School of Arts, Humanities and Social Science (SHASS) 50th Anniversary Colloquium, “Asking the Right Questions” (Session 4) 10/7/2000

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JOSHUA COHEN: I think we can get started. I'd like to welcome you all to this last session of this two-day colloquium-- just to make sure you're in the right room-- this is the 50th anniversary celebration session for. And our question for this final session is, is capitalism good for democracy? Or we could put the question more colorlessly as, what is the relationship between capitalism and democracy?

Now I have the-- I guess there's been enough turnover between the two days that I should reintroduce myself. My Josh Cohen, I teach in philosophy, and I'm the head of the Political Science Department. And for this session, I've been given the easy task of introducing a question that requires no explanation and speakers that require no introduction, so I'll be brief. At least-- well, it may not seem like I'm being brief, but it'll be brief for me.


So writing in the middle of the 19th century, Marx proposed some answers to the questions of today's session. He said, "capitalist democracy is possible only as," in his words, "a spasmodic exceptional state of things. It's impossible," he continues, "as the normal form of society." And the reasoning for this conclusion was straightforward. He said, "the classes whose social slavery the constitution is to perpetuate--" proletariat, peasantry, petty bourgeoisie-- "it--" that is, democracy-- "puts in possession of political power through universal suffrage.

And from the class whose social power it sanctions--" the bourgeoisie-- "it withdraws the political guarantees of this power. It forces the political rule of the bourgeoisie into democratic conditions which at every moment help the hostile classes to victory and jeopardize the very foundations of bourgeois society. From the ones, it demands that they should not go forward from political to social emancipation; from the others, that they should not go back from social to political restoration."

Now Marx was hardly alone in thinking that the political equality ingredient in a democratic state couldn't coexist with the inequality and private power ingredient in a capitalist economy, that either democracy or capitalism would win out. In the mid-19th century, he shared that outlook with conservative opponents of universal suffrage who feared the very thing that Marx hoped for.

When this school was founded in 1950 at MIT, it wasn't uncommon to think that the experience of the previous 30 years-- Depression, fascism, communism, and world war-- had demonstrated the truth of these earlier argument about the irreconcilability of capitalism and democracy. To be sure, there were some who thought that in the United States, at least, the New Deal had saved democratic capitalism, but it's worth recalling that conservative opponents of the New Deal thought that had paved the way to a new serfdom, and that even its proponents, the New Deal and democratic capitalism, may not have been entirely confident of its long-term stability.

Now something has changed in our understanding of the combination of capitalism and democracy. Marx, as well as the conservative critics of democracy, may have been onto something and thinking that there are interesting tensions between capitalism and democracy. Maybe it's an-- maybe it's an awkward marriage, but not every awkward union ends badly.

In any case, the confident thesis that capitalist democracy couldn't last has been overtaken by events. And the aim of our session this afternoon is to explore some of the changes in the world and changes in thinking about the world that have taken place over the past 50 years and led to different conceptions of the relationship between capitalism and democracy.

We have three very distinguished speakers with us who'll each speak for about 15 to 20 minutes on our topic, after which we'll have some open discussion. And I'll introduce them now in the order in which they'll speak. Our first speaker is Robert Solow, who is Institute Professor Emeritus and Professor of Economics Emeritus at MIT, winner of a Nobel Prize in economics and the National Medal of Science. Bob is publicly known for his work on technological change and economic growth, but he's secretly a Luddite who doesn't use email.


I shouldn't say doesn't, I should say refuses to use email as an act of refusal as I recently rediscovered.


Kenneth Arrow is the Joan Kenney Professor of Economics Emeritus at Stanford. Also winner of a Nobel Prize in economics and a National Medal of Science. And there are three bodies of work, at least, that are closely associated with his name, one of which precisely specifies the conditions under which Adam Smith's invisible hand hypothesis about markets is true, a second describes the problems in combining the separate values of individuals into a coherent social valuation, and a third on issues about decision-making under uncertainty.

Suzanne Berger, our third speaker, is the Rafael Doorman and Helen Staubach Professor of Political Science and Director of MIT's MISTI program-- that is the MIT Initiative on Science and Technology. She's written on French politics, and more broadly, on the disparate economic impact of different national ways of organizing political life. Suzanne, I can also testify from after 24 years, is the best colleague you could imagine having.

Now I know Bob Solow and Suzanne Berger well, although I should say that Ken Arrow is the only one I ever took courses from-- he doesn't know about-- when I was a graduate student at Harvard. I twice in consecutive years sat through his course on micro theory. I can't say that I--


--why I sat through it twice. But I did. But I know-- I do know all three of-- the work of all three of them well, and I do want to make a comment that applies to each, which is that they all are known for addressing topics of large significance with attention to the demands of reason and evidence, but also without ever losing sight of the fact that the social sciences are moral sciences in which the final stakes are human lives. Bob.


ROBERT SOLOW: Is it OK-- can I be heard if I just sit here and-- it's on. OK.

JOSHUA COHEN: Is it OK with the people up there? OK. Good. I don't mean you in the back, I mean them in the booth. It's OK with them. OK, good.

ROBERT SOLOW: Well, there was a famous recent occasion in the history of this country when a question asked of an important person was answered by the reply, it depends on what you mean by "is."


The question we're supposed to discuss here is capitalism-- is democracy-- which is it? Is capitalism good for democracy? But in this case, I think it depends on what you mean by capitalism, actually. I should start by telling you in an old cliche where I come from, where I'm coming from. My most deeply-held political belief is that power corrupts. I don't know if absolute power corrupts absolutely, these limiting propositions are sometimes hard to work out, but I do think as I look at the political world that power corrupts.

And therefore, for me, the basic problem of democracy is to avoid undue concentrations of power, to avoid the accumulation of too much power almost anywhere, actually, and certainly in the wrong places. The problem is delicate because some concentrations of power are needed in a society because there are economies of scale-- not only economies of scale in production, but economies of scale in the performance of other social functions, and it's very hard to get them done well without some group body institution acquiring a certain amount of power.

It seems to me, and it's always seemed to me since I was a kid, actually, that I hated school. That's probably where I got this notion that power corrupts. But this goes back a long way with me. It always seemed to me that this is the really fundamental argument against socialism as an alternative to capitalism.

It's true that there is no real example of the successful running of a socialist economy. But even if that could be fixed, even if one could find ways of operating a socialist economy efficiently, the fact that it means, it involves giving economic power to the state in a big way-- that is, attaching economic power to the locus of political power strikes me as a recipe for tyranny. To have, from a certain degree of abstraction, only one employer in a society, one source of finance and all that suggests to me that corruption will result.

In my youth, I had friends who thought that Stalinism was a perversion of socialism, and I wondered even then if they were not wrong. I personally would have little or nothing to say against democratic socialism, except the suspicion that it's an oxymoron. All the socialism as we have observed-- not so many, but all the ones we've observed seem to have either originated or finished in tyranny. One of them seems just to have finished the other day.

So coming now to the precise question posed for this meeting, capitalism has going for it that on paper, at least, it separates economic power from political power, and this was thought about explicitly in the philosophical origins of people like Locke I'm thinking of.

On paper, capitalism turns private property into a buffer for the individual against a political power. It defines a sphere in which you are your own-- in which you are your own boss. A person's home is his or her castle to put it that way. But in fact, it's not that simple. It's very far from being that simple.

We know from observation-- and there are some good reasons in principle, in theory for believing it-- that laissez faire capitalism tends to generate vast inequalities of income and even vaster inequalities of wealth. Any capitalist society living its natural life, so to speak, will make these big extremes, and in particular, there will be a group of very rich and very wealthy people.

Leaving aside whether that kind of inequality is intrinsically a good thing or a bad thing, it seems to me that there is an endemic tendency in capitalist democracies for the very wealthy to want to buy political power, to use their wealth to purchase political power. We see that all around us here today, most clearly in campaign financing where the influence of money on the electoral process is, I think, a real danger for democracy.

And this is not true only of the US. Helmut Kohl got himself into a lot of trouble for what, by American standards, would be a mere peccadillo, would be something you would barely report to your accountant. And the same thing is true in other democratic capitalist countries, there is a tendency for wealth to want to buy-- to want to buy power. It's not-- Texas oil tycoons do not play an important role in our political life because of their intellectual or moral quality, particularly.


During the Reagan and Bush administrations, we had the spectacle-- and I-- I guess still naive enough to have been shocked by it, not so many other people were. We had the spectacle of the representatives of big business sitting with the Republican majorities of congressional committees writing up and marking up legislation.

So the trouble with unregulated capitalism is that political power gets absorbed by economic power to a larger or lesser extent, but sometimes to a very large extent. And so we run the danger of ending up from this point of view where socialism ends up, only by the back door, but with economic power and political power sitting in the same hands.

And this suggests to me that probably the best we can do for democracy is partially regulated capitalism. And I have-- one could go on at length about the kinds of regulation that are required, but I'll just mention two or three. First of all, capitalism which is-- does engage-- in which the government, at least, engages in redistribution of income and wealth to relieve inequality and to limit the extreme accumulation of wealth and therefore of both economic and political power.

Secondly, one wants democratic capitalism in which there is serious public intervention to limit monopoly and exploitation, and to preserve competition-- real competition wherever that is possible. And third, the third thing I want to mention now is the public provision of seriously good education for everybody for the purpose not only of providing a skilled labor force and all that stuff, but to promote economic and social mobility, to promote the circulation of people through the economic system.

One could imagine easily, because we do other forms of intervention in economic life, but it's the-- it seems to me the natural habitat for democracy is not unregulated capitalism, but regulated capitalism, what we used to call the mixed economy. There will surely be imperfect, but it's the best we can do.

I want to make only one more remark now. Some of you will have noticed that the sort of society I'm suggesting as a good idea is exactly what Hayek, Friedrich Hayek in The Road to Serfdom was arguing against. Josh mentioned The Road to Serfdom parenthetically in his introductory remarks.

Hayek thought, I presume seriously, that the first steps toward serfdom, what I was earlier calling tyranny, are precisely the steps that I think are necessary to preserve the compatibility of capitalism and democracy. As a forecast, of course, The Road to Serfdom stands as one of the really great failures, like Marx's forecast of the progressive impoverishment of the working class in capitalist economies. It's 50 or more years since The Road to Serfdom, and during that time, the slippery slope from antitrust policy or regulation of other kinds toward serfdom has not shown itself at all.

I think Hayek could have been seen to be wrong on the day The Road to Serfdom was published because it was perfectly visible that those capitalist countries like Norway, the Netherlands, Sweden, which did more interfering in the economy and ought, according to Hayek, have been further down the road to serfdom than the more laissez faire places like the United States, we're not like that at all. They were both more regulated than the US, and generally more free as more open to unconventional ideas than American society was. That may still be true comparing those countries.

There is no reason to suppose that there is a slippery slope from, again, what used to be called the middle way toward Hayek's notion of serfdom, and I guess the middle way-- not necessarily Sweden-- is what I've been advocating this afternoon. Thank you.


KENNETH ARROW: First of all, I should explain-- it may be quite obvious to you that I'm not a historical scholar or a political scientist-- perhaps we'll hear from the professional after I speak-- that I'm not-- this is not research of mine that I'm acquainted with. And it's possible to argue, however, this is a subject in which researchers in the real scientific sense is unlikely to cast much light as a general impression-- what we know generally make up most, at least, of what there is to say, though no doubt it would be illumination in studying particular historical incidents in the, say, for example, of changes from democracy to the opposite or dictatorships of one kind or another or vice versa.

I also-- in fact, I must say, having been-- I would have given a simple answer to this question before I was asked-- in fact, I did on one occasion, and I participated in a written symposium on the 25th or 30th anniversary-- I forgot now-- of Joseph Schumpeter's Capitalism, Socialism, and Democracy in which he said capitalism seems to be a necessary condition for democracy, though clearly not a sufficient one since there are plenty of capitalist dictatorships. And there have been-- there have been and even-- and there are today.

But having this question posed, I've been thinking a lot about it, and so really I don't know whether I should continue, but anything I say now is sort of in the middle of development of my thinking. One of the interesting questions-- well, you can ask in the first place what the terms mean-- what is democracy and what is capitalism? Democracy, I think-- I don't think we're-- the working day definitions are good enough for us. I mean, some nominal legal equality of political power along a very broad class of people.

And with-- accompanied, of course, by the political freedom. The freedom of the press, freedom of speech, and freedom of assembly and so forth which are necessary to implement-- the freedom to criticize, some kind of-- and of course, you can get then into very interesting questions-- for example, access to government documents becomes a thing. There's a difference, for example, between Great Britain and the United States in that respect. And there are other differences.

What I found a little more puzzling, and I must say, I don't even know the answer. I'm not prepared to give an answer-- is what is capitalism? The reason that's important is because in a sense, in the modern day world, we think of the alternative is capitalism or socialism. Historically-- of course, there was a pre-capitalist feudal-- at least in the Western Europe-- feudal-- feudalism as an alternative.

And the way we usually tell the history-- I don't know-- I don't know how accurate it is-- of the emergence of the more democratic regimes, say the gradual developments in Great Britain or the more sudden developments, shall I say, in France-- revolutionary in the strict sense-- the-- are-- the idea is usually it's the middle classes, but the emerge-- there was an emerging capitalist system within a feudal framework, and somehow, along good Marxist lines, there was a-- these two were irreconcilable in a democracy. It was a shift of political power away from the king and nobles and all that.

I'm sure that any real historian would tell me this is all-- it's not really right, and of course, we have-- although it does correspond, I believe, to [INAUDIBLE] account, a rather famous account of the development the French Revolution, it was pointed out it was the more progressive regions of France where the revolution was. It was not the hopelessly impoverished regions where the peasants were totally repressed that was the center of revolutionary activity. So you can give that more than one interpretation. One is that the bourgeois--

So there is this association, then, of the emergence of democracy with capitalism. Of course, you go into little details, some of this fuss gets lost. Then why did Germany develop in a very different way of 1914, Germany was a limited democracy. That said, there was a popular election, universal suffrage, but the powers of the Reichstag were just very much less than those of the British parliament. So the emperor and his cabinet still, although they had to deal with the Reichstag, were by no means subservient to it in the way that the British cabinet is or the American president being elected or these different forms of responsibility.

So the capital-- so they-- now one way of looking at it is maybe the capitalist systems were different. I'll come back to this in several forms, but I-- the truth is I've no very definite answer as to what it is. And this is a matter and suddenly a great moment not merely for the analysis of democracy, but even for the analysis of economic growth, as we'll come back to at a later point.

The plus side, of course, why capitalism might be thought of to be a great contributor to the preservation of democracy is the argument that Bob has already given, namely that it avoids concentration of power. At least it spreads power-- economic power is different from political power, it can provide a kind of a shield for the-- for dissidents. For dissidents, it gives a kind of protection.

The more I thought about it, the connection to this, the more-- the less convincing this argument came to me. And there's nothing wrong with it in itself, but the trouble is, if you look at the way political power is-- anti-democratic political power is exercised, or even democratic political power and its populists and majoritarian phases when it becomes-- when the majority oppresses the minority, as has certainly happened in various episodes, but certainly if we consider a dictatorship, the economic power the state is usually one of the least powerful weapons.

I mean, killing people, power, putting them in prison, torturing them-- rather considerably more effective than depriving them of jobs. I think you'll find it in the Soviet Union, for example, dissidents who were not-- who, say, were allowed out of prison. They [INAUDIBLE] They got jobs. They weren't kept out. They might not get the jobs they felt they deserved, but even these dissident intellectuals usually worked as a translator, some kind of motive, and they weren't really starved to death except in a couple of cases. Well, they wanted to go after them. They went after them in much more brutal and effective ways than economics.

So the economic power is instrument of repression. It strikes me as kind of marginal. The additional economic power conveyed by the gulag, the concentration camps for dissidents in Germany is a-- not thinking about death camps now, but the political concentration camps. These are the ways-- well, or to take another example, the beginning of the Chinese-- when the Chinese communists took over, somehow about 30 million former landlords have disappeared. And I think, yeah, now it's pretty clear, they were just-- I mean, the statement was they were being deported to the border provinces, but it's pretty clear now, they were all just killed. They didn't want anything.

So this was not wasting time just taking away their land, for example, which might be an example of economic power. It wasn't even-- I mean, if China-- like all of these regimes, you'll always find exceptions people who were treated perfectly well, old capitalists and landlords would be perfectly well, but there was a fair amount of just plain prison and worse.

Also, if capitalism is good for democracy, one might expect that more capitalism-- I'm saying there may be degrees of capitalism-- should lead to more democracy. Well, of course there's a lot of problems-- what do I mean by more capitalism? Well, one test is the size of the state. For example, what percentage of the national income of a country goes through the state? Roughly, the tax bite.

And as Bob has already pointed out, there are countries like Sweden, which to this day, over 50% of the-- 50% or so of the national income goes through the state. And nobody would allege that they're less democratic-- in fact, some people say the opposite-- than those with much smaller, let's say, like Japan and United States, which have considerably smaller fractions going through them. And most European countries are between Sweden on one hand and the United States on the other

So it doesn't appear the size of-- at least empirically-- this is a very crude empirical statement, but at least on a contemporary-- using cross-section analysis, as we would say, you don't see much evidence of this. Well, another arguing might be, that's the wrong criterion because the state-- when the state just takes money from some people and gives it to the other, it isn't really interfering with freedom. It's not-- it's not a direct kind. So you might take state ownership of industry.

We have a very curious example of this. If you look at the Italy in the post-war period until about 10 years ago or so, 15 years ago, they had a rather large fraction of Italians she was state-owned. This was not a deliberate policy, by the way. In the Depression, the fascist government was bailing out failing industries and wound up sort of just by accident owning a very large fraction-- Olivetti, for example, was a state-owned firm. It's been privatized, but it was a state-owned firm.

As far as I know, this country-- it was never used for political purposes. It was never an instrument of a thing-- so that you had a large fraction of state ownership without any either-- not only did not affect the Italian democracy, but it-- that nobody even realized it was even being used in this way.

So I'm getting more skeptical about the idea of state ownership and things-- or actually instruments by which democracy is undermined. Now, in fact, there seem to be cases-- there seem to be some arguments, some sense-- although it may be a perverse sense-- state ownership may increase democracy.

One of the troubles, of course, one gets, if a democratic power is sufficiently small-- if the power of the state is sufficiently small, people-- and the United States, of course, is a prime example-- may be uninterested in participating. Now we have state ownership, one of things you find every time you have state ownership is that the employees-- and managers, too, for that matter-- start exerting political power. It sort of energizes the democratic system, people get involved. Of course, not-- from an economist point of view, this is a bad thing. But from the point of view of the viability, there is-- it actually creates an interest in the workings of the democracy.

If the democratic power is sort of itself unchallengeable, then if I want higher wages or I want to keep an industry from being closed down-- you see this in Israel, by the way, which is another state that has until recently been a high percentage of public ownership, and where the employees are very vigorously El Al or the telephone monopoly have been very vigorous and effective, by the way, in using the democrat-- using their power as voters to affect government policy. Now, this may be a bad thing, but it's certainly not a threat to democracy, it's a threat to something else.

School teachers in the United States are significant-- sorry, at the local-- this is more at the local level, although it's entered the public campaign also as you see in the promises of one of the candidates. Another possible thing is the role the state not in actually either spending money or in owning things, but in directing resources. Direct government controls of one kind or another, which, as Bob has said, there's a whole continuum of directions.

Now I find very interesting the examples of developing countries where it is certainly the philosophy of many developing countries in the post-war period was, it's hopeless for us to catch up on a laissez faire basis. The only way we can do it is by government direction. This was very common. In fact, one might almost say universal.

Let me take India, Korea, and Taiwan. In all of these countries, the state played a major role. Directed resources, said you can't do this, you can do that, this is through by-- either by control over credit, control over imports, various ways. Now India started out with a democratic constitution, which is that it has on the whole managed to maintain even fending off the Indira Gandhi attempt to destroy it or limit it.

Korea and Taiwan started out as authoritarian regimes. What's really interesting is these state-controlled regimes-- in the case of India, the democracy's preserved; in the case of Korea and Taiwan, authoritarian regimes have become democratic precisely in an era when the state was playing a major role-- they still play major roles, but diminished-- in the economy.

So no matter how you define the capitalism, the correlation between capital is more or less capitalism, more or less democracy, not the same. Let me take an even more striking example-- ah, haven't been watching my time, but I think we're-- and the question, suppose you have a democratic government and it's capitalist. Do you expect this to help fend off a threat to democracy? I've been talking here about democracies. Authoritarian regimes becoming democratic.

Well, we have a very-- at least one very conspicuous case, and that's Germany in 1933. End the '32, beginning of '33. Here we had a pretty well-developed capitalist economy. I don't think anyone would not describe the German economy as capitalist. Eh, there were a few feudal hangovers in the east, but they were not-- they didn't play-- they played some small role in the story, but I don't-- let me not go into details.

We have a squashing of a democratic government by a dictatorship, a very-- one of the most brutal and totalitarian of all dictatorships, certainly. And not only did-- not only did capitalism not prevent it, but I see no evidence that capitalism even provided any kind of a defense. It's not even that they lost the war, somehow. It was-- like the capitalists, the fact that it was a capitalist country seemed to play no role whatever in the transform-- the Hiterite take over.

So it's-- so I say, the idea that capitalism provides any kind of-- that in principle, it provides any kind of protection. Then we can go, the question, can capitalism be a threat to democracy? Well-- and Bob has certainly touched on that question-- essentially the problem may be that democracy-- when you have political power divorced from economic power-- this is going back way to that quotation Marx that Professor Cohen cited.

If capitalism-- the equality-- political power is in the hands of a majority, and it may well be that it will take steps which are anti-capitalist. And when it does, say, against the owners of capital-- against those who have profited by-- those who have most profited most by the capitalist regime. Of course, as Bob says, one thing we have in a capitalist regime is very considerable inequality

I gotta say one thing. I think what happens in every regime is considerable inequality. I'm not sure that capitalism is any particularly distinguished in this respect, but the socialist regimes have in fact considerable income inequality. But whatever it is, you have-- in other words, there is equality, and very considerable inequality in the capitalist-- in a capitalist regime.

And then, of course, you have a divergence between economic power. Economic power is translatable to political power. The United States, we're thinking of buying the power, but there are other ways, like buying military power instead of interfering in democrat-- and that's, of course, we have in Chile. 1973. We had it in Spain in 1936. Very much the same story. A left-wing government comes in with a big so-- not-- wasn't by any means purely socialist. As a matter of fact, it had socialist and communist elements in it.

Immediately there's a counter-revolution. In this case, it's because-- in both those cases because of the fact that there was a strong military power. Why that's-- why the military is kind of a third power, and that's-- why that's a separate power in some countries and not in others is something I don't-- is a fact, but I don't know why. I don't have any explanations for that.

So that's a case-- those are cases, at least, in which-- and of course, Latin America will exemplify that over and over again. Those are cases in which capital-- that which-- in fact, a capitalist interest. Sometimes it's even particular capitalist interest rather than a general capitalist interest. Can produce a subversion of democracy, or capitalism may actually be a danger to democracy.

To be fair about it, I think that almost any power structure in this-- say in a civil society, a non-government-- a non-political-- which differs strongly, which is powerful somehow, and which differs from the political majority can lead to similar situations. In the modern world, probably ethnic considerations have played some of the same role that I'm describing here to capitalism. But capitalism is one of the dangers in this-- in particular contexts.

So since-- it's not very clear as to why capitalism is related to democracy in any permissive way according to these historical accounts. And as-- on the other hand, there does seem to be an association. Of course, I-- our evidences-- I should be careful-- our evidence in some sense is dominated by one or perhaps two cases, namely the Soviet Union and China.

Eastern Europe I don't count, because Eastern Europe is, to a very large-- mainly on the simply the-- Soviet tanks. There's no great mystery as to why East Germany and Poland and Romania and so forth became a communist country-- Yugoslavia is a bit of an exception that way. They've got their-- its own indigenous things and that's a complicated story. In Czechoslovakia, there was, in fact, a strong communist movement, but not true of any other countries.

So Hungary last free election gave the communists 10% of the vote Now we could-- we have-- and the whole-- and even Czechoslovakia was quite-- the communists in Czechoslovakia we know very well moved-- as those in Hungary, too, for that matter-- moved against-- even a dissidence within the communist period could not-- was not tolerated as we know in 1953 and-- 1956 and 1968, or 1953 in Berlin, as a matter of fact.

The-- so I don't really count those as examples of capitalism-- having to do with capitalism or democracy. In the Soviet Union-- but of course, the interesting thing about the Soviet Union and China, since capitalism could hardly have been said to have been a well-developed phenomenon either of those countries-- it was-- I don't know-- there are capitalist elements, all right, but there was-- there was a lot of non-capitalist elements. So that's why I say there's some difficulty finding-- I mean, capitalism-- but I think one would agree that pre-World War I Russia was not a great example of a well-developed capitalist system. There were sectors of the country, and so China even less so.

So that the take-- the communist takeovers there were-- are not much evidence on the question of the relationship. Let's see. So in a sense, our identification of socialism with dictatorship and capitalism with democracy in a way fails, but of course, there are not many examples of the former, and they're rather special. Then on the latter, there are a lot, of course, as I've said over and over again, authoritarian capitalist states, nobody denies that. Not even the most laissez faire economist. Milton Friedman agrees to that statement.

So another point of view-- for whatever association there is is that really, there is a third variable here-- economic growth. Speaking or summarizing a lecture, there is of a theory sometimes called the Aristotle-Lipset hypothesis. I think there's some quote-- Aristotle, of course, interpreting-- Aristotle in modern terms is always at best a tricky business and contentious, because the circumstances were so different, but there are some ideas apparently, Aristotle and then Seymour Martin Lipset put forth some view many years ago that people taking cross-sections and doing statistical analysis claim to find this, that essentially economic growth leads to democracy.

And we have tended to view that economic growth is itself stimulate-- or capitalism is itself-- so you see a major enterprise in the development of economic-- a major cause of economic growth. So this suggests that whatever association-- now, by the way, I mentioned these as hypotheses are advanced and seriously studied. The way they say they approved I think would be nonsense, and of course, one thing is clear-- if you fit statistically the variance around the fitted lines, it's pretty-- it's very, very big.

For example, there was one big cross-section analysis designed-- due to Robert Barrow. And I-- whereas I'm a theorist and I look at the theory of the model. I looked at the-- he actually tabulated the residuals, and China was way off. The economic-- or the democracy in China was-- registered a very low level, well below what would have predicted by the economic growth of China.

So even if there's some vague statistical associations, like a lot of these other associations, like the alleged relationship between intelligence and income, which-- it's there. It's perfectly real. It's just not as big-- as nearly as big as people think. And the evidence-- statistical evidence there, unlike a country-- comparing countries is really dubious. In the case of the intelligence, I think that we really-- we have much better data, and the evidence is very striking.

Now we're not likely to get-- so the hypothesis we're discussing today, in a way, it's not likely to get a test because everybody says they're capitalists today. We got to-- I mean, we can discuss, as Bob and-- not surprised, those who know us will not be surprised that my political opinions are not very-- are hardly different from those of Bob. We sign a lot of statements together.

So I don't want to repeat his points, but of course, I think it's quite clear, and I won't-- that the-- from the point of view of economic growth, which is at least helpful in democracy-- I don't know that we know any more than that-- is that the capitalism itself doesn't work very well when it's not well-regulated and not proper-- when there isn't the checks and balances which can only supplied by a democracy, a democratic-- powerful democratic state with-- and access to free information by all citizens. Thank you.


SUZANNE BERGER: Well, our topic today is, is capitalism good for democracy? But as a political scientist, I guess I think the great surprise in human history is how good democracy has been for capitalism. And the great surprise has been that even in societies in which capitalism has generated enormous inequalities of property, wealth, wages, and opportunities, the majority does not vote to confiscate the riches of the super rich. The majority does not vote to flatten income inequalities through the tax system, let alone to overturn property rights or the market economy.

And what I'd like to talk about with you this afternoon is why capitalism and democracy have been compatible, and whether this compatibility can survive the globalization of capitalism. As we see waves of cross-border flows of capital, goods, and services transforming our economies, what's going to happen to the fit between capitalism and democracy?

Over the past 200 years, more and more countries have come to have both liberal democratic governments in which they choose leaders in competitive elections, and at the same time, free market economies with private property rights. These two systems have coexisted with remarkable stability despite the inequalities that capitalism generates.

No electorate anywhere that I know of has ever voted in free elections to overturn capitalism. There have been very strong anti-capitalist political movements of both left and right in Europe and in Asia and in the United States, indeed, but where political change has taken place through free and democratic elections, anti-capitalism has never won the day.

Now this result that democracy and capitalism can co-exist was not always taken for granted. I don't think you need to have been a Marxist or Marx to have had a great doubt about the potential compatibility of democracy and capitalism. In fact, it was the great anxiety of the Founders of the American republic that democratic politics might trample the rights of the propertied.

To take the formulation of one of the Founding Fathers, James Madison, he writes in the Federalist Papers, the great danger in a democracy is that citizens might organize, they might mobilize, they might form a faction to push their economic interests against property-holders. And here-- I'm quoting Madison now-- "Democracies have ever been spectacles of turbulence and contention. They have ever been found incompatible with personal security or the rights of property. In general, democracies have been as short in their lives as they have been violent in their deaths."

So I think the question we might start with is why these dire predictions about democratic government and an economic system based on individual property rights and on a free market economy have proved wrong, and I think there are basically two reasons. First, the constitutional engineering of Madison and the founders of other liberal democratic societies did, in fact, work to protect the rights of individuals and the functioning of a market economy. Institutions like the Bill of Rights, the Supreme Court, federalism, and much else did in fact build dikes that protect property and protect markets against democratic majorities.

And secondly, and this is the point I want to focus on this afternoon, democracy and capitalism have been compatible all these years, I think, because until recently, capitalism had been largely contained within national boundaries. Governments still stood on the frontiers of their national economies, and they regulated the flow of labor, capital goods, and services between their own societies and the international economy.

Within domestic societies, governments acted to cushion the most disruptive features of capitalism. Business cycles, unemployment, inflation, depression, environmental degradation. Now of course, some liberal democratic governments buffered and regulated capitalism more than others, and in some times more than others. But what strikes me is that in the United States, both Republicans and Democrats, like Social Democrats and Scandinavia, like the Tories in Britain, all acknowledge some measure of government's responsibility and government's capability for regulating capitalism to mitigate its negative effects.

To put it another way, the potential clash between democracy and capitalism was averted by constitutions that made our democracies something other than pure democracies, and by politics that made our capitalism something different than the textbook models of capitalism. Now today, I think globalization threatens to undermine this historic compromise.

And by globalization, I mean simply the emergence of a single world market and a single set of prices for goods, services, capital, and labor. And of course, there are many changes that are driving this forward, new technologies, the fall of the Berlin Wall, the worldwide liberalization of financial markets, the rise of big new consumer markets, the rise of big new producers outside the old developed world.

Globalization means that more of the population everywhere becomes more vulnerable to economic forces outside their own country. It means a widening of the inequalities that we've already seen grow in our own society. And at the same time, globalization apparently reduces government's capabilities for shielding citizens against markets.

In fact, far from shielding citizens against the harshest blows of globalization, today, governments' credibility with international investors seems to depend on governments' willingness to subject citizens to the full force of market pressures. So for example, in the Asian financial crisis, South Korea, Thailand, Hong Kong, they virtually competed in making commitments to impose the burdens of adjustment on their own citizens without regard to their relative ability or their relative willingness to absorb the pain.

Now I think the result in our own country and abroad has been the growing fear of globalization. The protesters in Seattle and Prague may look like marginal and violent individuals, but it's a fact that their slogans make a lot of sense to many ordinary mainstream citizens. It's a stunning fact to me that even after years of economic growth and prosperity in the United States, that surveys find that over 50% of people say that free trade is bad for the United States.

Now what this reflects is undoubtedly not economic sophistication, but it is a measure of the growing disease, the sense of a loss of control over the basic foundations of societal well-being. And I think many people fear that there's no one who can be held accountable for basic choices about society's use of resources and society's allocations of reward and risk.

When citizens ceased to believe that they together with others can shape their own future, then liberal democracies are in trouble. And I think that's the fundamental challenge we face today. It's not only an issue of how to protect weak groups in our society, even though that is very important, but I think that even more difficult question in a world with an international economy but no international government is how to bring globalization into the domain of human choice and human decision? How to bring globalization into the domain of liberal democratic process? How can we make the globalization, how can we make capitalism in a global economy compatible with liberal democracy?

Now I think one solution to this dilemma could be to provide individuals with resources that would allow each person to protect himself in the new economy, and that way, we would reduce the burden of expectations on what governments need to do. What kind of resources would we want people to have? Well, the kind of education and training that would allow a person to reinvent herself in her job over the course of a lifetime.

We'd want people to be able to diversify their assets so as to spread family risks, so that for example, an average family's life savings and wealth would not be so heavily concentrated in the ownership of a house, a home, whose value depends on many factors outside an individual or the family's control. And I think such policies would be major gains in our society, and they're policies on which most of us can agree.

But even if we were to imagine the best of education systems, even if we were to add a kind of minimum safety net for those people who are not intelligent enough or not agile enough to take advantage of these opportunities, I think there still remains a big question, and the big question is, are citizens in a democracy willing to accept that the basic social distributions of risk, resources, and uncertainties move so far beyond their reach, move so far beyond democratic accountability?

And on this question, diagnoses and prescriptions obviously diverge widely. Some people think there's nothing that government can do with the national or international level to regulate globalization. Thomas Friedman, who writes on the op-ed page of The New York Times, put it in a very striking way. He describes a globalized economy as a race of Formula 1 cars. And he says, if you're worried about drivers smashing into the walls, what you can do is give them better driving lessons and improve the skills of the ambulance technicians to clean up after the wrecks.

But, says Friedman, you can't put bales of straw all around the walls of the racetrack to buffer the accidents, or else you're going to ruin the race. If you don't want to be a Formula 1 driver, then walk or bicycle, but watch out-- you're going to be run over by a Formula 1 driver.

Now as a professor at MIT for many years, I've devoted all my professional life to educating Formula 1 drivers.


I know how much they contribute to the giant leaps forward in science, technology, and human organization that are transforming human well-being around the world. And yet, I believe-- and I know from discussions with my students-- that most of them believe that we want to live in societies in which the basic rules about the game, the basic rules about the race are decided not just by and for the fastest drivers, but by all that people.

And our problem, like James Madison's, is to find institutions that all allow us to reconcile democratic control and capitalism. That capitalism today is global makes this the most difficult and important of challenges. MIT, as I have known it, is a university driven by real-world problems, and I think here we have one that deserves our best thinking and imagination. And it's my hope for MIT and my hope for the one to grow on for the school that we can bring our Formula 1 faculty and students together to respond to this challenge. Thank you.


AUDIENCE: My comment is directed at--

AUDIENCE: Wait up.

AUDIENCE: My comment is directed primarily at Professor Arrow. I was listening very interestingly and finding myself in the funny position of agreeing with his point of view while disagreeing vehemently with one of the examples. I grew up in Italy in the '50s and '60s, and I can guarantee you that that concentration of economic power was indeed corrupting. It indeed generated a lot of examples of everything from the most base graft to the very programmed and planned usage of millions of votes of individuals who would benefit from that system in order to support a political system.


KENNETH ARROW: You're part of the Institute of [INAUDIBLE]?


KENNETH ARROW: That's what I had in mind.

AUDIENCE: I'm thinking of [INAUDIBLE], I'm thinking of [INAUDIBLE], I'm thinking of [INAUDIBLE] and of various others. However, it didn't work in the direction of tyranny, primarily because as a population, we tend to prefer to discuss these things over a good meal with a lot of wine, and that tends to calm the spirits and to focus on important things in life.

But I do want to say that over 15 years in this country, one of the items that I find most interesting-- and I think the topic of today's symposium is a symbol of it-- is a peculiar obsession with thinking that capitalism and democracy are indeed connected. And I'm wondering if the question shouldn't be, what else besides the economic system, be that capitalism or socialism, is indeed conducive to the kind of remarkably open society which I think this country is one of the best examples in the world?

JOSHUA COHEN: It's not the quality of the cuisine.


KENNETH ARROW: Well, thank you for your comment. There is, of course, an important point, which I alluded to in one form, but I didn't go into detail, which is, when you have an economy, let's say-- let's say a capitalist economy in conjunction with a political system which has economic power-- state ownership, regulatory behavior-- you have, of course, the question of translating that power into-- the economic power translates into political power, and one form takes, of course, is straight corruption.

As you suggest, it can be used by the government to try to buy votes I think it was one of your points-- it could be used for personal gain to get privileges and so forth. That is, of course, a fundamental dilemma of which there's no way of avoiding. Now one argument, of course, this does lead to an argument for a very minimal state, which I think, unfortunately has, other problems, that the inequality that arise in-- and even inefficiencies that arise out of an unregulated capitalism. Also, involve-- create another set of problems that are different from the corruption problems.

I think maybe it was Professor Cohen in his direct remarks suggested there's-- there are always-- it's not a question of saying that you will avoid problems. It's a question of saying, we try to minimize the tensions. Indeed, one can argue that if you have no problems, you have no progress, either, by the way, so that the tensions can be fruitful.

All I was pointing out in Italy, it was-- one thing, it was not useful, and that was the only thing I was saying, that it affected the democratic system-- it affected the performance of the democratic system I think is what you're saying, not-- it did not affect the democratic structure. And this is, of course, a problem can occur in vote buying of all sorts.

One typical example in the United States-- it's not anything threatening to democracy, but it's a complication-- is military expenditures as local goods, as providing an income and local goods. The most extreme version is we have bases. These bases typically develop a relationship to the local economy or thought of-- probably not even correctly, but they're thought of as supporting the economy. Anytime you try-- the Defense Department is perfectly willing to have these bases closed. They have no interest in many of them. It's not even-- it's not even a question of a military industrial complex. The military don't care. In fact, they'd like the money, but they want it for other purposes.

But then you always have local senators, congressmen and so forth protecting their interests. So as soon as you have-- and that's an example where there's some economic power operating in some locality, and therefore generates local things. And the Texas oil millionaires and the-- all of these-- the continuous buying of special tax provisions, which is notorious, all of these are examples of when as soon as the state has economic power, it's likely to lead to an attempt to buy that power.

And you point out-- it's quite correct that I'm sure that the [INAUDIBLE] and any involve themselves in-- I mean, I don't know the-- I'll take your word for the facts, but it's-- logically I see no argument against your position that they-- once you have these powers, that you will-- they will be used, yes. And the only hope would be to create competition and other things which would make this unsustainable.

JOSHUA COHEN: In the back.

AUDIENCE: Hi. This is kind of for anybody on the panel. I've heard it said that it's a good thing that the people who avail themselves most of government services are also the people who vote the least. And you see that to some extent evidenced by the 50% turnout that we see even in presidential elections in this country.

I'm wondering to what extent you think that economic power is able to buy political power and discourage people who might otherwise participate from not-- into not participating, how you think that might be able to be reversed, and what you think might happen to America if there was 90% turnout in terms of political and economic distribution.

ROBERT SOLOW: Well, I'll leave that last part of the question to Suzanne or anybody else, but I'm not sure that it's a very good-- that it's really quite right to say that in the US, for instance, those who use the government the most vote the least. I belong to one class of people which directly controverts that, namely the old.



ROBERT SOLOW: Kenneth wants me to say retired. That's an organizational statement. I think that the-- I'm not sure how good that correlation would be. Middle class people in the US who are generally the ones who vote get a lot of benefits from government. They don't much like paying the taxes that support them, but they don't mind the benefits, and they vote. I think what governs turnout in elections is much more complicated than simply how much of my annual budget comes from checks signed by the Treasury. But maybe Suzanne has more to say about that.

SUZANNE BERGER: There's an enormous literature in political science on who votes and who does not, but what I think is very striking is how high the abstention rate is in the United States compared to most other advanced industrial countries. And I think there, we have to go back to the point that Mr. Falcone made that there are other factors that really determine the quality of our democracy. What is the quality of the choices that people are offered in the electoral system? What are the possibilities for participating in various other-- in various levels of government?

So I think that there is a lot at stake here and there is a puzzle that's entered, doesn't depend uniquely on the economic system.

JOSHUA COHEN: Just on-- just one-- on the empirics of this, it is true that lower income citizens vote at smaller rates than higher income citizens, but people who've actually looked at the distribution of political opinion among voters and nonvoters conclude that there really isn't that large a difference in the distribution of political opinion.

So in order to think that a large increase in turnout would produce a substantial difference in electoral outcomes, what you'd have to do is make a bet-- not that this is an unsafe bet, but it's the bet you'd have to make. You'd have to make a large bet that the political opinions of nonvoters would be shifted by the way they were mobilized by people who got them to vote. But if you look statically, so to speak, the opinions of the population as a whole are very much like the opinions of the subset that votes.

ROBERT SOLOW: That's interesting, because that isn't the answer to the last part of the question.

JOSHUA COHEN: That's why I said it.


Yes, go ahead. Right here in the-- we need a microphone here. Oh, there's a microphone.

AUDIENCE: My question is for Professor Berger. You mentioned that about when you were talking about rules must be decided not by and for Formula 1 drivers, but by all people. What sort of institutions do you think would be necessary for that to happen? For example, Dani Rodrik at the Kennedy School, he advocates the conflict management institutions when she mentions democracy and social safety nets, et cetera, education levels. What, in your opinion, would be the critical institutions necessary for full participation and coverage as well?

SUZANNE BERGER: I wish I could give you an answer. And I think that the hardest part of the answer is that the institutions we would need would have to be more than national institutions. The widespread sense that the IMF, the World Bank are somehow determining the fortunes of societies and yet citizens have no way of effecting the decisions of the WTO or the IMF or the World Bank, the question is, how do we-- how do we provide some measure of accountability of those institutions?

Why is it that that-- I mean, we do have representatives of our own national governments sitting on those bodies, and yet it seems to most people to be far too indirect linkage to the bodies that apparently are making direct decisions about our social and economic welfare.

So the problem that we have to solve here is not simply how we change our own national institutions, but how we could link-- how we could link national governments to these international bodies. That's what I think is really the tough part here.

ROBERT SOLOW: Could I say something? I have a question about a part of Suzanne's argument. I'm not sure it's so clear that globalization in the sense of large volume of international trade, or even perhaps-- although I'm a little more doubtful about this-- a large volume of international capital movements creates such a drastic limitation on the ability of national governments to regulate the things that really matter.

I think the reason why in many poor countries the national government does not do the things that the people like us in this room would wish they would do is not because they're exporting and importing, or even in large part, and even often not because they're dependent on foreign capital, it's because they are either unwise or corrupt, or in any case, unsatisfactory governments on national grounds.

There is-- globalization has very little to do with the tax system of even a fairly small country, which can do more or less what it wants. The trouble is that they don't want to do-- I shouldn't put it that way, because it's not clear whose volition is involved here, but I don't think it's mainly globalization. Globalization provides a nice scapegoat for a government or a party or an institution that does not want to do something that it might for one reason or another does not want to do.

JOSHUA COHEN: I have-- and then back there. Yeah, go ahead.

AUDIENCE: Pursuing this question about limitations, I'd like to ask if any of you have reactions to the Danish decision about 10 days ago not to join the euro area, because at least according to the American newspapers, the reason was that they feared that they would have to-- they couldn't maintain their own safety net and active government to deal with the distribution of income and power that you've been talking about.

Now Denmark is the classic small open economy of economics, has been involved in international trade very heavily for the past century at least. And here, they voted against joining a single currency area. And so I'm wondering whether that's a critical limitation or whether this is just the opportunity to opt out of globalization or whether something else entirely is going on in the relationship between economic policy and the ability of the government to effect its own decisions.

SUZANNE BERGER: Professor Peter Temin, whose question concerned Denmark, is the person from whom I've learned most about the operation of the gold standard and the way in which government's credibility depended in the 19th century and parts of the 20th on government's willingness to inflict the burden of adjustment on its own population.

And I think that that's really-- that in some respects, that's the political dilemma that we're looking at again today. That remaining in an open market, a market which is-- in a market which is open to capital flows and short-term capital flows as well as direct foreign direct investment, puts governments in the position that the Asian economies were in 1997-1998 of fearing that unless they, in fact, impose the full weight of the adjustment on their own populations, they would not risk-- they would not be able to-- they would not continue to receive capital from the outside world.

I think-- I'm no expert on Danish politics, but it seems to be a judgment of the Danes that they would be giving up some valuable measure of political control over the conditions of everyday life.

ROBERT SOLOW: Peter, something is rotten in the state of Denmark here, because what I don't know-- the argument that you've described as having been given doesn't make a lot of sense. What the Danes voted against was the European Monetary Union. It has little or nothing to do with their ability to maintain their own social safety net. The problem with social services and social assistance is the European Union itself, which proposes eventually to have-- to harmonize, as the phrase goes, social policy across the members.

I'm not-- I think-- what-- myself-- the Danes were on about is that they understand that the monetary union is not an economic thing at all, it's a political gesture. It's a gesture that amounts to some kind of semi-commitment-- commitment is much too strong, but as a step toward a political union in Europe. And a small country living on a little neck of land right near Germany might not care much for a political union in Europe, and I think myself, the vote against the EMU was a vote against that. It certainly doesn't make sense to suppose that it would really limit their capacity to maintain social policy.

JOSHUA COHEN: All the way in the back.

AUDIENCE: This question is addressed to Professor Berger. One of the very strong point in your presentation, the argument was that the national governments were doing-- providing the institutional framework in which people still within the capitalism, if there were certain disparities or whatever, but they felt that they had the reach and they can make the basic choices. And the challenge is that that's not happening now because of the globalization.

And then there's a connection in your argument saying, well, this can be seen by the fact that the people never voted against capitalism, never wanted to turn down the property rights. But if that's the connection, and if I followed that correctly, to me, I pose to you, of course, drawing from the experiences of India, that people are not voting against government, which are also allowing the globalization to take place.

So this argument is that the peoples not voting against capitalist modes of production-- capitalism and the connection of democracy and goodness about it within the nationalist boundary, it was evident because of people not turning it upside-down. People are not turning upside-down to globalization process. And their national governments, elected by people, are taking decisions to move into globalization and integrate it well.

So, I mean, how do we see this, too, which may appear-- I mean, why would-- then there will be a worry about this people's helplessness about choices and not being able to-- I mean, are the worried about being overrun by the Formula 1 car, where apparently, by this logic, they are asking the governments to do that and put them in that situation.

SUZANNE BERGER: I guess we have to ask whether people actually believe that in voting for the governments they've chosen in India or wherever, that they're actually voting for globalization. In fact, parties, elections, choices have been structured around very different lines.

And what I think is one of the most fascinating changes over the last two or three years is, that globalization is emerging as an issue which people see at stake in political contests, but it would be very difficult for me to think that the rulers we chose or that Indians chose in the 1980s and the 1990s, that people thought that by their choices, they were choosing the kind of globalized world that we have moved into. Elections weren't fought out over those issues. What people will think once they think about politics in those terms, that seems to me a different point.

KENNETH ARROW: That's an observation the-- it strikes me as interesting that there are issues-- and I think globalization is-- I will say in the United States and that vote from NAFTA or WTO, that are-- where the elite, the political elite are different. Differ from the country as a whole. Here we have two presidential candidates firmly in favor of globalization. There's no way of voting for it.

In both cases, we know that significant members of the party-- in fact, in the case of the Democrats, a majority of the party has voted against the proposals which are espoused by Vise President Gore, and certainly within the Republican Party, while it's slightly different there, there's a large number who would probably follow Pat Buchanan-- if they could otherwise stand him-- on this issue.

And the same thing is true-- the discussion about capital punishment raises very much the same issues in Europe. Polls suggest that the majority of people are in favor of capital punishment, and yet no country in Europe has capital punishment. So there are situations in which the political elite take stands. Now presumably if the people felt strongly enough about it, if that became the big issue, then-- that it would overturn the other issues and people would vote for it. But when there's obviously a certain permissive attitude on the part of the broad electorate, I find this issue very interesting, and most these cases, to be perfectly frank, I think their leader's right and the people are wrong.


JOSHUA COHEN: Back here.

AUDIENCE: I'd like to address this question to the panel. And it's a very general question, I hope it makes sense. And I think generally, it has to do with the-- what might be called the globalization of ideas, which is an old idea, and the interaction of ideas with cultures. And I'd rather shout, if I may, can everybody hear me?

AUDIENCE: It's being recorded. There you go.

AUDIENCE: OK. My question, then, is the original question of the relationship between democracy and capitalism. I hear on one part it's an historical accident because it grew out of the same media, and that you would expect certain commonalities of values and commonalities. However, the way it evolves has to do with the way people respond to things like the application of brute force and the application of ideas that spread across boundaries.

And I think of this in terms of Southeast Asia very often, because the Southeast Asian revolts and revolutions, if you go back to the Philippines, the Philippines became a model for the Burmese revolt in 1988, which became a model for the Chinese revolt in 1989, which was in a country that was a curious mix of Chinese traditional values and European ideas on politics.

And I'm thinking that things tend to spread, and that the apparent correlation that remains between capitalism and democracy is a sort of convergence. That in fact, what's happening is you're getting a spread of ideas in their own way, and you're also getting people who want to develop economically, and that there's no real necessary correlation between the two. Thank you.

ROBERT SOLOW: I wish a simple yes or no would suffice.

KENNETH ARROW: Well, let me take a stab at it. There is-- of course, diffusion of ideas is very old. One of the examples I always like is the diffusion of foods from the new world after its discovery. Think Italian cuisine without tomatoes. The-- or Szechuan. Take something really remote without chili peppers.

These are all New World products, so they all-- all these, quote, "great traditions" are all very recent and spread out. However, it's quite clear that different places picked up different parts of that. To say the student revolt of the late '60s is another example of something that gets spread very rapidly from the United States and Europe-- imitation. But it took different forms, had a different consequence.

The culture, the-- or the needs of the particular haven't played a big selective role, and the fact is that some of these things fizzle out and do not remain permanent, some catch on and there is a-- it's a little more complicated than saying this is simply fadism or imitation in a crude sense. There has got to be a select-- it's like evolution. I mean, there's a slight analogous to, it's not identical to it.

So there's a selection-- there's a mutation element-- in this case, an imitation element which is-- we don't have in biology, but it's also a selection element, and the selection element may be the more permanent and important parts of the phenomena. Journalism may depend on fads, history may depend on selection.

SUZANNE BERGER: I think the question that Julian Wheatley has posed is really an interesting one, because I think we really do have mental maps that link together things that might have no necessarily relation in-- necessary mechanical relation, and that a particular kind of economic system and a particular conceptions of political freedom have become joined together in people's understanding of how the world works.

This is something like what I guess Gramsci meant when he talked about the hegemony of ideas, people's understanding that certain ways of organizing society are necessary to a good and decent and well-functioning society.

So I think that even if we could demonstrate that there are no necessary links between these economic-- features of the economic system and particular features of the political system, that you're absolutely right, that these have now become joined in a way where people feel that they do, in fact, have to sign on for the whole package, that these are not available, that you can't sign on for one item on the list, but it is-- that they are in some way joined as human possibility.

ROBERT SOLOW: But then it ought to be really very important to piece out what is true and what is false about the capacity to separate the parts of the package-- salesman, of course, are always trying to sell you the whole package. And I suppose part of the wisdom of shopping is to pick out only the part that you want.

I think the problem that's being circled around here is just that everything that happens, so to speak, in the political, social, economic realm is a mixture of general principles and local peculiarities. The local peculiarities are sometimes historical and sometimes arise in some other way. But the same set of principles applied in a place with one kind of institutions will generate something so different from what it would generate if the institutions were a little otherwise.

AUDIENCE: I've got a question for Professor Berger. It's essentially an objection to this argument that people don't vote against capitalism. And in my opinion, what happens that you can buy easily media coverage-- for instance, the two major party participated debate and another was not represented there. And what happened in [INAUDIBLE] was that just two people with liberalism ideas were facing each other with somewhat the same global program.

So, I mean, no socialist idea were discussed there, no promise about union rights or worker rights or stuff like that. So my opinion, it's easy for capitalists to buy consensus among people by agreement. It's easy to somewhat get agreement from non-educated people and keep them non-educated as was in the feudalist. And isn't what the same now here in the US because good schools are not easily accessible by poor people that can afford tuition and stuff like that.

So my question is that, it's not just capitalists buying his own agreement, his own place in society and in democracies?

SUZANNE BERGER: Well, I mean, I think that it is possible to buy something in politics, and I think everyone on the panel has acknowledged how much in politics and how much an electoral campaign does seem to depend on money. But if you look not at the United States, but let's say Europe, you'll find large anti-capitalist social movements, large anti-capitalist political parties, communist parties, Catholic parties that were anti-capitalist and that did receive significant numbers of votes in elections.

I didn't say that nobody voted for anti-capitalist parties, it's that a majority of the electorate in none of these societies has ever been able to get itself together on an anti-capitalist alternative. And even in societies in which there are strong anti-capitalists alternatives, the majority of the electorate has not made this choice.

AUDIENCE: Actually if I-- actually, three years ago in-- sorry, a few years ago, that's four years ago in Italy, the leftists wing go to the power, so it happened.

SUZANNE BERGER: Ah, but I guess I would say that's the-- it's examples like that that sort of would prove my point. Because what had happened to the left before they could win this election was the left itself had been transformed. We had the former communist prime minister of Italy, Massimo D'Alema, here at MIT explaining to us his profound commitment to all of the principles of the market economy, capitalism, and there was nothing in what he said that, in fact, any-- virtually almost any Republican might not have been able to sign onto.

ROBERT SOLOW: You should keep in mind that the United Kingdom today is governed by what is nominally a socialist party.

AUDIENCE: Could you please comment on the tensions between globalization and individuality and self-sufficiency?



KENNETH ARROW: Well, let me start by getting this off for both of us. Certainly when it comes to individuality if you're meaning individuality really on an individual basis, one could say that human beings are never more complete than when they're in contact with other human beings. I do not think having a greater variety group opposed to a greater variety of ideas, opposed to a greater variety of choices of ways-- examples of ways of life and as well as economic alternative commodities is anything but an increase in individuality.

Now perhaps you mean individual cultures. This is what the people talk about. It was a French hero-- true, he got three months in jail, but still is regarded as a hero for burning down a McDonald's. Now it's interesting-- who goes to McDonald's in France? It's not tourists. They don't go to-- it's Frenchmen who go there.

And now is this-- this-- it could be-- it could be regarded and is regarded, of course, by some people as something-- a deprivation of the right of France to have its own cultural things. And these examples usually in conflict turn out to be some kind of local economic interest, like protecting farmers or something like that.

Well, I think you have to ask yourself-- certainly about its self-sufficiency, of course. International trade is a branch of self-sufficiency. And that-- we can go into the argument as to whether you want self-sufficiency. I think it's a bad idea for every point of view, but that is a conceivable thing. But it's certainly-- the idea that most of this attachment to the Japanese growing your own rice or something like that, that's not self-sufficiency for the individual, by the way, that self-sufficiency to Japan, but it's no way improving self-sufficiency of any individual. An urban Tokyo-- a Tokyo persons is as much the victim of the Japanese farmer as he would be of a Thai or American farmer.

Well, the-- for example, that's an extreme case cause the Japanese actually ordinarily exclude foreign rice completely. And one of the fears, according to my Japanese friends, is they will find that American rice is superior. And there's some evidence for that, by the way.


JOSHUA COHEN: There you go.

AUDIENCE: A comment that Professor Berger can respond to, but I have a question for Professor Solow. The comment is the race-- the race car driver analogy to me fails because there's a kind of race where-- I know one or two examples, the drivers walk away unscathed and all the spectators get killed and pit crew gets killed next. I know a few drivers on beaches who are unscathed. So that's-- I don't think that analogy works in globalization.

The question I have for Professor Solow is, of the three remedies you mentioned, and everybody who's been talking about buying of power, you didn't discuss the campaign finance reform issues that have been so prominent. I'm just wondering whether that's because it's so obvious, or specifically I'd like to ask whether the extreme of making it a publicly-financed system would not be a good solution, oh whether that's not realistic to want that.

ROBERT SOLOW: Well, you guessed right, I did not-- I didn't mention campaign finance reform because it seems to me, as I suppose it seems to everybody in this room, that it's a desperately-needed thing and would be an improvement or our political system, so I didn't think I needed to make a plea for trying as best we can to diminish-- probably never possible-- to exclude the role of big time money in politics.

I would think-- it's a difficult legal problem, I guess. One way-- and it would be-- God knows would be better for all of us, especially students, people who have to read and work and things like that is to shorten the damn political campaign and have less time for the spending of money, but it's difficult to see how that can be done without violating individual rights, rights of free speech and so on.

But I think that-- I don't want to take too long about this-- an extremely important advantage that we could create for ourselves is either to go over to public financing of political campaigns or to do some quite drastic limitation on what can be spent.

JOSHUA COHEN: Let me go to you on the aisle. Yeah.

AUDIENCE: My question is, as everybody-- you all agree that globalization is necessarily--

JOSHUA COHEN: Can you talk into microphone?

AUDIENCE: I said you all agree that globalization is necessary. But what I'm asking is that when America wanted to industrialize, most countries that industrialized late after Britain have to close their borders in order to grow the economy, to grow the new industrial stuff to become competitive in the market.

So what I'm asking, why couldn't the developing countries be allowed to do so? Because globalization means opening the borders and competition between young industries and advancing industries. So what I'm asking next is, is globalization not a way for pushing all the polluting industries to developing countries and making benefit of it? If not, why can't we allow globalization to permit movement of labor? Not only capital and investment, but movement of labor so that it is globalization. Why is globalization against movement of labor? Thank you.

ROBERT SOLOW: I'm afraid I didn't understand.

KENNETH ARROW: One aspect is we're not permitting immigration along with the rest of globalization.

ROBERT SOLOW: Oh, oh, oh.

KENNETH ARROW: And you're right. Well, I don't who wants to tackle this. Is this as strong as-- if I understand your question correctly, I didn't quite-- you were saying that globalization, because of free trade-- so say industries move from the United States or other advanced countries into the less advanced world, and then you're worried about the-- apparently you don't regard that as a good-- I don't know why you don't regard that as a good solution, by the way, since it enhances the wealth of the world.

You suggest that instead of that, you're going to have migration of labor.

AUDIENCE: No, no, no. My question is, why is it that polluting industries migrate to developing countries? Well what is happening is the race to the bottom line, not even race to the bottom. Industries that are highly polluting-- for example, recently America passed the Africa Growth Opportunity Act. Under the--

KENNETH ARROW: Speak a little more slowly? I'm afraid--

ROBERT SOLOW: We're not understanding you here.

AUDIENCE: Do not understand me. OK, let me start off right. Why is it that when America wanted to industrialize, it had to close its borders so that young industries could grow and later become effective to compete with Britain? As France did and Germany did. Why is it that in the period of developing countries, they would not be allowed to do so?

And why is it that the developing countries are not allowed to take the responsibilities of polluting industries? Because there's no the race to the bottom line, not a race to the bottom. In this case, all the polluting industries, the chemical industries, textile industries are being shifted to developing countries. And it is devastating the environment of these areas. Now why can't we move-- allow labor its way to move around from developing countries to developed country? That's my question.

SUZANNE BERGER: I think what-- you're really asking about two things. One, what's the relationship between globalization and the possibilities for growth of today's developing economies. If societies like South Korea, Taiwan, Hong Kong were able to grow to some extent-- or Japan we're able to grow-- in part, they did do that-- behind closed borders, and one of the possibilities, if we, in fact, imposed through WTO or imposed through the IMF and the World Bank trade openness on today's developing economies, will we hurt their growth?

And I'll leave this question to my economist colleagues here, but I'd like to address the second question that you asked, and that is, why don't we allow free migration of people across borders? And in fact, during the first globalization, that globalization from the middle of the 19th century until World War I, there were far more massive migration of workers across national borders than anything we see today. And the result of that was that the price of-- wages-- wages fell in the societies into which the immigrants moved, and wages rose in the societies from which the laborers departed.

And I think that there is a keen sense in-- today-- in our population that the massive entry of new immigrants would be bad for peoples-- for the wages of the existing population. And so this is politically an extremely unpopular-- it's an extremely unpopular political move. That's why. Not that there is any justice associated with it, it's the luck of the draw which side of a border you happen to live on.

ROBERT SOLOW: Let me just add one more point, not to this particular issue, but to what I gather now you are asking about. If one of the characteristics or one of the accompaniments of what's called globalization is the free movement of capital from rich countries to poor countries, then that is probably the single most powerful force that is available for improving the standard of living in poor countries.

What distinguishes poor countries from rich countries generally is that poor countries are labor-rich and capital-poor, and rich countries are capital-rich-- not always labor-poor, but relatively speaking, highly capital-intensive. That provides a natural advantage both for capital-seeking profit, which is what it tends to do, and for poor countries that find themselves without the capital equipment that's the absolute-- absolutely necessary basis for rising incomes per person-- or rising wages to put it bluntly.

They should be welcoming capital from abroad. There's no reason to allow foreign corporations to dominate the politics, to dominate the culture, to do any of those bad things, but the capital itself ought to be welcome.

JOSHUA COHEN: I had-- there and then there. Yeah, go ahead.

AUDIENCE: Yes, this is directed to Professor Berger, pretty much. We live in a ever increasingly complicated feedback network in the world. Feedback networks are very well understood, particularly here at MIT, but they're also prone to instability unless they're designed very, very carefully. Could you comment on that in the context of all of this?

SUZANNE BERGER: Could you say more?


ROBERT SOLOW: Could-- well, I'll-- I think that it's a sort of poetry to say that we live in a feedback network and feedback networks are-- have the kinds of characteristics that you mentioned, instabilities and whatnot, unless they're carefully designed. But I called it poetry because I think the direct applicability of that sort of formulation to the kinds of problems we are discussing here is small, very small.

And the reason is that the elements of the network that you're talking about are human beings, corporations, whole societies, governments, legislatures, terrorists, God knows what. And we know very little about the responses of those elements to simple shocks, to simple disturbances. We don't know their operating characteristics very well. And the notion that you could think of a whole society, the society we live in as a feedback network we live in, is perhaps a good metaphor, but I don't think at the moment-- or for the next long period of time-- it's going to be a metaphor that we can translate into diagrams and equations.


AUDIENCE: OK, should I start--

JOSHUA COHEN: Microphone's coming.

AUDIENCE: All right. I think Sweden has been mentioned a couple of times here, so I might just as well say something, because I come from Sweden and I've been here for six weeks. And one thing that strikes-- strokes-- strick? No? Strikes me as how many more choices Americans have to make individual-- individualists choices for insurance and where to-- how to invest your pensions and what telephone company or whatever you have to-- you want to choose.

And this is something that your less-regulated capitalism forces upon you, I guess, if I could put it in that way. And I wonder, do you think that this-- all these choices in the US, are they good for democracy? Do they make people feel more empowered in order to participate in democratic activity or equality things? Or is it negative because it takes so much space of the information flow with commercials and so-- or is it irrelevant for democracy?

ROBERT SOLOW: Well, I think it's probably accurate to say that the availability of those choices is, in the American culture and the American level of income, welcomed. Very few-- I have occasionally tried the experiment of walking into a drugstore and saying, I'd like some toothpaste.


And the salesperson says, what kind of toothpaste do you want? And I said, I don't care, I just want some toothpaste. And there's a--

JOSHUA COHEN: And they say, where are you from?

ROBERT SOLOW: Yeah, no--


There's an-- you'd think that a good drugstore proprietor would know what brand of toothpaste his margin is 8/10 of 1% bigger on, and would thrust a large tube of that into my hand. But no, no, no, I can't tell you what toothpaste to have, you have to say what toothpaste you want. I've even sometimes gone so far to say, they're all alike, and-- no, no, no.

But the-- it's a funny experiment, but the point is I think valid, this is a cultural-- cultural economic thing, but choice is generally regarded favorably. Now we all agree, by the way, that political choice is a good thing. One could say yes, but you don't have to choose your portfolio for your pension fund, and probably a lot of people who do choose it would be better off if somebody else chose it for them. But who? They'd have to choose that person.

In any case, I don't know how Swedes feel about restricted choice, if they feel themselves as being hemmed in and having choices made for them that they would rather make for themselves. But on the whole, it sells in the US to widen choices that are available.

KENNETH ARROW: You're a multi-party system. So apparently when it comes to the booths, the polling booth, you obviously have more choice than the Americans. So-- and this doesn't seem to disconcert anybody in Sweden, right?

JOSHUA COHEN: Last question.

AUDIENCE: I don't know that I need it. I have a simple question, and that is we've talked to everything in a steady state, and the world population explosion is in front of us. And it seems to me the biggest thing that's facing us, and you haven't mentioned what effect that will have on capitalism and democracy.

ROBERT SOLOW: Well, Dr. Baranick is certainly right that population growth is a very, very large phenomenon and almost certainly a problem for the world. What its effects on democracy will be very hard to say. As the world gets more crowded, there will be more pressure to move across borders, and this may have influences on the way we live or our political lives.

If increasing population should in large parts of the world-- not in all-- force down standards of living, that would certainly affect both the way we organize our economies and the way we organize our political life.

KENNETH ARROW: To pick up on this a little bit, we notice that the population growth is concentrated in the countries where the democracy is least well-established. And this, I think, is the thing-- in other words, the average degree of democracy is going down for statistical, so to speak, just for-- on a pure counting basis. In fact, the countries of Western Europe are showing remarkable-- and actually, almost incredible degrees of population decline.

Now of course, one of the things-- and this links back to the-- links back to an earlier observation-- is that you're getting vacuums into which immigration is induced to flow. It's true that, as Professor Berger said, that immigration flows are not what they were in the-- around the turn of the century-- the last century ended years ago-- but the-- but they are-- there are large-- I mean, Italy was a country of emigration, it's now a country of immigration. And it changes-- there are lots of problems in assimilation connected with immigration, which-- they are transitory, but as your question hints, transition may be a long period, and we've got to worry about what happens in the transition.

But the real problems it seems to me is the growth in countries with low-- with relatively low democratic experience. And this-- certainly if you think of the idea, which has been suggested in questions about international institutions and the idea of responsibility of international institutions, it seems to me this is an increasing block-- a block to the democratization of-- and it is striking that these institutions are what somebody once called-- what [? Calabrese ?] once called it, aresponsible agencies.

They're not literally aresponsible, but the links are they're autonomous and they're-- the European Central Bank is incredible. There's no political counterpoint. Here you have a central bank running on money with no political counterpart. And in the short-run, there are perfectly good reasons why that happens. And I'm sure it'll run very well for a while. However, you worry about the long-run of-- what the long-run is.

And I think the attempt to-- the idea of discharging, increasing the role of international institutions, which there are obviously a lot of pluses, is going to be held back by the demographic imbalance. Democratic countries are not going to be prepared to give up their sovereignty to such organizations.

JOSHUA COHEN: It's an instance of our theme here, that when you make an agreement with speakers, you give-- there's a kind of contract you enter, and they get a certain privilege, which is the privilege that you end at the time you promised them, to end that even when most of the people in the room will have their hands up would like to keep going.

So I'd like to thank the speakers.


I thank all of you for a wonderful session, and it's time to end these two days that I thought were spectacular. Thank you very much.