Thursday, October 26, 2017

In Defence of Capitalism

The newly-elected (if you can call her grapple for power ‘elected’) New Zealand prime minister, Jacinda Arden, has criticised capitalism in her first interview. She said, "If you have hundreds of thousands of children living in homes without enough to survive, that's a blatant failure." The statement is simply untrue. There are not hundreds of thousands of children in New Zealand "without enough to survive." New Zealand has one of the most generous welfare systems in the world and no child is dying from deprivation unless it is caused by the criminal neglect of parents or caregivers, which is thankfully rare in our society. 

Ardern is employing the classic statists' ploy of creating a strawman issue to knock it down with the perennial solution - more taxes, more state control and more power for herself. The truth is, the natural state of humanity is subsistence living. Human beings lived in abject poverty for most of their existence. That began to change early in the 19th Century and today fewer than ten percent of the world's population still lives in historical levels of poverty, a dramatic fall as shown in the following graph. This trend is, of course, against an exponentially growing world population so the absolute numbers of people better off is a double-exponential graph.


What caused this dramatic change over the past two hundred years? It was a combination of events that we collectively call the industrial revolution, but that was the outcome rather than the cause. Historians disagree on the number and precise definition of the factors, but most are in general agreement about the nature of them. They include greater individual freedom, acceptance of the concept of intrinsic rights, and respect for the rule of law and property rights (and the importance of the latter is well-documented by respected Peruvian economist Hernando de Soto). These things provided the foundations of functioning free markets that allowed people to produce more than they could individually consume and to exchange and invest the surplus to produce even more. It meant the value of an individual's labour grew as the wealth that could be generated from that labour grew. The fact that it reduced the proportion of the world's population living in poverty at the same time as the population was growing exponentially meant that the increase in wealth was widespread and was not confined to a small elite.

The problem with defending capitalism is there is no generally accepted definition of what it means. Jacinda Ardern undoubtedly uses the Marxist definition, which is something like the exploitation of labour to provide a return to those who control the monetary resources. Marxists see the economy as a zero sum game and believe any return on capital is money taken from the pockets of workers. This is demonstrably nonsensical - capital enables us to leverage the very limited physical capacity of human beings to produce far more than the sum of individual workers' efforts. A person cannot produce a car or an iPhone, or even a pencil, on his own. Capital is the multiplier that enables people to produce these things, and in far greater numbers and for far greater reward than they could without capital's leverage effect. But capitalism is about more than capital (which is, incidentally, why I am not a fan of the term). Capitalism is the economic, political and social system that enables us to make the most valuable and productive choices with our resources, including our individual labour. It enables us to use our lives to the greatest value. The critical element is individual freedom - the freedom to make personal choices.

The arrogance of politicians like Jacinda Ardern is that they believe they are smarter than the countless people in a free market who make decisions about what is of most value to them, their families and their communities. They think they understand the incredibly complex system that is the modern economy better than the collective knowledge of all the people within it. In Ardern's case, this is spite of the fact that she has never had a full-time job outside of politics. She talks about housing as if she believes that she can create more, and more affordable, houses than all the builders, architects, materials suppliers and contractors in the market. She believes she can make better purchase decisions than all the buyers could make, and better financing decisions than all the bankers, if left to their own devices. The truth is that it is the interference of successive governments in the key market areas of building, land use and mortgage lending that has caused the current housing shortages and excessive prices, and Ardern's further interference will undoubtedly make those problems worse.

You would think a 37-year-old who had never held a truly productive job in her life would have a little more humility than to criticise the economic system that has lifted the vast majority of the world's population out of poverty.

1 comment:

Bruce Logan said...

Like so many 37 year olds.No context and little knowledge. Compassion which is costly is replaced by pity.