Capitalism and Democracy

Prosperity, Justice, and the Good Society

Thomas A. Spragens, Jr.

• Publisher: University of Notre Dame Press
• Year: 2021
• ISBN:
  9780268200152
• Topic: Politics & International Relations
• Subtopic: Political History & Theory
• Index: Politics & International Relations

This book serves as an introduction to the ongoing political debate about the relationship of capitalism and democracy. In recent years, the ideological battles between advocates of free markets and minimal government, on the one hand, and adherents of greater democratic equality and some form of the welfare state, on the other hand, have returned in full force. Anyone who wants to make sense of contemporary American politics and policy battles needs to have some understanding of the divergent beliefs and goals that animate this debate. In Capitalism and Democracy, Thomas A. Spragens, Jr., examines the opposing sides of the free market versus welfare state debate through the lenses of political economy, moral philosophy, and political theory. He asks: Do unchecked markets maximize prosperity, or do they at times produce wasteful and damaging outcomes? Are market distributions morally appropriate, or does fairness require some form of redistribution? Would a society of free markets and minimal government be the best kind of society possible, or would it have serious problems? After leading the reader through a series of thought experiments designed to compare and clarify the thought processes and beliefs held by supporters of each side, Spragens explains why there are no definitive answers to these questions. He concludes, however, that some answers are better than others, and he explains why his own judgement is that a vigorous free marketplace provides great benefits to a democratic society, both economically and politically, but that it also requires regulation and supplementation by collective action for a society to maximize prosperity, to mitigate some of the unfairness of the human condition, and to be faithful to important democratic purposes and ideals. This engaging and accessible book will interest students and scholars of political economy, democratic theory, and theories of social justice. It will also appeal to general readers who are seeking greater clarity and understanding of contemporary debates about government's role in the economy.

CHAPTER ONE

The Political Economy Debate

What Brings Prosperity?

In this chapter, we shall look at the debate about the right institutional strategy to create the best possible economic outcomes for a society. The laissez-faire or “classical liberal” claim is that leaving all members of a society entirely free to allocate their productive efforts and their economic assets as they choose will produce both the greatest efficiency in the short run and also the greatest advances in economic productivity in the long run. Reform liberals are generally willing to agree that societies wanting to be successful economically need to give a large role to the operation of the free market, but they also believe that unfettered markets are subject to dynamics that create significant problems and suboptimal results. Laissez-faire liberals therefore seek economic arrangements that give maximum play to free-market transactions and minimal scope to government. Governments, in their view, should function simply as “night watchmen”—protecting property and enforcing contracts, but not participating in or interfering with economic transactions themselves. Reform liberals argue in contrast that government constraints upon private economic transactions are at times essential. Part of the need for public regulation and resource redistribution comes about for moral and political reasons, which we shall consider in later chapters. But some of the reasons are prudential and economic, since reform liberals argue that—in the real world—markets can be dysfunctional and destructive.

The Logic of Laissez-Faire: Markets and Their Magic

The central mechanism of a free marketplace is voluntary exchange among individuals (or households). All individuals in the marketplace are entirely free to decide how to deploy their economic assets—both their labor and any capital they may own—in productive enterprise. And they are all simultaneously free to choose what goods they want to consume and what they are willing to pay for them. The fundamental claim of those who advocate leaving the marketplace entirely free is that doing so leads to the best possible economic results for any society. The free marketplace maximizes economic efficiency by directing resources to where they are most productive. Leaving markets free is also optimal in the long run, because they create incentives that maximize innovation and economic growth. What is amazing about the market system, moreover, is that it is entirely self-regulating. No external supervisory institution or authority is required to administer it, govern it, or make it work. It creates its great results automatically, as if—in Adam Smith’s famous analogy—led by an “invisible hand.”

Adam Smith’s account of the magic of the marketplace may be the most well known. Wearing a necktie decorated with profiles of Smith in fact became something of a hallmark of free-market conservatives during the Reagan administration. But Smith was certainly not the only political economist who rhapsodized over the magic of the markets’ invisible hand toward the end of the eighteenth century. To cite but one example, consider the classic statement of the dynamics and virtues of the self-regulating market provided by the eminent Enlightenment liberal theorist the Marquis de Condorcet in his Essay on the Progress of the Human Mind. “How with all the astonishing multifariousness of labor and production, supply and demand,” he wrote,

with all the frightening complexity of conflicting interests that link the survival and well-being of one individual to the general organization of societies, it makes his well-being dependent on every accident of nature and every political event, his pain and pleasure on what is happening in the remotest corner of the globe, how, with all this seeming chaos, is it that, by a universal moral law, the efforts made by each individual on his own behalf minister to the welfare of all, and that the interests of society demand that everyone should understand where his own interests lie, and should be able to follow them without hindrance? [People] therefore should be able to use their faculties, dispose of their wealth and provide for their needs in complete freedom. The common interest of any society, far from demanding that they should restrain such activity, on the contrary, forbids any interference with it.¹

As it happens, a great deal can be said in response to Condorcet’s rhetorical query “How is it that the efforts made by each individual on his own behalf minister to the welfare of all?” if we look at the motives and mechanisms through which the market’s invisible hand accomplishes its magic. It may seem counterintuitive to say that if everyone selfishly pursues his or her self-interest the result will be the greatest general good; and in some areas of life, this alchemy of turning self-seeking into common good would certainly not work. I would not recommend that anyone employ this strategy in relationships with friends, lovers, or family, for example. But in the case of economic efforts and transactions—and in a context where force and fraud are effectively prohibited and contracts are enforced—the salutary dynamics of free market transactions and allocations are pretty easy to understand.

The starting point and initial impetus for the development of economic markets is what Adam Smith called “the propensity to truck, barter, and exchange one thing for another.”² The term propensity is somewhat ambiguous and potentially misleading here, since propensities can be idiosyncratic or irrational, as in “He has a propensity to become agitated when questioned” or “She has a propensity to judge people by their looks.” But the specific propensity cited here by Smith is found almost universally in human societies, because swapping things is a rational strategy motivated by our interest in satisfying our needs and desires. We truck and barter because we make ourselves better off in doing so. The development of markets in goods and services, therefore, can be said to happen “spontaneously” and “naturally”—so long as we are clear about what those adjectives mean in this context. Spontaneous does not here mean uncaused, and naturally does not mean without human agency: markets are a product of human actions, and those actions are caused by the interplay between human desires and the circumstances of economic production. So to say that economic exchanges occur spontaneously and naturally simply means that no preexisting institutions, overarching plan, or governing authority is involved in the process. You and a classmate open your lunch boxes. You have a candy bar and she has chocolate chip cookies. She casts a covetous eye on your candy bar, which is one of her favorites. You admire her chocolate chip cookies—your favorite dessert! Your eyes meet. “I’ll swap you,” one says. The deal is done. Both parties are happier—or, as economists are wont to say, their preferences are maximized under the circumstances at hand—even though no additional goods had to be created, no additional costs were incurred, and no outside party had to arrange the transaction.

The creation of a marketplace begins with straightforward exchanges of this sort, but it does not end there. The benefits of such deals lead to a number of other important institutional arrangements that serve to facilitate these exchanges and to maximize their value. To see how this process of evolutionary institutional development comes about, consider how simple exchanges of the sort seen in the lunchroom wind up creating a large-scale marketplace in agriculture. You live in a small farming village. You grow your family’s food on your own land. You end up one year having more green beans than your family wants or needs, but you are short on tomatoes. You discover that your neighbor would love to have more beans and has tomatoes to spare. Voila! Just as in the lunchroom, a swap is made and both families eat better—or at least more happily.

Now it is possible that this exchange becomes an annual event. Each year you swap some of your beans for your neighbor’s tomatoes. It is also possible, however, that the circumstances that led to this pattern of repeated exchanges may lead to changes in what you and your neighbor do on your farms. Suppose you realize that your land is more suited for growing beans than your neighbor’s land, while his land is better for growing tomatoes. That’s why you keep winding up making the exchange you do. Or possibly you are just more skilled at cultivating beans than he is, while he has a better knack for producing bumper crops of tomatoes. In that case, if you are smart, you realize that you will both be even better off if you don’t simply exchange goods ex post facto but instead change what you grow. The logical thing to do is to become specialists: you grow only beans and he grows only tomatoes! When you do that, you can make your annual exchange as usual. But then you both will have additional produce left over that you can use to swap for something else you want. By specializing in your strong suit, you now not only get all the beans and tomatoes your family wants but also have the wherewithal to make some other swaps for sweet potatoes or corn, and now you’re really cooking. To put this in terms of economics, what has happened here is that you and your neighbor have come to recognize the presence of a pattern of “comparative advantage” in the conditions of your agricultural production. And you have also understood the practical implications of comparative advantage: namely, the benefits of division of labor. And once again, these developments come about solely and directly from voluntary transactions between knowledgeable parties seeking to advance their own self-interest: neither altruism nor some plan implemented from above plays any part in these wealth-enhancing developments.

The core consideration of comparative advantage and the strategy of division of labor, of course, need not remain confined to the one-pair exchange between you and your neighbor. The growers of sweet potatoes and corn we mentioned above can adopt the same strategy. And as this pattern spreads, arranging the most advantageous exchanges becomes increasingly complicated and cumbersome. Everyone is faced with the daunting task of finding multiple exchange partners, each of whom has to have more than they need of some good we want and also less than they need of some good we have to sell. Moreover, every exchange requires the parties to arrive at a mutually acceptable swap ratio between their respective goods. How many sweet potatoes will neighbor A or neighbor B give me in return for a bushel of my beans? And can either of us find some alternative trading partner who will give us more or demand less in return? At this point, the sheer mechanics of exchange require an expenditure of lots of time and energy on the part of all concerned. Moreover, all parties to an exchange are left wondering whether they could have struck a better deal for themselves had they been able to search longer and more widely.

Clearly, the way to avoid these cumbersome complications would be the invention of some medium of exchange that could serve as a general and widely accepted measure of value. Such a medium would eliminate the awkward and complicated process required to effectuate a trade when the only way to do that was by quid pro quo swaps of particular goods. So once again, “naturally” and “spontaneously,” such a medium of exchange comes into use by, as John Locke wrote, the “general consent of mankind.” We call that medium of exchange “money.”

With the introduction of money, the generalized value of a particular good can be established. I don’t have to find out or say that a bushel of my beans is worth two bushels of corn, three bushels of sweet potatoes, a crate and a half of tomatoes, and on and on. Through the aggregation of the terms of all the exchanges made for beans in the whole marketplace, I and all my potential buyers or trade partners can know that a bushel of my beans is worth so many dollars, or pesos, or euros, or yen. And we all can also know the “market value” or price of all the other goods I may be interested in acquiring. Now exchanges no longer have to be quid pro quo swaps of particular goods. Any good can instead be priced by and acquired through the general medium of exchange, since the medium of exchange serves as a measure of the relative economic worth of any one good to all other goods available in the marketplace.

A final and important benefit of money is that it serves as a store of value. If all I have of value as a farmer are my crops, then all that I have is quite perishable. It is hard to be a saver in such circumstances. I cannot very well accumulate wealth in surplus crops to save for future needs. But by selling my produce on the market for money, I can convert my perishable wealth into a good that will not rot or decay. (Money can lose value through inflation or changes in exchange rates with other currencies, of course. But absent some calamity in the financial markets, this is only a partial erosion of value.)

The creation of a sizable market and the availability of money also allow prices to be established for all goods and allow these prices to change automatically in response to changing market conditions. These constant spontaneous adjustments thereby direct economic resources to where they will do the most good.³ When people want more of a particular good than is available, the price will rise. In the short run, those who want the good the most will pay the higher price, while those who want it less will buy alternative goods. As the price rises, additional suppliers may enter the market, redirecting their productive efforts away from less desired goods. The result is a continual process of reconfiguring the supply and demand of all the goods in the marketplace toward a favorable equilibrium point—a point that maximizes consumer satisfaction and revenue within the constraints of current technologies.

These dynamics of the free marketplace, most importantly, create huge incentives for producers of goods to act in ways that benefit their customers, current and potential, and that thereby increase the economic well-being of the entire society. These incentives—the “profit motive”—represent a kind of “market discipline” that offers rewards for efficient producers and punishments for the less efficient. In the free market, all producers of any commodity are in competition with each other—and with other possible entrants into their line of work. Any business that can produce and sell a good of equal quality for a lower price than other producers (i.e., “the competition”) or that can produce and sell a good of higher quality for the same price will attract more buyers and make more money. Producers who fail to “match the competition”—who cannot keep up in terms of their efficiency or quality—will suffer financially and possibly be forced to find another line of business.

The competitive pressures of the marketplace benefit the economy not only in the short run by rewarding the most efficient employment of the current means of production but also in the longer run by rewarding those who succeed in improving the techniques of production itself. If I am running a business, I can improve its efficiency in the short run in a number of ways. I can work myself or my employees harder. I can organize my workplace better, lessening the waste of time and effort by improved coordination. I can improve the skill level of my workers. All these improvements may make a difference, keeping my business competitive in the market and possibly raising my profit level. But I also may be able to make a quantum leap in my business success through technological innovation and invention. It’s one thing to learn how to build a better horse carriage or to build one more economically. It’s another thing altogether to figure out how to build a horseless carriage. It’s a good thing to build a better radio, but much better to figure out how to transmit pictures and invent the television. Or to invent laptop computers, or iPhones, or Facebook. That’s when you make big money—and by being motivated to do so, that’s when you also really improve other people’s lives and economic well-being.

So this in a nutshell is the logical case for free-market economics. Create a free market, establish and enforce protection of property rights, leave economic enterprises and transactions to the voluntary actions and agreements of private citizens, and good things will follow. The key to the superiority of free markets in maximizing economic productivity is their extraordinary ability (1) to transmit crucial economic information both rapidly and accurately and (2) to create incentives that draw upon the supremely powerful motivating force of personal self-interest to direct economic choices and efforts into activities beneficial to society as a whole. Markets let buyers and sellers, both current and potential, know what consumer preferences are. And they operate in a way that, as one famous phrase goes, turns “private vice into public good.” (Vice here means “selfishness,” which in the form of acquisitiveness and concupiscence—to cite language of disapproval from our moral vocabulary—is traditionally depicted as a moral failing. And public “virtue” here signifies the good of aggregate material well-being.) These beneficent results happen because of the unique capacity of markets to convey crucial information and draw upon the power of human self-interest to establish and continually adjust rational (“market-clearing”) prices, to prompt productivity-enhancing cooperative endeavors through division of labor, and to enforce market discipline—that is, to reward those who are more productive and efficient while penalizing those less productive or efficient. And the supreme beauty of these benign causal mechanisms is that the system is self-regulating and requires no human superintendence. Hence no one exercises political control over other people when it comes to allocating economic resources and productive efforts. To the extent that anyone is “in charge,” it is the entire body of consumers—“consumer sovereignty”—because it is the aggregate force of all the people’s desires and choices that determines what will be produced, what will be sold, and at what price. Adam Smith’s “invisible hand” does all the administrative work, it works for free, and it works for all of us. Such is the magic of free markets.

So these are the facts and the logic that lead to the mantra of those who champion maximizing the scope and sway of the marketplace: leave it alone! It refers here to the marketplace; and the admonition is directed to any person or institution with the power to interfere with it—that is, the government and, in a democracy, the sovereign public. Any interference with the dynamics and the allocations of the market lessens productivity, efficiency, and the overall wealth of the society. As Richard Armey, the Republican House majority leader from 1995 to 2003 and a libertarian-leaning former professor of economics, famously put it: when it comes to economic decisions, “Markets are wise, government is foolish.”

That does not mean that laissez-faire advocates are anarchists. Except for the far-out radicals among them, they recognize that we need government institutions—and with them government power—to accomplish a few important things. But these legitimate purposes and functions are to their mind few and specific, centering on the need for security and the preservation of law and order. We need a military to defend ourselves against predators without, we need police to defend the law-abiding from thieves and thugs within, we need courts to adjudicate legal disputes and enforce contracts, and we need the institutional means to collect and disburse the funds needed to finance these limited government functions. The laissez-faire goal is minimal government—a government that essentially confines itself to the protection of life, liberty, and property. All other allocations of resources, all other economic transactions, should be left to voluntary agreements among individuals and private institutions.

This logical case for minimizing government and maximizing reliance upon free markets seems clear and, on its face, extremely compelling. But at this point the adherents of laissez-faire are faced with a conundrum that calls for some additional explanations. For the fact is that there is not now and never has been any real-world example of a political society that has organized its economy in the way that free-market fundamentalists recommend. All existing and past societies have in a number of significant respects “interfered” with the operation of economic transactions within their domains. So the questions that present themselves in the face of this apparent puzzle are: If the logic of laissez-faire is so compelling, why in the world would it be the universal practice of governments t...

Table of contents

• Title
• Copyrights
• Contents
• Preface
• Introduction
• Chapter 1 The Political Economy Debate: What Brings Prosperity?
• Chapter 2 The Moral Philosophy Debate: Are Market Outcomes Morally Acceptable?
• Chapter 3 The Democratic Ideals Debate: Markets and the Good Society
• Chapter 4 Why No Slam-Dunk Answers
• Chapter 5 Conclusion: Toward Reasonable Judgments
• Notes
• Index