BY LEN CABRERA/MARCH 10, 2019
With Rep. Alexandria Ocasio-Cortez (D-NY) stating yesterday that “Capitalism is an ideology of capital — the most important thing is the concentration of capital and to seek and maximize profit” and “To me, capitalism is irredeemable,” we are posting Len Cabrera’s column on capitalism that was originally published in the Gainesville Sun on July 16, 2017.
It’s becoming increasingly popular to attack capitalism for many of our country’s woes. Pundits on both sides of the aisle, from The New York Times to National Review, say that our capitalist system is suffering from too much greed and needs government reforms to ensure “fair” outcomes. These arguments demonstrate a lack of understanding of both capitalism and human nature.
Greed (self-interest) is inherent in every human being−worse in some, but present in all. Thus, “greed” exists in every economic system. Capitalism’s strength is that it mitigates greed by taking advantage of it.
Capitalism has nothing to do with Wall Street, large corporations, the Chamber of Commerce, or any other organization promoting “trade” (but actually looking for government policies to favor their industries). Capitalism simply means that society’s basic decisions on what, how, and for whom to produce are made by millions of individuals. The alternative is some type of command system where those questions are answered by a subset of the population: a regulatory board, a federal agency, a politburo, a tyrant. Distributing the decision making gives the capitalist system distinct advantages: (1) no one needs to know how everything works, (2) bad decisions have little impact, and (3) greed actually makes it work.
As a consumer, you can walk into any grocery store and be amazed by the sheer quantity and variety of products available. You don’t have to know anything about how the products are made or how they got to the store. Similarly, the grocer doesn’t need to know. His role is limited to stocking his shelves with the products he thinks his customers will want to purchase. The manufacturers simply worry about producing their products; any steps required for creating the raw materials or capital equipment are irrelevant to them. In a command system, however, the decision makers need omniscience to know every detail about every industry to satisfy every need and want in society. It’s simply impossible for any one person or group of people to accomplish such a task. Are you up to the task of ensuring everyone in town gets enough bread? See http://wonderfulloaf.org/
In a system with millions of decision makers, any one bad decision will have negligible effects. If the grocer decides to stock a product that no one wants to buy, he will lose a little money. If the grocer makes good decisions, he is rewarded with improved sales. His “greed” actually pushes him to provide what customers want. In a command system, however, the decision makers are not accountable to the consumers, and a single decision can impact all consumers through massive shortages or surpluses.
A capitalist system only needs two things to properly function: voluntary trade and free entry/exit. The ideal situation, from a consumer’s perspective, is to walk into a store and take whatever he wants for free. The seller, however, would like that consumer to walk in, empty his wallet, and take nothing. Both are “greedy”. If trade is voluntary, they will meet somewhere in the middle. The consumer will pay something for the products he buys, and the seller will accept said payment in exchange for the merchandise. Both will be better off.
If, however, the government forces the consumer to make the purchase, the seller will be at an advantage and will be able to charge a higher price. Also, if the government somehow restricts entry into the industry, the seller will have even more power. The problem in this scenario is not the seller’s greed. That’s a given. The problem is that the government’s involvement empowers the seller’s greed.
Even for a monopoly, price is limited by people’s willingness and ability to pay. Also, free entry into the industry will limit the ability to sustain abnormally high profits. As more firms enter, prices (and profits) are reduced. The “greed” of other entrepreneurs limits the original seller.
Very few business owners (especially large corporations) actually want free-market capitalism. Competition is hard. They’d rather have government intervention to limit competition or force customers to buy their products. However, these interventions (themselves the result of greed) limit the ability of greed to work within the capitalist system to ensure that consumers get what they want at affordable prices.
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