Why Do We Need Free Enterprise?

Several months ago French economist Thomas Piketty was all the rage.

Seeming to follow Jean-Jacques Rousseau, Piketty argued that free market capitalism was producing too much income and wealth inequality. He offered a set of policy prescriptions designed to reduce it.

Piketty also influenced French politics. When Socialist president Francois Hollande took power in 2012 he enacted a program that seemed to derive directly from Piketty.

How did that work out?

By the evidence of subsequent French elections, not very well.

The New York Times reported the results of a series of elections that took place in France last Sunday:

In the aftermath of balloting on Sunday, conservatives in France were well positioned to build momentum before the presidential election in 2017, political analysts said Monday.

The elections for thousands of local council members in 98 ofFrance’s departments amounted to a rebuke of the Socialists, who were ousted by conservatives from control of 28 departments — some they had dominated for more than 30 years.

The steady advances by conservative forces appear to have set adrift France’s political left, leaving it fractured and uncertain about how to regain popular support in the midst of an economic malaise that has failed to improve substantially over more than four years.

The French problem with inequality, and especially with high unemployment has actually been around for quite some time. So-called conservative parties are hardly bastions of free enterprise. Among the consequences, hundreds of thousands of France’s best and brightest are now living and working in London.

Apparently, policies that aim at redistributing wealth tend to stifle economic growth, thus wealth production.

Some believe that inequality is a symptom of capitalism's corruption. They believe that the profit motive, whatever its value, tends to produce greed and that in a capitalist system the very rich will take as much as possible for themselves even if they starve everyone else.

To solve this problem, they propose tighter government control over the economy, first, by increased taxation; second, by increased government regulation. In some places they also want the government to own the means of production.

In their radical forms, these efforts to overcome inequality have tended to produce misery.  Whether in Communist or Socialist countries, the results are consistent.

But, when government control is loosened the same countries show exceptionally strong economic growth. Accompanied, it is fair to say, by an unequal distribution of wealth.

Free enterprise does not solve all of the problems of inequality but it does solve the problem that excessive government control creates: that is, extreme poverty.

Edward Lazear asserts the value of free market reforms by examining the results obtained by nations that introduced them:

Consider some facts: In 2013, the World Bank reported that the number of people world-wide living on less than $1.25 a day had decreased dramatically since the early 1980s. In 1981 half those in the developing world had income below this threshold. By 2011 only 17% lived on less than $1.25 a day. In China 84% fell below the level in 1981, a proportion that shrunk to 6% by 2011. In India the figure fell to 24% in 2011 from 66% in 1979.

The fact that inequality within India and China has grown is of minor consequence. What’s important is that the average citizen of these countries, once among the poorest in the world, has seen income rise substantially. Though China and India are the most striking examples because of their size, smaller developing countries have experienced similar changes. In 1993, Vietnam had 64% of its then nearly 70 million people in poverty. But by 2008, after implementing market-based reforms, and with a population of 85 million, the percentage of Vietnamese in poverty had fallen to 17%, according to the World Bank.

But, Lazear asks, why should we believe that these same policy prescriptions will work for developed economies:

Still, these countries are very different from rich, developed countries and it might be argued that their lessons are not relevant for wealthier countries. Perhaps not, but there is no compelling evidence that the poorest citizens of rich countries fare better when there is more government control of the economy.

Does this mean that we should ignore inequality? Not at all. Equality of opportunity is a basic goal of every fair society, as is help for those who fall on hard times. But the bulk of those who have moved out of poverty in the recent past have done so because their governments have turned away from state control and toward markets, not the reverse.

No one doubts that capitalism is flawed. The same applies to all human institutions and to all policies. And yet, one should appreciate that capitalism has markedly improved the living standards of billions of people.

Economic policy is not designed to engineer the ideal state dream by philosophers and economists. If we say that capitalism is flawed, we must also add that those who condemn it are comparing it to something that does not and probably can never exist.

Idealists reproach capitalism for failing to produce the society that they want. 

We do better to judge whether it can produce and distribute goods and services to the general population. In that case, we would arrive at a different conclusion?

As for the idea of inequality, it is probably built into all human social groups. Some are older; some are younger. Some are richer; some are poorer. Some are stronger; some are weaker. Some have more talent; some have less talent. Some work harder; some choose to work less. 

And yet, inequality motivates. If some did not do better than others, no one would have anything to strive for.

It is surely possible to have too much of a good thing, and current conditions seem to have produced a cavernous divide between the rich and the middle class in America.

But, has this divide been produced by capitalism or by government meddling in the economy?

Lest we overlook the obvious, many people who could have made a good living in an old manufacturing economy are being left behind by a high tech industry that requires job skills that they do not possess.