Is capitalism perfect?

[Rourke]

I saw Naomi Klein on Charlie Rose the other night and saw she has a new book called The Shock Doctrine, which is supposedly an expose of what she calls "disaster capitalism". I haven't read it yet, but in the book she talks about capitalist fundamentalism. I found a quote from an interview she did that describes the attributes of it briefly:

They're almost the attributes of every fundamentalist: the desire for purity, a belief in a perfect balance, and every time there are problems identified they are attributed to perversions, distortions within what would otherwise be a perfect system. I think you see this from religious fundamentalists and from Marxist fundamentalists, and I would argue that [Austrian economist Friedrich] Hayek and [university of Chicago economist Milton] Friedman shared this dream of the pure system. These are brilliant mathematicians, in many cases, so it looks perfect in their modelling. But I think anyone who falls in love with a system is dangerous, because the world doesn't comply and then you get angry at the world.

What objections would Objectivists make to believing that it is a fundamentist mode of thought that laissez-faire capitalism is inerrant and perfect? I never thought of this before in this manner, but it is an interesting notion, the belief that the free market does in fact solve every problem and is in essence "perfect" has a striking similarity to the absolute belief in God. Is it possible to be an Objectivist if one doesn't believe that the market will cure all ills?

[softwareNerd]

What objections would Objectivists make to believing that it is a fundamentist mode of thought that laissez-faire capitalism is inerrant and perfect? I never thought of this before in this manner, but it is an interesting notion, the belief that the free market does in fact solve every problem and is in essence "perfect" has a striking similarity to the absolute belief in God.

Of course it is similar in that respect, and -- in the same respect -- it is similar to a claim like 1+1=2 or "a balanced diet is good for you" or something similar. The person being quoted is basically saying that there is no truth when it comes to political systems.

It's important to keep in mind though, that when Objectivism uses the term "Capitalism", it means a system based on the recognition of individual rights, including property rights. So, there is no implication that any specific solutions that have been formulated to defend such rights are necessarily correct.

Is it possible to be an Objectivist if one doesn't believe that the market will cure all ills?

As conceived by Objectivism, Capitalism is not based on the notion of "curing all ills". Many of today's conservatives approach capitalism this way: it is the most efficient system when it comes to curing societies ills. However, Objectivism does not approach the question that way. Of course, it is true that the type of wealth generated under Capitalism, even for those who are relatively poor, far surpasses that under socialism. However, while that is very important, it is still not primary. That is why, Objectivism does not speak of "markets" as the crucially primary aspect in Capitalism. In Objectivism, rights are the crucial aspect. A political system that protects individual rights, and does not force one person to sacrifice for another is Capitalism. "Markets" can follow from this, if one understands "markets" to be "people dealing with each other voluntarily".

[adrock3215]

What objections would Objectivists make to believing that it is a fundamentist mode of thought that laissez-faire capitalism is inerrant and perfect? I never thought of this before in this manner, but it is an interesting notion, the belief that the free market does in fact solve every problem and is in essence "perfect" has a striking similarity to the absolute belief in God. Is it possible to be an Objectivist if one doesn't believe that the market will cure all ills?

A few thoughts:

Remember that Friedman was not a 'radical' free-market fundamentalist, as he believed in central banking, government ownership of roads, government operation of hospitals, government regulation, and government sanctioned monopolies in a small amount of situations (city parks is all I can remember from Capitalism and Freedom off the top of my head). Even before I argue that Chile's Pinochet did not actually follow Friedman's thought, I would argue that this lady's point that Friedman's philosophy was tried in Chile says nothing about true free-market thought.

SoftwareNerd hit the rest of it - Objectivism's stringent belief in free-markets is not a derivative of the notion that the market cures all ills. However, to convince oneself that it does indeed cure all ills is simple. Look at history and observe where the most wealth has been created for the greatest amount of people and where standard of living is highest. Observe the statistic that in the rest of the world nearly 50% of income is created from ownership of assets, whereas in the United States income from asset ownership is less than 10%. This suggests a sort of ancient system exists in a great majority of the world, where one owns land because of one's status or family, and one's wealth is derived from that land by taxes and such. Contrast this with one's wealth being derived from one's productivity, as it is in a capitalist society, with the market not caring who you are or where you are from.

Moreover, consider that fact that political freedom is not possible without economic freedom. Throw that out to those such as this author who so highly value "democracy" and the political freedom that accompanies it. Challenge them to name one nation which did not have a high degree of economic freedom, and in which the citizens enjoyed political freedom and had any say in what government did.

I believe that a free-market is perfect because of the same imperfections that today's liberal and New Dealers ascribe to it. Income inequality? One individual may prefer a job which they have a great deal of time off and enjoy basking in the sun, another may prefer an exacting job which requires his attention 24/7. Inequality would result if they were both paid the same, as progressive liberals want. The market addresses these so called 'imperfections' the New Dealers ascribe to it, and therefore there is no reason to believe that a free-market advocate is a "fundamentalist" position. As Objectivism prescribes, it is the only way of dealing with men's rights properly. Some people just don't understand this, and so they call it "fundamentalist." I would challenge them on that statement.

[themadkat]

I am somewhat familiar with the type of argument which Klein probably wants to make. I was going to say at first that I'd read another one of her books, and then I realized we were talking about Naomi Klein, not Naomi Wolf, whose book is the one I actually read. Nevertheless, the song sounds the same. I think one of the objections people who want to attack modern "consumerism" raise is that corporations are marketing to people on a primarily irrational or emotional basis, and most consumers do make purchases on this basis, rather than making a purchase because it is life-enhancing. To a large degree I believe there to be some truth in this statement. The main difference between me and writers such as Klein is I do not believe the answer is government intervention, but rather helping people on both sides of the transaction to be (and want to be) more rational. I would add the caveat that I do believe it is the proper function of government to enforce laws against deceptive advertising practice, as that constitutes fraud and undercuts the whole concept of a voluntary trade of value for value. By this I don't mean really nebulous stuff like "this ad shows tall people, so this product will make me tall" as that is simply an example of the viewer/consumer being a moron. I mean things like saying "This product is absolutely guaranteed to make you grow three inches" when clearly the product does not do that.

Kat

[exaltron]

Excellent responses software nerd and adrock, I have honestly never seen that "markets are perfect" statement so eloquently dissected. I think the full statement might be "completely free markets are a perfect reflection of what individuals are producing and what it is worth to other individuals". Of course that gets to the heart of the matter, that the altruists are disgusted by the concept of putting a quantifiable value on anyone's work- they prefer to recognize the "inherent value of every individual" as if that statement could have any meaning at all.

This is fascinating too:

But I think anyone who falls in love with a system is dangerous, because the world doesn't comply and then you get angry at the world.

Again, this goes back to the idea that markets are a "cure for society's ills". If that is your assumption then yes, you will be frustrated when reality doesn't conform. No system can magically fill everyone's stomach if those who are producing stand nothing to gain. This has been proven over and over again throughout history. I guess what the esteemed author wants is a mixed economy, though heaven forbid we call it a "system". Someone might fall in love with it.

It's important to keep in mind though, that when Objectivism uses the term "Capitalism", it means a system based on the recognition of individual rights, including property rights. So, there is no implication that any specific solutions that have been formulated to defend such rights are necessarily correct.

Agree, and to put this in a reductio ad absurdum, no one argued that the American South should return to slavery when the economy stagnated after the Reconstruction. Should the economic failure of the South be used as evidence that abolition "doesn't work" or "isn't perfect"?

Clearly the important task is to emphasize capitalism as a political system and not simply an economic one.

[DarkWaters]

I wish to embellish upon some of the points SoftwareNerd already made:

First, to compare Naomi Klein's attack on capitalism with what Ayn Rand advocates is an equivocation. When I saw videos of Naomi Klein speak on Youtube, she seems to use the term capitalism for any system that is "money-centric". I am not even sure if she would discern laissez-faire capitalism from crony-capitalism, that is, corrupt government officials redirecting tax revenue to their favorite crooks running businesses.

Second, Naomi Klein's arguments presuppose a horrible standard for evaluating capitalism. That is, can it cure all social ills, including those afflictions accrued by those who do not wish to work or refuse to be rational? In addition, will it bring income equality? These are horrendous, altruistic standard to evaluate any economy. This becomes particularly evident when she makes abysmally unintellectual arguments against capitalism such as "Capitalism tells man to act contrary to his nature. Instead of saying good is bad and bad is good, we should say that good is good and bad is bad!"

Third, it would be dangerous for an individual to take a Rationalist approach to capitalism. That is, assuming that capitalism is the only moral and practical system without any recognition to its intellectual roots: a sophisticated system of ethics advocating egoism and individual rights, a metaphysics based on the primacy of existence and an epistemology based on reason as the only means to knowledge. To do so, would be known as context-dropping. Such a poor approach to capitalism might falsely conclude that a system of anarchy is the only ideal political system.

Even before I argue that Chile's Pinochet did not actually follow Friedman's thought, I would argue that this lady's point that Friedman's philosophy was tried in Chile says nothing about true free-market thought.

From reading Milton Friedman's arguments and from speaking extensively with several of my friends from Chile on this issue, I think the capitalist reforms worked wonderfully in Chile in terms of advancing freedom and creating wealth. What else can possibly explain why Chile became by far the most prosperous country in Latin America for several decades immediately after they adopted many reforms inspired by the Chicago School of Economics? It certainly is not Socialism, which has been present in various forms throughout much of Latin America since the post-colonialism era.

The problem is that Chileans in particular and South Americans in general did not properly evaluate Chile's reforms. Just like the errors of Naomi Klein, many South Americans were disappointed that capitalism failed to bring income inequality (which it certainly should not!) and full employment. Now Bachelet is overseeing some serious Socialistic reforms, especially with respect to Chilean health care and retirement planning. Coupled with Chile's constant appeasement of Evo Morales in Bolivia (an ardent supporter of Hugo Chavez who is building up the military on the Chilean-Bolivian border), I expect Chile to be taking a downturn economically. Fortunately, they are still very high on the Heritage Foundation's index of economic freedom.

Edited January 10, 2008 by DarkWaters

[adrock3215]

From reading Milton Friedman's arguments and from speaking extensively with several of my friends from Chile on this issue, I think the capitalist reforms worked wonderfully in Chile in terms of advancing freedom and creating wealth. What else can possibly explain why Chile became by far the most prosperous country in Latin America for several decades immediately after they adopted many reforms inspired by the Chicago School of Economics? It certainly is not Socialism, which has been present in various forms throughout much of Latin America since the post-colonialism era.

I agree with you (although I think an argument can be made that Brazil is currently Latin America's strongest emerging market). I am simply pointing out that a.) Pinochet did not follow all of Friedman's thought, and b.) Friedman's government played a greater role in economic policy than Objectivists and Austrian economists would like, so Chile doesn't necessarily reflect a truly free society. It does however reflect that Capitalism is the only proper system for man. Notice that democratic policy reform followed the economic reforms.

From my limited understanding of the exact nature of the economic reform policies, I believe Chile decided not to let their foreign exchange rates float, and instead insisted on pegging the currency at fixed rates to the dollar - an obvious mistake from a free-market economist's point of view.

From Wikipedia:

"Only one of the free market recommendations of El Ladrillo was not implemented: a floating exchange rate. Minister of Finance Sergio de Castro, departing from Friedman's well-known support for flexible exchange rates, decided on a fixed exchange rate of 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant inflation to heel. The result, however, was that a serious balance-of-trade problem arose. Since the Chilean pesos inflation outpaced the U.S. dollars inflation, every year the Chilean foreign goods buying power increased, all fueled by foreign loans in dollars.

Though many claim to have been opposed to the policy from its inception, the public record does not bear this out. Indeed, up until the very end of the bubble, the fixed exchange rate policy was very popular within Chile, since it allowed consumers to go into debt in dollars and thus purchase foreign goods at discounted prices relative to the Chilean peso. When it became clear that the fixed exchange rate could not be maintained indefinitely, the peso was finally allowed to float in mid 1982. In his Memoirs ("Two Lucky People", 1998), Milton Friedman strongly criticized De Castro for this monumental mistake, making clear that it was contrary to the free market model."

*** Mod's note: Discussion on money, pegging, backing, commodity money, gold, etc. has been moved to a new topic ***

Edited January 24, 2008 by softwareNerd
Added 'topic split' notice

[DarkWaters]

although I think an argument can be made that Brazil is currently Latin America's strongest emerging market.

This is possible but it needless to say, Brazil's position as an emerging market today does not conflict with my claim that Chile was one of the most prosperous for a few decades.

Friedman's government played a greater role in economic policy than Objectivists and Austrian economists would like, so Chile doesn't necessarily reflect a truly free society.

Nevertheless, if any government were to embrace much of Milton Friedman's ideas, it would be a stupendous step in the right direction. That being said, in the context of relatively free socities today, Chile was an excellent example.

Notice that democratic policy reform followed the economic reforms.

I honestly am not sure what the point is here. As soon as Chile embraced democratic elections, the people voted out the right-leaning party so as to purge their government of the "ghost of Pinochet" and swiftly voted the left-leaning socialist parties to power. Another example of the flaws of a democratic elective process. =/

From my limited understanding of the exact nature of the economic reform policies, I believe Chile decided not to let their foreign exchange rates float, and instead insisted on pegging the currency at fixed rates to the dollar - an obvious mistake from a free-market economist's point of view.

Definitely a bad move. Although, again, the problems Chile faces is probably a lack of a philosophically sound defense from the overwhelming pro-Socialism pressures in South America. The fact that they exhibited a poor understanding of currency-exchange markets is obviously still bad, but surely still minuscule in comparison to the Socialistic tendencies in the country.

[D'kian]

I honestly am not sure what the point is here. As soon as Chile embraced democratic elections, the people voted out the right-leaning party so as to purge their government of the "ghost of Pinochet" and swiftly voted the left-leaning socialist parties to power. Another example of the flaws of a democratic elective process. =/

That's because democracy is not a good thing. It's better than outright tyranny, but not that much better.

Still, it is important to note that things work better when ending a dictatorship if economic freedom comes before political freedom. That was the case with Chile, but also with authoritarian places like South Korea. Contrast that with placing political freedoms first as happened in the Soviet Union under Gorbachev. I for one was disgusted that the many former Soviet republics used their freedom to re-engage in bloody and meaningless "ethnic" fights.

[adrock3215]

I honestly am not sure what the point is here.

Really it is neither here nor there. In my original post, I was providing it as a knee-jerk response to today's liberal and the book The Shock Doctrine authored by Naomi Klein, which was actually being pumped by the ultra-progressive liberal Thom Hartman on his radio show today by the way. Anyway, because today's liberal holds political freedom and "democracy" in such high esteem, it is useful for one to point out to them that economic freedom is necessary for political freedom, as D'kian noted.

Edited January 11, 2008 by adrock3215

[Rourke]

SoftwareNerd hit the rest of it - Objectivism's stringent belief in free-markets is not a derivative of the notion that the market cures all ills. However, to convince oneself that it does indeed cure all ills is simple. Look at history and observe where the most wealth has been created for the greatest amount of people and where standard of living is highest. Observe the statistic that in the rest of the world nearly 50% of income is created from ownership of assets, whereas in the United States income from asset ownership is less than 10%. This suggests a sort of ancient system exists in a great majority of the world, where one owns land because of one's status or family, and one's wealth is derived from that land by taxes and such. Contrast this with one's wealth being derived from one's productivity, as it is in a capitalist society, with the market not caring who you are or where you are from.

Well the wealth creation examples you refer to would be coming from "mixed" economies, so I don't think laissez-faire capitalism can take credit. I can't think of a single economy that is laissez-faire, so the laboratory to test capitalism must come from the past I guess. I know economists use economic models to test their theories. I hesistate to bring this up because I know the global warming skeptics hate computer models.

I believe that a free-market is perfect because of the same imperfections that today's liberal and New Dealers ascribe to it. Income inequality? One individual may prefer a job which they have a great deal of time off and enjoy basking in the sun, another may prefer an exacting job which requires his attention 24/7. Inequality would result if they were both paid the same, as progressive liberals want.

I don't know many liberals who think this. Maybe some extremists. but I don't think this is anywhere close to a mainstream liberal view. Liberals believe, especially today, that capitalism is the best tool we have for wealth creation. But at the same time believe income inequality, left unchecked, will continue to grow, eradicating most of the middle class, and will lead to social upheavel by society's capitalist "losers". So in their view its only practical to nurture a middle class to maintain social order. As Churchill said, "The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of misery."

The market addresses these so called 'imperfections' the New Dealers ascribe to it, and therefore there is no reason to believe that a free-market advocate is a "fundamentalist" position.

The term "fundamentalist" has been generalized to mean strong adherence to any set of beliefs in the face of criticism or unpopularity. Critics of laissez-faire capitalism say that it does not properly address what to do about the inevitable concentration of wealth and power by a small elite. It appears Objectivism, as applied to macroeconomics and politics, does not much care about this problem. I have read here and there about some theories how the market "might" address these problems, but with little data to support them. In fact the thing I usually read is that if Objectivist-based markets fail, and society collapses, then it deserves to collapse because the people were weak. So there is no interest in preserving civilization for its own sake, only individual rights, and that if Objectivism-based economy implodes then that would be better than watering it down or trying anything else. Would this be a correct understanding?

[Koustubh]

The term "fundamentalist" has been generalized to mean strong adherence to any set of beliefs in the face of criticism or unpopularity. Critics of laissez-faire capitalism say that it does not properly address what to do about the inevitable concentration of wealth and power by a small elite. It appears Objectivism, as applied to macroeconomics and politics, does not much care about this problem. I have read here and there about some theories how the market "might" address these problems, but with little data to support them. In fact the thing I usually read is that if Objectivist-based markets fail, and society collapses, then it deserves to collapse because the people were weak. So there is no interest in preserving civilization for its own sake, only individual rights, and that if Objectivism-based economy implodes then that would be better than watering it down or trying anything else. Would this be a correct understanding?

The point is that civilization cannot be preserved without protecting individual rights. Preserving civilization by government interference is a contradiction in terms. If a free economy collapses, it would be because people are irrational. How could a government formed by these irrational people solve the problem?

[Rourke]

The point is that civilization cannot be preserved without protecting individual rights. Preserving civilization by government interference is a contradiction in terms. If a free economy collapses, it would be because people are irrational. How could a government formed by these irrational people solve the problem?

Are you saying shouldn't be preserved or can't be preserved? Civilization has soldiered on for thousands of years now without pure laissez-faire capitalism, with tremendous wealth creation and technological innovation, and a general improving of the human condition from one generation to the next. How could all this happen in a mixed economy? Shouldn't things have self-destructed by now?

[adrock3215]

I can't think of a single economy that is laissez-faire, so the laboratory to test capitalism must come from the past I guess.

The laboratory to test capitalism comes from the arena of ideas. Look at the nations who have accepted the ideas of free-market capitalism and observe how they have progressed relative to nations who have denounced free-market ideas. You don't need a perfect laissez-faire state in order to come to a conclusive thought about which idea is proper. In a similiar fashion to your proclamation, one could say that true Marxism has never been practiced on earth, and therefore cannot be pronounced right or wrong. But we have seen aspects of Marxist thought put into practice, and we have observed the consequences of those ideas; similiarly, we have seen aspects of laissez-faire put into practice, and observed the benefits of those ideas. The observations show that ideas have ramifications regardless of whether the idea is fully accepted or partially accepted. In nations where some aspect of capitalist thought has been practiced, society has progressed in direct proportion to the acceptance of the truth of those ideas.

Liberals believe, especially today, that capitalism is the best tool we have for wealth creation.

Liberal thought does not believe wealth is created; it believes wealth is a static quantity which does not grow, and can only be transferred from entity to entity.

Critics of laissez-faire capitalism say that it does not properly address what to do about the inevitable concentration of wealth and power by a small elite... So there is no interest in preserving civilization for its own sake, only individual rights, and that if Objectivism-based economy implodes then that would be better than watering it down or trying anything else. Would this be a correct understanding?

Laissez-faire capitalism seperates earned wealth from power, and therefore does not grant both to a "small elite." I would say that a centralization of wealth and power is only inevitable in an economy that contains some ideas exactly opposite of laissez-faire capitalism - mainly, socialism. In addition, your question has an underlying premise that markets fail. I would challenge that belief. To the best of my knowledge, there has never been a legitimate (meaning: not provoked by govermental policy) market failure.

[Koustubh]

Are you saying shouldn't be preserved or can't be preserved? Civilization has soldiered on for thousands of years now without pure laissez-faire capitalism, with tremendous wealth creation and technological innovation, and a general improving of the human condition from one generation to the next. How could all this happen in a mixed economy? Shouldn't things have self-destructed by now?

I am saying that institutionalized violation of rights (which is what a non-capitalist government does) is a destructive effect on civilization and establishing such institutions (regulatory authorities for instance) cannot be a solution to any perceived failures of capitalism.

[fletch]

Are you saying shouldn't be preserved or can't be preserved? Civilization has soldiered on for thousands of years now without pure laissez-faire capitalism, with tremendous wealth creation and technological innovation, and a general improving of the human condition from one generation to the next. How could all this happen in a mixed economy? Shouldn't things have self-destructed by now?

Yes, civilization will soldier on, but there have been vast swaths of time where there was virtually no discernable change in the human condition. Virtually any improvement you can think of is the result of the freeing of the human mind and the ability of the creator to capitalize on what he has created. When the Soviet Union collapsed, what great technological innovation or wealth creation ideas emerged from behing the Iron Curtain? Answer: None. The semi-free market West ran circles around the Communist slave states. But, a mixed economy's advancement is tied to the degree it unleashes the free market. If the leash is too tight, capitalism strangles and the society self-destructs. If a mixed economy awakens and demands its economic liberty it will survive.

[Rourke]

Yes, civilization will soldier on, but there have been vast swaths of time where there was virtually no discernable change in the human condition. Virtually any improvement you can think of is the result of the freeing of the human mind and the ability of the creator to capitalize on what he has created. When the Soviet Union collapsed, what great technological innovation or wealth creation ideas emerged from behing the Iron Curtain? Answer: None. The semi-free market West ran circles around the Communist slave states. But, a mixed economy's advancement is tied to the degree it unleashes the free market. If the leash is too tight, capitalism strangles and the society self-destructs. If a mixed economy awakens and demands its economic liberty it will survive.

Hey there fletch (one of my favorite 80's movies). Well for some reason you railed against communism here, and I don't think anyone disagrees with you on that. What evidence is there that a mixed economy is doomed unless it eliminates all constraints on laissez-faire capitalism? It seems that there are many examples of mixed economies that have done quite well, creating growth while maintaining economic/political/social stability.

On the other hand, it seems there is plenty of evidence that such unchecked capitalism yields wealth and power for a relative few, and increased turbulence such as uncertain markets and social unrest. One example is the absence of an economic depression since WWII, but before that, depressions happened every 20 years or so.

I'm not arguing against capitalism, per se, just the no-holds barred kind that is advocated by Rand.

[exaltron]

Hey there fletch (one of my favorite 80's movies). Well for some reason you railed against communism here, and I don't think anyone disagrees with you on that. What evidence is there that a mixed economy is doomed unless it eliminates all constraints on laissez-faire capitalism? It seems that there are many examples of mixed economies that have done quite well, creating growth while maintaining economic/political/social stability.

On the other hand, it seems there is plenty of evidence that such unchecked capitalism yields wealth and power for a relative few, and increased turbulence such as uncertain markets and social unrest. One example is the absence of an economic depression since WWII, but before that, depressions happened every 20 years or so.

I'm not arguing against capitalism, per se, just the no-holds barred kind that is advocated by Rand.

I don't think anyone is saying that a society that doesn't practice 100% LF capitalism is doomed. No more than an otherwise healthy individual can host an internal parasite indefinitely without it leading to his death (indeed, the nature of the parasite is generally not to tax the host to the point that there is nothing to left to live off). The mixed economy functions despite the socialist and right-violating practices it entails, because of the massive wealth-generating power of free trade.

The other issue you raise is the extreme concentration of wealth in the hands of the few. You also used the word "power", which in my experience is a smear word whose ambiguity is often exploited by leftists. Notice that you rarely see "power" in discussions of capitalism broken down into economic and political power. The thing to bear in mind is that from a standpoint of justice, these are two completely different types of power. Economic power simply means an individual has created something that is highly in demand. There is no coercion inherent in the concept of economic power. Political power on the other hand, is purely coercive, without the coercion, politicians are just a bunch of whiny windbags we can ignore with impunity.

Now in a mixed economy, the concepts of economic power and political power can become confused, when things like cronyism, subsidies, pork, publicly funded propoganda, etc. are brought into the equation. But that is not a fault attributable to capitalism, it is an issue of not having proper separation of economics and state.

If you believe that an extreme concentration of wealth and economic power is inherently unjust or undesirable, I would question why you believe this from a philosophical or moral standpoint. From an economic standpoint, it seems pretty clear that millions of individuals have freely deemed it to be in their interest to trade with Bill Gates for example. They have all decided that he deserves to have billions of dollars, by definition (since one assumes that a free and rational individual would never give anyone something unless they believed that person deserved it).

The issue of monopolies has been shown to be a characteristic of government intrusion in business; it is simply impossible for any business to completely rid itself of competitors without the coercive political power of government. Same goes for depressions, and the assumption that before the Great Depression that there was no government intrusion on business or economics is demonstrably a false one. In fact there is ample evidence that government regulation and tweaking of the money supply and lending policy directly caused the '29 crash.

I'm not sure what you're referring to when you mention "unchecked capitalism" leading to unrest and uncertainty. The period in US history that saw the most economic freedom also saw a huge increase in wealth and a higher living standard for the vast majority of people. Of course no system can magically lift everyone out of poverty and I don't deny that some people in the US lived in miserable conditions during the Industrial Revolution. But again, the waves of immigration did not happen without the assumption of better life than that of the motherland in the US.

The problem with calling that period "unchecked capitalism" was that it was neither completely unchecked- there was always some level of government intrusion in economics- nor was it purely capitalism, since capitalism requires the protection of individual rights and property.

As mentioned earlier by fletch and adrock, we do not have any real test case for pure capitalism or pure marxism, so we can only look at the ratio of these ingredients and what the outcomes are. It seems pretty clear that the freer the economy and the less government concerns itself with enforcing equality and "stability" (as defined by the government of course), the more wealth is created.

[charles fisher]

I saw Naomi Klein on Charlie Rose the other night and saw she has a new book called The Shock Doctrine, which is supposedly an expose of what she calls "disaster capitalism". I haven't read it yet, but in the book she talks about capitalist fundamentalism. I found a quote from an interview she did that describes the attributes of it briefly:

What objections would Objectivists make to believing that it is a fundamentist mode of thought that laissez-faire capitalism is inerrant and perfect? I never thought of this before in this manner, but it is an interesting notion, the belief that the free market does in fact solve every problem and is in essence "perfect" has a striking similarity to the absolute belief in God. Is it possible to be an Objectivist if one doesn't believe that the market will cure all ills?

This woman is a fool. She compares religious fundamentalism to Marxism, which is Communism, which proscribes religion. No two philosophies could be farther apart. The people who usually get "angry at the system" are the victims of the system, the system being socialism, in which one group of people (the productive) are forced by government to provide the means of existence for another group, (the nonproductive) a group for whom they bear no responsibility and whose condition they did not cause. Ayn Rand's desire for a perfect system depended upon basic freedom, in which men who produced were allowed to benefit from that production, and moochers were allowed to suffer the consequences of their inactivity. Rand saw that the USA was the best chance for all men, with a government rooted in the basic belief that a man's life belonged to himself and no other. Liberals, communists, and socialists believe that the best chance for man is to attach himself to another man like an economic parasite, the punishment for refusal being imprisonment. Welcome to America, I hope you're happy with what you've allowed your country to become.

[charles fisher]

I agree with you (although I think an argument can be made that Brazil is currently Latin America's strongest emerging market). I am simply pointing out that a.) Pinochet did not follow all of Friedman's thought, and b.) Friedman's government played a greater role in economic policy than Objectivists and Austrian economists would like, so Chile doesn't necessarily reflect a truly free society. It does however reflect that Capitalism is the only proper system for man. Notice that democratic policy reform followed the economic reforms.

From my limited understanding of the exact nature of the economic reform policies, I believe Chile decided not to let their foreign exchange rates float, and instead insisted on pegging the currency at fixed rates to the dollar - an obvious mistake from a free-market economist's point of view.

From Wikipedia:

"Only one of the free market recommendations of El Ladrillo was not implemented: a floating exchange rate. Minister of Finance Sergio de Castro, departing from Friedman's well-known support for flexible exchange rates, decided on a fixed exchange rate of 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant inflation to heel. The result, however, was that a serious balance-of-trade problem arose. Since the Chilean pesos inflation outpaced the U.S. dollars inflation, every year the Chilean foreign goods buying power increased, all fueled by foreign loans in dollars.

Though many claim to have been opposed to the policy from its inception, the public record does not bear this out. Indeed, up until the very end of the bubble, the fixed exchange rate policy was very popular within Chile, since it allowed consumers to go into debt in dollars and thus purchase foreign goods at discounted prices relative to the Chilean peso. When it became clear that the fixed exchange rate could not be maintained indefinitely, the peso was finally allowed to float in mid 1982. In his Memoirs ("Two Lucky People", 1998), Milton Friedman strongly criticized De Castro for this monumental mistake, making clear that it was contrary to the free market model."

I have to disagree based upon personal knowledge. My wife is Brazilian, and I can say with certainty that the country is largely populated by uneducated, nonproductive people whose only talent seems to be reproduction. The streets are flooded with begging homeless children and drug gangs who willingly machine gun the police whenever they see them. My wife's town turned from a paradise to a drug infested dump, from which everybody fled. The government does nothing. Brazilian senators and congressmen are routinely jailed for corruption, only to pay their way out of the charges. Goods are twice what they cost here based on incomes that average 3 dollars per day. Tourists are routinely kidnapped or robbed at gunpoint on Ipanema and Copacabana beaches, and tourism is off a tremendous amount. They have ethanol.....big deal. Most sellers have been prosecuted for upping the percentage from the allowed 20 to over 80 just to make money. There is no money, other than in the Swiss bank accounts of the people who rule. The exchange rate has been cut in half so that Brazil can get more dollars to fund this corruption. Go ahead, take a vacation there. Bring a bullet proof vest.

[Rourke]

I don't think anyone is saying that a society that doesn't practice 100% LF capitalism is doomed.

Good post overall, seems to be in sync with what I have read on this forum so far. When fletch wrote "If a mixed economy awakens and demands its economic liberty it will survive" it sounded like he was saying just that, so that's what I was directing that comment towards.

The other issue you raise is the extreme concentration of wealth in the hands of the few. You also used the word "power", which in my experience is a smear word whose ambiguity is often exploited by leftists. Notice that you rarely see "power" in discussions of capitalism broken down into economic and political power. The thing to bear in mind is that from a standpoint of justice, these are two completely different types of power. Economic power simply means an individual has created something that is highly in demand. There is no coercion inherent in the concept of economic power. Political power on the other hand, is purely coercive, without the coercion, politicians are just a bunch of whiny windbags we can ignore with impunity.

Now in a mixed economy, the concepts of economic power and political power can become confused, when things like cronyism, subsidies, pork, publicly funded propoganda, etc. are brought into the equation. But that is not a fault attributable to capitalism, it is an issue of not having proper separation of economics and state.

I'm curious as to why you feel economic power cannot be coercive. This assumes that corporations haven't found ways to thwart the free market system, e.g. market collusion, monopolies (or duopolies, oligopolies), monopsonies. I won't discuss the idea of market failure as a result of inefficient systems right now.

If you believe that an extreme concentration of wealth and economic power is inherently unjust or undesirable, I would question why you believe this from a philosophical or moral standpoint. From an economic standpoint, it seems pretty clear that millions of individuals have freely deemed it to be in their interest to trade with Bill Gates for example. They have all decided that he deserves to have billions of dollars, by definition (since one assumes that a free and rational individual would never give anyone something unless they believed that person deserved it).

I bought Windows XP without the thought of Bill Gates in mind. I don't think many others did either. The alternative of using Linux or getting an Apple is fraught with too many inconveniences for me. I'm quite certain very few people stop and think about the CEO of Mcdonald's when they buy a Big Mac, or the CEO of Walmart when they shop for household goods. They do it because they like the product (because it tastes good, and/or is cheap), or at least they think it is the best product for them. Inherrent in your post is the idea that all people behave in an economically rational way. I don't see the evidence for this, in fact the evidence appears to be heavily on the other side, hence the success of advertising and marketing to create markets and brand loyalty. One good example would be many consumers' insistance on brand name drugs over generics. I know a woman who insists Advil is soooo much better than ibuprofen.

I noticed you didn't refute that LF capitalism results in concentration of wealth and the widening of economic inequality.

The issue of monopolies has been shown to be a characteristic of government intrusion in business; it is simply impossible for any business to completely rid itself of competitors without the coercive political power of government.

I don't recall reading anywhere where, by direct cause and effect, it was demonstrated that government caused a monopoly by its hand and its hand alone. It would be interesting if you had an example of this. And what about oligoplies?

Same goes for depressions, and the assumption that before the Great Depression that there was no government intrusion on business or economics is demonstrably a false one. In fact there is ample evidence that government regulation and tweaking of the money supply and lending policy directly caused the '29 crash.

I didn't make that assumption. I was saying that, as compared to today, we were closer to a true LF capitalist system before the Great Depression than afterward. And since we have gone 60 years since this time without a depression (the longest depression-free stretch by far), this would demonstrate good evidence that some kind of a mixed economy works better to increase GDP increase while maintaining economic stability. And the theory you present about the cause of the Great Depression is not a very popular one among economists. The multitude of factors such as overproduction, a slow down in consumption, etc, few of which were government instigated. In fact Milton Friedman said that he believed the depression was the fault of the Fed because it did not act to pump money into the market. In fact the strict theory you mention is generally promulgated only by the Austrian School of Economics and its few adherants. This is a very marginalized group, and you really don't see their papers published in peer-reviewed literature (although they have contributed some great ideas in the field over the years, I hear).

I'm not sure what you're referring to when you mention "unchecked capitalism" leading to unrest and uncertainty. The period in US history that saw the most economic freedom also saw a huge increase in wealth and a higher living standard for the vast majority of people. Of course no system can magically lift everyone out of poverty and I don't deny that some people in the US lived in miserable conditions during the Industrial Revolution. But again, the waves of immigration did not happen without the assumption of better life than that of the motherland in the US.

The problem with calling that period "unchecked capitalism" was that it was neither completely unchecked- there was always some level of government intrusion in economics- nor was it purely capitalism, since capitalism requires the protection of individual rights and property.

As mentioned earlier by fletch and adrock, we do not have any real test case for pure capitalism or pure marxism, so we can only look at the ratio of these ingredients and what the outcomes are. It seems pretty clear that the freer the economy and the less government concerns itself with enforcing equality and "stability" (as defined by the government of course), the more wealth is created.

You have deduced that freer economies and less government result in more wealth creation by only looking at the ratio of these two factors. But the economy had tremendous booms of wealth creation during the 50's and 60's, a time when there was a great amount of government intrusion in the free market, as compared with the 1800's. And, as mentioned earlier, the 1800's saw an economic depression every generation or so. Here is a graph demonstrating GDP from 1789 to 2002. I think it is somewhat inaccurate because they didn't track GDP before 1930, but it gives a pretty good estimate. As you can see, GDP growth rose on a marginal scale until the Great Depression, but after WWII, it simply exploded. Now I would think the period before the 1930's would be the best real-world application of LF capitalism we have, and as you can see it appears in the more regulated economies of post WWII growth, there is expotentially greater growth.

The economic inequality generated during this time of the Industrial Revolution let to great social unrest, which in turn led to the rise of labor unions, communism and socialism. So the people getting left behind in democratic societies do not tend to fade into the background, but move to change the system, or even overturn it, sometimes violently. Call them irrational, but it appears to be an inevitable phenomenon. So, as to your earlier point about the justness or unjustness of wealth inequality, in the end it may not be the prime consideration.

It can be argued that the advent of successful mixed economies, which take advantage of the efficencies of the market as much as possible while maintaining some government controls to provide stability, has led to the marginalization of outright socialism and the near-eradication of communism.

Edited January 18, 2008 by Rourke

[Thomas M. Miovas Jr.]

And, as mentioned earlier, the 1800's saw an economic depression every generation or so. Here is a graph demonstrating GDP from 1789 to 2002. I think it is somewhat inaccurate because they didn't track GDP before 1930, but it gives a pretty good estimate.

<snip>

It can be argued that the advent of successful mixed economies, which take advantage of the efficiencies of the market as much as possible while maintaining some government controls to provide stability, has led to the marginalization of outright socialism and the near-eradication of communism.

I think you need to read Capitalism: The Unknown Ideal by Ayn Rand, because you have so many misconceptions about capitalism that they can't even be addressed in one single on-line essay. For example, that chart you referred us to is very misleading. We have not had near exponential growth in GDP over the past 60-75 years, as that chart indicates. However we have had near exponential inflationary pressures on the dollar. In order to have an accurate picture of the real GDP over the past 100-200 years, one would need to peg it to the price of gold. In other words, a certain amount of gold would be called the dollar, and all prices would have to be converted along that scale, rather than in terms of the inflated dollars of the past 75 years. Gold is now at about 880 dollars to the ounce, and I remember not too long ago it was at 300 dollars per ounce; which means that inflation has more than halved the value of the purchasing power of the dollar. So, while that chart showed a steady increase in GDP, that was really not the case, since one would have to adjust the scale down by over 50% from the time gold was at 300 dollars to the ounce to now.

Unfortunately, I can't find a gold adjusted GDP chart on the Internet. I'm sure there is one out there, but using a dial-up connection, I cannot find one that would show the true story. It would have to be a chart whereby the price of gold in dollars would have to be adjusted to be almost flat or rather adjusted to be almost flat over the investigated time period.

To get back to the topic of this debate, morally speaking capitalism is perfect, in that it forbids the initiation of force in transactions and protects private property. In Objectivism, the moral is the practical, so capitalism would also be the most practical political / economic system. Again, I refer you to Capitalism: The Unknown Ideal by Ayn Rand.

[agrippa1]

Gold is now at about 880 dollars to the ounce, and I remember not too long ago it was at 300 dollars per ounce; which means that inflation has more than halved the value of the purchasing power of the dollar.

That's not quite true. The value of the dollar is usually based mainly on the faith people have in the future performance of the American economy. This future performance is discounted by some no-risk growth rate to the current value. Only if there is a total collapse in the U.S. economy will the the value drop to an inherent value, which is the amount of currency plus debt divided by the gold reserves (and any other tangible assets). This faith in the American economy allowed gold to drop to under $300/oz in the late 1990's. You can't argue that the purchasing power of the dollar increased by 150% between 1980 (gold at $750+) and 2000 (gold under $290). In fact according to CPI, the dollar's value fell by over 55% during that time. (This could be construed as meaning that the faith in America's future increased by over 300% during that period.)

The same is true of stocks, which are valued more by their rate of growth (profits) than by their inherent capital value. It's only when a company fails that its stock's value falls to the value of its tangible assets.

Interestingly, GDP isn't tracked before 1929, which makes it very hard for the layman to analyze exactly what happened in the run up to the Depression.

Edited January 20, 2008 by agrippa1

[Thomas M. Miovas Jr.]

That's not quite true. The value of the dollar is usually based mainly on the faith people have in the future performance of the American economy.

You might have a point there, in that the value of the dollar and the value of gold are determined separately these days due to there being no direct connection between the US Dollar and Gold; and that a lot of the demand for gold has to do with foreign events (wars and such), rather than just the US economy. It makes things more difficult to figure out on the economic level and would probably require a professional objective economist to put it all together coherently.

But, here is the point I am getting at: For a rational standard as a medium of exchange, the dollar would mean a certain quantity of gold, just as the yard means a certain quantity of length. In other words, if we were put on a gold backed currency right now, $1=1/880 ounce of gold. It would be a name given to a certain quantity of gold, it would be called "one dollar" and would be equally redeemable in paper greenbacks or gold. The fact that gold prices in terms of dollars fluctuates shows that that there is not this type of connectedness between the dollar and gold right now. In other words, in a rational unit of exchange; demand for dollars would be demand for gold, and demand for gold would be demand for dollars. Instead of measuring how much gold one has in terms of ounces, one would measure the amount of gold one has in dollars. In a way, it would be like the difference between measuring length in terms of inches versus measuring length in terms of yards.

Of course, it is illegal for Americans to use gold or silver as a medium of exchange; one can barter with it, but you can't own and use, say, gold coins as the medium of economic exchange. One gold coin collector that I spoke to said that if he tried that, a gold or silver coin that said "one dollar" on it would only be redeemable as a medium of exchange for that face value, even though the actual value of the coin is worth quite a bit more than that.

Back in the early 90's, the ratio of gold to dollars was $1=1/300 ounce of gold; now it is $1=1/880 ounce of gold; so the value of the dollar in terms of gold has fallen dramatically. The overall global quantity of gold has not changed much in the past 20 years, but the overall quantity of printed dollars has increased substantially. And the market is right to be concerned with this, since it indicates that we could have high inflation right around the corner. One would have to look at the M1 quantity, the amount of paperbacks printed, to get the full picture, but certainly in terms of gold, the dollar has fallen dramatically -- i.e. investors would rather have gold than paperbacks. But in a more rational medium of exchange, where a certain quantity of gold would be the dollar -- and it would be set permanently -- there would be no such disconnect.

Considering what the Feds have done with their exclusive power to print money -- without it being back by anything -- having private banks print their own money is a much more rational approach to having a medium of exchange. It would be set by law that "one dollar" means a certain amount of gold, just as it is set by law that a certain length is "one yard". And paperbacks would be like a gold certificate redeemable in terms of a certain quantity of gold. And it would be illegal -- i.e. fraud -- to do what the Feds do all of the time: print money that has no direct connection to the quantity of gold held in reserve so that those greenbacks cannot be exchanged for gold at the customer's discretion.

[softwareNerd]

This assumes that corporations haven't found ways to thwart the free market system, e.g. market collusion, monopolies (or duopolies, oligopolies), monopsonies.

The free-market system can be thwarted, that's for sure -- corporations do it every day. The primary way they do this, however, is by using government power. That is to say: they use the "bad side" of the mixed economy. A simple example is the way cable companies use the government to monopolize certain areas. Consider all the things that people like "Common Cause" rail against, when they speak of the corruption that flows from current campaign financing. The part that the Common-Cause get wrong is that they wish to replace money-initiated force with vote-initiated force; instead, they we should do away with the initiation force altogether.

Inherrent in your post is the idea that all people behave in an economically rational way.

The fundamental principle is that sane adults should be free to be irrational. Who am I to force my view of rationality on another sane adult human being at gunpoint? To use your example, if I were a seller of generics, I could try to convince that lady that my drug is just as good as Advil -- using the advertising that is often reviled -- but it would be immoral for me to get gunmen to stop Advil from being sold, or to get gunmen to impose some type of tax on Advil to make it less favorable.

Of course people make mistakes and can be downright irrational. However, as long as this does not violate your rights, you have no place making yourself the philosopher-king.

I noticed you didn't refute that LF capitalism results in concentration of wealth and the widening of economic inequality.

Inequality is not a measure of goodness. Clearly, the poorest quartile in western economies are substantially better off that the second-poorest quartiles in some socialist counties. Giving up wealth for equality is poor economics. Even so, while this higher average wealth points to the more practical system, it still does not address the moral issue. Morally, one simply does not have the right to force one's view on others, nor force people to act against their own judgement.