Capitalism or Something Else

Pratt posted the article reporting that only 53% prefer capitalism over socialism. For years I have wondered why that occurs. Under free markets and voluntary exchange everyone gains -- all goods and services are produced at lowest cost and all purchases are made at lowest possible price. When government intervenes in the free market, economic growth slows, resources are misallocated, the well off stay well off and the poor remain poor. Yet, in survey after survey over the last twenty years I have found that people prefer the government to allocate scarce goods and resources whenever the good or resource is important -- health care, organ transplants, roadways, zoning, and on and on. When the good or resource seems unimportant, then people choose to allow capitalism and free markets to do the allocation -- berries at the store, candy, etc. That just doesn't seem to make sense on the surface.

But, as with most topics in economics we must examine Bastiat's broken window fallacy and concentrated benefits and diffuse costs. With Bastiat it is the unseen that bolsters capitalism and the seen which apparently bolsters socialism. The rate of growth of an economy, the increases in standards of living, the increased quality of goods, medical care, and everything else in an economy is not seen. It is instead, the "unfairness" of some getting something and others not, or of people losing jobs to better technologies or new products or new ways of doing things, that is seen. Of creative destruction it is the destruction that is seen not the creation.

Moreover, interference with markets for transferring wealth and income from some to others occurs because it benefits a few a great deal and harms everyone a little. While the free market enables anyone to achieve, to prosper, to improve, it also continuously seeks to reduce the monopoly profits, the barriers to entry, the power of a few.

Is there a solution? Are we doomed to all live in socialistic systems? I posted previously about the inevitability of democracy to lead to larger government, I can not think of a political system that won't lead to bigger government. As Thomas Jefferson noted, we need an awakening, a new beginning, a revolution to occur every generation.

Foreclosure "scandal" again, Arnold Kling | EconLog | Library of Economics and Liberty

Very, very said as we approach the day of reckoning with a tsunami of foreclosed homes.

I suspect that, as large investors work to arbitrage and clear the incredible surplus of homes (how this surplus developed is an important insight into the our future as a society based upon our decisions as individuals about the role of the state) I would anticipate (as would Kling) that the gap between old fashioned and modern lending will resolve itself - I hope that courts are allowed to referee the disputes and our legislative and executive branches do not.


Foreclosure "scandal" again, Arnold Kling | EconLog | Library of Economics and Liberty

Government and Growth of the Economy

Before the late nineteenth century, government was a very small percentage of gross domestic product in most Western countries, typically no more than five percent. But with the twentieth Century came the growth of governments across the Western world, to the point now where government expenditures are forty or fifty percent of gross domestic product.
Is government necessary for a nation to succeed? Most economists believe government has as its most basic function the protection of people and property. In addition, many argue that a provision of limited set goods and services, called public goods, such as roads and national defense, is also a necessary role for government. However, calling forth a role for government is a slippery slope. Where does the responsibility end? Is it to protect everyone from everything?
As governments move beyond the core functions, economic growth is adversely affected. Government spending undermines economic growth by displacing private-sector activity. Government is significantly less efficient at any function than is the private sector.
So if some government is necessary but too much government slows economic growth, there must be some “optimal” size of government. As I noted in an earlier post, economists have popularized the existence of an optimal size of government in a figure called the Rahn curve. As the size of government, measured on the horizontal axis, expands from zero (complete anarchy), initially the growth rate of the economy—measured on the vertical axis—increases. As government continues to grow as a share of the economy, expenditures are channeled into less productive (and later counterproductive) activities, causing the rate of economic growth to diminish and eventually decline.

In the figures you can see the relationship between size of government and growth of the economy in OECD countries. The "unseen", referring to Bastiat's broken window fallacy, is the cost of a slower rate of economic growth. A 2 percent decline means from 3 percent per year growth, means it would take 72 years for the economy to double rather than 24. How many lives are lost because of this slower growth? How many diseases not discovered, drugs not found, technologies not created?