Is Bernie Sanders A Democratic Capitalist?

snoopingMy Comments: This is more about economics than politics. Even if economics is boring for you, you should read it. It gave me a very different insight into the dynamics of today’s political arena. Please, just hold your nose, jump in and wade through the jargon until you see the real meat. (If you miss it, I have it at the end.)

by John T. Harvey, April 1, 2016, Forbes.com

Not surprisingly, there is no more important issue to me than the economy. Not only are there obvious benefits to growth in terms of material comforts, but it is also conducive to the creation of a society in which people are tolerant, generous, and cooperative. When folks struggle, they are prone to feeling angry and suspicious. Those experiencing joblessness become demoralized as they try to deal with the loss of control over their lives and their inability to provide for loved ones. This is hardly an environment in which it is easy to resolve political and social conflict. Things are contentious enough as it is.

This isn’t just speculation on my part. There is a long-standing scientific literature studying the non-monetary cost of unemployment. To cite just one recent paper:
For the unemployed, the non-pecuniary costs of unemployment are several times as large as those resulting from lower incomes, while the indirect effect at the population level is 15 times as large. For those who are still employed, a one percentage point increase in local unemployment has an impact on well-being roughly equivalent to a 4% decline in household income (Helliwell, John F., and Haifang Huang. “New measures of the costs of unemployment: Evidence from the subjective well being of 3.3 million Americans.” Economic Inquiry 52.4 (2014).

What that says in very scholarly language is that there is an extremely large negative impact above and beyond the loss of income not only to those without jobs, but even those who are still employed. Chronic unemployment and underemployment breed resentment and depression.

On the other hand, if we create jobs and generate decent wages, then we have a situation in which a) the scale of political and social problems will have been reduced and b) those that remain can be addressed in a more stable and fair-minded environment. Economic security encourages goodwill and political cooperation. Pre-WWII Germany, Italy, and Japan, each of which suffered much more than the US during the Great Depression, offer sobering contrasts.

It is within that context that I evaluate presidential candidates. I wouldn’t say that I’m a one-issue voter, but I definitely worry about economic policies first. To be honest, however, there is typically very little difference from one to another, even across party lines. That said, this year, we seem to have an outlier, someone who claims to be something radical: a “democratic socialist.” I am speaking, of course, of Bernie Sanders.

Just what does this mean in terms of policy and how might we expect the economy to respond under a Sanders presidency? While specifics are obviously important, I look first to a candidate’s general philosophical approach. This is so because the unexpected will occur. Many events will take place during a president’s term(s) that they did not and could not have anticipated or addressed during the campaign. I therefore want to know what they think makes the economy work in the first place, not what they’ll do if Japanese interest rates rise by two percentage points. Specifics are irrelevant if the overall understanding is flawed.

Examining both his statements and the background of his advisers, I would gauge that those in the Sanders campaign believe that 1) the economy struggles to generate sufficient demand to hire everyone who is willing to work, 2) there are built-in tendencies toward periodic crisis, and 3) the capitalist economy needs to avoid accumulations of power to operate properly. I explained the first two in some detail in a previous post where I described those scholars who support Sanders as Business-Cycle Economists and others as Establishment Economists (Evaluating Bernie Sanders’ Evaluators). To summarize, those in the latter group believe that interest rates automatically adjust to make sure that demand rises until we reach full employment. Meanwhile, Business-Cycle Economists not only reject the idea that such adjustments occur, but argue that households and businesses don’t really care all that much about interest rates anyway in the midst of an economic slump.

I did not, however, say much about the third, which is in some ways even more fundamental and representative of Sanders’ general economic and political philosophy. The basic idea is this. If individuals or small groups are able to accumulate power, both the democratic and capitalist processes are short circuited. Consider this. Capitalism properly understood is an anti-business system. Adam Smith, the Father of Capitalism, wrote:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

In other words, you can’t trust business people any further than you can throw them. They are greedy (not that this differentiates them from anyone else) and they aren’t stupid. They know that they can make a lot more money if they can collude with other business owners or otherwise trick or take advantage of their customers. They will therefore try to do so (or at least some will). Constantly. And remember, this is from one of capitalism’s most ardent supporters!

Smith thus wants a method of preventing firms from having the power to succeed in these endeavors. His answer: competition. Make sure there are enough businesses in a particular industry to not only make it difficult for them to collude (it’s harder to get 100 people to agree on something than two), but also to ensure that entrepreneurs have to assume that if they don’t make the best deal possible for their customers, someone else will. Then they are forced to please their clientele if they want to get rich. This is the Invisible Hand: entrepreneurs acting in their own self interest inadvertently promote the self interest of others. But only if there is sufficient competition.

So what, one might say, we already have a free-market system. The problem is that free markets and competitive markets are not the same thing and there are many industries in which significant accumulations of power have already take place. An increasing number of studies have pointed to this disturbing trend, traceable in part to the government’s reluctance to enforce antitrust laws or fund those agencies charged with monitoring industry concentration (Cornered: The New Monopoly Capitalism and the Economics of Destruction, Are US Industries Becoming More Concentrated?, Too much of a good thing). Ironically, part of the justification for this hands-off policy has been that to do otherwise interferes with the free market! That this distorted view often comes directly from those benefitting from the decreased competition is not surprising. While in public they are sounding the trumpet call for capitalism, in private they are hoping to cripple the Invisible Hand.

The comparison among the candidates is striking. Rolnik concludes, …the rules of the game are determined by the sheer power of the vested interests. Energy, agriculture, healthcare, finance, insurance, defense—there is a reason why they spend billions of dollars on lobbying at the federal, state, and congress levels. They are the people influencing the rules of the game and shaping the discourse and narrative in these industries…If we want to move into a more competitive market system, we should support the political revolution of Bernie Sanders.

That a University of Chicago economist should write a blog post suggesting that the “democratic socialist” is the most pro-market candidate is…I’m not quite sure what word to use here. Bizarre? Ironic? Shocking? Unexpected, at the very least. But there you have it.

Concentration and, therefore, the accumulation of power has not been limited to business firms, however. Household income, too, is ending up in fewer and fewer hands. In a market, it’s not one person one vote, it’s one dollar one vote. This means that one of the consequences of this transformation has been that the decisions regarding what is to be produced and in what quantities is being taken out of the hands of the average consumer, where supporters of capitalism intended it to be (economists call this ideal situation “consumer sovereignty”).

While Sanders is not unique among the candidates in lamenting the erosion of the middle class (all of them now appear to concede that this is an issue), it nevertheless occupies a key place in his platform. Sanders’ issues page singles out, for example, Income And Wealth Inequality, Getting Big Money Out of Politics and Restoring Democracy, Creating Decent Paying Jobs, and A Living Wage. And consistent with the theory behind the Stigler Center’s capture index, the beneficiaries of these policies–Main Street rather than Wall Street–also seem to be those from whom Sanders receives the bulk of his donations.

TK: “The real meat is not “free markets” but “free competition”. If not this cycle, then certainly the next.”

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