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The case for capitalism

November 7, 2010

People are losing faith in capitalism. Even in America, only 53% of people believe that capitalism is better than socialism. For under-30s, that number is only 37%.

Despite the incredible gains in health, wealth and happiness that have been correlated with the free-market system, compared with the relative failures of planned economies, many people are turning away from capitalism and embracing the security blanket of big government control.

The free market has an image problem. While the government has representatives who can get in front of a camera and with a solemn face tell you how much they care about you and your family, the “market” is an abstract concept which is hard to understand and has no opinion about anything, including your family.

The great advantage of the government is that it can claim good intentions. The market doesn’t have any intentions. Consequently, it is easy for some people assume that the government is “nicer” than the market. But poor people can’t eat good intentions.

The reality is that while the market can’t give a speech in parliament or hug your baby, it does an amazingly good job of coordinating people in such a way so that we are all better off. The market doesn’t do this because it likes us. But what matters is that it works.

The reason that the market works better than well-intentioned politicians comes down to the core economic problem of coordinating knowledge. In his famous article “I, Pencil“, Leonard Read explained how no person has all the skills necessary to make a single pencil. But all around the world, thousands of unrelated people come together to coordinate wood, graphite, wax, clay, paint, steal, erasers, capital, buildings, transport and other inputs and create pencils.

In discussing Read’s article, Milton Friedman expands:

“It is even more astounding that the pencil was ever produced. No one sitting in a central office gave orders to these thousands of people. No military police enforced the orders that were not given. These people live in many lands, speak different languages, practice different religions, may even hate one another — yet none of these differences prevented them from cooperating to produce a pencil. How did it happen? Adam Smith gave us the answer two hundred years ago.”

In his famous book “The Wealth of Nations“, Adam Smith had explained the process of the “invisible hand” where people all around the world acting in their own self-interest end up promoting the public good without even trying, through the process of the price mechanism and the free market.

The Sri-Lankan worker who helped mine the graphite to go into a pencil did not do that because he cares about the welfare of an Argentinean writer who needs a pencil. And the Argentinean does not buy the pencil to give a job to the Sri-Lankan miner. Both acted in their own self-interest, and the free-market produced an outcome where they both benefited, even though they will likely never even meet.

There was no super-computer, higher power, or politician who was putting all the pieces together. If we waited for bureaucrats to make a pencil, it wouldn’t get made.

The joy of the market is that it is able to coordinate a massive amount of personal knowledge and diverse information from around the world and use that knowledge to turn resources into things that people want. It would be impossible for any group of people to gather all of the necessary information first, and when the government tries to replace the market with a room full of smart bureaucrats (as they try to do in planned economies) they fail.

People instinctively want somebody to be in charge so they have somebody to thank or blame. And then politics can come down to an over-simplified contest of who has “better intentions”. But no amount of good intentions will make the government efficient at coordinating the diverse knowledge in society. And so the politician with good intentions, honesty and economic understanding will not offer to run the economy… they will step out of the way and let the market be free.

  1. Ben
    November 8, 2010 at 6:11 am

    Most points taken. In fact some libertarians have even convinced me that we need to open up the body parts market. (Seriously.)

    I’m not sure if I share some people’s pessimism in relation to capitalism’s image, however. Perhaps I’m more skeptical of pollsters.

    And do election results speak louder than poll-related Q & A chats? Many of the TEA Party-style House candidates in the U.S. for example were very successful.

  2. NoCaseNeeded
    November 8, 2010 at 11:30 am

    Even though America is moving towards socialism (with only 37% capitalism support from the under 30s), capitalism is growing in other parts of the world, the two most notable being India and China. Both countries came from governments stifling them, there are still some obvious issues, but the freedom that people have gained compared to the past has led to incredible growth and progress.

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