Free-Market Incentives Can Right Capitalism's Wrongs

Tuesday, 26 Apr 2011 10:23 AM

By Herbert London

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Writing in the pages of the Chronicle of Higher Education, Paul Mattick, a professor at Adelphi University, attempts to explain capitalism’s failure in an article entitled, “Capitalism’s Dismal Future.” Presumably its future is a continuation of its past.

As Professor Mattick notes, “Capitalism has been around for so many generations now, proving its vitality by displacing or absorbing all other social systems around the globe, that it seems a part of nature, irreplaceable. But its historical limits are visible in its inability to meet the ecological challenges it has produced.”

Alas, even if one accepts some of the exaggerated claims of ecological degradation, the evidence does not suggest that capitalism alone is responsible for the problem.

China, which has a state-controlled economic system, has environmental problems that surpass any in the United States and Europe. Moreover, a free market offers profit as an incentive to address the problem Professor Mattick identifies.

Mattick’s overheated rhetoric does not stop there. He also asserts that depression and recoveries are “a recurrent feature” of the capitalist economy.

As I see it, capitalism has the capacity to create wealth and put it at risk as well, as opposed to command economies which distribute limited wealth and keep their citizens in a permanent state of impoverishment.

The choices are not between a self-equilibrating system and the Keynesian concept of government manipulation as Mattick indicates, but rather an imperfect system of private incentives and a government-dominated system for the allocation of resources. History has already indicated that the former is to be preferred to the latter, despite Professor Mattick’s neo-Marxist interpretation.

Despite the assertion that capitalism is trapped in a cycle of its own creation, it is clear that capitalism is sufficiently flexible to address the problems the system has created.

For example, Mattick makes reference to the poor the capitalist system leaves behind. Yet it is clear that the enormous wealth capitalism produces has allowed for government largess for the poor in the form of welfare provisions.

In fact, one could make the argument that government interference very often is the factor that imperils capitalist success. The guarantees provided by Fannie Mae and Freddie Mac helped to create a real estate bubble that ultimately undermined the housing market.

To cite another example, the “carry trade” that gives banks the opportunity to borrow at near-zero interest and invest in 30-year Treasurys at 3 percent has restored solvency in the banks, but has not encouraged loans to entrepreneurs or a reasonable return on the savings accounts of average Americans.

These conditions suggest something that might be described as “crony capitalism” instead of mere capitalism.

However, seeking advantage or privilege, while one dimension of capitalism’s perversion, is a constant — indeed a permanent — feature of command economies.

Corruption in the form of bribery is the elixir that keeps the Chinese economy going and in the former Soviet Union, payoffs to party officials were the coin of the realm.

Yes, capitalism is fragile, in large part because people are fragile. But it is the most adaptable economic system the world has known.

The free market, the essence of capitalism, relies on the aspiration and desire of the people aggregated into something called demand. That demand quotient changes as conditions in the society change, including everything from natural disasters to the availability of fossil fuels.

Professor Mattlick has rehearsed a theme that coruscates through Western Civilization, a utopia of full employment, the fair distribution of resources, responsiveness to human needs (usually as some elitist sees it) and equality. But to the dismay of many, such a system does not exist and cannot exist.

What we do have is a capitalism that is robust, with all its flaws, and sufficiently adaptable to address the most basic human desires. That is not half bad and certainly does not presage a “dismal future.”

Herbert London is president of the Hudson Institute and author of the book "Decline and Revival in Higher Education" (Transaction Publishers).




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