The Long and Winding Road

As we continue On the Road with Hayek this term, we are faced with questions such as “what is capitalism?” and “what does it mean to have economic freedom?”   These are questions that we tend not to get at when we are teaching the nuts and bolts of supply & demand or getting to the bottom of a subgame perfect equilibrium.  But a nice piece in the New York Times argues that maybe we should pay more attention to the former than the latter.  It is on the role of economists and economics in the face of radical economic and social change:

Perhaps the protesters occupying Wall Street are not so misguided after all. The questions they raise — how do we deal with the local costs of global downturns? Is it fair that those who suffer the most from such downturns have their safety net cut, while those who generate the volatility are bailed out by the government? — are the same ones that a big-picture economic vision should address. If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.

The whole article is well worth the read and also worth thinking about as we continue our lifelong quest in developing an economics ciricullum.

Also fundamental seems to be this piece by Luigi Zingales on meritocracy and democracy.

[M]eritocracy is a difficult principle to sustain in a democracy. Any system that allocates rewards on the basis of merit inevitably gives higher compensation to the few, leaving the majority potentially envious. In a democracy, the majority generally rules. Why should that majority agree to grant a minority disproportionate power and rewards?

… Even the most meritocratic people, then, can vote against meritocracy when it damages their own prospects. No wonder meritocracy is so politically fragile.

However, two factors help sustain a meritocratic system in the face of this challenge: a culture that considers it legitimate to reward effort with higher compensation; and benefits large enough, and spread widely enough through the system, to counter popular discontent with inequality.

Certainly, we can see rather vocal and enthusiastic segments of our population questioning both of these assumptions.  What are the implications for American-style capitalism?