Capitalism Is Progressive – and Must Go On the Offensive

But this background of utter success is taken so much for granted that it is  almost entirely invisible.

With centuries of evidence fofr the power of economic liberty, and the recent  memory of an economic crisis that was nothing to do with the principles of  capitalism and everything to do with the one part of the economy that is  the least capitalist of all – big banking – acting, no less, within decidedly  anti-capitalist parameters set by the state, why on earth is the liberty  movement letting this mainstream “capitalism is the problem” narrative get  any air at all?

Why are supporters of a free economy allowing their principles to be so  entirely misrepresented, leaving them to engage in weak, piecemeal defenses  against a debate framed by their political opponents?

When a free-market supporter hears a left-leaning commentator talk about the  banking sector, he may well be quick enough to point out that the bank  bailouts were not free-market actions, but the opposite. The claim is  generally heard defensively in response to some criticism of capitalism.  Similarly, when free-traders are accused of supporting a system that  exacerbates economic inequality, the free-market supporter points out,  defensively, that it’s not the free trade that is ultimately responsible for  inequality but a financial system that concentrates wealth in a banking  sector that enjoys special privileges. Or he might point out the  anti-competitive nature of a system where large corporations can  influence the writing of regulations by legislators whose campaign they  fund and who exercise too much power in the first place. The effect, they  point out, is to enable them to price smaller competitors out of  the marketplace. Nothing capitalist about any of that at all.

However, such defenses when offered as part of a “capitalism’s not that bad” argument will not put the true principles of economic freedom into the  mainstream consciousness in a way that will attract enough popular support  to put the country back on the right track. Defensive positions generally  inspire no one.

Rather, popular support for the free-market as the best way back to  prosperity and economic justice depends on its supporters’ making a  passionate, positive, and systematic case for capitalism. Rather than  arguing on the finer points of the free market among ourselves, we need to focus  on presenting an easily understandable, even populist version of economic  liberty that is as coherent and complete as the palpably false case against  it. I say “palpably false” because it depends on a definition of capitalism  that is not only incorrect: it often defines capitalism as the very  opposite of what it is – such as when it refers to the trading of  derivatives, which do not represent any asset, in an environment in which losses  are socialized by the state – as in some way the epitome of a capitalist  system, when it is closer to being a mockery of it.

The type of banking that brought us to the private debt crisis that triggered  the current collapse is not capitalist. If anything, it is anti-capitalist  because it violates at least two fundamental principles of free economic  activity. First, capitalism requires informed, voluntary transactions between  two parties that benefit both parties involved (the principle of subjective  value), and do no harm to a third party (protection of individual rights  and property). Second, capitalism requires that, down to the lower bound of  bankruptcy, those who take economic risks bear the full consequences of those  risks. We might also add that having people store their wealth in an  instrument that is actually someone else’s debt arguably violates both  principles, especially when a cadre of market-making private  corporations (treated in law as immortal people – nothing capitalist about  that) have state-given privileges to do things with money that others may  not do (nothing capitalist about that, either).

“Capitalists against financial corporatism” isn’t very catchy as a slogan,  but if we are going to dominate the  mainstream, it is the kind of counter-intuitive and bold (and therefore  potentially persuasive) position we should be taking front and  center. The financial system is much more of a state-sponsored, centralized  and elitist concoction than it is a capitalist one, but since it sells itself as  capitalism, those of us who really care about economic freedom, need to be  very explicit about having the solution to much of the economic injustice  of the last few years, rather than being the cause of it.

Rapidly rising economic inequality in favor of an elite is the deeper, moral  issue that rightly feeds the fires of much of the Left and must be  addressed. Supporters of the free-market should be embracing the issue – raising it more loudly, robustly and systemically than any of the Left who would  seek to use it against us. Economic justice is our ground, and we  should be on the offensive, declaring proudly that, even if we don’t have  all of the answers, we are capitalists precisely because we want more  economic justice, not less, and we want to promote equality in a way that adds  more value across society than it destroys.

The Occupy movement talk about the 99%. They have the right point – but they  have the wrong number. Most of the top 1% have much more in common with 99%  than with the top 0.1%. Strip out that top 0.1% and inequality falls  dramatically. The distribution of income in the USA, for example, is an L-shape – and most of its  disproportionate concentration of wealth (disproportionate to real value  that its holders have created for others, that is) depends on the  aforementioned financial sector that operates, in many respects, in the least  capitalist way of any sector of our economy.

Supporters of free markets let the Left (excuse the label) get away with way  too much when we do not challenge its claim that in a capitalist system,  economic progress depends on inequality. It doesn’t. Rather, it depends on  the freedom of people to try to make themselves unequal – in whatever  way they choose, including economically. (Is that a definition of liberty?)  A “free market”, defined as nothing more than the sum-total of people’s  voluntary transactions made for mutual benefit, is both “free” and a “market” with any income distribution. In a capitalist system, (rather than  state-sponsored financial corporatism), economic success comprises entirely  in giving people something they want. Consumers make purchases only when  the thing bought is more valuable to the purchaser than is the money  they spend for it (the principle of subjective value). The capitalist, on  the other side of the transactions, values the money more than the goods or  services he has created. This indeed concentrates wealth – but only to an  extent that is counterbalanced by the distribution of value among those who  transacted with the capitalist. These capitalists are not the people who  crashed our economy. So it is not capitalism that is our culprit.

Schumpeter nicely summed up this truly progressive magic of capitalism.

The capitalist engine is first and last an engine of mass production  which unavoidably also means production for the masses. . . . It  is the cheap cloth, the cheap cotton and rayon fabric, boots,  motorcars and so on that are the typical achievements of capitalist production,  and not as a rule improvements that would mean much to the rich  man. Queen Elizabeth owned silk stockings. The capitalist  achievement does not typically consist in providing more silk stockings for  queens but in bringing them within reach of factory  girls.

Clearly, the only parts of our political economy that do not work this way  are the state (which concentrates wealth through taxation without a  corrective mechanism when the transaction destroys value), much of the  financial sector, and fraudulently operated business (and in a capitalist  system, fraud is a crime).

Schumpeter’s quote also tells us why simple measures of the distribution of  financial wealth, so often quoted in the mainstream media, can be  misleading. The Gini coefficient of inequality, for example, is a useful  metric for some comparative purposes, but if financial wealth concentrates  upward over time but does so more slowly than innovation makes better goods  available to those with less wealth, then an increasing number of people  get to enjoy goods that were previously only available to the super-rich.  In such a case, the distribution of real wealth or value through the  society may become more equal even as the financial wealth distribution  becomes less equal. In short, it’s not the money that matters as much as  what you can do with the money you have.

By failing to explain clearly what the free market is (and isn’t), including  how it provides a way out of the economic turmoil felt by so many families,  classical liberals continue to let the big-“L” Liberals equate “the free  market” with things that are nothing to do with it. In so doing, we risk not  only losing the political argument, but, more importantly, adding to the  very social and economic injustices that we would all like to see  overcome.

For example, the principles of capitalism do not require that corporations are treated as immortal  people in law.

Capitalism does not require – indeed it does not permit – that corporations  go unpunished when they harm people they do not transact  with. Capitalism is not even opposed to organized labor. Rather, it  champions the best kind of organized labor – labor that organizes  voluntarily. Voluntary membership of unions is important to ensure that  union leaders do not become exploitative masters in place of unscrupulous  employers. It also ensures that their organizations have to earn their  membership fees by providing a service of value to their members without  causing (usually financial) harm to those who would not join.

Capitalism doesn’t keep people in slums in the third world; rather, it gets  them out. Why? Simply because capitalism depends on the establishment and  securing of personal property rights. As Hernando de Soto – one economist  that has earned the right to call himself progressive in the very best  sense of the term – has explained, formerly destitute South Americans are  being lifted out of the gutter into true economic opportunity by the  most uniquely capitalist action of all: the formal recognition and  registration of their property in the land and shacks that they have  inhabited for years without any formal recognition, is making millions of the  poor solvent, turning the products of their labor into actual financial  wealth and collateral that can be used to raise credit.

Then there’s China, which has seen the fastest reduction of poverty in  history by allowing individuals to transact with each other freely over the  last generation. And what most threatens its success? Their artificially  massive, highly state-corrupted banking sector, and a property asset bubble  pumped up by the State’s financial controls that prevent privately saved  money’s being invested freely … Once again, we see the gains that were  provided by capitalism endangered by anti-capitalist practices in finance  and regulation. And of course, if it all comes crashing down, they’ll call  it capitalism’s fault, as so many have done in the West.

I’ve obviously not mentioned hundreds of issues that bear on economic  injustice in our modern world, and I’ve not even claimed that a purely  capitalist society (whatever that would be) is the best possible society.  Nevertheless, the evident economic and social injustices that are being suffered  today are much less caused by capitalism than they are mitigated by it.  Moreover, those parts of our political economy that most need reforming for  the truly progressive ends of improving the lives of the poor,  working people, and the middle class, are the least capitalistic of  all.

When it comes to big ideas, offense is often the best form of defense. And  when it comes to political change, a big, clear, positive message beats a  negative or reactionary one almost every time.

Most of the damage that has recently been done to economic and social justice  in the Western world is evidence for proper capitalism – not  evidence against it. We need actively to excite people about what proper  capitalism is. It is not financial state-sponsored crony corporatism.

Classical liberals should stop conceding the initiative by defending capitalism in spite of its impact on social and economic  justice; we should be seizing it by actively promoting capitalism because of its impact on social and economic justice.

Why bother? Because in providing a mainstream account of what capitalism  really is and explicitly setting ourselves against those who have stretched  its definition beyond breaking point, we who would promote liberty, can set  ourselves squarely with the people.

And it is almost always “with the people” that liberty is won.

Robin Koerner is Publisher, WatchingAmerica.com, Founder, Blue Republican (TLB partner), Contributor to The Liberty Beacon project and Contributor to the Huffington Post, Daily Paul , Moderate Voice and Ben Swann.com. Follow Robin on Twitter: www.twitter.com/rkoer