No Economic System is Perfect

By Max Gulker

Nobel laureate economist Joseph Stiglitz has a problem. He can’t ignore the central role that markets play in a prosperous society. But he spent his career studying so-called market failures, which many economists view as the responsibility of governments to solve with interventionist policy. What’s more, he’s ideologically geared toward viewing many of the relationships in markets as exploitative to workers and consumers.

What’s an economist to do?

Stiglitz provides his answer in a recent New York Times op-ed — ”progressive capitalism.” The broad agenda he lays out, an actively intervening government layered atop a foundation of markets, differs only by degrees from what politicians such as Bernie Sanders have come to call socialism. Stiglitz is rightfully squeamish about the S-word but adamant that a capitalist system can and should be molded by government with the goals of making the poor and the middle class more prosperous and reducing the influence of corporations and wealthy individuals.

I disagree with Stiglitz’s approach, which idealizes state intervention and demonizes the private sector. But beneath those familiar disagreements is a flaw in all of our thinking, across the ideological spectrum, that contributes to the current stalemate in our debates over economic policy. The culprit is what I’ll call ideological perfectionism.

Chasing Economic Nirvana

Without even realizing it, our thinking is often governed by the idea that the path to solving society’s problems lies in the perfection of a single overarching political and economic system. This ideological perfectionism is easy to see in utopian or autocratic philosophies like communism and fascism. The irony is that when those fanatical attempts at perfection catastrophically fail, some believe the problem was simply failed execution of the pure and ideal system. Real socialism, we’re told, has never been tried.

Readers who define themselves as pragmatists may think they’ve resisted the temptation to chase the perfect system, but they often tout pragmatism itself as a panacea for all social ills. Look no further than the Niskanen Center’s recent turn to moderation and centrism for a deeply ideological rejection of other existing ideologies.

In fact, the most common form of ideological perfectionism in the modern political and economic landscape seeks to find the ideal midpoint on an imagined continuum between markets and government planning. Stiglitz’s progressive capitalism is firmly in this camp. There is a single scapegoat for seemingly every problem we face, from stagnant worker incomes to “corporate greed” to the opioid epidemic: the turn away from government regulation of the economy that happened in the 1980s.

Make sure you’re sitting down when Stiglitz calls life in the United States circa 2019 a “dystopia.” The problems he calls out should be of great concern to everyone, but it’s hard to imagine someone in today’s developing world let alone virtually any past moment in world history wouldn’t be somewhat insulted by this claim. The way out, naturally, lies in perfecting the regulation, limitation, and control of markets by an enlightened state.

Progressive capitalism is not the only seeming compromise that tumbles toward its own brand of ideological perfectionism. Take conscious capitalism, a curious recasting of the simplistic notion that all problems are solved by firms maximizing their profits. The path to perfection under this system lies in firms awakening to a deeper understanding of what their profits truly are.

Once our corporations achieve a “higher state of consciousness,” they will understand “the interdependencies that exist across all stakeholders, allowing them to discover and harvest synergies from situations that otherwise seem replete with trade-offs.” In turn, “billions of people can flourish, leading lives infused with passion, purpose, love and creativity.” It’s that easy.

As is so often the case, the follies of those with whom we disagree provide a satisfying distraction from a hard look at if and when we make similar mistakes. Those fixated on top-down intervention or moral awakening don’t have a monopoly on ideological perfectionism. While favoring solutions that emerge from the bottom up in a free society can be a check on the quest for utopia, many libertarians take the all-too-easy next step of seeing “the market” itself as that ticket to utopia.

The quest for the ideal system is evident in the neoclassical construct of “perfect competition” and the Randian hero worship of the titans of business. All that’s good arises from capitalism, and all that’s bad from our failure to let it exist in its purest form.

Progress, Not Perfection

By now I may have at least mildly offended readers of all philosophical stripes, perhaps to the point that some may dismiss my argument as tautological — a set of mostly meaningless attacks one could levy against anyone proposing a solution to any problem. In truth there isn’t a cut-and-dry border between ideological perfectionism and simply sticking to one’s core beliefs. Perhaps the best way to avoid the former while maintaining the latter is simply to remind ourselves that our core beliefs do not have to get a perfect score on the test.

Stiglitz doesn’t dedicate so much as a sentence to potential pitfalls of expanding state intervention in markets. One can’t help but chuckle that he deservedly won his Nobel Prize for pioneering “information theory” yet seems oblivious to the limitations in information that plague central planning.

Conscious capitalists have a point that our conception of profits and value can sometimes be myopic, but to minimize the very real trade-offs in market outcomes between shareholders, workers, and consumers is to place one’s advocacy of capitalism atop a house of cards.

Finally, advocates of free markets, among whom I count myself, should not ignore that corporations sometimes hurt people in the quest for profits or that some people are poor because of undeserved bad luck in either birth or life events. In fact, we make a better case for free markets when we acknowledge that we may not like every single outcome, but many of the same bottom-up principles that fuel markets also show how we can address those outcomes through a renewed focus on stronger communities.

It’s human nature to want to sweep the dirt under the rug, so to speak, when making the case for what we believe. But glossing over complicating factors or issues not yet resolved is more likely to suggest to others that our core ideas can’t stand up to questioning. No matter the ideology, anyone who seeks perfection in a philosophy summed up by one or two words will fall far short of that ideal.

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research often focuses on free markets and technology, including blockchain and cryptocurrencies, the sharing economy, and internet commerce. He is a frequent speaker at industry conferences, especially on blockchain technology. Max’s research and writing also touch on other economic topics, including governance, competition, and small businesses.
 
Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.