CLEMSON, SC, October 4, 2011—Capitalism is on trial. The Wall Street occupiers want to see it supplanted. They look at the failures of the economy and say, “See! Capitalism has failed.” Dr. Tom Palmer, in his visiting lecture at the Clemson Institute for the Study of Capitalism, contends that this is wrong. Capitalism has not failed.
Then why the recession? Why the housing bubble that caused it all, why the corporate profits that create no jobs, why the taxpayer money thrown at Wall Street and the enrichment of a few to the cost of us all?
Let’s consider that last one first: Why did the Obama Administration throw over half-a-billion dollars of taxpayer money at Solyndra? Wasn’t this a company that some of his advisors knew was in deep trouble? Yes, but it was dominated by one of Obama’s major campaign donors. This wasn’t capitalism. It was a textbook case of cronyism.
What, then, is capitalism?
Palmer defines capitalism as, “a legal, social, economic, and cultural system that embraces equality of rights, ‘careers open to talent’ (one’s career isn’t primarily determined by family social status), which relies on decentralized innovation and processes of trial and error through the voluntary processes of market exchange.”
Joseph Schumpeter described capitalism as a process of “creative destruction.” Firms and industries are created, then later destroyed, as resources are allocated and reallocated in a constant process of innovation and new creation.
For both Palmer and Schumpeter, capitalism takes place within a moral and civil framework. It isn’t bloody and blind as nature is. The natural world requires organisms to devour each other in order to survive; capitalism doesn’t destroy people for others’ benefit, but it does force them to adapt to an ever changing landscape.
Consider the typewriter, the outdated product of a dead industry. Typewriter repairmen were put out of business by word processors, but if they could adapt, information technology created far more opportunities for them than it destroyed.
What protesters across the country see as the failure of capitalism is something else - the triumph of cronyism, the failure of government intervention, the triumph of politics over economics as a way to choose life’s winners.
The economic disaster of the last four years demonstrates all of these. It started with the collapse of the housing bubble (which was born of the collapse of the tech bubble eight years earlier, but let’s not make the causal chain too long), which was due to government interference in the free market, especially in giving the financial sector a strong incentive to lend money indiscriminately.
The Federal Reserve played a role. It made real interest rates negative on some loans. In essence, the national bank paid people to borrow money. Consequentially, a great deal of money was borrowed that could never be repaid. Some of this Palmer calls “NINJA loans”: The borrower had No Income, No Job or Assets.
Most complaints about capitalism these days are really about crony capitalism, or cronyism. Free market capitalism is not cronyism. According to Palmer, cronyism has “mired so many nations in corruption and backwardness.” It lets the politically connected get rich not by producing goods, but by gathering privileges from others under the authority of the state, what Frederic Bastiat called “legal plunder.”
People like the Wall Street occupiers hate crony capitalism, but at the same time they demand more government intervention. They want Obama to do more, markets to do less.
Cronyism is born of government intervention in markets, and it’s the sickness at the core of our financial crisis. Interventionism secures special privileges for some at the expense of others. It blocks competition, confiscates wealth, and secures power for the well-connected. The benefits from interventionism go to those with the concentrated interests and political connections to secure them - it feeds cronyism.
The Wall Street occupiers and capitalists see three ideas — competition, exchange, and profit — from radically different perspectives.
Critics see competition as “dog eat dog” and “cutthroat,” as violent and cruel. But competition is what spurs firms to give consumers what they want. We don’t all have to wear Mao jackets because clothing manufacturers compete to give us each what we want. Competition means you don’t have to dress just like your mom or your grandpa.
Exchange is viewed as taking place between selfish consumers and selfish producers, each selfishly looking for the best deal. But that means exchange is almost always mutually beneficial. Otherwise, why do it?
“Profit” is spat out as a curse, modified by “obscene” and “windfall,” associations which imply that my gain is always your loss. Its critics see profit as a “zero-sum game” (wealth is not created; it’s just shifted around) or a “negative-sum game” (your loss is always bigger than my gain). A mugging is a negative-sum game. The mugger gets your $15, you get a $1000 medical bill, and society loses.
Profit is really a measure of value added to a positive-sum game. You love to bake cookies, I love to eat them. You take $5 worth of flour, sugar and your labor and turn them into something worth $10 to me. That $5 value added is profit. It isn’t “obscene,” it’s glorious. It keeps me in cookies, while giving you $5 to indulge your passion for chicken wings. We’re both richer than we were.
Palmer stresses this Great Fact: The natural condition of humanity is poverty. Just as darkness is the absence of light, poverty is the absence of wealth. He concludes that people should be focused on how to create wealth, not how to prevent poverty, because as we create wealth, poverty will naturally diminish.
More wealth has been created in the past hundred years than ever before. Most of this has been through capitalism in democratic countries. Under most economic systems, the bottom 10% of wage earners still earn about the same percentage (2-4%) of the overall wealth generated yearly. Under capitalism, though, that bottom 10% is much wealthier because the total wealth created is so much greater.
Capitalism hasn’t just increased our wealth. It has improved the quality of our lives and added over 20 years to the average human lifespan. Capitalism isn’t responsible for what’s wrong with our economy, but for what’s right. Capitalism’s moral foundations are stronger than those of any other economic system. And to make things even better we should ask, “How can we dilute political power enough to rid ourselves of crony capitalism?”
John Paul Cassil studies Management/Entrepreneurship and Political Science at Clemson University. A former U.S. House of Representatives Page, Cassil has since worked on conservative campaigns and in Congress for Congresswoman Foxx.
Cassil is the Managing Editor of the Tiger Town Observer, Clemson’s Conservative Journal of News and Opinion. He regularly speaks about activism at national conservative conferences.
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