The Price of Civilization: Reawakening American Virtue and Prosperity (6 page)

When libertarians deride the idea of social fairness as just one more nuisance, they unleash greed. The kind of unconstrained greed that is now loose in America is leading not to real liberty but to corporate criminality and deceit; not to democracy but to politics dominated by special interests; and not to prosperity but to income stagnation for much of the population and untold riches at the very top. Fortunately, most Americans disagree with the harshness and extremism of the libertarian philosophy. Nonetheless, wealthy libertarians can gain the upper hand in real political decision making through massive lobbying, propaganda campaigns, and heavy campaign financing.

Achieving Society’s Triple Bottom Line

The majority of Americans support the idea that America should aim for three goals—efficiency (prosperity), fairness (opportunity for all), and sustainability (a safe environment for today and the future)—rather than the single-minded libertarian objective of tax cuts and a shrinking government. Americans are eager to support
effective public policies to achieve the three objectives. The question is how best to achieve those goals.

A free-market economy is not enough. A key lesson of economic theory and of two centuries of experience with market economies is that a
combination
of market forces and government actions is needed to achieve these three simultaneous goals. If we were to close down the government and leave everything to the marketplace, society could not achieve even one of the three core objectives. Only a mixed economy, one that is part business-led and part government-led, can achieve all three goals. Americans agree. According to a Pew Research Center survey, a solid majority of Americans, 62 percent to 29 percent, concur that the “free market needs regulation to best serve public interest.”
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The marketplace does have some elements of basic fairness: hard work can produce a higher income; laziness is punished. A lifetime plan to study hard and get a good education produces an economic reward for the individual as well as a sense of fulfillment. But the fairness of the marketplace should not be exaggerated. Many people are simply unlucky. Market forces such as foreign competition may turn against them (such as when a technological change wipes out an industry in a gale of “creative destruction,” as the economist Joseph Schumpeter called it). Others are born poor to parents who lack the education and skills to escape from poverty. Still others have disabilities and diseases that are no fault of their own. Some live in places hit by earthquakes, tsunamis, droughts, floods, or other hazards and depend on government to survive and recover. Whole regions of America and other countries have faced deep economic crises because of shifts in global market conditions that are far beyond anyone’s control. In all of these cases, the marketplace can be brutally unsentimental, leaving the poor to starve or die from illnesses and neglect, unless society steps forward through government or charitable relief.

Just as there are many people who don’t deserve their poverty, there are many others who don’t deserve their wealth. Many great
fortunes, such as the Koch brothers’, are inherited. And of the fortunes that are ostensibly earned, many are not really earned at all. Wall Street bankers took home tens of billions of dollars in Christmas bonuses each year in the lead-up to the 2008 financial meltdown, just as they were driving their firms toward bankruptcy. Several of America’s best-paid CEOs in the past decade led their companies into illegality, bankruptcy, or both.

Amazingly, even when Wall Street required government transfers to stay alive in 2009, the megabonuses persisted (and the White House looked the other way because Wall Street had financed Obama’s 2008 campaign). Oil companies often owe their profits to bribery (like Halliburton in Nigeria), cushy government contracts, specially tailored tax breaks, the lack of environmental regulations, and the backing of the U.S. military in the Middle East, all of which occurs without any reimbursement from the oil industry, other than the campaign contributions that continue to flow.

Despite the claims of free-market advocates, virtually all societies throughout history have organized governmental means to ensure support for the poorest among them.
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Most have also placed a special responsibility on the rich to pay their share. Until the last two centuries, however, the extent of poverty was so pervasive that there was often not much that society could really do for the poor beyond emergency relief (in the case of a famine, for example). Now, with our great affluence, we can do much more. Indeed, I argued in
The End of Poverty
that we can actually end extreme poverty once and for all in our generation if the rich will accept their share of the effort to help raise the education, health, and productivity of the poor.

Just as free markets do not guarantee fairness for the citizens of a generation, they do not guarantee sustainability for future generations. There are two reasons for this. The first is that much of any society’s natural capital—the air, water, climate, biodiversity, forests, oceans, and the like—is the common property of the entire society (or even the world) and is therefore vulnerable to abuse unless
it is properly managed through political choices. Right now, for example, the earth’s atmosphere is a free “dumping ground” for carbon dioxide, which is dangerously changing the earth’s climate. The world’s major estuaries are a free dumping ground for chemical fertilizers that run off from millions of farms into the major rivers flowing to these estuaries and on to the open seas. Unless the world’s governments agree to regulate the use of the environmental commons, private economic activity will inevitably undermine and eventually destroy these vital life-supporting ecosystems.

The second reason is the small matter of the market interest rate. Interest rates are positive because people are impatient, preferring present consumption to future consumption. The more impatient income earners are, the more today’s income is used for current consumption and the less is used for saving, thereby driving up interest rates. Yet because of positive interest rates, profit-oriented resource holders (of timber, fisheries, oil, freshwater aquifers, and the like) tilt their production toward the present rather than the future, since $1 today is worth more than $1 in the future. This causes a deep tendency to eventual depletion of scarce resources, even the extinction of species, unless we pay attention and put our thumb on the scale to protect the environment. We need to say that yes, we are impatient, but we are also stewards of future generations whose views are not directly represented in the marketplace.

Like it or not, we have the fate of future generations in our hands. There is little within the logic of a free-market economy that forces us to take their interests seriously. True sustainability therefore requires that each generation protect the future even beyond its own shortsighted consumption preferences. We need to reflect not only on our personal wants and desires but also on our responsibilities as the planetary stewards. Innovations such as the National Park Service and the Endangered Species Act are examples of ways that we can prevent our own short-term temptations from endangering the well-being of later generations. We’ve still not faced that challenge
squarely when it comes to long-term energy supplies, freshwater, and climate safety.

How Efficiency and Fairness May Reinforce Each Other

A few Americans, perhaps no more than 10 to 20 percent, believe that the market outcome is always fair. In this unforgiving view, if people are poor, it is their own fault. Most Americans don’t believe this.
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They know that circumstances matter. They remember the stories of their own parents or grandparents suffering through the Great Depression or through a tragic bout of illness that left them incapacitated and unable to work, of a factory in the town closing down, or of the impossibility of paying college tuition and therefore having to drop out of school and accept a low-paying job. Americans want the poor to make maximum efforts on their own behalf, but they also recognize society’s responsibility to step in when the going gets too tough.

Specifically, most Americans subscribe to the view that market-determined gaps between the rich and poor should be softened by government. The rich should be taxed, and the poor should be helped. But how much should the government intervene? One common argument is that there is a
trade-off
between efficiency and fairness. If the rich are taxed and the poor are helped through transfers, the hard work of the rich is punished and the idleness of the poor is rewarded. The rich cut back on their effort—for example, by not opening a new business—while the poor use their windfall to support their leisure, for example by not taking an available job. The result, say the critics of income redistribution, is that society squanders much more than $1 of income for each $1 of government help that actually reaches the poor. Redistribution, they believe, should be severely limited, used to address only the most extreme problems of poverty and hunger.

Other societies, such as the Scandinavian social democracies, have for a long time taken a very different view. They believe that even extensive redistribution can and should be carried out by government and that such a redistribution can be accomplished with very little inefficiency. The rich will continue to work hard even if they are taxed relatively heavily, and the poor will use the government help to raise their productivity. Economic theory indeed supports the view that high tax rates can actually spur, rather than hinder, work effort, since more rather than less work effort is then needed to reach a specific target level of income (for example, to buy a house or to cover a tuition payment).

Let me underscore a basic point that is generally overlooked in the heated U.S. debate on this issue: in many circumstances, there is no trade-off at all between efficiency and equity because the two goals actually go hand in hand. Promoting fairness also promotes efficiency. Here’s how.

In many cases, help for the poor is not simply an income transfer used for short-run consumption but is a government benefit that enables poor households to raise their long-term productivity. Some of the key government programs for poor households include help for nutrition of mothers and young children; preschool; college tuition; and job training. Each of these is a government-supported investment in “human capital” and specifically a way for a poor household to raise its long-term productivity. Taxing the rich to help the poor can then mean cutting lavish consumption spending by the rich to support high-return human investments by the poor. The outcome is not only fairer but also more efficient.

The need for public financing of education has been recognized by virtually all economists since Adam Smith, including the strong promoters of free markets such as Friedrich Hayek and Milton Friedman. They’ve understood that markets alone will not educate our young people, at least not enough of them. The situation has become even more serious today. With rising costs of education, the
poor are likely to be left behind, and trapped in poverty, unless the government steps forward to help finance a quality education for all.
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Finding the Balance of Markets and Government

The proper balance between markets and government has been at the center of debate for generations, going back to Adam Smith’s explanation of self-organizing markets. A fierce debate has been under way for more than two centuries. Here are five of my own conclusions regarding this debate, which I believe to be relevant for our times.

First, in productive sectors of many producers and consumers, and therefore where strong market competition applies, we should rely on market forces. This is Hayek’s position, and it’s a good one. Markets have several desirable attributes. They are decentralized, voluntary, and do not require the very difficult work of forging cooperation among a large number of people. They can cater to the distinct tastes of individual consumers. If markets suffice to get food from farms to urban tables, let us use markets. There is no need for central planning bureaus managing farm production, food processing, food transport, and food distribution. Profit-minded farmers, mill owners, shippers, and supermarkets will suffice. (And when government control of food production and distribution was tried in the Soviet Union, the result was a chronic shortage of basic food commodities.)

Second, we should turn to government to ensure the fairness and sustainability of market outcomes, including the broad distribution of income in the society. Market forces that cause wage levels to rise or fall can usefully direct workers to the sectors that need employment and away from those that do not, but the resulting distribution of income may be unjust. Many people can fall into destitution if they find themselves in sectors that face a sudden collapse of market
demand or if they have skills that suddenly become obsolete. Or the generation alive today may be enticed to consume too many of nature’s resources at great cost to future generations. The government should therefore use its powers to tax and transfer incomes, on a prudent and targeted basis, to help those who can’t help themselves and to protect the well-being of future (still unborn) generations.

Third, we should recognize that the knowledge of science and technology is a public good that should be promoted actively by government alongside the private sector. Markets alone will not create the twenty-first-century knowledge society. America’s huge interest in the accumulation and diffusion of knowledge calls for ample public spending on research and development, public education, e-governance, and open-source online materials, as complements to the market system of patents and copyrights. In this regard, patents and copyrights are double-edged swords. We use them to create a profit incentive to producers of knowledge, but we must also recognize that patents and copyrights create temporary monopolies that cause high drug prices, delays in research breakthroughs (when patented knowledge is a key input for further research), and an artificial digital divide of haves and have-nots.