Capitalism vs. the Free Market
“Greedy bankers, overpaid executives, anaemic growth, the stubbornly high unemployment—these are just a few of the things that have lately driven protesters on to the streets and caused the wider public in the developed world to become disgruntled about capitalism. The system, in all its different varieties, is widely perceived to be failing to deliver.”
This is how, in January of 2012, the Financial Times started its series “Capitalism in Crisis” (italics are mine). Even worse, the introductory article then continued, the above mentioned villains simply bought the politicians and “bought themselves protection from proper societal accountability.” So for the next four weeks, economists, politicians, editorial writers, and just about anybody else, attacked or defended something called “capitalism,” trying to offer explanations for what we have experienced in the last several years.
Two books reviewed here are, in a way, the continuation of this same battle. The Morality of Capitalism: What Your Professors Won’t Tell You is a short book edited by Tom G. Palmer, of the Cato Institute but also of Atlas Network and Students for Liberty. It consists of his Introduction and fourteen essays by fourteen different writers, all of them categorically defending capitalism as the best and most moral system of all economic systems tried so far. The book, unapologetically, offers the reader the Truth: “Capitalism is a system of cultural, spiritual, and ethical values. . . . Indeed, capitalism rests on a rejection of the ethics of loot and grab . . . [It is in other economic systems where] predatory elites use [a] force to gain monopolies and to confiscate the produce of others through taxes.”
As a professor, I must admit, I have no problem with defending a system so defined, but the question I pose is, has capitalism really proved itself so pure in the real life? We’ll come back to this in a moment.
Defending the Free Market: The Moral Case for a Free Economy, by Father Robert Sirico, president of the Acton Institute, has the same goal but a different approach. Through a personal story, Father Sirico tells us how he came to discover the Truth—actually two truths: economic and spiritual. Realizing that our country has a huge problem, he warns that “when a people surrenders their [sic] freedom to government—the freedom to make moral, economic, religious, and social choices and then take personal responsibility for the consequences—virtue tends to waste away and faith itself grows cold.” Only responsible people can save America. “Philanthropy, charity, voluntarism, activism, and care for the family and the poor are all related to the same impulses that drive the market economy: the peaceful and free association of people in the service of others.” Again, no problem in defending such a system, but is such a system possible at all?
Let’s turn, first, to some definitions, as one must be careful in word choice when economic systems are discussed. Palmer does insist, as the title of the book implies, on using the word capitalism. In the section “The History of a Word,” he tells us that the word was not invented by Karl Marx, as usually believed; it was already used in the twelfth and thirteenth centuries. Only with the birth of socialism did the word become a term of abuse. Despite his explanation, I, myself, see no reason for insisting on the word. Even several of the contributors in his book use terms like “the free market” and “the market economy,” trying to avoid a word so ambiguous and by now so ill-reputed. The above quoted article from the Financial Times insists on many variants of capitalism. Father Sirico himself calls it “admittedly a narrow and problematic word.” Palmer simply decided to shrug off such linguistic pedantry.
Unfortunately for Palmer, the term “capitalism” must be heavily qualified to have any meaning. The word has become so horribly unclear that it may have about as many interpretations as interpreters. It may describe financial capitalism, where mathematical geniuses are allowed to turn almost any piece of paper into wealth by using esoteric equations and giving them fancy names, like “synthetic CDO squared” instruments; the word may describe state capitalism, as in fascism and National Socialism, where governments decide what, when, and how to produce the things they deem important; it may describe free-market or entrepreneurial capitalism, as those who like the word usually call it; it may describe cowboy capitalism, as those on the left prefer to call it; or, finally, the word may describe crony capitalism, as Palmer himself does a couple of pages later. (Sirico tries to escape the traps of crony capitalism by naming that concept as cronyism, but the main problem persists: would the real capitalism please stand up?)
The fact is, for those less informed than Palmer (including perhaps those professors from the subtitle?), it is too easy to put all capitalisms in the same category and conclude that capitalism tends to devolve into an immoral system. Even Palmer sets himself up when he discusses crony capitalism. First, he tells us how Marx himself praised capitalism for improving productivity, for creating “a world literature,” for overcoming the hatred of foreigners, among other advantages. But then he quotes Marx as saying that the whole system is based on public credit. It is the state that helps the capitalists become richer, that protects them, and “[a]ll political upheavals perfected this machine instead of smashing it. The parties that strove in turn for mastery regarded possession of this immense state edifice as the main booty for the victory.”
Two pages later, in a section titled “Free-Market Capitalism vs. Crony Capitalism,” Palmer complains that we should never confuse the two. Sadly, he says, “crony capitalism is the term that can with increasing accuracy be applied to the economy of the United States, a country in which failed firms are routinely ‘bailed out’ with money from taxpayers, in which the national capital is little more than a gigantic pulsating hive of ‘rent-seeking’ lobbyists, bureaucrats, politicians, consultants, and hacks, and in which appointed officials of the Treasury Department and the central bank [the Federal Reserve System] take it on themselves to reward some firms and harm others.”
Isn’t that exactly what Marx just said? Is Palmer proving Marx right? Does capitalism inevitably end up in crony capitalism? And if so, how can Palmer declare capitalism not only moral, but the most moral of all economic systems?
In the first contribution to the book, Palmer interviews John Mackey. The co-founder and co-CEO of Whole Foods, Mackey praises capitalism for all the good things, such as creating value for the consumers, allowing people to voluntary exchange for mutual benefits, and engaging in all kinds of win-win relationships for the benefit of the whole society. But then Palmer introduces a question about “crony capitalism” happening in so many other societies, to which Mackey responds: Capitalism needs “an equal application of the law to everyone as the primary goal—no special privileges to some and not to others. So what’s happening in a lot of societies, and what I think is happening more and more in America, you’ve got special favors given to the people who have political connections. It’s wrong. It’s bad. [In crony capitalism] you are not in a free market society any longer and you’re not optimizing prosperity; you’re unnecessarily keeping many, many people less prosperous than they would be if you had a truly free-market order with the rule of law supporting it” (italics mine). After giving two examples of crony capitalism in America (Obamacare and “all these subsidies . . . taking [money] from taxpayers and redistributing it to people who are politically favored”), Mackey is adamant: “I call it immoral. . . . It certainly violates my ethics and my sense of what’s right and wrong.”
Both Palmer and Mackey insist that crony capitalism is opposite from a free-market capitalism, and some people would agree. But for a majority capitalism is capitalism is capitalism—crony, state, or whatever other adjective is in front of it. And what does one call a system—other than immoral—in which a single man can lower interest rates to zero and rob American savers for about $400 billion (a perfect example of Bastiat’s legal plunder), and in which the same man has a right to create untold trillions of dollars out of thin air and disburse that money to foreign central banks, foreign and domestic investment banks, hedge funds and insurance companies, and more or less to whomever he pleases? How to call a system in which governments intentionally debase their currencies, therefore raising prices on almost everything, to prop up failing banks and companies that are deemed “too big to fail,” a.k.a. too connected to fail? And how to call the CEOs of those banks and companies who award themselves bonuses of tens and even hundreds of millions of dollars after receiving such government “aid”? How to call a system in which some people make about ten dollars an hour while others make millions of dollars in a nanosecond (using another “brilliant” financial innovation—high speed trading)?
In theory, capitalism may be moral; in practice it is, without some other moral basis, a different story. In practice, capitalists turned plutocrats privatize profits while socializing losses. The moral hazard arises; the corrective process of the market, Adam Smith’s invisible hand, disappears, leaving taxpayers to hold the bag. The latest financial crash (and many more will come) inflicted such huge losses on the innocent—all those who lost their jobs, their houses, their families—and all that suffering so the masters of the universe, the real culprits, could be saved from losing their own wealth they had “risked” playing a game most of them never mastered. Therefore, it won’t do, as some try, to use the circular argument that capitalism is the best of all bad options. The fact is, as Kevin Dowd and Martin Hutchison end their book, Alchemists of Loss, “The basic weakness of the capitalist system, the problem of how to prevent management and powerful interest groups more generally from enriching themselves at everyone else’s expense, has escalated to the point where the capitalist system itself is now in a major legitimation crisis . . . These interest groups have also taken over the state itself to a very significant extent, in the process turning modern capitalism into an ugly and corrupt system of crony capitalism that cannot be defended and is rightly reviled by an increasingly restive man in the street, who is called upon to pay for it” (italics mine).
So, if Palmer fails to prove his case, what choice do we have? Well, we still may have a choice: A system with secure and transferable property rights and a reliable contract enforcement in which people can exchange their skills, their ideas, their goods, and their services freely with other people, where consumers rule, not producers: a system called free market. The defense of this system is offered, as already mentioned above, by Father Sirico. Although he also uses the word capitalism too often for my taste, his defense of a free-market economy is much better reading. For Sirico, to create a prosperous society people must be free, and to create a free society people must be virtuous. In such a society, people will exercise their God-given talents, their reason and creativity, and will achieve their personal goals more successfully than in any other known alternative.
Several chapters in the book are especially delightful to read. The chapter on the creative-destruction part of the market should be required reading for all those who don’t understand how a higher standard of living is created. The chapter on health care, for me at least, having lived in an “Obamacare” system for forty years in Yugoslavia, is brilliant. Being a Christian myself, I found the best chapter to be the last one, “A Theology for Economic Man.” It is here that Father Sirico admits that to “build an authentically free and virtuous society is far more complicated and difficult” than (as I would put it) simplistic and mechanistic economic theories would have us believe, “requiring habituation to just deeds, both visible and invisible.”
Sirico is especially angry at the mechanistic approach of modern textbooks and their idea of homo economicus, “the imaginary perfectly self-interested human being,” whose “sole purpose in life is to maximize utility. He never stops calculating costs and benefits . . . The results dictate his next choice in life. This patter repeats itself every day from maturity until death, and in every aspect of life.” But, he concludes, this “caricature of homo economicus” does not help us in understanding the real nature of the market system, with all its limits and potential disappointments for so many market participants.
Thus, in my view, Father Sirico’s book, explaining the pluses and minuses of a market economy, is much more convincing than Palmer’s, whose take-no-prisoner, you-are-either-with-us-or-against-us approach will gain him few converts. Sirico’s model, to integrate sound economic thinking with a proper understanding of the human person, to explain all other social institutions, especially the rule of law, without which the same market economy cannot exist, and to add the moral component, which textbook economics tries to avoid, might offer better explanations to those who despair over the present state of the world economy.
The issue is much more than semantics. The leading world economies, those that go under the name of capitalism, are, for all the practical purposes, bankrupt. Advocates of capitalism are confronted by a question: With huge and unrestrainable governments, highly interventionist and mostly plutocratic, going increasingly into unsustainable debt all around the world, and then allowing irresponsible central banks to “monetize” this debt through printing trillions of dollars, euros, or whatever other currency needs saving, are we, with every new day, closer to the final bankruptcy of this system, whatever one pleases to call it?
Tumultuous events over the last twenty-five years—the stock market crash of 1987, S&L crises of the late 1980s, the dot-com crash, LTCM default, the flash crash in May 2010, the LIBOR scandal, the MF Global and Knight Capital scandals, the Great Recession here in America, the bankruptcy of Greece, Spain, Italy, Ireland, and Portugal in Europe—have all been, directly or indirectly, products of the same governments, which have been hopelessly trying to “manage the economy,” stimulating production at times, stimulating consumption at other times, redistributing from the rich to the poor at times, and then redistributing from the poor to the rich at other times. Not so surprisingly, most people have by now lost any confidence in a “free” market economy. Once the distinction is blurred between capitalism, socialism, fascism on one side, and free market on the other, the case for the free market is lost. When the catastrophe finally occurs, most people will want a knight on a white horse to save them, not a free market. History is perfectly clear here.
Professor Pongracic teaches economics at Indiana Wesleyan University
Posted: March 3, 2013