A Soft-hearted Defense of Capitalism

...Workers should be encouraged to purchase stock and other paper assets possibly at reduced prices...

...So what has caused the howls...

...This is why the constant innovation which many view as a sign of waste in capitalist economies is, in fact, an indication of the constant experimentation which alone can provide the feedback producers need to discover how to provide maximum consumer satisfaction at minimum cost...

...guarantees of long term loans to homeowners have made possible a substantial increase in the wealth of middle-income people...

...Indeed, I have not seen a single modern, cogent, moral argument for accepting the distribution of income which a free market presents us with...

...Thus, a free market price is a trelative) measure of the subjective benefits consumers receive from the last unit of a good they buy...

...Not many sensible people would object to these observations I should think - - but their proper interpretation is more controversial...

...practice of warning managers in state enterprises not to hire dissidents who are then arrested on charges of "social parasitism...

...High profits act as an effective signal to expand output in this industry...

...The New England Branch of the National Restaurant Authority would no doubt be staffed by hundreds of the best dieticians and economists money could buy...

...First it was one hundred two degrees...

...e) to care for the insane and the infirm...

...Private Ownership and Individual Freedom It would be difficult to deny that in the modern world today there is a strong association between anthoritarian political systems and nearly complete state control over the means of production...

...A capitalist style capital market, then, relies on competition at both ends in order to channel private savings to the investors who are capable of earning the highest possible returns...

...In addition, much greater effort must be made to redistribute income directly through tax reform, more generous family assistance and other programs...

...Free market, competitive, capitalism can be usefully defined as the economic system in which factors of production and commodities are privately owned and in which transactions among economic units are made voluntarily, on terms agreeable to all transactors...

...The competitive process thus contains a naturally selective The A l t e r n a t i v e ; March, 1972 5 mechanism which tends to weed out employers who incur unnecessary costs and reward single-minded devotion to minimizing costs and maximizing value of output...

...too, a noble few toant martyrdom...

...It seems unlikely that any mere statutory protection for a man's livelihood in a socialist state monopoly will be as effective a barrier to popular intolerance as the centuries old tradition of private property...

...It is not difficult to imagine a private home or business being confiscated for similar reasons...

...As Milton Friedman reminds us in Capitalism and Freedom, when about 150 script writers were blacklisted by Hollywood studios for their suspected Comlnunist connections, they went right on selling scripts to the industry...

...Even when businessmen appear to bow to popular intolerance and dismiss unpopular employees, the pressure to covertly purchase their services is sometimes irresistible...

...This must certainly be ranked as one of the most successful federal programs ever undertaken...

...In the ]ollowing essays we asked the three writers to make their cases ]or the three outstanding economic systems...

...This soulless timidity and single-minded pursuit of profit tends to strike the intellectual as unappealing at best...

...Teachers were almost invariably reluctant to sign petitions, participate in organizational activity or even register to vote...

...Flexible prices automatically adjust to clear markets, thereby eliminating surpluses and shortages...

...Now many people have advanced various cogent arguments in favor of a certain amount of inequality: need for incentives, concentrations of wealth produce patrons for the arts and for dissident political views, reward for hard work and thrift, etc...

...A further essay and three reviews are added, So now let us decide which system is the most serviceable to the Re~mblic...

...Michael Clurman received his B.S...

...Rights to the ownership of property are invested in individuals and households, although managers of other economic units, like firms or unions, may intermediate some transactions among thesp ultimate owners...

...The verdict of history concerning free markets is rarely questioned by intellectuals (least of all, ironically, hy the reformers who most strongly challenge the status quo, which is, after all, the most recent verdict of history...

...Clearly, any economy must choose which investments to make with its scarce savings and any socialist worth his salt ought to have a pretty good idea what he would like to see replace competitive capital markets...

...At any given point in time this mechanism is not 100 per cent effective...

...Some resources must always be set aside to provide the tools to maintain or increase future consumption...

...Yet this institution performs a crucial social function...

...A primitive fishing society, for instance, would employ some of its scarce labor repairing, replacing and augmenting its supply of fishing nets (capital) so that future consumption of fish could be maintained or increased...

...In one of the nastier towns I was in the school board even made a practice of faithfully attending civil rights meetings in order to make sure that none of "their" people showed up...

...The case for free market competitive capitalism deserves reconsideration...

...the historical causes of the retreat from free markets deserve re-examination...

...In a modern economy the alternative capital investments are vastly more complex...

...To some extent they already have...

...Essentially, the state's proper role is viewed as that of rule maker, umpire and nightwatchman...

...But what about Elsie's...

...another unit is worth less than its price to him...

...The economy clearly becomes more efficient when it increases the output of a good which has a value to consumers in excess of the production cost...

...It could hardly be otherwise since the decision to indulge personal tastes in favor of, say, segregation, or anti-communism by firing an efficient employee (or by hiring an inefficient one) is an added business cost...

...He intends only his own security, only his own gain...

...Although the situation is vastly worse in the Soviet Union than it would likely to be in a parliamentary democracy, one still remembers with a shudder Richard Nixon's intrusion into the New Jersey governor's race in 1966 when the main issue was whether the state-supported University should fire a history professor (Eugene Genovese) for a pro-Viet Cong speech...

...In three summers of door-todoor canvassing in Mississippi and Louisiana I was-surprised by the consistent timidity of the black school teachers...

...Yet implicit in the positions taken by many conservative spokesmen is a deep antipathy to any measures designed to redistribute income...

...They often simply assume that increased state intervention was necessitated by the failures of the free market...

...I will point out the importance of the institutions of private property and limited government in preserving individual freedom and also suggest the advantages of prices and markets over central planning in the efficient production of goods and services...

...If there were no way lo make one person better off without hurting someone else, then an economist would say the economy was fully efficient and resources were rationally allocated...

...Indeed politics largely consists in the attempt to satisfy the preferences of as large a part of one's constituency as possible...

...I believe that the attitudes underlying this situation are mistaken...

...The intellectual's stock in trade is his scope, his daring, and often his idiosyncratic ideas or behavior...

...in economics from the University of Wisconsin in 1965, his M.A...

...One did not have to look far to discover the cause of this trepidation...

...What they do not do, what they do not even attempt to do, is to refute the proposition that there is too much inequality in capitalist society...

...I remain convinced that an economy in which at least half the incomes are generated in the private sector is desirable both because it makes a large contribution to the maintenance of individual freedom, and because a market economy remains the best means of efficiently and flexibly producing goods and services...

...It is difficult to understand why else the Buckley brothers, for instance, would be so disturbed about the Family Assistance Program's proposed extension of benefits to the working poor...

...Competition between firms gives investors maximum possible choice of methods, managements and products in which to invest their savings...

...The functions assigned to the state by advocates of the free market system generally lie in the classical liberal tradition of limited government .and the rule of law...

...Its advocates have offered a variety of justifications for their views...

...The businessman may display daring in matters concerned with cost cutting or production innovation but elsewhere all instincts tell him to keep his principles, or peculiarities strictly out of his business affairs...

...It would be difficult to think of a more thoroughly "capitalist" instithtion than the network of stock exchanges, bond markets, banks and other financial intermediaries which channel money from savers to investors...

...The studios simply attached pseudonyms to the scripts and when caught in the act one producer explained, "We have an obligation to our stockholders to buy the best script we can...

...The libertarian position is that the free market is the system of economic organization which permits maximum individual liberty...

...At that point he buys no additional units...

...The justifications for the free market which I label 'economic" naturally derive from standard economic analysis...

...In contrast, production goals in a central plan are generally stated in terms of maximizing some relatively crude measure of aggregate output such as tons of steel, pounds of butter, etc...

...Monty Krieger Science Editor The A l t e r n a t i v e ; March, 1972 7 Such "spread the wealth" programs are to be encouraged for a variety of reasons...

...A government agency (say the Bureau of the Budget) would be empowered to decide how many dollars would be invested in nail production, how the money should be divided up between little nails and big nails, and which production techniques should be used...

...Those of us who are not persuaded that the freedom to keep all one is able to earn on the market is an essential human right are thus free to remain skeptical about the sanctity of our present distribution of income...

...In a given period of time, a consumer buys just enough of a good to bring his subjective valuation of the last unit down to equality with its market price...

...An arbitrary list follows: (a) to operate a legal system which prohibits initiated violence, theft and fraud, defines property rights, enforces contracts, adjudicates disputes, guarantees liberty and disperses just punishment to convicted criminals...

...d) to reduce involuntary exchanges caused by neighborhood effects," like air pollution...

...A successful stock broker, for instance, is one who knows which sectors of the economy are going to grow most rapidly and which particular firms within those sectors have the resources and entrepreneurial skills to take advantage of such rapid sectorial growth...

...The systematic enforcement of orthodox behavior on school board employees (who constituted the vast majority of local government employees in the black community) contrasted sharply with the rarity of pressure from private employers, except in cases where their interests were directly threatened...

...And he is led by an invisible hand t o promote an end which was no part of his intention...

...I find such moralizing unconvincing...

...A routine defense of capitalism, if it does not positively extol the everlasting moral virtues of a system which allows the ambitious and productive to thrive, while the slothful and indolent are impoverished, is at least expected to point out that tampering with the mechanis~ that produces these results will inevitably, tend to destroy the initiative and ambition of the whole society...

...School personnel were hired and fired by an all-white school board elected by a mostly white electorate bitterly hostile to civil rights activity...

...The basic economic problem is the scarcity of available resources relative to unlimited human wants...

...Capitalism and Efficiency The primary task which any economy must cope with is the problem of choice...

...An additional moment's reflection may also suggest that a decentralized mechanism which deals with this problem by relying upon the voluntary decisions of every individual could not avoid total chaos...

...The instinctive reaction of ritualistic conservatives is extreme reluctance to extend "'welfare" to large numbers of additional families while reluctantly agreeing to continue paying minimal benefits to keep the really destitute non-working poor afloat...

...Businessmen who voluntarily incur unnecessary costs tend to be businessmen whose enterprises grow more slowly or decline more rapidly than their colleagues who ruthlessly avoid any costly indulgences in personal whims...

...c) to maintain a stable monetary standard...

...Competition ensures that an agreement to exchange (of rent) a factor of production or comnodity is voluntary rather than coerced because competitors provide alternatives to any particular transaction...

...they of course are idiots...

...State enterprises are generally monopolies...

...Consequently defenders of capitalism are often suspected of being hardhearted defenders of the privileges of the rich...

...Elsie's restaurant is worth mentioning because it is an example of the flexibility which markets allow people in expressing their preferences...

...The opinion that, "the gap between the rich and the poor is too wide," or that "Hugh Hefner should not be allowed to ride around in his own personal eight million dollar airplane while children go hungry," cannot be refuted by proving that "a certain amount of inequality is a good thing...

...Why does the free market come as close to attaining economic efficiency as it does when consumers are mainly interested in their own wellbeing and producers are interested in maximizing their profits...

...As the English economist, J. E. Meade, reminds u s in his excellent little book, Efficiency, Equality and the Oumership of Property, the relative shares of national income going to labor and capital is the outcome of an intricate web of economic forces, and to expect the result to manifest any special moral virtue is unreasonable...

...When the howl becomes a chorus, thoughtful persons begin to scratch their heads...

...I am convinced that such policies are indeed compatible with both a high level of economic incentives and with a free society--but that is a whole new essay...

...But there is no reason why free men in a parliamentary democracy must accept all the inequality which a true laissez-faire economy produces...

...Competition between brokers and other financial intermediaries means only those with the requisite talents to channel their clients' money to the firms best able to use it will prosper...

...The economic arguments emphasize that free markets generally allocate resources efficiently in response to the material wants of consumers...

...He is induced to invest in the industry where expected profits are the highest...

...Presumptions are too often poor substitutes for analysis...

...This initial reaction, though understandable, departs surprisingly from the truth, because free markets in fact provide a remarkably efficient device for the rational allocation of resources and distribution of commodities...

...Second, Cornelius Drebbel, who had never before made or done anything, invented the thermostat and, thereby, affected the lives of future generations, or so they say...

...As they have received Celebrity rather than Condign derision, now it seems to us an appropriate time for a serious discussion of ,olitical economy...

...Vigorous policies ought to be pursued aimed at equalizing the distribution of income and wealth...

...robably in the history of the world, as exists in the United States today...

...Their political bosses can afford to indulge their (or their constituency's) personal preferences without effective consiraint...

...I would suggest that anyone who is in danger of succumbing to this reasoning or to any species of enthusiasm for central planning come up to Cambridge and have lunch at Elsie's restaurant near Harvard Square...

...It is inconceivable that any central planner would even consider the ridiculous trade-off between expenditure on space and food to which Elsie's customers pay tribute every" lunch-time...

...The true radical (and the one whose faith has been unshaken by a half century of economic history) would nationalize investment planning entirely...

...But a reasonably free competitive economy ensures that such employers will be at a competitive disadvantage...

...A developed economy will have tens of thousands of distinct "products" with several competing production techniques feasible for each...

...I propose instead to give a softhearted (albeit hardheaded) defense of capitalism...

...During the 1950s, for instance, New York provided for the mandatory revocation of the driver's license of any motorist con: victed under the Smith Act of advocating the overthrow of the government...

...All this stands in sharp contrast to the situation in the public sector...

...Such aspirations are normal and traditional, and had they been ,,resented unadorned by ideological plumage they would not have attracted such celebrity...

...They perhaps constitute a sound argument against exact equality of income or wealth...

...Any producer in a competitive market who can figure out how to combine existing inputs into a more valuable output (or to produce the same output with less inputs) will wind up making extraordinary profits...

...A stock broker who can spot such firms before the rest of the market will enrich both his clients and himself...

...b) to provide for the common defense...

...These experiences illustrate the following general rule: a reasonably competitive private sector ensures that most employers most of the time will be concerned exclusively with his employees' performance on the job and will avoid indulging his tastes for conformity in matters not directly related to business performance...

...maximizing rate of return on invested capital) as "'pro6 The A l t e r n a t i v e ; March, 1972 duction for profit instead of to satisfy human needs...

...l COMING IN THE ALTERNATIVE It was an unusual winter's day in seventeenth-century England for two reasons...

...Consider the owner of capital who wants to maximize the return on his investn~ent, i.e., his profits...

...Is a statified economy really infertile soil in which to cultive a political freedom, or is the association between state ownership and tyranny merely coincidental, due, in fact, to some third factor such as the revolutionary origins of many statifled economies, Leninist ideology or centuries of peculiarly Russian political tradition...

...that it must be regarded as instrumental or a corollary of some other principle such as freedom...

...Now the almost immediate objection raised to virtually any proposal to redistribute income is that it would reduce the incentive to work, compete and innovate...

...Probably not freedom, as Mr...

...A particularly crucial set of choices involves selecting the best investments society should make with its scarce savings...

...Similar increases in wealth can be encouraged among lower income groups by generous programs of interest subsidies (which can half the payments on a long term mortgage) to low income families...

...Almost all the world's parliamentary democracies have a large private sector responsible for generating at least half and more usually two-thirds of the total national income...

...recently observed that: "Never has there been so much talk of repression, but never has there been so great a degree of c~vit /reedom...

...Markets are free in that first, neithe buyers nor sellers are excluded from entry by law, thereby promoting com petition, and second, no legal restrictions are placed on the terms of the transactions regarding price, quantity, or quality, thereby enhancing the range of voluntary agreement...

...even hypothetically...

...The relatively poor, and extremely hungry students who eat most of the sandwiches are more than willing to consume their lunch in a proximity to their fellow eaters that a more normal crosssection of the population would consider outrageous...

...What Is To Be Done...

...Elsie's is a tiny eating place, generally jammed to far more than capacity and featuring the largest sized meat sandwiches available anywhere around...

...To illustrate, consider two countries, identical in all respects but one...

...What these idealists want is a "hand in the till and their lovely muzzles in the wide end of the trougl...

...F.H]A...

...He is presenHy doing an economic study of the computer industry for a firm in Boston...

...Both countries would have the same natural resources, the same capital stock, the same number of capitalists, and equally sober and industrious workers...

...The distribution of income in all capitalist societies is highly skewed and the distribution of wealth much more so...

...SoIne seem to want the obliteration of all social distindtions...

...There is no need to deny that the factors nourishing individual freedom are numerous and complex in order to maintain that a large, autonomous private sector is an important bulwark of a free society...

...What techniques should be used in their production...

...The District of Columbia even denied a married man in his forties a permit to operate a taxi because, when he was a young man in his twenties, he and a woman had been discovered making love in his car...

...Production continues to rise until the increased supply drives flown the market price enough to eliminate abnormal profits, i.e., un8 The A l t e r n a t i v e ; March, 1972...

...One is reminded of the Soviet Secret Police (K.G.B...

...That is, in terms of every individual's own preferences, there is little scope for altering the outcome of the free market in a way that could ,hake everyone better off...

...Some efficient mechanism must be established which chooses the investments which will yield the greatest future economic benefits...

...No doubt all these wise men would have worked out formulae showing the desired distribution of restaurants and' the optimal amount of floor space for each expected customer...

...By pursuing his oum interest he frequently promotes that of society more effectively than when he really intends to promote it...

...To commemorate the anniversary of Cornelius Drebbel's first spanking, we, at the Saturday Evening Club have sent our roving correspondent to Knobbyknee, Devonshire to interview Drebbel's only living descendant, Peter "Sticky Fingers" Drebbel...

...This effect is desirable, because high profits mean that the cost of production per unit is less than the market price--a measure, remember, of the benefits consumers receive from the last unit purchased...

...The complexities involved multiply madly as an economy becomes richer and more diversified...

...Others want to exchange places with those they hate - - though often this only means exchanging places with their parents...

...The campaign cry then was that our tax dollars should not be used to pay someone who supports our nation's enemies abroad...

...Capitalist economies typically rely on private capital markets in order to make investment decisions...

...No society uses all the resources available to it for current consumption...

...from Harvard in 1968...

...and (f) to prevent private monopoly and collusion which restrains competition...

...Inequality Still the nagging problem of inequality remains...

...Even so uncompromising a defender of the free market as Milton Friedman is forced to admit (in Capitalism and Freedom, p. 165) that the degree of inequality imposed by a market economy "cannot in and of itself be regarded as an ethical principle...

...There seems to be no sensible reason why a species of moral and political animal should be content to allow the essentially random (or more properly, morally random) forces which determine the market clearing prices of labor and capital to also determine the distribution of economic resources among men...

...These justifications all contain a certain amount of merit...

...It was not, for instance, advisable for someone to encourage a sit-in at a luncheonette where he worked, but with only occasional exceptions, militant general political activity was not punished...

...The principles underlying demand, supply and the price mechanism explain why the invisible hand" works so well...

...Which goods and services should scarce resources be used to produce...

...To put it awkwardly, how scarce resources to be used with what techniques to produce which commodities to be distributed to whom ? A moment's reflection reveals the staggering proportions of this problem in a world populated by billions of people...

...Then...

...Fortunately the Republican candidate lost and Professor Genovese retained his position, but the incident should serve as an ominous reminder that in a statified economy the right to dissent depends on the transitory tolerance of a majority of the electorate...

...There exist private employers who are needlessly arbitrary, unfair and discriminatory...

...T HE EXTENSION of state regulations and controls in the last several decades has reduced the role of the free market in guiding the economic activity of Western countries...

...The idea of extending progressively diminishing benefits to working families as their income rises rankles, even though such an extension is necessary to eliminate the incentive-killing 100 per cent marginal rate of taxation presently imposed on welfare recipients...

...their arguments fall into three rather indistinct categories: (a) economic, (b) pragmatic and (c) libertarian...

...But our whole tax and welfare system is so shot through with loopholes (such as the provisions of the capital gains tax), special privileges (e.g., the oil depletion allowances), and sheer irrationalities (e.g., the present welfare system) that there are many opportunities to implement reforms which would increase both efficiency and equity in our economy...

...Unfortunately, we cannot yet present our correspondent's report, but as soon as we can locate him (or Knobbyknee for that matter), we will bring to you his timely, meaningful, and, lest we forget, relevant story...

...Accordingly, the defender of the free market is a disadvantaged participant in the marketplace of ideas," while the ~speculator," who envisions beneficial results from new anti-market reforms, enjoys substantial returns...

...In general terms, what is it that they desire...

...After scratching his head the editor of Commentary, Mr...

...Adam Smith first provided the answer in the Wealth of Nations in 1776: Every individual...generally neither intends to promote the public interest, nor knows how much he is promoting it...

...The nations with the most complete state control of the economy, the Communist regimes of Eastern Europe, the Soviet Union and China, are all characterized by their lack of respect for individual rights and the absence of meaningful elections...

...Norman Podhoretz...

...Podhoretz has already noted They have plenty o] it, and it only seems to intensify their rinisery...

...Finally I will point out that the inequality produced by a capitalist economy can be greatly reduced without killing the goose that lays the golden egg...

...This selective process accounts in large measure for the natural antipathy which intellectuals seem to feel toward successful businessmen...

...The pragmatic arguments are that direct state interventions to correct real or alleged market imperfections have been (and will always be) generally counter-productive...

...With some justice the relationship between the two concepts is generally thought to be close...

...In addition, efforts should be made to encourage and subsidize other forms of wealth accumulation by the bulk of the population...

...Such an administrative monstrosity (an American equivalent to the Soviet Gosplan) is the logical outcome of rhetoric which denounces capitalist investment criteria (i.e...

...Then let us argue our case intelligently, and hence , u t the rascals to M ENTION THE word "'capitalism" and someone is sure to make the association "inequality...

...those who cannot will eventually be forced to turn to some less ruinous trade...

...Who has stepped on the rascals'tails...

...This trend has strengthened the common presumption among intellectuals that the case for free markets is fundamentally invalid...

...Thus the conservative antipathy to redistribution gives us the worst of both worlds, inequality without incentives (at least for the poor...

...And in addition a person blackballed by the gov: ernment in a statified economy has nowhere else to turn while arbitrary action in the private sector at least has the consolation that alternatives exist...

...property gives people a sense of security and independence which is very desirable in our over-wrought, urbanized civilization, property ownership gives people a stake in the society and aversion to violent change which certainly should be welcome in America, and finally, wealth earns income and thus a more equal distribution of wealth automaticalIy results in a more equal distribution of income...

...If indeed profits and consumer satisfaction have nothing to do with each other, then the only sensible course of action is to scrap the market altogether in favor of complete central planning...

...Of course, private or market alternatives to many of these state functions have been occasionally suggbsted, as have additional governmental responsibilities...

...The only difference would be that country A will have more workers than country B. Then the wage rate in country A will be lower and the return to capital (and the average income of the capitalists) will be higher than in country B. If one believes that country B, the more egalitarian of the two, has the right amount of inequality it is difficult to see how one can justify the greater inequality imposed on the equally meritorious workers in country A. Even if one is a hard-hearted believer in inequality and believes that country A has the appropriate gap between the rich and the poor, it is hard to see how the more egalitarian economy of country B is to be justified...

...Now imagine, if you will, a completely nationalized restaurant system, with a central planning authority making all the decisions concerning investment and pricing...

...What is the socialist alternative to competitive private capital markets...

...The case for free markets is difficult to summarize...

...The importance of a powerful private sector was impressed upon me quite vividly in the deep South (of all places) when I worked for CORE in the middle 1960s trying to persuade black ~itizens to vote...

...Given these market prices, consumers spend their available income on various goods so as to attain the greatest satisfaction...

...Capital as well as other factors of production flow into the high-profit industry and are allocated efficiently by suppliers who try to reduce costs as much as possible...