In Defense of Capitalism (or "Why Karl is Wrong")

I had dinner last night with some friends, one of whom we'll call "Karl." (I've given him the pseudonym because the allusion amuses me. If you don't recognize the allusion, perhaps it's best if you sit this one out, and wait for the next blog entry.)

[N.B. IF WHILE READING THIS YOU IDENTIFY YOURSELF AS "KARL," I AM WARNING YOU NOW, KARL, NOT TO CONTINUE ANY FURTHER. YOU MUST DESIST IMMEDIATELY AND CLOSE YOUR BROWSER. YOU MAY BE OFFENDED AT MY ANALYSIS OF YOUR ARGUMENTS, AND BECAUSE I HAVE PERSONALY RESOLVED NEVER TO RECOMMENCE THIS DEBATE WITH YOU, I DO NOT WANT TO HEAR WHATEVER REJOINDERS YOU MAY BE COOKING UP. MOREOVER, I CANNOT BE HELD LIABLE FOR ANY OFFENSE, INJURY, AND/OR PERSONAL SLIGHT YOU MAY INCUR AS A RESULT OF READING THIS, BECAUSE I AM WARNING YOU (FOR THE THIRD TIME), "KARL," THAT YOU SHOULD STOP READING NOW.]*

Karl, as it turns out, recently viewed a documentary entitled "Corporation," which claims that the corporation is legally recognized as an entity, or "individual." If the corporation's behavior were measured according to the standards we apply to individual people, it would display, according to Karl, "the characteristics of a psychopath." That is, the corporation looks out only for its own good, and is willing to promote its welfare ("the bottom line," as Karl puts it), at the expense of everyone else. It has regard for neither society at large, nor the environment, and will exploit either or both if the opportunity arises. Capitalism is evil, according to this line of reasoning, because it is based solely on self-interest, and thus, it delegates the cost of its activities to the environment, and to countries, societies, and individuals vulnerable to manipulation and marginalization. (But believe me, that is a considerably more articulate version of what was presented to me yesterday evening.)

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Let's take a step back, and define a couple things first. We'll start with rival school of capitalism, which as anyone sentient during the Cold War well knows is, communism. Because there are all sorts of communist variations (Lenninism, Stalinism, Maoism, Trotskyism, "Eurocommunism", &c), we'll try to focus on communism proper, that is communism according to Marx and his Manifesto. Unable to read the original German, I am forced once again to (what may be construed as) my unhealthy dependence on Wikipedia for information. According to Wikiped', the Communist Manifesto has 10 "planks":

1. Abolition of property in land and application of all rents of land to public purposes.
2. A heavy progressive or graduated income tax.
3. Abolition of all right of inheritance.
4. Confiscation of the property of all emigrants and rebels.
5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
6. Centralisation of the means of communication and transport in the hands of the State.
7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.
8. Equal liability of all to labour. Establishment of industrial armies, especially for agriculture.
9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.
10. Free education for all children in public schools. Abolition of children's factory labour in its present form. Combination of education with industrial production, &c., &c..

By ignoring planks ten (because I don't think it stands in opposition to capitalism as practiced in the majority of free markets) and nine (for the same reason, plus as economies develop, they tend to be much less dependent on agriculture as a share of the labor market or as a source of capital), we can sum up the communism by saying that the State owns all land and maintains a centrally planned economy, and that private property either ceases to exist, or is distributed more or less evenly among the populous.

So what is capitalism? There are even more variations of capitalism than of its rival school (due in no small measure to the fact that the former system has proved vastly more successful, thus eliciting more critical thought and experimentation), but Wikipedia [maybe I am becoming a Wiki slave...] provides a concise and easily understood summary: "Capitalism generally refers to an economic system in which the means of production are mostly privately owned and operated for profit, and in which distribution, production and pricing of goods and services are determined in a largely free market."
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First, Karl's argument is annoying because it sounds like not too much more than a parroting of the documentary, which itself sounded like reductionism at it's worst. In other words, it's a bad copy of an original which itself was poor to begin with. One cannot treat a corporation in all the ways that one treats an individual, primarily because a corporation by definition must be composed of several individuals, whereas an individual can only be "composed" of him- or her- self. In this sense, a corporation is more like a family. And how do families behave? They act in their best interest, making decisions that help them, and often hurt others in the process. A family looks out for its own well being, cares for its members, usually to the exclusion of caring for those outside the family. Does Karl consider families in general psychopathic?

Second, let's pick apart the idea that capitalism is "evil" because it promotes self-interest. First, it does not "promote" self-interest, although this is a clear reference to the ideas of Adam Smith, one of the founders of modern capitalist thought. Smith merely observed that when people do look out for their own good, in a capitalist system, they can subsequently stimulate the economy and help the poor; I doubt the same can be said of the competing ideology, but more on that later. Moreover, we need to face the realities of living in a post-lapsarian world, namely that people are, on the whole, selfish. To build a system that tries to ignore—or, worse, to deny—this fact is simply foolish. A capitalist system can use people's innate propensity for greed and selfishness for good, rather than trying to impose an alternate reality (i.e. that people are selfless and benevolent). Capitalism does not promote egotism; it simply presupposes that this condition already exists among humanity, and allows for that natural impulse to be channeled toward a positive end. IMO, any system that takes an ineluctable evil and utilizes it to lift millions out of poverty and double (sometimes treble) the life expectancy should be not be summarily dismissed as "evil."

Third, although this in itself may be a bit simplistic, let's take a pragmatic approach to weighing the relative good of a free market versus a command economy.^† I have assembled two kinds of data: 1) indices of economic liberalism, as measured by the Fraser Institute^‡; and 2) measures of per capita GDP, adjusted by PPP, assembled by the International Monetary Fund (IMF). On another (once again self-congratulatory) note, I think it's good that the data were culled from two separate sources to avoid the appearance that they had somehow been doctored to artificially imply a link between market freedom and the creation of wealth.^α There are countries listed in one set of data but not in the other, and these have been removed since the absence of data can neither confirm nor deny the link I am suggesting. Another notice: the per capita GDP figures included 181 countries, the economic freedom figures included 130 countries, the economic freedom final score was on a scale between a low of 0 and a high of 10. [Click on any of the charts to see them enlarged. Thanks again to Ben for engineering a method to put Excel® charts on my teeming brain.]

10 Wealthiest Countries, Xref Economic Freedom Percentile:

10 Most Economically Liberal Countries, Xref Wealth Percentile:

10 Poorest Nations, Xref Economic Freedom Percentile:

10 Least Economically Liberal Nations, Xref Wealth Percentile:

Okay, so this entry is getting a wee bit Ross Perot with all the charts and tedious digressions into facts and figures, but just remember: at one point in time, Mr. Perot was leading both Bill Clinton and George H.W. Bush in the polls (he was almost president!) (But don't worry, I won't start referring to my readers as "you people.") Anyway, because yes, I actually do have this much free time, I eliminated the data for all countries not in both the Fraser and IMF charts, plotted economic liberality on the X-axis and per capita GDP on the Y-axis, and asked Excel® to create a regression line and give me the coefficient of determination (R²), which came in at a decent 0.6349. Thinking I could do better, I eliminated seven outlying data points, re-plotted the points, and received an even better 0.7252! I'll be the first to admit that: 1) 0.7252 is not 0.9000, or even 0.800; and 2) the regression slope equation contains x², meaning that at some economic freedom level below 4.5, individual wealth is actually predicted to increase. These two points notwithstanding, given the enormous number of complex variables that affect per capita GDP, the primitive forms of statistical analysis available to me, and my very basic understanding of macroeconomics, 0.7252 is something of a minor miracle.
I am not unaware, however, that my magnificent coefficient of 0.7252 does not ultimately prove that capitalism is inherently a "better" system. (Maybe the only thing it really does show is that I truly do have too much leisure at my disposal.) Nonetheless, I think it provides weighty evidence that an increase in liberalism is correlated with an increase in personal wealth, which is a good thing.^β And in the end, I'm sure both Karl and "Karl" would rather be rich than poor.


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*For those of you prone to speculation, "Karl" is neither Alvin nor Shui.

^†Here is great potential for things to get quite hairy, potential to start down the dangerous path toward questions of axiological judgement. (E.g. "How exactly will we define 'good'?", "Is being rich inherently better than being poor?", or "How will we define and/or measure 'wealth and 'poverty'?") To save both the reader and myself the time, we will sidestep these labyrinthine questions [and, naturally, even more complex questions such as "Even if wealth by itself brings happiness, is such happiness diminished, cancelled, or even reversed by the associated income inequality and increases in crime levels?"] by noting a couple things: 1) It is true that several studies have demonstrated that more money does not, in fact, equal more happiness, and that over a certain point (in the US, approximately $50,000 per annum, according to Harvard psychology professor Daniel Gilbert on KPCC's AirTalk—scroll to 5:00 of the interview for the source) increased income appears to have no effect on perceived happiness; 2) while preferred standards of living, and the requisite incomes to sustain those standards, vary widely from person to person, and from country to country, I think we can all safely agree that it is very hard to be happy in abject poverty (that is, starving and/or homeless), and that everyone's standard is somewhere above abject poverty; 3) therefore the system that has the most power to lift up the most people out of total destitution with the fewest adverse side effects is best.

^‡Really, what the Fraser Institute has done is nothing short of astonishing. You and I are the beneficiaries of a single, final computation for each country, but this number was arrived at by myriad other calculations which included gov't consumption as a share of total consumption, gov't subsidies as a share of GDP, judiciary independence, protection of intellectual property, mean tariff rate, freedom to own foreign currency bank accounts, compliance costs of import/export, foreign ownership/investment restrictions, freedom to trade internationally, competition in domestic banking, interest rate regulation, "[l]abor force share with wages set by centralized collective bargaining," "labor market regulation," and a vast array of other categories of "economic freedom," which demonstrates, if nothing else, that the people of the Fraser Institute have invested huge sums of time and capital into arriving at what you might otherwise fear to be somewhat arbitrary estimations. I know I already gave the link, but if you're into poring over economic data, click here for the aforesaid categories by country, plus many more.

^αIn fact, as of my typing this, I have not yet put together the Excel® spreadsheets that will demonstrate what I'm sure will be the correlative link between wealth and economic de-regulation. [I know Eddie will be quick to interject one of his favorite mantras, that "correlation is not causation," but I have every confidence that both he and the reader would rather live in a country with an economic model strongly correlated with wealth than in one whose model is strongly negatively correlated with it.] I am so smug and certain, in fact, that even if the data does not live up to my expectations, I will include it in this article to remind me of the consequences of hubris.

^βRemember that scripture teaches us that "For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows. " (1 Tim 6:10). Money of itself is, as Pam likes to say, "just a place holder." In fact, there are plenty of scriptural references that imply that wealth can be a blessing or a hedge against uncertainty: Ps 112:1-3; Pr 10:3-4, 10:15, 22:4. 13:22; Ecc 5:18-20.