Behavioral economists have proven that humans are irrational. All market economics is predicated on two assumptions that are false:
1- Humans are rational economic actors
2- Market pricing accurately reflects the values people place on goods and services
First, the inability to replicate behavioral economists’ findings has largely discredited the field.
Second, trying to decide what’s “rational” is tricky. We tend to think that someone is acting rationally if their actions help them achieve their goals, and that they’re acting irrationally if their actions cause them to fail. But the observer may not know or completely understand the actor’s goals. Or the observer may have information that the actor doesn’t have. If the actor has mistaken beliefs, he may be acting in ways that – if his beliefs were true – would be logical.
I’m skeptical of claims that people are generally irrational. If that were true, then humanity could not have survived. Assuming the theory of evolution is correct, people must have acted rationally more often than not. And “more often than not” is good enough for progress to occur and for the two assumptions of market economics to work more often than not.
Capitalist economies are subject to bank runs, panics, and recessions.
From early in the 19th Century through the 1990s, many U.S. states prohibited branch banking. The result was thousands of small banks with undiversified loan portfolios at the mercy of local economies. Banks routinely collapsed when crops failed, produce prices fell, or large companies went bankrupt. This was not a failure of the free market but of government regulation.
Virtually every recession and depression in history was preceded by an inflationary boom. Governments cause inflation by debasing the currency – either by mixing base metals with the gold and silver in the nation’s coinage or by resorting to the printing press. The injection of new money into an economy creates a temporary boom, which inevitably turns into a bust when the flow of new money stops or slows.
Capitalism puts economics ahead of a clean environment.
An improving economy and a cleaner environment go hand in hand. A clean environment is a “luxury good” that poor people typically can’t afford.
The United States and Western Europe have restored the environment over the last half century as they became wealthier. The Thames River, for example, is no longer the open sewer that it was in Shakespeare’s time. London’s “fog” and Pittsburgh’s smoke-filled skies are things of the past.
By contrast, pollution in places like Venezuela, China, Iran, Cuba, and North Korea is far worse than in the west.
A key difference between capitalist and socialist countries is respect for property rights. As far back as Aristotle, people recognized that, “men pay most attention to what is their own; they care less for what is common; or at any rate they care for it only to the extent to which each is individually concerned.” The phrase “tragedy of the commons” refers to the tendency for unowned or communally owned resources to be overused and abused.
The whole point of socialism is to turn everything into a “commons.” The results have been horrific.
Capitalism is racist.
Free enterprise makes discrimination costly. For example, southern bus companies opposed Jim Crow laws that required blacks to sit in the back of their vehicles. Angering customers is bad for business as is having to leave seats unfilled when there are too few customers of the “right” color.
Child labor is a feature of Capitalism.
Throughout most of human history, child labor wasn’t a “problem,” it was simply what children had to do to survive. Only when capitalism magnified the ability of one person to produce enough to support a family was child labor no longer a necessity.
Child labor laws weren’t enacted in the United States until they were largely unnecessary because relatively few children worked. When similar laws were passed in countries where productivity had not yet risen sufficiently, children continued to work because the only other option was starvation. Unfortunately, with no recourse to the law, they were exploited far worse than before.
Capitalism oppresses women.
Capitalism liberated women. Women are “second-class citizens” in societies in which possessing brute strength is a matter of life and death. This reality wasn’t changed by waving banners in street demonstrations. It was changed by the vast gains in productivity brought by the Industrial and Information Ages. Now that free market innovation has made brains more important than brawn, women are more than able to compete with men.
Richard Fulmer worked as a mechanical engineer and a systems analyst in industry. He is now retired and does free-lance writing. He has published some fifty articles and book reviews in free market magazines and blogs. With Robert L. Bradley Jr., Richard wrote the book, Energy: The Master Resource.
READER COMMENTS
Jon Murphy
Jul 19 2022 at 10:11am
To emphasize your point, I think it’s crucial to note that capitalism encourages a clean environment, both through the mechanism that you discuss (making people wealthier), but also fostering innovation through the profit motive. To the extent that pollution and other externalities are a cost, that implies there are also profit opportunities if one can reduce that cost.
Just to take the previous COVID-19 pandemic as an example: disease spread has an externality involved. Many places were incentivized through the profit motive to reduce that externality even before government regulations ordered it (eg putting one-way lanes in store aisles, requiring masks to shop, various barriers between shoppers and employees, etc). Additionally, many firms stepped in to provide hand sanitizer, masks, or other items to overcome or internalize the externality. In fact, in many cases government regulations actually made the externality worse.
We see lots of innovations all the time whose goals are to reduce externalities. And those companies have made lots of money in the process.
Capitalism encourages a cleaner and less wasteful world.
Monte
Jul 19 2022 at 4:52pm
Au contraire! Racism is a foundational tenet of Marxism, advanced by Engels et al through “scientific socialism.” Those who would stand in the way of the communist revolution must be exterminated:
Jim Glass
Jul 19 2022 at 7:38pm
I find that those skeptical of capitalism, like most people, typically are more impressed by true stories than lecture points. E.g.:
Racism – Sports competition crushes racism in Alabama.
Child labor – Two cheers for sweatshops!
And slavery?! Everybody’s all about slavery these days. Well, through all human history slavery was endemic, practiced everywhere — in China, Greece, Rome, in Bible tales and Arab lands, Africa (who sold slaves to the western slave traders?), by the native people of North and South America, everywhere.
Over 2,300 years ago Aristotle said “Slavery will exist until the time comes when statues do the work of men, looms fly to-and-fro self-powered, and lyres play by themselves ” (That’s the gist.)
And he was exactly right! With the Industrial Revolution that time arrived. Look at animated maps of the spread of the capitalism and the end of slavery from then, across time and place … what a coincidence! After 300,000 years of human existence those two things happened at just the same time and place. What were the odds? Slavery was the disease and capitalism was the cure.
So when people tell me that “capitalism” is bad, and cite the other items on the list as proof, I never argue the details.
I just ask, “Compared to what? I’m always eager to learn! Show me the other system that in real life exterminated slavery … increased wealth for the masses so much that the poor of today are richer than the kings of old … tripled human life expectancy at birth from 25 to 75+ … freed women from home duties with capitalistic mercantile appliances so they could become educated & earn their own income & control their own bodies, etc. What is the name of that other better system and where is it? Teach me!”
Then I let them bluster. Occasionally one admits, “Yes, capitalism is by far the best thing that has ever happened to the human race, but it is not perfect”, and we have a friendly conversation. But most don’t admit anything like that because, cognitive dissonance. When they don’t and go “but, but, but”, I just leave ’em alone, frustrated.
Anders
Jul 20 2022 at 2:32pm
While I have stayed clear of stark claims like that, just like anyone taking flat earth or intelligent design seriously, what strikes me is that almost every example of the evils of capitalism brought forth by intellectual luminaries like Stiglitz and Piketty are examples plagued by the many evils that subsidize the latter part of a system of profit and loss. Policies inflated house prices as the financial system was rapidly liberalised, creating opportunities whose downside enjoyed implicit subsidies aplenty such as fdic, incentives for rating houses to underestimate risk, and a web so complex too big too fail was a real concern. Reducing fossil fuel production and subsidising renewable energies have created massive windfalls in both sectors with no tangible effect nor comprehensive solution in sight. And most regulation ends up benefiting the incumbent by imposing costs of compliance it is best set up to manage.
Of course, capitalists are going to jump at such rent opportunities. Or shareholders will replace them with someone who will. Rather, should we not ask ourselves what exactly it is about the mobile phone sector that has made more computing power than the world had half a century ago available for as little as 50 usd that is missing in, say, the health sector? Surely that would be the place to start. What is standing in the way is as simple as the fact that i agree with all the faults Stiglitz pointed out, but my solution is more capitalism, not less.
Jim Glass
Jul 20 2022 at 4:00pm
Capitalist economies are subject to bank runs, panics, and recessions.
Again, compared to what? The Roman Empire had these things. The only way not to have them or equivalent problems is to not have an economy – which hardly seems an endorsement of any alternative to capitalism.
But, that said…
Virtually every recession and depression in history was preceded by an inflationary boom. Governments cause inflation by debasing the currency…
Well, there were eight recessions from 1869 through 1899. [NBER] None of them were preceded by inflation, much less an inflationary boom, as the entire period was deflationary.
The price index 1867-99 dropped 40%, with only one year of >0% inflation. [Minn. Fed] This was the gold standard era with the dollar pegged at $20.67 per one once of gold. No ‘debasing the currency’ then.
Recessions happen when the demand for money unexpectedly rises relative to demand for goods and services. As people now want more money and less of everything else the result is what in olden times was called a “general glut”, what Marxists call “overproduction”, and what Detroit calls “unsold cars on the lot”.
In simplest terms the price of money unexpectedly rises in terms of what money buys. What causes an increase in the price of anything? Either the quantity supplied falls OR the quantity demanded increases. Just from the price change itself, one can’t tell. “Never reason from a price increase”, didn’t somebody smart say that?
So what causes this sudden increase in the price of money that leads to the general glut? It could be a sudden restriction on the supply of money, as when a central banks yanks back on the money supply to end excessive inflation – as per 1981. Or it could be a sudden increase in the demand for money – as when there is no central bank to yank back and no inflation. One can’t tell just from the change in the price of money in terms of goods and services, or “the glut”, itself.
What could cause a sudden increase in the demand for money? Well, lots of things! In the 21st Century as in the 19th.
Richard W Fulmer
Jul 20 2022 at 6:13pm
What were M1 and M2 doing prior to the 1869-1899 recessions? I was using the word “inflationary” in its original sense of expanded money supply. Scott Sumner has convinced me that that ship has sailed, and inflation means a sustained period of rising price indices. So, did the money supply expand prior to those eight recessions?
robc
Jul 22 2022 at 5:25pm
Meh, I still stand behind the original definition.
Jim Glass
Jul 22 2022 at 9:31pm
What were M1 and M2 doing prior to the 1869-1899 recessions? I was using the word “inflationary” in its original sense of expanded money supply.
M1 grew an average 2%, 1867-1899, and M2 an average 5%, the Fed tells us. If you want the year-by-year, look it up for yourself (table 3) as one should before making such strong claims.
Note well: If you decide to conclude their numbers rocketed up and down to cause eight recessions in 30 years — with no Fed, and on the classical gold standard, entirely via free market activity — you’ll have made the socialists’ case that free markets consistently wreck themselves, and Rothbard’s spirit, wherever it may be residing, will not be happy.
Scott Sumner has convinced me that that ship has sailed,
Yes, long ago. That usage dates back to the days of studying the aether, literally. If that’s been your presumption you maybe should widen your reading list. E.g., to Professor Sumner’s post right here “What causes recessions?“…
(I knew I’d read that somewhere!) … and the archive of his personal blog at themoneyillusion.com, which is an entire education by itself.
Richard W Fulmer
Jul 23 2022 at 6:10am
So, M1 grew 60% in thirty years. Compounded annually, it’s over 80%. Either way, that’s a lot of new money.
Sooner or later, new money ends up in banks, which lend it out. So, interest-sensitive industries tend to get the new money first. Today, that typically means housing, automobiles, and capital expansion. Between 1869 and 1899, that often meant railroads. Guess which sector of the economy featured heavily in, for example, the Panics of 1873 and 1893?
There was no Fed, but there was the Treasury Department, which was fully capable of printing money as it did during the Civil War.
Yes, we were on the gold standard, but (a) the rules weren’t always followed, and (b) discoveries of new gold deposits (such as the Alaskan gold rush of 1896-1899) can result in inflation.
Jim Glass
Jul 24 2022 at 11:59pm
So, M1 grew 60% in thirty years. Compounded annually, it’s over 80%. Either way, that’s a lot of new money.
While GDP grew 140%? Ye olde Austrians taught you that there’s a “lot of money” in an economy running deflation at 2%/year?
You didn’t give the year-by-year numbers you requested. They weren’t convincing?
Sooner or later, new money ends up in banks, which lend it out. So, interest-sensitive industries tend to get the new money first…
That was one of the stories discussed back when talk of the aether was still popular. The conversation has moved on, considerably. See Prof Sumner’s archive at http://www.themoneyillusion.com.
Between 1869 and 1899, that often meant railroads. Guess which sector of the economy featured heavily in, for example, the Panics of 1873 and 1893?
You should check facts before presenting conclusions…
There I very clearly see a sudden increase in demand for money causing a recession, driven by events in Europe — European investors who needed money cashing in their investments here. I don’t see any “money growth ‘inflationarily’ slower than GDP growth suddenly causes recession via ???”
There was no Fed, but there was the Treasury Department
Which no doubt caused market crashes in Europe.
Yes, we were on the gold standard, but (a) the rules weren’t always followed, and (b) discoveries of new gold deposits (such as the Alaskan gold rush of 1896-1899) can result in inflation.
Producing 80% M1 growth / 140% GDP growth. You’re grasping at straws that aren’t there.
In law school they teach, “If you don’t know the other side’s arguments you don’t even know your own.” Austrian economics isn’t a church, and if it were, Rothbard of all people wouldn’t be it’s infallible Pope. You can learn the business cycle analysis of all the other economists in the world without putting your soul at risk. Eg., First try explaining, to Prof Sumner’s satisfaction, how rising demand for money can cause a recession, then explain to us why that couldn’t have happened in 1873.
And as to the real reason for the boom-bust railroad industry of the 1800s, Vanderbilt was Titan of railroads, so read that book. But here’s a hint: When an industry has huge up-front capital costs then low operating costs, competitive marginal cost pricing prevents the capital costs from being recovered. So these firms are natural monopolies and when they compete head-to-head somebody goes brutally broke. See: Software, fiberoptic cable, “the airline industry has failed to earn its cost of capital in every year of its existence“… Quantity of money has nothing to do with it.
Richard W Fulmer
Jul 25 2022 at 6:50pm
On the history of the 1873 panic… Economists are still debating the cause; likely there were many causes – monetary expansion and over-investment in U.S. railroads (both foreign and domestic investment) among them.
In a free market economy with increasing productivity, prices should be dropping. Like Friedman, you see stable price indices and think that all is well. But your indices miss things like rising stock prices. They also miss the fact that some prices are rising sharply, others are stable, while still others are dropping. They miss the reallocation of resources caused by the introduction of new money.
Richard W Fulmer
Jul 25 2022 at 9:12pm
There was a lot of stuff going on in 1873 – not least the Coinage Act of 1873, which effectively ended the country’s bi-metal (gold-silver) standard and pushed it into a gold-only standard. One result was a sudden drop in the nation’s money supply.
Jim Glass
Jul 22 2022 at 9:57pm
Also, trying to be friendly, not patronizing, I’d suggest Violence and Social Orders, by the Nobelist Robert Fogel & Co, giving a very different view of where states come from, why, and what they do — shortish (200 pp), remarkably accessible for the quality of the analysis, full of historical details, it was really eye-opening for me …. and the Pulitzer-winning bio of Vanderbilt, The First Tycoon.
I’ll bet you like Vanderbilt! He made his fortune by breaking government-created monopolies, first and foremost — his NY ferry was only the start. He was the first to be called a “Robber Baron”, by the NY Times in 1860, because he “robbed” state-created monopolies. In the editorial that applied the term to him The Times damned him for…
… the “legitimate” being the state-sold monopolies everywhere. “Robber Baron”, there’s a term that’s reversed its meaning in the popular mind!
The book covers the whole era of unbridled cutthroat-cowboy-crooked-crony capitalism, and its great personalities and scandals — like Fisk & Gould & the brother-in-law of President Grant in their attempt to corner the gold market, which near crashed the entire economy … the Erie RR War … Credit Mobilier … the epic “double corner”, and all the infamous rest.
Vanderbilt strode through it all like Warren Buffett with a shotgun and a bullwhip. “I don’t mind having to buy a legislature, but gentlemen who are once bought stay bought.” Thusly the great capitalists created the country by breaking state monopiles, and overcoming shamelessly corrupt politicians, crooked business-looting competitors, and markets they rigged against each other.
If you aren’t familiar with all the great naughtiness of the Republic’s early days you really should explore it – if only for the entertainment value. 🙂
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