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Varieties of Capitalism

by TGeraghty Tue Oct 2nd, 2007 at 07:55:58 AM EST

Hit and run diary on the topic of "there's more than one way to skin a cat."

Dani Rodrik reports that the libertarian Cato Institute has just released its annual report on the Economic Freedom of the World.

Why should you care? Well, take a look at their own data on the relationship between economic growth and freedom:

Damn reality is so complicated - Colman

As Rodrik points out:

. . . there is no determinate relationship.

How do we make sense of this?

. . . What the second picture reveals is the tremendous variance in economic performance among countries that pass a minimum threshold of market-orientedness.  

In these countries, the pursuit of ever freer markets is rarely the most appropriate government strategy. The binding constraint often lies elsewhere, and may involve more government rather than less.

But of course we already knew that. I just love it, though, when the other side makes our own case for us.

Great catch TG.
by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 1st, 2007 at 02:46:19 PM EST
Excellent! (And thanks for the link to Dani Rodrik).
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 1st, 2007 at 03:17:55 PM EST
So the "third way" does work...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Oct 1st, 2007 at 04:22:03 PM EST
This is ironic in the deepest sense, because when I read the title of the diary I assumed that TGeraghty was going to write on the "varieties of capitalism" (VOC) literature in political economy.  Basically the VOC literature suggest that rather than converging on the free market model proposed by market fundamentalists, there is and will continue to be continued divergence in advanced capitalism.

That is to say the passing of the communist alternative does not indicate that humankind is on a terminal path towards the Anglo-American version of capitalism.  

Foremost among these works is Varieties of Capitalism: The Institutional Foundations of Comparative Advantage that kicked off the study of why Europe isn't converging on the Anglo-American model.  They argue important advantages fro the German model of industrial relations in allowing for diversified quality production (DQP) (I could have messed this acronym up) where human capital is developed in the private sector through workplace training and union apprenticeship rather than being forced into the public sector or onto the shoulders of individuals. This of course being but one of the many ways in which the fairytale of "economic freedom" promoted by the Right fails to meet muster upon even the most cursory examination.

In the same vein (VOC) Inequality and Prosperity: Social Europe Vs. Liberal America lays out the real world effects of the differing types of capitalism present in the United States and Europe.   Dozens of scatterplots, with interpretation.  Interesting though throught the quantitative cloud produced.

I suppose the question should be, "Why is it that the European capitalist model is seen to be in eclipse?"

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Oct 1st, 2007 at 07:21:43 PM EST
[ Parent ]
You mean they realize China exists???

Amazing catch.. really.. somehow I never thought they would be so fact-based at CATO

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Oct 2nd, 2007 at 05:49:39 AM EST
are a lot more intellectually coherent than other libertarians.

I have that text on unbundling of the energy networks that they oppose for fairly pragmatic reasons.

I can also dig up the article where they point out that Democrats in power are a lot better tax-wise because, being favorable to public spending, they have to justify that it works, and tend to (i) make government work better, and (ii) make it work at a decent cost because they know it has to be funded.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 2nd, 2007 at 08:26:32 AM EST
[ Parent ]
Doesn't Jerome shows us regularly that The Economist scatters facts around which complete defuse their economic narrative a few stories later?

It's not that they need to listen to their own facts... It's about the narrative, isn't it?

Heh. I feel like an acolyte.

Oh well. Now all the more fitting:

A pleasure, also

by Nomad on Tue Oct 2nd, 2007 at 08:27:15 AM EST
[ Parent ]
How are they quantifying freedom?

The people commuting into London on cattle-truck public transport to jobs they hate so they can hover above the debt pit for another year would like to know, I'm sure.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Oct 2nd, 2007 at 07:37:48 AM EST
Here are some quotes from Chapter 1 that discuss the difference between Democracy and Economic Freedom:
Economic freedom is about the freedom of individuals to decide how they will develop and use their productive abilities, exchange goods and services with others, compete in markets, and keep the fruits of their labor. Political restrictions that inhibit voluntary actions and personal choice in these areas conflict with economic freedom, even when they are adopted democratically. A country can be democratic and still severely restrict the economic freedom of its citizens.

Second, the basis for economically free action is fundamentally different than that for political democracy. Agreement and mutual gain provide the basis for economically free activities. Unless both parties to an exchange agree, the transaction will not occur. On the other hand, democratic political action is based on "majority rule." The majority, either directly or through their representatives, decides and the minority must submit.

The political process tends to be shortsighted.

Unlike ... no, come on, this is too easy!

[...] the democratic political process is characterized by politicians who "trade" programs that benefit special-interest groups at the expense of the general populace in exchange for political contributions that will help them win the next election. In contrast with market actions based on mutual agreement, there is no assurance that political action will be productive, that it will expand output and enhance the income levels of the citizenry.

In other words: true economic freedom is incompatible with worrying about what effect your actions may have on third parties.

sapere aude

by Number 6 on Tue Oct 2nd, 2007 at 12:23:51 PM EST
[ Parent ]
CATO is quite frank about the compatibility of "economic freedom" with democracy. Again from the first chapter I note:

Unconstrained democracy is not the political system that is most complementary with economic freedom; limited constitutional government is. Constitutional restraints, structural procedures designed to promote agreement and reduce the ability of interest groups to exploit consumers and taxpayers, and competition among governmental units (federalism) can help restrain the impulses of the majority and promote political action more consistent with economic freedom. It is widely recognized that the protection of civil liberties requires political constraints capable of controlling the excesses of the majority. Thus, we do not count on majority rule to protect civil liberties such as the right to free speech, freedom of the press, the right to assembly, and religious freedom. Rather, it is recognized that constitutional and structural protections are needed to secure these liberties. The same thing is true of economic freedom. Basic economic freedoms such as (a) the right to trade with others, including foreigners, at mutually agreeable terms, (b) the right to enter and compete in the business or occupation of your choice,(c) the right to keep what you earn, and (d) protection of your property from confiscation by others, including the government, are too important to be left to the "rule of the majority." Like other basic liberties, they deserve constitutional, procedural, and structural protection.

They have a rather nonintuitive idea about freedom as well. In the part were they define, the whole regulation of labor thing (in which obviously workers' rights are inimical to the advancement of economic freedom and countries that have labor standards above China's are penalized as "unfree"), they state that:

Many types of labor-market regulations infringe on the economic freedom of employees and employers. Among the more prominent are minimum wages, dismissal regulations, centralized wage setting, extension of union contracts to nonparticipating parties, and conscription.

This is bloody Orwellian and certainly in line with the Freedom is Slavery slogan - or perhaps Slavery is Freedom.

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Tue Oct 2nd, 2007 at 05:05:45 PM EST
[ Parent ]
That certainly makes it amusing, because it suggests that economic freedoms don't even create freedom as they define it.

I suppose putting out 'papers' like these is better than a proper job.

But realistically, if they weren't being funded by wacky billionaires with personality disorders it's unlikely they'd be taken even slightly seriously.

Can't we just rename the whole charade 'crankonomics' and be done with it?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Oct 2nd, 2007 at 07:07:41 PM EST
[ Parent ]
or "Con-omics"...

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Oct 2nd, 2007 at 08:06:40 PM EST
[ Parent ]
Today I read somewhere that the Burmese tragedy is its failed "socialism", government domination and absence of free markets - hence, hail the most free markets! Now I can only re-google a socialist perspective.

Differentiation between socialist and capitalist opressors is becoming academic. The minimal threashold for market economics in Burma was never reached, but junta's freedom could be an envy of many libertarians.

by das monde on Wed Oct 3rd, 2007 at 07:34:24 AM EST
[ Parent ]
Ah, the Economic Freedom of the World report.  So Jim Gwartney's not dead yet.

He was one of my freshman-level microeconomics professors.  Total idiot.  Nothing but anti-Keynes, Kudlow-league bullshit the entire time.  Head of the halfwit clique that teaches low-level classes at Florida State's econ department -- a clique we students were all quite happy to move beyond once we'd mastered the precise science of drawing pictures on graph paper.

Put bluntly, I'd eat paint before I'd take something written by James Gwartney seriously.

The graph is roughly what I would've predicted -- a fairly significant jump in economic performance with a basic level of economic freedom.  To the extent that a government does not cut off the ability of a person to develop new and better ways of doing things, that person should generally have the freedom necessary for he and his fellow countrymen to better their lot in the aggregate.

I'd be curious to see, however, how this would look if the "freedom" variable were isolated.  That is to say, I'd guess that levels of freedom can be seen to be fairly consistent within different regions -- relatively little freedom in Africa relative to Europe, relatively little freedom in Asia relative to North America, and so on.  Then, to take one issue into account, we might consider how natural resources vary across these regions.  That, I suspect, has a lot to do with the comparison of the "Second" and "Third" columns.

My sense is there would be a slightly positive relationship between growth and freedom, but that it would, like most things, be subject to diminishing returns.  Take a man from North Korea to South Korea, and he'll likely find a way to do much better for himself.  Take him from France to America, -- his tax bill will be lower and his business will be subject to less regulation -- and he might do better, but he might not.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Oct 2nd, 2007 at 11:35:12 PM EST
ah, the subject of liberal use by Mr Illarionov in his alchemic recommendations.
Biased as it is because it's trying to range countries on questionable and ideology-oriented criteria.
All countries are different but most we can range (personally) in two categories - bad and good. For example Zimbabwe with hyperinflation falls in the former category, others - I don't know, all have some setbacks. For example take Scandinavian countries - they usually are leading in all ratings but people from there used to tell me one thing - it's deadly boring up there. Are they right?
by FarEasterner on Wed Oct 3rd, 2007 at 09:29:28 AM EST
It depends on how you pass your time...

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed Oct 3rd, 2007 at 09:55:04 AM EST
[ Parent ]
No, not boring in Norway, at least...
We are experts at creating 'big battles' out of small things...quite amusing sometimes...

And then there is the hobby of 'saving the world', of course.  Much energy (and money)is spent on that... (Norwegians know best...or think they do...)  

by Solveig (link2ageataol.com) on Wed Oct 3rd, 2007 at 05:15:27 PM EST
[ Parent ]

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