Reforming Capitalism Leads To Socialism

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Posted: Oct 19, 2020 11:55 AM
Reforming Capitalism Leads To Socialism

Source: AP Photo/Charles Krupa

A professor of business and public policy at the University of Oxford asked in a recent article published in Forbes, Why do attempts at reforming capitalism fail?. The author gets many things wrong because he has learned only mainstream economics. For example, the U.S. is not a capitalist country. We have reformed capitalism into oblivion. 

The author makes limited liability the cornerstone of capitalism. That would surprise every capitalist from Adam Smith to Vernon Smith. The cornerstone of capitalism is property; free markets only instantiate property. Without free markets property doesn’t exist. 

Limited liability is not a regulation. It’s the ancient wisdom that people shouldn’t be held responsible for things they didn’t do. If I loan someone money to start a business, I’m not responsible if he chooses to import cocaine from Columbia. And yes, large scale businesses could exist without limited liability. Corporations have issued about $8.8 trillion in bonds compared to the stock market’s capitalization of $30 Trillion. But courts have never found bond holders responsible for the actions of management. Without limited liability for corporations we wouldn’t have a stock market, but we would have large international corporations. 

The author got one thing right, corporations will buy politicians and use them to write regulations that favor them. He wrote, 

“Before long, you’re in a state of ‘regulatory capture,’ in which capitalists shape regulations to meet their private needs. In this case, the risk-reward balance that is inherent to well-functioning capitalism is thrown off-kilter as the taxpaying public increasingly picks up the costs of private economic failure. The more the regulation, the greater the opportunities for capture.”

But he misfired on the Reagan regulatory revolution. There wasn’t one. Jimmy Carter ended federal price controls on oil and natural gas. Witnessing the good results, Reagan ended price controls on transportation and banking. But there was never any deregulation. The Federal Register of new regulations grew by 70,000 pages annually from 1970 until today. 

The author’s faulty history allows him to conclude with this: 

“The ecosystem of both public- and private-sector bodies is such that neither can really deliver on traditional left versus right ideological performance myths. Both markets and governments have their flaws, and it is through a nuanced management of these flaws that we strike a sustainable balance between them.”

We can forgive the author for having such a bad grasp of history because schools haven’t taught economic history in over 40 years. It seems that only followers of the Austrian school know history. But the author would only need to search the internet for “hockey stick graph of per capita GDP” to discover that the West is at least 30 times wealthier today than it was 300 years ago. Did we accomplish that through the proper mix of state and public enterprises? 

No. Those had existed for millennia. We did it through the freest markets in history. And as the economic freedom indexes demonstrate, there is a strong correlation between freer markets and increasing standards of living. 

In the heat of World War II, the greatest economist of the 20th century, Ludwig von Mises, noticed that the myth of a third way between capitalism and socialism had become popular. He called the ideology “interventionism” and demonstrated that it would always end in socialism. Mises concluded his book Interventionism: An Economic Analysis with this: 

This analysis is intended merely to explain that the economic policy of interventionism, which is advertised by its advocates as a progressive socioeconomic policy, is based on a fallacy. This book demonstrates that it is not true that interventionism can lead to a lasting system of economic organization. The various measures by which interventionism tries to direct business cannot achieve the aims its honest advocates are seeking by their application. Interventionist measures lead to conditions which, from the standpoint of those who recommend them, are actually less desirable than those they are designed to alleviate. They create unemployment, depression, monopoly, distress. They may make a few people richer, but they make all others poorer and less satisfied. If governments do not give them up and return to the unhampered market economy, if they stubbornly persist in the attempt to compensate by further interventions for the shortcomings of earlier interventions, they will find eventually that they have adopted socialism.

An eighteenth century philosopher wrote, “Men will always deceive themselves by abandoning experience to follow imaginary systems.” That’s what socialists and promoters of a balanced public/private partnership, or third way, have done.