Fallacy Friday #5: “But Hasn’t Capitalism Already Failed Us?”

“Capitalism will never work. It’s already failed us with the housing market collapse and the greedy corporations that control policy making. It will never work!?

The Confusion
This argument generally takes many forms but it comes down to the above idea. This is simply a case of confusing corporatism with capitalism (or crony capitalism). These are two different things. Capitalism is “an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.” Unlike socialism, the means of production is privately owned.

Corporatism on other hand is “the control of a state or organization by large interest groups.” This means that corporations are working with government to achieve certain ends. This means that, rather than compete by offering the best products and services at the best price, a handful of corporations can use something like a single payer system in order to sell their products. This subsidizing means that they can sell the worst possible product at what ever price they want. Through the monopolization on force that government achieves, they can then force consumers to buy their products and stifle competition and innovation. This leads us to ask a simple question. What system does it sound like we have? (Hint: It’s corporatism).

What People Actually Advocate

“Those politicians, professors, and union bosses who curse big business are fighting for a lower standard of living.”

Ludwig Von Mises, “History and Theory”

What has achieved the highest standard of living ever in the history of mankind? Was it government or capitalism? We have had governments much longer than the concept of capitalism, so it cannot be government that has granted us so much. Hundreds (or even thousands) of years ago, the difference between a king and serf on the road was that the serf walked and the king rode in a carriage or litter. Today, the difference between a “serf” and a “king” is that the “serf” drives car and the “king” drives a better car. The left likes to whine and complain about income inequality, but the difference between the poor and the rich is incredibly small compared to all the rest of human history. All of this is thanks to capitalism. (As a side note, wealth cannot be measured simply by numbers but by the standard of living as well).

So what happens when governments intervene in markets? They stifle innovation because they ruin competition. Mises, in “Planned Chaos” said “The consumers suffer when  the laws of the country prevent the most efficient entrepreneurs from expanding the sphere of their activities. What made some enterprises develop into “big business” was precisely their success in filling best the demand of the masses.” This is when we have the “bailouts” and “Corporate Welfare”. This is because certain business are “too big to fail” and because we don’t let them fail due to their malpractice, we only encourage our own economic disaster. This sort of corporate welfare leads invariably to socialism of some kind. Mises, in another insightful observation in “Bureaucracy” said “In the bureaucratic machine of socialism the way toward promotion is not achievement but the favor of the superiors.”

In our current economy, we do not really reward those that achieve but those who make their case loud enough (or throw down enough money). “We can’t let the ‘X’ industry fail because events ‘Y’ and ‘Z’ will also occur and ‘Y’ and ‘Z’ are bad.” This sort of thinking looks only at one particular group which means policy focuses on one particular group. This means that government intervenes in the market to fix “undesirable” instance of the economy.

“The government believes that the price of a definite commodity, e.g., milk, is too high. It wants to make it possible for the poor to give their children more milk. Thus it resorts to a price ceiling and fixes the price of milk at a lower rate than that prevailing on the free market. The result is that the marginal producers of milk, those producing at the highest cost, now incur losses. As no individual farmer or businessman can go on producing at a loss, these marginal producers stop producing and selling milk on the market. They will use their cows and their skill for other more profitable purposes. They will, for example, produce butter, cheese or meat. There will be less milk available for the consumers, not more. This, or course, is contrary to the intentions of the government. It wanted to make it easier for some people to buy more milk. But, as an outcome of its interference, the supply available drops. The measure proves abortive from the very point of view of the government and the groups it was eager to favor. It brings about a state of affairs, which, again from the point of view of the government,is even less desirable than the previous state of affairs which it was designed to improve.”

-Ludwig Von Mises, “Middle-of-the-Road Policy Leads to Socialism

This means that in order to stem the chaos the government can do two things, take its hand out of the economy, or reach further back in the process to “fix” the problem. Governments, of course, never conclude to leave the market alone. They always conclude that they can fix the problem by regulating even farther back into the production of a product. In the case of the milk, in order to mitigate the loss, the government may go even further back in controlling the production of animal feed. Once this same chaos arises with feed, it may go back further with grain production. Tampering with grain production then affects other circles of production. As you can see, the problem is never solved and government continually has to regulate farther and farther back on the path of production when, if they had just let the market dictate prices, this chaos would have never occurred. This reaching farther back in the economy invariably leads to socialism and fascism.

The catch is that corporations love this sort of control because it means competition is stifled and they can make a profit without having to actually offer what the market demands. This is why those that cry for a highly regulated economy invariably cry for a lower standard of living.

The Remedy
The remedy is rather simple. Abolish all regulations in the market and let the market dictate the cost of a product and wages. This simple policy of no policy grants the best possible growth for wealth and innovation and the consumer is the one that benefits the most from that. Their dollars go further and they end up getting a better product. This is true capitalism. The irony of the people that voice the fallacy originally cited above is that corporatism is a product of their own ideology. They just can’t seem to put the pieces together in their heads to see that they are advocating for the economic disparity they wanted to decrease in the first place.

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