By Michael Woronoff
Sunday, March 24, 2024
In 1848, a pair of authors published one of the most
influential political pamphlets in history. They highlighted the transformative
and dynamic nature of capitalism, which they noted had, in just a century,
“created more massive and more colossal productive forces than ha[d] all
preceding generations together.” They also emphasized the egalitarian power of
free markets, observing that wherever capitalism took hold, it eliminated
feudal arrangements and swept away entrenched prejudices.
But their acknowledgment of the forces unleashed by
capitalism was far from an endorsement. While conceding the enormous benefits
bestowed by free markets, they argued that capitalist systems un-avoidably led
to inequality and exploitation of the proletariat by the bourgeoisie. To these
authors, the contradictions inherent in capitalism would precipitate its
downfall in a revolutionary transformation to Communism.
The authors, of course, are Marx and Engels, their
pamphlet The Communist Manifesto. The pair proved prescient in
their observations of the transformative nature of capitalism and its ability
to supercharge economic development and promote liberty. Around the time they
wrote, 90 percent of those on the planet lived in extreme poverty. Today, fewer
than 10 percent do. Global life expectancy has more than doubled, from around
30 years to just over 70. The duo was less successful in their prediction that
the forces of capitalism would lead to self-destruction.
Since publication of the Manifesto, free
markets have been under constant assault from the left. During that same time,
with some notable intellectual exceptions, conservatives have generally argued
that capitalism is the most effective system to foster individual freedom,
economic growth, and prosperity. With the recent escalation of right-wing
populism, however, an increasing number of self-described conservatives have
turned anti-capitalist. Politicians, including former President Trump and
Senators Josh Hawley (R-Mo.), Marco Rubio (R-Fla.), and J.D. Vance (R-Ohio),
and intellectuals, including Patrick Deneen, Sohrab Ahmari, and American
Compass founder Oren Cass, challenge the premise that free markets promote the
common good. Those in this camp advocate embracing the mechanisms of central
planning to, in the words of Marco Rubio, “ensure that the results our economy
produces are in the best interest of our people, our families, our communities,
and our nation.”
The attacks on capitalism from both left and right are
based on many factual and conceptual errors. As these views take hold, the need
for a full-throated defense of free markets has increased. Johan Norberg meets
this need with his most recent book, The
Capitalist Manifesto: Why the Global Free Market Will Save the World.1 It
makes the definitive case for capitalism and repudiates common arguments
offered against the system.
***
Norberg begins by cataloguing the immense economic and
social benefits capitalism has conferred on mankind. For most of history, until
just under 300 years ago, life was miserable for the bulk of humanity. Nearly
all of Earth’s inhabitants lived in abject want with no hope of im-proving
their lot. Global average income remained stagnant. Economic systems based on
coercion were the norm. Then, beginning in the late-18th century, the
liberalization of the British economy, transitioning from feudalism to capitalism,
catalyzed the Industrial Revolution. The establishment of competitive markets
and private-property rights facilitated the efficient allocation of resources,
creating an environment conducive to innovation. The resulting rapid economic
growth produced an unprecedented reduction in the percentage of the British
population suffering from extreme poverty. As economies across the globe
liberalized, the phenomenon spread.
Since then, capitalism has continued to benefit the world
in an astonishing way. Norberg cites a review of more than 1,300 academic
articles showcasing a resounding truth: “The correlation between economic
freedom and societal outcomes [is] overwhelmingly positive: countries with
freer markets have faster growth, better wages, greater poverty reduction [and]
more investment.” Countries in the top quartile on a common index of economic
freedom boast a per capita GDP seven times higher than countries in the bottom
quartile. Those in the bottom quartile experience an extreme poverty rate that
is a staggering 16 times higher than those in the top.
Of course, correlation isn’t causation. That’s why the
cases of China, Korea, and Germany prove instructive. All three split into two
nations, in which the citizens on each side were essentially the same; neither
had an advantage in terms of history, culture, aptitude, skills, or ambitions.
Without exception, the path of free markets led to far greater wealth and
well-being. Taiwan, marginally richer than China in the mid-1950s, grew four
times richer by 1980 (around the time China began to liberalize its economic
policies). South Korea, poorer than resource-rich North Korea in 1955, is 20
times richer today. Pre–World War II, West Germany lagged East Germany in per
capita GDP. By the time of reunification in 1990, West Germany’s per capita GDP
was more than double that of East Germany. No counterexample exists. As Norberg
observes, wealth inequality across the globe “is due to the uneven distribution
of capitalism: people who have it become rich; those who do not have it stay
poor.”
Moreover, the economic benefits of capitalism trigger a
cascade of social advantages, including improved health care, increased average
life expectancy, greater democracy, reduced levels of corruption, enhanced
respect for human rights, and heightened subjective well-being. Norberg
presents data showing that “Western market economies are the world’s least
racist societies” and “that economic freedom is positively correlated with
tolerance of other ethnic groups and gay people.”
Norberg reveals the simple mechanism by which capitalism
increases well-being: increasing societal wealth. In general, “the richer a
country is, the longer and healthier people live, with improved outcomes on
almost all indicators of well-being.” And the key to increasing a society’s
wealth is to free its economy from government intervention. An unambiguous
negative correlation exists between the size of government and economic growth.
As a result, policies to reduce perceived inequality or otherwise tame capitalism
impede growth, paradoxically making the intended beneficiaries of those
policies worse off than they would otherwise be.
Why does free-market capitalism result in greater growth?
As Norberg explains, capitalism isn’t about capital, it’s about how an economy
allocates resources. In a free-market system, allocation decisions are driven
by the forces of supply and demand. Billions of market participants make
choices that express their preferences and needs. These choices, and the prices
that ensue, aggregate and convey valuable information about the relative
scarcity and desirability of goods and services. As a result, resources flow to
their most valued use, fostering efficiency and innovation. Because no single
entity can possess or process all the consequential information essential for
the functioning of society, any interference in market decisions leads to
shortages, surpluses, wasted resources, and decreased innovation, obstructing
the growth that would otherwise benefit society.
Critics counter that the benefits of capitalism flow to
the rich and powerful at the expense of the poor, so the system should be
constrained. But their claim is false. Norberg notes that, regardless of how
free a country’s economy is, citizens in the poorest decile receive around 3
percent of the country’s income. In fact, a slightly higher percentage flows to
the poorest in the economically freest countries (2.9 percent), versus those in
the least free (2.7 percent). As a mathematical result, the more economic
growth a country experiences, the more absolute wealth flows to its poorest
citizens. This effect is so powerful that today’s indigent are wealthier than
the average citizens of just a few decades ago. As Kevin Williamson notes:
It is much better to be a poor
American in 2022 than it was in 1982, 1922, or 1822, in that poor Americans
today are better-fed, better-housed, and better-doctored than were poor people
only a few decades ago, and, by most physical metrics, they are better
provided-for than were middle-class people a generation ago.
Norberg illustrates Williamson’s point, observing that
those in poverty in the U.S. today “own more amenities such as dishwashers,
washing machines, dryers, air conditioners and televisions (and of course
computers and mobile phones) than the average American did in 1970.”
After extolling the benefits of capitalism, Norberg
addresses common attacks against the system, starting with assaults on free
trade. Norberg, a fellow at the Cato Institute, has been defending free trade
for over two decades after a youthful flirtation with anarchic leftism in his
native Sweden. In the beginning, he defended globalization against leftists who
asserted that free trade is evil because it allows richer countries to exploit
poorer ones. The evidence since the turn of the century has destroyed this
argument, as globalization cut the world-wide level of extreme poverty by over
70 percent.
Today, Norberg is more frequently confronted by those on
the new right, who contend, as Donald Trump does, that “globalization . . .
wipes out our middle class and our jobs.” Marco Rubio insists our trade
policies have “exported [these] jobs to places like Mexico and China, leaving
many American workers without the means to provide for their families.” Norberg
provides abundant evidence that Trump and Rubio are simply wrong. For example,
he cites one study showing that recent trade with China has resulted in a
net increase in American jobs. To demonstrate that trade
barriers destroy rather than save jobs, he points to an analysis establishing
that, for each job saved by U.S. protectionist measures, the purchasing power
lost could have been used to hire six additional workers.
Critics highlight the shift in the mix of available jobs,
arguing that international trade has caused a significant decrease in
well-paying manufacturing jobs that workers without a college degree could
perform. Norberg concedes that as advanced economies become wealthier, they
lose manufacturing jobs. But the decrease is overwhelmingly due to increases in
productivity, primarily from automation, rather than outsourcing, by a factor
of almost seven to one. That is why, despite the loss of around one-third of
manufacturing jobs over the past 45 years, U.S. industrial output has more than
doubled. In fact, the U.S. has the second-largest manufacturing economy on the
planet, and our manufacturing output is near an all-time high. Furthermore, the
resources freed by increased productivity have resulted in the replacement of
the lost jobs with generally higher-paying jobs. On average, the U.S. adds
around 2–3 million jobs annually.
And trade restrictions harm others besides workers.
Norberg believes that
protectionists too often overlook the significant costs their policies inflict
on American consumers. By allowing individuals and nations to specialize
in what they do best, free trade unleashes the forces of comparative advantage,
maximizing efficiency and resource allocation. Trade barriers perpetuate
inefficiencies and misallocate resources, limiting choices and increasing
prices. The resulting harm disproportionately affects “low- and middle-income
households who spend a larger share of their income on internationally traded
goods, such as clothing, food and consumer electronics.” For example, a recent
study found that the tariffs imposed by the Trump administration on imported
washing machines increased the cost of washers by 11.5 percent. So protectionist
measures are a double whammy, decreasing employment and raising prices, often
substantially.
Recent events have increased the frequency of the
argument that government intervention in international trade is necessary to
ensure uninterrupted access to essential goods during emergencies, such as
natural disasters and wars. For example, the Biden White House, claiming that
the Covid pandemic exposed the dangers of relying on global supply chains,
insists that “the U.S. must take stronger action to identify and get ahead of
vulnerabilities in the supply chains of critical goods.” The world undeniably faced
shortages of critical items during the pandemic. However, government actions
intensified these shortages, which, it turns out, is typically the case.
Norberg notes a review of the 389 economic crises in the world occurring after
1992, revealing a historical pattern of government intervention significantly
exacerbating the effect of upheavals.
Why does government intervention inevitably muck things
up? While hindsight may offer clarity on the appropriate responses to past
crises, predicting the nature of the next calamity is impossible. And
governments are not equipped to respond to unpredictable events as they occur,
since centralized decision-making can’t keep up with the high volume of
fast-changing information and conditions. The free-market system’s ability
instantly to synthesize and rapidly act upon dynamic and decentralized
information makes it the most effective way to navigate the significant
challenges encountered during volatile circumstances. Arguably, adherence to
unfettered capitalism is most important during precarious times.
After taking on protectionism, Norberg addresses other
criticisms of capitalism, exposing myths and misconceptions regarding income
inequality, the dangers of big companies, the ability of industrial policy to
improve on market results, the threats posed to our economy by China, and the
risk that unfettered capitalism poses to the environment. His discussion of
these issues demonstrates that “capitalism makes us freer and richer, creates
better jobs and greater opportunities and helps us solve environmental
problems.”
Norberg then turns to address those who make a social
case against capitalism, quoting Noreena Hertz, who believes that liberal free
markets rob us of “solidarity, community, togetherness and kindness”; Patrick
Deneen, who claims that the system makes us “insecure, powerless, afraid and
alone”; and Joel Halldorf, who maintains that freedom “makes us lonely.” These
critics believe that liberal capitalism turns otherwise decent human beings
into greedy competitors, seeking ever more material benefit at the expense of
others, destroying personal relationships and creating feelings of isolation.
To reverse these effects, critics, such as Oren Cass,
would buttress and constrain capitalism by “adopting public policies necessary
for shaping markets toward [the common good].” Of course, these paternalistic
critics often disagree on what the common good is, so their policy
prescriptions vary, often in contradictory manners. Broadly speaking, those on
the left propose policies intended to combat income inequality, while those on
the right call for a return to traditional, religious-based values, which they
believe will rebuild communities, among other things, curbing the perceived
loneliness epidemic.
Once again, the critics misconstrue the dynamics at play.
Take the claim that capitalism results in increased loneliness. Polls typically
show the opposite: Those in the most market-oriented societies report being
less lonely. These polls also show no correlation between the level of income
inequality or religiosity of a society and the prevalence of loneliness. As
Norberg says, it turns out “we need personal freedom and free markets to remedy
the existential isolation that equality and spirituality can’t solve; it’s not
the other way around.”
Even though no evidence links the free market to
increased loneliness, some argue that capitalism, by fueling the pursuit of
wealth, turns us indifferent and ruthless. However, the premise is wrong.
Capitalism doesn’t instill a desire for profit that does not already exist, nor
would such a desire vanish under an alternative economic system. Self-interest
is a fundamental aspect of human nature, independent of the economic framework
under which someone lives. Banning market forces won’t eradicate this inherent
trait. Those who believe we can eliminate self-interest by departing from
capitalism completely misunderstand how human beings work. Constraining
capitalism won’t alter a person’s essential make-up. Milton Friedman
articulated this point in an appearance on The Phil Donahue Show more
than 40 years ago that has gained new life as a viral YouTube video:
Is there some society you know that
doesn’t run on greed? You think Russia doesn’t run on greed? You think China
doesn’t run on greed?…The world runs on individuals pursuing their separate
interests…. Is political self-interest really nobler than economic
self-interest? Where in the world do you find these angels who are going to
organize society for us?
This conclusion doesn’t suggest that life under
capitalism is without challenge, merely that comparable issues are greater in
societies with more severe market constraints. The central feature of systems
like feudalism, Communism, and socialism is that they compel some citizens to
provide a portion of the rewards of their efforts to others, regardless of the
wishes of the providers. This inherently breeds divisiveness. Under capitalism,
in contrast, which depends on voluntary interaction, we naturally consider the
needs and desires of others, fostering a spirit of cooperation. This stands as
a vital differentiator between capitalism and other systems. Instead of
ignoring the existence of inherent self-interest, capitalism channels it in
beneficial ways.
The empirical evidence substantiates the assertion that
individuals in free-market economies exhibit less callousness and greater
generosity. A team of psychologists measured the prevalence of various forms of
generosity and helpfulness across 152 countries. These actions included
willingness to, among other things, donate blood, organs, and bone marrow;
contribute to charity; volunteer, assist strangers; and show kindness to
animals. One of the most robust correlations identified was the heightened likelihood
of assistance by residents of individualistic countries. Experiments conducted
across societies at diverse developmental stages reveal that citizens of
cultures least accustomed to daily market transactions are most likely to view
human interactions as an opportunity to exploit others.
***
The minor flaw in Norberg’s otherwise comprehensive
defense of free markets is that he touches only incidentally on the moral case
for capitalism—for example, noting in passing that it is “the insistence on
voluntary relations that makes the free market morally superior to all other
systems.” But the moral case is both essential and strong. As Milton Friedman
laid out in, among other places, his seminal work, Capitalism and
Freedom, free-market economic arrangements promote political and individual
liberties in two essential ways.
First, as Norberg highlights, economic freedom is
inherently valuable, constituting an end in itself. The essential feature of
capitalism is that it enables people to interact voluntarily, without
interference from others. Any government-imposed restriction on individuals’
rights to transact (or requirement to engage in certain transactions) deprives
them of a portion of their personal freedom. According to Friedman,
it is partly this feature of the
market that leads many people to be opposed to it. What most people really
object to when they object to a free market is that it is so hard for them to
shape it to their own will. The market gives people what the people want
instead of what other people think they ought to want. At the bottom of many
criticisms of the market economy is really lack of belief in freedom itself.
Second, economic freedom is necessary (though not alone
sufficient) to safeguard individual liberty and democratic governance. Friedman
contended that “the essence of political freedom is the absence of coercion of
one man by his fellow men.” The danger to political freedom arises from a
concentration of power that would permit such coercion. To preserve political
freedom, concentrated power must be eliminated or checked. But if the
government controls the means of production, real dissent becomes a practical
impossibility. Economic power, gained through a market free of government
interference, has so far proven to be the only effective way to curb
concentrated political power. Empirical evidence supports this claim. As
Friedman observed, there has yet to be a politically free society that lacked a
form of free-market system for the bulk of its economic activity.
At the end of his
book, Norberg provides a warning:
[If you are] convinced of the
importance of open societies and free markets: do not take them for granted….
Capitalism has meant the greatest social and economic progress humanity has
ever experienced, and millions respond by rejecting it in favor of the next
singer they have never heard. For the first time, free markets provided broad
populations with the resources and leisure to engage in theoretical ideas and
political debate, and to a not insignificant extent, we have devoted them to
rejecting the market economy as unfair and soul-destroying.
Because we exist in a largely free and prosperous
society, we often fail to appreciate that we live during the smallest sliver of
history in which humans have enjoyed anything approaching the enormous wealth,
political freedom, and individual liberty we in the United States possess. The
last two and a half centuries stand as a remarkable anomaly in the broader
historical trend, and our continued fortune is far from guaranteed. Nearly 60
years ago, Ronald Reagan noted the fragility of our freedom, advising that it
“is never more than one generation away from extinction.” Maintaining our
prosperity and liberty requires constant vigilance. We ignore Norberg’s warning
at our peril.
1 Atlantic Books, 304 pages
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