Download Topic: Brock, Ch. 6: Beyond Democratic Capitalism pp199

Topic: Brock, Ch. 6: Beyond Democratic Capitalism pp199-230
Ch. 6 Subtitle: An idealized Political Economy, with Distributive Justice
Name:______________________________
Democratic Capitalism* is: _______________________________________________
_______________________________________________________________
* see Note2 below
1. Brock asks (p199), "What properties do people.. seek from their economic and political
systems? Is economic efficiency...enough? ..is there room for justice and fair sharing
of the pie along with economic efficiency? ..what about privacy and freedom? Can these
accommodated as well?" Techno-optimists answer yes, techno-pessimists answer no. Brock
says:
(circle one): yes/no
2. Later he adds (p201) justice, equality, informational efficiency (not just classical
efficiency) and stability as desired goals. He then focuses on the "polarizing issue of
justice, in particular ...distributive justice, which concerns the optimal distribution
of wealth and income." He claims to demonstrate that "a belief in the principles of true
capitalism logically requires a belief in redistribution. This is a theorem based on the
role of luck in life, not a speculation, and it is one that will make many antiredistributionists do a double-take!" Did he convince you? (circle one): yes/no/haven't
read it
3. What is Brock's "pie"? ______________________________________
4. What is the Gross Domestic Product (GDP) of a country?
_____________________________________________________________
5. The equation is: GDP = Consumption (US~71%) + Investment
+ Government Spending + Net Exports.(p31) (see Note3 below for choices; suggestion: use
the word spending in each, ie money going OUT)
a. What is Consumption? ________________________________________
b. What is Investment? _________________________________________
c. What is Government Spending?_________________________________
d. What is Net Exports?_________________________________________
6. You cannot see any black market activity or the Government Deficit in that equation,
but we forecast growth using it. US GDP $14.59 Trillion in 2010. $15.09 in 2012. World:
$63.1 Trillion in 2010. $69.6 Trillion 2011 (IMF).
How much did US or World grow? __________________
What's the (future percentage change relative to now) growth rate of either US or World?
___________________
7. Next: Any $1 money goes OUT from one person and IN to another.
So we have numbers for the dual of spending: its income. Spending has to balance income.
The equation is: (p35) National Income = National Product (GDP). Brock prefers to
forecast using national income. He says doing both and making them balance keeps people
honest. Do you agree? (circle one): yes/no
8. The equation is:
Government Deficit = Net Private Savings + Net Foreign Capital Inflows
which says that a fiscal deficit of 10% of GDP (US, 2009) must be matched by (funded by)
savings (household and business income minus expenses, a positive number) plus foreign
capital coming in (say it's 4% GDP). Then private savings IS what? ___________
9. If Obama wants to increase growth by 2% GDP to 4% GDP and reduce the deficit by 7 %
GDP from 10% GDP to 3%GDP, can it happen? Brock says, "almost impossible... This is the
problem we face."(p37)
10. This used the "conventional view that ... fiscal deficit is difference between total
government spending and total tax revenue."(p40) So we need to rethink: distinguish Good
and Bad Deficits. See Fig. 2-3, p43: How to Fix the US Economy and Labor Market While
Not Upsetting the Bond Market Vigilantes; The moral: It is the composition and quality of
total government spending that matters, not the "size of the deficit."
Do you agree? (circle one): yes/no
Why? ___________________________________________________________
11. Country B differs in one regard: Of its total $4T in spending, $1T is spent on
profitable investments (human capital and infrastructure investments) which are certified
by an independent research organization to generate a positive expected return on
capital, as calculated within the venerable field of public finance. The remaining 3T
are expenditures on defense, interest payments, administrative costs and transfer
payments like Social Security and Medicare. ...there is no deficit from unproductive
spending." ie unproductive spending is matched by tax revenue.
Graph on p36 shows this. (Figure 2.2) Draw it on the back.
12. What is your risk preference? Suppose there’s a bargaining game. Both players will
receive a “threat payoff” if no solution is reached, and it leaves them worse off than if
a deal can be struck (one sliver of pie). Players state they each want 90 percent of the
pie. They argue and there are concessions. (Players have different preferences toward
risk. One is more risk averse than the other due to worrying about getting the small
sliver of pie.) By Nash Harsanyi theory (1956), they reach a sticking point when both
reach their risk limits. But the pie gets divided asymmetrically. Pie is awarded in
relation to risk tolerance. (p. 166, Ch. 5) Each player receives a slice of the pie where
the slice size of player A is larger than player B’s slice size to the extent that player
A has a greater tolerance of risk than player B. Let’s code risk tolerance as 1-10,
where 10 is very tolerant of risk and 1 is totally risk averse:
A: _____________ (if 10…)
B: _____________
Draw pie, divide it
(A tol. > B, A’s pie > B),
and mark for A or B:
13. Now consider what is your relative need? Player A just had pie for lunch. So he
don’t need pie. Player A is relatively less needy than player B. Player A can bargain
down the other player who is hungry for pie. It may not seem “fair” that the needier (B)
settles for less, but it is the way of the world. (p. 166, Ch. 5) Pie is awarded in
inverse proportion to the player’s relative need for it. Code need as 1-10 where 10 is
very needy and 1 is not:
A: _____________ (if 1…)
B: _____________
Draw pie, divide it
(A need < B, A’s pie > B),
and mark for A or B:
14. There are two norms in the issue of fair distribution:
1) contribution principle: each receives a wage equal to relative contribution (RC);
2) needs principle: each receives a wage equal to relative needs (RN).
Is there a way to satisfy both norms?
(I skip over Brock’s pp. 214-220 5 ways in which issues of distributive justice show up
in free-market theory, illustrated by Oprah Winfrey’s book club lottery example, p. 217.)
Brock says yes, and sets up a 2-stage game. Left side starts with no constitution.
Relative need says (social contract framework) things are really bad (Hobbes).
Adopt a constitution due to prospect of payoff p(i) > p(Hobbes), for every player i.
Once adopted, behavior is constrained by the constitution, with laws, tax rates and
penalties (p. 222). In the real life stage, contribution-based justice is appropriate.
In adopting the constitution, no one contributed more. With the constitution, we have an
impartial judiciary (not a biased one), a progressive tax code (not a regressive one) and
an overall sense of fairness.
Draw the 2-stage game (p. 221):
Stage 1: RN Justice
Stage 2: RC Justice
Final Payoffs
o
But individuals do contribute differently in creating businesses, writing books,
running restaurants or other worldly activities. Distribution via relative contribution
is the appropriate moral criterion (p. 224). Market behavior will not be efficient if
workers are altruistic during 8am-5pm jobs. They can and should be altruistic after
hours with friends, family, charitable activities (p. 225).
But how to measure relative need? Do it as above and no interpersonal comparisons (as
Rawls requires) need be made. Use the inverse of the ratio of pie from bargaining.
One skipped step explains that market efficiency requires hedging via insurance – see
Oprah example. Also, surprise of surprise, “to each according to his relative need” and
“from each according to his relative contribution” are “closely related, the one being
dual to the other”! (p. 228)
Note1: Merriam-Webster dictionary:
Definition of CAPITALISM
: an economic system characterized by private or corporate ownership of capital goods, by
investments that are determined by private decision, and by prices, production, and the
distribution of goods that are determined mainly by competition in a free market
Note2: Wikipedia:
Definition of Democratic Capitalism:
Democratic capitalism, also known as capitalist democracy, is a political, economic, and
social system and ideology based on a tripartite arrangement of a market-based economy
based predominantly on a democratic polity, economic incentives through free markets,
fiscal responsibility and a liberal moral-cultural system which encourages
pluralism.[1][2]
This economic system supports a capitalist free market economy subject to control by a
democratic political system that is supported by the majority. It stands in contrast to
authoritarian capitalism by limiting the influence of special interest groups, including
corporate lobbyists, on politics.
The United States is often seen as having democratic capitalism as its political-economic
system although some argue it has become more authoritarian in recent decades.[3] In the
United States, both the Democratic and Republican Parties subscribe to this (little-"d"
and "r") democratic-republican philosophy. Most liberals and conservatives generally
support some form of democratic capitalism in their economic practices[citation needed].
Note 3:
Choices: household spending; corporate investment in plant and equipment and household
investment in housing; government spending excluding transfer payments; difference
between what a nation exports (goods sold to buyers in other countries) versus imports.