What’s Wrong With Capitalism?

Sit-ins and marches are regular occurrences on the modern campus, as students on the Left rally against all that is evil and oppressive in the world. While I do not disagree with their entire inventory of evil ideologies and phenomena, not everything they are protesting is equally deserving of disgust.

Most common among the ills they wish to eradicate: racism, sexism, ageism, ableism, rape culture, homophobia, capitalism…

Capitalism? How is it that a system that has liberated hundreds of millions of people from the crushing oppression of poverty and enables the full embrace of freedom has ended up on the millennial Left’s hit list?

There are numerous recurring complaints against capitalism, some more valid than others, but one of the most common is that capitalism creates poverty.  Earlier this year, during a controversy at Stanford over adding a Western Civilization course requirement, a student wrote a misguided op-ed protesting the promotion of Western civilization. Among the mostly misinformed reasons for her opposition is that the requirement would teach students that capitalism is good, when capitalism is, in fact, one of the “driving forces in the creation of poverty.” She goes even further to say that capitalism is one of the reasons that many countries in Africa are poor.

Not only is this criticism completely unfounded, but this widespread belief is extraordinarily dangerous. Capitalism, far from causing poverty, is the most effective anti-poverty solution ever created.  Free markets, supported by property rights and a fair, dependable legal system, create vastly more wealth and raise living standards more sustainably and efficiently than any other known economic system. If we define poverty as a lack of resources to provide for needs, there is no better system that creates more resources and allocates them more effectively.

Capitalism, put simply, is an economic system that relies on private transactions and ownership of the means of production. The system relies on the law of supply and demand, well-defined property rights, and transparency, so consumers and producers have the information necessary to facilitate mutually beneficial transactions.

Success in a capitalist system requires that a person produce something that is of value to others. The framework of capitalism is geared towards solving problems of scarcity and fulfilling needs because it provides rewards for those who come up with solutions. Prices indicate when resources are dwindling or where there is an unmet desire.  People can then use these indicators to identify opportunities for providing a good or service, with the promise that a successful and useful product will reap financial reward. Property rights ensure that the person providing the product will be able to enjoy the rewards of the transaction. A person can contribute to the system in many ways, including selling his or her own products or ideas or offering his or her labor to further the endeavors of others. Thus, capitalism facilitates cooperation between people who may have no common ties towards fulfilling mutual goals and meeting needs. It recognizes the natural human desire to serve himself and those closest to him first, and allows a person to simultaneously fulfill that desire and serve the larger community Thus, the system naturally encourages the creation of material prosperity that is necessary to combat poverty.

In contrast, the college student’s preferred system, socialism, ignores the incentives that lead to innovation and more material resources. Its central planning schemes pervert the law of supply and demand so that actors in the market cannot gauge the needs of their fellow citizens. Even the best central planning schemes cannot replicate the natural cooperation of the market, which coordinates interactions between billions of actors in millions of different sectors across the world. Furthermore, socialism destroys incentives to innovate because no idea or business enterprise is truly self-owned and people are rewarded minimally, if at all, for valuable work. If a person cannot reap the value of extraordinary effort or receive something for work that, as has been noted, helps a person with whom they have no emotional ties or personal connection, it is unlikely that he or she will provide the services he or she would provide in a free market. The result is a decrease in available technologies and products without a decrease in desires or needs, leaving everyone worse off.

The magic of capitalism is that people help each other by helping themselves. The sadness of socialism is that it prevents people from helping each other except through an easily corruptible and ineffective central government.

This is not just theory; we can see it in our world.  Many American students mistakenly assume steady increases in living standards , technological advances, and the vast accumulation of material resources are inevitable. In fact, rapid and sustained economic growth has only existed for a few hundred years. For most of human history, the population did not grow and neither did the standard of living. Both have seen massive growth since the late 1800s, primarily in the West, when the protection of property rights became institutionalized and markets were liberalized. Countries that later liberalized their economies and created functioning markets, like China and India, have seen similar phenomena. It is not a coincidence that, all else being equal, embracing free markets leads to prosperity, while strangling markets with socialist and communist policies creates hunger and crippling scarcity.

The irony of bringing African economies into the discussion is that many leaders promote using free market policies to help eradicate poverty in sub-Saharan African countries. In a terrific piece on poverty in developing countries, Ricardo Hausmann points out, “…poor countries and regions are characterized by the absence of capitalism, of capitalist forms of production.” Even Bono has acknowledged, after his extensive work in foreign aid and charity, that capitalism is the only effective means of eradicating poverty long-term. Far from creating poverty in African countries, capitalism the only ladder out of poverty.

Perhaps a Western Civilization requirement isn’t the answer, but Stanford, as well as other universities, should make sure students leave with a sense of reality. The reality is that capitalism does not create poverty; implemented correctly, in conjunction with proper rule of law, political legitimacy and strong institutions, and respect for property rights, it is actually quite efficient at reducing it. Capitalism cannot, and does not, promise to cure all of the world’s ills, and both the theory and our current implementation of it deserve scrutiny. Nevertheless, as far as systems that provide materially for the world and allow individuals to find fulfillment in their work, capitalism has no known equal.


4 thoughts on “What’s Wrong With Capitalism?

  1. Congratulations. I didn’t understand all words, but I understood the contest and liked much. I’m learning English.


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