How to think about capitalism

by | Apr 27, 2018 | Markets, Economy, & Government | 1 comment

James Lee Burke in his novel, Robicheaux, reminded me of something none of us should ever forget, “People are what they do, not what they think, not what they say.” The same is true for government policies and economic systems. What counts is how they perform, not how they are advertised. I hope my college-bound grandchildren will keep Burke’s wisdom in mind as they try to decide on their own what makes sense. I am terrified that their professors, most of whom will be leftists and proud of it, will tempt them to adopt ideas that appeal to their idealism, but in practice are terribly damaging, especially to the very people they want to help. I hope to inoculate them against ideas that are not just wrong, but downright dangerous.

An idea is wrong if the results from its implementation are different from what was promised or expected. An idea is dangerous if its effects are harmful. The most dangerous ideas are those which derive from good intentions or are presented as furthering goals almost everyone would support. Pope Francis in his condemnation of capitalism and free markets on grounds they promote excessive consumerism, greed, and indifference to the poor is the poster child of a well-intentioned man with wrong, harmful ideas.

David Gordon, editor of The Mises Review explains why the Pope is misguided. In brief, the Pope confuses the means people use to attain their ends for the ends themselves. Capitalism is the means by which people improve their situation, as they themselves define improvement. The essence of the capitalistic process is the voluntary exchange of goods and services among free people in free markets within an institutional framework providing for protection against force and fraud. The pope may not approve of what people want, but that disapproval is not grounds for criticizing the process by which they get what they want.

In Pope Francis’s view,  capitalism not only encourages people to focus too much on acquisition of material goods, but it encourages greed as well. Greed, he believes, causes the powerful to exploit the weak. As Milton Friedman pointed out, greed — the desire to better one’s position — is intrinsic to human nature. What matters to human well being is how that desire is channeled. Regrettably, the Pope fails to give us a comparative analysis of how well alternatives to capitalism have worked out for regular people.

The pope’s assertion that capitalism is harmful to the poor is just plain wrong. In the history of humankind, no other system has come remotely as close to producing  so much wealth so fast for so many. The pope like so many other critics of capitalism fail to ask the fundamental question, “Compared to what?” Capitalism like any system devised by man has its flaws. But compared to any other system, it generates more individual freedom and prosperity long run than any other -ism ever. In fact, every alternative to capitalism ever tried has ended in poverty for the masses, stagnation, loss of freedom, and enrichment of an entrenched, tiny elite at the expense of the many.

Critics of capitalism fail to understand that before wealth can be given away or taxed, it first has to be created, and there is no better wealth generating system than capitalism. The challenge for all of us who want to give a hand to the less fortunate is how to preserve the dynamism of an entrepreneur-driven capitalistic system — keeping the goose laying golden eggs — while acting individually and in communities to live up to the principles and dictates of the great religions.

Why does capitalism work better and why is it so disdained? Unlike any other way of organizing production and distribution, capitalism forces people who want to get rich to become the servant of others if they want to succeed. A capitalist doesn’t make money unless someone else voluntarily buys what he has to offer. Capitalism also is unique in another vital respect. Unlike communism, socialism, or any other -ism one can conceive, with occasional exceptions, no party to an exchange of any sort in a capitalistic system has a monopoly of power. I am constantly astonished and annoyed when socialists, prattling on about the evils of greedy, monopoly capitalists, seem enthusiastic about handing over monopoly power, backed by the threat of force, to an institution that throughout history always has been used by the few to enhance their power and wealth at the expense of the many. That institution of course is government. I cannot think of a single exception to this dynamic. Obviously, government is necessary to protect people’s property rights, the foundation of individual freedom, but over the long term, freedom and prosperity cannot exist unless the coercive power of government always and everywhere is strictly limited . The developed nations of the world are early in the process of learning this lesson.

If free market capitalism has proven itself by far the best way for humans to organize their actions so as to produce the greatest possible human flourishing, why is it so disdained? And why have other -isms been so appealing, despite always ending in stagnation, misery, and loss of freedom over the long run? The leadership cadres promoting various -isms tend to come from people who are very clever, interested mainly in gaining personal power, and skilled in doing so by appealing to people’s best instincts. Their universal mantra is, “I share your outrage at the injustices of the world. Give me power and I will subdue powerful exploiters [almost always capitalists] and will make the world better. The great majority of -ism supporters, however, are well meaning people who want their tribe, their nation, or, if sufficiently suffused with grandiosity, the people of the world to treat one another like family. I suspect that most of Bernie Sanders’ supporters fall in this category.

Capitalism works, but does not appeal to our emotions. Communism, socialism, and progressivism fail but do appeal to our desire to help and “give back”. In case after case –minimum wage laws, foreign interventions, foreign aid, the “fight” against climate change, etc. – policies founded on good intentions and a family-based model of how the world should work have led to results that at best are ineffective and often are disastrous.

Let us grant that the family model appeals to the best in our nature, the desire to nurture and protect other human beings and our island home. After all, within the confines of one’s immediate family, almost everyone acts according to the basic communist principle, “From each according to his ability, to each according to his need.” But I believe we must acknowledge that, however appealing, the family model does not scale to society, and every attempt to override this reality doesn’t just fail; it leads to stagnation and authoritarianism; the candle of individual liberty burns down. The reasons why the non-scalablity of the the family model is an iron rule are beyond the scope of this essay, but I will explore this in another post.

How does a young person who wants to make the world a better place decide what to believe in and support? Here are some guidelines:

  1. Ignore intentions; always ask for evidence of results over time.
  2. Start from the default position that more power to the people — decentralization — is preferable to more power to the elites — centralization. Understand the direction of the flow of power. Since Woodrow Wilson, the flow of power in America has been toward ever greater centralization of power in the hands of political elites and “experts”. Markets decentralize; governments centralize. To the greatest extent possible, government authority should rest with he smallest competent governmental jurisdictions, closely watched by and accountable to their constituents. The more remote the government body, the less power it should have. The trend in so far in the 21st century has been in the opposite direction, but there are signs the tide is ebbing if not turning.
  3. Always seek to understand why some people think an intuitively appealing “solution”  is a bad idea. What are the arguments of “the other side” and what are alternatives to what is being proposed? Don’t rely on an advocate to present “con” arguments. Be especially skeptical of what the powers-that-be are telling you.
  4. Always remember that the chances someone is talking self-promoting nonsense are high if they do not have skin in the game, i.e., they bear no adverse consequences if what they are proposing fails to perform as advertised.

The following example may bring these points to life. In recent weeks, there has been justifiable furor about Facebook’s promiscuous use of personal information for commercial purposes. This inevitably has led to the tired refrain, “We need regulation”. Regulation sounds like a good idea. But, when tested against our guidelines, it is revealed as nonsense. The history of government regulation is a history of capture buy powerful interests,very skilled at using power delegated to government by the people for their own private purposes. If the privacy issue is dealt with via regulation, what will happen is that the big, powerful digital technology giants, e.g., Google and Facebook, will hire the best lobbyists money can buy to tailor the interpretation of regulation in their favor. Innovation will become more difficult, and sooner or later a bureaucracy fiercely determined to entrench the status quo will spring up. The flow of power will be toward big government and big business. There is a much better, simpler, low cost, almost no government alternative: give every individual a property right to his own personal information. Since each person would own her own information, she would be free to use it as she wished. She could sell access to it in return for services or not, depending on her own preferences. Government’s role would be in the form of establishing the legal framework for defining and enforcing compliance with these property rights. Just like one’s dentist or plumber, digital information providers would be exposed to adverse consequences in the form of reimbursing people whose property rights they had infringed.

Besides wanting tools to decide what ideas they should support, young people also seem focused on how best to “give back”  There are lots of ways, but one of the best is to become a capitalist: start a business.


1 Comment

  1. Here Here! Even my democratic friends agree.


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About The Author

Sam Mitchell is a researcher by trade. For almost four decades, Sam's job has been to invest other people’s money as well as his own. The total amounts involved have been in the billions of dollars.

Sam lives or dies economically according to whether the findings and conclusions from his research are correct.

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