Capitalism, Competition, Prosperity, and Happiness

Capitalism is a misnomer for the system of free markets that could deliver abundant prosperity and happiness, were markets left free. Free does not mean unfettered; competition for the favor of consumers exerts strong discipline on markets. And laws against theft, deception, and fraud would serve amply to keep markets honest, the worrying classes to the contrary notwithstanding.

Capitalism is but one pillar of free markets — an essential pillar, to be sure. But it is competition that drives capitalists, entrepreneurs, managers, and workers alike to excel in the satisfaction of consumers’ wants and to make the best use of resources as they satisfy those wants.

I argue that it is the curtailment of competition, due to the enlargement of government, that has caused the economies of the West to yield much less prosperity than they could, and much less psychic satisfaction than workers, managers, and entrepreneurs (if not to capitalists) would otherwise enjoy.

One reason for the ease with which competition has been stifled is the word’s negative connotation, which seems to hold sway even among millions of Americans who compete gladly for more business, better jobs, and higher incomes. The negative view of competition may date from 1845, when Friedrich Engels wrote these words:

Competition is the completest expression of the battle of all against all which rules modern civil society. [The Condition of the Working-Class in England in 1844, 1892 edition, p. 75]

Thanks to Engels and his ilk, most notably Karl Marx, competition became and remains a dirty word, with respect to economic activity if not with respect to games, sports, and idiotic TV shows. Economic competition is too much thought of as a brutal contest in which there are relatively few winners and myriad losers.

In fact, economic competition has myriad winners, consumers prominent among them. Adam Smith explained it in 1776:

When the quantity [of a commodity] brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages, and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. [An Inquiry into the Nature and Causes of the Wealth of Nations, Chapter 7]

Consumers benefit not only from competition among the sellers of a particular good or service, but also from competition among the sellers of a variety of goods and services. In the first instance, consumers benefit from lower prices or higher quality when there’s more than one seller of a particular item (or items that are close substitutes, such as compact cars). In the second instance, the availability of a variety of items requires sellers of all of those items to compete for the consumer’s patronage, either on the basis of price or quality (or both). In either case, sellers often compete by offering new and improved goods and services, thus further benefiting consumers.

The owners of a particular business might wish that they had no competition. But even if the wish is seemingly granted (e.g., by crony-friendly regulations that prevent the formation of similar businesses), that business still has to compete with other kinds of businesses for the favor of consumers.

Most consumers are also sellers of their labor. And as sellers, they compete for jobs. Unless government steps in to designate winners (as in the case of affirmative action), labor competition enables employers to hire and promote workers who have seem to have skills and experience best suited to the work at hand. This is a boon to consumers because competition among workers enables the producers of goods and services to get the most “bang” from their labor budgets.

Labor competition is also a boon to workers. Rarely are workers in a situation where they have only one prospective employer. Employers must usually compete against one another for the services of workers. Competitive labor markets — markets that are free of arbitrary government rules and union-imposed restrictions on about hiring and promotion — help workers to find employment for which they are best suited, and help them maximize their income, given their skills and experience.

Again, absent government- and union-imposed restrictions, workers must use their skills and experience productively. If they don’t, they will be fired or at least not promoted beyond the level at which they are worth their pay. If employers are prevented from firing or demoting unproductive workers, better workers are denied opportunities to earn more. And consumers are harmed because they are forced by widely applicable government- and union-imposed restrictions to subsidize the products of inferior labor. The only escape from federal mandates is the substitution of capital for labor, which is why government-imposed minimum wages (among many things) harm the very groups that they are meant to help.

Engels, Marx, and their purportedly empathic successors want to do away with competition because they don’t understand how it helps consumers and workers. The “ideal” alternative to competition is communism (with a small “c”). But communism, like anarchism, is a system that works only for relatively small numbers of like-minded or genetically bonded persons, and then not for long. The only lasting substitute for communism has been state socialism (also known in its more draconian manifestations as Communism with a capital “c”).

State socialism — even in its relatively mild but still heavy-handed American form — decrees the variety of goods and services that may be produced, and restricts their production. This differs in degree but not in kind from Communism, which produced disastrous consequences for the material and psychic well-being of the hundred of millions of persons who labored and still labor under it. (Party leaders, officials, and favorites were and are given special treatment, of course. Elites never disappear, they just assume different titles.)

The false premise of central planners and those who believe in central planning is that a group of persons — even armed with massive computing power — can anticipate and satisfy the vastly varied and ever-changing skills, wants, tastes, and preferences of a diverse populace. All that the central planners can do, at best, is impose their own preferences on others and make some groups (mainly themselves and their favorites) better off at the expense of others.

A bureaucracy which is set on producing X when people want Y will go on producing X for many years after businesses would have shifted to the production of Y. A bureaucracy that stifles innovation (as bureaucracies do) is unlikely to take a chance on introducing Z, which some consumers might prefer to X or Y, but the introduction of Z is what businesses do every day. Nor are stodgy bureaucracies likely to improve their methods of producing X, Y, Z, or anything else, and so they will use labor and other resources in wasteful ways. All for the sake of avoiding what shallow thinkers like to call “wasteful competition.”

It’s ironic that competition (in contexts other than sports, games, and idiotic TV shows) became a dirty word. Most people compete daily without giving it a second thought. It’s simply a matter of doing the best that one can do — or that one is willing to do — and accepting the consequences, or doing better if one is dissatisfied with the consequences. It is gratifying — not demeaning — to meet life’s challenges, and to meet them successfully (or as successfully as one is able).

Engels and Marx’s pseudo-intellectual successors in politics, the academy, and the punditocracy would recognize the truth of this if they were capable of candid introspection. Assuming that they are (sometimes) capable of it, they must believe themselves to be different from (and superior to) the great mass of people, who must be “rescued” from competition. This belief is a compound of psychological projection and condescending hogwash.

Yes, it’s true that most people are willing and eager to get something for nothing. But until the advent of state socialism (also known euphemistically as democratic socialism) most people were unable to get something for nothing. Yes, there have always been those with access to power — like today’s so-called crony capitalists (whose reliance on cronyism disqualifies them as capitalists) — but they were the major exception. Today’s cronies, “capitalist” and other, run the gamut from CEOs of major corporations to physically and mentally able dole collectors to retirees whose productive investments in economic growth have been stunted by the lure (and cost of) “free” Social Security and Medicare benefits.

It needn’t have been thus. The Framers of the Constitution meant to limit the central government’s powers to those sixteen (enumerated in Article I, Section 8) that would “provide for the common Defence and general Welfare.” And the powers of the central government remained within the Framers’ limits for well over a century. But once the government’s powers began to spread beyond their constitutional boundaries, there was no turning back — or so it seems.

The growth of dependency on the state, which in the United States began in earnest with the New Deal, is a cancer that has eaten away the competitive spirit that once animated Americans’ economic striving. The cancer needn’t have taken hold and spread, but it did, thanks to ambitious politicians and know-it-all academicians and pundits, whose siren song of “something for nothing” has lured too many Americans into the arms of the nanny state. And those who have resisted the siren song are nevertheless forced to pay for the “something” that others get for nothing.

Competition is a good word, not a dirty one. It should be praised and emulated, not derided and denigrated. It is at the heart of psychically satisfying and materially enriching economic activity.

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Related reading:

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Related posts:

Fear of the Free Market — Part I
Fear of the Free Market — Part II
Fear of the Free Market — Part III
The Cost of Affirmative Action
Socialist Calculation and the Turing Test
Monopoly and the General Welfare
Slopes, Ratchets, and the Death Spiral of Liberty
Academic Bias
Intellectuals and Capitalism
Greed, Cosmic Justice, and Social Welfare
Positive Rights and Cosmic Justice
Fascism with a “Friendly” Face
The Interest-Group Paradox
Parsing Political Philosophy
Monopoly: Private Is Better Than Public
Gains from Trade
Trade
The Near-Victory of Communism
Tocqueville’s Prescience
The Real Burden of Government
The Left
The Constitution: Original Meaning, Corruption, and Restoration
The Illusion of Prosperity and Stability
The Deficit Commission’s Deficit of Understanding
Our Enemy, the State
“Intellectuals and Society”: A Review
Competition Shouldn’t Be a Dirty Word
The Stagnation Thesis
Social Justice
The Left’s Agenda
More Social Justice
Luck-Egalitarianism and Moral Luck
Empathy Is Overrated
Union-Busting
In Defense of Wal-Mart
Taxing the Rich
More about Taxing the Rich
The Evil That Is Done with Good Intentions
Understanding Hayek
The Left and Its Delusions
Creative Destruction, Reification, and Social Welfare
The Arrogance of (Some) Economists
The “Jobs Speech” That Obama Should Have Given
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
The Spoiled Children of Capitalism
Politics, Sophistry, and the Academy
Subsidizing the Enemies of Liberty
In Defense of the 1%
Are You in the Bubble?
Lay My (Regulatory) Burden Down
The Burden of Government
Economic Growth Since World War II
The Eclipse of “Old America”
Genetic Kinship and Society
Government in Macroeconomic Perspective
How High Should Taxes Be?
The Value of Experience
Economics: A Survey (also here)
Why Are Interest Rates So Low?
Vulgar Keynesianism and Capitalism
America’s Financial Crisis Is Now
“We the People” and Big Government
The Keynesian Multiplier: Phony Math
The True Multiplier
Parsing Political Philosophy (II)
Some Inconvenient Facts about Income Inequality
Modern Liberalism as Wishful Thinking
Mass (Economic) Hysteria: Income Inequality and Related Themes
The Pretence of Knowledge
Alienation
Income Inequality and Economic Growth
A Case for Redistribution, Not Made
Ruminations on the Left in America
McCloskey on Piketty
The Rahn Curve Revisited
The Slow-Motion Collapse of the Economy
Nature, Nurture, and Inequality
How to Eradicate the Welfare State, and How Not to Do It
The Real Burden of Government (II)
Diminishing Marginal Utility and the Redistributive Urge
Obamanomics in Action
Academic Ignorance
Judicial Supremacy: Judicial Tyranny
Does the Power to Tax Give Congress Unlimited Power? (II)
The Beginning of the End of Liberty in America

And guest-blogger L. P.‘s posts about the downside of empathy: here, here, here, here, here, and here.

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2 comments

  1. This post reminded me of another post I encountered on Quora yesterday. It addressed how competition (along with cooperation) are naturally embedded into life in so many ways and on various scales (major and minor) that to demonize and think we can significantly reduce competition from life is foolish fantasy. This post also includes an accessible historical overview of attempts to install socialism that I don’t often find elsewhere (in schools, etc.): http://www.quora.com/Is-it-fair-to-say-that-socialism-as-a-system-has-always-failed-when-it-was-implemented/answer/Charles-Tips

    Just wanted to get your thoughts on what Charles Tips wrote since I haven’t studied history extensively.

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  2. Thanks for the comment and the link. Cooperation is indeed an essential element of free markets. Taking the internal combustion engine as a metaphor, if competition is the spark that ignites the fuel (labor and capital) and causes the pistons to move, cooperation is the lubricant that enables them to move smoothly. Cooperation depends not only on the rule of law and the observance of property rights, but also on mutual trust.

    As for Tips’s piece, my economic history is very rusty, but it strikes me as about right. On matters of interpretation, I would make less of a distinction between command socialism (or state socialism, as I call it) and fascism. Historically (rather than theoretically) both have been nationalistic and rather myth driven (e.g., making heroes of the likes of Stalin and Mao). The difference between central economic planning and heavy-handed regulation (Dirigisme) is more a matter of nomenclature than of practice.

    I would take issue with Tips’s characterization of the Democrat Party (especially in the North and West) as “truly liberal” during his youth, which was probably not long after my own. The Northern Democrat Party of my youth was dominated by labor unions, and its anti-business, pro-worker rhetoric definitely gave impetus to the rise of state socialism in America, which was built on the New Deal — a Democrat initiative. In fact, the North’s vaunted racial tolerance was a masquerade, as I point out in my post “Academic Ignorance,” and labor unions were among the most racist of Northern institutions.

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