Sunday, April 12, 2009

Capitalism vs. Free Markets

The New York Times today has a roundup of opinion about the popular perception of capitalism and socialism, in response to a recent poll that surprised some by finding that only a plurality of Americans find capitalism superior to socialism. Times editor Tobin Harshaw focuses mostly on possible shifts in the definition of socialism, even going so far as to quote a dictionary definition of it. But what of the shifting meaning of capitalism?

The core idea in capitalism is capital, which in theory is the equipment necessary to produce things of value. Capitalism holds that the people who supply this equipment should take charge of all the work that gets done. This makes sense if you think of an industrial-age enterprise such as one of the forges built not far from here at Valley Forge in the 1800s. The metalworkers who worked there couldn’t do much without the forge itself. Yet, as I have been saying for years, the importance of equipment in work has been declining for more than a century. In most businesses there is no key piece of equipment that makes the business go. And so, often, capitalism is the kid who says, “It’s my baseball, so I’m in charge of the team.”

There is confusion about this because talking heads have repeated the phrase “free market capitalism” for so long that people have started to put those two ideas together, and that is a mistake. The free market is the main thing driving down the importance of capital. In a free market system, anyone who wants to be a capitalist, to put equipment together to set up a business, has to compete with all the other capitalists. A business in which capital is king and the needs of workers, customers, and suppliers are secondary is soon replaced by another business. And it cannot be any other way in a world in which capital is no longer as scarce as the other key resources that make a business work.

Despite the efforts of capitalists to hold on to their privileged positions, market forces will continue to work against them. The New York Times may not yet understand this, but the public does. The Times points out another recent poll from the same pollsters “in which 70% of Americans prefer a free-market economy.” Clearly, Americans see a divergence between free markets and capitalism. Billionaire-investors, business tycoons, and their friends in Washington may continue to introduce roadblocks to slow down the decline of capital, but that cannot last forever; the free-market approach will win out in the end.