7 Myths About Capitalism

Myth 1 - Capitalism promotes inequality

The first important task in rebutting the slur that capitalism results in inequality is to question the premise. Claims of inequality in free economies are grossly exaggerated. The claims rely on snapshots of income distribution, ignoring the economic mobility of individuals up and down that income scale.

For example, analysis of American income data has found that of the lowest-earning 20 per cent of Americans, 95 per cent were no longer in the bottom quintile 16 years later, while 29 per cent were in the top quintile. Moreover, more than half of the people in that notorious top 1 per cent were no longer there just nine years later. Similarly, researchers at the University of Melbourne have found that in Australia, 43 per cent of people in the bottom quintile had reached a higher quintile within just two years.

The second task, now that we’ve debunked the idea of an entrenched class divide under capitalism, is to compare the situation under economic freedom with the actually entrenched inequality of non-capitalist economies. In socialist systems those who can carry political favour enjoy a consistent leg-up over those who do not. In fact, there appears to be no correlation between increased economic freedom and increased inequality.

But regardless of statistical categories, the most important fact is that real inequality, in the only sense in which it matters, has diminished radically thanks to economic freedom.

Whereas long distance travel, round-the-clock entertainment and even indoor plumbing were once the exclusive preserve of the ultra-wealthy, all of these amenities are now taken for granted by the ordinary citizens of capitalist countries. Throughout history, the mega-rich could always hire live musicians to play in their parlours should they crave diversion, but today, not even Bill Gates can access higher quality music than the average member of a capitalist economy can enjoy on their smartphone. Nor can his Rolex tell the time demonstrably better than your Casio. And while he might have more room to stretch his legs on his own personal plane, he cannot fly across continents any quicker or safer than the median Australian or American can on an Airbus.

Inequality only matters in the extent to which people are suffering. Only capitalism minimises the number of people that are suffering.

The trajectory of capitalist progress is such that what only the rich could have in their houses a generation ago, the poor can have in their cars today: be it air conditioning, television or surround sound entertainment. Meanwhile, anti-capitalists complain that the free market cannot provide in equal measure to everybody what socialism cannot provide to anybody.

Myth 2 - Capitalism caused the financial crisis of 2008

Ask any self-appointed expert on the global financial crisis of 2008, and they will usually assure you that unfettered deregulation and wild-west style capitalism is squarely to blame for the economic meltdown. Ask them exactly which regulations were repealed, and how they caused this crisis, and they will pretty much tell you to look over there, and then run away.

Anybody who thinks that banks’ greed triggered the GFC must provide a satisfactory answer to the following question: how does it serve greed to lend money to people who cannot pay it back? And no, it is not so you can foreclose on their house: a bank can only claim the original principle of a mortgage when it sells a foreclosed house.
The cause of the GFC was actually too much government involvement in the housing market, particularly in the US, but also in much of the rest of the world.

Ultra-low interest rates from central banks (notably the US Federal Reserve) during the 1990s and 2000s are perhaps most guilty for causing vast over-investment and speculation, while state backing of Orwellianly-named “government-sponsored enterprises” such as Fannie Mae and Freddie Mac, and the guarantees they enjoyed should the mortgages on their books fail, is largely responsible for aggravating this over-investment and funnelling it into housing.

Other crude government efforts to extend more housing credit to poorer Americans also cop some blame. For example, the Community Reinvestment Act of 1977, which was given teeth by the Clinton Administration in the 1990s, forced banks to make loans to poor or minority individuals who would not have qualified for loans otherwise. It should not be a surprise that lending standards deteriorated when the government required them to deteriorate.

The only “deregulation” that did take place was the partial repeal of the Glass-Steagall Act by the Gramm-Leach-Bliley Act of 1999, which simply allowed investment banks, commercial banks and insurance companies to be owned by the same holding company. That’s it. There is no conceivable way that this deregulation caused the crisis.

As historian and lay-economist Thomas Woods points out, for the benefit of those who would blame a lack of regulatory oversight, there are 115 government agencies in the US that regulate the financial industry. Would this crisis have been averted if there had only been 116?

Myth 3 - Capitalism is bad for the environment

A simple look around the globe should be enough to seriously undermine the claim that capitalism is bad for the environment.
The worst environmental devastation is not found in Australia or Switzerland or Hong Kong. Rather, it can be found in former Soviet republics, China or Sierra Leone: countries with long and often fairly recent histories of socialism, statism and poor respect for private property rights.

There are three main reasons why capitalism is the best system for the environment.

Firstly, the sheer wealth afforded by capitalism allows better stewardship of the environment. A society needs to be wealthy before it can afford scrubbers on coal power stations, a proper waste management system and the luxury of conservation.
Secondly, the same private property rights that underpin capitalism itself are the most effective tools for preserving a healthy environment. When natural resources are commonly owned, be they forests, agricultural land, or, notably, the ocean, nobody has an individual incentive to maintain the capital value of that resource, and by the same token, no incentive to contribute to its conservation. The results are forests logged to extinction, over-exploited land and depleted fisheries.

By contrast, private entrepreneurs will ensure that forests can regenerate and that land remains healthy and fertile. Similarly, private property rights place a premium on the dumping of waste, resulting in less waste overall, and more waste where it causes the least damage.

Thirdly, capitalism thrives on producing goods and services with the smallest possible quantity of resources- that is how firms minimise costs and maximise profits.

That means, thanks to capitalism, we can enjoy any given standard of living with the smallest impact on the environment. For example, capitalism is often blamed for the scourge of global warming, but importantly, CO2 is not a by-product of capitalism itself, but of production. And it is estimated that towards the end of the communist era, it took Soviet manufacturers around four times the resources of Japanese and Western counterparts to produce a comparable car.

Capitalist efficiency means less resource extraction, less waste, and less pollution.

Myth 4 - Capitalism promotes discrimination

It is often claimed that without our current tangle of anti-discrimination legislation, untrammelled market forces would mean that discrimination against women and minorities would become rife.

The contrary is actually true: market forces and the profit incentive are the greatest tools for breaking down discrimination. Legislation, ostensibly introduced to protect vulnerable groups, often entrenches inequity.

Obviously, a business owner that turns away customers because of their race will suffer a serious loss of profits, which means that although many business owners might individually be racist, the free market punishment for engaging in discrimination means that practically none of them would, even in the absence of anti-discrimination law.

Similarly, employers who hire workers based on irrelevant factors such as race or gender, rather than pure merit, will suffer higher labour costs, worse staff and lower profits. Bigots arbitrarily like some groups of people more than others, but they invariably like themselves the most, and in a free market, money talks. Henry Ford, for instance, was a notorious anti-Semite, yet still employed Jews and sold his cars to them as well.

Large-scale discrimination requires state backing and the suspension of capitalism. The Davis-Bacon Act of 1931, America’s first federal minimum wage law, was lobbied for by all-white trade unions that wished to prevent “cheap coloured labour” from the South from undercutting white construction workers.

Closer to home, Australian unions lobbied for racist regulations that effectively crippled the ability of Chinese immigrants to work in factories, while the Australian Workers’ Union only dropped its support for the White Australia Policy in 1972.
US economist Walter Williams notes that South African unions that did not allow black members among their ranks lobbied fiercely for minimum wages for black South Africans, in order to price them out of the labour market.

Even laws explicitly attempting to stop discrimination can have the opposite effect. Employers may be more reluctant to hire people of minorities or with disabilities when they know that they might face a ruinous lawsuit should they ever be accused of mistreating or unfairly dismissing the employee.

Moreover, if a sexist employer prefers to hire men over women, women can at least offer to work for less, giving them at least one weapon against sexism, and imposing a cost on the employer for discriminating. However, equal pay laws reduce the cost of discrimination to zero, and take away the woman’s only way of competing in a possibly sexist job market.

The free market reduces discrimination, while well-intentioned and badly intentioned government policy only serves to worsen it.

Myth 5- Capitalism hurts workers and causes unemployment

If you have ever read Karl Marx, you may be familiar with the term “reserve army of the unemployed.” The idea is that capitalism deliberately leaves a pool of jobless workers to hang over the heads of those lucky enough to get jobs as an implicit threat, in order to scare them out of demanding better wages and conditions. You hear other permutations of this in the general claim that widespread unemployment is an inherent symptom of capitalism.

This hypothesis is, of course, pure tripe. It would take the most elaborate conspiracy between millions of diffuse employers, with an unbelievable level of compliance, to get firms to refrain from hiring available workers in order to keep employees scared and pliable.

In reality, in a genuine free market, where wages can freely fluctuate, employers obviously have a profit incentive to put unused labour resources to work. Of course, state intervention can cause Marx’s reserve army to emerge- most notably, minimum wage laws which exclude low-skilled workers from employment.

But the free market has no more incentive to leave workers unemployed than it does to leave wheat uneaten or land unused. There will always be some frictional unemployment as people are between jobs, but that is a good thing, insofar as it is desirable that people take ample time to find the job to which they are most suited.

A parallel myth is that capitalism depresses wages. Of course, capitalists want to hire workers who will work for as little as possible. However, by the same token, they also want to sell products for the highest possible price.

The constraint of competition, however, means that in real terms, prices of consumer goods come down and down. Similarly, firms want to bid workers away from rival employers, and will do so by offering higher wages. To be able to do so, they invest in capital, such as tools and machinery, to make workers more productive.

Empirically, wages and conditions in capitalist countries (or countries that have started to embrace capitalism, such as China) have risen dramatically over recent decades. It is not because of unions (which are outlawed in China): it can only come with increasing productivity through the accumulation of capital that is at the heart of capitalism.

Myth 6 - Capitalism is pro-business

People are often tempted to conflate support with capitalism with a simple affinity with big business. If you support laissez-faire, it must be that you simply wish to boost the bottom lines of Exxon Mobil and Goldman Sachs as much as possible.
In fact, it might not be a stretch to say that massive corporations actually hate genuine capitalism. At the very least, it is fair to say that even if they want capitalism for everyone else, they do not want it for themselves.

Instead of having to slug it out in a genuinely free market, businesses want all sorts of special privileges to goose their profits: be it tariffs for imported sugar, or corn subsidies, or occupational licences.

By contrast, true capitalism means resisting the temptation to afford special economic privileges, and the capitalist worldview is that an economic system should not aim to maximise the profits of businesses, but to maximise the welfare of consumers by forcing businesses to compete fiercely with each other.

Businesses are of course essential to this equation, but only as a means to an end, not an end in themselves.

Opponents of capitalism often confuse it with crony capitalism or corporatism, but whereas corporatism values the interests of corporations in themselves, capitalism holds that firms should exist under the yoke of market forces as dictated by millions of diffuse consumers.

Because of this mistake, examples of state intervention such as bailouts, subsidies and favourable regulations are often labelled as “capitalist”, whereas such government meddling is absolutely antithetical to capitalism.

Remember: capitalism is not just a general fetish for industry: it is a politico-economic system that celebrates consumer sovereignty over private property, not share prices, cash reserves and credit ratings.

Myth 7 - Capitalism is inhumane

Many people concede that capitalism does have an extraordinary ability to produce wealth. However, it only does so with a sort of ruthless efficiency that ignores people dignity and human needs, forcing them to participate in a coercive, dog-eat-dog rat race, and leaving them little time or space for fulfillment and self-actualisation.

In reality, capitalism is the only system that both respects individual dignity and provides the most scope for individualism.
Capitalism often has complex definitions ascribed to it: usually some combination of private ownership of the means of production, free exchange of goods and services, freely floating wages and prices and so on. And yes, all those things are reliable manifestations of capitalism.

But ultimately, laissez-faire is simply the right of individuals to make whatever voluntary accommodations they can with each other, unmolested by coercion from third parties. That is all. It is the only system that does not rely on violence or the threat thereof to bring about the immense economic harmony and material wealth that we enjoy.

So whenever you hear somebody making some seemingly iconoclastic statement like “I hate capitalism,” what they are really saying is “I hate the ability of people to make voluntary, mutually beneficial arrangements with each other without my approval and violent intercession.” That is a far less enlightened, far less tolerant and far less humane statement than the nose-ring-sporting green-haired person making the statement probably thinks it is.

Capitalism is the only system that allows people to actually pursue their own interests, and not just because of the rights it reserves for the individual but also because of the unprecedented material wealth it provides.

How many people in non-capitalist countries are able to join their local book club or amateur theatre group? How likely are you to be able to indulge your love of medieval French literature or campanology if you have to spend all day doing backbreaking labour in a rice patty? Not very. Almost nothing is more inhumane than poverty and deprivation, which makes capitalism the most humane system of all.

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