Economic Theories

I have always held Rudy Baum's editorials in high esteem because they reflect a broad mind that does not stop at the Atlantic and Pacific shores. His international perspective on current problems seems to surpass the intellectual capacity of some of his compatriots, as can be seen in recent letters to the editor (C&EN, June 1, page 2). I was amazed by the black-and-white picture presented by the authors.

The letter writers correctly describe the inefficiency of a communist (or, if you prefer, socialist) economy. A cruel field experiment, conducted over the course of more than 70 years, by the Soviet Union and its satellite countries, proved communism wrong. The writers are also correct that the main virtue of the free-market economy (or capitalism) is decentralization of decisions and responsibilities. To function, however, this highly efficient economy needs states or supranational organizations to provide equally efficient frameworks of order. One example of this order is found in the European Union.

Following World War II, a "social market economy" developed in Germany; similar systems have worked well in Austria, the Scandinavian countries, and, although somewhat differently, in France. By 1990, there was even a near-consensus among Conservative, Social-Democratic, and Green Parties to enlarge the concept to a "social-ecologic market economy" to achieve sustainable growth-the contrary of what we are experiencing right now.

The philosophy behind the social market economy is, at least in Germany's Freiburg School, called "ordoliberalism." Friedrich von Hayek, the great Austrian thinker cited in A. E. Lippman's letter, spent some years in Freiburg after his return from the U.S. This may be an indication that even this liberal economist and Nobel Laureate was convinced that some control is needed to provide more stability to capitalistic systems.

Unfortunately, the social market economy has been diluted, weakened, and partly replaced by pure capitalism (called "Anglo-Saxon capitalism" in continental Europe) during the process of increasing globalization.

The menace of climate change has also been known since the late 1980s, but all efficient measures have been obstructed at the international level and are still being obstructed by several leading economies that espouse faulty economic reasoning. It will be very difficult to make up for the lost time, because investments in long-lived industry have a timescale of about 50 years.

With regard to Mark Molen's letter, environmental protection is not just about protection of human health and local ecosystems, it is also about protecting the entire ecosystem of the planet. Climate protection is part of environmental protection, not a separate endeavor. I am glad the U.S. Environmental Protection Agency is now finally allowed to deal with carbon dioxide and other greenhouse gases as extremely dangerous pollutants, because that is what they are. It seems centuries ago that the U.S. was leading the fight against ozone-depleting fluorocarbons, but, in reality, this happened only 30 years ago.

Walter Kloepffer
Frankfurt am Main, Germany

I was disappointed by the letters regarding capitalism. It does not help to use loaded yet undefined terms such as socialism versus capitalism. Baum questioned unbridled capitalism (C&EN, Feb. 23, page 3). What bridles might be needed?

There may well be more viable models, but I will consider just two. In one, regulators (call them bureaucrats if you wish) make supposedly informed decisions, in the other the public makes them. The keyword here is "informed." The problems with the current economy are largely due to carefully engineered lack of information. In the toxic assets case, for example, the subprime mortgages had been relabeled as triple-A although they were actually junk bonds that had been sliced and diced sufficiently so that nobody could see what was really in them. This made them travel across the globe and internationalized this U.S.-made crisis. If regulators had the power or the inclination to look at what was going on, or if information had even been available to investors, the crisis might have been prevented. But the mortgage companies and banks involved carefully prevented both. That is what one might call unbridled capitalism.

A recent example of the approach via openness is given in Daniel Goleman's book "Ecological Intelligence: How Knowing the Hidden Impacts of What We Buy Can Change Everything," Broadway Press, 2009. Trans fats, introduced in the U.S. more than a century ago so that deep-fried foods could have crispy crusts and juicy interiors, were shown in a 1993 report from the Framingham Heart Study to lead to heart disease. This was confirmed in 1997, and eating trans fats rather than unsaturated ones was estimated to increase the odds of heart disease by more than 50%.

In 2000, the Food & Drug Administration estimated that about 7,000 deaths could be prevented annually by removing trans fats from margarine and other foods, and in 2001 the National Academies' Institute of Medicine confirmed the health effects. Consequently, FDA started considering whether the labeling of fats, already required by law, should be extended to show trans fats. The industry opposed this, arguing that there was no good-tasting substitute available. (Even if that were true, they only argued against letting the public know what they were buying and eating.) When not long thereafter FDA required labeling, the major manufacturers had actually "found" substitutes, and many had already lowered their use of trans fats. In 2007, Dunkin Donuts announced that it would no longer use trans fats. In a few short years, forced openness did what in a "socialistic" system regulators might have done.

Unfortunately, there are few, if any, examples where industry would volunteer such potentially profit-diminishing information. When industry has only a financial disincentive, voluntarism is not an acceptable solution for society as a whole. So the question is not whether, but how, to regulate: with bureaucrats, who decide for us, or with forced openness, so that we can do it for ourselves. I personally favor the latter as long as it is combined with educating the public about the issues involved. But some externally imposed constraints are needed: As any engineer knows, no amplifying system can be stable without negative feedback.

Robert de Levie
Orr's Island, Maine

Baum's editorial brought forth the expected uproar from those of us who were taught that capitalism is good and socialism is bad (weren't we all?). Apparently, no one teaches that the U.S. has a mixed economy. Our road system is government owned, operated, and patroled. Our armed forces are not available to the highest bidder, and our educational services are mixed. Some of our greatest universities are private, and some are government owned and operated.

Looking abroad, we find more economic success in socialist China than in the emerging capitalist economy in Russia. Few scientists would wish to conclude that either capitalism or socialism is more successful on the basis of these experiments.

A mixed economy seems to suit the U.S. May our country continue to be successful with its hodge-podge economic system that is based more on people's experience and observations than on textbook theory.

Nelson R. Eldred
Tampa, Fla.