In the recent months, capitalism has received a lot of criticism from a number of sources. The actions and words of politicians and central bankers have only exacerbated the situation. Some people have even blamed capitalism for the current unfolding financial crisis. To refute these claims, I have written a series of articles to explain the basics of why capitalism is good for society, why the current system is not based on sound money, why the current economic system failed and why we are headed for a depression.

Increase in living standards

Thanks to the capitalist system, we have witnessed an increase in living standards unrivalled by any other in human history. Before the industrial revolution, there were only the rich and the poor. Things have changed a lot since that time and you don’t have to be rich to afford housing, food, medicine, transportation and a vacation every now and then. The Green Revolution, led by the increased production of fertilizers and other agricultural chemicals, increased agricultural production, which increased the world population, which, in turn, gave birth to new industries that would have been unimaginable before.

A larger population means there is a bigger market, hence economies of scale were born. Economies of scale make everything from toothpaste and toilet paper to household appliances and cars affordable to the average person. This is only possible in a market where the producers are rewarded for their innovation. The fact that they produce better and cheaper goods only because they are interested in bigger profits is not of significant importance. Making a profit is not inherently bad and should not be viewed as such, because it is not only the companies that aim to increase their utility in life, but also the people who work for these companies. Money is the only thing that keep these companies in business, whereas in a planned economy it is the state that keeps the companies afloat. This means less innovation, more inefficiencies, more job injuries, lower quality standards et cetera, all due to no competition between companies.

Trade

“Productivity is what makes us rich. Specialization is what makes us productive. Trade allows to specialize.”[1]

These are the words of Charles Wheelan, from the book “Naked Economics” (a superb read). The point he is trying to make is pretty clear – we would not have the kind of specialization witnessed today without global trade because everyone would be growing wheat, weaving baskets and repairing their homes. The system is not perfect, illustrated by the fact that a large percentage of people still live below the poverty line, but I am not saying it is. Child workers in China and Thailand are clearly something we should try to change but not through boycotts and trade barriers. Not so long ago, Victorian England was using child labor and the only thing that led to the de facto abolishment of this, was economic development. It was economically more reasonable to use child labor in factories and have adults work on more complicated things, until the development and implementation of better machines that could replace child labor. Once again, I lend a helping hand from Mr. Wheelan:

“They are paid very little by Western standards because they accomplish very little by Western standards. If foreign companies are forced to raise wages significantly, then there is no longer any advantage to having plants in the developing world. Firms will replace workers with machines, or they will move someplace where higher productivity justifies higher wages. If sweatshops paid decent wages by Western standards, they would not exist. There is nothing pretty about people willing to work long hours in bad conditions for several dollars a day, but let’s not confuse cause and effect. Sweatshops do not cause low wages in poor countries; rather, they pay low wages because those countries offer workers so few other alternatives. Protesters might as well hurl rocks and bottles at hospitals because so many sick people are suffering there.”[2]

When you take a look at the facts, you will see that for a rural family in China, it is more sensible to send a child to work rather than send him to school, which bring with it additional expenses. What we are witnessing here is an economy in transition and the children are just inevitable victims of it. Over time, as their economy develops, people will have better access to education, which will lead to more skilled workers. Obviously, a person with a diploma will not be sowing together jeans; but maybe he will be designing a machines that would do the work better than humans or perhaps find a cure for cancer. The thing that keeps workers in sweatshops is not the mean capitalist, the oblivious consumer or the central planner; it is, rather, the combined effect of lack of skills and the need to earn income.

The price is right

The sensationalist news media is always on the hunt for market speculators because they make a great story for the masses, who usually do not understand basic economics. During the summer of 2008, crude oil prices were pushed to $147 a barrel, a price that was not sustainable, witnessed by the precipitous fall afterwards. The only reason the price was driven so high was the excess capital on the marketplace, which led investors and speculators to allocate their assets in commodities and stocks. One could argue that governmental price caps would keep these wild fluctuations from happening but this would completely miss the whole point of free markets. The idea behind a free, capitalist market is that companies will compete to offer the best product and the lowest price. Short-term fluctuations will occur every now and then due to the increased supply of goods, or, in this case, capital. If the state were to keep a lid on the price of goods and services, companies would have no interest in research and development and would halt new projects as soon as the market goes against them. When the price of producing something is bigger that the government mandated sale price, there would be no reason for the company to produce anything. It would simply seize to exist! In a free market, companies are allowed to adjust prices according to production costs, which will lead to long-term price stability because higher prices draw more investment, which makes for increased supply.

Capitalism created freedom

Capitalism has led to the development of highly specialized sciences, which the modern world is built upon. It has freed the human population from having to spend day after day on the field, growing food. This has led to the creation of true freedom in which a person is free to choose a lifestyle and occupation that best suits his needs and aspirations.

“Under capitalism, each person’s life is his or her own, not the property of the state, the public nor the “common good.” As capitalists, we are neither slaves nor masters, but traders whose relationships are voluntary and to mutual benefit. And while we are free to pursue happiness, we aren’t guaranteed to find it nor permitted to sacrifice other individual’s rights in order to obtain it.”[3]

Compare a capitalist society with a state planned society and you will see that capitalism is not about limits, it’s about choices. You are free to pursue your dreams, whatever they might be. There are so many success stories out there and you could be one of them. Choices require decisions and commitment, which is one of the reason so many people are unhappy with capitalism. Society has changed so much and people have not been able to keep up with it, they are confused and want someone to make those decisions for them. People of all races and nationalities want stability in life and in work. The rapid development of technology means that millions of people who used to do the work of machines have had to readjust their whole lives. But this should not be viewed as something inevitably bad, rather, it should be taken as a chance to start over, to learn new skills and develop into a better person for the good of society, but, more importantly, for the good of oneself. Learning new skills is not only about getting a better job, it is about pushing the limits of personal development, of finding out who you truly are and what you want from life. This allows you to take greater pleasure from your work and you life.

References
1. Charles Wheelan, “Naked Economics”, p 191
2. Charles Wheelan, “Naked Economics”, pp 201-202
3. “In Defense of Capitalism” by Jonathan Hoenig, Smart Money

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