Dispelling myths about Capitalism was the focus of Dr. Jay Richards, Research Professor in Business and Economics, Catholic University of America, during a presentation in Billings for the Big Sky Worldview Forum on March 22-23.
Only one system, “Under certain economic conditions, with the rule of law, private property, limited government and economic freedom… maximizes our ability to pursue our own self-interest and channels even our vices, and channels our creative capacity to create wealth, that was not there before — there is only one system that does that and it is called free enterprise,” summed up Richards. Richards is author of several best-selling books including Money, Greed, and God and the latest The Human Advantage.
Richards actually resists calling that system “Capitalism,” because it doesn’t convey the reality of the system. He prefers using “free markets” or “free enterprise” etc. Free enterprise is a reflection of free people exercising free will, he underscored. The term “Capitalism” was actually coined and popularized by Karl Marx, who abhorred the system. Adam Smith who wrote the classic “Wealth of Nations” which first described how free enterprise works, never heard of the word “Capitalism” nor used the term, writing as he did before Marx.
“You don’t have to have a course on economics to understand free markets,” said Richards. All its objections can be reduced to eight basic myths about free
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enterprise, and he explained four of those myths before a packed house at Big Horn Resort.
Capitalism or free enterprise functions counter intuitively. It manifests benefits to society as a whole, even though individuals are doing things that are good for themselves. “Sometimes you can do things for greedy reasons that are beneficial to others.”
To understand how that can be “you have to think about the nature of economic reality…People treat economics as though there is no reality,” said Richards. That is what is weird about economics, “people talk about it as though there is no reality.”
“People usually study economics for moral reasons… but that can be an impediment” he said, because it tends to encourage people to do “something from a desire to help people even though it doesn’t work.” And, that happens because they fail to ask three questions.
Ninety percent of the problems we get into in economics come from not stopping and asking, “What could happen?” And then asking, “Why?”
What if Congress raised the minimum wage to $100 an hour?
While the motivation might be laudable, the real outcome would be disastrous. Rather than getting $100 an hour in income, people simply would have no jobs, because in reality few people’s labor is worth $100 an hour and no one is going to hire them. So while the intent is to help people it ends up harming them because people do not look down the road to the ultimate consequences. They do not think about the reality of things like what prices do, and the relationship between supply and demand.
They do not ask what might happen and why.
The third question to ask is “What ought?” What ought we do? Should we do this?
Richards asks “How could you answer the third question if you don’t know the answer to the first and second question?”
If we want to know what kind of system we ought to have we have to have some understanding of economic realities.
Richards said that he encountered the arguments for socialism when he was in college, and at first he fell for them, but he kept exploring and asking questions, which led him to his understanding of free enterprise. “Not long ago virtually everyone knew that socialism was bad,” he said, but about 25 years ago, its advocacy expanded beyond the walls of academia and started being endorsed publically. The reason is that it involved younger people with no knowledge of the Cold War.
As he tried to make the case that free enterprise is better, he said he was bombarded with so many objections that it was hard to deal with them all. He realized that “there are a thousand misconceptions” about free enterprise.
He consolidated all the objections into eight basic myths. “If you learn to recognize those myths, you can see your way through to understanding economic dilemmas.”
The first myth is to confuse intentions with what you actually do. In deciding if a policy is good, one has to look at the long term effects and look at how it affects all groups of people, not just one.
The second myth has to do with the issue of greed. There is a popular idea that the market economy “at its essence is about greed.” We are taught, almost from birth, that greed is all that capitalism is about.
But, Richards referred to a few movies and books that make the point that “greed is good, greed is right, greed works.” The point of those outlandish proclamations is about how when a person is serving their own self-interest in the market, they most often wind up benefiting others. For the butcher, the baker and the candlestick maker, to serve their own needs they must be good at identifying and providing what their customers want. Adam Smith called it the “invisible hand.” In spite of man’s nature, he said, without even having the intention to do so, they advance the interest of society.
“The butcher can’t steal from you or sell you spoiled meat without ruining his business.” His self-interest is to please you as the customer…”he is going to provide meat at a price you are willing to pay and a quality you like, better than his competition.” The process is one which channels the butcher’s self-interest into a benefit for society. Richards also elaborated on the fact that there is a healthy self-interest everyone has to have in order to survive.
Then a third myth is that of “the zero sum gain.” The idea that one can only win if someone else loses. While most games are like that, the market place is not. When people are free to trade, create and work as they choose, the amount of wealth is not only increased but the individual contentment with outcomes is much greater which contributes even more to the likelihood that everyone is better off.
“You don’t compare yourself to your neighbor, you compare your current situation to the situation you were in before.”
Mutually beneficial trade requires the rule of law, Richards emphasized, “You can’t coerce others.” “Economic freedom only exists where there is a functioning government that enforces the rule of law and sets up a domain that allows free exchange.
He also pointed out that traded items are not necessarily of equal value, in fact the trading partners perceive them to have different values. When you purchase groceries, you are declaring that the groceries are of greater value than the money you give to the grocer, while the grocer is declaring that the money is of greater value to him.
Many people do not believe that wealth is created. They perceive that it can only be transferred. “That is not how real economies work. . . the economy grows and wealth increases.”