Pondering Deirdre McCloskey's Defense of Capitalism

Just got around to reading Deirdre McCloskey's somewhat famous review of Piketty's Capital in the 21st Century, which is both a magnificent essay and the best defense of capitalism I have seen in years.

McCloskey notes that for as long as economics has existed, economists have been worrying about flaws in the market. Colbert worried about trade imbalances, Adam Smith worried about collusion among rival businessmen, Malthus worried about rising population, Marx worried about monopoly and alienation. Thomas Picketty worried about inequality. He offered, as a general postulate, that the returns to invested capital will always be greater than overall economic growth, a relation he expressed as r > g, and therefore that inequality will increase forever. 

McCloskey agrees it is generally true that r > g. But not always; it was not true in the US or Britain during the inflation of the 1970s, and it was not true in China during much of its recent growth spurt. It is also not the only mechanism of inequality, since inequality has increased in China despite decades of g > r. Plus, we have seen long stretches of time when we had growth without inequality increasing; In Britain from 1810 to 1950, inequality decreased dramatically even though r > g held true across most of that period.

But McCloskey's main complaint is about Picketty's pessimism. Sure, markets are imperfect. But where is the evidence that these imperfections are really making the world worse? So far as she can see,  "capitalism and democracy as they actually, imperfectly are in places like Europe or its offshoots are pretty good."

All the worries from Malthus to Piketty, from 1798 to the present, share an underlying pessimism, whether from imperfection in the capital market or from the behavioral inadequacies of the individual consumer or from the Laws of Motion of a Capitalist Economy —this in the face of the largest enrichment per person that humans have ever witnessed. During such a pretty good history 1800 to the present, the economic pessimists on the left have nonetheless been subject to nightmares of terrible, terrible faults. 

None of the dire predictions of eighteenth- or nineteenth-century economists came to pass. Population did not increase exponentially until everyone was poor, as Malthus predicted, nor did landlords engross an ever larger share of the national income, as Ricardo feared. Why these errors?

Admittedly, such pessimism sells. For reasons I have never understood, people like to hear that the world is going to hell, and become huffy and scornful when some idiotic optimist intrudes on their pleasure. Yet pessimism has consistently been a poor guide to the modern economic world. We are gigantically richer in body and spirit than we were two centuries ago. In the next half century—if we do not kill the goose that laid the golden eggs by implementing leftwing schemes of planning and redistribution or rightwing schemes of imperialism and warfare, as we did on all counts 1914-1989, following the advice of the the clerisy that markets and democracy are terribly faulted—we can expect the entire world to match Sweden or France.

This resonates with me on several levels, but let me start by offering two caveats. First, the great economic progress of the past two centuries has not happened in some kind of libertarian-capitalist vacuum chamber. In has come alongside other developments, including the growing power of the regulatory state, mass public education, the union movement, the environmental movement, the growth of universities, etc. It is a major part of the modern synthesis that makes us rich, but not all of it. Second, the modernization of the world has come at a very high social, cultural, and environmental cost. Cultures and languages have vanished, the prairies and steppes became plowed fields, etc.

But if we're talking simple economics, modern capitalism has done miracles. Jesus said, "the poor you have with you always," but there are parts of the world now where there is nobody Jesus would have considered poor. Homeless schizophrenics aside, most of the people we consider poor would have been comfortably middle class in 1800. The modern world is far from perfect but, as McCloskey says, it is pretty good.

Besides finding the rich economically objectionable, Piketty also attacked them on moral grounds. Like many observers of our time, he thinks modern millionaires may be worse than ancient aristocrats because they believe they got rich by their own virtue, things like brains and hard work. McCloskey is puzzled by this attack. After all the creation of the modern world has involved major cultural changes as well as new technologies, in particular the cult of bourgeois discipline I often write about, and why shouldn't we want our cultural leaders to preach this gospel? She quotes Daniel Boudreaux:

Yes, well, bourgeois virtues were not in the early nineteenth century as widely celebrated and admired as they later came to be celebrated and admired. We should be pleased that today's [very] high-salaried workers brag about their bourgeois habits and virtues, and that workers— finally!—understand that having such virtues and acting on them is dignified.

But back to inequality. Piketty did not try to deny that most people are richer now than they used to be, but he believed that inequality is a very bad thing in itself. What makes people miserable, he thinks, is not poverty in some absolute sense, but feeling poor compared to others. McCloskey, it seems, cannot wrap her mind around this. How, she seems to be saying, can people be upset about the economy when everyone is getting wealthier? It's a hard question, but many people think inequality is at the root of it:

Americans are angry not because America is failing but because our current system does not feel fair. We are measuring our lives against an algorithmically amplified social media elite. Today we are less grateful for what we have and more bitter about what we think we lack.

Personally I am not at all sure that this is any worse now than it used to be; was there really anyone in 19th century Europe who didn't know that some people were very rich? But since our misery about our economic situation is so hard to explain, maybe there is something to this. I am, for whatever obscure psychological reason, basically free from envy myself, so I don't get it. But there does seem to be a lot of envy around. And it is very old; some of the most primitive human societies we know basically do not tolerate anyone being richer than anyone else.

For me, the doings of billionaires interest me in the same way as, say, the doings of kings in Gondor. I don't see how either effects me very much. I think billionaires should pay more in taxes, but then I think I should probably pay more in taxes, too. Whatever wealth they are accummulating hasn't kept me and all my neighbors from enjoying a standard of living that is, by any reasonable historical standard, fantastic. 

It seems to me that the record of capitalism is unimpeachable in material terms: it generates wealth like nothing else. 

But, all that wealth has not made us happy.

I believe that much of the anti-capitalist anger we see now, and have seen over the past seventy years, has not been driven by material concerns but by unhappiness. Not sure where else to put the blame, millions have put it on our economic system. It is certainly possible that something about our economic lives is immiserating, whether that is our jobs or gross unfairness, or something else.

But it is also possible that we are just not wired to be happy or satisifed. Or, less radically, that we cannot be made happy by material things. Either way, we should stop expecting any economic system to make us happy, and rather than rant about capitalism we should look to other, non-material places for our bliss.