Why Capitalism Will Never Die

Many have blamed the current economic woes on capitalism and free markets. This is patently false since it doesn’t take too much research to see that it was government regulation and/or interference in markets and not a lack of it that led to the housing bubble and easy debt, but let’s leave that argument for another post. In the wake of this economic crisis many have been cheerleaders for the death of capitalism. Of course I understand they don’t mean capitalism is dead any more than gravity was dead when the Wright brothers built their first workable plane. The death they speak of is the disuse of capitalism as an economic system. But while capitalism may be used more or less by our society in the coming years, it will never go away as long as humans live on the earth. Why? Because it works better than anything else we’ve got.

It is simple Darwinism. Capitalism is the most effective means of creating goods and services and then distributing those goods and services to the largest number of people. This means that societies and nations that embrace capitalism have higher standards of living. This enables those nations to live longer and support larger populations. In addition, they serve as role models to other nations and thus capitalism becomes infectious. Those nations that embrace other systems struggle to survive, let alone grow, and thus they either collapse and disappear completely, or their governments are overthrown by the people in favor of a government that will embrace a system that works, which ultimately will be capitalism. In short, capitalism leads to growth and life, and all other systems available to us lead to death.

Capitalism is this simple; Imagine you have a chair, and your neighbor wants it. Your neighbor offers you $50 dollars, which is acceptable to you and so you take it and give him the chair. That’s capitalism and free markets. But let’s suppose the government says that whenever you sell something, you have to report it on a form. If you don’t file the form, they’ll fine you $50. If you file the form, but make a mistake, then they won’t fine you the $50, since you filed the form, but they’ll fine you $10 for submitting it incorrectly. Suddenly, the market isn’t so free. It’s getting annoying just to sell a chair to your neighbor. Then let’s suppose the government wants you to account for what you paid for the chair, and if you sell it for more than you bought it for you need to pay taxes on the profit. Now it’s getting to the point where you wonder if the $50 and loss of the use of the chair is worth all the paperwork and bother. Maybe you’ll just keep the chair, even though you don’t need it, your neighbor does, and he has the money to pay for it.

This is just a simple example of how government involvement in restricting markets can inhibit transactions and prevent the flow of goods and services. It gets more serious when we talk about food, water, healthcare, and other goods and services that sustain and prolong life. Let’s take the pharmaceutical industry, for example. Should there be regulation of the pharmaceutical industry? Certainly there should be to prevent fraud. A company should not be allowed to market a cancer-curing medicine that in reality is nothing more than water inside a capsule, or worse yet, something dangerous. But let’s take a look at how the patent process works with pharmaceuticals.

Pharmaceutical companies create drugs that are designed to improve and sustain life. When they invent a new drug, they are able to patent it, meaning only they can produce or license production of the drug, which means they are able to make a lot of money off of it if a lot of people want the drug. However, patents on pharmaceuticals have a 20-year term (nevermind that the 20-year term starts from the date of the filing of the patent, which may be 10 years before the drug is approved by the FDA–it doesn’t matter for this argument), the idea being that this allows the company that invented the drug to make enough money off of it, and then afterwards the drug can be produced by other companies and the competition will lower the price of the drug and make it more widely available. This seems like a nice arrangement, but there are trade-offs.

Imagine that pharmaceutical companies couldn’t patent their drugs at all. After all, how dare they have exclusive rights to set prices on drugs that might save millions of lives if they were cheaper? But then what incentive would there be for pharmaceutical companies to invent drugs in the first place? Sure, someone might want to create a drug because of altruistic reasons, but if it’s not commercially viable where would they get the funding to do it? Who would invest in their idea if there was no chance of earning a positive return? The government could fund drug ideas, but if you remove financial incentives to create new drugs, you only have the altruistic people working to create those new drugs. If you include financial incentives, you get a much larger body of people working on new drugs, which means more drugs than would otherwise be created. One need only compare the pharmaceutical industry in the United States to those of the former Soviet Union or today’s China to see which ones have produced the most and best drugs over the past 50 years.

What if we went to the other extreme and allowed patents with no expiration term on drugs? Obviously, companies would be much more motivated to develop new drugs than they are currently. It would be easier to secure funding, and drugs that are difficult to engineer would be worth the time, cost, effort, and risk because of the chance of a large payoff. The trade-off, of course, is that one company would have a monopoly on the drug they created, and they could charge whatever they wanted. But if your only two choices were expensive life-saving drugs or no drugs at all, which would you choose?

Of course it’s not that easy of a choice because there are infinite options in between no patents and unlimited-term patents. And yes, patents are government interference in markets, but of a sort that benefit society just as anti-fraud interference benefits society, if done in a reasonable way.

Even in Soviet-era Russia there was capitalism. It was called the black market. The black market exists wherever free markets are regulated to the point that incentives over-power the risk of breaking laws that regulate the flow of goods and services. The Unites States will never abandon capitalism entirely, because even if it were the express goal of the government and the people, someone would find a way around it. But that’s not what I’m afraid of. I don’t believe the United States will ever become like the Soviet Union, but I do worry about whether we’ll be 5% more like them in four years than we are today. I think that 5% difference would be enough to cause immeasurable suffering to millions, not only in the US but around the world, since lower standards of living here lead to lower standards worldwide and vice versa. One less pair of sneakers purchased here in the US might mean one more starving child in China.

I also do not advocate 100% open markets. As I mentioned, I believe governments should regulate market to prevent fraud, as well as monopolies and illicit products. A certain amount of regulation provides stability and trust to otherwise free markets, and that leads to a safer environment for inventors to create products and services that raise our standard of living. But the overregulation of markets stifles creativity and keeps those same products and services from reaching those who need them, often because those products and services are never created in the first place.

Our new government is dominated by one party. If they follow through on passing the laws and regulations they have pushed for, it will move this country away from capitalism, and that will lead to fewer businesses being started, fewer transactions, fewer jobs, and if serious enough, we could see an crisis much worse than what we are experiencing today. I suspect whatever programs the government has in mind, they will indulge capitalism enough to maintain the status quo. But if they are confident enough to jettison capitalism, it won’t take long to see the negative results.