Simon & Schuster • 1997 • 528 pages • $27.50
Stanley Kober is a research fellow in foreign policy studies at the Cato Institute.
The American economy is booming. Unemployment and inflation are low. Exports are soaring, and the budget deficit is shrinking as revenues exceed everyone’s expectations.
But William Greider isn’t happy. The real story, he insists, is not the good news, but a disaster looming ahead. “Our wondrous machine,” he warns, “appears to be running out of control toward some sort of abyss.” The reason is that we are becoming too productive, and productivity, by his reasoning, impoverishes workers. The growth of international trade only aggravates this problem. “In the global economy,” he argues, “wage arbitrage . . . moves the production and jobs from a high-wage labor market to another where the labor is much cheaper.” Thus, globalization is especially bad for the American worker.
With the collapse of communism, one would have thought this sort of Marxist critique of capitalism would have been discredited, but it appears we have to return to the basics. Greider’s book displays a profound misunderstanding of both economics and capitalism. First, contrary to his assumption, economics is based on the assumption that our wants are infinite while our resources are finite. That is why we have to economize. This realization is implicit in his ancient Greek definition of “economy”: “The management of the household and husbandry of its valuable assets.” You husband your valuable (i.e., limited) assets only if you know you can’t spend them on everything you want. The purpose of markets—which Greider seems to regard as almost a perversion of economics—is to establish the relative scarcity of things people want to buy and sell, thereby directing capital to those things that are relatively more scarce so that they will become more abundant. Capitalism is simply financial intermediation, that is, the procedure and mechanisms by which those with money to invest direct it, typically through intermediaries (banks, stock exchanges), to those who want the money for productive purposes.
Once we understand these concepts, we can understand where Greider goes astray. To be sure, the outcome of investment is increased productivity (assuming it is successful!), which means that fewer people will be needed to produce a given level of output. Assuming additional demand is not created, that would indeed mean downward pressure on wages. But experience demonstrates that increased productivity leads to higher wages. There are two reasons for this. The first is that the increased income from higher productivity typically flows also to the worker. Indeed, higher productivity is the way incomes grow in a noninflationary way.
More importantly, however, the same inventiveness that increases productivity also creates new products. That is why the vastly increased productivity in agriculture has not resulted in a small class of successful farmers in an ocean of impoverished ex-farmers. The people who 200 years ago would have been relatively unproductive farmers (at least by modern standards) are now free to produce automobiles, airplanes, and computers. And this process will continue because human imagination is infinite; there is no limit to scientific discovery.
The benefits for the U.S. economy have been profound. “Technology and electronics are now the largest industrial employers in the U.S.,” reports Worth magazine (July 1997), and—contrary to Greider’s sources—they are very profitable. “High-tech profits expanded 25 percent in 1996 and are expected to grow 35 percent in 1997.” The significance of this transformation is now recognized by our leading competitors. “The majority of [U.S.] jobs are created in the technologies of the future,” Edith Cresson, the European Union commissioner for research and development issues, recently acknowledged. “We have a large gap to fill vis a vis the U.S.”
Similarly, Greider’s attack on greedy capitalists is misplaced. The purpose of financial intermediation is simply to provide a mechanism for bringing together those who need capital with those who have it, thereby promoting economic efficiency. It is not to solve all the problems of society. Similarly, it does not mean that those involved in this process will be absolved of some of humanity’s worst qualities, such as a greed that will lead them to cut corners.
Greider recounts tragic stories of workers burned in fires because of employer negligence and indifference, but these kinds of tragedies are not unique to capitalist societies. Environmental degradation was far worse in the communist Soviet Union than in the capitalist United States, and no amount of worker tragedies in capitalist societies can compare to the 30 million dead of Mao’s Great Leap Forward or the genocide of Pol Pot’s attempt to create communism in Cambodia. The answer to these problems lies in the recognition of Lord Acton’s famous dictum that “power tends to corrupt, and absolute power corrupts absolutely.” That is one reason it is better to have individuals rather than governments make investment decisions: the concentration of power in the latter case makes the sort of tragedies Greider condemns more, not less, likely.
Markets and democracy naturally go together, because they both are based on a dispersion of power, but they are not the same thing and they should not be confused. Greider’s evident inability to recognize this difference underlines the inadequacies of this very long book.