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Archive for July, 2014

Here is an excerpt from an interview with Kenneth Arrow, one of the most prominent economists, available from the Federal Reserve Bank of Minneapolis:

Region: In 1978, you wrote an article for Dissent titled ‘A Cautious Case for Socialism.’ Given the recent changes in the Soviet Republic, would you now make a ‘cautious case for capitalism’?

Arrow: I should start by saying that, as usual with magazines, the title is not written by the author. It was actually more of an autobiographical account of my early concerns with socialism. Let me say that the ideals that were sought for there, I still firmly accept. I think the idea that a society has to be responsible for all of its citizens, those who do well and those who do not, is really a precondition of a good society. Let me say that from the time I first understood economic principles, I was always concerned also that any system be operated on an efficient basis, which meant decentralization because knowledge is not concentrated anywhere. It’s based on motivation, and so these are the advantages of, say, the cautious case for capitalism, that the market system is efficient.

On the other hand, markets are not, in my opinion, a full solution to any problem. The obvious problem they don’t meet is the concerns of the welfare of individuals who may get lost in the operation of the system–the distributional question. We’ve seen this growing as we go further and further toward a market ideology in the United States and the United Kingdom. We’ve seen a decline in the welfare of the working poor, leaving aside any other pathologies, just the working poor, a very distinct increase at the very top levels.

This is not universally true by the way. It’s not true of those European countries that have maintained social welfare institutions to a much greater extent than we have–Germany, France and, of course, the Scandinavian countries; and they are not doing worse than the United States on an overall basis. The fact is that the United States in the last 12 to 13 years has shown a remarkably modest rate of growth per capita. So it’s not that we’re unleashing tremendous productive forces.

The switch to the market in Eastern Europe, of course, has not exactly been one of the greatest advertisements for the market. There’s no question the socialist system–and I hate to use the word ‘socialist,’ but I suppose some description of a system in which the state is in control–was breaking down, really collapsing. In these countries, most markedly in Russia itself and in a number of the others, it obviously was based on a tyranny, which is unacceptable even if it were producing good economic results, which it was not. But the fact is the conversion to a price system, which according to all our theories should have resulted in an immediate boost of productivity, has done nothing of the sort. Some people say Russia is running at 50 percent of its gross domestic product under that during the Communist period. In fact, none of the countries seems to have recovered the level that they had under communism, although the other countries in Eastern Europe are doing better than Russia and particularly the Czech Republic seems to be doing modestly well. East Germany I can’t count because they have a rich uncle. You have economic benefits which have nothing to do with the workings of the system. While I do believe that these countries will sooner or later find an equilibrium and start a satisfactory rate of progress, they’re going for quite a long period through a tremendous drop.

I think on the efficiency level, not only the distribution level, capitalism is a flawed system. It probably has the same virtues as Churchill attributed to democracy: It’s the worst system except for any other. And I think that’s right, but it cannot be thought that some unmitigated belief in free markets is a cure even from the efficiency point of view. As I say, the United States is not showing that now. The British probably could be getting better, but they’re not remarkable either. The fact is the heyday of intervention, as in the 1960s, was our golden era, in retrospect, from the point of view of growth. Admittedly, the reasons for the growth may have nothing to do with the system at all, but with unexploited opportunities due to the war and the Great Depression.

Classic economic theories recognize public goods aspects of one kind or another–the need for economic intervention in, obviously, the supply of infrastructure and, particularly in this case, of education. We’re not supplying that infrastructure at an appropriate rate today. I don’t doubt it isn’t just money; it’s organization and goals and so forth. The intrinsic social structure, the family structure and so forth, is certainly in a very bad state. And I think that this is showing up in productivity. I think part of the reason, and I can’t prove this, we’re seeing a decline in some places is the breakup of the family, which is partly the result of an extreme form of individualism.

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