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Frank S. Robinson stands up for the free market.
Capitalism’s critics triumphantly proclaim that this rotten system of greed, exploitation, and social injustice is now discredited as a failure. ‘Corporate’ and ‘capitalism’ are curse words. I will offer a different view: that the free market has not failed, is not morally bad, and in fact serves deep human values. This is not to disregard its downsides, and, yes, victims. We must pay heed to them, and various reforms might help. But it’s mistaken to imagine society as a whole being better off with some radically different system.
First, free market capitalism has not failed. We have suffered from big mistakes and abuses in financial and credit institutions. The banks, investment houses, trading firms, and mortgage outfits perform a function within the larger system, facilitating flows of money. That’s analogous to your car’s carburetor: it’s needed to make the engine run, but it’s not the engine. The economy’s engine, the true heart of capitalism, is not Wall Street or the City: it’s the production of goods and services, rightly called ‘the real economy’.
That’s what Adam Smith’s 1776 book The Wealth of Nations was about: showing how a free market in products benefits society. Some today dismiss his theory as reflecting a na ïvely idealized view of commerce. Not so. Smith was in fact caustic about businessmen’s venality; but his key point was that in a free market such self-interest leads them to provide goods we want efficiently and affordably (or else they couldn’t be sold). The market is a vast information-driven system, matching up supply and demand – Smith’s ‘invisible hand’.
This classical idea of free market efficiency, as devolving from rational self-interest, has also been derided lately. Alan Greenspan, ex-Chairman of the U.S. Federal Reserve, notably spoke of his mistake in thinking that the self-interest of Wall Street operators would serve to counteract market excesses. Furthermore, science has shown that emotions can undermine rational decision-making, and often people don’t even understand their own interests or desires.
This argument against market economics might be correct if people were never rational. Yet, though imperfectly we do employsome considerable rationality in how we pursue self-interest. And free market theory does not assume every economic decision is rational. It merely assumes that your free choice is more likely to improve your welfare than if you don’t have any choice; and that society as a whole is better off the more such freedom there is.
Some banks and traders did make bets that in hindsight proved disastrous. Yet even if financial markets are more prone to go haywire than markets in goods and services, demonization of the former is overdone. Greece blamed those perennial scapegoats, ‘speculators’, for the shredding of its credit. Well, there was indeed speculation among bond traders that Greece’s debts would prove unpayable. That was hardly irrational. The financial markets performed the desirable function of spotlighting Greece’s unsustainable profligacy. ‘Shoot the messenger’ is not the proper response.
However, again, the real economy concerns not financial speculation, but the production of more down-to-earth goods and services. Even there, mistakes can be made – remember the Edsel car? – but by and large businesses pursue profit rationally, by meeting customer desires in an efficient manner. That is the essence of free market theory, and nothing in behavioral science or recent history disproves this theory or negates the fact that, in the big picture, it works. The real economy has stumbled, but words like ‘collapse’ are wildly overblown. Capitalism continues to chug along generating comfortable incomes for the great majority, and resources to help the rest.
No one believes the market is always right, or answers every societal concern. That’s a straw man caricature. Government does play a necessary role – not running the economy but facilitating it, and ameliorating capitalism’s acknowledged downsides.
Free market believers have been labeled simply deluded, because markets are never free. Perfectly free? Well, nothing ever is. That hardly refutes the belief that more freedom is better than less. We do accept laws to regulate human conduct – to prevent arson, murder, jaywalking, etc – and likewise, businesses too are restrained from harmful, antisocial conduct. Thus nobody advocates ‘unrestrained’ capitalism either. That’s another straw man. In fact, businesses must be regulated to protect the free market’s freedom – to keep markets open and competitive – with government as referee. That’s what ‘unfettered’ capitalism should really mean.
Consumerism is Necessary
Free enterprise does do the job Adam Smith described, giving us a cornucopia of goods and services. This is often denigrated as ‘materialist consumerism’ – some sort of offense against virtue into which we’re somehow manipulated. But Howard Bloom’s book The Genius of the Beast (2009) explores how our purchases reflect deep, ineradicable emotional needs, most prominently the assertion of self-identity. We are highly social animals, and a lot of our spending is governed by its anticipated effect on our relationships. Businesses make money not, primarily, by conjuring up false desires, but by identifying and satisfying real ones. If you think about it, the bulk of your spending goes not on needless fripperies, but things you consider indispensable. (Ironically, critics of ‘materialist consumerism’ often also bemoan the inequality that keeps the poor from fully participating in it.) Moreover, the production of goods and services is what gives most of us the jobs and incomes enabling us to buy them. With no consumerism there would be no such jobs. A fine virtuous society we’d have then.
Sneer if you like at our cushy modern affluence – our comfortable homes, abundant food, recreation and entertainment, health and longevity – but please compare it against the lives of our forebears, which Thomas Hobbes characterized in Leviathan (1651) as “poor, nasty, brutish, and short.” This vast uplift has occurred by the grace of free market economics. In the past century, average real worldwide incomes rose five-fold, or 500%. The average human today lives five times better than in 1900. That gain did not come from the world’s socialist economies.
Now, some commentators denounce such economic growth as a perverted lust we could do without, urging us to embrace simpler lives. Easy to say, perhaps, when you’re in our modern cocoon of comfy affluence. But for the world’s poor, economic growth is their road out of squalor. Every percentage point of economic growth for a society tends to reduce the numbers in poverty by two percent. In the last two decades, a billion people have climbed from extreme poverty to a decent living standard. That is capitalism’s most fundamental human value.
Competition is Freedom
Competition is an essential element of free market economics. Businesses never gain permanent advantage: there are always alternative ways to satisfy demand. Economist Joseph Schumpeter called business ‘creative destruction’ – a never-ending Darwinian struggle. Like a new predator in an ecosystem, an innovative new competitor can wreak destruction upon rival firms. The list of top companies is continually changing.
Thus in a genuinely free (i.e. competitive) market, corporations don’t control the economy – they block one another from such power. It’s mainly government intervention that confers such control on business, through protectionism against competition, for example. French consumers gripe that even French products are cheaper in Germany. Why? Because numerous French laws shield businesses from competition. They even have laws against price-cutting. This reflects French beliefs that competition is ‘harsh’, and its opposite is ‘social solidarity’. In fact, the opposite of market competition is monopoly and privilege.
But when competitors battle for market share, the real winners are consumers, who pay less for more. Air travel is a perfect illustration. Once, flying was heavily regulated, and only for the rich. Deregulation and competition opened it to the masses. If airlines profit too, we shouldn’t begrudge this. But in fact, thanks to competition, the industry’s cumulative profits over its entire history total approximately zero. So here, all the benefit has gone to consumers, and none to the ‘greedy capitalists’ who made it possible. Talk about economic injustice!
Another example is TV. In my childhood, three major networks ruled supreme in America. Then along came cable and VCRs, cutting the heart out of their business model. A whole new video sale and rental industry sprang up. This was challenged by Netflix, with another way of serving consumers. And now Netflix’s lunch may be eaten by Redbox, with a newer idea still. Creative destruction.
Profit is Productive
I recall a newspaper column decrying that the American healthcare system ‘now’ has ‘making money’ as its primary mission. Well, healthcare workers do need to make a living – just as the columnist provides columns to make a living. And why shouldn’t you expect to pay for what you receive, so the providers earn profits?
The word ‘profit’ gets mixed up with ‘greed’. But isn’t it natural to prefer having more rather than less? Adam Smith’s most famous line was that “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Greed is bad when it’s fed at others’ expense; but those tradesmen feed others, and so their desire to profit thereby is good, not bad. It leads them to provide your dinner, and to make it as tasty as possible so you’ll come back tomorrow. And yet, while we do honor the worker who earns money by producing something, still many condemn the businessman who earns a lot of money by producing a lot of things.
Capitalism’s critics say it does impel people to feed their greed at the expense of others, and of their own integrity: it’s a rat race, where only the rats win. But some will always act like rats whatever the economic system. Fascism, socialism, and communism all engendered their own (far deeper) moral corruptions, without the free market’s benefits. Democratic politics also impels people to make moral compromises, even to lie and cheat, to achieve their aims – but that is no argument against democracy. Things are even worse without it. Similarly, that businesses sometimes do bad things doesn’t make capitalism intrinsically rotten. Just as most citizens earn their livings honestly, most businesses profit not by exploiting, but rather by serving people. Properly understood, the raison d’être of any business is not simply profit, but to profit by creating value for customers.
The essence of a free market economy is exchange. It’s not a zero-sum game: when two people trade, each gets something she values or needs more. That makes society richer. In this kind of economy, you do what you’re best equipped to do and trade for your other needs, circumstances allowing. This system enables the division of labor, the specialization, that also makes us all richer. And, as shown in Matt Ridley’s book, The Rational Optimist (2010), trade speeds the dispersion of ideas. Indeed, mirroring biological trade – i.e. sex, which creates more diverse, adaptive, and successful organisms – economic trade is the equivalent of ideas sexually reproducing. The result is more and better ideas, and a richer world.
In addition, a trading ethos rewards moral behavior, because building trust among participants benefits all. A free market economy also fosters the virtues of prudence, diligence, foresight, and inventiveness. It encourages cooperation and collaboration to achieve desirable ends. And if you want a utopia where everyone is busy helping others, try a free market society, because that’s how its members prosper – by giving others something they value, whether it’s goods or services or labor.
The Market is Pro-Democracy
The most important moral dimension of free market economics is that it is, indeed, free: it involves people seeking to flourish in their own ways. Any alternative has required coercion, forcing people to relinquish what they personally strive for. This isn’t just about material self-interest. As Hegel explained, such freedom enables us to satisfy not merely our animal needs, but our deepest desires for dignity and self-worth.
Moreover, as The Economistsaid on January 16, 2010 (p.60), “democracy has never endured in countries with mainly non-market economies” because their concentration of political and economic might “sucks the air away” from the diversity of power centers that coexist in a free economy. Those who believe corporate power is a problem should think twice about merging it with the vast power already wielded by government. Would we want a society where the state is everything – the state our one shepherd, and we its sheep?
The market is also democratic in its results. Rewards are mostly not garnered through political or hereditary privilege, but from people’s willingness to part with cash for value received. What counts most is not who you are, but what you do. It’s precisely because the market is so ‘vulgarly democratic’ that the elitist Left hates it so, as Irving Kristol remarked in Neoconservatism: The Autobiography of an Idea, p.208 (1995).
This ‘vulgar democracy’ is just what America was set up to achieve. Older societies were based around landed aristocracy and/or might-makes-right – not so good for ordinary people. America was instead organized around free commerce, which its founders believed would make for a better kind of human being, with all the stalwart virtues I’ve mentioned – self-disciplined, industrious, innovative, ambitious – with the resulting promotion of the general welfare. And free enterprise has not only made America prosperous, but a vibrant, dynamic, and progressive society as well.
Wealth is Good
The chief indictment of capitalism centers upon inequality.
Let’s clarify this issue. Poverty is a bad thing. Wealth is the opposite to poverty. But some people apparently believe wealth somehow causes poverty, and hence wealth is bad too.
This reflects a zero-sum concept of capitalism, with a few individuals profiting at others’ expense, as though there’s only a fixed amount of wealth in the world, the rich take more than their share, and every dollar gripped by a capitalist makes some peasant a dollar poorer. But wealth is expandable. And although of course some people gain wealth parasitically, most is gained by productiveness, which increases society’s overall riches – it’s not taken, but earned, through making others better off, not worse off. Thus it’s wrong to think that wealth causes poverty.
Wealth is created by productive human effort, it doesn’t fall like manna from Heaven. So we need the rich. More precisely, we need the opportunity for gaining riches, which motivates people to the efforts that make us all better off. When everybody is working to get ahead, it’s one big human betterment machine.
A recent book by Gar Alperovitz and Lew Daly, Unjust Deserts, makes a counter-argument: that the true source of wealth is not individuals, but society itself. Its infrastructure, educational system, and accumulation of knowledge, supplies the platform for the production of riches. Hence, they contend, everyone deserves equal shares in the wealth it produces.
It’s true that society makes wealth possible, and that this justifies disproportionately taxing the rich, which we already do (over half of U.S. income tax revenue comes from the top 5% of payers; almost a third from the top 1%). But does everyone deserve an equal share irrespective of their contributions? That unjustly devalues individual effort. And if you’re guaranteed an equal share regardless of how hard you work, why work hard? That was the real downfall of communism. The proletarians used to say, “We pretend to work, and they pretend to pay us.”
It’s also been argued, by Rob Buitenweg, in Human Rights, Human Plights in a Global Village(2007), that all wealth ultimately derives from force, manipulation, exploitation, etc – so that social justice requires seizing and redistributing the riches. Since you’re reading this, your wealth is probably in the top few percent globally. Did you get it by ripping off the poor? Or mainly by doing good things for which you profited, or were deservedly paid? Admittedly, the rich can exploit their power to gain undue advantage. It’s unrealistic to imagine any social model where no one has undue influence. It’s certainly not socialism or communism. But at least in a free economy power is greatly constrained by competition. If you’re profiting unduly, someone will find a way to stymie you by offering a better deal. Further, in a democracy, the rich are ultimately at the mercy of the masses through voter-driven legislation. That’s why the rich pay disproportionate income taxes.
‘Social justice’ language is problematic because while some poverty may be rooted in injustice, much is just misfortune, and so uplifting the poor should not hinge on blaming their plight on the rich: it is instead simply humane. And what is the so-called social justice alternative to capitalism? Some in this field talk (vaguely) of a ‘sharing society’ where we all take care of each other. That’s a noble idea, but the problem, again, is that there won’t be that much to share if people aren’t motivated to produce it by the prospect of advancing themselves.
Leftists worry too much about wealth distribution, and not enough about generating wealth in the first place. They want to cut open the goose that lays golden eggs (and you know how that turned out). In the resulting society, the poor would therefore be even worse off than under capitalism, which at least generates lots of resources for helping them. The real redistributionist challenge is to spread not the fruits of productiveness, but productiveness itself – to create the opportunities for people to prosper through their own efforts. And people are happier when they accomplish their own prosperity than when receiving unearned largesse.
Self-created prosperity is indeed what capitalism has achieved. In developed capitalist societies, the great majority earn decent living standards, and even our ‘poor’ should actually be rated as ‘rich’ on any comparative global or historical assessment.
Success is Just
A leading egalitarian philosopher was John Rawls, who in A Theory of Justice (1972), posed the question of what kind of society you’d choose under a ‘veil of ignorance’ – that is, not knowing what advantages or disadvantages you’d have in it. Rawls opined that people’s advantages are basically undeserved luck, which should be tolerated only if the system involved benefits the less advantaged even more.
In reality, success in life is molded by both luck and pluck. Many born with lucky advantages squander them, while many born disadvantaged nevertheless prosper through hard work, enterprise, and drive. Yet having such personal qualities can also be considered luck; and that’s the playing field Rawls would need to level. A better concept for a level playing field is not everyone achieving the same score, but to apply the same rules to everyone. Equalizing the score would require holding back the stronger players; but society does not gain by squelching people with talent and drive, or redistributing away the fruits of their efforts. Instead, we’re all best served if such individuals are encouraged to make the most of their gifts. That’s how we all best benefit from the prizes given out in life’s lottery.
Rawls argued that choosing a society from behind the ‘veil of ignorance’ implies that any social contract must be egalitarian, because nobody would agree to risk his or her own poverty. However, many rational people would freely accept the risk of poverty if doing so means better outcomes overall. I’d opt for the society where the most people have the greatest opportunity to thrive. That means one with the greatest possible freedom to better oneself, not one with an equality fetish which kills the incentive for productiveness, making us all poor.
What really matters is one’s absolute quality of life, not whether it’s equal to someone else’s. Society is better concerned with the size of the pie than of the slices. Capitalism expands the pie, so the poor can get more without anyone getting less. And there is far more social and economic justice in a free market society, where people benefit from their contributions, than in a society seeking equality by stripping its most productive members of the fruits of their sweat. Where is the morality in one set of people presuming to redistribute what others have earned? How can their opinions of what constitutes social justice be objectively validated?
Capitalism is as Good as it Gets
Capitalism is often portrayed as sacrificing some in order to benefit others, in a cold-hearted utilitarian calculus. No economic system will ever work to everyone’s benefit. But capitalism at least gives most people the opportunity to flourish, and the resultant society is the richest attainable, even for the losers.
The Left talks about the ‘contradictions of capitalism’, but the only contradiction is that individual striving for advantage serves the common good. It’s anti-capitalism that’s contradictory – the idea of achieving justice by taking away what people have earned. And that this also nurtures poverty rather than solving it.
Capitalism is not perfect. No economic system ever can be, and the quest for utopia has produced rivers of blood and tears. But if we accept human imperfection, as we must, a free market economy is as good as it gets.
© Frank S. Robinson 2011
Frank S. Robinson is a former administrative law judge, and the author of five books, most recently The Case for Rational Optimism (Transaction, 2009). His blog is rationaloptimist.wordpress.com.