Can free markets really cause selfishness and altruism to go hand in hand? I realize it must sound too good to be true, but if there’s even the possibility that people acting out of selfish egoism can also benefit everyone else in the process (as long as certain conditions are met) – isn’t it worth investigating?
I want to distinguish though, from the get-go, between what most people understand to be capitalism, which is actually State capitalism, and what true free markets are all about.
State capitalism, also known as crony capitalism, cronyism, corporatism, fascism, or a mixed economy, is that system of social organization in which corporations have great legal privileges, corporations lobby the government for favors, and the government can choose who is allowed to exist in the world of business, and who is not (for example through licensing laws, or selective corporate bailouts).
State capitalism is a horrifying combination, because it brings together the profit motive of corporatism with the violence of government. Corporations use the State to accomplish things that they could otherwise never have dreamed of, and certainly not with legal cover.
They use the State to create monopoly rights for themselves and restrict competition, and the State extracts huge favors too, such as the cosy relationship between government agencies’ data mining schemes, and companies like Google and Facebook who are more than happy to oblige and give away all of your data.
But I don’t want to talk about State capitalism, because that’s not what I advocate. I advocate free markets, that is to say markets completely absent of any government influence. Free markets are only free insofar as they are free from intervention and meddling – from the dead hand of government. State capitalism is at best a corrupted perversion of free markets.
(As a side note, when talking about free market organizations, I will replace the term corporation with firm, or company, to distinguish between the corporate behemoths of today, with the firms that would operate without all the legal privileges.)
The Hypothetical Free Market
Let’s for a moment imagine a society driven by the free market process, and absent of any government. I’m not talking about Somalia here, which is actually in a civil war between competing governments. I’m talking about a society of individuals who consciously understand how the free market works, and why government is not necessary.
What would it look like, and why do I think the free market is such a good idea?
Well, first of all, individuals and organizations would have to compete based not on their ability to influence and corrupt the government through lobbying, but on:
- Customer service,
- and other areas.
Moreover, only the economic means would be available to them – and not the political means. More on that below. But first I want to talk about the indispensable building blocks that allow it all:
Economic calculation and resource allocation
Without economic calculation there can be no market economy. Which means no prices, no signals, and no rational allocation of resources.
Economic calculation requires there to be a common medium of exchange, and for individuals to be able to freely trade between each other. This free trade creates a bargaining mechanism out of which prices arise. Prices are very important, since they’re a collective estimation of the value of a thing, whether a good or a service.
While each individual has his own valuation, it is only when individuals come together to trade that these different valuations clash, and out of that process arises a common price for a particular good.
That price will of course fluctuate regularly based both on the changing valuations of individuals, and on the prices of all those components that go into the production of the thing in question.
This system, the market process, is so incredibly complex, that it can only operate as is. Any attempts by governments to simulate or play the free market will always be doomed to failure.
Why is economic calculation so important?
Without economic calculation, we could not rationally allocate resources. We could not rationally decide what to produce, where to produce, how to produce, for whom to produce, and what price to put on the end product. For that matter, none of the means of production would have prices either.
How could you decide which loaf of bread to buy, if they had no price – or worse, if the prices represented a central planner’s arbitrary decision, rather than the actual costs of production and demand for the bread? How could you know whether taking a bicycle to work made more sense than public transportation?
For that matter, how would the bicycle manufacturer know what components to use, if he didn’t know their free market prices?
A government can of course simply decree that these things be done in a certain way, but that decision cannot be based on sound economics – only on the arbitrary whim of some central planner. Which means that all forms of central planning misallocate resources on a systemic basis, and are very wasteful. They constantly have shortages and surpluses, the people become hungry, and living standards fall.
The rational allocation of resources is imperative in a world where resources are scarce and finite. The free market provides both a yardstick by which to measure the value of goods (through the common medium of exchange), and a mechanism for the reward and punishment of those who allocate resources.
The mechanism is simple: any allocation that creates a profit does so only insofar as the outputs of that allocation are worth more than its inputs. If a blacksmith has created a hammer that is worth more than its constituent components, his time, and any capital goods or land he required to make the hammer, then he will net a profit.
This profit gives him purchasing power, which is the power one has to then turn around and purchase the goods and services of others.
The Economic vs. The Political Means
This method of obtaining wealth is called the economic means. A system in which all wealth is obtained only by economic means ensures that any particular person’s purchasing power is dependent entirely upon his prior ability to create value for others.
Which means that whether or not our hypothetical blacksmith has created something of value depends on whether he has managed to satisfy other people’s desires.
As a stark contrast, and in all systems where there is a territorial monopoly on the legitimate use of force (i.e. a government), we have the political means.
The political means is the obtention of wealth with violence. Not by the creation of value, but by the forceful taking away of value from those who create it. It’s a vicious system, because it rewards those who create nothing of value, and punishes those who make our lives better.
Of course, we have to understand that the economic means is a two-way street. Just as purchasing power gravitates towards those who create value, so does it escape at surprising speed from those who destroy it. The free market can with similar ease make a poor man rich, as a rich man poor.
Those who systematically destroy value, that is to say those who allocate resources in such a way that the outputs are worth less than the inputs, are punished by losing purchasing power. Their poor ability to allocate resources and create value then reduces their ability to dictate who else in society is a value creator or destroyer, because their purchasing power is now diminished as is their say in what is produced.
Doesn’t that make the free market a kind of meritocratic democracy?
The competitive free market has a built-in mechanism that induces people to create value, and punishes them for its destruction. Government systems have no such mechanism. If anything, the government tends to increase funding for failing schemes, and take away funding from those that are successful (though their failure and success still have nothing to do with the creation of value).
In a sense the free market is the ultimate altruistic meritocracy, with the only merit being the creation of value, and the only demerit being its destruction.
It is also curiously democratic, because who is rewarded with purchasing power, and from whom it is withheld, depends entirely upon the wishes of others. Every unit of currency is a vote, and those who create greater value wield more votes.
The money in this case is a sort of token. A proof of work done. More importantly, money obtained through mutually consensual trade is proof of *useful* work done.
And after all, why should every person have an equal say in what is produced in an economy? Should the failed boss of a bankrupt company have as important a say in the valuation of goods and services (he who himself was unable to allocate resources properly), as the successful entrepreneur who creates innovative new products that beat the competition?
Should the dedicated worker who produces great value for others have an equal say in how things are run as the lazy slacker who takes every opportunity to distract his co-workers, rather than producing something of value to others?
The greater the value you create for others, the more votes (currency) you have given to you by those happy customers of yours. When customers patronize one particular firm over another, they vote to give that firm more deciding power in how the economy is structured.
Those who are more skilled at creating value for their customers are hence given a greater decision power over what constitutes value in their own role as consumer of others’ production. I think the free market is really quite an elegant system.
And if Democracy is really power to the people, then there is no clearer power than the power to decide what is produced, consumed, and how; not once every four years, but with every consumption and production decision you make.
As for the power to decide what others can and cannot do with their lives – that is a political power. It has nothing to do with economics, and everything to do with the will to control others, which is quite possibly the root of all evil.
Consumer sovereignty rules supreme in the free market
We’ve already established that firms themselves have very little decision-making power over what they can produce, or at what price. If they want to make a profit, they are entirely beholden to consumers. This concept is known as consumer sovereignty.
A firm that produces a useless product, or produces with very little efficiency, or creates an unreliable product which frequently breaks and malfunctions, will soon find itself making a loss. Losses, just like prices, are market signals to STOP. Stop production, or change it until you make a profit again, that is to say, until you create value.
Now let’s get back to the various ways in which firms can compete among one another for the consumers’ purchasing power – for their vote.
It doesn’t take a genius to realize that lowering prices, keeping all other variables the same (such as quality, durability, etc.), will increase market share by attracting more consumers.
For who in their right mind would overpay for an identical product?
Thus, one of the major ways in which firms or individuals can compete between each other on a free market is by lowering their prices. It may sound simple, but in order to lower the price of a good, a firm has to go to great lengths.
It cannot just lower the price without doing anything else, for that would eat away at its profit margin. Nobody wants to sacrifice profit, and sacrificing too much profit could put a firm out of business altogether. Which means that firms have an incentive to lower their prices while still maximizing profits, and in order to do that, they have to lower the costs of production.
Lowering the costs of production is tremendously beneficial not just to the firm and its owners, who now see increased profits, but also to the firm’s customers, who can now enjoy cheaper products. The environment in general benefits if the same thing can be produced with less, for its scarce resources are now being more efficiently put to use.
Competition based on quality
If Apple want me to buy their new mobile phones within a free market framework, they need to do a better job than HTC, Nokia, Sony, Samsung, and all of their other competitors. (In our current perversion of a free market, all they have to do is sue every competitor into oblivion.)
One of the ways they can stand out is through quality. While they might be selfishly pursuing the desire to gain greater market share by improving the quality of their products, they’re improving the satisfaction and lives of everyone who use them too.
Competition through Innovation
This is even more obvious with innovation. An individual or company might choose to spend their efforts innovating for various reasons. Let’s say that in this case they’re driven by the profit motive. They want to earn as much future purchasing power as possible, and so rather than pocketing all of their current profits, they’re actually re-investing part of them into research and development projects.
They’re taking a risk – those projects might not work out. They might just be throwing their money away on a pointless exercise. But by taking that risk, by funding that research, they might come up with a new or improved product. That product, by virtue of being better than their competitor’s offerings, will attract customers from rival firms and earn them a handsome profit.
Whether they care about bettering the world, or simply about gaining as much profit as possible, they’ve just taken a risk with their own personal money, and improved things for everyone else by creating value.
Likewise, a marketing campaign may tell you that they very much care about your satisfaction as a customer. Maybe it’s even true. The point is that it doesn’t matter. When firms compete between each other to provide the best customer service, they benefit the customers too.
The environmentalism of it all
One could look at the efficiency of the free market and point out the obvious advantages it has to the environment. Government companies, agencies, and departments are horrifically wasteful, quite simply because they can afford to be.
The bureaucrats can’t pocket any profit, in fact any profit means their budget will be reduced the next year. And since on the other hand any losses are to the taxpayers and not themselves, they have neither the carrot nor the stick the free market provides.
Furthermore, free markets (and private property rights) are also the only way to save the environment. Anything else results in the tragedy of the commons. Think that sounds unrealistic? Read this.
I would like to remark that in the mixed economies of the world, some of the features of a free market are present, while others are not, so even in a market hampered by government intervention, we may still see some of the benefits outlined above.
But the world is a mess not because of free markets. How can it be? Free markets don’t exist. Liberty has been a refugee for a long time – nobody seems quite willing to welcome it.
No, the world is in a mess because of the constant use of political means to obtain wealth, and provide purchasing power not to those who create value, but to those who destroy it.
This is why aggressive imprealistic nations such as the United States can have hundreds of foreign military bases, bully other nations, and take over the resources of people by force. It is not because the U.S. government has earned its wealth by creating value, but because it takes purchasing power by force through taxation, which is just a fancy term for theft and slavery.
Is it then surprising, that those very same people whose entire modus operandi is to obtain wealth by the destruction of value and of those who create it, then go on to use that wealth to wage wars, and pass laws that restrict our freedom and diminish our prosperity?
The people who are unwilling to recognize or understand how the world does, and how it can potentially function. The people who constantly justify using the political means of force and violence to achieve their goals. The people who cannot leave others in peace.
These people have created the world we now have, by allowing and even defending the right of the purveyors of the political means to rule the world.
But free markets make peoples’ inherent selfishness into a good thing. While people act out of self-interest, through the free market system they help others. Free markets are that system of economic organization that is most compatible with human nature.
Free Markets as Charity
Those who have obtained wealth through voluntary, mutually consensual transactions, have already provided value to others in order to acquire that wealth in the first place. What they do with their money now that they have acquired it, and whether they decide to help others a second time, is their prerogative and their property to dispose of as they wish.
Far too many people are obsessed with labeling anyone with wealth as evil, especially if they don’t use that wealth to help others. They make no distinction between whether the wealth was acquired through consent, or coercion and fraud, and they ignore completely the inherent altruism of free markets.
There’s no need to invent collectivistic systems of plunder to force altruism onto people. The trade-off is not between pure selfishness and human nature on the one hand, and selfless altruism that runs counter to human nature on the other. Free markets take the best of human nature, and transform every selfish act into an altruistic one.