The Worst of Both Worlds

7/24/2010 – Henry Oliner –

Karl Marx understood that capitalism is intrinsically productive but saw an inherent unfairness in any value other than that provided by labor. Marx also understood that individual incentives to produce would inevitably lead to overproduction and painful contractions. To avoid these contractions and their impact on labor costs, he believed the proletariat should, and inevitably would, exercise control over the means of production. Some true believers insist that he sought a utopian ideal rather than an authoritarian state, but the control of production by the state became essential to their objective.

Herein lies a critical distinction between Marxism and capitalism, and this difference could not be more significant than it is today. Marxism is willing to sacrifice economic growth in order to manage or control contractions or volatility, and capitalism is willing to tolerate a degree of economic instability in order to achieve economic growth.

Both have succeeded.

Marxist economies punish non-production. Workers have production quotas which they must meet to get paid, but they get nothing extra to produce more than their quota. This ensures plenty of work to avoid unemployment, but it also ensures that workers will produce just enough to avoid punishment, but no more.

In a well-functioning capitalist economy, workers will produce as much as they wish. If they are restrained by one employer, they will seek income from another employer, either instead of or in addition to the first. Instead of being punished for not producing, they are rewarded for producing. It is not hard to understand why the growth of capitalist economies, even with frequent painful corrections, has far outpaced Marxists economies.

The Marxist restraint on growth increases as eventually the economy is starved of needed skill sets. Initially you may be able to get workers requiring higher education to perform on command, but eventually they will stop seeking the higher education that is not rewarded.

It is not surprising that after the economic turmoil of the Great Depression, we would seek a system with a greater emphasis on controlling and avoiding corrections and inequality, and that we would adopt some portions of it to balance our capitalist system, trying to achieve the best of both worlds.

But America has reached a point where the political aims of social justice and equality have so outweighed our capitalist thirst for growth that we have instead achieved the worst of both worlds. We now pay workers not to produce and punish the workers who aim for growth.

Marxists economies do not experience bankruptcies. Capitalists have efficient bankruptcy systems because we understand the value of recognizing failures quickly. Capitalism is about the competition of ideas, and bad ideas must be allowed to expire. But central planners do not tolerate competing ideas. If their ideas are good, then the economy prospers, but if they are not (and without competition, how would they know?), then the economy falters, and failures become institutionalized.

When crony capitalists are bailed out, we again get the worst of Marxism (restraint of growth) mixed with the worst of capitalism (market volatility and corrections). Failures are protected and producers are restrained, forced to compete with companies supported by government favoritism.

As unemployment benefits and minimum wages got progressively more generous, the time required for employment to recover from recessions extended, and the cost of government soared, just as the ability or incentive to produce more tax revenues declined. New laws, regulations, and jawboning have so killed the incentive to produce that corporations are sitting on nearly two trillion dollars that they are not spending.

Yet again, we have the worst of both worlds: Private capital accumulated from previous periods of production and current cost-cutting to adjust to new market conditions are stilled by government action that squelches the benefits from deploying that idle capital.

The problem is not the idle cash on corporate balance sheets; it is the oppressive policies that compound the risks associated with their deployment. It is not the uncertainty that so many critics lament; it is the near certainty of the expiring tax cuts and government intrusion into all aspects of our economy. The massive growth of social spending, legislation, growth-punishing regulations, and higher taxes in the last eighteen months threatens to set the American growth engine back for decades.

Unemployment remains high and economic growth remains low after record-low interest rates, record deficit spending, and a succession of foolish and reckless stimulus programs. We are past the time to cease doubling down on failed policies and return to the mix of sound money and low taxes that have worked so well in the past.

Capitalism is a continuously developing, messy, imperfect system, but we do not improve its performance by polluting it with ideas from a system that has failed consistently.

HT: American Thinker