The Conundrum of Capitalism

Winston Churchill famously said that “democracy is the worst form of government except for all those others that have been tried….”  The same is often said of free market capitalism.  Of capitalism itself, Churchill quipped “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

Capitalism takes its name from the idea at its root: capital, or material “stuff.”  It is a system where the “means of production” – including both liquid investments as well as factories, machinery and all manner of productive property – are owned privately, and put to use according to the whims and wishes of private owners.

The central tenant of capitalism, that some unseen social force (the “invisible hand”) directs the use of that capital toward the productive creation of new wealth, was first published in 1776 by the Scottish philosopher and economist Adam Smith.

The greatest intellectual struggles over economics and capitalism grew out of the slow grinding tides that brought an end to royal Europe.  The French Revolution, the Bolshevik Revolution of 1917, and the First World War eroded away the old order of wealth and social class that had governed European society since the end of the Middle Ages.

Riding on the wave of technological change that brought the industrial revolution, came the radical idea that “capital” was no longer a birthright.  Rather, wealth was created and possessed by those that invented and used the new technologies of the day.  In America, the invention of Bessemer process steel, the rise of the railroads, and the advent of electricity created a class of industrialists who controlled vast sums of capital.  Inventors and industrialists with names like Carnegie, Pullman, Rockefeller and Edison.  Some of their progeny (Exxon, General Electric, Con Edison) live on today, more than 3 generations later.

Along the way, free market capitalism has taken a number of hard knocks, and rightly so. Capitalism thrives on an equality of opportunity, not an equality of result.

So the first complaint is that some are left behind.  In a “pure” system of market economics, those left out today must change in order to be included tomorrow.  Workers must either change – offer a different product, sell a new service, move to a new location – or they lose out.  In the practical world of a modern post-industrial economy those changes come at lightning speed.  Faster than the lifetime of an East German party member, a Detroit auto worker, or a Shanghai peasant famer.  In the long run, the market forces each of us to change for the better.  But in the words of Keynes, “in the long run we’re all dead.”

The second complaint, often unspoken, is that there is no “pure” market economy.  Economists use a careful definition for the idealized theoretical “free market.”  A free market must have three components: many sellers, many buyers, and a purely voluntary exchange with no “friction” or outside costs.  Friction – in the form of taxes, economic regulations, monopolies, or other interference – distorts that theoretical “free market.”

The practical world clearly intrudes on market theory.  The U.S. tax code has more than 10,000 pages of regulations specifically designed to distort the market.  More than 50,000 registered lobbyists prowl the halls of Congress, all seeking to overturn the “free market” of the United States.  (Each would vigorously deny it, I’m sure.  But that is in fact what they are doing.  Lobbyists are the great anti-capitalists.)

So: Capitalism creates wealth, but intentionally leaves many out of that wealth until they can change.  Some cannot change (or cannot change fast enough), and are left permanently behind.  Still others work actively to defeat that change, even further reducing the pool of available wealth, all the while fighting to redistribute what wealth is left.

The squalor of the poor in 19^th century industrial England gave us Karl Marx.  The utopian promise of socialism in turn gave the world an endless parade of evil doers working the in the name of “the people” – as in “The People’s Republic of Fill-in-the-blank-i-stan.”  During the Great Depression, America dallied with some of its own socialists.  After the Second World War, many feared that Italians and possibly even the French would elect themselves into a communist system focused on redistribution.  The Occupiers of Wall Street take their rightful place in a long historical sit-in against unequal wealth.

What to do?  The answer is maddening (to progressives) in its simplicity, and terrifying (to conservatives) in the complexity of its execution.  We must bake a bigger pie of wealth to have more to distribute for all.   That’s where entrepreneurship comes in, and that’s what we will be talking about in the pages of this blog to follow.

Jim Wolfe