The free market grows and explores like an organic system, formed by billions of minute democratic decisions made by consumers every hour. Its unique ability to adapt means it can rise to any challenge, including environment crisis. Those who wish to contain this power - and to plan our futures from the centre - are gravely mistaken, argues Madsen Pirie.
Like a virus, free market capitalism mutates to take advantage of new opportunities and to move into new territories. Unlike a pathogenic virus, however, it is symbiotic with human nature, and is one of the most benign institutions that human beings have ever created, perhaps even the most benign. This is the main reason why capitalism will survive and prosper after the pandemic: it is not a fixed thing, but something that has shown remarkable strength in adaptability and endurance, and in its ability to change with changing circumstances.
It was not created deliberately, but emerged as a consequence of the ways in which people behave towards each other. In only a few hundred years it has lifted almost all of humanity out of subsistence and starvation, and given billions of people the chance to seek and enjoy better lives. It enables people who will probably never meet to interact spontaneously with each other for mutual advantage. It has given humanity the wealth that has fostered advances in medicine and sanitation, as well as access to opportunities never available before.
Critics of free market economics, usually those who wish to see the world reordered to meet their own priorities, seize on virtually everything that happens to predict the imminent demise of capitalism and its replacement by an economy centrally planned in what they believe is a more intelligent way, one controlled by the “inputs of stakeholders and their representatives.” They rather miss the point that the unplanned spontaneity of free market capitalism is its major strength. It is what makes it adaptable, ready to change as times change, and to morph into a new version of itself.
Free market capitalism is one of the most benign institutions that human beings have ever created.
They also miss the point that this economic system is the most democratic one possible: people vote with their wallets and purses every day, rather than periodically at the ballot box. It is their decisions about what to buy that determine which companies will prosper and survive and which will not.
Commentators, including those involved in Davos, talk of the need for a “Great Reset” to the world’s economy, so that it can “rebuild itself sustainably” following the economic ravages wrought by the pandemic. They do not need to. The world's economy will reset itself as capitalism finds new ways to meet new demands. And it has already found new routes to sustainability, developing non-polluting and less-polluting fuels at a rate few thought possible. Moreover, the huge and ongoing reduction in the cost of renewables and alternatives offers the prospect that it can be done without reducing living standards. Manufacturers, moreover, are finding ways to produce more value with fewer resources. The smartphone uses a tiny fraction of the resources that it once took to perform all of the functions it can achieve.
The companies that can adapt flexibly and quickly to technological and institutional innovations will survive at the expense of those that cannot. Capitalism does not stand still. It has to adapt itself to a world in constant flux. New technologies open new possibilities to be seized upon by the bold and the brave. Artificial Intelligence is but one of several new technologies, each of which has the power to reset the world economy. Autonomous (self-driving) transport in land, sea and air is another. Cultured (lab-grown) meats is a third. Yet others include advances in areas such as genetic engineering, desalination, and communication.
An example of institutional innovation is what used to be called sweating underused assets and is now called the gig economy, involving firms such as Uber and Airbnb. Any one of these technological and institutional innovations has the power to transform the way in which we live and work, and to expand immeasurably the opportunities open to us. It will be free market capitalism that brings this about, not some earnest government-directed body or some world assembly of the great and the good attempting to steer the world economy into what they regard as a more worthwhile direction. It will be the spontaneous adaptation of businesses to the opportunities that these technological developments make possible that ushers in the changes, rather than the decisions of politicians and academics.
Those who prefer to crush the spontaneity of free market capitalism with decisions made by public bodies containing people like themselves, or by governments that listen to people like themselves, would do well to look at the record of such bodies with sanguine, rather than starry, eyes. When public bodies and governments have attempted to second-guess the economic future, their record has fallen far short of what the spontaneous economy achieves by itself. When they try to pick winners they pick losers. When they try to stimulate economic growth, they find themselves subsidizing firms that end up seeking to maintain and expand the subsidies, rather than honing better products to sell in the market.
Those who crush the spontaneity of free market capitalism would do well to look at its record with sanguine, rather than starry, eyes.
In the coronavirus pandemic, it was the for-profit supermarkets that filled the shelves with food when people started hoarding it. It was private suppliers who came up with the medical equipment in response to government requests and incentives. It was the scientists working in private, for-profit, drug companies who developed vaccines in record time and rushed through the tests to have several approved within one year instead of the customary five or ten years.
By contrast, the record of public bodies and governments fell short even of adequacy. The botched ordering of protective equipment and tests led to shambles and shortages. The conflicting and often contradictory advice of public officials led to uncertainty and confusion. The frequent reversals of policy gave the impression of people making it up as they went along. The private sector proved adaptive and responsive, the public bodies did not.
The notion that capitalism must be replaced by the central direction of such bodies is doomed to be a non-starter. They simply cannot adapt fast enough and respond to needs and opportunities in the way that free market capitalism can. Capitalism will emerge, having adapted yet again into a form more appropriate to the circumstances it finds around it. Meanwhile the best thing that governments, public bodies and their academic advisors can do is to get out of the way and let it happen.
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