The Point of Capitalism

Here is a discussion Russ Roberts has pieced together on the struggle over the idea of capitalism. A Volokh Conspiracy post by Todd Zywicki asked for a stronger argument from capitalists defending the system than just that which “delivers the goods,” sparking this comment by a reader:

“I reject the premise that capitalism is currently failing to ‘deliver the goods.’ The whole point of capitalism is to destroy companies like GM and Chrysler. The whole point of capitalism is to destroy unions like the UAW that favor older and retired workers at the expense of younger workers and workers yet to come. The whole point of capitalism is to destroy the ‘smart guys’ who create defective financial products. The whole point of capitalism is to punish us for electing a government that enmeshes itself with the jokers above. The ‘current unpleasantness’ is a feature, not a bug.

To this point Roberts replies:

“It may not be quite the whole point, But as Milton liked to point out, it’s a profit and loss system. The losses are just as important as the profits. This seems to be very out of fashion these days.”

And I agree. As we’ve posted repeatedly on Out of Control, capitalism is not an economic system designed to create a utopia where all succeed (though some believe it can create a utopia loosely defined). While trade is designed to benefit both sides of a transaction (the only reason for trade is some measure of gain), for competition to actually be competition there have to be winners and losers, at least on the margin. There must be loss for there to be gain in competition. Trying to understand this aspect of capitalism and its final end reminds me of Thomas Sowell’s dichotomy of the constrained vs. unconstrained vision (discussed here).

But there was one other thing from the Zywicki post worth noting. He writes:

“Big picture, though, what strikes me is that libertarians and conservatives need to construct an intellectual and spiritual vision of a free society that speaks to its coherence with man’s nature and the conditions necessary for human flourishing. Obama seems to have tapped into this spiritual void, especially among American youth (in a way that is sort of creepy to me, to tell the truth, but that’s for another day).”

Important to understand in the construction of any vision for a prosperous society built on economic and political freedom is that the goal is not equality of outcome. The vision can be utopian–but how that is defined is important.

An economically free society lifts all as a rising tide lifts all ships–but that tide doesn’t make all ships equal in size or power, and the collective of ships should not be blamed for one of the ships sinking due to poor construction. Neither should the rising tide (economic freedom) be blamed for a ship falling apart (the downfall of Bear Stearns and Lehman, or Chrysler’s bankruptcy). So for libertarians to build the vision Zywicki speaks of, we will have to articulate the final end of our vision to clearly communicate why economic freedom is the “best” way to go.