The Economic Way of Thinking, Part 4

Dr. Ronald Nash is Professor of Philosophy and Theology at Reformed Theological Seminary in Orlando, Florida. His 25 books include Poverty and Wealth and The Closing of the American Heart: What’s Really Wrong With America’s Schools, both published by Probe Books.

Sooner or later, any introduction to the economic way of thinking will have to discuss the major economic systems: capitalism, socialism, and the mixed economy. My brief analysis of the idea of the market in the third part of this series provides a helpful way of getting into our subject for this month. One way of thinking about capitalism is to see it as the economic system that recognizes the importance of the market and that seeks to protect free market exchanges from harmful governmental interference and control. In its classic sense, socialism is the name we give to that economic system that seeks to replace the freedom of the market with a group of central planners who exercise control over essential market functions. There are degrees of socialism in the real world. But basic to any form of socialism is distrust of or contempt for the market process and the desire to replace the freedom of the market with some form of centralized control. So-called mixed economies (another name is interventionism) differ from socialist economies only in degree.

The Two Means of Exchange

An excellent way of clarifying the essential difference between capitalism and socialism is noting that there are basically only two ways in which anything may be exchanged. Economist Walter Williams calls them the peaceful means of exchange and the violent means of exchange.

The peaceful means of exchange may be summed up in the phrase, “If you do something good for me, then I’ll do something good for you.” When I place an order in my local McDonald’s, I am in effect saying that if the store does something good for me (gives me the food I’m requesting), then I’ll do something good for it (give it my money). When capitalism is understood correctly, it epitomizes the peaceful means of exchange. The reason people enter into a market exchange is because they believe the exchange is good for them. They take advantage of an opportunity to obtain something they want more in exchange for something they value less. Capitalism then should be understood as a voluntary system of relationships that utilizes the peaceful means of exchange.

But exchange can also take place by means of force and violence. In this violent means of exchange, the basic rule of thumb is: “Unless you do something good for me, I’ll do something bad to you.” This is the operating principle for thieves and robbers, and, some would add, for the Internal Revenue Service as well. It is also the controlling principle for socialism.

Socialism means far more than centralized control of the economic process. Socialism requires the introduction of coercion into economic exchange in order to facilitate the goals of the elite who function as the central planners. Even if we fail to notice any other contrasts between capitalism and socialism, we already have a major difference to consider. One system (capitalism) stresses voluntary and peaceful exchange, while the other system depends on coercion and violence.

An Objection

Socialists in the West often object to the last point. (Of course, the multitudes who suffered under socialism in Eastern Europe and the former Soviet Union know the point is true.) Many socialists in nations like the United States would like us to believe that there is a form of socialism, not yet tried anywhere on earth, where the controlling ideas are cooperation and community; and where coercion and dictatorship are precluded. Either these people are confused or they have a secret that they want kept from the rest of us. These utopians ignore the fact that however humane and voluntary their socialism is supposed to become after it has been put into effect, it will still take massive amounts of coercion and theft to get it started. Voluntary socialism is a contradiction in terms. Whatever else socialism is, it means a centralized control of the economy made possible by the use of force. Socialism epitomizes the violent means of exchange.

Additional Features of Capitalism

As we have seen, capitalism is a system of voluntary relationships in which people exchange on the basis of the peaceful means of exchange. But we can add more detail to this general picture. For one thing, capitalism is not economic anarchy. It recognizes several necessary conditions for the kinds of voluntary relationships it recommends. One of these is the existence of inherent human rights, such as the right to make decisions, the fight to be free, the right to hold property, and the right to exchange what one owns for something else. It is encouraging to hear Boris Yeltsin and other former Marxists in Russia declaring that they now recognize the fundamental importance of these rights.

Capitalism also presupposes a system of morality. It does not encourage people to do anything they want. There are definite limits, moral and otherwise, to the ways in which people should exchange. Capitalism should be regarded as a system of voluntary relationships within a framework of laws which protect people’s rights against force, fraud, theft, and violation of contract. “Thou shalt not steal” and “Thou shalt not lie” are part of the underlying moral constraints of the system. Economic exchanges can hardly be voluntary if one participant is coerced, deceived, defrauded, or robbed.

There is no mystery as to why existing national economies fall short of the capitalist ideal. Deviations from the market ideal occur because of defects in human nature. Human beings naturally crave security and guaranteed success, values not found readily in a free market. Genuine competition always carries with it the possibility of failure and loss. Consequently the human preference for security leads people to avoid competition whenever possible, encourages them to operate outside the market, and induces them to subvert the market process through behavior that is often questionable and dishonest. Most often, this subversion of the market finds people seeking special advantages from government, which is one of the unavoidable consequences of socialist and interventionist economies.

The best way to mitigate the effects of evil in the human heart and the subsequent pursuit of unlimited power is to disperse and decentralize power. Because of its reliance on markets, capitalism is the only one of the three economic options that decentralizes economic power. The necessary reliance of socialist and interventionist economies upon state power leads inevitably to the greater consolidation of economic and political power in the hands of a few. The combination of a free market economy and limited constitutional government is the most effective means yet devised to impede the concentration of economic and political power in the hands of a small number of people. Every person’s ultimate protection against coercion requires control over some private spheres of life where he can be free. Private ownership of property is an important buffer against any exorbitant consolidation of power by government.

What About “Monopolies”?

But, some will ask, doesn’t capitalism lead to monopolies, the concentration of wealth and power in the hands of a few private individuals and companies? The truth is that it is not the free market that produces monopolies; rather it is governmental intervention with the market that creates the conditions that encourage monopolies. The only real monopolies that have ever attained a high degree of immunity from competition achieved that status by governmental fiat, regulation, or support of some other kind. Governments create monopolies by granting one organization the exclusive privilege of doing business or by establishing de facto monopolies through regulatory agencies whose alleged purpose is the enforcement of competition, but whose real effect is the limitation or destruction of competition. More attention needs to be given to the ways in which America’s infamous nineteenth-century “robber barons” were aided by special privileges granted by government.

Why Socialism Fails

The miserable performance of socialist economies is no accident. There is a fundamental reason why socialist economies do not work, and that is because they cannot work. The reason socialism can never work is because it is an economic system that makes economic calculation impossible. Without free markets to set prices, without the constant stream of information supplied by changing relative prices in a market economy, socialists can never attune production to human wants. Without free markets and the vital information they supply, economic activity becomes chaotic and results in drastic inefficiencies and distortions. The great paradox of socialism is the fact that socialists need capitalism in order to survive. Unless socialists made allowances for free markets, which provide the pricing information that alone makes rational economic activity possible, or monitored the pricing information available from capitalist economies, socialist states would have collapsed more quickly than they did. Anyone who doubts this can quickly learn the truth by visiting countries like Russia or Cuba.

The Mixed Economy

Many people are attracted by the possibility of an economic system that would fall somewhere between capitalism and socialism, that would—they think—combine the “best elements” of each. Interventionism or the mixed economy results from the mistaken belief that governmental intervention in the economy can successfully achieve good results while still falling short of the total controls that characterize a socialist system. An interventionist economy is supposed to be a workable third alternative to the freedom of a market system and the total state control of a socialist system. The state, interventionists believe, interferes with the market process in order to attain some desirable social goal, such as a more “equitable” distribution of wealth or jobs or positions. For anyone wanting an example of an interventionist economy, one need only look at the U.S. economy. For those seeking examples of how interventionist economies fail, one need only look at the U.S. economy.

In reality, interventionism turns out to be a system in which government interferes with the normal operation of the market in order to alter the terms of trade in ways that benefit some at the expense of others. Interventionism occurs when one group invites government to enter the process and change the rates at which exchanges take place. This may assume the form of price controls or tariffs or other forms of coercion. Of course, advocates of interventionism never explain that this is what interventionism really is. Instead, they talk in lofty moral terms about the importance of certain social goals and how those goals can only be attained if government intervenes in ways that will counterbalance the selfishness of some in order to bring about the good of all. But in the long run, interventionism always results in the large majority of people being worse off. Interventionist controls fail be cause whenever government intervenes in the market (as through rent controls in New York City, for example), private owners and entrepreneurs react in ways that thwart the objectives of the politicians and those they are trying to advantage. The exorbitant price of housing and the substandard condition of the housing that’s left for the poor are inevitable by-products of liberal politicians playing interventionist games with the housing market.

But whenever liberal economists and politicians are confronted by the failures of interventionist economic controls, they always have a predictable response. The failures of the mixed economy are judged to show that previous controls did not go far enough; what is necessary is more interference with the market, not less. In other words, it is always the market process and never interventionism that receives the blame for failure. Through this remarkable sleight of hand, past failures are never regarded as grounds for abandoning interventionism. Rather the mistakes of the past are used as justification for even more controls in the future. More attention should be given to the clever but immoral way in which liberals and radicals blame capitalism for what are in truth the failures of economic interventionism.

Free Exchange versus Coercion

The alternative to free exchange is coercion and violence. Capitalism is a mechanism that allows natural human desires to be satisfied in a nonviolent way. Little can be done to prevent human beings from wanting to better their lot in life. What capitalism does is channel that desire into peaceful means that benefit many besides those who wish to improve their own situation.