Organize the Economy:
Firms are islands of socialism in an ocean of capitalism. Transaction costs determine whether firms develop their own internal process or rely on exchange
In an economics class, students learn about how prices direct people in a market economy. But in the real world, most people work in little “command economies” called firms. The reason is that the transaction costs of using markets are high. Imagine that a worker on an assembly line puts some bolts into an auto chassis. She doesn’t then go look for a buyer for that partial car, or sell the thing on eBay. Instead, the assembly line just moves the chassis on to the next worker, who adds a fender. And so on, worker after worker, task after task, until the car is ready to be sold. …
Coase noticed that this margin, the point where it is cheaper to use the market than to use a firm to internalize the costs of organizing a transaction, is highly variable. The size of the firm, then, depends crucially on the cost of using the market. Every firm faces what we now think of as the “make or buy” decision. An auto company may own the steel company that supplies the metal used to make the cars. It probably does not own the iron mine where the ore to make the steel is dug out. And almost certainly, the auto company does not own the wheat farm where the grain used to make bread for sandwiches in the employee cafeteria is grown. If it is cheaper to buy, the firm shrinks; if it is cheaper to make, the firm grows. (p. 360).
On Rules & Norms:
While living abroad in Germany, Munger attempted to cross the street before the light turned green, in front of a group of school children, then this happens:
Having taken only a couple of steps, I heard some shrill shouting in German — ”Kindermörder! Kindermörder!” — and then felt a pain in my elbow. A little old lady was hitting me, pretty hard, with her umbrella, and accusing me of being a “child murderer.” Loudly.
Anger acts as a kind of argument in a rule-making setting, but this can be atavistic where the rules are bad:
Providing the public good of enforcement, or feeling bad about violating the rules, makes the rules work better and at lower cost. But that may not always be the case, if the rules themselves are bad. Worse, the rules may be the product of the moral intuitions that were evolved for an earlier time period. That’s when we may have to deal with such intuitions as atavisms. … The particular rules they care about differ across societies, depending on culture. And things that would upset some individuals are a matter of indifference to others. Still, one is reminded of David Hume’s famous observation that “reason is, and should be, a slave to the passions.” (p. 42)
Later, Munger gets in trouble for trying to return an old lady’s grocery cart to the store (she is trying to take it back herself to get her 1 euro deposit back). She screams and a police officer rushes over. Munger explains himself to the officer, who pretends to berate him in front of the women, since he realizes it’s a misunderstanding. This is a lesson in when it makes sense not to enforce a rule. (page 370)
When Does Capitalism Become Cronyism?
The word sustainability is usually used in an environmental context.
At some level, even the most independent-minded entrepreneurs realize that it’s easier to sell a sad story to the state than it is to sell real products to consumers. In fact, you can’t blame the corporate leaders who succumb to this temptation: there’s nothing illegal about making government your source of revenue.
If self-interest leads toward cronyism, there’s a problem. Government incentivizes corruption, and makes honest firms go out of business:
Worse, if some modern Commodore Vanderbilt tried to refuse subsidies, it’s likely he would be fired and replaced by someone who was less principled and more willing to deliver short-run profits from taking subsidies. Or some outside firm might buy up the stock of the principled company, because the equity would be underpriced compared to its value if managers sought government rents and handouts”
The problem is worse for older companies:
It comes down to this: as a company grows, it has fewer opportunities to make new investments that have high returns. At some point, the last dollar invested in honest profits is going to return less than the first dollar to be spent on cronyism. After that, the firm becomes dependent on the state. And that’s crony capitalism. Independent capitalism may not be sustainable, in the face of such incentives. Russ Roberts and I recently discussed this, on an episode of EconTalk. We didn’t come up with many good solutions. What do you think?”
This is the topic of Munger’s paper for the Independent Institute, The Road to Crony Capitalism — riffing off Hayek’s Road to Serfdom:
“That’s not capitalism. That’s crony capitalism!” Might not a modern Hayek but of the left be tempted to write his own treatise called “The Road to Crony Capitalism”? The thesis would be that real capitalism is not sustainable and that any attempt to set up capitalism in democracies is a step toward crony capitalism.
The Worthlessness of Constitutions without Norms
Munger credits Jasay with the themes of his book. Jasay was a philosophical anarchist who thought the “minimal state” always grew beyond that, since those motivated to seek power always will try to acquire more. Cincinnatus and George Washington are the outliers.
Constitutions are worthless if the people don’t believe it in their hearts (as Americans did for so long).
Capitalism is a social system based upon the recognition of individual rights, including private property rights where all goods, both intermediate goods and final goods, are owned privately. . . . An economy remains capitalist so long as the government, or any other agency for that matter, refrains from intervening coercively in the peaceful private lives of citizens. The implications of this fact are substantial: under pure capitalism there are no taxes, no price ceilings, no price floors, no product controls, no subsidies to either the rich or the poor, no public streets, no public schools, no public parks, no central banks, no wars of aggression, no immigration restrictions, etc. Government neither resorts to aggression under capitalism nor does it sanction its use by others, end of story. . . .
Corporatism shares no such description. It is a social system where the government intervenes aggressively into the economy, typically with political instruments that benefit large corporations and enterprises to the detriment of smaller businesses and private citizens. Such instruments include subsidies, tariffs, import quotas, exclusive production privileges such as licenses, antitrust laws, and compulsory cartelization designs. [(2009) Michael Labeit.]
Adam Smith saw crony capitalism coming:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register, facilitates such assemblies. . . .
But he was not advocating antitrust laws, rather arguing against forced cartelization by government.
With these examples, we can render our concern more starkly: in a system that sells legal protection and bottlenecking, why would a rational manager or stockholder eschew cronyism? You’re expecting investors to leave money on the table because at some point it is nearly certain that it becomes more profitable, at the margin, to invest in lobbying for protection than to invest in engineers for innovation.”
It is true that in some places Marx claims that capitalism has “internal contradictions” on technical grounds. But we would also have to credit Marx’s even longer-term prescience. The distinction between “economic” and “political” arenas is no longer sustainable. As Marx often claimed, “capitalists” recognize that their self-interest encourages co-optation of the state apparatus. The fact that the agents of the state want to be co-opted and even demand to be co-opted to serve their own self-interest does not improve matters.
Liberalism — it is well to recall this today — is the supreme form of generosity; it is the right which the majority concedes to minorities and hence it is the noblest cry that has ever resounded in this planet. It announces the determination to share existence with the enemy; more than that, with an enemy that is weak. It was incredible that the human species should have arrived at so noble an attitude, so paradoxical, so refined, so acrobatic, so antinatural. Hence, it is not to be wondered at that this same humanity should soon appear anxious to get rid of it. It is a discipline too difficult and complex to take firm root on earth. (76)” — Jose Ortega y Gasset
We would argue that successful capitalism leads to an impulse on the part of economic powers and political agents to restrict and control the destructive power of entrepreneurship. This unholy partnership is “rational” in the sense that the participants benefit, in some cases creating wealth and privilege far beyond any other mechanism that is available to them.
“Capitalism is the essential organizing system for large societies. Full stop. Period. There are no other contenders.”
- Michael Munger (@mungowitz) / Twitter
- Amazon.com: Is Capitalism Sustainable?
- AIER — American Institute for Economic Research
- Michael Munger on Crony Capitalism — Econlib
- The Rise Of Crony Capitalism | Hoover Institution
- Anthony de Jasay: A Remembrance — Econlib