TCS Daily


Attacking Capitalism: the Human Costs

By Christopher Lingle - September 1, 2004 12:00 AM

There has been a rising swell of voices to denounce the forces of capitalism and globalization. It has gone beyond the normal complaints of professors, journalists and politicians who criticize capitalism and markets and, if not the wealth they create, the way it is distributed. Demonstrations at the WTO meeting in Seattle and Genoa have been followed by similar outbursts during the World Bank and IMF meetings in Washington on an annual basis.

When times are good, such outbursts may seem harmless even though they may lead to increased inefficiencies arising out of new regulations or enforced redistribution. However, when times are bad these complaints may help legitimate attacks on certain groups that tend to be identified as being part of the problem. Hitler used the Jews as scapegoats for all that was going wrong in Germany. Similarly, Prime Minister Mahathir of Malaysia tried to pin the blame for turmoil in East Asia during 1997-98 on Jewish bankers. A resurgent anti-Semitism is now being observed in Russia due to the concentration of wealth among entrepreneurs belonging to that group.

More ominous rumblings are heard in Indonesia where ethnic Chinese had been the target of looting attacks and rapes. This was a repeat of pogroms that took place during the 1965 coup d'etat that toppled President Sukarno. Neighboring Malaysia also experienced race riots against the Chinese minority in the 1960s. In fact, perhaps the greatest sin of these groups is that they are more productive and wealthier than most of the rest of the population.

Arguments that blame capitalism and markets for our woes fail to see that we ourselves are to blame. This is because markets are merely a summation of the results of actions arising from the myriad of decisions made by each of us every day. A full understanding of market processes indicates that if there is an enemy, it is us.

Some commentators describe markets as if they were the outcome of a conspiracy concocted on Wall Street. However, it is more accurate to describe markets as the outcome of choices made on Main Street. Certainly the choices of mutual fund managers and bond dealers are more prominent and better chronicled. Yet, these self-important movers and shakers cannot match the supremacy of the faceless masses of humanity. Power in competitive markets is always limited ultimately by the refusal of consumers to pay higher prices for their perceptions of lower quality products or when their preferences shift without warning.

It is useful to understand what the market is and what it is not. Unfortunately it is difficult to make sense of the market in the context of an ongoing political debate that demonizes the market. Despite having weathered the withering criticisms and surviving real world experiments with communism, the capitalism and the market economy remain under assault.

If markets reflect human choice of actions, then competition is at its heart. When competition is understood to be the logical outcome of choices that drive economic behavior, then markets can be seen as a pure, if crude, form of democracy. And the outcomes can be crude indeed. However, contempt and condemnation for market outcomes reflects an elitist view of the choices of the unwashed and ill-tutored. Those who accept such nonsense have taken the notion of "fallen man" a bit too far while being equipped with too little knowledge. It might be said that the market, like democracy, is the worst economic system available except all the others.

In the first instance, economics is best understood to be a study of exchange arising out of choices guided by the life purposes of individuals. Second, it is these choices made in the face of competition that are constitute the market. Finally, exchanges generate mutual advantage for trading partners and leads to a "positive-sum game" where all trading partners gain. Too often, anti-market forces portray international trade as a "negative-sum game" where gains to one country come at the uncompensated expenses of some or all the others.

Finally, although prices and markets can be temporarily distorted by government decree, they can never be eliminated. Markets operate whenever and wherever human beings act out their lives and whenever the setting is more complicated than Robinson Crusoe's.

Several aspects of economic life are inescapable, although as in other aspects of life, exceptions tend to prove the rule. These can be combined in a single, simple sentence that appears as banal to professional economists as it is considered evil by others. Self-serving actions taken by individuals in a competitive market provide benefits that spillover to the entire community. It is also true that there are spillovers of costs to other groups, but the fact that individuals have continued to rely upon markets suggests that spillover benefits dominate.

Markets require a set of certain supporting institutions such as property rights and extensive individual freedoms protected by an independent judiciary under a rule of law. Under these arrangements, free people can pursue their life purposes within the context of the market.

In many ways, markets serve as a "civilizing" agent. Once accustomed to the interactions of the market, people tend to develop a greater regard for and sense of trust for strangers which itself represents a form of investment in personal and corporate reputation. Transactions based upon trust are more inclusive than are purely personal relationships.

Markets inspire the development of a contract culture where the spirit of compromise becomes part of human interaction. In such a setting, equals are treated as equals just as unequals must also be treated as equals before the law. Governments or large corporations should not receive special treatment in the courts over individual citizens while domestic interests should not override those of foreign claimants.

In this sense, capitalism and free markets provide a necessary underpinning for democracy's success rather than a sufficient one. It is through individualist-based institutions associated with and arising from markets that people exercise true self-ownership to pursue their own chosen goals.

Attacking capitalism and markets is more that an intellectual exercise. Condemning markets ignores the human content that lies behind them. Experiments with communism show that attempts to legislate against self-interest can have disastrous results. The most compelling lesson of this century is that establishing institutions that reward entrepreneurial actions allow the overall community to benefit through wealth and job creation effects of market outcomes.

Christopher LINGLE is Visiting Professor of Economics at Universidad Francisco MarroquĂ­n in Guatemala and Global Strategist for eConoLytics.


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