Capitalism
Part 4 – Can you plan your own life?
I recommend reading Parts 1 through 3 before reading this essay
Critics of capitalism claim that free markets must be regulated by a central planning authority – the government. They never provide a sensible economic justification for this, other than to say that ‘planning’ something is always preferable to embarking on a task haphazardly. Superficially, this seems plausible. However, such claims are completely presumptuous. Capitalism does not require central planning; indeed, that is its strength, but this is quite different than saying that planning does not occur.
Individuals and businesses plan their own affairs on a daily basis. Will you spend money on a good economics book, or a nice bottle of wine? When you go on vacation, how do you decide where to go? You have several destinations in mind, and you compare prices for travel and accommodations. When you need to buy a car, how do you decide which one to buy? New or used? Which model? Sedan, convertible, or van? Price – expensive or cheap? All of these things require planning! We all do this, every day, in numerous ways.
The government claims that citizens benefit from government planning because politicians and bureaucrats are impartial and objective. First, as we have seen through our discussion of government regulations (Part 3) – the heart of government planning – they are certainly not impartial. Second, the planning which you do in your personal life is, by definition, subjective. You may seek advice from others, but final decisions rest with you, and these decisions are always subjective, not objective. Surely you would not want it any other way. It is with extreme arrogance that the State claims it can ‘plan your life better than you can’.
George Reisman, economist and author, wrote about ‘planning’ in his book Capitalism:
Now the fact that capitalism even has economic planning, let alone the only possible kind of rational economic planning, is almost completely unknown. Practically everyone under capitalism has been in the position of Moliere’s M. Jourdan, who spoke prose all his life without ever knowing it. The overwhelming majority of people have not realized that all the thinking and planning about their economic activities that they perform in their capacity as individuals actually is economic planning. By the same token, the term “planning” has been reserved for the feeble efforts of a comparative handful of government officials, who, having prohibited the planning of everyone else, presume to substitute their knowledge and intelligence for the knowledge and intelligence of tens of millions, and to call that planning. This is an incredible state of affairs, one which implies the most enormous ignorance on the part of the great majority of today’s intellectuals, from journalists to professors.
The profit motive – financial self-interest – makes everyone be concerned with the revenue or income he earns and the costs or expenses he incurs. As stated, precisely this is what harmonizes and integrates the economic plans and the economic activities of all the separate businesses and individuals who make up a division-of-labor society.
The profit motive is what balances the demand and supply of each product and ensures the most rational and efficient distribution of each product over space and time – among all the markets that compete for it – and its delivery into the hands of those individuals who, within the limits of their wealth and income, need or desire it the most. The profit motive ensures the most rational and efficient allocation of capital and of every type of labor and material among its possible alternative uses, and makes the economic system respond to changes in economic conditions in the most rational and efficient manner possible.[1]
PRICES MUST BE FREE FROM GOVERNMENT INTERFERENCE
Reisman mentions profits, revenue, income, and expenses. When we speak of prices, since money is the medium of exchange, then we are speaking of prices in terms of dollars (or whatever unit of currency is being used). Reisman is correct about the coordination of the economic plans and activities of all the separate businesses and individuals who make up a division-of-labor society. This coordination depends on prices, which are established through the forces of ‘supply and demand’. Without accurate prices, markets become less efficient.
We do not live in paradise. We live in a world of scarcity. The only good in abundant supply is air – there is more than enough air for everyone to breathe. Air is readily available. Air has no price because human effort is not required to produce it. However, air alone is not sufficient to sustain human life. Other things which are needed to sustain and improve our lives require human effort to produce – water, food, clothing, shelter, beer, etc. Given that we must expend effort to produce things, it is obvious that everyone cannot have everything they want. Therefore, we must prioritize.
If you are shipwrecked on an uninhabited island you must prioritize quickly. Your top priority is to find a source of water, then food. After these two priorities have been met, shelter may be next on your list. Every decision you make has a cost, a price. During your search for water, the price you pay is foregoing the search for food. You decide this is a cost worth paying because water is higher on your list of preferences (priorities). You decide that your first task will not be to build shelter because the price you must pay is too high i.e. foregoing the search for water and food. To put it another way, you would be wasting a scarce resource (your labour) if you tried to create some sort of shelter before you acquired water and food.
Whether you are consciously aware of it or not, you are always following an important economic principle on your island. The principle is this: upon consideration of the alternate uses of all available resources (labour and natural resources), you always decide to allocate resources to their most highly valued use at any point in time.
You wake up one day to discover you are not alone. Another person has just been shipwrecked on the island. Your standard of living can now be raised through the division of labour. The joint efforts of two people can produce more than the total of their individual isolated efforts. In this way, peaceful cooperation ensures the continuing optimal use of resources. Each of you benefits from the increased production of this arrangement.
However, suppose the newly arrived person does not cooperate. He enslaves you, forcing you to provide food, water and other things for him, while restricting your consumption to a level which barely sustains your own life. As a consequence, overall production is much lower than what it would have been under the division of labour. It is plain to see that both parties do not benefit from this arrangement. One benefits at the expense of the other. The new arrival – the brute – expends very little effort, and does not concern himself with resource usage. He forces you to gather more food than he can eat. He tastes each offering, then throws it into the sea, and demands something new. He is wasting resources, which he would be unlikely to do if their acquisition required him to expend his own energy. In other words, he does not pay a price for the use of resources – he forces you to pay the price. Thus, the island’s price structure has been forcibly altered, resulting in suboptimal resource usage by the island’s inhabitants.
When you buy or sell something in our modern economy, price is an important factor influencing your decision, just as it was on the island. The only way for the masses to enjoy the highest possible standard of living is to have accurate prices.
Fractional capitalism is the result of government regulations, as discussed in preceding essays. The most egregious of these are laws which (a) create a central bank, and (b) enforce legal tender. These laws allow the State and the banks to manipulate the money supply to their advantage (see my essays on Money). This forced manipulation, as well as the imposition of thousands of other regulations causes significant distortion of market prices. Thus, coordination of the economic plans and activities of everyone becomes greatly hampered. Production and living standards decline. As economist Thomas Sowell wrote:
Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated. To say that we “cannot put a price” on this or that is to misconceive the economic process. Things cost because other things could have been produced with the same time, effort, and material. Everything necessarily has a price in this sense, whether or not social institutions cause money to be collected from individual consumers. . . .
Price fluctuations convey knowledge of changing trade-offs among changing options as people weigh costs and benefits differently over time, with changes in tastes or technology. The totality of knowledge conveyed by the innumerable prices and their widely varying rates of change vastly exceeds what any individual can know or needs to know for his own purposes. . . .
Price movements economize on the knowledge needed for given decisions. . . . How accurately these prices convey knowledge depends on how freely they fluctuate. . . . Where such prices are artificially maintained by force, rather than through voluntary transactions, they convey misinformation as to relative scarcities, and therefore lead the economy away from the optimal use of resources. Accurate prices resulting from voluntary exchange permit the economy to achieve optimal performance in terms of satisfying each individual as much as he can be satisfied, by his own standards, without sacrificing others by their own respective standards. . . .
Price fixing as a process cannot be defined by its hoped for results – “a decent wage,” “reasonable farm prices,” “affordable housing.” Price fixing does not represent simply windfall gains and losses to particular groups according to whether the price happens to be set higher or lower than it would be otherwise. It represents a net loss to the economy as a whole to the extent that many transactions do not take place at all, because the mutually acceptable possibilities have been reduced. The set of options simultaneously acceptable to A and B is almost inevitably greater than the set of options simultaneously acceptable to A, B, and C – where C is the third party observer with force, typically the government. . . .
. . . the use of force is emphasized here not simply because of the incidental unpleasantness of force, but because the essential communication of knowledge is distorted when what can be communicated is circumscribed.[2]
THE FREE MARKET OUTPERFORMS THE GOVERNMENT
Consider those sectors of the economy over which the government exercises total planning in all respects, with capitalism having been outlawed. Consider also those sectors over which they exercise only partial planning – many regulations but a fraction of capitalism still exists. Economist Walter Williams wrote:
Try polling people with a few questions. Ask them what services they are more satisfied with and what they are less satisfied with. On the “more satisfied” list would be profit-making enterprises, such as supermarkets, theaters, clothing stores and computer stores. They’d find less satisfaction with services provided by nonprofit government organizations, such as public schools, post offices and departments of motor vehicles.
I’m sure that we’d be less satisfied with supermarkets if they, too, had the power to take our money through taxes, as opposed to being forced to find ways to get us to voluntarily give them our earnings.
. . . Capitalists seek to discover what people want and produce and market it as efficiently as possible as a means to profit. . . . There are literally thousands of examples of how mankind’s life has been made better by those in the pursuit of profits.[3]
We take so much for granted. Even highly skilled technicians and engineers lack an appreciation of the complexity of the entire production process in which they are involved. Take for example, a lead pencil, such a simple product that should be easy to produce, right? Yet, no one knows how to do it. In 1958, Leonard E. Read, founder of the Foundation for Economic Education (FEE), wrote a short and entertaining essay titled I, Pencil.[4] Please put aside ten minutes of your time to read Leonard’s essay. It will increase your appreciation of the productive powers of capitalism, and the utter futility of State planning.
CONCLUSION
The definition of capitalism reveals that it is not a ‘system’ which was created or invented, nor does it need to be managed by a particular person or government. In a free society, capitalism simply ‘is’. Even in the most extreme totalitarian societies (such as China prior to 1978, or the former Soviet Union) capitalism can never be completely eliminated because it is what naturally occurs as people pursue their own interests (think underground economy), while abstaining from aggression against others and their property.
If government taxes and regulations are minimal, people tend to obey because non-compliance is risky. But as the State increases its economic control, more people disobey these regulations in an attempt to avoid a falling standard of living. The State speaks of the evils of the black market, but the black market is simply where people go to escape the clutches of a suffocating government. In a manner of speaking, it would be appropriate to view the black market as the ‘free market’ and to recognize the ‘legal’ market for what it really is, namely the ‘un-free market’.
I do not claim that everyone employed by the State is bad, and everyone else is good. Philosophically, the problem is not with the character or desires of any of these individuals, but with the means which are available to them to pursue their desires. By definition, an exchange (transaction) on the free market is a voluntary exchange – neither party employs coercion. The exchange must be mutually beneficial to the parties involved, or they will not agree to the exchange. Thus, the free market does NOT enable the satisfaction of one’s desires at the expense of someone else. Government actions on the other hand, are designed to do just that!
This is made possible because the State makes the laws, and because the public ascribes legitimacy to the State, the public assumes all laws are based on the purest of moral intent. In the United States alone – just one country – forty thousand new federal, state, and local laws took effect in 2012. This is not the total number of laws which exist in the country, which in itself would be outrageous. This is 40,000 new laws created in one year.
“The more numerous the laws, the more corrupt the government”………… Publius Tacitus (b. 56, d. 117), Roman senator, considered one of antiquity’s greatest historians
Operating behind this veil of legitimacy, politicians and bureaucrats are free to pursue their hidden agenda without concern for market constraints. They promote their agenda with noble speeches, such as “Since markets are vital to the prosperity of our country, one of the primary functions of government is to enact legislation which will address the concerns of citizens by eliminating the occasional inefficiencies which are inherent in our system of capitalism, in order to ensure the continued viability of free markets.”
Those unable to connect the dots are easily swayed by propaganda spewing from the mouths of smooth-talking charismatic politicians, thereby relieving the charlatans of the need to substantiate their claims. By convincing the masses that its laws are the source of their peace and prosperity, the State proceeds to make laws which limit those very things. Our ignorance on these issues works to our detriment, and as the degree of ignorance grows, so grows the State. As the State grows, capitalism shrinks.
In a world of scarcity, our standard of living rests on the division of labour. The division of labour rests on the right of individuals to own the product of their labour and to engage in voluntary exchange. Voluntary exchange rests on the availability of a reliable medium of exchange. Reliable money therefore, is a prerequisite for the development of a prosperous civilization, and the continued advancement of same. This is the market allocating human labour and natural resources. Only the free market can establish functional economic prices. The longer honest money exists, the further the division of labour expands, the more prosperous we become, the greater is our standard of living. If we decide to save instead of consume, we do so with confidence that our money will retain its exchange value into the future. This confidence is what prompts us to save, and our savings are the source of rising production, which begets rising living standards. An expanding division of labour allows for increasingly complex production processes. This complexity is the essence of social order. This is social cooperation getting stronger, human relationships getting stronger. No ‘authority’ has to plan this. It is a natural product of self-interested human actions undertaken in an environment of non-aggression, through the process of voluntary exchange on the free market. This is capitalism.
When a State interferes with the medium of exchange, it disturbs the money/social relationships which are the source of our prosperity. This suppresses the proper functioning of the price system. The division of labour expands more slowly. Left unchecked, the coercion continues, regulations multiply, and the division of labour begins contracting. Living standards fall and civilization regresses. Over the long term the deterioration of civilization is easily identified, but at any point in time we may be fooled by what we see. Our technological gadgets today are better than yesterday, so we think civilization is advancing, but we fail to detect the foreboding clues – relentless inflation, falling employment, social bickering and unrest rising, government and personal debt exploding, international aggression increasing.
Civilization is infected with a parasitical political structure which is destroying many of the benefits available under capitalism. For more than a century, production has been increasingly directed by those with political skills, instead of those with business skills. Individuals wishing to produce must first seek permission from those who produce nothing. Those receiving the green light must then bear the risk of future regulations which may force them out of business, thereby sacrificing their considerable investment of time and money. Regulatory costs imposed on new businesses, and the uncertainty of future regulatory expenses, dissuade many aspiring entrepreneurs. In our politically-regulated society, corporations grow large by using the State to quash competition. Success or failure is determined by the whims of bankers and politicians, not by individual initiative. State control of money has transformed our entire economy from one based on ‘savings and production’ to one based on ‘borrowing and consumption’. No longer can one generation expect to live a better life than the previous one. When someone criticizes capitalism, inform them that capitalism does not exist, and tell them that all the goods and services which they enjoy are a direct result of the fraction of capitalism which the State has yet to extinguish.
Change is possible. Capitalism can make a comeback, but not until more citizens educate themselves in basic economic principles. I encourage you to review my suggested reading list, which you will find in my short essay, Economics For Dummies. Heed the words of Ludwig von Mises:
Economics . . . is the philosophy of human life and action . . . It is the pith of civilization and of man’s human existence.
Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.
There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen. In such vital matters, blind reliance upon “experts” and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people’s domination.[5]
[1] George Reisman Capitalism (TJS Books, Laguna Hills, California, 1998) pp 137-38
[2] Thomas Sowell Knowledge and Decisions (Basic Books, Inc., 1980) pp 79 – 80, 167 – 68
[3] Walter E. Williams The Pope and Capitalism, December 18, 2013
[4] Leonard E. Read I, Pencil: My Family Tree as told to Leonard E. Read (Library of Economics and Liberty, 1999)
[5] Ludwig von Mises Human Action, A Treatise on Economics (Ludwig von Mises Institute, 1998) pp 874 – 75
