Limited government, individual liberty, and the market economy are the best ways of organizing society for the benefit of the needy.
True, the market economy is efficient – but efficiency is not an argument that resonates with the general public. Ludwig von Mises, the great Austrian economist, warned in the 1920s that those who defend market capitalism will be accused of simply justifying the status quo, which favored the rich.
Yet the marvel of capitalism is that is has benefited enormously the poor and middle class. In my recent book, A Capitalist Manifesto: Understanding the Market Economy and Defending Liberty, I explain von Mises’ point that only capitalism is capable of creating wealth for the masses. Why? Because socialism and other forms of central planning cannot solve two problems.
The first is what might be called the incentive problem.
How do you get people to work hard and to innovate? Some will do so just because they enjoy inventing things, or because have a strong sense of duty. But if people are not directly rewarded for working hard – or taking the risk of innovating – then the system as a whole will not be very productive.
As I tell my Hillsdale students, my mom never told me she could hardly wait for the new Soviet washing machine to come out so she could upgrade. We never knew anyone who drove a Soviet car or bought a Soviet watch. The Soviet system was famous for people finding ways to shirk at their jobs – working as little as possible.
As for markets, Adam Smith famously wrote in An Inquiry Into the Nature and Causes of the Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”
Providing for others is rewarded in a market system. That’s what profit is about.
Whether you particularly like me – or even know me – is not necessary for you to want to produce a good or service for me. If you can produce something that I am willing to pay for at a low enough cost then you will earn a profit.
The other major problem (perhaps the greater one) is that the central planner cannot possibly solve what is known as the information problem. How can a central planner possibly know how much toothpaste 1.3 billion Chinese are going to want next Thursday? This is true of any good or service.
Markets solve this problem through the price system. If demand for toothpaste goes up, then the price will rise, producers will make more, and consumers will buy less. If the demand for toothpaste goes down, then the price will rise, producers will make more, and consumers will buy less.
This simple system of individuals freely exchanging labor, goods, and services has created a world where the poorest person is in the US today is enormously wealthier than the king of England in the 13th century. Abandoning it will harm the poor rather than the rich.
(Read Part 2 in this space next week)