The Morality Of Capitalism

In an op-ed piece for the Washington Post, Steven Pearlstein suggests that the nation is caught up in a historic debate over free-market capitalism and poses the question:  is capitalism moral? Pearlstein points out that over the last thirty years, the experiment with communism has been “thoroughly discredited,” and that a “billion people have been lifted from poverty through free-market competition.” But he also claims that we’ve recently seen a dark side of free markets, which for Pearlstein includes stagnation, inequality, financial crises, and 20-year-olds still living with their parents.

In praising capitalism, Pearlstein uses the phrase “free-market competition,” but when he describes the evils of capitalism, he uses the words “free markets.” Although Pearlstein doesn’t draw a distinction, these phrases are not interchangeable.  Markets can be free and at the same time non-competitive, such as monopoly. There are different forms of capitalism and what free-market advocates support is free-market competition (which is another way of describing decentralized economic power), not the consolidation of power that characterizes noncompetitive markets.

The dark side of markets that Pearlstein highlights are more likely to occur under state capitalism or crony capitalism, which  exhibit a high degree of government involvement and control over markets. Free-market advocates oppose these corrupt forms of capi-talism as much as they oppose centrally planned economies, and their solution to Pearlstein’s evils is not more government, but more competition. In so far as state capitalism and crony capitalism best describes America today, Pearlstein’s dark side is actually a critique of big government, not free markets properly understood.

Pearlstein suggests that free-market advocates believe that individuals and firms should be free “to act as greedily and selfishly” as they want within the law, “absolved from any moral obligations.” But does Pearlstein even understand how voluntary exchange within competitive markets works? Yes, firms seek to maximize profits, but  so what? In a competitive market, firms only earn profits if they can first figure out how to serve people in some way (not to mention that competition restrains prices). So let the greed flow, it’s powerless as long as consumers have alternatives, which is to say as long as markets are competitive.

It’s hard to see how serving others is immoral. Free markets serve people to a degree that government bureaucrats can only dream about (that is, if they have any imagination to start with).  Pearlstein is wrong when he implies that free-market advocates have a weak moral case against government interference. Free-market advocates do not call for laissez-faire capitalism – they understand very well that government is necessary to provide the legal framework, including the regulations dealing with legitimate market failings within which competition will thrive.

Pearlstein concedes that free-market advocates have a stronger case against government “confiscating the money earned by one person to give it to another.” But for Pearlstein, one of the glaring problems with the moral case against redistribution is that because today’s economy is so complex, capitalism might not distribute income in a way that “accurately reflects everyone’s relative economic contribution.” Because big government is the alternative to competitive markets, Pearlstein’s skepticism implies that politicians and bureaucrats are more qualified to measure everyone’s economic contributions than a competitive market.

Pearlstein’s confidence in big government is misplaced. One of the great strengths of free markets is precisely the ability to sort through today’s complexities. For example, know-ledge is decentralized and markets are better suited to exploit knowledge than bureau-crats. Pearlstein is right that the gap between top income earners and average earners has been expanding, and that labor’s share of national income has been declining. But this is more likely the result of a lack of competition in markets and so the solution again is not more government, but more antitrust enforcement to insure competition.

Free markets and competition in America have created an economy that has generated the greatest prosperity for the greatest number of people in the history of the world. Prosperity and freedom of this magnitude could hardly be characterized as immoral. Pearlstein doesn’t seem to get this, especially when he confounds (intentionally or otherwise) state capitalism with competition in free markets. America needs to go back to the decentralized approach that has made this country great, not continue down the road with policies that created the “dark side” of the economy in the first place.

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