Thursday, April 21, 2011

Constrained Capitalism? Not

From the Guardian and you can find an article entitled "Arguments for Constrained Capitalism in Asia."

And we wonder where people get ideas, like ending our addiction to economic growth.

The article is very thought provoking, but I'm not sure the author truly understands economics, prices, or capitalism, or they are confusing their terms.

They advocate "constrained capitalism – which limits the use of natural resources and inhibits the behavior of consumers" and state that  "Governments need to tell their people that they can't have everything"

Prices, interest rates, profits, property rights, torts- all the things that make up a system of capitalism, by definition, work to limit the use of natural resources and constrain the behavior of consumers. They serve as reminders that we can't have everything and that our choices always involve trade offs. Often times, it is the intent of government policy to override these constraints, sending the false signal that yes you can have everything. (i.e. socially planned interest rates  and the excess that lead up to the financial crisis that reminded us, no you can't have everything and prices matter).  Prices reflect information related to scarcity and the knowledge and preferences of multitudes (billions) of individuals, and force each of us (consumers and businesses), with nearly every decision we make, to consider the impacts of our choices on others and the environment.  There are of course instances when we think that prices don't capture the full impact of our behavior  (externalities- see Hardin, Coase, Demsetz) but many times over the answer isn't less reliance on market forces, but more.  Paul Ehrlich and Jared Diamond have tried to make similar arguments related  to 'constrained capitalism'  and economic growth, but technological change and economic growth have undermined their claims time and time again. 

"investment in rural areas to improve sustainable farming methods and raise farming incomes."

This is one area, perhaps, where I agree, but modern agriculture in general (with GM foods, the application of genomics, proteomics, and pharmaceutical technologies in livestock production, GPS, modern intricate supply chains) is an example of an industry that has drastically reduced its environmental impact, mostly as a result of voluntary decisions by farmers on a global scale to adopt these practices.  Investment in these green technologies has paid off. How much of it is due to government sponsored R&D I'm not sure.

"He uses a telling fact: 2.2 billion Asians now have mobile phones, but far fewer have access to drinking water or toilets."

Access to potable water is perhaps one of the areas where increased reliance on markets and the price mechanism could offer the greatest improvement.

"The problem is not about needing more technology but about restructuring an economic system to meet human needs."

Economics and capitalism are all about meeting human needs. There are cases, where according to the article, it may seem that capitalism has not favored nations or peoples that are less than well off, but take the case of Egypt for example, or the many countries in Latin American.  As Hernando DeSoto has pointed out, they suffer from a lack of markets and capitalism as opposed to suffering from markets and capitalism. In a market system, if needs are not met, then competition drives profits down. If needs are met with great difficulty or under constraints of scarcity (as the article in the Guardian implies), then prices and profits will reflect that.

"There is no future unless we constrain human behaviour, how you do that is the question of our time"

That is the question of all time, and the subject of economics, which is the study of people's choices and how they are made compatible. Understanding economics and the nature of the price mechanism and spontaneous order provides the analytical framework for addressing so many of the concerns of this article.

Science 13 December 1968:
Vol. 162 no. 3859 pp. 1243-1248
DOI: 10.1126/science.162.3859.1243
The Tragedy of the Commons
Garrett Hardin

The Problem of Social Cost
R. H. Coase
Journal of Law and Economics
Vol. 3, (Oct., 1960), pp. 1-44
Published by: The University of Chicago Press

Toward a Theory of Property Rights
Harold Demsetz
The American Economic Review, Vol. 57, No. 2, Papers and Proceedings of the Seventy-ninth
Annual Meeting of the American Economic Association. (May, 1967), pp. 347-359.

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