In defence of capitalism

Winston Churchill gave us: “It has been said that democracy is the worst form of government except all the others that have been tried.” The same principle should be applied in defending capitalism. It is easy to find fault – but in contrast to any other system that has been tried it IS an outstanding success.

At the heart of economics is the problem of achieving the maximum benefit for all given the resources available. Even in the most simple economy – the hunter-gather – issues arise about the distribution of outcome of the hunt: who gets to take what and why. Once agriculture comes along, issues of land ownership rapidly emerge: one of Jesus’ parables is about tenants who, having benefited from the landowner’s planting of a vineyard, refuse to pay him any rent. Mt 21:33-41

Output in an economy grows when the inputs are more productive. To make them more productive, investment is necessary; the core distinction between capitalism and socialism is who provides that investment and thus who decides what projects to invest in. Capitalism allows individuals to take the risks, reap the rewards and thus benefit society. Socialism argues that the state knows best and that a monopoly supplier will be more efficient than the creative destruction of capitalism.

The emergence of Aldi and Lidl on the British retail scene over the past 20 years demonstrates the advantage of capitalism; by offering a very different business model of limited choice and own brands, they offer shoppers the choice of high quality produce at remarkably low prices. When Aldi first opened here in Manchester offering sliced white bread at 25p in marked contrast to the 53p that most supermarkets stuck at; it forced several to match it… The effect is to devalue the brands which were forcing everyone to pay more than they needed – a form of exploitation that derives from the need for information. It is the lack of information, creating uncertainty, that makes building an economy problematic; is there really a demand for this particular widget at the price I will be offering it after I’ve invested to build this factory.

The internet is a clear advert for capitalism; as well as the emergence of totally unexpected services such as Facebook, Twitter and Skype, the competitive pressures between Internet Explorer and Firefox, Google and Bing, Apple and the world, means that us consumers get a rapidly improving experience. The effect of competition is to make it more likely that the benefits of progress are shared with the consumer as prices are competed down when technology offers easier ways to do the same thing.

Is capitalism perfect? Of course not. The temptation for incumbents to act monopolistically, preventing the emergence of competition, is huge; that noone from Microsoft went to prison for their destruction of Netscape remains a matter of regret. That bankers play the system likewise is

painful; the temptation to cut corners (e.g. fly tipping) is always there. Even the recent pin up for capitalism, the 15yo who made £14,000 selling sweets to his school mates, achieves it because he is ignoring his school’s discouragement of junk food. There need to be rules, which are strongly enforced. But the challenge is to offer a serious alternative, given the demonstrable failure of both centrally planned State Capitalism (USSR, China) and the Licence Raj of India to produce falls in poverty; by contrast the past 25 years of freer markets have seen hundreds of millions raised from poverty as those economies have grown at far higher rates.

So: capitalism is the least worst option; it’s a dangerous beast but does provide major benefits for most of the population most of the time; fantasising that there is a obvious viable alternative is a mistake – though we do well to criticise when things go wrong, we need to recognise that as a system capitalism has bought us many benefits.

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