Physics Napkins

Capitalism is perhaps the most misunderstood economic system in history, largely because it is routinely blamed for the consequences of violating its own principles. Capitalism means private property, individual rights, voluntary trade, and a government limited to protecting those rights. It is a system in which individuals are free to produce, compete, trade, and prosper without requiring political permission or favoritism. Cronyism, by contrast, means government granting economic privileges through subsidies, bailouts, tariffs, regulations designed to protect favored businesses, and other forms of political favoritism. Socialism, communism, fascism, theocracy, absolute monarchy, feudalism, mercantilism, corporatism, and cronyism differ in their doctrines, methods, and objectives. Yet all have permitted political authority or privileged groups to override individual economic freedom. The fundamental distinction is between voluntary exchange and political coercion. Under capitalism, economic success depends on creating value that others voluntarily choose to purchase. Under cronyism, political influence can substitute for earning that success through trade. This brings us to the mixed economy, where elements of capitalism coexist with government intervention, redistribution, regulation, and political favoritism. When intervention produces unintended consequences, critics routinely attribute those failures to capitalism simply because they occurred in an economy containing private businesses and markets. That is a fundamental error of causation. The existence of private businesses does not make every government policy capitalist. Nor does the existence of wealthy businessmen make political favoritism a product of free markets. A businessman who earns a fortune through voluntary trade and one who obtains privileges through political coercion are operating on fundamentally different principles. Pure laissez-faire capitalism has never been fully implemented. Yet to the extent economic freedom has existed, it has demonstrated its extraordinary capacity to create wealth, increase productivity, encourage innovation, and raise living standards. And here lies the great irony. The remaining economic freedom continues to generate much of the wealth that makes government intervention and redistribution possible, while helping cushion society against their destructive consequences. Critics then demand further intervention to remedy problems caused or aggravated by previous interventions, perpetuating a cycle in which political power expands while capitalism receives the blame. Before blaming capitalism for any economic problem, establish whether that problem arose from voluntary exchange or the coercive exercise of political power. You cannot reasonably condemn a system for the consequences of violating its principles while ignoring the benefits produced when those principles are respected.