World-famous investor Ray Dalio is in the news, claiming that capitalism is failing and needs reform. Mainstream media loves it. It seems that Dalio is on every channel this week, talking about income inequality and the need to reform capitalism. One might think he’s getting ready to run for president.
I’m happy to see that there’s been immediate push back. The Week’s James Pethokoukis responded with evidence showing where Dalio has gone wrong. Euro Pacific Capital’s Peter Schiff makes an excellent (if somewhat abrasive) case that it’s not capitalism that’s the problem; it’s government intervention.
Others have chimed in as well, so I’m not going to duplicate those efforts to rebut Dalio. Instead, I want to address the fundamental issue driving this debate.
Let’s start with a definition. Webster’s says:
Capitalism: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.
First off, I don’t think “capitalism” is a good word for what we’re talking about. It was Marx who gave it to us. I think “consumerism” would be a much better word, since even the richest capitalist can go broke if he or she doesn’t give consumers what they want. I know that consumerism has negative connotations, but the word capitalism is worse, perpetuating the image of the greedy 1% controlling everyone else.
Whatever words we use, this misperception is critical: In a system that truly embraces free markets, all transactions are voluntary. That means no one agent calls all the shots. Buyers and sellers, employees and employers, capitalists and consumers—all must agree to a deal or there’s no transaction.
The lack of coercion is what makes free-market systems the most ethical economic systems.
What’s unethical is to rob Peter to pay Paul. That’s true whether Peter and Paul are equals or Peter is rich and Paul is poor. And it’s just as unethical if a majority votes for it, sending someone in a uniform to carry out the crime.
But what if Paul is starving—shouldn’t the government coerce Peter to help him out?
No.
Sure, it would be nice if Peter helped Paul. I’d want to help Paul if I could. In fact, most people are as charitable as their means allow, when given a chance. And the more money people make, the bigger their contributions tend to be, both in absolute and relative terms.
Also, when laws take such decisions out of individuals’ hands, they take away the individual’s opportunity to choose to help. Without that choice, the help is no longer a virtuous action. Instead of being a helpful person, Peter becomes a victim of the system.
But what if Peter is an evil billionaire who got rich selling snake-oil medicine or getting the government to seize little old ladies’ homes so he could build casinos on the properties? Well, then we’re talking about criminal behavior, not capitalism.
But what if…?
And what if…?
There’s no end to the “what ifs” here.
If your definition of injustice is unequal wealth, then nothing I say is likely to convince you to see things my way.
But if you see injustice as stemming from criminal behavior, we can talk.
Whether it’s a serial killer, a rapist, a burglar, or a conman, true crime revolves around coercion of the innocent. Fraud involves an indirect form of coercion. So does welfare.
A market-based economy does the opposite. Since it’s based on voluntary transactions, it’s ethical and just.
The fact that some people in a free market will make more money than others doesn’t make it unjust. But employing coercion to try to equalize outcomes is unjust. No matter how lofty the goal, the moment coercion is introduced, a system becomes unjust. Some innocent participants who are harming no one will be forced against their will.
That’s criminal.
People say the road to hell is paved with good intentions. I’d say its signposts are arguments that ends justify means.
Any time unethical means are used in pursuit of noble ends, the means undermine the ends.
This is the essential point and message of J.R.R. Tolkien’s masterpiece, The Lord of the Rings. Using something inherently evil, even if your goal is to do good, can only result in evil. Evil means corrupt the loftiest goals.
Back in the real world, it’s no surprise that systematized coercion has unintended negative consequences, like welfare dependency and many other social problems. Robbing Peter to help Paul not only victimizes Peter, it often ends up hurting Paul.
In contrast, market-based systems give both Peter and Paul a chance at building better lives for themselves. They’re free to engage in charity if they want to, so they often do. Since it’s all through voluntary transactions, it’s ethical. That’s the yardstick—not how well Peter does compared to Paul.
It’s as simple as that.
