Tuesday, August 10, 2010

In Defense of Recalculation and Capitalism

Arnold Kling's gotten some heat that the Recalculation Story suggests, as Matthew Yglesias puts it, "radical underlying flaws in the capitalist economic model that call not for small-bore government intervention but for wholesale rethinking of the way the economy functions." For those of you just joining us, the Recalculation Story attempts to explain booms and busts through fundamental changes in the landscape of the economy and the difficulties in adapting to those changes. The wrong people go to the wrong jobs as firms try to adapt. Productivity struggles until firms figure out how this brave new world functions.

Nothing in the story suggests the capitalist system is fundamentally flawed and should be scrapped. When there's massive technological change, growth is hard. This should not be surprising because growth requires time to invest in both skills and capital. It requires planning and when you can't plan, you can't grow. But once you figure out the landscape, you're much better off for it.

Think of high schoolers dating. You don't really know what you want in a partner when you're young but dating's fun and you get pretty good at it. You might happily date someone regularly for years. But then you go to college and everything changes: you're exposed to new people, new ideas, things you never considered before, couldn't consider before, because you lived your life in a world in which you had no idea how small it was. Try to return to your old ways and you'll be miserable. So you break up and spend a lot of time dating new people, trying to determine what you want in this much larger world. That's recalculation.

Technology expands our world. It makes things we thought impossible, possible. This is hard to adapt to: clearly seen in how newspapers are struggling to evolve with the Internet. And yes, the system is not perfect, but few economists will say capitalism is perfect. But trying to fix the problems derived from mere mortals by mere mortals is doomed to make a mess of things. In some countries, we still have that in dating: arranged marriages. And young people hate it.

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