Friday, October 21, 2011

Empty-Headed Protest

The Occupy Wall Street protesters carrying “Down with Capitalism” signs have been asked by reporters what they would put in its place. Silence and a deer-in-the-headlights look is the typical response. They’re not the first critics of capitalism who know far more about what they don’t want than what they do want.

The protesters’ predicament reflects a long tradition of the left, and illustrates a major difference between liberalism and conservatism. Conservatives provide details of what their objectives are; liberals provide virtually none.

Conservatives have a strong preference for a market-based economy. Virtually the entire vast body of microeconomics is about how a market economy works.

A market economy is a system, a system of “spontaneous order” (in the words of Friedrich Hayek). The order, however, is not magical. It has a well-known much analyzed structure and logic. It results from the interaction of elements such as the price system, the profit mechanism, competition, and self-interest. The interplay of these ingredients is how choices are made, how resources get allocated, and how economic growth occurs.

Starting with the publication of Adam Smith’s Wealth of Nations in 1776 there has been a long line of brilliant economists who have built on the intellectual foundation he established—David Ricardo, John Stuart Mill, Alfred Marshall, Friedrich Hayek, and Milton Friedman, among countless others.

The closest socialist equivalent to the Wealth of Nations is Karl Marx’s Das Kapital, published in 1867. Das Kapital, however, in no way addresses how a socialist or communist economy is supposed to work. The purpose of the book, and many since, is to describe the supposed flaws in capitalism and why capitalism is inevitably doomed. Many of the books since Das Kapital have been attempts to explain the interminable delay in capitalism’s collapse, the most famous being Lenin’s Imperialism, the Highest Stage of Capitalism. Like Marx, Lenin, and numerous others, the Wall Street protesters dearly long for the demise of capitalism, but somehow it keeps on ticking.

A primary theme of liberal economic theory, insofar as it exists, is “market failure.” The emphasis again is negative, not positive, reactive rather than proactive. Its purpose is to explain why the market can’t work, not why socialism can. It explains problems with the existing structure, but offers not even a vague outline of an alternative.

“Market failure” is a multi-purpose excuse for all manner of “government interventions.” It’s always automatically assumed, usually wrongly, that the intervention will solve some problem rather than making it worse.

In any economy choices must be made. Choice is necessary because human wants exceed available resources. That fact is what economists refer to when we talk about “scarcity.” Dealing with the implications of scarcity is the basic purpose of economic science.

If we decide to reject market choices, choices will nevertheless be necessary. Economic scarcity will still be very much with us. When you reject the features of the market there is not something that will automatically take its place.

What is the alternative to a market economy? The not-market? What exactly is that? How do they plan to allocate resources? Who or what will determine prices? How will incomes be determined?

No one has ever conceived of anything that works remotely as well in generating wealth as does the market. To date the only real-world alternative is an inferior and inefficient system of politicians and bureaucrats.

In a market economy the price system is the most important mechanism for dealing with scarcity. It signals to decision makers (consumers and producers) the relative scarcities of resources, goods, and services. Prices provide the essential information and the incentives needed to make efficient choices. If you reject the price system, some other mechanism will be needed to accomplish these crucial functions.

If we don’t allow supply and demand to determine relative prices, how will they be determined? You can’t just say, “From now on everything’s a dollar!”

Is there any underlying logic as to how resource allocation choices are made in Cuba or North Korea? They more or less take the attitude “Our policy is we reject capitalism!” The results, not surprisingly, are disastrous.

It is no accident that liberalism and socialism have no theoretical foundations. There are good reasons why no clearly articulated alternatives have been offered. The main one being it’s simply not that easy. If there were good alternatives available, or at least conceivable, we would certainly know about them.

Liberals apparently have the attitude, “We don’t need no stinkin’ theory!” Socialism and liberalism are fundamentally utopian in character. In utopia everything is attainable. It is based on an “unbounded” vision of the world in contrast to a world of limits and trade-offs. Issues such as efficiency are not a concern in utopia. Consequently, utopia needs no theory.

There are other reasons it could be argued that liberalism needs no intellectual foundation. For liberals choices are based almost exclusively on intentions. Intentions don’t really require a theory or structure. Intentions are self-contained — they are the starting point and end point. It is impossible to collect evidence about intentions. You would have to be a mind reader to do so.

The protesters are certainly free to express their dislike for capitalism. They should not be surprised, however, if others are reluctant to throw capitalism overboard before they’ve been offered a well-defined alternative.

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Empty-Headed Protest October 20, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

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