The paradox of capitalism

First Published: 2014-05-23

Why is capitalism not appreciated? This is the theme of Peter Foster’s new book: Why we bite the invisible hand: The psychology of anti-capitalism. I am yet to read it, but I did read a review in this weekend’s National Post. The reviewer, Robert Fulford, writes: “Free enterprise has enriched millions of lives, but that’s a hard fact to grasp.” He goes on to state: “Capitalism depends on genius, luck, inspiration and an acquisitive spirit. It’s unsystematic, chaotic, erratic and (as its enemies love to point out) unfair. It’s good because it works, not because it’s flawless.”

Besides his first sentence about free enterprise, Fulford’s characterization of capitalism is inaccurate and non-essential and therefore worth analyzing here. No wonder people don’t grasp capitalism’s benefits when intellectuals and journalists don’t understand capitalism and cannot explain it. Let’s consider the first sentence of Fulford’s characterization: “Capitalism depends on genius, luck, inspiration and an acquisitive spirit.” Despite having recognized free enterprise as central to capitalism, he fails to recognize that capitalism depends on freedom, or individual rights. Without freedom, there is no capitalism. Ayn Rand defined capitalism as “a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.” In our current mixed economy, individual rights are only partially recognized (and compromised, for example, by evoking eminent domain in the name of “public interest”), and public ownership of property by governments is common.

While it is true that geniuses like Steve Jobs and Bill Gates would do even better under capitalism, capitalism does not depend on genius. It does depend on reason: adhering to facts and logical thinking. Those who are the most rational achieve the most and create the most wealth. Capitalism definitely does not depend on luck, or chance. Capitalism is not a casino, but a social system where businesses freely produce and trade goods and services. Those who adhere to reality and identify and grasp market opportunities will achieve the most. “Luck” favors those who are alert and prepared. Fulford is right in that inspiration and motivation to produce are required to be successful under capitalism. What “an acquisitive spirit” entails is not clear, but I argue that it is productiveness and the desire to create wealth that capitalism encourages and depends on. Acquisition of things can only follow production.

Fulford’s characterization of capitalism continues: “It’s unsystematic, chaotic, erratic and (as its enemies love to point out) unfair.” I’m not sure what he means when he calls capitalism “unsystematic”—centrally planned, statist economies perhaps, although they hardly can be described as that. Capitalism—free markets with private ownership of property and protection of individual rights—is very systematic in that it is governed by the law of supply and demand and the price system. There are no shortages or oversupply in capitalism beyond the short term it takes the markets to adjust. As for chaotic and erratic, these terms better describe centrally planned economies, where shortages of some goods and oversupply of others are constant.

The alleged “unfairness” of capitalism is completely unfounded. Fairness, or justice, means getting what one deserves. Capitalism is a system of fairness: you get what you deserve—but you have to earn what you get. People are rewarded according to their productivity. Those who produce the most, gain the most. But contrary to what the critics of capitalism claim, capitalism benefits also the less productive because more overall wealth is created and invested, translating into more opportunities for all.

Finally, Fulford claims that “[Capitalism is] good because it works, not because it’s flawless.” Certainly capitalism works. We have enough evidence to show that the freer the markets, the more wealth—and innovative products and services at lower costs—is created. Think of the 19th century America and Hong Kong today as examples. But capitalism is also flawless in that it is the social system most suited for human survival and flourishing. Imagine where we would be in terms of innovations in medicine, healthcare, information technology, and all other fields, if we had capitalism instead of government interference in the economy and curtailing of individual rights. Instead of inventing unsubstantiated “flaws” of capitalism, Robert Fulford and all others confused about capitalism should educate themselves about it, for example by reading Ayn Rand’s “Capitalism: The unknown ideal”, and Yaron Brooks and Don Watkins’ “Free market revolution.”

Benefits of capitalism are not hard to grasp, but as all knowledge, understanding them requires effort. It is worth it—if happiness and prosperity are your goals.

May 3, 2014

Jaana Woiceshyn teaches business ethics and competitive strategy at the Haskayne School of Business, University of Calgary, Canada. She has lectured and conducted seminars on business ethics to undergraduate, MBA and Executive MBA students, and to various corporate audiences for over 20 years both in Canada and abroad. Before earning her Ph.D. from the Wharton School of Business, University of Pennsylvania, she helped turn around a small business in Finland and worked for a consulting firm in Canada. Jaana’s research on technological change and innovation, value creation by business, executive decision-making, and business ethics has been published in various academic and professional journals and books. “How to Be Profitable and Moral” is her first solo-authored book.

Help support The Nassau Institute

Leave a Reply

Your email address will not be published. Required fields are marked *