theory and practice

Someone mentioned this sentiment to me over the weekend, during a discussion of exorbitant CEO pay:

“The trouble with socialism is socialism. The trouble with capitalism is capitalists.”

After a little research online, I saw it attributed to Willi Schlamm in this National Review article by William F Buckley. It’s a nice aphorism, but sayings can be witty without being correct. I prefer this idea, often attributed to Yogi Berra:

“In theory, there is no difference between theory and practice. But, in practice, there is.”

which is a broader sentiment with no less applicability to the economic discussion I was having.

Each side in the communism/capitalism debate (and in many other debates) insists that its own pet theory is perfect, while always and everywhere being imperfectly implemented; the other side’s theory is simply wrong. In this way, one can try to salvage an ideal from its messy implementation while using a double standard to pillory his opponents. In the real world, where theories must be practiced to be studied, a theory is—in most people’s minds—nothing other than its practice.

Pure capitalism, in the sense of a completely free and unregulated economy and unlimited private ownership, is the dream of libertarians but a nightmare in reality; the era of robber barons and child labor of the early twentieth century demonstrated this quite adequately. The folly of pure communism, a completely planned and regulated economy with unlimited public ownership, also failed in similarly spectacular fashion. Ideologies unconstrained by reality—from Adam Smith’s invisible hand to Stalin’s five-year plans—are unworkable for the same reason all utopian ideals are: reality is more complex and unpredictable than any theory can be.

As Madison wrote in The Federalist 51, “If men were angels, no government would be necessary.” This is no less true in the economic realm than in the political. Economies commonly called “capitalist”—such as our own—are invariably mixed economies in practice, as an admixture of liberty and law tempers both extremes: the individualistic unconcern for despoiling the commons and the authoritarian disdain for freedom.

Market failures are no less common than those of centralized planning; it’s just that we’ve had longer (a century or so) to incorporate the necessary corrections (unemployment insurance, Social Security, the right to unionize, environmental protections, consumer protections, health care, public education, etc.) into our economic mindset while still calling our mixed economy “capitalist.”

In the globalization realm, unrestrained “free trade” is gradually yielding to “fair trade,” a concept which recognizes that return on capital investment is not the highest goal to which a society can aspire. Take a look, as another example, at the thoroughly mixed economy of Denmark—often derided by market fundamentalists as “Socialist” for being too mixed for their liking—in this article from The New Republic:

Over the last decade, the Danes have turned the conventional wisdom on its head by boasting not only one of the world's most expansive welfare states, but also one of its most robust economies. Given the way average American workers' wages continue to stagnate even as their burden of risk--of losing a job, of losing medical insurance--continues to rise, it looks increasingly as though the conservative triumphalism has been misplaced: It may be that Europe has something to teach us after all.