Marc Geddes: Economic system still the world's best despite flaws

COMMENT

In his comment on capitalism, John Minto questioned its moral basis. The basis is simple - individual liberty.

Libertarian capitalism defines capitalism as not just an economic system but a political system, based on property rights. People's property rights are the right to utilise the resources they own, including their own mind and body.

The underlying theory of capitalism has been thoroughly developed by thinkers such as Adam Smith, Friedrich Hayek and Milton Friedman. Their neo-liberal theory has come to occupy the mainstream viewpoint in economics.

The reason for this is the overwhelming body of empirical data that supports it. Free markets are simply the most efficient way to allocate resources and make decisions.

That does not mean that capitalism is perfect. Far from it. It just means capitalism is the best that can be done at a given time. All other systems do worse.

The main alternative to capitalism was communism, which was a disaster in every single country where it was tried. All advanced democracies include a high level of free market capitalism because that is the system voters have decided provides the best standard of living.

Anyone who does not believe that markets are the most efficient way to make decisions can easily test themselves against free markets that let them put their money where their mouths are.

Try the stockmarket or sports betting. If people think they can predict odds or prices better than the market, let them prove it by placing their bets and demonstrating they can make money. Hardly anyone can, of course; the market knows best.

John Minto spoke of Chilean right-wing dictator Pinochet, under whose rule about 2000 people were murdered. According to The Black Book Of Communism, by Stephane Courtois, more than 100 million people perished as a direct result of the communist system, making it the most destructive political system in human history.

Centralised farming practices in communist nations such as Russia and China saw millions starve to death. Today in North Korea, the same farming policies have caused famines and the deaths of millions.

John Minto made many inaccurate statements. The idea that "30 per cent of our children live in poverty" might sound plausible, but consider the definition of "poverty" and the statement is ridiculous.

I receive the unemployment benefit, more than $160 a week. By some liberals' definition I might be "poor" but, strangely, in my "poverty" I have access to clean water, food, shelter, colour TV, radio, phone, video, and the internet. And my income is about 50 times that of the average person living in poverty in the Third World. Capitalism has made New Zealand wealthy.

John Minto bemoaned the fact that under capitalism there was a minority of obscenely rich people and a larger number of people suffering "huge hardship". But capitalism did not cause the poverty, and the rich did not get rich at the expense of the poor. Wealth is not something that simply exists. It is created through human labour and ingenuity. That is why we speak of "making money".

There is no fixed pool of resources waiting to be distributed. Resources have to be created through hard work. Capitalism is not a zero-sum game but a positive-sum game in which everyone can benefit.

Economic growth creates wealth that did not exist before, and, provided the wealth is spread about a bit, everyone gets richer. Hardship exists not because there is too much capitalism but because there is too little. Capitalism is lifting humanity out of poverty, and capitalism generates the wealth that pays for the healthcare, education, and welfare that those living in advanced democracies now enjoy.

If we desire a decent standard of living for all, we should encourage more entrepreneurship. The claim that the removal of tariffs and more free trade causes unemployment is false. In fact, more free trade creates more jobs.

Capitalism is a dynamic system in which the nature of work continues to evolve. Some people lose their jobs but more jobs are being created elsewhere.

Human ingenuity enables more of us to figure out ways to achieve more productively for less effort. So fewer people are needed to do the same amount of work. This is progress.

Capitalism results in net job creation because wealth creation results in new opportunities and new kinds of work. For instance, cars resulted in drivers of the horse and buggy losing their jobs, but whole new kinds of work - mechanics, for instance - produced a net job creation.

John Minto thinks that employees create wealth, and investors in sharemarkets are parasites. Nothing could be further from the truth. It is true that employees help to create wealth, for which they receive wages. But investors and business owners create wealth as well. It is not simply labour that adds value but human ingenuity and intelligence. Economists are coming to recognise that the "knowledge" component is the most important.

The business owner and investors supply the knowledge component. The "profit" they make is not parasitic but a measure of "added value" to the good or service produced.

Profit is not something swindled from other people. It is a reward and remuneration for the work and ingenuity that went into producing the goods and services that other people want.

John Minto called for someone from the "underclass" to defend capitalism. I have responded. I defend it because as an unemployed person I know who pays my dole. It's the people who created every cent of that money. The entrepreneurs of New Zealand ... the capitalists.

* Marc Geddes, an Auckland freelance writer, is responding to John Minto's view that attempts to construct a moral basis for capitalism will inevitably fail.