Capitalism is irrational. Where's the paradox?

Paul Krugman is the only indispensable mainstream opinion writer we have. Unlike most of the others, when you get done reading a Krugman column you don't feel like you've actually lost knowledge. Krugman combines a healthy liberal politics with a deep understanding of economics and an ability to put all this in accessible language, and he makes most other columnists look like amateurs.

But he's still a liberal, and he's still an economist. That means he's incapable of giving any sort of fundamental critique of the economic forces he's made a career of explaining. Take this passage from his column today, on a theme he's been pursuing for months now:
We’re suffering from the paradox of thrift: saving is a virtue, but when everyone tries to sharply increase saving at the same time, the effect is a depressed economy. We’re suffering from the paradox of deleveraging: reducing debt and cleaning up balance sheets is good, but when everyone tries to sell off assets and pay down debt at the same time, the result is a financial crisis.

And soon we may be facing the paradox of wages: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.
Here’s how the paradox works. Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.

But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.
The language of paradox here naturalizes capitalist dynamics, distracting attention from the more fundamental question - what on earth are we doing with a system that converts individual merit into collective disaster?

These so-called paradoxes are just more examples of the perverse incentives built into market economies. Sweatshop clothes are cheaper than those produced under decent working conditions, so the rational individual will choose the socially destructive product. Companies that force the costs of the pollution they produce onto society win a competitive advantage, so the environment is steadily destroyed that the individual consumer might save 50 cents. Cutting corners on quality means higher profits - even at the cost of seriously injuring or killing the consumer - so the fairly free markets of China have churned out scandal after scandal of tainted food and drugs.

As with Krugman's "paradoxes", these phenomena illustrate a fundamental truth of capitalism - brutally rational at the individual level, it is insanely irrational as a whole. Even more terrifying, altho the economic system was created by humans and only exists thru our collective institutions and individual behaviors, its logic exists as something beyond our control, acting upon us as an external force animated by unstable, mysterious laws.

This helps explain the widespread portrayal of the economic crisis as a kind of natural disaster rather than what it is: a creation of human beings. We have to start aggressively making the point that capitalism, like the crises and social devastation it endlessly produces, is a human invention and could be ended once and for all if we so chose.

1 comment:

Anonymous said...

sweat shops are an easy target and are often misunderstood by outsiders. I went to a talk at Northwestern given by Nicholas Kristof on how in nearly every southeastern asian country sweat shops are the only REAL way out of prostitution (the only other line of work available to young girls there). sure sweat shops suck, but they want the work, they want the business, and its really the best we can give them.

what do you think about that viewpoint? i'm just looking at this from a realist perspective.