Gary M. Galles – January 26, 2020
True or false? “Capitalism is a system in which the fittest flourish and the least fit disappear.”
Despite the fact that many would say this statement is true, the series this article wraps up has shown many ways that dog-eat-dog “survival of the fittest,” “capitalism is a jungle” rhetoric is in error when applied to the people in society. But it can indeed be accurate if we are talking about ideas, processes, products and organizational forms. However, to the extent such things are subject to dog-eat-dog competition, people are not victims but massive gainers.
In markets, producers succeed by creating goods and services that offer customers more value for the money than rivals offer. But as Howard Baetjer Jr., an economics lecturer at Towson University, has noted,
if its competitors should cut costs and charge less for a similar product, or offer a better product at a good price, that company must adapt or lose customers. It must improve its own product, develop cost savings of its own, or even go into a different product line. But if it doesn’t adapt, it goes out of business.
New ideas and innovations that offer the prospect of what George Reisman calls “revolutionizing products and methods of production” are often the path to breakout successes for some firms. But such attempted improvements not only pose potentially existential threats to current competitors, but they are also risky forays into the unknown, as things that are new are seldom widely recognized as proven beforehand.
Failing Small Businesses
How risky are these efforts? One indication of the risks facing innovators is new business failures. According to the Small Business Administration, 30 percent of businesses fail within two years, 50 percent within 5 years, 66 percent within 10 years, and 75 percent within 15 years. Things are not exactly safe for larger firms, either, including ones considered dominant. Just check out a list of companies that were once in the Fortune 500 or the Dow 30 but are not there now. That sounds like a pretty dog-eat-dog environment for business firms. But we should not stop our analysis there, or we will overlook the almost uncountable improvements those risks have created for consumers, which means the process is not a jungle but an incredibly generous benefactor to them.
The key to understanding this is that typical survival-of-the-fittest rhetoric implies that unfit individuals will be weeded out. That is false. The market requirement to earn positive profits in order to survive does weed out the least fit goods and services from consumers’ perspectives (those that consumers value less than alternative goods and services that could be produced with the same resources). It also weeds out what consumers find to be the least fit organizational forms (e.g., if organizing production via corporations is more efficient than through partnerships, corporations will capture increasing market shares at the expense of partnerships, and if large-scale factories are more efficient than handcrafts, more will be produced at a large scale).
This form of survival of the fittest is highly beneficial to consumers (reversing the conclusions capitalism’s critics reach), greatly improving their well-being as better and better options are offered to them as a result. In George Reisman’s words,
the only sense in which only the “fittest” survive is that it is the fittest products and fittest methods of production that survive, until replaced by still fitter products and methods of production.
But what about those adversely affected by the business failures this process creates? When a business venture fails or a line of work becomes less attractive, owners and employees do not die. They are moved toward different work that consumers value more. At such times, the workers and owners may earn less than they wish, but that is because their services have become less valuable to others. And there is no way to prevent that possibility unless all those chances for improvement are to be abandoned — and most progress along with it.
Jungle of Business Competition
As George Reisman expands on this issue, even those whose pay and prospects may be reduced by a business failure cannot be said to be hurt by the jungle of business competition:
Even in those cases in which an isolated competition results in an individual having to spend the remainder of his life at a lower station than he enjoyed before…he cannot reasonably claim that competition has harmed him. The most he can reasonably claim is merely that from this point on, the immense gains he derives from competition are less than the still more immense gains he derived from it previously…
For competition is what underlies the production and supply of everything he continues to be able to buy and is what is responsible for the purchasing power of every dollar of his…And…it proceeds to raise his real income from the level to which it was set back. Indeed, under capitalism, competition proceeds to raise the standard of living of the average wage earner above that of even the very wealthiest people in the world a few generations earlier.
Thus, the “survival of the fittest” that actually takes place in markets — the process of discovering and introducing the fittest goods and services and the fittest productive and organizational forms — greatly benefits consumers rather than harming them. And it has transformed billions that would have been “unfit” into successes beyond even the dreams of earlier generations. As Baetjer added,
This distinction between companies and people is crucial. In fact, because capitalism permits only the fittest companies to flourish, it dramatically assists even the least skilled people to prosper.
In fact, this is why the Darwinian imagery of the survival of the fittest people was emphasized not by capitalism’s proponents, who recognized its dramatically un-Darwinian results, but by capitalism’s opponents, who wanted to demonize it in order to open the door for various versions of state control that would hamstring its productive processes and create a real jungle competition for control of the state, which would control others.
Originally published at Fee.org. Gary M. Galles is a professor of economics at Pepperdine University.
Photo by Tim Gouw on Unsplash