Thursday, 21st October, 2021
Thursday, 21st October, 2021

OP-ED: Understanding capitalism, free markets

No place has grown to wealth without a roughly capitalist, roughly free market system

It is possible to rather misunderstand capitalism and free markets as the basis of a socioeconomic system.

There are, for example, those who claim that capitalism is in some manner moral – just as there are others who claim it is immoral – but that’s not the point at all. Economics is, famously, amoral.

Morality is something decided by other areas of intellectual endeavour; economics tries merely to describe what is, not what ought to be.

In the jargon used here, economics is a positive science, describing what is observed, and not a normative one outlining what should be.

The saving grace of the market-tempered capitalist system is that it works. It works in producing what humans seem to desire.

We could say that what we all desire is driven by greed, and we might reframe greed as a healthy regard for our own enlightened self-interest.

But it is observably true that humans like full bellies, changes of clothing, dry housing and so on.

The so on extends to travel, the arts, health care, insurance against the vicissitudes of the universe, and on and on.

Indeed, it’s a core assumption within economics that human desires are infinite, yet we live in a universe of scarce resources with which to sate them.

What this economic system we call “capitalism” provably does is increase the capacity of society to meet more of those desires over time.

This turned out to be a heck of a surprise for the socialists of a century ago. They insisted that “scientific socialism” would do away with the waste and chaos of markets, the greed and profits of the capitalists, and would therefore be more efficient at providing what the people want.

So, in a good scientific experiment – a natural one – some one-third of the world went off to try that. With the collapse of the socialist states in 1989, we found out that the insistence wasn’t true.

When the Soviet dust settled, the roughly capitalist and market-based economies had increased the standard of living of the average inhabitant by some eight times over the previous century. Socialism did not, to put it mildly, achieve that.

Further, there was the point about how it was done.

There are two ways to gain growth: to be more efficient with scarce resources, or to use more of them. The growth that the Soviet Union did enjoy was entirely from using more resources, while some 80 percent of the growth of the market economies came from being more efficient.


So, if we want a system that produces what people desire and does so with the least consumption of scarce natural resources, we need a capitalist and market system.

This is not to say that capitalism is perfect. Of course it isn’t. Humans aren’t perfect, and no system being run by – or even containing – them will be.

More specifically, capitalism isn’t good at things that people cannot make a profit out of – what we call public goods.

So we need either to change the nature of such public goods so as to encourage the capitalists, or to find some other method of provision. We do both. Patents and copyright are encouragements to capitalists, while direct government provision is another method. Which we use depends upon the specifics of the thing being provided.

Similarly, markets do not deal well with things that are not included in market prices. We call these externalities – they are external to market prices. Again, we can try to get them into market prices through taxation, thus the recommendation of a carbon tax – or perhaps that won’t work. and we need regulation, or even bans by government.

Tax will not, for example, deal with which side of the road people should drive upon.

There are different flavours and admixtures of markets and capitalism that we can plump for.

Social democracy is, largely enough, markets and capitalism, plus lots of government correction of the bits that we don’t like about it. Laissez faire goes long on markets, with a lot less correction, and possibly faster growth overall as a result. We can be anywhere we like on the spectrum.

But it is essential to understand that the scientific socialism failed in that prime task of the very reason we have an economy at all, so that the average person can have more of what they want.

No place has grown to wealth without a roughly capitalist, roughly free market system.

Every state that has had this system has grown. Yes, there are variants of the base idea, and yes there are limitations that need to be put on it.

But it is still the one economic system with the saving grace that it actually works.

Tim Worstall is a senior fellow at the Adam Smith Institute in London

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