Excerpt from Capitalism and Democracy

C A P I TA L I SM AND

D E M O C R AC Y Prosperity, Justice, and the Good Society

T HOM A S A . SP R AG E N S J R .

University of Notre Dame Notre Dame, Indiana

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CONTENTS

Preface vii

Introduction 1 CHAPTER 1

The Political Economy Debate: What Brings Prosperity?

13 CHAPTER 2

The Moral Philosophy Debate:Are Market Outcomes Morally Acceptable?

69 CHAPTER 3

The Democratic Ideals Debate: Markets and the Good Society 107 CHAPTER 4

Why No Slam-Dunk Answers 163

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CHAPTER 5

Conclusion: Toward Reasonable Judgments 189

Notes 235 Index 249

vi Contents

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Introduction

On June 10, 1962, in New Haven, Connecticut, President John Fitz­ gerald Kennedy stepped to the podium to deliver the Yale University Commencement Address. He began with a few ingratiating remarks to his audience of new graduates and their families, friends, and faculty. Alluding to the honorary degree conferred upon him, he said that he now had “the best of both worlds, a Harvard education and a Yale degree.” And he added, “I am particularly glad to become a Yale man because as I think about my troubles, I find that of a lot of them come from other Yale men” such as Henry Luce and William F. ­Buckley.

Kennedy then turned to his chosen topic for the day, which was the relationship between business and government, between the private marketplace and public policy. He lamented that when it came to discussions about the proper way to institutionalize this relationship and the best way to manage our national economy, there was a danger of “meeting present problems with old clichés” and that “some conversations I have heard in our own country sound like old records, long-playing, left over from the middle thirties.” Instead of letting ourselves be distracted by “incantations from the forgotten past,” he continued, we need to realize that “the problems of fiscal and monetary policies in the sixties as opposed to the kinds of problems we faced in the thirties represent subtle challenges for which technical answers, not political answers, must be provided.” “To maintain the 1

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kind of vigorous economy upon which our country depends,” he said, we have to be “prepared to face technical problems without ­ideological preconceptions. . . . What is at stake in our modem economic decisions today is not some grand warfare of rival ideologies which will sweep the country with passion, but the practical management of a modem economy.” Success in this management task, he concluded, involves “sophisticated and technical questions” that are “basically an administrative or executive problem in which political labels or clichés do not give us a solution.”1 Against the backdrop of American political history, this suggestion that questions about fiscal policy and the size and shape of government had become essentially technical issues rather than political and ideological ones had to seem on its face quite remarkable. Ever since the transformation of the American economy in the decades following the Civil War from a rural and agricultural one to an urban and industrial one, the relationship between corporate capitalism and democratic purposes had served as a central fault line in American political conflict. The many major innovations in government policies and institutions that regulated the capitalist marketplace—the creation of the independent regulatory commissions, the Sherman Act, the Fair Labor Practices Act, Social Security, unemployment insurance, minimum-wage and maximum-hours legislation, and so on— had usually emerged out of fierce political battles.

Kennedy’s argument that more detailed and focused debates on technical questions of economic management had superseded 1930s-­ style ideological battles about the New Deal did not seem entirely implausible at the time, however. For when the Republicans had recaptured the White House for the first time in twenty years in 1952, the Eisenhower administration had seemingly accepted the basic contours of the welfare state rather than trying to repeal it. Moreover, Eisenhower was willing to undertake large-scale government investments in the national economic infrastructure, since one of the most notable endeavors of his presidency was the building of our modern interstate highway system. And later, when Eisenhower’s vice president, Richard Nixon, became president in 1968, his administration proposed extensions of the welfare state in some respects, including

2 Introduction

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sending to Congress a measure that would have established a national guaranteed minimum income.

Moreover, Kennedy was not alone in his conviction that political and economic developments in the advanced industrial countries had rendered the standard ideological clashes of the previous decades obsolete. Only two years before his Yale speech, for example, the emi­ nent social scientists Seymour Martin Lipset and Daniel Bell had published major books with similar arguments. The great debate between laissez-faire capitalism and Marxist-style socialism was a thing of the past, they wrote, rendered irrelevant by changes and events in countries on the opposing sides of the Cold War. On the one hand, the heady utopian aspirations and expectations voiced by communist societies had lost credibility in the face of the dreary oppression on clear display in the Soviet bloc. On the other hand, what Lipset referred to as “the democratic social revolution in the West” had pragmatically modified and constrained market economies to make them more stable, successful, and beneficial to the larger populace. As Bell wrote: “Such calamities as the Moscow trials, the Nazi-Soviet pact, the concentration camps, the suppression of the Hungarian workers, formed one chain [of events]; such social changes as the modification of capitalism, the rise of the Welfare State, another.” The result, he continued, was the displacement of ideological disputation by the emergence of a “rough consensus among intellectuals on political issues: the acceptance of a Welfare State; the desirability of decentralized power; a system of mixed economy and of political pluralism.”2 Since its articulation around 1960, however, this “end of ideology” thesis has had a bumpy ride. Only a few years down the road, a “New Left” appeared and with it somewhat new and different axes of ideological conflict. With the benefit of hindsight, however, the most consequential components of the late ’60s and ’70s battles can be seen as turning on manifestly unfinished business within the “democratic social revolution” cited by Lipset. For in 1960, Jim Crow racial oppression and exclusion was still alive and well in this country; and however one might define the content of a twentieth-century democratic social revolution, clearly the dismantling of profoundly antidemocratic practices such as these would have to count as an essential

Introduction 3

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part of it. So with the demise of Soviet-style socialism in 1989 and with the largely successful results of the civil rights movement in this country, the perception that the technocratic management of a broadly consensual welfare state market economy was where the political action of the future resided regained credibility. On the academic side of things, the appearance of Francis Fukuyama’s The End of History and the Last Man was a prominent example of this renewed perception of ideological decline and the ascendance of a mixed economy run by technocrats. And on the ground, Bill Clinton’s and Tony Blair’s depiction of the refinement and management of a “third way” political economy as the principal task of their administrations gave concrete expression to a similar sensibility.

It has come as something of a surprise to many political observers and analysts, therefore, that essentially the same spirited ideological battle that JFK derided decades ago as an outmoded and distracting relic of the 1930s has resurfaced with renewed intensity a decade into the next millennium. Voices can now be heard in the public square proclaiming that the regulatory reforms and social insurance protections of the contemporary welfare state are destructive and/or morally illegitimate. Within the social sciences, economists of the public choice school skillfully highlight cases where the displacement of market allocations by governmentally determined distributions of resources seems not only inefficient but inequitable. On the pop culture side, television propagandists like Glenn Beck have resurrected and dramatized the dubious 1950s insistence of Friedrich von Hayek that any institutionalized restrictions on the free market will put a country upon a slippery slope to Nazi-like tyranny.

How, then, are we to account for this return to front and center of the American political arena of the 1930s’ set-piece confrontation between the partisans of laissez-faire economics and the minimal state on the one side and the adherents of welfare state regulatory and redistributive policies on the other? I think a number of contributory causes are at work here.

In the first place there is in any society—and certainly in those shaped by a liberal culture and institutions—a perennial antigovernment constituency. Freedom is a great good. Constraints are onerous.

Governments perform their functions through the enactment and im4 Introduction

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plementation of laws. Laws, even those providing important benefits, always impose constraints in the form of prohibitions or obligations upon some or all of those under the state’s jurisdiction. So at some level of our being, we are all anarchists. Laissez-faire. Leave us alone indeed. We want drunks off the roads, but we chafe at highway checkpoints. We want to reach our destinations as quickly as possible, so we dislike stop signs and are loath to find highway patrol cars along our path. We may want government services, but no one loves the IRS. People who live near public land are frustrated if they are not permitted to hunt there or cut timber there or graze their livestock there. So, even if we know better, we all have a piece of us that sympathizes with the ne’er-do-well who had suffered numerous unpleasant encounters with the law and who came upon the American revolutionary leader, and later to be president, John Adams on the road one evening in the fall of 1775. “Oh, Mr. Adams,” he reportedly exclaimed. “What great things have you and your colleagues done for us! We can never be grateful enough to you. There are no courts of justice now in this province, and I hope there will never be another!”3 Adams himself, conservative jurist that he was, was dismayed by this encounter. But the profound natural desire to live without constraints has deep roots in the country whose independence he helped to achieve. Indeed, I think that one thing Alexis de Tocqueville got wrong in his account of American political mores and values was his claim that A ­ mericans— as citizens of the most democratic society of his day—had as their ruling political passion a love of equality, something they valued above all other goods including liberty.4 If anything, in my view, Tocqueville got it backwards. Yes, there is in American political culture a strong and enduring animus against political hierarchy and aristocracy. But the principal source of that animus is not so much some kind of passion for equality per se. Instead it embodies the recognition, born of painful experience and not logic alone, that the corrupt fruit of entrenched political inequality is domination by those on top. Dominion is control, and to be subject to the control of others is to be unfree.

As Jefferson’s memorable analogy captures this dynamic, those at the top of a political hierarchy often act as if they had been “born booted and spurred, ready to ride others by the grace of God.” The ultimate source of the democratic and American animus against entrenched Introduction 5

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social and political inequality, then, is that such inequality enables the abridgement of liberty. Patrick Henry’s famous oration, after all, was “Give me liberty or give me death”; and New Hampshire’s state motto is “Live free or die.” They didn’t say, “Give me equality or give me death” or “Live equal or die.”

Second, the scope of welfare state transfer payments and the role of government in the American economy have undergone significant expansion since the day that JFK addressed his audience of Yale graduates. Between the years 1960 and 2010, government-­mediated transfers of resources to individuals increased by 700 percent in real dollars. In 1980, approximately 30 percent of Americans were re­ cipients of some form of government entitlement benefits; today that number is almost 50 percent.5 As a result, even someone who might have found a 1960s-level government safety net reasonable and acceptable could also consider today’s more extensive government programs to be problematic in principle and dangerous in their practical consequences. Moreover, in that context the ballooning of the federal budget deficit in the face of curtailed revenues produced by the 2009 financial crisis and tax cuts enacted during the administration of George W. Bush on the one hand and the growth of government outlays for social services—especially for Medicare and Medicaid—on the other only sharpen this understandable worry.

People seem to forget, however, that the most discussed issue in the 2000 presidential election debates between George W. Bush and Al Gore was “what to do with the surplus in the federal budget” that the Clinton administration had been able to create. And most of today’s programs were already in place at that time. So, to some very real extent, our assessment of the sustainability of transfer payments for things such as health care, old age support, and education depends upon the trade-offs that we as a society decide to make between these important public goods and consumer goods.

The debate about the sustainability of welfare programs, then, is to a considerable extent a function of competing beliefs about the proper role of the government. The former senator and leading advocate of free-market economics Richard Armey made that clear with his candid acknowledgment that “balancing the budget . . . is the attention-­getting device that enables me to reduce the size of govern6 Introduction

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ment. . . . The national concern over the deficit is larger than life. . . .

So I take what I can get and focus it on the job I want. If you’re anxious about the deficit, then let me use your anxiety to cut the size of the government.”6 Nonetheless, the deficit numbers today can raise concern even among those not so ideologically motivated. Few can contemplate without flinching the blithe assurance offered by Vice President Dick Cheney, when he was questioned about the prudence of proposed further tax cuts in the aftermath of the 2004 election, that “President Reagan showed us that deficits don’t matter.” At some point, deficits matter very much. So the debate over the proper and prudent extent of entitlement programs—along with other government disbursements—has understandably achieved renewed salience and urgency.

Third, the 2008 bursting of the housing bubble and the resulting financial crisis caused the American public a notable loss of wealth and purchasing power, at least for the time being. And, for understandable reasons, conflict over the distribution of resources tends to rise in such circumstances. Compromises are always easier to work out when at the end of the day everyone can be a bit better off and the battle is only about how much better off specific groups are going to be. In a declining economy, on the other hand, not only do concrete political battles become more intense, but ideological conflicts tend to sharpen as well. Combatants in the wars of ideology become increasingly insistent upon their “principles” and increasingly loath to concede any points to adversaries when doing so entails absorbing financial loss. The battle of ideas in straitened circumstances ceases to seem essentially academic, for wins and losses carry a price tag. And even during the more recent recovery from the recession, some sectors of the populace have lagged behind.

The past several decades have also seen a conscious and extremely well financed movement on the part of a number of wealthy devotees of free-market economics to create and fund a panoply of institutes and foundations to promote their ideas in the public forum. Prominent examples include the Cato Institute, the Heritage Foundation, the American Enterprise Institute, the Liberty Fund, the Charles Koch Foundation, and the Charles Koch Institute. The mission statement of the last of these could serve for the most part as that of all of them: its Introduction 7

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goals include “helping people who are passionate about economic freedom develop the skills necessary to advance it,” “building the ­professional skills of tomorrow’s economic freedom advocates,” and “equipping individuals for careers in advancing economic freedom.”

Within the academic domain, it is also relevant in this context to mention the rise and influence of the “public choice” school of political analysis. Public choice theory essentially consists in deploying the standard tools and models of economics to explain and to evaluate political behavior, policies, and institutions. This form of analysis can be quite illuminating, as seminal works such as James Buchanan and Gordon Tullock’s The Calculus of Consent amply demonstrate.7 At the same time it is important to understand that the construction of ­political relationships and transactions as a subspecies of economic transactions operates from and gives force to a particular “moral point of view.”8 Specifically, it essentially assumes that the only morally legitimate political relationships (among adults) are those freely consented to by all the individual parties involved, acting in their self-­ interest as they understand it. To adopt this mode of political analysis not merely as an ideal-type model useful for explaining certain patterns of human behavior but also as the proper standard for normative evaluation of moral and political legitimacy, in other words, implies a commitment to a specific moral and political persuasion—to wit, to a form of libertarian individualism.

The central point here is that the efforts of the various institutes and foundations devoted to the spread of “economic freedom” and laissez-faire politics, in tandem with the importation of economizing explanatory and normative models into academic political theorizing, have given new voice and injected new vitality into what adherents like to refer to as “classical liberalism.” In the process, champions of laissez-faire such as Friedrich von Hayek and Ayn Rand have achieved new prominence and a wide following.9 These developments have therefore contributed to the return to the center of today’s public discourse the clash between the public philosophies of free-market liberalism on the one hand and the reform liberalism associated with the New Deal, the welfare state, and the “democratic socialism” endorsed by the followers of Bernie Sanders on the other.

8 Introduction

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The final, and perhaps the most important, reason for the return to the forefront of today’s politics of this long-standing political fault line in the economically advanced liberal democracies is that President Kennedy’s claim about the fundamentally technical nature of governmental economic policy is at best only partially true. Technical issues turn upon ascertaining means-ends causal relationships, whereas ideological issues almost invariably also involve contestation over the desirability and propriety of the ends themselves. So for the thesis of Kennedy’s Yale commencement address to be vindicated, it would be necessary for decisions about the government’s economic role to depend exclusively upon our understanding of the causal factors of wealth creation and not also upon our conceptions of distributive justice and other possibly important features of a good democratic society. And whether we look at either the debates surrounding New Deal policies in the 1930s or our current equally passionate debates over social insurance programs such as Social Security and Medicare, over public investment in education and environ­ mental protection, and over tax policy and levels of public spending, it seems quite clear that Kennedy’s characterization of the relevant issues as technical rather than moral and ideological is more a wistful hope than an accurate depiction of what is at stake in these debates.

As a result of these several causes, the ideological battles between advocates of free markets and minimal government on the one hand and partisans of greater democratic equality and some form of the welfare state on the other, rather than withering away as relics from a bygone era, have in recent years returned in full force. Anyone who wants to make sense of contemporary American politics and policy debates, therefore, needs to have some understanding of the divergent beliefs and goals that animate the combatants in this partisan warfare.

The central purpose of this book, then, is to serve as a guide to those intrigued but also somewhat perplexed by the political sound and fury that confronts us at every turn these days, following us into our homes in the newspapers we read, the constant debates on television news, and the inescapable exhortations of political advertising. My principal purpose here is explanatory—to identify the major issues and to clarify the most important arguments of the opposing

Introduction 9

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sides of the free-market-versus-welfare-state debate. Having done that, however, I will also offer toward the end some observations and judgments about these controversies. I do not pretend to have any definitive answers to the issues at hand, something I believe impossible for reasons to be discussed later. But I also believe that it is possible to narrow the geography of debate to a place where reasonable people may differ. And I hope here to make a contribution to that important task.

In the service of these goals, the topics and roles of the chapters to come are as follows. Upon examination, the sharp disagreement encountered these days between advocates of laissez-faire and champions of a more expansive welfare state turns out to be not one disagreement but three. One dispute is about political economy: Do unchecked markets maximize prosperity? Or do they often produce wasteful and economically damaging outcomes that require some form of government intervention? A second dispute takes place on the terrain of moral philosophy: Are the distributions of economic resources produced by the capitalist marketplace morally justified or at least morally acceptable? Or do they instead violate important standards of justice and fairness? The third and broadest dispute is about political philosophy: Is a society of free markets and minimal government the best kind of society possible? Or would that kind of society violate important democratic ideals and not really be all that good a place to live?

The next three chapters examine the central issues and competing arguments in these three areas. Chapter 1 first outlines the logical and evidentiary basis for the claim that a free-market system creates the best economic outcomes we can achieve. Then it will examine some of the main counterarguments that insist upon the need for government intervention and regulation to head off destructive dynamics found in unfettered markets, to create economic stability, to promote economic productivity, and to protect the economic interests of future generations. Chapter 2 looks at the several different arguments offered to defend market outcomes as morally acceptable with respect to their justice and fairness. It will then look at some of the more important lines of argument that depict market distributions as in violation of any defensible conception of social justice. In chapter 3, we will con10 Introduction

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sider the claim that a free-market society with minimal government should be seen as the best society available to us—perhaps even a ­utopia of sorts. We will then look at why others argue that a purely free-market society would violate democratic norms, subvert the attainment of important democratic ideals and purposes, and not be a very pleasant place to live.

In the final two chapters I will try to step back from the arguments canvassed in the previous three chapters and offer my assessment of these controversies. In chapter 4 I want to explain why there can be no final and definitive judgments about whose argument is right ­regarding any of the three central issues: prosperity, justice, and the good society. Having there conceded the impossibility of fully settling these controversies about the proper relationship between capitalism and democracy, I will try to explain in chapter 5 why some of the ­answers given to that question are better and more persuasive than others. My concluding argument will be that any society that values liberal freedoms and wants to foster economic growth and efficiency needs to give a significant role to the capitalist marketplace. But I will also argue that both practical considerations and a dedication to moral and democratic values require us at times to constrain and supplement the workings of the invisible hand through the visible hand of a popularly elected government.

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