Foundation #3: Why Capitalism Better?

Why is Capitalism Better?

Why is free-market capitalism superior to Big Government? It boils down to two big words: dignity and prosperity. Free-market capitalism provides the average person with greater dignity and prosperity.

There are many reasons why this is so, but the one overarching reason relates to freedom. Free-market capitalism allows individuals to keep more freedom, while Big Government takes freedom away.

The foundation of free-market capitalism is the freedom of people to engage in voluntary commercial transactions. Consumers are free to choose which products and services they wish to buy and at what price. Businesses are likewise free to choose which products and services they wish to sell and at what price.

Transactions occur only if both buyer and seller consider them beneficial. Completed transactions therefore tend to be a win for both buyer and seller. This is a truly wondrous thing! Both buyer and seller feel they have bettered themselves. This goes a long way in explaining why capitalism provides better results. 

Big Government, on the other hand, tends to interfere with free-market transactions. Sometimes it reduces freedom for buyers, sometimes for sellers, and sometimes for both.

Supporters of Big Government tend to ignore or downplay the fact that Big Government reduces individual freedom, but that is the essence of government. Government equals force. What else underpins taxes, licensing, fees, permits, import duties, quotas, regulations, and mandates?

Big Government advocates tend to justify government action by focusing on only the positive aspects of government action. However, every government action also includes one or more negative aspects. Poverty assistance programs may help poor people, but they also harm taxpayers who must pay for the programs. Import duties on steel may help steel producers, but they also harm manufacturers that buy steel and consumers that buy steel products. There is no escaping the reality that government action always has a negative side. 

Capitalism Provides More Dignity

How does free-market capitalism provide more dignity to the average person?

First, freedom itself provides dignity. Individuals possess more dignity and self-worth when they are free to make their own choices. Capitalism allows billions of voluntary (and mutually beneficial) transactions between buyers and sellers.

Second, capitalism expects every able-bodied adult to support themselves, and their families if they have one. Individuals are not only free to forge their own path in life, they are also considered capable of supporting themselves and their families. This endows people with a certain dignity.

Third, free-market capitalism provides a higher standard of living for the poor as well as for the average person (see below). They enjoy better food, clothing, and housing compared to the residents of countries that stifle economic freedom. Surely this provides some dignity. 

In contrast, Big Government imposes a loss of autonomy and dignity when it tells people what they can or cannot do. Big Government delivers a message to many people that they cannot succeed on their own without government help. Big Government assistance programs pay people to not work, which traps some of them in dependency. None of this endows people with dignity.

Generally speaking, there is more human dignity in working and supporting oneself than in relying on a government handout. Self-reliance is better for the human dignity of each individual. It also happens to be better for the economic prosperity of the individual as well as overall society.

Our most precious possession as individuals is the freedom to live life the way we choose to live it. This gives each of us the independence, dignity, and worth that we all deserve. Our right to own and control our own property, our own bodies, and the rewards of our own labor helps give us human dignity. Free-market capitalism is based on these principles; Big Government typically interferes with them. 

Capitalism Provides More Prosperity

How does free-market capitalism provide more prosperity to the average person? This actually involves many factors. The simple explanation is that the freedom, choice, and competition of capitalism lead to greater prosperity.

When people are free to choose, they naturally tend to choose what they think is best for themselves. On the other hand, when government forces people into a different course of action, they tend to be worse off because the forced action is less preferable than what they would have freely chosen to do.

When buyers and sellers are free to choose, this naturally sets up competition between businesses as they compete to satisfy customers and win sales. This competition is quite good for the average consumer. On the other hand, government typically squelches competition, either by its nature or at the behest of large corporations and other special interest groups. 

If we dig just a little deeper, we see that prosperity is really driven by productivity and innovation. Free-market capitalism encourages productivity and innovation. Here are some reasons why: 

  • Under free-market capitalism, businesses have more time and resources to pursue productivity and innovation because they are only lightly taxed and regulated.
  • The lighter yoke of government gives entrepreneurs more confidence to press forward with start-up companies founded on innovative new ideas.
  • Market participants are more free to act or react to changing conditions in a timely manner.
  • Capitalism often rewards first-rate innovation with handsome profits, and does the same to a lesser extent for productivity.
  • Overall, the freedom, choice, and competition of free-market capitalism encourage entrepreneurialism, productivity, and innovation.

On the other hand, Big Government does nearly the opposite of all the above. Big Government therefore typically leads to less productivity, innovation, and prosperity.

Do we have evidence that capitalism leads to greater prosperity? Sure!

For example, every year the Heritage Foundation and the Canadian think tank Fraser Institute publish studies evaluating economic freedom around the globe. Both report that the freest countries enjoy economic output and incomes about FIVE TIMES higher than the least-free countries. Clearly, economic freedom and capitalism produce better economic results. 

Comparing certain pairs of relevant countries also shows that freedom increases prosperity. For example, Chile has outperformed Venezuela, South Korea has outperformed North Korea, and Hong Kong has outperformed China.

Various other studies also show that freedom increases economic growth, while bigger government reduces it. The conclusion is fairly clear that countries which practice economic freedom and free-market capitalism achieve greater growth and prosperity than countries with heavy government intervention.

Capitalism Helps Poor People

Furthermore, the greater dignity and prosperity of capitalism is not just for the rich, but the poor as well. Yes, the poor are also better off under capitalism, even if not equally so.

In fact, capitalism is the only economic system that has provided relative luxury and comfort to all levels of society, from high to low. Claims that capitalism tramples on the poor are crude Marxist class warfare arguments that either A) demonstrate ignorance or B) support cynical efforts to obtain votes or justify Big Government.

Let’s talk about some evidence. The Fraser Institute study mentioned above shows that the incomes of poor people are much higher in the freest countries than in the least-free countries. Fraser compares incomes of the poorest 10 percent of the population in the most-free quartile (one-fourth) of countries to the poorest 10 percent in the least-free quartile of countries. The result: incomes for the very poor were TEN TIMES higher in the freest countries than they were in the least-free. Clearly, economic freedom also produces better results for the poor.

Furthermore, it is an observable reality that all of our lives have been enriched and our daily struggles reduced by innovations like central heating and air conditioning, automobiles, antibiotics, televisions, dishwashers, automatic washers and dryers, computers, cellphones, DVD players, and so on. Yes, many poor Americans enjoy these things, as reported by the U.S. Census Bureau.

This is capitalism at work. Capitalism has enabled innovation and cheap mass production of all these things. With capitalism, our products are cheaper and more innovative and our incomes are higher. This makes all of us better off, including the poor. Just compare the standard of living for poor Americans to the poor in other countries that have never embraced free-market capitalism. Stark difference.

Actually, one can plausibly claim that capitalism has helped improve the standard of living for the poor and middle class more than it has for the upper crust. In every era, members of the upper crust are able to obtain the best products and services available at the time. It is therefore a more significant victory that capitalism succeeded in bringing more and better material possessions into the reach of the average person.

As economist Joseph Schumpeter put it many years ago, Queen Elizabeth already owned silk stockings, but capitalism enabled ordinary factory workers to buy silk stockings. A queen is able to own more silk stockings when society becomes more prosperous, but she gains little benefit from owning sixty pairs rather than thirty. It is a broader victory for society when many average people become able to buy two pairs of silk stockings when previously they could afford none.

This same principle applies to many products and services besides silk stockings! Increased production and competition have made products and services affordable even for poor people. Capitalism actually does help poor people.

Conclusion

The freedom, choice, and competition of free-market capitalism provide all of us with greater dignity and prosperity. For the poor as well, even if they are not as well off as the rich. 

I don’t claim that capitalism is perfect. What is? I just claim that capitalism is better than all the alternatives, including Big Government.

For skeptics who doubt that capitalism provides more dignity and prosperity, please tell me which system has done a better job. I mean actual achievements in the real world, in a country with millions of people. Comparisons to hypothetically wonderful systems don’t count if they have never achieved actual results in the real world.


I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.

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