Nowadays, especially as people are fretting about AI taking their jobs, and wondering what can be done to address “growing inequality,” and the “hollowing out of manufacturing,” some pundits wonder whether it is time to re-imagine capitalism. This sort of thinking is visible on both sides of the political spectrum – in that respect, Donald Trump and Bernie Sanders have more in common than either would have us believe.
But instead of re-imagining capitalism, I’d say we need to un-forget the facts about it that we should have known for many years, and un-learn some new non-facts that have crept in to our collective consciousness through a combination of malicious prevarication and lazy learning. As Mark Twain said: “The trouble with the world is not that people know too little; it’s that they know so many things that just aren’t so.’’
I’ve been blessed by friendships with three great scholars – Deirdre McCloskey, the late Allan Meltzer, and Phil Gramm – who have devoted much time and effort to defending capitalism by keeping the factual record straight and getting us to see which facts are most important. All three wrote influential books on the big questions about capitalism. Let’s un-forget and un-learn with them for a moment.
Our amnesiac journey begins with Deirdre McCloskey, who takes us through more books than you can shake a stick at, including her magisterial “Bourgeois Trilogy” (The Bourgeois Virtues: Ethics for an Age of Commerce; Bourgeois Dignity: Why Economics Can’t Explain the Modern World; Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World) and the much shorter and more accessible book written with Art Carden, Leave Me Alone and I’ll Make You Rich: How the Bourgeois Deal Enriched the World.
McCloskey focuses our attention on the great hockey stick of economic history: Prior to the Industrial Revolution, for thousands of years, humans suffered through miserably impecunious lives, with only very few people living at a standard above subsistence (the flat part of the hockey stick). Then, all of a sudden, in the late-eighteenth and early-nineteenth century, we see an increase in average human living standards, first in Britain and Western Europe, and later in other countries, and that improvement (the sloped part of the stick) displays an improvement that is not just permanent, but one that is perpetually growing. Classical economists like Adam Smith, David Ricardo and Karl Marx could never have imagined that this sort of permanent growth was possible, which is a large part of the explanation for why Marx was so pessimistically wrong about the future of capitalism.
What happened? After considering a wide range of alternative explanations, McCloskey tells us the simple answer: Common people (not just the privileged elite) were given permission to try out new ideas and to benefit from their success if the new ideas proved fruitful. We may take that sort of world for granted, but we shouldn’t. McCloskey reminds us that this secret sauce of economic freedom had not been the way the world was organized, even in Western Europe. In many places it still isn’t.
Allan Meltzer’s Why Capitalism? focuses attention on more recent experiences, and considers alternative socialistic approaches to managing an economy. His conclusion is that, despite some limited economic successes from socialism in promoting spurts of growth (such as in the Soviet Union in the mid-20th century), only capitalism has proved able to deliver either sustained economic growth or individual freedom, and Meltzer rightly insists that freedom is not a footnote when it comes to our quality of life. Man does not live by bread alone.
Adam Smith knew that, too. Although Smith’s most famous book is his 1776 masterpiece, The Wealth of Nations, his other famous book, published in 1759, is The Theory of Moral Sentiments. In the latter, Smith shows how participating in free markets makes us better human beings, not just wealthier ones. Smith argues persuasively that market interactions (voluntary exchange) make people more civilized, moral, and virtuous, less selfish and less corrupt. It does so, Smith tells us, by increasing our capacity for sympathy and impartial judgment. Markets promote “fellow-feeling” practices, and encourage prudence, love of justice, probity and punctuality.
Adam Smith is the hero of William Easterly’s brilliant book, Violent Saviors: The West’s Conquest of the Rest, because of his advocacy of voluntary exchange as an alternative to imperial conquest as a model of how Britian and Europe should connect with the rest of the world. In his book, Easterly gives substantial attention to some of Smith’s little-known lectures, which are quite different in tone – more passionate, I would say – than his two famous books. Rather than see distant people as savages, Smith saw their potential to flourish as equals, if they were given the chance, and he advocated on their behalf.
The evidence I have seen from people I know who live in economically unfree and deeply corrupt countries confirms Smith’s view, as does academic research by Luigi Guiso, Paola Sapienza and Luigi Zingales, who find in their 2016 article, “Long-Term Persistence,” in the Journal of the European Economic Association, that a major dose of economic and political liberty has lasting, positive effects on a society’s level of interpersonal trust and charity. If you ask me, improving our humanity, not increasing our wealth, is the more important advantage of living in a society that fosters economic freedom.
But if capitalism is so wonderful, why do some people hate it so much? In two recent books (The Myth of American Inequality: How Government Biases Policy Debate, and The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism), Phil Gramm and his coauthors (Robert Ekelund and John Early in the first book, and Donald Boudreaux in the second) have pointed out the need to un-learn beliefs about where the recent history of American capitalism has gone wrong, which have been a source of much dissatisfaction with the status quo.
Industrialization did not impoverish workers; it has been associated with improving real wages and living standards in America, with consumption per capita more than doubling from 1869 to 1900. Laissez faire economic policies did not result in widespread corporate monopolies or unsanitary preparation of foods in the 19th century, and did not necessitate the cures to those problems government provided during the Progressive Era. The Great Depression was the result of catastrophic monetary policy errors by the Federal Reserve, not the inherent fragility of capitalism, speculative excesses, or under-consumption, as are often alleged. FDR’s New Deal did not end the Depression (see also the excellent recent book on that question by George Selgin, False Dawn: The New Deal and the Promise of Recovery, 1933-1947). Freeing international trade did not produce a hollowing out of manufacturing. Deregulation did not produce the financial crisis of 2008.
Perhaps the biggest shock Gramm offers readers relates to perceptions about poverty and inequality. Average living standards have improved dramatically in recent decades, and both poverty and inequality have been reduced. Real income of the bottom quintile of US households increased 681% from 1947 to 2017. The percentage of people living in poverty fell from 32% in 1947 to 15% in 1967 to only 1.1% in 2017. Opportunities created by economic growth, and government-sponsored social programs funded by that growth, produced broadly shared prosperity: 94% of households in 2017 would have been at least as well off as the top quintile in 1967. Bottom-quintile households enjoy the same living standards as middle-quintile households, and on a per capita basis the bottom quintile has a 3% higher income. The top quintile of households receives income equal to roughly four times the bottom (and only 2.2 times the bottom on a per capita basis), not the 16.7 proportion popularly reported.
All of the myth busting in these two books is actually common knowledge to economists who specialize in each of these areas. Nothing in either book is controversial. The books do not truck in opinions but rather in well-established facts known to economists and economic historians, published in top, refereed academic journals. What explains the disconnect between reality and common belief?
One way to answer that question is to point out the details of how common errors have been made. For example, in the case of poverty and inequality myths, government statistical reports exclude “noncash” sources of income, which means they exclude most transfers from social programs, so poor people’s incomes are understated by the commonly used statistics. Taxes (paid disproportionately by high earners) are also ignored in official calculations. Furthermore, improvements in real (inflation-adjusted) income over time are understated because government inflation measures fail to use the appropriate chained price indexes or take account of new products and services.
When reporting about poverty or inequality, journalists and pundits tend to focus on measures of earned income, rather than total income or consumption, which are more meaningful when gauging income inequality or poverty. It is true that earned-income inequality has increased over time, but greater earned-income inequality is the natural consequence of aggressive redistributive policies that have been successful in reducing total income or consumption inequality: If one can enjoy median household consumption without earning any income, the incentive to work is substantially diminished. This largely explains the growing distance between earned and total income for poor households (transfers to those households have gone up dramatically). Ironically, it is the very success of redistribution in reducing poverty and inequality that has led mismeasurement to create the false perception of increasing inequality. The equality of consumption between the bottom quintile (in which only 36% of prime-age persons work) and the middle quintile (in which 92% of prime-age persons work) is a striking finding. As the authors note: “It is hard to see how a middle-income family with two adults both working would not resent the fact that other prime work-age people who are not working at all are just about as well off as they are.”
A deeper, more interesting, and more important way to answer the question of why anti-capitalistic factual myths persist goes beyond explaining the specific sources of journalists’ errors. I believe the answer to that question is that many people (perhaps especially journalists and pundits) want to believe the anti-capitalist myths. The principle of cognitive dissonance is a powerful tool for explaining human behavior. We follow paths that reinforce rather than challenge what we want to believe. It’s not just journalists. The history curriculum in the Washington DC grade school and high school I attended, Sidwell Friends, treats Howard Zinn’s textbook, A People’s History of the United States, as gospel. Why don’t the extremely left-leaning teachers at Sidwell know that this textbook is Marxist claptrap, full of factual errors and fatuous arguments? I’d say they deeply don’t want to know that.
You can see the same cognitive dissonance even among experts who know better. When Thomas Piketty published his book, Capital in the Twenty-First Century, informed economists saw many fundamental errors in the book. But even when they noted those errors, they did so with kid gloves, and always bent over backwards to congratulate Piketty for focusing attention on the issue of inequality, even though his book probably set back the informed discussion of the topic by about a decade. An example of this sort of treatment is After Piketty: The Agenda for Economics and Inequality, a collection of essays by prominent leftist economists (including Robert Solow and Paul Krugman).
So, I say to you who are fact-challenged journalists, teachers, and academic researchers, instead of re-imagining capitalism, I would like to re-imagine you. I would like to imagine you are all more like my friends, economic journalists Craig Torres, Sebastian Mallaby, Greg Ip, Daniel Blackburn, Victoria Guida and a few others, who (at least most of the time) seem to be committed to the unbiased presentation of facts, to the pursuit of truth even when it is inconvenient or uncomfortable or inconsistent with their political preconceptions. But, to be honest, I can’t re-imagine you that way; my re-imagination powers are not that great. So instead, I will do the easy thing: imagine myself and other scholars continuing to write scholarly articles and books, knowing that journalists, pundits and teachers, for the most part, will happily ignore the ones that don’t square with their worldviews. I laugh a little at them for that, but even more, I laugh at myself for blithely doing what I do with so much self-seriousness and so little effect. But I wouldn’t trade places.
