Capitalism—Posner

I agree wholeheartedly with Becker that capitalism is a superior economic system to any other that has been tried, the others being mainly socialism and communism. The best evidence for this is that out of the 194 countries in the world, I can think of only two that are not capitalist—Cuba, which however is moving slowly in the capitalist direction, and North Korea, the greatest economic failure on the planet. 

But this statistic indicates that capitalism is a necessary condition of economic success rather than a sufficient condition. Many of the world’s countries, though capitalist, are basket cases—not as badly off as North Korea, but plenty badly off. Per capita incomes in rich capitalist countries such as the United States, Canada, Germany, Britain, and Japan greatly exceed per capita incomes in poor capitalist countries, which are the majority of countries. 

So the big question is, given capitalism, what else does a country need in order to prosper? We know that it doesn’t need abundant natural resources or a large population. But it needs a legal and political system that protects property rights, allows a large degree of economic freedom, minimizes corruption, controls harmful externalities (like pollution) and subsidizes beneficial ones (like education), distinguishes between equality of opportunity (which it promotes) and equality of incomes (which it promotes only to the extent of combating poverty), welcomes and assimilates skilled and wealthy immigrants, and (related to protecting economic freedom) avoids public ownership or control of economic enterprises. To create and maintain such a legal and political system a country also requires a culture of respect for business success, of competition and risk-taking, and of consumerism—since, as Keynes argued, consumption drives production. 

Such a combination is difficult to achieve; no nation has achieved it. The variance across nations in culture and in institutional structure is very great, and determines the relative economic success of the different nations. 

Since there is so much variance across capitalist countries—so much that can go wrong with a capitalist system because of the complex institutional structure and social culture that capitalism requires if it is to be maximally successful in contributing to social welfare—we need to avoid complacency. Complacency was a major factor in the surprising economic collapse that began in September 2008, a collapse the consequences of which are still very much with us. 

When I started teaching in the late 1960s, the economist Harold Demsetz was talking about the “Nirvana Fallacy.” He defined that as the belief of many economists that any market failure, such as monopolization or pollution or underproduction of public goods, could be rectified at little cost by government intervention. If that were true, it would indeed enable “Nirvana” (in the sense of heaven—which isn’t actually what the word means; it’s nearer to “oblivion”) to be attained. But as Demsetz pointed out, it isn’t true. There are government failures as well as market failures, and they have to be taken into account in deciding whether and what the government should be asked to do about market failures. 

Over time, however, a reverse Nirvana Fallacy took hold of many economists, most famously Alan Greenspan. This was the idea that capitalism was a self-regulating system; market failures were, with few exceptions, either self-correcting, or less harmful than regulation aimed at eliminating them. Such thinking influenced the regulatory laxity that contributed (decisively in my view) to the financial collapse of September 2008 and the ensuing worldwide depression, and to the disbelief until then of many economists that there would ever again be a major depression. Greenspan and other like-minded economists and political leaders were wrong to think capitalism self-regulating; they neglected the need for an institutional structure, and a culture, that differentiate successful from unsuccessful capitalist economies. 

The institutional structure of the United States is under stress. We might be in dangerous economic straits if the dollar were not the principal international reserve currency and the eurozone in deep fiscal trouble. We have a huge public debt, dangerously neglected infrastructure, a greatly overextended system of criminal punishment, a seeming inability to come to grips with grave environmental problems such as global warming, a very costly but inadequate educational system, unsound immigration policies, an embarrassing obesity epidemic, an excessively costly health care system, a possible rise in structural unemployment, fiscal crises in state and local governments, a screwed-up tax system, a dysfunctional patent system, and growing economic inequality that may soon create serious social tensions. Our capitalist system needs a lot of work to achieve proper capitalist goals.

Comments

[Misaki]

>a seeming inability to come to grips with grave environmental problems such as global warming,

People are less likely to 'believe' in global warming when unemployment is high.
http://www.freakonomics.com/2010/08/24/unemployment-vs-global-warming/

Unemployment can be fixed without increasing government spending.
http://jobcreationplan.blogspot.com/

>a very costly but inadequate educational system,

http://mikethemadbiologist.com/2010/06/15/the_scientist_shortage_its_a_d/
http://www.scientificamerican.com/article.cfm?id=does-the-us-produce-too-m

>an excessively costly health care system,

http://jobcreationplan.blogspot.com/2012/05/controlling-health-care-costs-in-united.html

>a dysfunctional patent system,

I think everyone is thankful you are pointing this out.

[William Ahern]

Mr. Bennet,

You're confusing theory with reality, no doubt a symptom of an affliction suffered by millions of liberals and conservatives alike--naive adherence ideology.

"It used to be, in bygone centuries, that when a person was thinking about putting money in a bank, he would consider competing banks and inquire about their solvency and the degree of risk they took in investing their / his assets."

I'm sorry, but unless you lived in one of a very few cities, your only option was a single bank. Not much has changed today considering that there are only one or two retail banks in the vast majority of localities. And let's not forget the systemic interdependence of those banks, both today and yesteryear. You're presuming competition where none exists, or minimally a degree of competition far beyond the reality. You can't wish a precondition into existence merely because that condition is favorable.

And insinuating that we should throw average folk into the fire to spur them to invest more time and effort than is in reality reasonable is, frankly, misanthropic. The idea that successful markets spontaneously emerge and naturally tend toward equilibrium sans any concerted governance is, as Posner suggests, the very root of our present problems. In fact, its ahistorical on its face.

[Misaki]

>despite having a brutal and expensive military dictatorship, crippling sanctions, and a terrible lack of quality farm quality, North Korea's GDP per-capita (PPP) is 6 times that of the Congo's

Much of North Korea's problems are simply a lack of energy.
http://www.telegraph.co.uk/news/worldnews/asia/northkorea/7249849/North-Korea-secrets-and-lies.html
http://www.koreatimes.co.kr/www/news/opinon/opi_view.asp?newsIdx=6093&categoryCode=166

It could import fossil fuels like every developed country, but corporations don't want to deal with it (probably due to trade restrictions by the US) and consumers think that Communism is icky so it has basically no chance of developing brands that would bring more money into its economy.

Oh, and it's worth mentioning that if the US had fulfilled its promise to build two nuclear reactors in exchange for North Korea stopping its nuclear problem in the 1990's (and provide fuel oil in the interim), there might have been no famine, fewer economic problems today, and North Korea might not have nuclear weapons.

Just as a quick estimate, the world factbook lists North Korea as 22.52 billion kWh of electricity. That's an average of 2,570 MWe.

The US was supposed to build two 1000MW light water reactors under the Agreed Framework (http://en.wikipedia.org/wiki/Agreed_Framework ). So it's pretty easy to understand that North Korea's economy would have been substantially assisted by more electricity.

[iamchristopher]

I rarely comment on online posts/blogs but i just wanted to state that this post exhibits a lucidity of thought and clarity of focus/purpose that is absolutely unique and completely needed in this dark hour. Judge Posner you are to be commended on your clear articulation of the problems that face us, and more than that, for walking the talk as you did in your resounding decision in the MMI v. Google case. This is a watershed moment in an IP system which was devolving into insanity.

More of the same de-regulation, tax breaks, and laissez-faire economic policies will not extricate ourselves from social, political, economic, and ultimately institutional decay that we currently confront (as Einstein said so wonderfully, "We can't solve problems by using the same kind of thinking we used when we created them.”) In many ways American of 2008-2012 resembles America of the early 20th century, we are in a New Gilded Age where an emerging plutocratic class- Koch Bros, et al.- has the power, money (and now, with Citizens United, the legal legitimacy) to control the power of the purse, which was formerly in Congress's hands. Congress is now the patsy (in the passenger seat), the big conglomerates in dirty energy, big pharma, and the broken financial institutions are driving over a metaphorical cliff that might literally represent financial default, climate disaster, and mass corruption. As citizens most of us are currently sitting helplessly in the back of the bus moaning about tax raises, while we have forgot that we are actually about to enter free fall. The time of the fair weather patriot has passed, and the time for true leaders and reformers/advocates for justice to step forward has arrived. We need politicians like Teddy Roosevelt and legal scholars/activists like Mr. Posner at the helm in order to stand a chance against the powers that would destroy us from within, and not from without. Keep fighting the good fight sir.

[ripcity]

"grave environmental problems such as global warming" "I don't know how I take this guy seriously after this." People like you who don't understand or take science and reason seriously are the problem.

Posted by: Global warming is a problem | 06/08/2012 at 02:19 PM

Says the fantastically misinformed ideologue who probably still believes in the hockey stick graph. The science is settled? Global warmists are more like religious zealots. Use some reason and do some research yourself.

[ripcity]

ObjectiveSee, Are you familiar with the phenomena of "Critical Mass/Critical Path" analysis and "Tipping Points" in regards to Physical Process's? I thought so...

Posted by: NEH | 06/09/2012 at 08:08 AM

NEH, are you familiar with the phenomenon of global warmist commenters on blogs who throw out a few terms and buzzwords and think this proves they are really smart and everyone who disagrees with them is stupid or paid off by the Koch brothers? I thought so . . . .

[NEH]

ripcity, Talk about the "kettle calling the pot black". Is this all the better you can come up with? Science is Science, just as Math is Math, Chemistry is Chemistry, Biology is Biology, and Physics is Physics, unless of course, you don't like its conclusions...

Remember, the Earth is still the center of the Universe and all revolves around it and the universal elements are still Earth, Fire Air and Water. Shall I continue... ;)

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[Linda R. Monk, J.D.]

For a judge who is considered eminently rational, why use "embarrassing" to describe the obesity epidemic? Should we use shame-based language to describe other medical conditions? Who should be embarrassed? Industrial agriculture that produces cheap and unhealthy calories, Congress that subsidizes it, an overworked population that doesn't have time or money for healthy cooking? Maybe capitalism? Please be specific and "rational."

an embarrassing obesity epidemic,

[Capitalism loving socialist]

What a crock. Why is this judge-chap juxtaposing capitalism with socialism before going on to describe a list of the requisites of a healthy capitalist society, many members of which are entirely socialist in nature?

Where does the subsidy for education come from Judge? The Capitalist Fairy Godmother, or is it collected from the people on some involuntary basis with the resulting funds put to the public good, you know exactly like socialism?

Without socialism, you would not even have police serving the public good, but only privately contracted vigilantes. If you want a capitalist country without socialism, try Somalia. All the healthy capitalist countries I know of are characterized by examples of healthy socialism and are the better for it.

[Expat]

"So the big question is, given capitalism, what else does a country need in order to prosper?"

It's interesting to me that nobody ever talks about the basics of what makes a healthy human society. Good relations between men and women (ya know, the foundation of the whole thing), and from that healthy diet (thanks mom), respect for men, happy parents (and from that happy kids), lots of sex for the man...and that's about it. What else is needed?

The USA has already taken values such as maximizing profit, maximizing GDP, etc as far as it can go. Step back and look, what has been acheived?

The foundation is the people. The USA is easy to break because the people are already broken. Strengthen the root.

[massappeal]

Sorry to be late to the party, but I do want to add my thanks to Judge Posner for this post. In my view, one necessary precondition to addressing many of the pressing national problems outlined in the closing paragraph is the creation of a critical mass of moderates and conservatives willing to break with the extremist ideologues who dominate today's Republican Party.*

That doesn't mean I expect, or even want, conservatives holding hands with liberals singing "Kumbaya". Nor do I expect conservatives to agree with liberals on how best to address a problem like climate change. But as long as extremist ideologues hold sway in Republican and conservative circles, it will be impossible to address those problems at all.

Thank-you for doing your part.

*http://masscommons.wordpress.com/2012/06/12/a-reverse-nirvana-fallacy-dionne-award/

[Lynn]

The stress the institutional structure is under is because government is too large and too complex and too driven by the daily headlines. It tries to do too much, while ignoring all which it must do to support a functioning capitalism. It has ignored all the basics of e.g., securities and antitrust law. Government workers will have limited vision and limited power, and often fall to self-serving. Government failure is about abdication of basic duties, counterintuitively caused by its size. So all our calls for government to assume still more duties, elaborately articulated in unread and unreadable laws, will only make all our problems far worse.

[Tab Cocovillea]

The Judge apparently gets all of his news from CNN (Communist News Network), how else to reach the bizarre conclusions he's reached. He alternates so widely in his views, from police-state overreach (in a vain attempt to ward off "terrorists") to selling children on the open market.

I think the judge should retire and let more principled folks take over... Ron Paul provides an excellent roadmap for personal and public policy formation that respects the individual, minimizes the encroachment of the state and provides economic sound footing.

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[Andrew Percy]

Agreed. Basic point made: economies exist as clients of societies. A capitalist economic system inevitably operates within the context of a social system and while capitalism is a natural and effective economic model it is entirely dependent on the quality of its client society's structures.
The absence of critical development of our social models in the last century is at the root of any failure we can observe. We are operating a 21st C capitalist system in the framework of a 19th C social structure. It no worky, and the fault for that lies squarely at he feet of our public intellectual sphere which has failed to expand its conceptual realm.
The dearth of innovation in social development has now reached its evolutionary culmination. It's adapt or die time.
Luckily we have a few moment of planetary time left and new ideas are emerging, witness www.standardsoflife.org.

@ Mr Story: separating social security from the finance industry will allow the destruction of capital to resume its important role, and that will restore the risk reward balance.

[Joaquim]

I think that this crisis is the perfect moment to rethink Capitalism and make it more sustainable.
If you want to read my article about it:
http://www.opttic.com/content/optimizing-capitalism

Or my blog about this and other human issues:
http://www.opttic.com/blog-optimize-world

[Luis Augusto Fretes Cuevas]

I think many people commenting here are misunderstanding that Posner said.

All "capitalistic" countries Posner mentioned are mixed economies, mostly capitalistic. For example, Sal Magundi says: social-democratic states have done just as well/poorly as relatively-free-market states.

The Nordic model is by all measures a capitalistic mixed economy, if you don't take into account the size of government when measuring economic freedom, Denmark is the freest economy in the world. That's, essentially, the Scandinavian Model.

While economic freedom strongly correlates with economic growth, the size of the government correlates with it negatively. What the Nordic Model achieves (and this has been empirically checked) is that you can combat the defects of a big government with a functional free market and attain growth.

My favorite model, though, is closer to Singapore's Model.

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