The paradox of capitalism

The paradox of capitalism

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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 haven’t read it, but I did read a review by Robert Fulford in National Post. 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 therefore worth examining here. No wonder people don’t grasp capitalism’s benefits when intellectuals and journalists don’t understand capitalism and misrepresent it.

Let’s consider 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 what freedom means: the protection of 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 the mixed economy of today, individual rights are only partially recognized  by governments (and compromised, for example, by evoking eminent domain in the name of “public interest”), and public ownership of property is common. In other words, the principle of individual rights is not upheld.

While it is true that productive 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 most consistently apply reason achieve the most – provided they are free to think and act on their thinking.

Capitalism 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 create the most wealth. “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 continues: “[Capitalism is] unsystematic, chaotic, erratic and (as its enemies love to point out) unfair.” I’m not sure what he means by calling capitalism “unsystematic.” Perhaps as an opposite to “centrally planned”? 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 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 its critics’ claims, capitalism benefits also the less productive because more overall wealth is created and invested, which translates 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 (in contrast to government-directed economies), 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 best suited for human survival. Imagine where we could be in terms of innovations in medicine, health care, information technology, and other fields, if we had capitalism instead of welfare state where government violates individual rights and interferes in the economy.

Instead of inventing unsubstantiated “flaws” of capitalism, Robert Fulford and others confused about capitalism should educate themselves about it, for example by reading Ayn Rand’s “Capitalism: The unknown ideal”, and Yaron Brook and Don Watkins’ “Free market revolution.” Benefits of capitalism are not hard to grasp, but as with all knowledge, understanding them requires effort. It is worth it—if happiness and prosperity are your goals.

This is an edited version of the original post on 3 May 2014.

Photo by Yasir Eryilmaz on Unsplash

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4 Responses

  1. Peter Foster’s book asks an excellent question, but he writes poorly and goes out of his way to try to smear Ayn Rand.

    A National Post writer should at least half half a clue about her teachings, even if disagreeing (religion is a common reason for disagreement, as Ayn Rand asks for evidence).

    The answer to the boo’s title question is psychology in my judgement, Foster is suspect – learning that may have been worth the money I paid for the book.

    (Fulford sounds as though he is launching from Adam Smith, who made some very good observations but missed some fundamentals, as John Ridthpath explained in a lecture.)

    1. Yes, I’ve read Peter Foster’s smears of Ayn Rand. It is flabbergasting that people like him who want to defend capitalism do not engage with Rand’s writings who are so clear and so well grounded in facts. What are they scared of?

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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.

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