by Bryan Caplan
[Won 1st prize in the Center for World Capitalism's 1995 Davis Essay contest. Footnotes omitted.]
"The flimsiness of Soviet ethics might not have been so damaging, since Communism was essentially a materialist system, had the purely material achievements been more substantial."
--Paul Johnson, Modern Times
"Civilization is the progress towards a society of privacy. The savage's whole existence is public, ruled by the laws of the tribe. Civilization is the process of setting man free from men."
--Ayn Rand, The Fountainhead
The economic defense of capitalism has an impressive pedigree. The classic work in this tradition, Adam Smith's Wealth of Nations, was itself to a significant extent a compilation of pre-existing intellectual pieces of the argument that a free-market economy increased the living standards of most people at a markedly faster rate than an economy more closely under the command of the state. Arising in competition with this stream of thought, it is only natural that many of the influential arguments for socialism have been economic as well.
But the economic defense of socialism is only half of the story. Alongside the economically-oriented socialists, there has always existed a second wing of socialists, dubbed "Utopian" by Marx, who see something essentially evil in the very demand for continuous economic improvement. And whenever the empirical success of socialist economics falls into doubt, it is on the second tradition that socialist thought relies.
With this in mind, I shall here take up a two-pronged argument. The first has become rather widely accepted: empirically, socialist economies not only failed to deliver the goods, but very often lead to severe and even tragic declines in economic welfare; capitalist economies, in contrast, have done remarkably well in improving the human condition over the long-run. The second part of the argument is more original: taking up the challenge of the Utopian socialists, the speedy economic growth associated with free markets will be defended not only as good in itself, but as an essential precondition of a redirection of human life towards the learning, art, recreation, and self-fulfillment frequently acclaimed within the Utopian tradition.
2. A Brief History of Economic Growth
By all estimates, economic growth must have been extremely low, zero, or negative for most of human history preceding the Industrial Revolution. The example of the United States illustrates this point well: "[R]eal GNP is about 37 times larger than it was in 1874, 7 times larger than in 1919, and 3 times larger than in 1950. Extrapolating backwards leads to the well-known conclusion that economic growth at these rates cannot have been taking place for more than a few centuries." One very interesting question here is why it is that two to three centuries ago, some of the European nations broke out of the historical pattern of stagnation and began to experience startling economic expansion. On this point, even Marx and Engels readily admit that the disintegration of feudalism and the rise of an economic system closer to laissez-faire capitalism was a big part of the explanation:
Modern industry has established the world market, for which the discovery of America paved the way. This market has given an immense development to commerce, to navigation, to communication by land. This development has, in turn, reacted on the extension of industry; and in proportion as industry, commerce, navigation, railways extended, in the same proportion the bourgeoisie developed, increased its capital, and pushed into the background every class handed down from the Middle Ages.
On this point, their judgment is confirmed by virtually every other economic historian: the unprecedentedly free markets of the 18th and 19th centuries were responsible for turning a world of stagnation into a world of continuous and rapid progress in the standard of living for everyone.
With all this in mind, it seems rather strange that socialism found the intellectual appeal that it did in the late 19th century. Of course, economic conditions in an absolute sense were still dreadful; but the mere wish for an even faster rate of progress than that of free markets hardly showed that such a wish could be satisfied. In any case, socialism found many converts in the late 19th century, and socialists won control of economic policy (to varying degrees) throughout the world in the 20th century. To a large extent, they claimed that socialism could do even better than capitalism, buttressing their claims with the curious "law of history" that if a system did well in the past, then it will not do well in the future.
The empirical literature on comparative economic growth is vast, so there will only time for the highlights. To begin with, there have been two nearly perfect natural experiments: the cases of East and West Germany, and North and South Korea. In both cases, the more capitalist nations showed vastly greater economic growth than their socialist cousins. In fact, the divergences were so great that the socialist nations felt it imperative to make emigration impossible by any means necessary. The cases of Taiwan and Hong Kong as compared with Communist China are not quite as clean in "experimental design," but are perhaps even more dramatic in terms of the divergence between the ability of free markets and the socialist state to deliver the goods.
The economic growth statistics for even the most doctrinaire communist states have at certain points been substantial, even exceeding those for more capitalist nations. Yet the numbers are misleading on at least three levels. Firstly, many of these statistics have been downwardly revised after the collapse of communism made more accurate accounting possible. In general, the CIA's official estimates were found to be grossly overstated. A prominent team of Soviet researchers freed from the demands of Party dogma put actual GNP at below half the CIA estimate; later researchers using newly available data made smaller but substantial downward revisions to the CIA figures. Of course, this means that many of the growth figures from previous years must have been much lower than reported. Secondly, and even more critically, much of the "production" under communism consisted in military spending, economically unviable "prestige" products, and other forms of consumption for the Party elite rather than production for the wants of ordinary people. And finally, oftentimes this pen-and-paper economic growth was purchased with devastating blows to agriculture accompanied by horrible famines, which are very difficult to quantify in GNP measurements despite their obvious importance in human living standards.
To many, this comparison of communist to capitalist performance sheds little light on the debate between the welfare state and hard-core free-market capitalism. But this dismissal is too swift. It is a well-known idea in statistics that you learn a lot about e.g. the effect of a drug on heart attacks only if the doses of the drug have a reasonably wide range. If everyone gets between .99 and 1.01 milligrams, the variation in the population is not broad enough to generalize. And the same idea makes sense in the comparison between socialism and free-market capitalism: We learn a lot more by comparing free markets with extreme socialism than we do by comparing them with very mild socialism.
There is one failing that afflicts the welfare state even more than full-fledged socialism. A basic promise of moderate socialist reformers at the dawn of the welfare state was that they could raise the well-being of most people by redistribution from the rich. The historical experiences of Western nations swiftly falsified their predictions. Very quickly, it became clear that in order to pay for national retirement systems, national health systems, and other programs designed to make ordinary people better off, it would be necessary to tax everyone, not just the rich, at a very high rate. The logic, if not the justice, of making most people better off at the expense of the wealthy minority is clear. But the logic of taxing almost everyone in order to pay for benefits that they could have bought for themselves is rather difficult to grasp. Especially when the government's "handling fee" is subtracted, it seems impossible that these programs benefit more than a tiny minority on balance.
The point here of course is not merely historical; I have in mind two related problems which capitalism's economic vitality could help to solve. The first problem is how to raise the living standards of those not fortunate enough to be born in the select group of nations which have inherited the fruits of their ancestors' free-market policies. The answer that the preceding historical studies suggest is simply an aggressive move towards the unregulated market, including privatization, free trade, liberalization of labor markets, and so on.
The problem of economic growth in the Western nations is rather different. Most of them have experienced a severe slowdown in economic growth in the past twenty years. And while this is not a life-threatening matter (due to the accumulated blessings of earlier economic progress), it is profoundly harmful for the swelling numbers of the long-term unemployed (perhaps the most serious current economic problem in Western Europe). Even among those not directly affected, the decline of progress leads to a palpable malaise and pessimism about the future. Again, the prescription here is a move towards deregulation (especially of labor markets), privatization, and tax and spending reductions -- especially of the dangerously "politically untouchable" government retirement and medical programs, which quantitatively are usually the bulk of government expenditure.
3. Economic Growth as an Essential Input of Civilization
Just because one thinks that more economic growth is good does not imply that it is the only good. The charge that socialism retards economic growth pales in comparison with the mass murders and abridgments of freedom imposed by all too many socialist regimes. Nevertheless, economic growth remains undervalued, especially for the non-economic goods that it makes possible.
As mentioned earlier, there has always been a strain within socialism that rebels against the very idea of economic growth. To take just one example, socialist philosopher Herbert Marcuse calls for a revolution to implement "a total technical reorganization of the concrete world of human life" :
When I say technical reorganization I again speak with reference to the capitalist countries which are most highly developed, where such a restructuring would mean the abolition of the terrors of capitalist industrialization and commercialization, the total reconstruction of the cities and the restoration of nature after the horrors of capitalist industrialization have been done away with.
Realize that Marcuse is writing in the late 1960's, not the 1860's, and he is talking about the advanced Western nations, not the Third World. And he looks at the malls and stores and businesses, like many socialists in the Utopian tradition have done, and sees "terrors" and "horrors"!
The best that can be said here is that this view is profoundly detached from common sense. Designer jeans and coffee makers may not be the most important things in the world, but they do make many people happy. And the wonder of it all is that however many products strike one particular person as junk, there are almost always other fruits of the capitalist system that they do enjoy. For the remaining minority of strict ascetics, there is the simple option of not buying what they don't want.
But there is a more fundamental critique of the Utopian position: In reality, the route towards the truly human society that they dream of can be made possible only by the ceaseless economic progress that they deplore. In a pre-industrial society, the most that people can hope for is to toil to eke out enough to support themselves for another day. Every human being is tied helplessly to his minimum physical needs. The desperate struggle for survival occupies so much time and thought that even the cost of sketching a distinct personality is prohibitive. Forget about developing one's mind, or finding true love. This is the state that should inspire "terror" and "horror," not modern capitalist society.
The crucial point is that though the highest values are non-material, they still cost something: our time. A person can't slave sixteen hours a day in the field and then come home to read philosophy, contemplate great art -- or seek out a soulmate. The greatest blessing of economic growth is precisely that it makes it possible to take care of people's merely physical needs with less and less effort, thereby giving us the time we need to strive after something higher. The greatest product of the capitalist system is not any good or service, but the gradual extension of civilization to the whole human race. What I mean here is not "civilization" in the sense of any particular culture, but rather the liberation of people from their brute physical needs, giving them the opportunity to develop their individuality, their minds, and the quality of their lives.
In this sense, economic growth spreads civilization along many dimensions. When the human lifespan was a mere 35 years, everyone had to spend over half of their lives just getting acquainted with themselves. Would it really be possible to fully develop one's individuality knowing that (by the time the issue occurred at all) there were only fifteen more years to live? But the benefit is even greater. A longer lifespan means not just more time for oneself; as social animals, we also enjoy the blessing of seeing spouses, friends, and children live out their extended lives alongside us.
Perhaps the oddest feature of the Utopian socialist critique is its attack upon the "alienated" labor of modern capitalist nations, to which they contrast the fulfilling activities their new society will give us. Odd, because it is precisely the constantly expanding capitalist economy which has liberated mankind from physical toil and created a vast menu of interesting and fulfilling kinds of work. This historical anomaly is made possible by economic growth, but again it is not essentially an economic achievement. It is yet another way in which human beings can fulfill their creative identities and explore their full potential.
The predictable objection to this picture is simply that many members of capitalist society do not use their new-found leisure time to read Aristotle, appreciate Da Vinci, or even look for true love. They work just as hard and unhappily as their unfortunate ancestors, and then spend their earnings on empty material goods.
The complaint is valid to some extent, although when compared to the medieval serf even the least reflective modern lives an enriched and fulfilling life. But more fundamentally, what better alternative is there? Is it really possible to elevate mankind to the "fully human" level by force? Capitalist development gives humanity more than just the raw means to civilize itself. It also assures that the process of civilization, however slow, will not be a coerced and hypocritical path, but a real and freely chosen improvement in the human character.