Sunday, May 23, 2010

A Primer On Capitalism

Marxism, socialism, and other forms of leftism have long been discredited to anyone not driven by ideology. Indeed, after having bankrupted country after country, it has become obvious that even a little bit of socialism is destructive. But capitalism has failed now too, right? Actually, no. What has gone “wrong” is that liberals have misinterpreted capitalism and falsely attribute their own failures to it. Let’s dispel a few of these misinterpretations.

1. The Left Misuses “Market Failure”:

Since Clinton’s term, the left has started using the lingo of capitalism. They just don’t use that lingo correctly. For example, capitalism is not entirely opposed to regulation as the left likes to claim. Capitalism has long recognized that regulation is important where you have “a market failure.” A market failure is a situation where the normal disciplines of the market, which allow buyers and sellers to exercise their preferences, are impaired for some reason. This prevents the “market mechanisms” that solve problems from working. Thus, regulation can be appropriate.

Leftists have learned the phrase “market failure,” but they misuse it. Rather than using it only where market mechanisms cannot work, they apply it whenever they don’t like what the market has done: prices are “too high” for everyone who wants the product, demand is too low to keep companies like GM working, consumers won’t voluntarily select features the left wants them to want. . . those are not market failures. Those are, in fact, market mechanisms at work.

Examples of market failures are situations where you have a chicken and egg problem that keeps would-be-willing suppliers from making a product that would-be-willing consumers desire because neither group is willing to act first, or where consumers and producers are able to push “externalities” onto third parties (typically safety or pollution concerns), or where a monopolist can control the market price.

So when the left tells you that there has been a “market failure” that requires government action, ask yourself if there has been true interference with market mechanisms or if consumers have simply rejected the things the left wants.

2. The Involvement of Private Business Does Not Make It Capitalism:

In both the healthcare and cap and trade debates, the left argues that they are employing “market solutions” because they are involving private firms in their schemes. That’s not capitalism. Capitalism involves producers and consumers exercising their preferences and thereby creating market prices. When the government requires producers or sellers to make something or buy something, that’s not capitalism, that’s socialism even if private firms benefit. Said differently, just because a crony private firm will profit from government action does not make that action capitalism, it is still state control over the economy, i.e. socialism.

3. Capitalism Requires Failures:

The left loves to whine that capitalism “has failed” whenever a business goes under -- like GE’s Jeffrey Immelt said during the big crash in 2008. This is stunningly ignorant. Capitalism does not assure there won’t be failures. To the contrary, it expects them. Failure is a market discipline. If you don’t produce something that consumers want, then you will fail. And when you fail, the resources that were allocated to you, will seek out higher valued users. That’s how the market ensures that resources are allocated efficiently. The idea that businesses can't be allowed to fail, i.e. that the government should substitute its judgement for that of consumers, is anti-capitalism.

4. "Crony Capitalism" Is Not Capitalism:

2008 proved (once again) that crony capitalism does not work. But it proved nothing about actual capitalism because crony capitalism is not capitalism. Crony capitalism is corporate socialism, where the taxpayers prop up large businesses but well-connected private investors reap the benefits. That’s the situation at the top of our banking system. When everyone at CNBC kept talking about the failure of our banking system in 2008, what they were really talking about was the failure of the top tier of corrupt banks. What they tried hard never to mention was that right below the corrupt names you know -- Goldman Sachs, Morgan Stanley, Lehman Brothers -- were a whole group of next tier banks ready to take their places.

That's how capitalism works. In a capitalist system, we would have let these institutions fail and be replaced by the Jefferies and Raymond James of the world. By the same token, we would have let GM and Chrysler fail and let Ford take the next step up. So don’t buy this idea that somehow capitalism was what failed in 2008.

5. The Left Loves The Broken Window Fallacy:

There has been a fallacy in economic thinking on the left that holds that regulation is not harmful. This is based on the broken window fallacy. This is the idea that if we break a window, we create economic activity as people need to replace that window. What this theory completely fails to consider is that by forcing people to replace that window, we are keeping them from using that money on something more worthwhile. Thus, while we may create a job in the window industry, we are destroying jobs in other industries (and these are more valuable jobs).

This is the problem with regulation. Regulations force people to allocate their resources to things they would not have otherwise chosen. Thus, it is disingenuous to claim that regulations will ever create jobs because every job created when someone is forced to comply with regulations is more than offset by jobs destroyed elsewhere in the economy. So don’t believe for a minute that cap and trade regulations will “create jobs.”

6. The Left Loves The Fallacy of Certainty:

Finally, the same thing is true with the fallacy of “certainty.” The left has claimed for years that all business wants is certainty. In other words, business doesn’t care what the rules are so long as it knows what those rules are. This is garbage. When rules are put into place that harm business, business will respond by hiring fewer people, investing fewer resources, and by looking for more profitable pursuits. They don’t just shrug this off and say “hey, at least we know what the rules are.”

I had to laugh recently when I read how mystified The Economist was at the current lack of job growth. They pointed out that everyone now knows what Obama will do, so we have certainty. So why aren't businesses responding by hiring? To The Economist, this was a “mystery”. To the rest of us. . . it wasn't.


Unknown said...

Andrew: Excellent analysis. California produced its first huge financial crisis during the Gray Davis governorship. The energy industry went kablooey, and we had blackouts and rolling brownouts for months on end. And what did the liberals blame it on? De-regulation and capitalism.

Except there was one minor flaw in their brilliant reasoning. We never got de-regulation. What we got was Democrat re-regulation. Posing as friends of the consumer, the liberals rigidly regulated retail prices to the consumer, while paying phony homage to the free market by de-regulating wholesale prices. It didn't take long before consumers were paying less for their energy than the companies that provided it.

Instead of a slow but realistic increase in energy prices, we got energy cuts. Then, when something absolutely had to be done, the price controls were raised radically on the consumer prices, causing immense overnight energy bills that were two or three times what the consumers were used to. So, of course, to help out, the government raised taxes and fees to bail out both the consumers and the retailers.

That's what happens across-the-boards when liberals impose socialist/statist controls and call it free enterprise.

AndrewPrice said...

Thanks Lawhawk. I remember that. I remember when they did their "de-regulation" that everyone warned them that they couldn't only do part of the market. But they didn't listen because they wanted to "help" the people. And, as with every free lunch, there was a heavy price to pay.

As I understand it, California is so under-powered now that they face brown outs every year.

I keep debating if liberals are just being stupid or intentionally deceitful? Probably both.

Joel Farnham said...


What I think is that Mercantilism is being confused with Capitalism. Mercantilism is where the State approves a company or a monopoly. Like the East India Company by Great Britain.

AndrewPrice said...

Joel, Mercantilism is very popular in many places, including Europe and the Democratic Party. I think you make a good point.

The one thing I would disagree with, however, is that I don't the Democrats are consciously mercantilistic. I think they favor statism and command economies, and they have simply learned to use the words of capitalism to dress up their discredited socialistic tendencies.

patti said...

perhaps there should be a new law that all elected officals should have experience in either a) owned a business or b) operated a business. that could help straighten out things pronto. i'm sick of folks who have no real world experience telling those of us who do how things work.

Ponderosa said...

The left has a habit of changing the definitions of words as it suits them whether it is a rhetorical flourish or a legal definition.

Here in CO our “Taxpayer Bill of Rights” basically doesn’t allow for a tax increase without a vote. So the legislature changed a few items from taxes to fees – then raised them. Problem solved.

They are liberals or progressives depending on the year. Even with liberal you still have to check – are you a liberal or a ‘classical liberal’. It doesn’t matter as long as there is confusion.

It’s not lying – it is ‘poetic license’. lol

StanH said...

Capitalism is a catch phrase of the left. There understanding is what they’ve read in a book. Knowing this is empowerment of the masses and will lead to the downfall of the left, this is a good thing.

AndrewPrice said...

Patti, that would be a great law, but you know the left would scream bloody murder!

AndrewPrice said...

Ponderosa, They definitely rely on confusion! I think it's because they have nothing else to offer. The truth gets people slamming doors in their faces.

AndrewPrice said...

Stan, I get the feeling they're just using these words whenever they need cover. I don't think they even care what they mean, except that they know other people seem to like them.

Individualist said...

We have so construed our economy with regulation that goes beyond setting controlling "market failures" to regulation that just plain controls the "market" that I doubt anything done since 1990 can be construed as the results of a "free market".

Today when the left says anything with the word "market" in it the first thing I have to ask is "What the H are you B going to tax now"

AndrewPrice said...

Individualist, Good point. Despite the supposed "free market" period we've been in, we really haven't. Since the mid-1990s, right after 1994, everything has been creeping toward greater regulation. And you're right, we now regulate things that should never be regulated.

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