“Over the past 25 years, a billion people have escaped poverty as their countries moved away from command and control, toward capitalism and freedom.”, Nobel Laureate in Economics, Gary Becker

“As Milton Friedman said, the arguments for capitalism are subtle and sophisticated, while the arguments for collectivism are simple and emotional. There are at least four cornerstones of limited-government, private-property, market-price economies that create prosperity but that are not intuitively obvious and require analysis and thought to appreciate.”, Douglas Coate, “Improving the GOP’s Free-Market Pitch”, The Wall Street Journal

Opinion

Improving the GOP’s Free-Market Pitch

Capitalism’s virtues don’t easily reduce to sound bites, but that isn’t a reason to give up.

By Douglas Coate

As an economics professor, I have sympathy for market-oriented Republican candidates who at times seem unable to explain their economic philosophy in sound-bite form. As Milton Friedman said, the arguments for capitalism are subtle and sophisticated, while the arguments for collectivism are simple and emotional. There are at least four cornerstones of limited-government, private-property, market-price economies that create prosperity but that are not intuitively obvious and require analysis and thought to appreciate.

One is Adam Smith ’s idea of the invisible hand. Smith argued that individuals in market economies, although motivated by self interest, will be guided by an invisible hand to take actions that benefit society as a whole. A farmer works hard to grow wheat at the lowest possible cost. When he tries to sell his wheat at a high price, however, he discovers that other farmers have also worked hard to grow wheat at low cost and competition with them pushes prices down close to production costs.

This is not the outcome planned for by our self-interested farmer and his competitors, but it is great for the rest of us who get cheap food.

A second is trade. Trade between people within and across countries leads to the division of labor. People can specialize in what they do best and trade with others for what the others do best. This makes everyone more productive and more prosperous.

Photo: Corbis

This holds even for trade between peoples of highly developed countries and peoples of less-developed countries. We all have a comparative advantage in something because of differences among us and in the resources we command. Self-sufficiency at the individual or country level may be a romantic ideal, but it also means subsistence living.

A third is the market-price system. From property rights and trading come market prices as suppliers and demanders interact based on the information and resources each possess. These prices in turn guide our plans and actions as consumers or producers.

A high-school graduate makes the decision of whether to go to college or not based on the information reflected in prices. What is the price or wage of a college graduate in the labor market? What is the price or wage of a high-school graduate? What is the price of a college education? A factory owner in a market economy chooses how labor intensive or capital intensive to make his production process by looking at the wages of workers and their skills alongside the prices of the different production technologies he could use.

A factory manager in the old Soviet economy, not blessed with a market-price system, relied on the information or allocations of a central planner to guide his use of workers and machines in the production process. But the central planner was largely playing a guessing game. He did not have market prices to keep him up to date on the skills of workers in different locations and on the technologies available to them.

The fourth is that the productive resources of land, labor and capital are guided to their best use. This results from the constant feedback provided by the profit-and-loss system and from the lack of discrimination when governments are hands off.

Labor, the most important resource in market economies with educated work forces, is fully utilized, for example, because employers hire the best workers they can at prevailing wages to maximize their profits. And it is in their best interest to treat them well thereafter so they won’t leave. Any differences in wages by characteristic, such as race or gender, that do not reflect productivity, are quickly arbitraged away in the pursuit of profit. Why hire men if women are cheaper?

The counters to these arguments are that our economic system should not be based on selfishness but on caring, that international trade leads to the exporting of jobs to low-wage countries, that the best and brightest should be assembled to plan our economy because the plans of ordinary people reflected in market prices are not informed, and that discrimination and unfair treatment are everywhere if employers are free to hire, fire, pay and promote without oversight.

Nice sound bites, appealing to the emotions, and probably characteristic of too much of the K-12 and college education in this country. But, to paraphrase Friedrich Hayek, “these views lead us down the road to serfdom.” For peaceful and prosperous lives, based on personal responsibility and voluntary cooperation, capitalism is the way.

Unfortunately, I am not sure how best a political candidate might argue for capitalism and limited government in a sound bite. Maybe by borrowing from Gary Becker : “Over the past 25 years, a billion people have escaped poverty as their countries moved away from command and control, toward capitalism and freedom.”

Mr. Coate is professor of economics at Rutgers University, Newark.

Posted on March 10, 2015, in Postings. Bookmark the permalink. Leave a comment.

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