Capitalism - the Progressive Solution, Not the Problem

By Robin Koerner
Our America Initiative Advisory Council Member of Liberty Coalition Partners

If much of the economic commentary in the mainstream media is to be believed, the rising inequality of wealth in Anglo societies and the crashing of our economy by the big banks and financial class make the problems of capitalism not just evident but self-evident.

Such claims are made, of course, against a background of hundreds of years of capitalist growth that has, for the overwhelming bulk of our population, made affordable the books that these claimants have presumably read, the computers on which they type, the Internet on which they do their research, the air-conditioning or central heating in the room where they do it, and even the food in their bellies – food of a variety and quality unparalleled in history.

But this background of utter success is taken so much for granted that it is almost entirely invisible.

With centuries of evidence for the power of economic liberty, and the recent memory of an economic crisis that was nothing to do with the principles of capitalism and everything to do with the one part of the economy that is the least capitalist of all – big banking – acting, no less, within decidedly anti-capitalist parameters set by the state, why on earth is the liberty movement letting this mainstream “capitalism is the problem” narrative get any air at all?

Why are supporters of a free economy allowing their principles to be so entirely misrepresented, leaving them to engage in weak, piecemeal defenses against a debate framed by their political opponents?

When a free-market supporter hears a left-leaning commentator talk about the banking sector, he may well be quick enough to point out that the bank bailouts were not free-market actions, but the opposite. The claim is generally heard defensively in response to some criticism of capitalism. Similarly, when free-traders are accused of supporting a system that exacerbates economic inequality, the free-market supporter points out, defensively, that it’s not the free trade that is ultimately responsible for inequality but a financial system that concentrates wealth in a banking sector that enjoys special privileges. Or he might point out the anti-competitive nature of a system where large corporations can influence the writing of regulations by legislators whose campaign they fund and who exercise too much power in the first place. The effect, they point out, is to enable them to price smaller competitors out of the marketplace. Nothing capitalist about any of that at all.

However, such defenses when offered as part of a “capitalism’s not that bad” argument will not put the true principles of economic freedom into the mainstream consciousness in a way that will attract enough popular support to put the country back on the right track. Defensive positions generally inspire no one.

Rather, popular support for the free-market as the best way back to prosperity and economic justice depends on its supporters’ making a passionate, positive, and systematic case for capitalism. Rather than arguing on the finer points of the free market among ourselves, we need to focus on presenting an easily understandable, even populist version of economic liberty that is as coherent and complete as the palpably false case against it. I say “palpably false” because it depends on a definition of capitalism that is not only incorrect: it often defines capitalism as the very opposite of what it is - such as when it refers to the trading of derivatives, which do not represent any asset, in an environment in which losses are socialized by the state - as in some way the epitome of a capitalist system, when it is closer to being a mockery of it.

The type of banking that brought us to the private debt crisis that triggered the current collapse is not capitalist. If anything, it is anti-capitalist because it violates at least two fundamental principles of free economic activity. First, capitalism requires informed, voluntary transactions between two parties that benefit both parties involved (the principle of subjective value), and do no harm to a third party (protection of individual rights and property). Second, capitalism requires that, down to the lower bound of bankruptcy, those who take economic risks bear the full consequences of those risks. We might also add that having people store their wealth in an instrument that is actually someone else’s debt arguably violates both principles, especially when a cadre of market-making private corporations (treated in law as immortal people – nothing capitalist about that) have state-given privileges to do things with money that others may not do (nothing capitalist about that, either).

“Capitalists against financial corporatism” isn’t very catchy as a slogan, but if we are going to dominate the mainstream, it is the kind of counter-intuitive and bold (and therefore potentially persuasive) position we should be taking front and center. The financial system is much more of a state-sponsored, centralized and elitist concoction than it is a capitalist one, but since it sells itself as capitalism, those of us who really care about economic freedom, need to be very explicit about having the solution to much of the economic injustice of the last few years, rather than being the cause of it.

Rapidly rising economic inequality in favor of an elite is the deeper, moral issue that rightly feeds the fires of much of the Left and must be addressed. Supporters of the free-market should be embracing the issue - raising it more loudly, robustly and systemically than any of the Left who would seek to use it against us. Economic justice is our ground, and we should be on the offensive, declaring proudly that, even if we don’t have all of the answers, we are capitalists precisely because we want more economic justice, not less, and we want to promote equality in a way that adds more value across society than it destroys.

The Occupy movement talk about the 99%. They have the right point - but they have the wrong number. Most of the top 1% have much more in common with 99% than with the top 0.1%. Strip out that top 0.1% and inequality falls dramatically. The distribution of income in the USA, for example, is an L-shape – and most of its disproportionate concentration of wealth (disproportionate to real value that its holders have created for others, that is) depends on the aforementioned financial sector that operates, in many respects, in the least capitalist way of any sector of our economy.

Supporters of free markets let the Left (excuse the label) get away with way too much when we do not challenge its claim that in a capitalist system, economic progress depends on inequality. It doesn’t. Rather, it depends on the freedom of people to try to make themselves unequal – in whatever way they choose, including economically. (Is that a definition of liberty?) A "free market", defined as nothing more than the sum-total of people’s voluntary transactions made for mutual benefit, is both "free" and a "market" with any income distribution. In a capitalist system, (rather than state-sponsored financial corporatism), economic success comprises entirely in giving people something they want. Consumers make purchases only when the thing bought is more valuable to the purchaser than is the money they spend for it (the principle of subjective value). The capitalist, on the other side of the transactions, values the money more than the goods or services he has created. This indeed concentrates wealth – but only to an extent that is counterbalanced by the distribution of value among those who transacted with the capitalist. These capitalists are not the people who crashed our economy. So it is not capitalism that is our culprit.

Schumpeter nicely summed up this truly progressive magic of capitalism.

The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses. . . . It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls.

Clearly, the only parts of our political economy that do not work this way are the state (which concentrates wealth through taxation without a corrective mechanism when the transaction destroys value), much of the financial sector, and fraudulently operated business (and in a capitalist system, fraud is a crime).

Schumpeter’s quote also tells us why simple measures of the distribution of financial wealth, so often quoted in the mainstream media, can be misleading. The Gini coefficient of inequality, for example, is a useful metric for some comparative purposes, but if financial wealth concentrates upward over time but does so more slowly than innovation makes better goods available to those with less wealth, then an increasing number of people get to enjoy goods that were previously only available to the super-rich. In such a case, the distribution of real wealth or value through the society may become more equal even as the financial wealth distribution becomes less equal. In short, it’s not the money that matters as much as what you can do with the money you have.

By failing to explain clearly what the free market is (and isn’t), including how it provides a way out of the economic turmoil felt by so many families, classical liberals continue to let the big-“L” Liberals equate “the free market” with things that are nothing to do with it. In so doing, we risk not only losing the political argument, but, more importantly, adding to the very social and economic injustices that we would all like to see overcome.

For example, the principles of capitalism do not require that corporations are treated as immortal people in law.

Capitalism does not require – indeed it does not permit – that corporations go unpunished when they harm people they do not transact with.

Capitalism is not even opposed to organized labor. Rather, it champions the best kind of organized labor – labor that organizes voluntarily. Voluntary membership of unions is important to ensure that union leaders do not become exploitative masters in place of unscrupulous employers. It also ensures that their organizations have to earn their membership fees by providing a service of value to their members without causing (usually financial) harm to those who would not join.

Capitalism doesn’t keep people in slums in the third world; rather, it gets them out. Why? Simply because capitalism depends on the establishment and securing of personal property rights. As Hernando de Soto – one economist that has earned the right to call himself progressive in the very best sense of the term - has explained, formerly destitute South Americans are being lifted out of the gutter into true economic opportunity by the most uniquely capitalist action of all: the formal recognition and registration of their property in the land and shacks that they have inhabited for years without any formal recognition, is making millions of the poor solvent, turning the products of their labor into actual financial wealth and collateral that can be used to raise credit.

Then there’s China, which has seen the fastest reduction of poverty in history by allowing individuals to transact with each other freely over the last generation. And what most threatens its success? Their artificially massive, highly state-corrupted banking sector, and a property asset bubble pumped up by the State’s financial controls that prevent privately saved money’s being invested freely … Once again, we see the gains that were provided by capitalism endangered by anti-capitalist practices in finance and regulation. And of course, if it all comes crashing down, they’ll call it capitalism’s fault, as so many have done in the West.

I’ve obviously not mentioned hundreds of issues that bear on economic injustice in our modern world, and I’ve not even claimed that a purely capitalist society (whatever that would be) is the best possible society. Nevertheless, the evident economic and social injustices that are being suffered today are much less caused by capitalism than they are mitigated by it. Moreover, those parts of our political economy that most need reforming for the truly progressive ends of improving the lives of the poor, working people, and the middle class, are the least capitalistic of all.

When it comes to big ideas, offense is often the best form of defense. And when it comes to political change, a big, clear, positive message beats a negative or reactionary one almost every time.

Most of the damage that has recently been done to economic and social justice in the Western world is evidence for proper capitalism - not evidence against it. We need actively to excite people about what proper capitalism is. It is not financial state-sponsored crony corporatism.

Classical liberals should stop conceding the initiative by defending capitalism in spite of its impact on social and economic justice; we should be seizing it by actively promoting capitalism because of its impact on social and economic justice.

Why bother? Because in providing a mainstream account of what capitalism really is and explicitly setting ourselves against those who have stretched its definition beyond breaking point, we who would promote liberty, can set ourselves squarely with the people.

And it is almost always “with the people” that liberty is won.

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