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Monday, September 10, 2007's naive view of Capitalism

Ben O'Neil has today posted a blog on the perfectness of Capitalism. While I think Capitalism a more realistic model than Socialism, I do not share his utopic view of it.

He correctly asserts:
"Indeed, there has been a recent resurgence of academic critiques and self-help literature lamenting excessive "materialism" and "consumerism," much of which lays the blame squarely at the feet of free-market capitalism and its lifeblood, money, " and then spends a very long blog post trying to debunk this statement. Let's go through it point by point.

Mises Point 1:
"the analysis of inalienable nonmaterial goods [personal achievement, relationships, broad knkowlege...] is well within the province of economics and does not present any particular problem for economic analysis.... Of course, there are none who desire only alienable goods and hence none who act in this absurd manner. Rather, we rationally weigh alienable and inalienable goods against one another, according to our particular preferences and with a view to achieving the greatest possible happiness over the course of our lives." [ie, the decision between inalienable and alienable goods is an economic one]

I 100% agree with the above statement, but fail to see how it at all addresses the concerns that Capitalism leads to an onverly consumeristic society. Few would disagree that Economics can concern itself with such topics. Few would disagree that people face tradeoffs with regards to inalienable goods (purusing relationships etc) just as much as alienable goods. The point is that the system itself - its very framework - by its very definition - forces people to consume and consume some more, and accumulate more and more wealth- less for real happiness and more for status and social norm and the need to feel superior (the best competitor in a competing world).

To its credit, does note that retort. response:
"... the level of social status derived from wealth and the satisfaction derived from this social status are themselves subject to diminishing marginal does not matter why we gain satisfaction from material goods."

The problem with the above idea of diminishing returns is, while true, it does not paint a full picture. I may be a guy who wants a Ferrari solely for status, so I buy one. My value of a second high-end luxury/sports car is diminished. Fine. But maybe now I see that my neighbor Tim just bought a Lamborghini, in addition to a Ferrari he just bought last year. Well now I feel really small. I have to have one too lest I be laughed at behind my neighbors' backs. I have strut my wealth for all to see....

In this sense, Capitalism is a big form of overcompensation. might disagree on the reason:
"But in truth, this behavior is nothing more than a manifestation of diminishing marginal returns. The highly wealthy person desires these more opulent goods only because his desire for basic accommodation and other more fundamental goods is already satisfied."

Again, technically correct. Again, missing the big picture. When you combine the need for status maintainence and social norms with the above mention of diminsihing returns, you realize that at some point returns must hit a constraint. At some point, using just the idea of diminishing personal returns, you would ordinarily decide not to buy your 21st car. But you do anyway - money, status, norms ---they are all powerful motivators in and of themselves and can often cloud what might otherwise be our wants, absent capitalism.

This is not to say such consumption is irrational. I think makes good points about that - afterall, status etc can be thought of as part of ones utility too. The point is that the Capitalist model causes consumption and materialism over and above what might occur in an identical society without such motivations. In other words, these concepts work together - they are not incompatible. And, Capitalism - ie a community-wide system of markets - in and of itself can create motivations that distort wants. To deny this without seeing the full picture is naive.

Mises might respond by saying, "so what. Economics does not care about 'why' people do what they do."

I would respond: "That's the problem. Because it is often the 'why' that matters most."

Having said all this, the positives of capitalism far outweigh the negative. And many of the negatives can be tempered with personal restraint, government assistance, and a sense of community.


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I think that you are overlooking a fundamental concept that most misesians/austrian economists include in their world view but don't talk much about. They all believe that humans, at their core, are driven by urges that we ourselves don't understand and have difficulty controlling. Thus, any system, whether it is a political, social, or economic one, has to take those urges into account and figure out a way to deal with them. What such a system should NOT do is to ignore those urges and pretend that they don't exist. Pretending that they don't exist is a sure fire recipe for allowing those urges to control the system in one way or another.

One of those urges is the desire for competition. Imagine, for example, that you have a system in which you pretend that the desire for competition does not exist. All the people are perfectly happy to look the same, dress the same, make the same amount of money, live in the same house, and drive the same car, regardless of what they do or how much they are capable of achieving. Sounds like utopia, right? Well, as you know very well, that idea is the central idea behind socialism and it's more extreme offshoot, communism.

And, we don't have to guess how such a system would work in reality, because the whole world was watching while the USSR and the iron curtain collapsed. What the collapse revealed was a world in which human competition continued at the same if not accelerated pace, but with the lovely added benefit of tens of millions of people slaughtered in Gulags or tortured by secret police, and many more millions dead from lack of food, medicine, heat, or clean water. And this while the USSR was in power, mind you, not after its collapse. It was a world in which all were equal, but some more equal than others. Of course if you prefer to look for more successful versions of this same story that have not yet collapsed, you can always look at Cuba or North Korea. China was another example for a while, but its economy has started turning around. Strangely, about the same time that it realized the folly of socialism and instituted market reforms. Weird how that works.

Communism and Socialism started out as ideas invented by intellectuals who really wanted to change the world. However, they had an extra dose of hubris, because they did not stop to consider WHY the world currently worked the way it did. They just identified stuff that seemed to them unfair, and decided to legislate it away. They decided that they could just create reality by fiat, regardless of the raw material (humans) that they were working with. But, as you and I know, humans have some very specific properties, and you ignore the properties of your raw material at your own peril.

Down at the very base of everything, it turns out that there are only two options -- Freedom or Control. That has always been the two competing forces throughout human history. Various devices have been utilized to maintian control by elites -- nationalism, communism, religious fanaticism of various kinds, tribalism, racism. In the end, all of these prey upon various urges within people as a means to encourage them to submit to control by a leader. The catch is, you as an individual have to submit to control first, and are promised freedom later. That's why socialism is such a bastardized philosophy, because it proposes to achieve its stated aim of freedom for individuals through control of individuals, and these are mutually incompatible.

The difference between capitalism and some of the other "isms" is that capitalism is not a philosophy. It was not invented by anyone, was not designed to counteract some perceived evil or injustice in the world. It simply is how nature and the world works. Deer, elk, bears, ants, bees, grasses, trees, fungi, all behave like capitalists. They are free to do as they please in the world, and understand that they live and die, succeed or fail, based on their own actions. Period. That is the ethic of the philosophy of freedom applied to the realm of economic systems. Capitalism doesn't care what you do with your life. It does not "encourage" you to be materialistic -- it allows you to be if you prefer. It does, however, prevent you from hijacking the means of production to further your own pet version of the world and leading the rest of us down the path away from freedom and towards control. But hey, every system has its down side, right?

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