Why markets fail
- The information of consumer desires conveyed by prices is
relative to consumers' income, so capitalism is more responsive to the
desires of the rich than the poor. The classic argument by Mill is that
the government should keeps its hands off of "production," to allow the
market to produce efficiently, and then "redistribute" the results to
better the poor. The modern liberal orthodoxy is that the welfare state
needs to provide a "safety net" for the poor.
- Capitalism is subject to business cycles. During the trough of
a business cycle production falls and unemployment rises. Keynesian
economic theories describe how the government can use fiscal and monetary
policies to "stabilize" the economy, avoiding deep troughs. An active
fiscal policy requires a big government. Current modern liberal orthodoxy
downplays activist fiscal policy in favor of monetary policy, which
requires only government regulation of the money supply, which even most
classical liberals would support; but it also emphasizes "automatic
stabilizers" which again require a big government. The decisive historic
event behind this consensus is the Great Depression.
- Since capitalism depends on competition, government regulation
is necessary to prevent monopolization.
- Capitalism works because all interested parties to a transaction
must consent to it, so that only mutually benefical transactions take
place. But the cost of obtaining consent from all parties to some
mutually beneficial transactions outweighs the mutual benefit. So
government needs to intervene to provide such public goods. The modern
liberal orthodoxy would list: education, pollution, national defense.
(The two essential tasks a social system must perform are raising good
children and national defense; otherwise, the social system cannot
survive.)
A more radical critique of capitalism might argue that the emphasis on
economizing ignores the importance of production. It is of little
consolation that capitalism economizes on goodness if it doesn't produce
very much of it.
There are also moral arguments for and against capitalism. They're not
my specialty, but I'd like this Apology eventually to address them.
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This page maintained by Steven Blatt.
Suggestions, comments, questions, and corrections are welcome.