The Mises Institute monthly, free with membership
Volume 24, Number 6
By Art Carden
It is always the fashion among many intellectuals to blame society’s ills on the free market. One college newspaper recently argued that the market is "The God That Sucked." The course summaries in my university’s catalog, the themes of the lecture series, and the editorial content of the student newspapers suggest that many students and faculty would agree.
Popular contempt for the market is distressing. Few institutions are so universally reviled, and perhaps fewer institutions are so universally misunderstood. This misunderstanding can be dangerous: the radicals who protest so vehemently against the workings of the free market rarely understand that they advocate strangling the goose that lays the golden eggs.
To borrow from Robert Frost, we should consider how the heavens go before we try to change the world. In other words, we must consider what is before we talk about what ought to be.
Many disagreements have their genesis in misunderstanding and equivocation. So let’s define the term "free market." Dictionary.com defines a "market" as "an opportunity to buy or sell" and a "free market" as "an economic market in which supply and demand are not regulated or are regulated with only minor restrictions." "Free markets" and "capitalism" are practically synonymous, and George Reisman defines capitalism eloquently:
"Capitalism is a social system based on private ownership of the means of production. It is characterized by the pursuit of material self-interest under freedom and it rests on a foundation of the cultural influence of reason. Based on its foundations and essential nature, capitalism is further characterized by saving and capital accumulation, exchange and money, financial self-interest and the profit motive, the freedoms of economic competition and economic inequality, the price system, economic progress, and a harmony of the material self-interests of all the individuals who participate in it."
Thus, we can define a "free market" as a social system based on the voluntary exchange of property rights. And yet the "free market" is almost universally reviled within the academy.
Many popular criticisms of the market are so common as to warrant the charge of cliché (critics of capitalism might say "axiom"). They can be distilled into a few broad propositions, which we consider here. They are: the market is antisocial; the market tramples human rights; the market is the enemy of the environment; and the market is the weapon of the rich against the poor. Let’s consider each in turn.
One of the more popular myths about the market economy is that it necessarily entails a Hobbesian "war of all against all," a man-eat-man world in which we all compete in a zero-sum scramble for resources. A recent op-ed in the Washington University Student Life posited that the "apocryphal idea of [the market’s] reality . . . may lead the entire species to self destruction." That’s scary stuff. It follows, then, that the market must be warlike: if resources are finite and everyone lives to consume, conflict—and war—must be the natural result.
But conflict and war are the very antithesis of free-market principles. The essence of market exchange is cooperation: two parties exchange goods and services, and both are enriched as a result. You pay Wal-Mart for a necktie. Wal-Mart buys the necktie from the manufacturer. The manufacturer pays for the labor and capital necessary to produce the necktie. Everybody wins.
The reader should also note that people never start wars of subjugation to extend the voluntary exchange of goods and services. In fact, many wars occur for fundamentally anticapitalist reasons: namely, trade disputes. We would do well to consider the wisdom of Frédéric Bastiat, who noted that when goods don’t cross borders, armies will.
Another popular criticism of the free market is that it tramples human rights. Slavery, racism, sexism, and "sweatshops" are the children of capitalism; therefore, the market economy should be overthrown post haste.
First, slavery is anti-market by definition: free markets are guided by the principle of voluntarism. Second, racism and sexism are difficult to sustain in competitive markets: no matter how much a certain employer hates blacks, women, Jews, homosexuals, etc., consumers are rarely willing to pay the price premium that would be necessary to allow them to indulge their taste for discrimination. The market has been profoundly benevolent to even the most oppressed minorities. In his masterful Competition and Coercion: Blacks in the American Economy 1865–1914, Robert Higgs chronicled the spectacular gains the sons and daughters of slaves made when they were allowed to participate in the market economy.
Third, we have to ask two questions when we consider the plight of "sweatshop" laborers. First, why are working conditions so wretched? Second, what are these workers’ next best alternatives? Working conditions in the third world are wretched precisely because many third-world countries have only recently begun to adopt the institutions that characterize the market economies of the west. Workers’ next best alternatives are often appalling: many children leave lives of crime, prostitution, and starvation to work in sweatshops.
If we close the sweatshops, they will likely return to crime, prostitution, and starvation.
It is also popular to charge that the market is the enemy of the environment. This is also untrue; environmental degradation occurs when property rights are poorly specified or enforced. If anyone or anything has failed in this respect, it is the state. There is ample evidence for this in former communist countries: many lakes and streams in the former Soviet Union are so polluted as to be unusable.
The market economy is also accused of being the ultimate weapon of rich against poor. Capitalist "meritocracy" is responsible for widespread poverty, rampant inequality, and Big Business’ choke-hold on the world. While these challenges to capitalist institutions make for intriguing rhetoric, they are also false.
Today’s poor countries were poor long before modern liberal market economies developed in Europe and North America; therefore, we cannot blame capitalism for poverty. Many critics also point to the unequal distribution of wealth in the United States as evidence of capitalism’s evils, but this overlooks two crucial points.
The first is income mobility: someone born into poverty in the US stands a very good chance of moving up in the world. Second, while the distribution of money incomes is relatively unequal, the distribution of access to goods of similar technological composition has narrowed considerably. For most of world history, the difference between rich and poor was the difference between who ate and who starved. In today’s market econ-omies, the difference between the super-rich and the poor is the difference between who drives a Dodge Viper and who drives an ‘87 Chevy Cavalier.
The reader should note that the power of "big business" is overstated. A unique feature of capitalism is that the greatest rewards go to those who cater to the common man. Consider Wal-Mart, a favorite whipping boy among left-wing intellectuals: Wal-Mart’s clientele consists almost exclusively of the middle- and lower-class. Capitalism generates fantastic wealth, and the benefits accrue almost entirely to the least of these among us.
Ludwig von Mises put it succinctly in a series of lectures which were published posthumously as Economic Policy: Thoughts for Today and Tomorrow. He notes that "this is the fundamental principle of capitalism as it exists today in all those countries in which there is a highly developed system of mass production: Big business . . . produces almost exclusively to satisfy the wants of the masses." The "power relationship" of which Marxists are so fond is precisely the opposite of that which is most often supposed: consumers, not producers, are the masters of the dance.
Nonetheless, enemies of the market argue that the only reason people put up with market economies is because they are forced to. The evidence of twentieth-century immigration doesn’t support the hypothesis. Thousands died trying to cross into free West Germany and South Korea, and there was very little traffic in the opposite direction. Similarly, thousands of Cubans have risked life and limb to come to America. Few—if any—have braved the ocean on a homemade raft to seek a better way of life in Cuba.
Finally, it is deficient scholarship to merely point out the litany of crimes that the market (supposedly) commits and suggest that it has "failed" in any meaningful way. One must propose a superior alternative. In this case, both theory and history are firmly on the side of the free market. Mises and Hayek demonstrated that rational calculation is impossible without private ownership of the means of production. This isn’t to say that a "socialist economy" is inefficient—it is quite literally an oxymoron. Our experience with radical revolutions and planned economies in the twentieth century is hardly encouraging: in the name of "the people," Che Guevara killed thousands, Hitler millions, Stalin and Mao tens of millions.
It may be fashionable to blame the market economy for all of society’s ills, but this blame is undeserved and many scholars’ faith in alternatives to the market is misplaced. No socialist regime has ever held a free election, and no free market has ever produced a death camp. Popular academic opinions to the contrary, the market works. And we can take that to the bank.
Art Carden is a graduate student in economics at Washington University in St. Louis (firstname.lastname@example.org).