An Unholy Alliance

A guy goes to the doctor, who draws blood 56 times for tests.  When he returns to hear the diagnosis, the doctor tells him he is anemic.

Any number of pundits have used similar logic to announce their diagnosis of the current financial crisis, indeed of the diagnosis of most of America’s ills–capitalism.  Let’s examine how well this bears up under scrutiny.

First, the economic system of the United States is not, and never has been, pure capitalism.  It is a mixed economy, containing both elements of free markets and those of government intervention.  Though the 19th century came close to laissez-faire capitalism, even it was tainted with political influence.

True capitalism entails no government intervention.  Let’s go over that again.  True capitalism tolerates no intervention.  Were laissez-faire instituted in this country, no government entity could influence the economy in any way, save the enforcement of contracts and the prevention and punishment of fraud.

Why those two “exceptions?”  Well, they are not exceptions.  A society in which there is no enforcement of contracts is an anarchy.  It would soon devolve into bloody chaos as private parties to contracts fight out their differences.  The initiation of force (in this case, forcing one party to honor its commitments) must be public.  Likewise, fraud is a form of theft.  Promising caviar and delivering sardines is theft no less than a mugging.

I know people who are seized with terror at the thought of big, nasty companies doing “anything they want.”  In their minds, economic power is evil and government is the Great Savior who protects us all from their capitalist excesses.  This mentality stems from a common but erroneous premise–that economic power is a menace.  It is not economic power that threatens us.  It is the unholy alliance between large business interests and politicians that threatens us.  How do you get TBTF (Too Big Too Fail)?  Certainly not under pure capitalism.  Under pure capitalism, there is not such thing as TBTF.  A company that cannot operate profitably eventually fails, period.

Are there negative repercussions when a business fails?  Sure there are.  Jobs are lost, contracts cannot be honored (though this is quite different from refusing to honor them), and local economies can be disrupted.  Welcome to life, where the universe does not honor our every wish.

Surely I don’t mean that we (read “government”) should not do something to ease the pain of economic disruption.  Must we stand by while people lose jobs they have held for years?  Can we tolerate that some have a lot and others have a little?  In short, yes.  That is exactly what I mean.

Lest the reader think me a cold, calloused bastard, let me explain why this is better for all.  First, a company that cannot survive in a free market should not survive at all.  If it is provided a favorable competitive environment through licensing, regulation, or subsidies, the resources that are used by the business are wasted.  How do we know that?  Because were it not for these governmental interventions, brought about through force, not free choice, consumers would spend their money elsewhere.

Even if we were to assume the best about our leaders, that they only have our best interests at heart, intervention would be wrong.  The root premise is that one should be able to contract freely with others short of causing non-participants in the agreement tangible harm.  This is part and parcel of what it means to be free.  Aside from that, no one, even a person with the best of intentions, can allocate resources as efficiently as a free market.

In short, under free markets, people in general get what they want.  Note that I did not say everyone gets everything he/she wants for the price desired.  I said that in general, resources go to fill the desires of people within the market.  You may think the Dvorak keyboard is better than the QWERTY, but most people think differently.  That is why QWERTY is the standard.  I think three and four-button suit coats are an abomination, but two-button suits won’t come back until enough other people reclaim their hijacked fashion sense.

Capitalism requires us to be adults, to make good choices, and to live by the consequences of those choices.  If we are to live in a society worthy of emulation, we also have to demostrate benevolence toward those who are genuinely unable to provide for themselves.  Capitalism is for grownups.  It is not the cause of our current economic woes.  Rather, it is the fountain from which springs the material and spiritual wealth necessary to human greatness.

About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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2 Responses to An Unholy Alliance

  1. Sally Lacy says:

    Ahhh Terry,

    I know you’re not a cold, calloused bastard. I also think you state your case very eloquently. The rub for me is when you present the strengths of capitalism in its pure form and propose social interventions as if this true form of capitalism were in place in our society.

    Since the actual form of economic practice present in our society (which the majority continue to refer to as capitalism) throws all sorts of favors to the big guy, shouldn’t there be a competing power out there trying to balance out that equation in honor or the little guy? It seems as if the theory behind some of your suggestions presumes a level playing field, when this is not the case.

    At some point, I’d be interested in hearing more about your thoughts on spiritual wealth’s outgrowth from capitalism. I must admit I’ve never envisioned those two concepts as complementary. For another day… –Sally

    Like

  2. Terry Noel says:

    Sally,

    You are right to point out that the word “capitalism” does not really describe our current system. I think that the injustices we see would not occur if it were not for the coercive power of government being coupled with economic power. How big could a company get if it actually had to earn every customer with no help from the government? And even if a company were to grow big, there would be a thousand little guys willing and able to knock it from the top as long as there were no government-imposed barriers to entry.

    The problem with offering government up as a “power balancer” stems from the roots of human nature. Given coercive power, a human being will invariably use it. The politically powerful always manage to justify their intervention by invoking the “public interest” or “the little guy.” In fact, though, their interests are best served by kowtowing to the big guys. Rather than power balancing, I advocate limiting coercive (governmental) power to a bare minimum.

    Ahhhhh…the spiritual side. I will make a note to blog on that soon. It is one of my favorite topics. I think we often fail to integrate material values with spiritual values. The two are, in my view, linked closely.

    Thanks for a thoughtful post.

    Terry

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