"[In 1937] Roosevelt was listening to and following the advice of another set of advisers: the anti-big business crowd...Corcoran, Cohen, Ickes, Hopkins, and Robert Jackson were telling the president he must use the opportunity of the downturn to move in for the kill when it came to big business."
-- Amity Shlaes, The Forgotten Man
Franklin D. Roosevelt's economic policies during the 1930's were a terrible failure. Why, then, is he so revered in history? I believe that Roosevelt's restrospective halo is derived in part from the fact that he catered to the anti-capitalist trend among intellectuals. This trend long preceded Roosevelt, and it persists to this day. Historians are predominantly anti-capitalist, which inclines them to favor Roosevelt. And if historians do nothing else, they do influence our view of history.
This essay is about the history of polarized intellectual views of capitalism. I make no claims that my thesis is original. On the contrary, it is a central theme in a number of recent books, including Jerry Z. Muller's difficult but highly rewarding treatise The Mind and the Market, Deirdre McCloskey's erudite and offbeat The Bourgeois Virtues, and Brink Lindsey's just-published perspective on capitalists, beatniks and hippies The Age of Abundance.
McCloskey talks about the anti-capitalist "clerisy," as she describes the academics and others who hold the bourgeoisie in contempt. Lindsey describes the way that post-WWII affluence in the United States helped foster widespread cultural experimentation and criticism, with protestors attacking the very capitalist institutions that enabled such experimentation and criticism. Muller offers an intellectual history of the controversy about capitalism. He shows, for example, how Joseph Schumpeter predicted exactly the sort of critical rebellion against capitalism that Lindsey chronicles.
The Two Sides
GMU economist Robin Hanson notes that ideological positions tend to come in "clumps." He writes,
Below is a table that summarizes the two sides in the tug-of-war over capitalism.
Our Behavior in Markets
Solve Social Problems
comes from exploitation
Those of us on the pro-capitalist (P) side tend to approve of the price system, because we think it helps send signals. Those on the anti-capitalist (A) side see prices as corrupt. For example, when the price of gasoline goes up, P's say that this tells people to consume less and to produce more. A's see gouging. Where P's address the problem of pollution with taxes, A's want to regulate and punish polluters. Where P's see no problem with using a market for organ transplants, A's would view such a market as inhumane.
Does the market teach us to behave ethically or unethically? P's look at the positive aspects of market behavior. We learn to make rational calculations of costs and benefits. We develop habits and ethics of dealing with strangers peacefully. We engage in transactions for mutual benefit, without coercion. P's point out that other forms of human interaction, such as competition in a status hierarchy, cause more friction than market trading.
A's see markets as fostering greed. They would prefer that people interact on the basis of higher motives.
P's believe that decentralized, un-coordinated, and trial-and-error processes can solve problems better than centralized, planned processes. The watch on my wrist can be thought of as coming from a centralized, planned process -- you can think in terms of a watchmaker. My wrist itself, which is more complex and can perform a greater variety of functions, came from the decentralized, trial-and-error process known as evolution.
Decentralized, evolutionary processes produce more elegant solutions than central planning. One reason for that is local knowledge. A single planner cannot know everything needed to solve a complex problem. (In fact, because of the need for local knowledge, today there is no single watchmaker. My wristwatch results from a combination of centralized and decentralized processes.)
Another advantage for trial-and-error is that it takes advantage of diversity. Imagine that you had lost an earring on a large lawn, and you had two groups of people -- experts and amateurs -- to help you find it. If you can pick just one person to search for the earring, you should choose an expert, who will look in the most likely location using the best search technique. However, if you have to pick between the two groups, you might be better off going with the amateurs. The experts will all tend to look in the same place and in the same way. The amateurs will tend to look in diverse locations in diverse ways.
I use this example to illustrate why Scott Page, author of The Difference, argues that diversity trumps ability. It helps explain why entrepreneurial trial-and-error often comes up with better, more innovative ideas than the bureaucrats of large corporations.
For the P's, the social heroes are the entrepreneurs. We see entrepreneurs as The real solution to poverty.
For A's, the social heroes are anti-capitalist policymakers. Roosevelt was redistributionist and contemptuous of private industry. His economics was arguably about on par with that of Hugo Chavez. Like Chavez, he had a huge popular following. Just as Chavez was preceded by economic failure, Roosevelt took office at a time when the economy was in depression. The net result of Roosevelt's policies was that the American economy was still in depression right up until the Second World War. And the A's lionized him.
Many mainstream economists are A's. They see the need for heroic policymakers to come in and correct the many market failures that they discern. Roosevelt elevated the role of intellectuals in government, giving them opportunities to be heroes, and this in turn helped solidify his heroic status among intellectuals.
Jerry Muller points out that anti-capitalism can be traced as far back as the Greeks and to ancient religious tradition. Throughout much of human history, it was natural to see wealth as fixed, so that if one person were particularly wealthy then others would be correspondingly poor. This zero-sum perspective naturally leads merchants and profitable market activity to be viewed with suspicion and hostility.
Modern P's see market activity as positive-sum. In a voluntary trade, both sides are better off. Widespread trade makes many people better off. Competitive innovation is an extreme example of a positive-sum game, leading to very large cumulative improvements in the living standards.
Nonetheless, A's still see wealth in zero-sum terms. They see the rich as having too much wealth, and they see a need for redistribution.
For the P's, business success is a good thing. For any one individual, it may represent luck, but overall business success is correlated with the introduction of innovations that improve our lives. For A's business success comes from exploitation. P's look at Wal-Mart and see efficiency and lower prices. A's look at Wal-Mart and see a large, profitable firm hiring employees at low wages and benefits.
For the P's, business failure is also a good thing. In order for productivity to improve, obsolete products and inefficient processes need to disappear. A's focus on the adverse consequences of firms going out of business.
Robin Hanson is pessimistic that differences such as those that exist between P's and A's will be resolved through reasoned argument. People have their identities wrapped up in their particular sides of the tug-of-war. See my essay on trust cues.
Jerry Muller reminds us that over one hundred years ago, Vilfredo Pareto was equally pessimistic. In his chapter on Joseph Schumpeter, Muller writes,
Pareto's 1901 essay "The Rise and Fall of Elites," conveys two themes to which Schumpeter would return time and time again: the inevitability of elites, and the importance of nonrational and nonlogical drives in explaining social action. Pareto suggested that the victory of socialism was "most probable and almost inevitable." Yet, he predicted...the reality of elites would not change. It was almost impossible to convince socialists of the fallacy of their doctrine, Pareto asserted, since they were enthusiasts of a substitute religion. In such circumstances, arguments are invented to justify actions that were arrived at before the facts were examined, motivated by nonrational drives.
Part of the A's outlook is that the economy can no longer improve. As Amity Shlaes and Jerry Muller point out, there was a widespread belief in the 1930's that capitalism had run its course. As Muller puts it,
Analysts of very diverse political hues concluded that the era of dynamic capitalism was over and that the United States and other "mature economies" had entered into a period of long-term economic stagnation. Some argued that there were no new technologies in sight for consumers to buy. Others feared that natural resources were nearing exhaustion, or that slowing population growth translated into a lack of consumer demand. Such assumptions lay behind Roosevelt's 1932 campaign address...
For pro-capitalists, capitalism offers an endless wellspring of renewal. For anti-capitalists, there seems to be an endless wellspring of reasons for capitalism's doom. The tug-of-war between the two sides is likely to be endless.
Arnold Kling is author of Learning Economics.