A Dirty Word: Why Capitalism’s Bad Reputation Is Largely Undeserved

Despite its undeniable importance as a mechanism for human progress and flourishing, capitalism is widely associated with mass poverty, social inequality and a host of other negative externalities. Capitalist is considered a dirty word, especially on the left, where capitalists are traditionally portrayed as a shadowy elite of ruthless exploiters, who contribute nothing to society. Their profits are immoral, and liberal democracy is nothing but a smokescreen to cover up their manipulations, while the masses of ordinary people are deliberately kept in a state of “false consciousness” (Engels), preventing them from seeing the true nature of their alienated existence.

It has thus been concluded that, under capitalism, social conflicts and disparities are invariably the result of external conditions—systemic oppression, exploitation or discrimination—rather than internal traits. As there is apparently no such thing as human nature, it follows that all it takes to solve social problems is to overthrow the socioeconomic conditions that render us unequal and self-interested. Usually, this solution involves a massive redistribution of wealth. (As wealth is taken for granted, little attention is paid to wealth creation.)

This persistent belief, for which evidence has yet to emerge, goes back to Karl Marx, who held that the revolutionary overthrow of the capitalist system, followed by an intermediate stage known as socialism (“dictatorship of the proletariat”), was inevitable and would lead to a communist utopia. He was wrong. Whether we call it Marxism, socialism or communism, revolutionary collectivist redistributionism, which is based on an idealistic rather than evidence-based view of humanity, has led to some of the worst humanitarian catastrophes in history, leaving entire societies in ruins. “From each according to his ability, to each according to his needs,” as Marx so famously put it, has turned out to be a recipe for disaster.

Under western-style democratic capitalism, by contrast, the masses of ordinary people have come to enjoy a greater measure of freedom and prosperity and increasingly live longer, healthier and more peaceful lives than ever before or under any other system. The reason is simple. People are not pawns that can be moved around at will in pursuit of some collectivist utopia. They have agency, and a system based on individual liberty, personal responsibility and free enterprise, in which they can pursue their ambitions in open competition, allows them to efficiently meet and communicate their individual needs and preferences.

When large numbers of people participate in free and competitive markets, disposing of their labor and their property as their own, they not only trade goods and services, but also information about their actual (rather than ideologically determined) needs and preferences (using the language of price to indicate supply and demand), which can change as circumstances change. A more efficient and more productive way to get large numbers of people to cooperate on a voluntary basis has yet to be discovered.

In an economic system based on collectivism and central planning, on the other hand, production is, by definition, detached from people’s individual needs and wants. These are overridden by so-called collective interests, determined by ideological authority. But collectives don’t have interests: people have interests. And if people are free to pursue their individual self-interest within a legal framework of democratic (i.e. non-arbitrary) laws and institutions, they tend to provide goods and services—with the aim of making a profit—that benefit others. Adam Smith famously referred to this effect—the unintended social benefits of individual self-interested actions—as the “invisible hand.”

Contrary to how it is portrayed by the hard left, capitalism is not a zero-sum game. One person’s gain is not another’s loss. When people exchange goods or services, they each get something in return that is worth more to them than what they give up: it is a positive-sum game. The secret of capitalism’s unmatched productivity is that it creates incentives for individuals to innovate and provide value for others.

By contrast, collectivist redistributionism disincentivizes individual initiative and curbs productivity—to the detriment of society as a whole. As history has taught us, such a system can only persist in the absence of individual autonomy, especially if it is aimed at achieving some higher goal such as social justice (equality of outcome). The fundamental problem is that “if you give the government enough power to create ‘social justice,’ you have given it enough power to create despotism,” says Thomas Sowell. To achieve equality of outcome, people must, at any rate, be prevented from outperforming one another, which is an inevitability given that human beings are equipped with different skills, talents and ambitions. Therefore, their freedom to use their skills, realize their talents and pursue their ambitions as they, as autonomous individuals, see fit must be restricted—by force, if necessary. The consequences are repression, mismanagement and humanitarian disaster:

Of the seventy million people who died in major 20th-century famines, 80 percent were victims of Communist regimes’ forced collectivization, punitive confiscation, and totalitarian central planning. These included famines in the Soviet Union in the aftermath of the Russian Revolution, the Russian Civil War and World War II; Stalin’s Holodomor (terror-famine) in Ukraine in 1932–33; Mao’s Great Leap Forward in 1958–61; Pol Pot’s Year Zero in 1957–79; and Kim Jong-il’s Arduous March in North Korea as recently as the 1990s.

We may add Venezuela under Chavez/Maduro, praised by left-wing populists such as British Labor leader Jeremy Corbyn, to this list from Steven Pinker’s Enlightenment Now. Yet it is capitalism, not socialism or communism, that gets a bad rap. Even those wise enough not to resort to the trite but that wasn’t real communism defense tend to argue that capitalism causes poverty and inequality: a logical and factual fallacy. For most of human history, most people lived in extreme poverty. This changed with the advent of industrial capitalism. “The Gross World product today has grown almost a hundredfold since the Industrial Revolution was in place in 1820,” writes Pinker. In the same period of time, global extreme poverty has fallen from 84% to under 10% and may be eradicated in our lifetime. This has had many positive knock-on effects, such as a decrease in child labor around the globe.

As with poverty, inequality has always existed. In the modern capitalist world, however, “Inequality in life outcomes is decreasing both across and within countries,” according to the Economist. This may have something to do with the fact that capitalism, being meritocratic in nature, “undermines status and introduces social mobility,” as Milton Friedman puts it in Capitalism and Freedom. What’s more, in a free market economy, arbitrary discrimination constitutes a competitive disadvantage and, therefore, comes at a cost to the discriminator.

Nor is inequality an adequate measure of wellbeing. Nobody is worse off because of economic inequality. Consider the following thought experiment: if everybody’s income doubled tomorrow, the gap between those at the top of the pile and those at the bottom would widen, but everybody would be better off for it. Conversely, if everybody’s income was halved, they would be more equal but worse off.

It’s simply not true that only the rich benefit from economic growth. Thomas Piketty, the author of Capital in the Twenty-First Century, was wrong when he wrote, “The poorer half of the population are as poor today as they were in the past, with barely 5 percent of total wealth in 2010, just as in 1910.” As Pinker points out, today’s total wealth is “vastly greater than it was in 1910.” So, “if the poorer half own the same proportion, they are far richer, not ‘as poor.’” On top of that, their money buys them a vastly greater variety of life-improving goods and services, most of which either didn’t exist in 1910 or were prohibitively expensive.

Inequality does not imply injustice. Inequality of outcomes is a byproduct of economic freedom, and “economic freedom, in and of itself, is an extremely important part of total freedom,” argues Friedman. Conversely, this means that equality of outcome necessarily entails a loss of freedom. Having examined real socialism, Friedman arrives at the following conclusion: “The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both.”

Needless to say, Marxists see things differently. Part of the reason is that the classically liberal definition of liberty—freedom from coercion—is antithetical to the Marxist definition—freedom from inequality. The Marxist ideal is a classless society, not individual autonomy. In Capital, Marx described society in terms of class conflict: those “who have nothing to sell but their labor power” (the proletariat) are exploited by a capitalist elite (the bourgeoisie), who grow richer while deliberately keeping the poor poor, i.e. wage-dependent. In other words, the rich get richer at the expense of the poor, which necessitates an ever-growing army of destitute wage slaves.

This theory is demonstrably false. Those countries that have the highest density of rich capitalists are also the ones that have the lowest rates of poverty and the largest middle classes. Worldwide, the number of billionaires has gone up, while poverty has declined sharply. According to the World Economic Forum, “Half the world is now middle class or wealthier”; and for the first time in human history, “the majority of humankind is no longer poor or vulnerable to falling into poverty.”

Of course, capitalism also has its pitfalls. Financial markets can spiral out of control, and there is clearly something wrong with multinational corporations controlling governments (whether, or to what extent, such phenomena can be laid at the feet of capitalism is another question). Externalities—i.e., costs passed on to other countries, other species, the environment or future generations—do occur and deserve to be criticized. We must not forget, however, that capitalism is merely a mechanism which we use to further our interests. We are the ones who define what those interests are, and we determine the morals that guide our actions.

Given limited natural resources, capitalist economic growth has been attacked as inherently unsustainable. This criticism implies that we are nearing said limit faster than we can come up with alternatives. But we don’t live in a static world. We have renewable resources, including our most valuable resource: human ingenuity. Innovation is the key to human progress, and capitalism drives innovation, not least because it rewards self-interested actions that benefit large numbers of people. Those who condemn capitalism wholesale must demonstrate—conclusively—that there is a viable alternative that can yield the same amount of freedom, progress, and prosperity.

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