There are a couple challenges in writing about what capitalism does right. First is that there are many different varieties out there, and no clean separation between “pure capitalism” and other economic models. Depending on who you’re talking to and what the subject is, certain examples might or might not qualify as “capitalism.”
Secondly, people have strong feelings about it, and are likely to face strong urgest to play up or suppress various aspects of capitalism depending on their political leanings and why capitalism’s being discussed.
I would be remiss if I ignored Adam Smith’s Wealth of Nations, and his thesis that individuals acting in their own self-interest together combine their efforts to yield what contemporary utilitarian philosophers termed “the greatest good for the greatest number”. Those utilitarians were also very skeptical of government actions. However,
Adam Smith does reject government interference in market activities, but he does allow that governments should serve just three functions: protecting national borders, enforcing civil law, and engaging in public works. The public works included universal education, infrastructure like roads & bridges, and enforcement of criminal law. These make the market more smoothly, but are sometimes derided by modern laissez-faire capitalists.
Adam Smith described persistent profits as a waste, an inefficiency - and thus any businesses which continue to profit are inefficient. Today, many companies which claim adherence to free-market capitalism back intellectual property laws, and government-backed licensing requirements to limit their potential competitors. Such legal barriers block market action and should be seen as compromising the fundamental principles of laissez-faire capitalism.
He also disliked extreme income inequality, disliking the accumulation of persistent undeserved profits while backing government policies in favor of individual workers.
Capitalism’s greatest modern cheerleaders are quite willing to take government handouts when it comes to saving large businesses and supporting wealthy individuals.
Adam Smith warned about the risk of regulatory capture, though he didn’t use those words. Unsurprisingly, the party of big business supports this, though it is at odds with their professed love of free markets and opposition to big government.
So, insofar as Adam Smith’s vision of capitalism was intended to maximize the standard of living for large numbers of people, it is disconnected from the modern vision of laissez-faire, business-friendly capitalism. In addition, laissez-faire capitalism usually assumes effective technology and innovations will be widely shared - corporate secrets and copy-written technology are anathema to this “free market” vision of capitalism. Proponents of the current government-enforced patent system compare it not with a broad exchange of ideas but with a regime of corporate secrets.
Still, there are things to learn from Smith’s original ideas, and from the inarguable successes of capitalist industry:
Capitalism is good at finding cost-effective solutions to the problems prioritized by individuals with the means and will to solve those problems: Wealthy people fund research into diseases they fear. Multiple companies compete for grants, awards, and prestige, often making progress not only on the stated problem but also on related fields - and producing more research than the granting agency would likely obtain through direct investment. Consumers find the cheapest sources of equivalent goods. Long-distance trade and communication help to cheaply move labor, ideas and goods from producers to consumers. This smoothly ameliorates local surpluses and shortages.
Capitalism motivates the organization & unification of laborers from many different disciplines toward a single purpose.
It also provides solutions tailored to individuals’ needs. Centralized bureaucracies have a hard time delivering what is needed in every individual circumstance.
The pressure for efficiency promotes division of labor and economies of scale, helping humanity overall.
This post is part of a series on interactions between the government and the economy. The previous post was “What is Government?” The next will be “What are the major benefits of a centrally-planned economy?”
