April 10, 2015

Capitalism in 16 Lessons: Part 1, The Difference Between Capitalism vs. Central Planning

By In Blogs, C.Jay Engel

You can read the introduction to this series here.

Before we get into the nitty gritty of economics, we must say a few words about the place that Capitalism –the word and the system — has in minds of the modern citizen.  Today, it is almost scandalous to label oneself as a capitalist.  It sounds arrogant, as if there is a secret message behind the word that suggests conspiracy against the poor and ridiculously wealthy men smoking their cigars on the top floor of a building with a massive dollar sign hanging on the front for all the world to see.  To consider yourself a capitalist seems to draw controversy and skepticism about your morality. Why is this so? Why is there such an intense predisposition against capitalism?

What we hear as we go about our daily lives –whether on tv, in the classroom, in books and newspapers, in conversations, and plastered all over social media — is that the”greediness of capitalism” has had its way in our economy and, in order to fix this, we need “restraints” on the market, more “love” in our economic system, and an emphasis on “equality” and “people rather than profits.” To dismiss all these things as Big Government propaganda is to be labeled an extremist, among other things.  But let me be clear: we must dismiss all these things as propaganda and uphold the economic benefits of a capitalist system.  Capitalism is the only viable option that can lead to an increase the standard of living and a rise in prosperity for people as a whole. When we seek to intellectually defend a free society, there are two ways of doing so: ethics (political theory) and economics.  While it is my stance that ethics is primary, this series of 16 posts will focus on the economic benefits of capitalism.

Capitalism is the system in which all the means of production (we will get to this) are both privately owned by individuals and are employed based on the decision of the owners.  Capitalism stands against the two types of socialism, which are: 1) communism (the public or government ownership of the means of production) and 2) fascism (the private ownership of the means of production based on monopoly privilege by the State, where the decisions are made and directed by the government).  Capitalism is the system in which individuals “are free to use their private property without outside interference” (Murphy, page 1) and toward whichever ends they think is the most useful in achieving their individually valued goals.  Therefore, capitalism is to be used to mean a “free market,” that is, an economy that is not restricted by government interventions.

This means that in capitalism, there is no central planner telling people what jobs they must hold, what resources should be used to achieve what ends, and at what level prices should be.  It means that there are no government issued “quotas,” nobody has an inherent “right” to an employment position at a business owner’s operation, and that one doesn’t need the government’s permission before it attempts to create a good or service. This reality is what brought the socialist critics of capitalism to explain: “capitalism has no plan! It is simply an anarchy of production with no one in control!”  This, of course, could not be further from the truth. As we will see in a later part, capitalism does indeed have a plan, it is just that its planners are a different group of people than the central planners that the socialists wanted to put in control.

The economist must point out that the central planner is inherently a very bad planner on the basis that he lacks the knowledge that is required to allocate the scarce resources to its must important ends in an economy. Because of this, for example, the socialist economy, among a great number of other failures, will always result in shortages of some goods (like food) and a wasteful surplus of other goods.  Central planners are not bad at what they do because dumb people are elected into that position; rather, these planners are bad at planning because it is inherent in their very position that they do not know the proper decisions to make.  Economies are too big, too complex, and in a state of constant flux; no single mind, or collection of the most brilliant minds in a society, could ever come close to making the right decisions on behalf of an economy.

The capitalist system, on the other hand, does allow for stunningly accurate allocation of resources because of the relationship that entrepreneurs, who are seeking a profit, have with consumers, who are constantly “casting their votes” for what they want, and in what supply, and at what price they are willing to pay.  Thus, it is by the very fact that consumers are willing to trade their money for certain goods, that entrepreneurs know where to employ resources for an opportunity to receive a profit for his role of pleasing the consumer.  This is the basis for the capitalist system’s planning.  There is no central planner. It is the ultimate decentralization of planning.

This is the opposite of what we are taught in society, as we hear all the time that socialistic planning is about “serving the people” while capitalism is about “padding the pockets of the rich over against the plight of the poor.”  What we are saying here is that it is the reverse. Socialism glorifies the State, the elected minority who get to plan their economies. Capitalism is the means by which the masses, the consumers at large, get to freely and voluntarily participate in the economic system.  Thus, capitalism is a type of “democracy” (as Mises stated) that is much different than the “political democracy” that the Social Elites pretend to love and promote.

The critic of capitalism may have a response as follows: “you say that capitalism is about freedom. Indeed it is! If by that you mean the freedom of the unskilled to starve because they cannot find a job and the freedom of the workers to injure themselves because there is no regulation over work-place conditions! Capitalism puts the individual at the mercy of the capitalists!

The critic here ignores the importance of both profit, which he naturally despises, and the effects that capitalism has on rising the standard of living for those who are more disadvantaged in society.  As we will see as we proceed in this series, rather than claiming that capitalism results in every person living in mansions (a utopian dream), the capitalist’s point is that the unskilled, the disadvantaged, and the relatively poor, will live at a higher standard of living and will have more opportunities to improve his life that those who live in a socialist system. The unskilled and disadvantaged are far greater in number and lacking in material goods in a socialist system than they are in a capitalist one.  We will explain the social utility that free markets provide in a coming post.  Secondly, the complaint does not understand the profound effects that profit has on business operations.  For instance, it is expensive, and takes out of the business-owner’s “bottom line”, for him to repair damages, pay for lawsuits, and waste time on the damaging results of poor working conditions.  Thus, because of his desire for profit, there is an incentive for business owners to not be reckless in overseeing their business operations.  We will discuss this more in the sections on profit and labor.

The next installment of this series will be on the nature of profit and prices, and will address the idea of the “fair price.”

Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com
  • C. Davis

    Have you read “The Poverty of Nations: A Sustainable Solution,” by Wayne Grudem and Barry Asmus? What did you think of the book overall, and more specifically what did you think about their argument for capitalism as opposed to the other economic systems that are described in the book?