Debunking Five Myths Used Against Capitalism

Capitalism gets a bad reputation. Critics have blamed it from everything to exploiting workers to inequality, racism, global warming, and poverty. With all the accusations lobbed against capitalism, you would think that capitalism is the worst thing to have ever plagued the planet. Yet when you take a closer look at capitalism, it's quite the opposite. It's in that vein that I write this blog entry: to dispel some myths people use to discredit capitalism.

Before beginning, I would like to briefly cover what capitalism is because there is enough misunderstanding of what capitalism is. Capitalism is an economic system that is characterized by private ownership of the means of production. The production, distribution, and exchange of wealth is conducted by private individuals or enterprises. Although there are different gradations of a capitalist system, common features of a capitalist system include property rights, spontaneous order, voluntary exchange, consumer sovereignty, and willingness to adapt and change. Capitalism is also hallmarked by minimal government intervention, although in its purest form, it would be considered a free market system. I would like to start off with debunking five myths today in the hopes that I can debunk more in the future. With that out of the way, let's begin:

1. Capitalism causes poverty. Poverty predates capitalism. When looking back in history, poverty was the default. 99.999999% of people in premodern times lived in squalor. It was not some foreign aid or international development project that caused the decline of extreme poverty in the world. It was market capitalism. Allowing for freer trade, foreign investment, and market liberalization have done more for alleviating poverty than any government intervention. There is no political or economic system that holds a candle to capitalism.

2. The United States has a capitalist economy. One could apply a purity test to the term "capitalism," but it wouldn't be practical. Government has always played some economic role. The question is whether that role is extensive enough to no longer be considered capitalist as was outlined in the introduction. According to Heritage Foundation's Economic Freedom Index, the United States is only considered "Mostly Free." Its score has declined since former President Obama took office. The United States currently is ranked in 17th, and is tied with Denmark.

Looking at general government spending statistics from the OECD, the United States spends 39 percent of its GDP on government spending. There are a fair amount of taxes that have to be acquired to fund this largesse. And then there's the size of the public sector. In the United States, 17 percent of the labor market was public sector in 2013. This is smaller than the OECD average of 21 percent, but it's still a far cry from having a capitalist society. Why?

Capitalism is about maximizing the separation between the private and public sectors, as well as limiting the public sector's scope. In the United States, you have considerable government intervention, not just in terms of taxation but also regulation. The government interferes in the economy in a number of ways to achieve social aims, including, but not limited to, tariffs, occupational licensing, the child tax credit, land use regulations, federal student loan subsidies, and daylight savings time.  While there are certain elements of voluntary exchange in the U.S. economy, it cannot definitionally be considered capitalist. Yes, the United States has more elements of capitalism than most other countries, but it is, at best, a mixed economy.

3. Being pro-capitalist is the same as being pro-business. The premise behind consumer sovereignty is that businesses have to compete against one another to benefit the consumer. Since this means that businesses have to work harder than they would like, there are a fair number of businesses that actually despise capitalism for this reason. Businesses will use their political connections to get into bed with Big Government in order to protect themselves from competition in what is known as rent-seeking. Here are some examples. Walmart has supported minimum wage, not because it wants to provide people a living wage but because its competitors cannot afford to pay it. Netflix is for net neutrality not because it cares about its customers, but because it doesn't want to be charged a premium for being a bandwidth hog. Oil producer Exxon-Mobil supports a carbon tax not out of concern for the environment, but to tax coal companies and give itself an advantage in the market.

4. Capitalism was responsible for the financial crisis that caused the Great Recession. For one, the U.S. government was instrumental in causing the Financial Crisis. It heavily subsidized the risk and incentivized housing investment that created the conditions leading up to the housing bubble. Let's also recall that there was more financial regulation, not less, leading up to the Great Recession. Looking at the companies that benefited under the bailouts from the Troubled Asset Relief Program (TARP) were huge corporations, including banks, automobile companies, and government-backed mortgage giants Fannie Mae and Freddie Mac. This was not free enterprise. This was a collusion between Big Business and Big Government known as "corporatism" and "corporate capitalism," or what I prefer to call "crapitalism" (see points #2 and #3).

5. Capitalism is about greed and envy. As Nobel-winning economist Milton Friedman points out in his succinct case for capitalism (see 1979 interview with Phil Donahue below), no political or economic system is immune from greed. I don't necessarily want to get into how self-interest is not the same as selfishness, but I would like to say this. Capitalism is not synonymous with greed, but rather functions primarily a description of voluntary exchange. Entrepreneurs want to maximize profit, and do so by pursuing their self-interest and creating a product or service that benefits consumers. Consumers want to maximize utility by purchasing said goods and services. Laborers want to maximize their wages.

The premise behind voluntary exchange is that actors engage in economic activities with minimal coercion. There is legitimate self-interest and then there is the illegitimate kind that involves deceit, coercion, and violence. When legitimate self-interest is pursued, then all parties benefit (see point #1). Capitalism is about an economic system in which legitimate self-interest is best channelled to maximize economic efficiency and the benefit of society as a whole. Legitimate interest is the foundation for real economic growth that not only spurs innovation and production, but has done so much to give us a quality of life that our ancestors could only dream of.