Market-Failure Theory vs. Soviet Theory
By Arnold Kling
I have just started reading Alan Brinkley’s The End of Reform, about the evolution of liberalism during the New Deal. Very strongly recommended. It does what Jonah Goldberg claims that the Left refuses to do, which is make a serious examination of the history of liberal ideology. Although Jonah does not cite this book in Liberal Fascism, I think it supports a lot of Jonah’s arguments, even though its basic perspective is sympathetic to FDR liberalism.
This material also pertains to a discussion that we have been having about the Soviet experiment. Many commenters want a more precise definition of market failure. Instead, I want to turn the question around and ask for an example of market success.
That is, try to name an industry in which there is no economic argument for regulation or subsidies. Food? imperfect consumer information. Health care? same thing, plus insurance market breaks down due to adverse selection. Education? Positive externalities. Manufacturing? Pollution. And so on.
Marxism is the theory that there is a generic, all-encompassing market failure that pervades capitalism. Class exploitation, waste of resources in competition and advertising, and other ills.
Market-failure theory eschews the generic, all-encompassing market failure story. Instead, it says that every industry is dysfunctional in its own way. But every industry is dysfunctional. And in every case, experts wielding the power of the state are presumed to make things better.
I think that market-failure theorists would claim to have a better understanding of markets than Lenin had. My concern is that their misunderstanding of markets in fact is as bad as Lenin’s. But that will require a longer argument in a separate post.
For now, I want to get back to Brinkley, but below the fold.The End of Reform was published in 1995, and Alan Brinkley was intending to write something that was meaningful in the context of an era where liberalism was generally on the defensive. However, much of it also feels very relevant today. For example, on p.17, he tries to explain how Roosevelt’s landslide election in 1936 failed to translate into extensive new reforms.
In the weeks after the 1937 inaugural, members of the administration launched a series of initiatives…what they believed to be their popular mandate. Their efforts encountered unexpectedly intense opposition. Support for Franklin Roosevelt was not the same…as support for a liberal vision of a powerful state. By choosing to believe otherwise, the administration had propelled itself into a crisis.
Maybe Barack Obama is the next FDR.
On p.34, we find a passage on the way some FDR advisers thought about competition that is not too far removed from G. Liberty Nell’s description of Soviet theory.
To them, the greater challenge was protecting the business world from excessive competition…the conflict and instability of a chaotic marketplace: destructive rivalries within industries, destabilizing clashes between capital and labor, disastrous swings in the business cycle…”We are resolved to recognize openly,” Rexford G. Tugwell, a member of Roosevelt’s original “brains trust” wrote in 1933, “that competition in most of its forms is wasteful and costly…Unrestricted individual competition is the death, not the life of trade.”
Much of p. 31-64 concerns the differences between the views of two groups of advisers. One group I call “harmonizers” and the other group I call “regulators” (Tugwell was a harmonizer). Both groups favored government intervention, but not in the same way.
|Tugwell, Moley, Hugh Johnson…not against big business…think small enterprise is outmoded…think that the need is to reduce conflict and competition…National Recovery Administration…government needs to help plan business, impose order on market chaos…somewhat utopian…with the right plan, the economy can become a harmonious whole||Tommy Corcoran, Ben Cohen, Harold Ickes…hated big business…need strong stick of regulation…SEC, FCC, NLRB, etc…regulators must be experts, insulated from Congress…do not expect conflict and problems to disappear, so will always need expert regulators|
FDR started out with both groups in his “team of rivals” (to borrow an expression from a more recent book). The conflicts between the groups could be papered over, because they all agreed that capitalism was broken and government needed to fix it.
During Roosevelt’s first term, the Harmonizers were in ascendance. However, they fell out of favor in the second term. Brinkley attributes this to the widespread perception that the NRA was a failure and to the panic that took hold inside the Administration when the economy had a severe recession in 1937-38. When the Regulators proposed the theory that evil business leaders had gone on a “capital strike,” Roosevelt took comfort in this explanation for the downturn, which strengthened the hand of the Regulators.
Another factor that helped the Regulators was the fact that the focus of economic policy was shifting from the problem of production to the problem of consumption. The problem of production was to produce more. But people noticed that what America lacked during the Depression was not productive capacity. The problem of consumption was to ensure enough demand for output and to give consumers enough means (income distribution) and assistance (education, regulation) to spend wisely. Harmonizers will still solving the production problem, while Regulators were adapting to the consumption problem.
That takes me up to p. 80, which is as far as I have gotten. More later, assuming the book doesn’t fizzle out.