In Defense of Classical Economics

I’m often rather critical of economics in this blog, but there are good reasons to defend it as the best available system. Churchill’s famous dictum that ‘democracy is the worst form of government, except for all the others,’ may prove to be true of classical economics as well.

The constant insight about current policy I get from reading  Reinhold Niebuhr convinces me that his analysis of human nature is close enough to reality to be indispensable to policy analysis. Niebuhr offers two defenses of capitalist economics:

  1. “Self-interest must be harnessed for two reasons. It is too powerful and persistent to be simply suppressed or transmuted. Even if individual life could rise to pure disinterestedness so that no human mind would give the self, in which it is incarnate, an undue advantage, yet it would not be possible for collective man to rise to such a height.”
  2. “…self-interest must be allowed a certain free play for the additional reason that there is no one in society good or wise enough finally to determine how the individual’s capacities had best be used for the common good, or his labor rewarded, or the possibilities of useful toil, to which he may be prompted by his own initiative, be anticipated.”

Both of these defenses relate to human nature.  Self-interest is a fact of human existence, so any economic or political system needs to account for it upfront. Capitalist economics does this by relying largely on self-interest as an engine for economic growth. The second reason to allow capitalist economics with all its flaws is that the alternative of centralized planning is worse. Niebuhr notes that most successful countries do a form of mixed capitalism, so that the flaws of both models are muted and balanced with each other.  Capitalism mixed with democratic accountability and economic redistribution through a political process may be the best system that human beings can set up.

Bringing us into more modern times, Andrew Sullivan has an excellent piece on the reasons capitalist systems give rise to the welfare state:

The turbulence of a growing wealth-creating free market disrupts traditional ways of life like no other. Even in a culture like ours used to relying from its very origins on entrepreneurial spirit, the dislocations are manifold. People have to move; their choices of partners for love and sex multiply; families disaggregate on their own virtual devices; grandparents are assigned to assisted living; second marriages are as familiar as first ones; and whole industries – and all the learned skills that went with them – can just disappear overnight (I think of my own profession as a journalist, but it is one of countless).

Capitalism is in this sense anti-conservative. It is a disruptive, culturally revolutionary force through human society. It has changed the world in three centuries more than at any time in the two hundred millennia that humans have lived on the earth. This must leave – and has surely left – victims behind. Which is why the welfare state emerged. The sheer cruelty of the market, the way it dispenses brutally with inefficiency (i.e. human beings and their jobs), the manner in which it encourages constant travel and communication: these, as Bell noted, are not ways to strengthen existing social norms, buttress the family, allow the civil society to do what it once did: take care of people within smaller familial units according to generational justice and respect.

The key here, and the reason I’m so critical of economics, is that it is entirely necessary to realize that economics is badly flawed in both its initial assumptions and the outcomes it leads to. In our modern discourse, capitalism and the welfare state are often seen as opponents, rather than complements to each other.  I ultimately hope to improve economics by putting it on a better philosophical footing. If better assumptions go into the models, better results will come out.  I’m certainly open to the idea that tweaking our current system is a waste of time and we need to come up with a better one; but the more I read Niebuhr the less convinced I am that any system of  justice will do a significantly better job of standing up to the ideal of justice than something that balances democratic political power with individual economic power.

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3 thoughts on “In Defense of Classical Economics

  1. That all makes sense, but we have (I believe) come to a point in history where the forces of Democracey and Capitalism are not in balance, and not keeping each other in check. Is this due to a specific flaw in our Democracey, a specific set of decisions by a few people, or is it the natural lifecycle of a Democracey/Capitalism duality? Will there also be a natural flow in the opposite direction, or will Capitalism grow until it eats it’s twin? This is what keeps me up at night. A better understanding (with better inputs) will be key, but will a better understanding among acedemia be enough to alter this huge beast of a system? Good stuff though man, reading your blog is making me (I think) a little smarter about economics.

    • I just now saw this comment (WordPress’s notification system is odd). I agree that capitalism and democracy aren’t currently balanced. I think part of that is capitalism moving to a global scale much more quickly than democracy has. I don’t think they will inevitably balance, but I think/hope that balance can be achieved with a lot of hard work and a slightly better understanding of the system. Academic understanding will not be enough, but hopefully it’s a start. Good questions though, and ones I don’t have ready answers too.

  2. Pingback: Markets Shape Human Behavior (And Not Always For The Better) | Faith and Public Policy

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