Economics on Trial -- THE FREEMAN

Sorry, Charley, But That's Not Capitalism
By Mark Skousen

"All economic transactions involve a win-lose proposition. Every gain involves a loss."
--Charley Reese, Orlando Sentinel, May 22, 1994

Lord Acton once said, "There is no error so monstrous that it fails to find defenders among the ablest men." That was my reaction to a series of articles recently written by national columnist Charley Reese. Over the years, Reese has made a reputation as a strong defender of individual rights against a growing Leviathan, the federal government. So it was all the more perplexing when I read some of his claims about free-market capitalism:

"Two people can't eat the same bean. That's the essence of economics."

"All economic transactions involve a win-lose proposition."
 
"The historically visible trend [in capitalist societies] is always for the rich to get richer and the poor to get poorer."

"Only the youngest, the strongest can put stock in pure capitalism."
 
Statements like these were demolished years ago in Leonard Read's classic little book, Cliches of Socialism, which was recently updated by Mark Spangler under the new title, Cliches of Politics (Foundation for Economic Education, 1994). Unfortunately, some cliches die slowly.
 
Let me respond to each one of these commonly held criticisms of the free market.

Voluntary Exchange Is Win-Win

First, is the free market similar to a sporting event, where one team wins and the other loses? Not at all. In every voluntary transaction, both the buyer and seller gain. Here's a simple proof: Suppose I sell an apple to a student for $1. The student buys the apple because he would rather have the apple than the dollar bill. Thus, by purchasing the apple, he improves his situation. On the other hand, I sell the apple because I'd rather have the dollar bill than the apple. I too am better off.
 
In Das Capital, Karl Marx popularized the view that all exchanges under free enterprise capitalism involved an equality of values and therefore one person's gain must be another person's loss. But now we see that just the opposite is true: All transactions in a voluntary exchange involve an inequality of values. In fact, without an inequality of values, no voluntary exchange would ever occur.
 
Because of an inequality of values, both the buyer and seller gain in every transaction. The only exception to this law is when fraud or deception is involved. When that happens, one party gains at the other's expense. But in a voluntary exchange, where full and honest information is revealed, everyone benefits.

The Essence of Capitalism

Reese says that the essence of capitalism is contained in the statement, "Two people can't eat the same bean." Not so fast, Charley. A free market is not just an "either-or" proposition. Capitalism is also a highly cooperative system. If there are two people and only one bean, the free market provides a better alternative: plant the bean and harvest enough beans to feed both people! That's the true essence of capitalism.
 
Granted, natural resources are limited. But the beauty of free enterprise is its ability to multiply these resources into goods and services that people can use to increase their standard of living. What really matters is not so much the amount of resources in their natural state but the supply of economically useable natural resources, which are limited only to the extent of our know-how and physical ability to transform these inputs into useable wealth. In that sense, there is virtually no limit to further advances in our standard of living. In reality, nature isn't scarce, only the productive capacity of labor to change nature into real wealth is.

Capitalism Can Improve Everyone's Standard of Living

Finally, Charley Reese is wrong in suggesting that capitalism breeds inequality, that the rich get richer and the poor get poorer. Under the free market, the rich get richer and the poor get richer too. Historically, citizens of capitalistic nations have enjoyed higher real wages and steady advances in the quantity, quality and variety of goods and services. Only government, the politics of coercion, causes a decline in the standard of living.
 
Moreover, the free market does not only benefit the young and the strong, as Charley Reese suggests, but the weak, the poor, and the discriminated. Contrary to popular belief, capitalism is not a dog-eat-dog jungle where only the fittest survive. As the classical economist David Ricardo demonstrated, the market is characterized by comparative advantage, not just absolute advantage in the division of labor. Therefore, opportunities abound for people of all abilities, talents, religions and races. The less fortunate may not earn a high wage, but they can and do benefit from the blessings of a technologically advanced capitalistic society. Today practically everyone, rich and poor, enjoys the benefits of electrical power, the telephone, the automobile, television and radio, books and newspapers, and a myriad other goods and services. Such everyday products were available only to the wealthy less than a century ago.
 
A free society is by no means perfect. People make mistakes, employers sometimes take advantage of workers, sometimes workers shortchange their employers, and salesmen may deceive the public. But the strength of the market is that bad business, deceptive practices, and shoddy merchandise are constantly being overwhelmed by good business, accurate information, and quality products. On net balance, there is no substitute for the free-enterprise system.