Why Arrow was a Socialist

In 1978, Ken Arrow made  

A Cautious Case for Socialism

which, back then, meant using a Prices & Incomes Policy to contain cost-push inflation- a strategy which had already failed.  I suppose, Arrow, being a heavyweight, could afford to voice an unpopular opinion. Yet, re-reading his essay, we realize that his entire economic theory was shit because it ignored Knightian Uncertainty and was based on the 'intensional fallacy'.  

The discussion of any important social question must involve an inextricable mixture of fact and value.

This would become Hilary Putnam's war-cry. Yet, for any particular purpose, fact and value can be disentangled well enough.  

The fundamental impulse to change and especially to great change is a perception of present wrong and a vision of potential right.

No. Change occurs when it can't be stopped from occurring. Perceptions don't matter if people who think they can change things keep getting shot or going bankrupt. 

The initial impulse must still be checked for feasibility;

Nope. Either the impulse is immediately slapped down or one can persist with it.  

 Values and emotions are best apprehended personally,

The problem is that our true values and emotions may be hidden from ourselves. There is no 'Momus window' into the Soul. 

and I will speak of my own attitudes and their development. This does not mean that my values are all that matter, even to me. I hold that others are free and autonomous human beings, each capable of developing his or her own value system of equal worth and respect to my own.

But those values and emotions may be simulated or strategic.  

But by that very token, the values of others must always retain an element of mystery. The equal but different emotionally based axiological drives of others can never be fully communicated.

The 'intensions' can be communicated, it is just that the 'extensions' are not well-defined. That's why you can't do mathematical econ with 'Preferences' or 'Social Welfare functions'. Well, obviously, you can but it is a case of Garbage in, Garbage out. 

...The great issues of socialism and capitalism became alive to me, as to so many others, in the Great Depression. My own family was severely affected. ... What gave bite and impetus to these reflections on the rottenness of the times was the presence of an alternative possibility.

Slavery. The Depression was a 'coordination problem'. Appoint a Dictator and full employment could be achieved, more particularly in the shooting-dissidents sector.  

It has become a truism that a scientific theory, however incapable of explaining the facts, will never be displaced except by another theory.

Or by the decision that the thing isn't scientific at all.  

It is even more true that a social system, political or economic, however bad its consequences, will be replaced only if there is a vision of a better system.

Nonsense! A shitty system may stop operating. Something else has taken its place but it does not have a name.  

The idea of socialism was easily available. One read about it even in textbooks and newspapers, as well as in the that major source of education, the public library. Here we did seem to have a resolution of our difficulties. Surely, a rationally organized, centrally coordinated economic system could avoid the instability of the capitalist economy and the terrible human and material costs of unemployment.

The trouble was that if the Government says 'hand over your cattle and grain', you may kill the agents of the Government and keep your cattle and grain.  

... But as I observed, read, and reflected, the capitalist drive for profits seemed to become a major source of evil. Clearly, the individualistic profit drive had something to do with the uncoordinated inefficiency of capitalism.

What was needed was a collectivistic profit drive which would bail out Banks, reflate the economy, and get Stock Indices to start rising again. Both Hoover and FDR favoured Cartelization but this was inefficient and so the New Deal ran out of steam by about 1937-38. 

But, more, the drive for profits had other manifestations. The Nye committee, a congressional investigating committee, was engaged in a major investigation of the munitions industry; its influence over governments in creating the fears that improved its sales seemed to be well documented.

The munitions industry began to boom thanks to Hitler. This pulled the US out of Depression.  

The economic explanations of imperialism were virtually standard. Charles Beard and other historians had accustomed us all through their books to seeking an economic explanation of all political actions. The Constitution represented a certain set of economic interests, the Civil War a conflict, sometimes called "irrepressible," of different profit-seeking groups. Most serious of all, World War I, a tragic living memory, was clearly caused, at least in great measure, by competition among the capitalist interests of the different powers.

Because guys called 'Kaiser' or 'Tzar' or 'King Emperor' are Capitalists- right? This was a war between Imperial Cousins. It wasn't a war between Henry Ford & Karl Benz.  

 I could not follow Marxist doctrine very literally for a number of reasons. The labor theory of value was a stumbling block even before I studied economics with any seriousness; there were too many obvious phenomena that it ignored.

Marx said that his theory did not cover services. 

Nevertheless, the insight Marxist theory gave into history and particularly as to political events was striking: the state as the executive committee of the bourgeoisie,

the post-War extension of the franchise meant that a deal could not be done by cigar smoking, top hatted, Capitalists such that there was a bail-out and a rapid reflation following a one off market correction.  

the class interpretation of political and social conflicts, and the interpretation of war and imperialism as the conflict of competing national capitalist interests were illuminating and powerful.

They were nonsense. Capitalists go in for portfolio diversification. The American buys shares on the French Bourse. The German owns stock in British and Dutch companies.  

It appeared more profound than the alternative versions of the economic interpretation of history; they seemed to be mere muckraking, the behavior of venal individuals. Marxism put the system rather than the individual into the foreground. What I drew from this thinking was an argument for system change. The basic criterion for change was moral and ethical. I did not accept ideas of historical inevitability. What the Marxist analysis did say to me, at least then, was that the system of production according to profit established vested interests in destructive activity, most especially war and imperialism, but also oppression of workers and destruction of freedom. I do not believe I ever accepted the theory that racial discrimination was the result of capitalist endeavors to divide the working class, but I certainly accepted the general belief that the capitalist class would overthrow democracy rather than lose its power, as it had done in Italy and Germany and was then striving to do in Spain.

In Italy and Germany and Spain there were crazy Commies who believed 'class war' meant the physical elimination of the bourgeoisie, the petit-bourgeoisie, the kulak, guys who look like they might become kulaks, guys who look like they might begin to look like they might become kulaks, or just guys in general. Kill them all unless they are actually killing you because you are a left adventurist or a right deviationist or look like you might one day start to look a bit Jewy.  

Thus, beside the efficiency value, the values of freedom and the avoidance of war were vital in my attitude toward socialism. The two were and are intimately linked in my mind.

Yet it was the war which dragged America out of Depression. The Cold War meant a large military industrial complex keeping aggregate demand high. It also meant ending Jim Crow because African Americans were needed in the Army and in Industry.  

Discrimination against blacks—denial of their political rights, segregation in housing and employment—was the most blatant case domestically; remember that lynching still existed.

A strong Federal Government can help minorities. African Americans made splendid soldiers and workers. America needed to enable them to rise up to win the Cold War.  

Imperial control of the United States, as in the Philippines,

the US wanted to get shot of it in the Thirties because they feared skilled immigrants from that part of the world.  

and, much more extensively, by Great Britain in India and Africa, served to demonstrate that political freedom had narrow limits under capitalism.

Britain created parliamentary democracy in its Empire though some countries decided not to keep it.  

... Like many others of the time, I was strongly attracted by Gandhi's nonviolent campaigns against British rule.

It was foolish. Gandhi got money from Indian mill owners to burn foreign cloth. He was a tool of specific capitalists. To give one example, when one of his financiers had some dogs killed (which is against various Indian religions), Gandhi wrote articles saying everybody should go out and kill dogs. Not to do so was 'Himsa' (violence)!  

To sum up, the basic values that motivated my preference for socialism over capitalism were (1) efficiency in making sure that all resources were used,

by beating people who were selfishly resting rather than using their labour power for the common weal.  

(2) the avoidance of war and other political corruptions of the pursuit of profits,

Lenin and Trotsky had waded through an ocean of blood to create their 'dictatorship of the proletariat'. Stalin's innovation was in killing 'Old Bolsheviks' with as much vim and vigour as kulaks had been killed.  

(3) the achievement of freedom from control by a small elite,

The politburo was way smaller than the American Senate 

(4) equality of income and power,

Stalin's cronies lived large while the masses starved 

and (5) encouragement of cooperative as opposed to competitive motives in the operation of society.

Gulags were actually cooperatives run by vegetarian Lesbians.  

From the perspective of greater education and experience and with 40 years of history, my understanding of the relation between these values and the desirability of socialism has altered.

Not sufficiently.  

 The true enormity of the Soviet tyranny was revealed only in time.

No. It was reported on faithfully enough. People simply didn't want to believe something which was obvious- viz. the place was a hell-hole. Those who could, voted with their feet and ran away. 

But from my point of view, the challenge to socialism was already reasonably clear. At a minimum, the socialist economy did not guarantee democracy and individual freedom. I had the naive idea that in the absence of a profit-making class, there would be no class interested in achieving power over others.

Everybody makes a 'profit' by selling things they have which they value less than some other guy values that thing. It could be labour power. It could be family heirlooms. It could be petroleum underneath land you own.  

It became clear that this view was hardly adequate. The worse problem was the possibility that socialism, by concentrating control of the economy in the state apparatus, facilitated authoritarianism or even made it inevitable. I return to this vital challenge below. I became seriously interested in the study of economics only after beginning graduate study around 1940.

Arrow was Hotelling's student. One could say that the notion of a coordination problem lies at the heart of one of his most famous results.  

Needless to say, learning something of the workings of the economic system and of the logic of neoclassical economics had a considerable effect on my attitude toward socialism. George Stigler remarked once that the study of economics is a highly conservatizing force. To some extent this is true, but only to the extent that any increase in knowledge may lead to greater realization of limitations. The inner coherence of the economy, the way markets and the pursuit of self-interest could in principle achieve a major degree of coordination without any explicit exchange of information

the price vector, or 'spread' of the arbitrageur, is 'common knowledge'.  

—in short, the valid elements in Adam Smith's doctrine of the invisible hand—became important possibilities that qualified a simple view of the inefficiency of markets.

What was missing was the notion of Knightian Uncertainty and why prudence or 'regret minimization' could lead to collective irrationality. One may also mention the 'concurrency problem'. Essentially, plans to reflate the economy foundered on the question of who should be first in line to benefit.  

Similarly, the facts of long-term economic growth in spite of the contemporary economic debacles had to register—though, to be sure, one could scarcely ask for a greater testimonial to the creative power of capitalism than was already contained in the Communist Manifesto.

I suppose Arrow means that Marx was saying that the industrial proletariat- unlike the peasantry- wouldn't want to keep killing Jews because Jews use the blood of innocent Christian babies to moisten their matzoh bread.  

My immediate reaction was to interpret neoclassical economic theory and particularly the then new and rapidly developing discipline of welfare economics as pointing to an ideal efficient economy rather than the actual one, marked both by massive unemployment and by monopolistic distortion.

But there was overfull employment by the time Arrow started studying Econ. I think it would be truer to say that like other young American mathematical economists, Arrow was impressed by the power wielded by 'Price Tzar' J.K Galbraith. War economies were 'Command Economies'. Why should this trend not continue into the post-war years? The nerdy mathematical economist would be flattered and cajoled while the Merchant Bankers and CEOs of big Corporations would eat humble pie. 

Socialism was the way in which the ideal market was to be achieved.

In other words, academics turned bureaucrats would tell supposedly 'private' companies what to do. But this would only breed corruption.  

This doctrine was held by many, including especially the professor here at Columbia to whom I owe so much, both intellectually and personally, Harold Hotelling.

a disciple of Henry George like Vickerey.  

Graduate education in economics at Columbia at that time, just before our entrance into World War II, seemed curiously designed to emphasize the ideal nature of neoclassical theory. The dominating voices, Wesley Mitchell, J. M. Clark, and Arthur F. Burns, held that neoclassical theory had little descriptive value. Though Clark and Burns, at least, certainly had no support for socialism, their views, when taken into conjunction with the theorems of welfare economics, resonated with my convictions that socialism could yield a more efficient economy.

You could have a better 'correlated equilibrium'.  

Finally, the development of Keynesian economics and, after the war, its gradually increasing application changed the nature of the efficiency discussion. In true Hegelian fashion, capitalist instability and the socialist counterattack seemed to be synthesized: it seemed possible to have an economy that retained much of capitalist drive and initiative and yet gave room for the government to intervene to avoid at least the worst inefficiencies of unemployment and the idling of other resources.

In other words, lots of corrupt deals and 'pork barrel' politics while the shareholder got shafted and the pensioner's savings were redistributed to the baby boomers.  

I accepted provisionally what seemed to be a widespread consensus in the euphoria of postwar economic growth. The state had an active role to play in maintaining effective demand and in dealing with the many imperfections of the market system revealed by theoretical welfare economics— the overcoming of market failures and monopoly and the realization of economies of scale. These interventions should take the form of relatively impersonal measures, taxes and expenditures, rather than detailed controls and direct regulation.

Why? The answer was that in America local politicians refused to cede power to academic-bureaucrats.  

The higher taxes meant that the government was automatically engaged in redistributing,

only from those with inelastic supply. 

and some of us felt that it should go much further. I have spoken of a provisional acceptance. I still felt it important to explore more deeply the possibility that socialism was a superior possibility. I was more aware of the complexities of operation of a socialist system and sought to develop more deeply the theory of such a system.

Socialism is cool if there is no Knightian Uncertainty- i.e. all possible future states of the world, and their associated probability, are 'common knowledge'. In that case, the only question is whether the appearance of free markets or uncoerced transactions can achieve as good a result as an omniscient Benthamite planner.  

I also sought to explore more fully the criteria for a democratic social organization. These matters could be thought of as matters for slow reflection and long-term analysis, so long as the economy seemed to be performing so well and the political process seemed to be responding, however slowly, to demands for improvements in efficiency, redistribution, and the overcoming of market defects. The apparent pause in economic growth, the crisis in stabilization policy occasioned by the current inflationary threats and realities, and the loss of purpose in redistributional measures all combine to raise anew the question of alternatives to capitalism.

The solution was Reagan and Thatcher. What stagflation had saddled the West with was a sclerotic economy where Prices and Incomes Policy was the only tool to contain an inflationary spiral. But democratic governments can't shoot Teamsters or jail a hundred thousand striking workers. What Reagan could do was sack Air Traffic controllers while Thatcher was able to break the Coal Miner's Union in the UK only because Scargill, the militant Miner's leader, was a Stalinist blathershite who inspired fear not sympathy.

. With regard to equality of income, let me first remark that I am taking it to be a good, other things being equal.

Why? Different people have different preferences. Ceteris paribus, they should have different incomes because of different 'disutility from work'.  But such disutility is a function of transfer earnings- i.e. opportunity cost. 

It can be objected that the drive for equality may dull incentives, and the net result will be a reduction in everyone's real income. This is a legitimate instrumental objection but not an objection to the value presumption in favor of equality as such.

Why not suggest instead that everybody should be the same height even if some want to be jockeys and others want to be basket-ball players?  

Many current thinkers object to distributive equality on principle, on the grounds that it contradicts freedom of property. This is a large subject; I simply state my conviction that property is itself a social contrivance and cannot be taken as an ultimate value,

why should you be allowed to deny needy sodomites the right to fuck you in the ass? It isn't as though anybody owns parts of their own body. That is merely a 'social contrivance' invented by evil Capitalist bastids. 

indeed, that institutions

e.g. Columbia University which won't admit me as a student jus' becoz I iz illiterate 

that lead to gross inequalities are affronts to the equal dignity of humans

my dignity is affronted by the fact that Columbia University hasn't given me tenure as a Professor of finger painting.  

and can only be accepted as necessary evils.

It is not a necessary evil. We think it a good thing if smart, hard-working, Jews, rather than lazy, stupid, Hindus, get appointed Professors at Columbia.  

It certainly seems as obvious as can be that a socialist economy can achieve much closer income equality than a capitalist economy.

Unless its people run away. Prison can achieve equality of material well-being, but the prisoners may escape.  

The category of profits is absent.

In which case there is no reward for risk. There can be a workaround for this but only if there is no Knightian Uncertainty.  

While we now understand that most inequality in income is due to inequality of so-called labor incomes, it is certainly true that the ability to acquire profits increases inequality.

Arbitrage, or market-making, is a service. Some are very good at it. This increases allocative efficiency.  

Further, the higher end of the income of professionals and executives is largely a rent in the economic sense

It is a quasi-rent. Try to tax it and professionals and executives will emigrate. Medium to Long term, factor elasticity is high.  

and would be unnecessary in a socialist society. One needn't ask for utopian dreams of virtually complete equality of income. In a world of any complexity, there must necessarily be both antagonistic and cooperative elements. The model laissez-faire world of total self-interest would not survive for ten minutes; its actual working depends upon an intricate network of reciprocal obligations, even among competing firms and individuals.

But those 'reciprocal obligations' are self interested and 'regret minimizing'.  

But the capitalist system is structured so as to minimize cooperative endeavor.

The Coasian firm internalizes externalities. It is based on cooperation though it competes with other firms.  

The worker is a factor of production, a purchased item, not a part of a team.

That is certainly true of academics. But, in the Coasian firm, you have team-work.  

The attempts to handle externalities in recent years have led to interesting resistances; antipollution regulations are perceived as a threat to profits, not a social gain.

It depends on the regulations. Profits can increase when a repugnancy market is removed or there is a level playing field. In particular, profits can rise in the anti-pollution technology sector. 

Again, socialism is far from a magic cure. Each suborganization, for example industrial plants, will have its own proximate goals, which will not mesh completely with those of others. But the system should permit a greater internalization of broader goals.

Like firing religious Jews or Zionists and then labelling them as 'refuseniks' or 'social parasites'.  

It should be easier for a plant to regard product safety as one of its socially valued outputs.

Punitive damages awarded by Courts can ensure this happens.  

The comparative economic efficiency of capitalism and socialism remains one of the most controversial areas.

Maybe this was true at one time. Then Gorby spilled the beans on how the Soviet economy actually worked.  

The classical socialist argument is that the anarchy of production under capitalism leads to great wastage.

In particular, the opportunity to kill lots of people is wasted.  

An appeal to the virtues of the price system is, in fact, only a partial answer to this critique. The central argument, which implies the efficiency of a competitive economic system, presupposes that all relevant goods are available at prices that are the same for all participants and that supplies and demands of all goods balance.

No. There is no need to presuppose any such thing. We can have missing markets and markets that fail to clear and imperfect competition of various types.  

Now virtually all economic decisions have implications for supplies and demands on future markets. The concept of capital, the very root of the term "capitalism," refers to the setting-aside of resources for use in future production and sale. Hence, goods to be produced in the future are effectively economic commodities today. For efficient resource allocation, the prices of future goods should be known today. But they are not.

They can't be. Knightian Uncertainty obtains. One may just as easily say 'for our words to mean anything, we must know how they will be understood by others at different times and places. Since this knowledge is lacking, language is meaningless. We may as well just make miaow miaow noises.'  

Markets for current goods exist and enable a certain coherence between supply and demand there. But very few such markets exist for delivery of goods in the future. Hence, plans made by different agents may be based on inconsistent assumptions about the future.

Just as language used by different agents have to be based on inconsistent assumptions about how that language will be understood. Thus when I said 'it's true that all I do at work is look at porn and wank' I didn't mean for my boss to take this as an excuse to fire me. Instead I assumed what he would hear was 'Vivek is a great worker. We should double his pay.' The fact is, when we speak we hope to be understood in the manner most favourable to us. But the person grilling us wants an excuse to sack us or lock us up for some crime we confess to committing.  

Investment plans may be excessive or inadequate to meet future demands or to employ the future labor force. The nonexistence of future markets is no doubt linked to uncertainty about the future.

i.e. the fact that we don't know what will happen- even stochastically- in the future.  

But this points to an even more severe shortcoming of the actual capitalist system compared with an ideally efficient economic system.

It turns out this shortcoming is also the shortcoming facing language as compared to some perfect type of telepathy featuring only angelic beings.  

The uncertainties themselves are relevant commodities and should be priced in such an economy. Only a handful of insurance policies and, to a limited extent, the stock market serve to meet the need for an efficient allocation of risk-bearing.

Arrow doesn't realize that everybody is bearing all sorts of risk they are not even aware of.  

In the ideal theory of the competitive economy, market-clearing prices serve as the communication links that bring into coherence the widely dispersed knowledge about the needs and production possibilities of the members of the economy.

Markets don't have to clear. We just say that the supplier's ex poste and ex ante outcome don't match.  

In the absence of suitable markets, other coordinating and communicating mechanisms are needed for efficiency.

What are needed are costly signal based discoordination games giving rise to 'separating equilibria' such that hedging and income effects arise. This does mean that general equilibrium is anything goes.  

These come close to defining the socialist economy, although admittedly wide variations in the meaning of that expression are possible. As I have already suggested, the existence of idle resources is a prime example of coordination failure.

There was massive coordination failure in Communist countries precisely because arbitrageurs could not gain economies of scope and scale.  

The experience of the Communist countries bears on this point. With all their difficulties and inefficiencies, and they are not few, recurrent or prolonged unemployment is not one. A graph of economic activity in the United States is, under the best of circumstances, jagged and spasmodic, that of the Soviet Union much smoother.

not to say fictitious 

Fluctuations there are, as there must be in any complex dynamic system. But the planning, however -inept, serves to keep the basic resources and their uses in line.

Kantorovich's work focused Soviet minds on the low 'shadow price' for their oil. They'd be better off selling on the spot market and telling their allies to go fuck themselves.  

The sophisticated antisocialist reply to this argument is not to deny it but to emphasize that a socialist system is not an ideal resource allocating mechanism either. Much is made of the obvious inefficiencies of the Communist countries, though the Soviet growth rate and technical development has on occasion caused fear and trembling and overall still averages above the United States rate.

Arrow, it seems, agreed with Samuelson that the Soviet Union might overtake America.  

As all too frequently happens in the social sciences, no clear-cut dominance pattern of efficiency can be found either way.

It was found. Gorby announced it. But LSE students had already found it in Morishima's introductory Econ course.  

All that can be said is that socialism is clearly a viable economic system,

provided there is low preference and endowment diversity and there is a big positive externality associated with belonging to the country 

contrary to what many would have asserted in the not-too-distant past, and it does not release energies and productivity far beyond the capitalist norm. I have referred rather vaguely to the corruption of the political system by narrow economic interests as one of the evils of capitalism that might be avoided under socialism. More explicitly, a democratic polity is supposed to be based on egalitarian distribution of political power.

No. I am as stupid as shit. I vote for a Party which will be very careful to exclude nutters like me from having any 'Voice' in public affairs. We want power to be held by those will do a good job exercising it. The same is true of wealth. I don't want to have a lot of it because I will soon become the mark of fraudsters and scheming women. It is good that stupid and useless people like me have no wealth or power.  

In a system where virtually all resources are available for a price, economic power can be translated into political power by channels too obvious for mention.

& political power can turn into lots of money  

In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham.

We may emigrate to such a society knowing we will remain poor and powerless there. But one of our kids or grandkids may have superior ability, or luck, and rise into affluence and influence.  

In a sense, the maintained ideal of democracy makes matters worse, for it adds the tensions of hypocrisy to the inequality of power.

Politicians have to pretend to listen to crazy nutters like me. Otherwise, people think they are arrogant or elitist.  

My early assumption that only capitalists would have an incentive to influence democratic decisions was too simple. Everyone in an economy has an economic interest. It is also true that individuals have interests and attitudes that do not derive from their economic improvement and may even oppose it. But it is today a widespread doctrine, held by conservatives as well as socialists, that concentrated economic interests are more than proportionally powerful in the political process.

But if they press their luck, they may have the rug pulled from under them. The British Trade Union movement was riding high in the Seventies. It could bring down governments. Then Thatcher called the bluff of the Coal miners.  

George Stigler and his colleagues have maintained with great vigor that regulation of industries is usually carried out in the interests of the regulated and is not infrequently originated by them.

Alternatively, regulation kills the thing off save in so far as it is subsidized by the tax-payer.  

The reasons offered are perfectly in accordance with ordinary economic principles; there are economies of scale in the political process, so that a small economic interest for each of a large number of individuals is less likely to get represented than a large interest by a small number. So long as the state power can be democratically run, much of this distortion of the democratic process should be minimized under socialism.

If all socialists were angels who spurned gifts or the offer of cocaine and prostitutes- maybe.  

Income inequalities should be greatly reduced. Economic power deriving from managerial control rather than income should be less easily translatable into political power than under a regime of legally and practically autonomous corporations.

It makes sense for producers to have some political power so as to ensure that conditions for production and wealth creation improve.  

We come then, finally, to what is probably the most serious of all the concerns about socialism. Is it in fact compatible with freedom and democracy?

No. Voters kick it in the goolies and tell it to fuck off to wherever it is that Liberalism disappeared to.  

It is the fear that socialism may bring tyranny that has inhibited so many of us from being more active advocates. It is noteworthy that when Joseph Schumpeter wrote on Capitalism, Socialism, and Democracy, he affirmed that socialism, which he thoroughly disliked, was fully compatible with political democracy.

It is compatible only as long as voters say it is. That is the crux of the problem.  

It is only perhaps with Friedrich von Hayek's The Road to Serfdom that the association of capitalism and democracy became a staple of the procapitalist argument.

Don't forget that much of Europe was against both Capitalism and Democracy. It was thought that the Land owning Aristocracy and the Church, which also owned land, were the two strong pillars of the state. To some extent the 'Third Estate' should be allowed to industrialize the nation using modern technology. But they lacked the breeding to achieve the type of social cohesion which the Crown, the Aristocracy, and the Church knew instinctually how to achieve. 

The 'ordoliberal' aspect to Hayek and the Austrians pointed to a new educated, urban, class of knowledge workers who could become the prop of a Liberal Democratic regime pursuing economic growth while creating a 'Social Minimum'.  

The association itself, however, was not new; it was one of the standard Marxist views, though not held by all. The hypothesis was that the resistance of capitalists to the coming of socialism will lead to the subversion of democracy by them. At least the transition will require the "dictatorship of the proletariat," a phrase whose ambiguities have been only too well clarified by history. This Marxist view indeed gives credit to capitalism for the origins of democracy; it is an appropriate political form, a parallel to the ideas of free contract. So long as the "contradictions" of the system are not too sharp, the nominal equalization of political power offers no threat because economic power is so preponderant.

The Marxist view was that a Bismarck could easily manipulate a Lasalle, create a social minimum, and thus turn the proletariat into a hyper-nationalistic force. Also extending the franchise to women was a bad idea. Their hearts fluttered when they saw the aquiline profile of a Top Hatted toff and so they gave him their votes. 

But democracy will decline with the failure of capitalism. The experience of Chile, to cite only a recent example, certainly gives some credence to this theory.

Rosenstein-Rodan blamed Allende's incompetence for his failure. I suppose if Copper prices hadn't fallen, he might have stayed in office. Still, the fact is democracy declined because of incompetent socialism, not 'the failure of capitalism' 

Ironically, the current conservative model explaining the supposed association of capitalism and democracy relates to the Marxist as a photographic negative to a positive. It too suggests that the political "superstructure" is determined by the "relations of production." The conservative model contrasts the dispersion of power under capitalist democracy with its concentration under socialism. Political opposition requires resources. The multiplicity of capitalists implies that any dissenting voice can find some support. Under socialism, the argument goes, the controlling political faction can deny its opponents all resources and dismiss them from their employment. This theoretical argument presupposes a monolithic state. It is something of a chicken and-egg proposition. If the democratic legal tradition is strong, there are many sources of power in a modern state. Adding economic control functions may only increase the diversity of interests within the state and therefore alternative sources of power.

Arrow understood that countries which had always been totalitarian shitholes tended to turn into Communist totalitarian shitholes.  

It is notoriously harder for the government to regulate its own agencies than private firms.

Not under the rule of law. The Judiciary provides the check upon the executive.  

Socialism may easily offer as much pluralism as capitalism. The overpowering force in all these arguments is the empirical evidence of the Soviet Union and the other Communist countries, and it is strong.

It was a fantasy.  

But the contrary proposition, that capitalism is a positive safeguard for democracy, is hardly a reasonable inference from experience. The example of Nazi Germany shows that no amount of private enterprise prevents the rise of totalitarianism.

Weimar was playing 'extend and pretend'. Once it was no longer a net borrower, it collapsed. Germans backed the Army's maximal program- viz. grabbing land to the East to avert the starvation which Keynes had said would be Germany's inevitable fate because the US had become a net food importer by about 1920! Truly, 'great economist' means 'ignorant shithead'.  

Indeed, it is hard to see that capitalism formed a significant impediment. Nor is Nazi Germany unique; Fascist Italy, Franco's Spain, and the recurrent LatinAmerican dictatorships are illustrative counterexamples to the proposition that capitalism implies democracy.

Why not mention Saudi Arabia or the UAE? They are capitalist but, thanks be to Allah!, not democratic- which is why so many people are happy to go and work and live there.  

Further evidence can be drawn from the increasing role of the state in guiding economic activity. The United States, the United Kingdom, and Sweden, though not socialist as that term is properly used, have certainly greatly increased their intervention in the economy. Yet democracy and political and personal freedom have never been stronger in these countries.

Actually, the tide had already turned. Intervention wasn't falling but its rate of increase definitely was. To squeeze inflationary bias out of the economy, even the Nordics needed to free up markets and abandon 'solidarity wages'.  

Indeed, Samuel Huntington

who was working in the Carter White House at the time. His book 'The Crisis of Democracy: On the Governability of Democracies' came out in 1975. The question was how to increase the authority of the central government while maintaining accountability. 

has argued that an excess of democracy makes it difficult to meet the current problems of the United States. The evidence, it seems to me, points to the view that the viability of freedom and democracy may be quite independent of the economic system.

Huntington had been saying since 1968 that nations are likely to be governed in the way they always have been. 'Modernization theory' was a crock of shit.  

There can be no complete conviction on this score until we can observe a viable democratic socialist society.

Like the Chinese unicorn, we can only observe it if we don't know what it is.  

But we certainly need not fear that gradual moves toward increasing government intervention or other forms of social experimentation will lead to an irreversible slide to "serfdom." It would be a pleasure to end this lecture with a rousing affirmation one way or the other. But as T. S. Eliot told us, that is not "how the world will end." Experiment is perilous, but it is not given to us to refrain from the attempt.

Sadly for Arrow and Rawls and Sen and so forth, the experiments would be made by Thatcher and Reagan. There was a brief moment of optimism that Gorby would create a utopia through 'perestroika'. Instead, he sank the Soviet Union by surrendering Party control of the economy. There was an immediate 'scissors crisis' and Yeltsin came to power. He ruined Russia with help from the Harvard Econ Dept. No blame attaches to Arrow or Samuelson for this outcome. Still, they should have seen it coming. Where they fell down was in neglecting 'Knightian Uncertainty'.