Friday, June 17, 2011

Socialist economies smooth better the cycle

Capitalism is often presented as a wild economic system where conditions are harsh as everyone fights for his survival. The fact that economic agents are not sheltered against shocks leads them to be more efficient and possibly protect themselves better against events. Incentives are not as well aligned in a socialist economy, as free-riding is more prevalent and weaker agents may be more likely to survive in such a sheltered system. The endless discussions on which system is better ultimately boil down to preferences about risk tolerance and fairness, and on which system offers higher welfare.

Bruno Amable and Karim Azizi point out that more socialist economies appear to be better at smoothing out business cycles in the aggregate. Indeed, they tend to adopt more readily Keynesian policies, which do smooth somewhat economic fluctuations, France being the prime example. But that does not yet mean these economies are better: while fluctuations are lesser, the average level may also be lower. And fluctuations may be optimal, as we have learned from the real business cycle literature. So the jury is still out.

1 comment:

NormanB said...

Like US Democrats that quote Keynesian policies the Socicalists forget the second part of his prescription for recessions. The first part they inact with gusto: Spend, spend, spend. The second part everyone seems to have forgotten: After the recovery has taken place run surpluses to sop up the deficit spending. No, Keynes is used as a cover to implement government control and spending.

And the jury is not out, its voted 12-0. Free market capitalism works. We have the highest standard of living in the world by 30% plus we protect the world from the bad guys. We were so sucessful that the Soviet Union collapsed bringing about a 180 degree change in Chinese economic policy (20% of the world's population plus surrounding Asian countries) which in turn scared the hell out of the Indians who did the same (another 20%). We won hands down.

What the hell have you been looking at?