In the final installment of this series, I want to first outline a key point about capitalism that we all inherently know, but it is worth repeating: capitalism as an economic system is not perfect. Now that I have that off my chest, I believe we all need to realize, if we haven’t already, that there is no perfect economic system and there will be no perfect system, ever. What should hearten us, however, is the excellent point that Jay Richards makes in his book Money, Greed, and God, stating that though free market [capitalism] doesn’t guarantee that everyone will win in any given competition, it allows many more win-win encounters than any alternative. And thus free market capitalism is the solution and not a part of the problem. The problem that actually led to the current economic crisis was an abuse of capitalism, and not the outcome of capitalism itself. So the worst thing we could do is to unceremoniously ditch capitalism in favor of some utopian alternative, particularly alternatives that have been demonstrably proven to not work, such as socialism.
One thing I have heard regularly from my liberal friends is how greed brought about the current economic crisis. I absolutely agree with the assertion that greed contributed to the economic crisis, but it was largely caused by the government in terms of monetary policy and gross interference in the free market by browbeating lenders into making home loans they would not otherwise make for the sake of encouraging an “ownership society.” This government interference crossed party boundaries, so there is plenty of blame to go around, but I would argue that the lack of proper regulation by the House Financial Services committee and the Senate Banking Committee caused untold damage, particularly in their oversight (or lack thereof) of Fannie Mae and Freddie Mac. My liberal friends, however, go further by excoriating corporate executives in general for their greed. And this is where we part ways, because first, whereas I do agree that greed is wrong, I don’t believe it always produces a poor outcome. I have on numerous occasions done business with people who I thought were greedy, but the transaction occurred because they offered a better value than the alternatives, possibly seeking to make more profit by volume. Second, since we have the rule of law in place, I know that the greedy people I chose to avoid will ultimately be brought to justice (some of which was served by me not giving them my business). As well, the greedy person’s volume strategy could fail causing them to go out of business, or they might rub enough people the wrong way and achieve the same effect. So consumer choice and rule of law are clearly two important keys to making free markets work.
As Richards points out in his book, free trade is not anarchy, as some would assert. It requires “a rule of law that makes sure one person doesn’t steal from another person or force the other person into an unwilling exchange (merely a more sophisticated form of theft).” He next argues that this doesn’t mean the government should control the market. The government’s job, amongst the few things it is designed to do, is to put a rule of law in place so unwilling exchanges are minimized, such as when unseemly brokers and banks attempt to sell “toxic loans” to unsuspecting homebuyers. In effect, this was the sophisticated theft through greed that the government was supposed to prevent, but only aided and abetted through poor monetary policy and lack of proper oversight of the financial markets. Beyond proper oversight, the government cannot control an economy because the free actions of individuals engaging in free trade is enormously complex, and when the government goes into the business of setting prices and controlling the production of goods and services through central planning, it has never worked out well for the people. In the governments whose leaders have tried this approach, such as those of Lenin and Mao Tse-tung, widespread famine and death resulted. So hopefully we have learned our lesson from history.
Richards notes that determining the economic value of anything is indeed a mystery and that market order is a wonder. Essentially, the price of a good or a service in a free economy is a little “packet of information” that tells us its economic value at that moment. It represents an underlying reality that is not merely the random choice of a store clerk, but is a highly sensitive network for gathering and disseminating information, leading to specific prices for goods and services of interest. Richards further states that price alone allows entrepreneurs to decide where to invest, and it tells producers of goods how much to produce compared with other things it could produce. Thus, in a free market, goods and services will typically end up where they are valued the most. An excellent example is if a hurricane in the South leads to a local shortage of gasoline, gas prices will go up there and draw more gasoline to that region where it is more needed. Unfortunately, what typically happens in a crisis is that the government manipulates prices instead of allowing the free market to do its work. Another classic example is the “oil crisis” of the 1970s, when the government implemented price controls which, according to historian Thomas Woods, led to perverse outcomes that basic economic literacy would have avoided. In short, price controls did not allow more expensive oil to flow where it was most productive, which included oil rigs off the Louisiana coast, and further, did not allow other oil suppliers to enter the American market and alleviate the shortage. The result was long, unnecessary lines at the pump (as I distinctly recall, thus dating myself).
To bring this to a close and solidly address social justice, my conclusion is that a free market, properly regulated by consumer choice and a rule of law that minimizes (since it cannot eliminate) win-lose exchanges, provides for the greatest degree of social justice since it allows for the free exchange of goods and services with prices being set by willing sellers and willing buyers. If sellers don’t meet the needs and desires of buyers, then those sellers will ultimately go out of business. Now as to the rich, they do not become so at the expense of the poor, because economics is not a zero-sum game where for someone to win, someone else has to lose. The economy grows naturally as greater productivity is achieved, lifting all involved. And capitalism is setup precisely to maximize win-win situations so the economy can increase productivity and expand accordingly. The problem is with so much government meddling in capital markets, and the confiscation of wealth to fund inefficient, bureaucratic social programs, the poor have less capital to work with to start businesses or achieve more education that would allow them to command higher salaries. Indeed, most people of wealth today in the United States started from very humble beginnings, so we can have confidence that people of all economic levels can aspire to a better life, even if not great wealth.
In this current technological age, new wealth and opportunities to create wealth are created all the time. Yes, there will be the inevitable disruptions as technology shifts, but this is no different than the way things were 150 years ago when whole agrarian communities could be wiped out after a couple of years of drought, or in the early 1900s when the horseless carriage put buggy manufacturers out of business. Yet we live in a time of unprecedented comfort and leisure that even the wealthiest people 100 years ago could only dream of, due to high productivity and division of labor. In day to day life, there isn’t a major lifestyle difference between the average middle-class family and Hollywood celebrities or sports stars though obviously, many of the latter have a more secure financial future (presuming they don’t blow it). Even the poor today live considerably better than the average middle-class family in the early 1900s (e.g., running water, sanitation, refrigeration, air conditioning). But to bring about the social justice necessary to lift up those in poverty will require the church and charities working at the local level, in concert with the principle of subsidiarity as I discussed in my previous blog post. If the federal government gets out of the business of social programs, the necessary capital will be freed up so that people can make free decisions in an efficient manner to help those less fortunate within their own communities. The American people have always been up to this task, and it is time the government put its trust and the future of America back into the hands of the people.
* References:
Richards, Jay W. Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem. New York: HarperCollins, 2009.
Woods Jr., Thomas E. The Church and the Market: A Catholic Defense of the Free Market. Lanham, MD: Lexington, 2005.
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