OP-ED: Understanding capitalism, free markets

No place has gotten rich without a pretty much capitalist and pretty much free market system

It is possible to misunderstand capitalism and free markets as the basis of a socio-economic system.

There are, for example, those who claim that capitalism is in some way moral – just as there are others who claim that it is immoral – but that is not the point at all. The economy is, notoriously, amoral.

Morality is something decided by other areas of intellectual effort; economics is simply trying to describe what is, not what should be.

In the jargon used here, economics is a positive science describing what is observed, not a normative describing what should be.

The saving grace of the market-oriented capitalist system is that it works. It works by producing what humans seem to want.

We could say that what we all desire is motivated by greed, and we could rephrase greed as a healthy respect for our own enlightened self-interest.

But it’s obviously true that humans like full bellies, changes of clothes, dry housing, etc.

This extends to travel, the arts, health care, insurance against the vicissitudes of the universe, and so on.

Indeed, it is a basic assumption in economics that human desires are infinite, yet we live in a universe of scarce resources with which to satisfy them.

What this economic system that we call “capitalism” does in a proven way is to increase the capacity of society to satisfy more of these desires over time.

It turned out to be quite a surprise to the socialists of a century ago. They insisted that “scientific socialism” would eliminate the waste and chaos of the markets, the greed and profits of the capitalists, and therefore be more effective in delivering what the people want.

So in a good science experiment – a natural experiment – about a third of the world has gone to try this. With the collapse of the socialist states in 1989, we discovered that the insistence was not true.

When the Soviet dust settled, the roughly capitalist and market economies increased the standard of living of the average inhabitant about eight times over the previous century. Socialism has not succeeded, to put it mildly.

Plus there was the update on how it was done.

There are two ways to gain growth: being more efficient with scarce resources, or using more. The growth that the Soviet Union enjoyed was entirely due to the use of more resources, while about 80 percent of the growth of market economies came from greater efficiency.

So if we want a system that produces what people want and does it with the least consumption of scarce natural resources, we need a capitalist and market system.

This does not mean that capitalism is perfect. Of course not. Humans are not perfect, and no system directed by – or even containing – will be.

Specifically, capitalism is not good at things that people cannot profit from – what we call public goods.

We must therefore either change the nature of these public goods in order to encourage the capitalists, or find another method of supply. We do both. Patents and copyright are incentives for capitalists, while direct government procurement is another method. What we use depends on the specifics of the item supplied.

Likewise, the markets do not handle well the things that are not included in the market prices. We call these externalities – they are external to market prices. Again, we can try to bring them into market prices through taxation, hence recommending a carbon tax – or maybe that won’t work. and we need government regulation or even bans.

The tax will not determine, for example, which side of the road people should drive.

There are different flavors and mixes of markets and capitalism that we can aspire to.

Social democracy is, for the most part, markets and capitalism, plus a lot of government corrections from parties we don’t like about it. Let it be is long in the markets, with much less correction, and possibly faster overall growth as a result. We can be anywhere on the spectrum.

But it is essential to understand that scientific socialism has failed in this primary task of the very reason we have an economy at all, so that the average person can have more of what they want.

No place has gotten rich without a pretty much capitalist and pretty much free market system.

Every state that has had this system has grown. Yes, there are variations of the basic idea, and yes, there are limitations that need to be placed on it.

But it is still the only economic system with the saving grace that it actually works.

Tim Worstall is a senior fellow at the Adam Smith Institute in London

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