Capitalism: Frequently Asked Questions
One of the most common fallacies about laissez-faire capitalism is that it inevitably leads to the formation of monopolies, so this topic deserves special attention. To find out why this assumption is false we must ask: what are monopolies? and where do they come from?
A coercive monopoly is exclusive control in a field of production, completely exempt from competition and the normal laws of supply and demand. The only reason competition could ever be absolutely barred is because the monopolist is benefiting from what is called a "barrier of entry." These barriers, however, can only come from one place: the government. It is only a government which has the power to "raise" a business above the laws of the market. In a free market, all businesses are subject to competition, and therefore must constantly be competing to stay ahead of their competition. But when the government grants a certain business a franchise, subsidy, or tariff protection, competition is legally barred. In other words, government interference into the free market is the real source of all coercive monopolies. And it is precisely these types of monopolies that Adam Smith condemns in The Wealth of Nations. It should finally be noted that socialism, where the government has complete control over the means of productions, is the ultimate form of monopoly. For example, in the United States all utility companies are coercive monopolies. This is not because they deliver utilities, such as water and electricity, better than any of their competitors, but it is because the government has granted them a franchise for a certain territory. This means that no one else is allowed to enter the utility business apart from the government, and any attempt to do so would be treated as a criminal act.
In a free market, the only type of monopoly that could exist is a non-coercive monopoly, one that is earned. This could be accomplished only if the firm "delivered the goods" better than any of their competitors, and even if they did, they would only have monopoly status only so long as they were the best in their field and they would still be subject to competition from other firms in their industry. Historically speaking, any business that tried to establish a monopoly in a free market by buying out its competitors or undercutting prices by selling at a loss has gone bankrupt. Thus, free market "monopolies" should be applauded as a demonstration of superior business skills on the part of the firm who best serves their customers.
The simplest answer to this question is that in a capitalist society all workers are free to choose who they are going to work for. If a worker doesn't like the terms that an employer is offering them for a job, they can simply look for work elsewhere until they find a better job, or not accept any job at all. Just because a worker doesn't like everything about his job doesn't mean he is being "exploited." For someone to be exploited they have to be physically forced to work against their own will. It is only a government, not a businessman, that has the type of power necessary to force people to work against their own judgment.
In a free market economy, all employers must compete for the services of their employees. If an employer offers lower salaries or poorer working conditions than other employers in a given field, workers will seek to work elsewhere, and the employer will lose his employees and go out of business. This means that it is in the economic self-interest of employers to provide higher wages and better working conditions than their competitors. Wages are not set by employers as a reflection of their kindness or cruelty. Wages, which are prices for the labor of individuals, are primarily determined by the productivity of labor. It is an inevitable consequence of capitalism, through the accumulation of capital, the widening of labor markets, and an increase in the productivity of labor, that workers' real wages rise and their choices of employment increase over time. It is thus due to capitalism, not monopolistic unions or "pro-worker" legislation, that the standard of living of the average worker has been increasing since the industrial revolution.
Many opponents of an unregulated economy fear that without government safety regulations unscrupulous businessmen will try to maximize their profits by selling cheap, unhealthy, and unsafe products to an ignorant populous. On the contrary, however, it is the profit-motive that would ensure the safety of products and services in an unregulated economy at a level higher than in an economy with safety regulations.
In a free market there are no government agencies deciding what products, foods, and services qualify as "safe enough" to be sold. This means that under capitalism all companies would have to earn their reputation through a demonstration of consistent quality and safety to their consumers. Since most consumers consider quality and safety to be very important features of the products they buy, a good reputation would be essential to success of any company in a free market. The importance of reputation for quality would force any potential profit seeker to ensure that his products were safe and his customers trusted him, or else they would simply purchase from another competing company whom they do trust.
Furthermore, the free market would prevent any "fly-by-night" scams from having any real success because before any company could achieve real success, it must establish itself with a good reputation for quality and safety which can take many years. For example, what investor would take the advice of a brokerage company that just opened its doors, and with no success rate to speak of, as opposed to a firm that has been in existence for decades with an unparalleled reputation for quality investment advice. Thus, it should be realized that it is in the economic self-interest for companies to provide quality products and services in order to satisfy their customers' demand for quality and to beat out their competitors. Finally, it should be observed that in a free market private agencies and publications, such as Consumer Reports, would exist for the sole sake of recommending quality products and services which would help to set health and safety standards for a given industry.
Ironically, it is safety regulations which actually operate to lower the quality of products and services. When safety regulations force companies to divert their capital into areas of production that they would not have done so on their own, it leaves the company with less capital to invest into areas of production which they otherwise would have, which will end up affecting the overall quality of the product. Furthermore, it is usually much easier for a business to obtain a government safety license than it is to actually earn a quality reputation -- which may take up to several years. This leaves the possibility of scam artists taking advantage of people, because the typical consumer is all too willing to place their faith in a government license which could have easily been earned by bribing an official. Lastly, safety regulations create a false sense of security and promote consumer irresponsibility because they discourage the need for consumers to be responsible for their own choices.
Most importantly, all forms of government regulation, whether they are personal or economic, are violations of rights -- the right to free contract, and should not exist in a free, i.e., capitalist, society. If a company wants to sell cheap and unsafe products, and people are willing to buy them, then no one has the right to stop them from doing so.
Capitalism means the complete separation of economy and state, and the American economy is far from being separate from the American state. Minimum wage laws, all public "services," and regulatory agencies (such as the FDA and the EPA) are all anti-capitalistic because they represent the government interfering into the economy, infringing upon the voluntary association of individuals, and thereby violating their rights (which are the foundations of capitalism).
America can properly be referred to as a "mixed economy," which is a mixture of freedom and controls, or free market and socialist policies. In its founding principles the United States of America is a capitalist nation, but one need only to look at history to see how the founding principles of life, liberty, and the pursuit of happiness were violated from the outset (and especially since the "New Deal") through an ever expanding government encroaching on people's political and economic freedoms.
It cannot be stressed enough that it was capitalism that led a small group of colonies to become the most powerful and productive nation on earth in less than one hundred and fifty years. It was capitalism that unleashed the productive forces necessary to raise the standard of living in America to levels undreamed of in earlier times. It was capitalism that led people to come from all over the world to start new lives and take advantage of new found opportunities. It was capitalism that was America's glory. Yet the philosophical and economic foundations of the United States have been under heavy attack since the turn of the century, and nothing but misery has been the result.
No. (If you've begun to notice a pattern in these answers, its because there is one. Without exception, all accusations that are leveled against capitalism are false and are ironically a product of the abrogation of capitalism.)
Many fear that under a system of laissez-faire capitalism -- without legal penalties for racism in the workplace -- many employers will refuse to hire minority workers even when they are better qualified for the job. Yet the exact opposite is true. It is capitalism that operates so as to make all forms of irrational discrimination economically unsound, and it is state intervention into the economy that impedes poorer minorities from achieving economic advancement.
The driving force driving all economic activity under capitalism is the profit motive: firms want to maximize their profits at all times. The simple fact is that it would not be in the economic self-interest of companies to hire white workers who are less qualified than minority workers for the same wage, or to hire white workers who are just as qualified as minority workers at a higher wage. If the minority worker is able to do the same work for a lower wage, then it would be in the economic self-interest of the employer to hire him. It would also be in the economic self-interest of the employer to hire a minority worker who can do the job better than a white worker for the same wage because this would increase his companies overall efficiency. Conversely, if a racist employer was willing to pay higher wages for white workers or if he was willing to hire less skilled white workers because he prefers the color of their skin, he would be at an economic disadvantage in a competitive market place where other companies could afford to offer cheaper services or products than him because they were not practicing racism in their hiring practices.
In other words, if a company wants to maximize their profits and be as competitive as possible, they will practice colorblindness -- the profit seeking businessman is a minority's greatest ally against economic injustice. To borrow an example from Professor Reisman1 let us look at a small company with just 10 people. If the owner is racist enough that he is willing to pay whites just 25 cents more per hour to work for him. In a forty-hour work week, with fifty work-weeks in a year, he will lose $5,000 (since .25 X 40 X 50 X 10 = $5,000) As Reisman notes, this employer's racism is costing him a new small car each year.
Finally, it should be known how the mixed economy under which all minorities live serves to stifle their economic equality. For example, all antiprofit legislation, which either limits the amount of profit a business can make or taxes profits so heavily as to make it a burden to try and attain them, impedes minority advancement because employers are free to practice irrational discrimination without fear of economic punishment. Secondly, minimum-wage laws artificially raise wage rates (see above) and cause employers to hire less workers, the impact of which is always felt on the poorer and least educated, of which blacks comprise a disproportionate amount. Also, the welfare system allows minorities who could otherwise get jobs to live off of welfare payments. These payments serve to stagnate the ability of the recipient because even if the welfare income is higher paying than a job would be, in the long run the recipient does not acquire the abilities that could promote him to better jobs in the future. Furthermore, the self-perpetuating cycle of the welfare system (see below) leads many minorities to a life of dependence and self-abasement. Finally , it should be noted that anti-discrimination laws which force employers to hire minorities serve only to increase tension between races and do not achieve any permanent form of stability.
Before answering this question I would like to point out that the welfare state represents a gross injustice and massive violation of individual rights. Simply described, it is a system in which the government steals money from most of citizens to give it to others on the basis the those with more wealth have a duty to serve those with less. There is nothing that can justify the violation of rights, especially not the "need" of the recipients of grand scale theft.
Like all false theories, the welfare state crumbles when put into practice. The goal of the welfare system is to help certain citizens when they "need" financial help in order for them to become productive members of society. But running counter to its intentions, welfare actually helps to create the problem it is supposed to help by literally creating a class of dependents. These dependents are people whose concept of self-responsibility has been stifled because they can easily look upon the government to take care of them just as their parents did (or were supposed to) when they were young. Once again, it is the government that is the source of the problem, in this case the large number of poor people in America, not capitalism.
If one were really concerned with poverty they should realize that capitalism has raised man's standard of living, created more opportunities for economic advancement, and done more to increase human happiness than any other system ever could. Without the welfare state, those unfortunate individuals who could not support themselves would have to rely on private charities. In capitalist society, however, these individuals are necessarily a small minority and have always been in more capitalistic periods throughout history.
[Note: no principled advocate of capitalism could morally justify "over night" abolition of the welfare state, a quick down sizing would be the only appropriate action]
The key to stopping unnecessary pollution is the hallmark of capitalism: private property. The reason that it is so easy to pollute rivers, oceans, the air, and land is because they are publicly owned. Since public property partially belongs to everyone, no one person takes care of it, and property with no real owner is easy to pollute. However, if all property was privately owned, then no one could dump in a river that they owned only a section of because the waste would drift into another person's part of the river, thus violating their property rights. The same applies to beaches and oceans. If the ocean was divided up into privately owned portions, then no one could pollute their part of the ocean without the pollution spilling into someone else's property. Also, if the beaches and parks were privately owned and the owner charged money for people to use his land, then it would be in his economic self-interest to keep his beach or park clean and pollution free so people would frequent his property more than his competitors.
It is a clear violation of rights for the state to force children to go to school with or without their parents' consent to learn ideas that their parents may or may not approve of (today's "private" schools are not truly private because they must meet the educational standards set by the state). Government schooling is bad in theory because it assumes that a proper function of the state is to provide education for some of its citizens at the expense of others -- it is not. The state must never enter the realm of teaching ideas because then it becomes nothing more than a tool for social engineering. Teaching is necessarily selective, therefore it should be up to the parents to send their children to schools who teach in the manner they deem best. It should not be up to pressure-group influenced politicians to decide the content of a child's education, and therefore his mind.
The sorry state of American education, which has become nothing but a vast bureaucracy, pays tribute to the fact that the government cannot provide quality education (or anything else) to its citizens. For example public schools actually consider teaching, and sometimes do, that the Bible's "creation" myth has equal scientific validity with the theory of natural selection. The solution to give America's disastrous educational system is to give the market free reign on education and end the state sponsored monopoly on education. If the government can't even deliver mail on time, then how are they supposed to be expected to properly educate people?
In an industrial society there is a very real economic need for education. If educational institutions had to compete for the value that is attached to the diplomas the offer, educational standards would necessarily rise. Like all goods and services provided in the free market, quality education would become a service that would available to nearly all of the population because of its high demand. Just look at what a (basically) free market has done to the computer industry, with cheaper and more powerful computers being made every few months, just imagine what it could for education. Schools would be competing with each other to provide the best education at the lowest price to all consumers.
There is a concluding principle that should be realized: The free market can do anything cheaper and with higher quality than the government can, except provide protection from force. The state necessitates bureaucracy and waste because inherent in all government operation is a grave split between service and payment which means there is little or no incentive for government to ever improve the quality of its services.
No, minimum wage laws violate the freedom of two people to enter into a voluntary association with each other and actually end up hurting those who they are intended to protect, the worker.
Minimum wage laws are supposed to stop employers from offering wages that are considered to be "too low." In an attempt to protect workers, minimum wage laws actually turn out to hurt workers by causing unemployment. For example, if the minimum wage is $4.25/hr, then it means that anyone who's labor is worth less than $4.25/hr cannot get a job. This can be easier understood if looked at from the point of a worker who has labor to sell. If an unskilled worker (who is usually more desperate for a job than a higher skilled worker) only has labor to sell that is worth $3.00/hr, then a minimum wage of $4.25/hr will stop him from selling his labor and he will not be able to get a job. If an employer is forced to hire workers at a rate above what their labor is actually worth (as determined by the labor market) he will necessarily hire less workers -- causing unemployment, or raise prices -- shifting the burden onto the consumer. Furthermore, minimum wage laws stifle economic advancement because it is usually the poor who would be willing to work for less than the minimum wage, and if they cannot find jobs, they cannot better themselves.
Regulation of medical products is an attempt by the government to intervene in the free choices of individuals regarding what medical products they should consider "safe." Since 1938 the U.S. Food and Drug Administration has decided what medical goods may be sold in the United States. The FDA requires that every new medical product must establish its safety through often time consuming and unnecessary testing procedures. But does the FDA actually save lives? No. It is possible that the FDA may stop some dangerous drugs from coming on the market (assuming that they would have been bought any ways), but the number of lives lost due to delays of life-saving drugs far outweighs any lives that might have been saved. For example, the FDA kept beta blockers off the market for ten years, and estimates show that they could have saved about 10,000 lives a year. This means that the FDA is responsible for more deaths than the Korean and Vietnam Wars combined.(!) In a free market, it would be in the economic self-interest of a medical product or drug company to only release safe products so that they would earn the trust of the public and they buy their products more often.
No. This question can be answered by recognizing a fundamental economic fact: Wealth is not a static quantity, it is created.
Many people falsely believe that a capitalist society is much like the animal kingdom. It is believed that humans compete through the marketplace for a static quantity of wealth in which the economic gain of one person is necessarily to the economic detriment of another. This view leads one to logically conclude that those who are wealthy became so simply by depriving others who are not as wealthy. Yet this "analogy" with the animal kingdom is not only false, but it is actually the precise opposite manner in which a capitalist society operates.
Under a division of labor capitalist society, wealth is created. By rearranging the physical world in such a way so as values which did not previously exist now do, wealth is created. For example, if I put two potatoes in the ground and cultivate five, three new potatoes have been created not only not at the expense of anyone else, but actually to the benefit of others who want a potato and are willing to trade for it. Thus, under capitalism, one man's economic gain is another man's economic gain.
This is why doctrines like Social Darwinism do not apply to the realm of human affairs. Non-human animals compete for a given quantity of recourses, and only those who are best suited to obtain certain values, such as food and safety from predators, will survive. This method of survival, however, does not apply to human beings. If it did, human population would not have increased by 300% since 1900. Thanks to capitalism and the division of labor enough wealth has been created for even the most ignorant and inept person to be able to live. This economic principle has been easier to grasp since the industrial revolution, which created a level of material abundance on earth that no Pope, Czar, Pharaoh, or King could have even dreamt of (let alone equaled) in previous times.
see Reisman, George. Capitalism: The Cure for Racism. P.5