In addition to his side job as Director of Undergraduate Studies for the Economics Department at Harvard University, Jeff Miron is Director of Economic Studies at the Cato Institute.
He’s also the narrator of this video from Learn Liberty that discusses three myths about capitalism.
Unsurprisingly, I think Jeff is right on the mark. Here are some of my thoughts on the three myths, but I’ll take a different approach. I’ll state the truth and then add my two cents to Jeff’s debunking.
1. Capitalism is pro-consumer, not pro-business.
I think the myth about a link between capitalism and big business arises because defenders of free markets often are in the position of opposing taxes, regulations, and mandates that also are opposed by the business community. But for some reason, many people overlook the fact that those same advocates of free markets also oppose cronyist policies that are widely supported by big business, such as Export-Import Bank, the so-called stimulus, TARP, and Obamacare. Part of the problem may be that far too many Republicans actually are pro-business instead of pro-free market.
2. Capitalism rewards those who best serve others.
In a genuine free market, you can only become rich by providing goods and services that are valued by others. But I think the myth that capitalism leads to unfair distribution of wealth exists for two reasons. First, a non-trivial number of people actually think the economy is a fixed pie, so they assume a rich person’s wealth came at the expense of the rest of us. This is obviously wrong. The second reason is that some people do get rich because of government intervention and coercion. This is true, of course, but as discussed in the video and in my remarks above, cronyism, handouts, bailouts, and subsidies are the opposite of capitalism.
3. Capitalism can’t work without failure and bankruptcy.
Regarding the myth that capitalism caused the financial crisis, I’ve already explained that bad monetary policy and corrupt subsidies from Fannie Mae and Freddie Mac deserve the lion’s share of the blame. So I want to focus on the bailouts that occurred once the economy soured. There’s a semi-famous saying that “capitalism without bankruptcy is like religion without hell.” Unfortunately, politicians feel a compulsion to shield people (especially if they’re politically powerful) from the consequences of bad decisions. That’s not capitalism. And I’m not just making an ideological point. For those who think that the financial system needed to be recapitalized, the “FDIC resolution” approach would have achieved everything we got with TARP, but without rewarding people who made bad decisions.
My only complaint about the video is that it was too short and didn’t address some of the other viewpoints that undermine support for capitalism.
I don’t know if these are myths, per se, but they certainly are mental roadblocks we need to overcome to build more support for a free society.
4. Some people crave security.
Capitalism is all about opportunity, but that also means uncertainty. And for those who crave predictability and security, that makes them uncomfortable. And I suspect they would be uncomfortable even if you showed them all the evidence that capitalism leads to far more wealth in the long run. Simply stated, they worry about falling through the cracks. When trying to convince these people, I point to the collapsing welfare state in Europe and argue that there’s far less long-run security in a society where everyone tries to live at the expense of everyone else.
5. Some rich people are jerks.
Whether it’s being obnoxious or ostentatious, people with a lot of money sometimes give capitalism a bad name. And that’s true even if they are genuine capitalists rather than cronyists. It doesn’t help that a lot of what comes out of Hollywood routinely paints rich people and big business as bad guys. By the way, it could very well be the case that there are fewer bad people, per capita, among the rich when compared to the rest of us. But the ones that are jerks get a disproportionate share of attention. And since I mentioned Hollywood, it is a bit of a mystery that becoming uber-rich by acting (or singing or in sports) doesn’t seem to arouse as much envy. Yet I strongly suspect those people are far more likely to engage in unseemly behavior. Go figure.
6. Some businesses try to rip off consumers.
While free markets in the long run reward honesty and punish bad behavior, that doesn’t mean much to a person who has been ripped off, whether by a local contractor or a big multinational. The fact that there are bad people, though, isn’t an argument against capitalism. After all, bad people are quite likely to obtain power in a big-government society. And backed by the coercive power of the state, they’ll have much greater ability to do bad things.
P.S. If you want to know the practical difference between capitalism and socialism, check out this image.
P.P.S. The most free-market place in North America is not in the United States.
P.P.P.S. We live in a strange world when Bono is more pro-market than the Pope.
P.P.P.P.S. Statists like to criticize free markets, but they sure seem to enjoy the fruits of capitalism.
P.P.P.P.P.S. I also suspect statists think free markets are bad because they equate capitalism with rich people and the wealthy folks they know are more likely to have obtained their money dishonestly.
[…] https://danieljmitchell.wordpress.com/2014/10/08/myths-about-capitalism/ […]
Reblogged this on kommonsentsjane and commented:
Reblogged on kommonsentsjane/blogkommonsents.
For your information.
kommonsentsjane
Some poor folks are jerks too. Like the pan handler who calls a woman a cake eater and slashes her tires when she won’t give him $$$.
Some depictions of rich, evil business moguls on movies/TV are ridiculous. How could such an anti-social jerk make the necessary connections to succeed in building a business to start with? Let alone an empire.
Capitalism isn’t about survival of the fittest as much as symbiosis. People helping each other. Getting along and stuff we should have learned in kindergarten.
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“And since I mentioned Hollywood, it is a bit of a mystery that becoming uber-rich by acting (or singing or in sports) doesn’t seem to arouse as much envy.”
There’s nothing mysterious about this at all. It’s very easy to compare people’s skills at singing or sports; there are explicit competitions for who can sing best, or who can make the most free throws. In contrast, the skills required to run a hedge fund or a corporation are rarely put into direct competition. We know Michael Jordan was one of the greatest basketball players because he scored the most points. We also give credit to the supporting players on the Bulls, but even that can be tabulated as “assists.” How do we determine who the greatest CEOs are? Making the most money doesn’t seem right, because some industries simply have higher profit margins than others. Being able to squeeze a lot of profit out of the discount retail sector, as a WalMart CEO does, can be a greater accomplishment than getting an equal profit in the oil industry. Plus, CEOs’ failures in many established industries are more obvious than their successes. People think Steve Jobs was a great CEO because they can see the new products created under his direction. They have no reason to think Tony Hayward was any good as a CEO, given that BP didn’t produce obvious new consumer products but did create one big oil spill. So people feel a greater envy of CEOs’ and financiers’ *money*, while they feel envy of singers’ or athletes’ *abilities*. Moreover, entertainers and athletes don’t control life necessities. If I think the Situation (the abs guy from Jersey Shore) is an idiot, I’ll never be using his products: reality TV, dopey smartphone apps, stupid clubs that pay him for appearances, etc. He can make millions (and has, according to the IRS’s case against him) solely from people who think he’s great. The same is not true if I object to Wal-Mart but it’s now the only store in town that sells certain products because it successfully underpriced and drove out the old small businesses.
“We live in a strange world when Bono is more pro-market than the Pope.”
Similarly, not at all strange. Bono has made millions from the market and done so in a creative field where people envy his talent rather than his money. So far as I can tell, the Pope has made hardly anything. Existing legal structures, particularly those for tax and intellectual property, largely favor Bono. (Remember, he’s Irish so he benefits from their tax system without having to merge into anything!) There’s a reason he lobbied for *voluntary* debt forgiveness for the 2000 jubilee, rather than saying that we ought to go back to hardcore early Christian principles opposing interest-based lending entirely.
“Some businesses try to rip off consumers.”
But businesses’ ripping off consumers isn’t just attributable to regulation. If anything, snake oil salesmen may have been more prevalent, as a percentage of all businesses or all consumer expenditures, when the economy was less-regulated (and lower-information due to technological limitations). It’s arguable that in today’s high-information environment, there’s less need for regulation. If a snake oil salesman comes to my door, I can quickly check his reviews on Yelp or at the Better Business Bureau. But most regulation in a democratic society will actually originate in popular unhappiness with having been ripped off, whether it’s food and drug regulation after too many snake oil salesmen and babies’ deaths from dubious milk; or stock market regulation after the 1929 crash. You’re much better off claiming that we don’t need regulation anymore, than in claiming it only came about because “bad people” lobbied for it.
Reblogged this on Right From Yaad and commented:
We had posted this video shared by Dan Mitchell some month ago. Great piece by the way Dan!!
A corollary to seeking security is that most people also underestimate the effect of growth. In the longer term, this security over growth preference becomes catastrophic.
In the past, when growth rates were low, one could indeed favor security over growth with only modest consequence in his/her own lifetime. Growth was slow and the compounding effect of missed growth moderate. Reducing growth from a 1% trendline to 0.5% compounded into a 28% lower prosperity over a 50 year period. A moderate effect which made the selection of security over growth more plausible (though still a great compounding disservice to future generations).
It’s the hippie syndrome: “All human growth so far has been good. Thank you very much. Now we can afford to relax, let growth lag, so long as we can more safely maintain our current standard of living. The machines can do the work and people will relax (The machines of 1968 that is)”.
But today, and as of a few decades, humanity has finally entered an irreversible era of accelerated growth. Five percent growth trendline is now the norm for the world average. At this rate, going from a vibrant capitalism growth of 5% down to a “successful” Euro-socialist trendline of 2%, results in a compounding growth deficit of over 400% in one’s adult fifty year lifetime alone!! Further compounded over a couple of generations, the effect of hippyism is catastrophic. Note: I compared to 2% growth, the most vibrant amongst Euro-socialist states, such as, say, Germany and Scandinavia. The comparison is even less favorable with moribund statist nations such as France and Italy which are more on a 1% growth trendline. But let’s not be picky. A 3% growth deficit is still catastrophic as the simple exponentiation 1.03^50=438% shows.
How would you feel if you took a country that had a per capita prosperity five times the world average (the US) and handed over to your grandchildren fifty years later a country whose per capita prosperity is just the world average? (This is the net effect of a fifty year growth deficit compounding to 400%).
Of course, we are not only talking about money. Prosperity and per capita income is essentially a proxy for all the other things that embody this prosperity: scientific advances, medical advances, technology etc.
In today’s world, forfeiting growth for security is catastrophic, with dramatic consequences felt even during one’s own single lifetime.
Had humanity had a mere 0.5% growth trendline in the past millennium, you would already be living in a fantastic and unimaginable world(*). A world where things such as cancer no longer exists, just to mention a predictable result, since we cannot possibly imagine the other futuristic things that humanity will experience, likely as soon as the next century.
It is still time to experience these fantastical things, especially if you are young. If we can get past hippyism and start growing at a free capitalist rate of 4-5%. Absent that, the world average is in America’s prosperity future.
All this seems irrelevant to the voter lemming. In the polling booth, a redistribution dollar today is worth five perpetually compounding growth dollars in the future. Hence, western world trending towards the world average will continue. And continue with accelerating intensity since after a certain tipping point a French style electoral vicious cycle forms.
(*) 1.005^1000=14657% = x146
A 1% growth for a millennium is 1.01^1000=x20950!!
Fantastical numbers. But they will happen. And our descendants will laugh at today’s hippies, just like we laugh at Luddites.
I would like to know if he has written any papers, or possibly a book on Capitalism and Myths.
Thanks so much,
Ray Metcalfe
Toronto, Ontario