Columbia University professor Edmund Phelps was recently awarded the 2006 Nobel Prize in Economics. The media is portraying him as a defender of the free market, and a recent essay he wrote for the Wall Street Journal is described by Instapundit as “a strong defense of capitalism“. But if one looks closer at his essay, there are a lot of problems from the Objectivist perspective.

Phelps does correctly contrast the European mixed economies with the American less-mixed economy, and shows that the increased level of statism in the European systems stifles innovation. But when he defends the American version, he says the following:

We all feel good to see people freed to pursue their dreams. Yet Hayek and Ayn Rand went too far in taking such freedom to be an absolute, the consequences be damned. In judging whether a nation’s economic system is acceptable, its consequences for the prospects of the realization of people’s dreams matter, too. Since the economy is a system in which people interact, the endeavors of some may damage the prospects of others. So a persuasive justification of well-functioning capitalism must be grounded on its all its consequences, not just those called freedoms.

To argue that the consequences of capitalism are just requires some conception of economic justice. I broadly subscribe to the conception of economic justice in the work by John Rawls. In any organization of the economy, the participants will score unequally in how far they manage to go in their personal growth. An organization that leaves the bottom score lower than it would be under another feasible organization is unjust. So a new organization that raised the scores of some, though at the expense of reducing scores at the bottom, would not be justified. Yet a high score is just if it does not hurt others. “Envy is the vice of mankind,” said Kant, whom Rawls greatly admired.

In addition to citing egalitarian philosopher John Rawls, he also cites Kant:

As Kant also said, persons are not to be made instruments for the gain of others. Suppose the wage of the lowest-paid workers was foreseen to be reduced over the entire future by innovations conceived by entrepreneurs. Are those whose dream is to find personal development through a career as an entrepreneur not to be permitted to pursue their dream? To respond, we have to go outside Rawls’s classical model, in which work is all about money. In an economy in which entrepreneurs are forbidden to pursue their self-realization, they have the bottom scores in self-realization — no matter if they take paying jobs instead — and that counts whether or not they were born the “least advantaged.” So even if their activities did come at the expense of the lowest-paid workers, Rawlsian justice in this extended sense requires that entrepreneurs be accorded enough opportunity to raise their self-realization score up to the level of the lowest-paid workers — and higher, of course, if workers are not damaged by support for entrepreneurship. In this case, too, then, the introduction of entrepreneurial dynamism serves to raise Rawls’s bottom scores.

Then there’s his mention of the usual purported failures of capitalism, without mentioning how they are actually caused by government interference in capitalism (rather than a problem with capitalism itself):

Actual capitalism departs from well-functioning capitalism — monopolies too big to break up, undetected cartels, regulatory failures and political corruption. Capitalism in its innovations plants the seeds of its own encrustation with entrenched power. These departures weigh heavily on the rewards earned, particularly the wages of the least advantaged, and give a bad name to capitalism.

And his conclusion spells out his purported defense quite clearly:

I conclude that capitalism is justified — normally by the expectable benefits to the lowest-paid workers but, failing that, by the injustice of depriving entrepreneurial types (as well as other creative people) of opportunities for their self-expression.

So Phelps’ moral defense of capitalism rests on two pillars — the fact that it is the best system for helping the poorest amongst us, and that it helps maximize “self-expression” of creative people. Although these are incidentally true, they are so far removed from what Objectivists would regard as the fundamental moral defense of capitalism, namely man’s need to think in order to live, and the corresponding need for freedom from inititation of force in order to use his mind. So if this is a “strong defense of capitalism”, I’d hate to see a weak one!

But it’s always interesting to see what is portrayed as a moral defense of capitalism in the mainstream culture (from a well-respected Nobel laureate in economics no less), because this is an area where Objectivists have a critically important and unique contribution of ideas relative to the libertarians and conservatives.