The Perils of Democratic Capitalism

I hate to pick on them, because they’ve written a fairly lucid defense of capitalism, but I have to express slight disappointment in Steve Forbes’s and Elizabeth Ames’s new book, How Capitalism Will Save Us. What’s beguiling is that they present a highly readable introduction to some key concepts in economics; they debunk many popular anti-market fallacies; but then, having seized the castle and taken the tower, they raise a white flag and surrender everything thing they’ve gained in a single phrase.  It’s very frustrating.

Here’s what vexes me so: for some inexplicable reason, whenever they mention “capitalism,” they qualify it with “democratic.” What’s the difference? No where in the book do they delineate the concept of democratic capitalism, other than with vague gestures about a people having a means to express their grievances to their rulers. In no place do they describe how plain old vanilla capitalism differs from the democratic version. It is as if the word democracy has magical powers like the relics of a dead saint–merely being near it will convey powers to those in proximity.

What’s worse, they present compelling arguments showing that economic downturns are typically caused by massive government interventions.  They ably describe the harmful unintended consequences of byzantine tax-schedules, rampant regulation, occupational licensing, and price controls–they do all this with great aplomb, but then they never stop to ask why these thorns exist in the first place.  In fact, everything they mention about government failure is the upshot of political entrepreneurs in the market of public choice. Democratic capitalism isn’t the answer to the ills Forbes and Ames mention. To the contrary, it’s the cause.

Markets fail. Let’s use markets. That’s a tough nut to sell to a public that believes in heroes and villains and storytelling drama. When markets fail in a democracy, political entrepreneurs–and demagogues are the best–will exploit the event for their personal advantage, first by claiming to diagnose the problem, and then by offering their remedy. “Markets fail, let’s use government” becomes the tag line for any successful politician. This is a feature, not a bug, in democratic governance.  Indeed, it is the democratic politician’s professional science to whip the mob up into a mad crowd of witch-burners.  Elections are wild orgies wherein each side attempts to substitute a new and worse, though largely imaginary fear for the one that previously prevailed. Insofar as he innovates, the political entrepreneur innovates problems with no solution. He’s like a psychoanalyst; there’s never an incentive to end the treatment.

Take tax-policy: Forbes and Ames highlight the wealth-destroying effects of capital gains taxes and progressive taxes, the predilection Congress has for ignoring tax incidence, the inequities of sin taxes, the inefficiencies of VATS, and tax rates penalizing two income families. This byzantine structure is not the result of central planning. No, no, it’s the spontaneous order of the democratic market place, a result not of human design, but of human action–each political actor imposing a distributed cost on the many to sell promises to the highly motivated and coordinated few. Each one of these excrescences is the solution to some imaginary problem raised in a previous election. That’s democracy, love it or leave it or constrain it.

The sad fact–other than the relentless indifference of the universe–is that merely electing the right people will do nothing to change this in the long run. Forbes and Ames complain about profligate government spending. They are very pessimistic about the coming debt tsunami. They admit “government tends to politicize and not solve economic problems.” But then they offer no way to freedom. I hear whispers of folk activism in the wings.

Our solution: don’t hate the player, hate the game. Let’s just call it capitalism and rejoice in its simplicity.