When did you first form the opinions you currently hold about capitalism? Was it as a teenager, reading newspapers or discussing politics with your parents after dinner? Was it in high school or college, when you took your first classes in history, sociology, or economics? How much have your views changed since then?
Time to Reconsider?
More than a few of us have to admit that we formed our opinions early in life and never got around to subjecting them to rigorous questioning. Oh sure we’ve read books and listened to speeches by experts, but more often than not we were reading and listening to reinforce our earlier opinions, not challenge them.
This is a real problem since the times, after all, are changing. If you are liberal, you may not yet have figured out how the collapse of the Soviet Union and East Germany-and the revelations of human rights violations and environmental devastation that followed-”fits” into your mental picture of how the world works. North Korea and Cuba, the only remaining communist nations on the planet, have become “hermit nations,” reverting to pre-industrial technologies and lifestyles and suffering rising levels of poverty and malnutrition.
It isn’t just liberals who have a problem keeping up with a changing reality. If you are a conservative, you may be grappling with the meaning and effects of “globalization,” which seems to be “hollowing out” the manufacturing sector of the U.S. economy (those famous “good blue collar jobs” your parents may have held) and moving decision-making authority in both the public and private sectors further and further away from the community. How do you feel about mediocre (or worse) corporate executives getting “golden parachutes” worth tens of millions of dollars? The accelerated rate of change caused by the Internet? Proposals to privatize Social Security?
One problem with not regularly revisiting the roots of one’s economic and political views is that one loses the ability to defend them in public debate. We think we know the right answers, but we don’t remember how we got to them the first time, and when we try to explain our answers we are quickly embarrassed by how clumsy and naive we sound, even to ourselves.
Take a Look Around
Recent changes around the world really have exposed the fallacies of some ideas and affirmed others. Free enterprise has replaced socialism as the economic model for nations pursuing peace, freedom, and prosperity. The so-called “Third Way” popular in European politics is essentially capitalism clothed with socialist or populist rhetoric, making it a good slogan for winning elections though not, apparently, for governing.
President Clinton’s admission in 1994 that “the era of big government is over,” while hardly sincere, was accurate. Big government no longer captures the imagination of the nation’s best and brightest, or even of most plain folk. A Gallup poll conducted in November 2000 found that 65 percent felt “big government” was the biggest problem facing the nation.
Here in the U.S., poverty recently fell to its lowest level in the nation’s recorded history, this at a time when welfare reform has slashed welfare rolls nationwide by 50 percent. An annual study of 161 countries, published by The Heritage Foundation and the Wall Street Journal, proves that a country’s civil rights record and level of prosperity depend largely on how free their economies are from government regulation and interventions. This is the kind of “natural experiment” that social scientists rely on to test their theories, and there’s no debate as to who was right.
The passage of time has revealed the truth about some issues that were fiercely debated the last time you checked in, such as whether or not economic liberties must be protected in order to secure civil liberties (the answer is yes), and whether sustained economic growth and prosperity are possible without private property rights and markets (nope). It could even be said that, 200 years after Adam Smith said the way to prosperity is to limit government power and allow markets to work, we’ve finally reached a stage in history where all but the willfully blind have to admit he was right all along.
What Is Capitalism?
Let’s start at the beginning: What is capitalism? Economist Thomas Sowell writes, “Since capitalism was named by its enemies, it is perhaps not surprising that the name is completely misleading. Despite the name, capitalism is not an ‘ism.’ It is not a philosophy but an economy. Ultimately it is nothing more and nothing less than an economy not run by political authorities.”
A standard dictionary definition of economy is “a system of producing, distributing, and consuming wealth.” Individual households operate as little economies: One or both parents typically produce wealth and decide how it shall be distributed to other members of the household. Information as to opportunities for production and individual wants is gathered by observation and dialogue, while decisions are made by the assertion of the parents’ natural authority over their children.
The economy of the household is separated from the economy of the community or a national economy by the division of labor: people acquire different skills, enabling them to work in groups to produce a relatively narrow range of goods in abundance. Each of us specializes in doing that which we do best, and as a result most goods are no longer produced in the same household in which they are consumed. Goods must now be exchanged-traded with others-on a regular basis.
The rise of exchange creates the problem of coordination. How does each group of producers know what to produce or how much of it to produce? It is no longer possible, as it was in the household economy, to simply observe opportunities or to ask household members about their wants. Opportunities and customers might be located in different communities or even in different nations.
Solving the Coordination Problem
Historically, civilizations have tried to solve the coordination problem by relying on tradition, central planning, or freedom. Tradition-based systems work only for small societies where opportunities for exchange are limited and the rate of technological change is very slow. Central planning was the rule in many of the world’s nations before giving way to democracy and property rights starting in the eighteenth century. The former Soviet Union attempted to bring central planning into the twentieth century, with devastating consequences. Its collapse is compelling proof that the autocratic solution fails to solve the coordination problem.
The third solution, freedom, is in fact the capitalist economy, one in which there is no conscious authority in charge of operating or managing the economy. Instead, authority is diffused throughout the system. Three institutions are critical to a capitalist economy: Private property, which the seventeenth century political philosopher John Locke defined as a person’s right to his life and liberty as well as his physical possessions; markets, from the Latin word mercatus, meaning trade, where producers (sellers) and consumers (buyers) meet and negotiate mutually agreeable prices for the goods and services; and freedom of contract, enforcement of voluntary pledges to perform a duty or deliver a product at a later date and the prohibition on the initiation of coercion or fraud.
Working together, these three institutions not only solve the coordination problem, but they create the conditions for a steep increase in the amount of trade that can take place among individuals, and consequently the amount of specialization and division of labor that can occur. Since it is the division of labor that fuels improvements in productivity, a free-enterprise system is also an engine for economic growth and prosperity.
Next month: how to defend capitalism from its most common attacks, and nailing down the toughest question of all, the appropriate role of government.
