Debunking Three Misconceptions About Free Markets

 

These days, while socialism and communism (Marx and Engels used the two interchangeably) are portrayed as rational and altruistic, the free-market capitalist system is vastly misrepresented in the general culture. A recent Pew study indicates that 44 percent of millennials would prefer to live in a socialist nation, rather than a capitalist one. While these misconceptions can arise in many different ways, they most frequently are spread by academia and the mainstream media, and the case for markets is no different. Misrepresentation breeds misconception, and although the myths surrounding capitalism are truly endless, here are three which seem to be most prominent today.

1: Capitalism Is Zero Sum

The existing western economic order constitutes a system of plundering and exploitation like no other in history. – Noam Chomsky

Before the notion of capitalism being zero sum is addressed, it must first be noted that socialism is truly a zero sum economic system in which the majority benefits at the expense of the minority through what Frédéric Bastiat accurately describes as “legal plunder,”  all the while slowly crushing the creative and entrepreneurial spirit of the legally oppressed minority. As former Federal Reserve Board Chair Alan Greenspan states in his essay, “The Assault on Integrity” “Beneath all government regulation lies a gun” (the threat of physical coercion).

In a free-market capitalist society there can, however, be a general harmony of interests among rational, self-interested people because—as both Adam Smith and F.A. Hayek recognized—knowledge and preferences exist in a dispersed pattern within billions of individual minds. Therefore, the total knowledge and evolving preferences of an entire society cannot be known within a single mind. This total knowledge and general will is revealed through the process of free exchange and voluntary interaction in free markets. Since nobody is subjected to exactly the same circumstances in life, multiple parties with completely different preferences are able to mutually benefit through free trade.

The free market is truly positive sum. This mutual benefit happens every day in our society; as Smith famously stated, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” In this statement he accurately captures the beauty of a free society governed by rational self-interest. By living according to one’s own preferences and values, society benefits as a whole from the creation not only of wealth, but of beauty.

2: Capitalism Brings Out the Worst in Humanity

The bourgeoisie, wherever it has got the upper hand…has left no other nexus between man and man than naked self-interest…It has drowned the most heavenly ecstasies of religious fervor, of chivalrous enthusiasm, and of philistine sentimentalism in the icy water of egotistical calculation. – Karl Marx

There are two basic ways by which one can obtain wealth in a given society: plunder (both legal and illegal) and creation. Russian-American philosopher and novelist (she never differentiated between the two) Ayn Rand states that “Most people lump together into the same category all men who become rich, refusing to consider the essential question: the source of the riches, the means by which the wealth was acquired.” Socialism encourages plunder and discourages wealth creation while a free-market economy incentivizes altruism and the creation of value for others.

Today in the United States, nearly 100 percent of the Forbes 400 richest people have obtained their wealth through creation and by improving the lives of others. This is because, in the free market, individual ambition serves the common good—i.e., by helping oneself, society benefits as a whole. Only by fulfilling or serving the needs of others can one amass any sum of money, thus inventing the concept of a self-made man.

On the other hand, socialism truly does foster the dog-eat-dog mentality it claims to oppose. It is in our nature to resort to deception and physical exploitation in an environment where free thought and the creation of wealth are chastised, and property rights are non-existent. While socialism causes humans to retreat into a sort of postmodern tribalism, the capitalist free-market system encourages us to be peaceful, altruistic, and creative.

3: The Rich Get Richer and the Poor Get Poorer

We must work together to ensure the equitable distribution of wealth, opportunity, and power in our society. – Nelson Mandela

This myth—which was first popularized by Karl Marx in the Communist Manifestoclaims that in a free market capitalist economy, the rich will continue to get richer and the poor will continue to get poorer, thus slowly concentrating all the wealth into the hands of a few people and squeezing the middle class out of existence. While this assertion sounds plausible, history has proved it to be false on many occasions.

Just as all parties can benefit from free exchange, all of society benefits from free thought and innovation. In every society there are—as described by Ayn Rand — “…the men who take first steps down new roads, armed with nothing but their own vision.” These are the world’s great altruists. They convert the machinery of nature into the servant of their will. They are the individuals who cause society to evolve and offer humanity new and better opportunities through innovation and the creation of wealth. Both rich and poor benefit alike from the rational self interest of these entrepreneurial men and women. This basic truth that freedom of exchange fuels economic progress for all people has been mostly tossed aside by those who fail to recognize that it is in our nature to differ in talents, abilities, and preferences. Even if we were all magically made equal in wealth today, we would return to inequality by morning. Similar to the argument of Thomas Sowell in The Quest for Cosmic Justice, “cosmic” justice (a complete eradication of all injustice) is unattainable under any system of government. As soon as a central power enacts laws in an attempt to achieve this “cosmic” justice, it necessarily creates inherent injustice in a society. The degree of inequality that exists in a free market system is not something to be lamented; rather, it should be celebrated when creative individuals are free to pursue their unique talents, abilities, and preferences. In reality, when given political and economic freedom, the rich get richer and the poor get richer. The standard of living grows exponentially among all socioeconomic classes. It is only under socialism where all people are equally poor.

Why then are these particular myths so ubiquitous if they can be refuted so easily? Likely for many reasons, however—as Sowell recognized—the endless longing for a utopian society might simply be an aspect of the human condition. Perhaps we can not help but compare our clearly imperfect present with a perfect (but impossible) future.

 

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