The Morality of Capitalism, part 2: Barriers to Free Markets

In part 1 of this series we looked at the benefits of capitalism as discussed in a Prager University video narrated by libertarian economist Walter Williams. Williams defines free-market capitalism simply as voluntary transactions between individuals. Ideally, market freedoms lead to individual freedoms. In an ideal world, capitalism is the most moral economic system ever invented.

But in the real world, it doesn't always work that way. Williams, in his video, gives one example of a barrier to free markets: government coercion. When a government bails out a failing company, we are all forced to contribute financially to cover the losses caused by mismanagement by that company's leaders. Williams uses this single example to promote the view that limited government produces maximum individual freedom.

Take the example of the American automobile industry. It was struggling to survive in 2009. Why? Because they were producing cars that did not please a sufficient number their fellow men. In a free market they would therefore have gone bankrupt. The market would have said, look, you're done, sell your plant and equipment to somebody who can do a better job.

But when Chrysler and General Motors failed, they went to Washington, D.C. and got the government to bail them out. The government bailout essentially meant to them, you don't have to be accountable to customers and stockholders. No matter how inferior your product is and no matter how inefficient you are, we'll keep you in business by taking your fellow man's money.

When the government interferes in this way, it takes the power away from the people and rewards companies that couldn't compete successfully in the marketplace. That may work out very well for politicians, big unions, and corporate officers, but it seldom does for the taxpayer. That's why a free market system can only work if there is limited government.

That's libertarian philosophy in a nutshell. But the real world isn't so clear-cut. Suppose the government had let Chrysler and GM go bankrupt. All the employees working in all the factories of both corporations would be out of a job. And although Williams glibly asserts that the plant and equipment could be sold to "somebody who can do a better job," the reality is that when a large corporation goes out of business, it is nearly impossible for an entrepreneur to step in and launch something new at the same scale. At best, a fraction of the laid-off workers will start their own very small businesses—possibly something similar to Williams' example of the guy who mows lawns to get money to buy steaks. These entrepreneurs won't have much use for Chrysler's plants and equipment. And for the majority of laid-off workers, even that is not a viable option. There are only so many lawns to mow.

Let's recall Williams' definition of free-market capitalism.

The free market calls for voluntary actions between individuals. There's no coersion. In a free market, if I want something from you, I have to do something for you.

Corporate efficiency, however, relies in part on reducing the individuality of the workers. If the typical employee can easily be replaced by someone else—or by a machine—with no loss of productivity, the corporation can return the same level of profits to shareholders even with high workforce turnover. And if the employees are paid less than the value they bring to the company, that's more profit for the executives and the shareholders. In fact, corporations must underpay their shop floor employees. If the workers are paid what they're worth, there won't be enough surplus to cover multimillion-dollar C-level salaries.

The reality is, any separation of labor and ownership produces a market that is somewhat less than free. And that's not just my opinion. Adam Smith, the "father of capitalism", warned against allowing corporations to gain too much power. He argued that corporate leadership, which he referred to as "dealers", could never act in the public's best interest.

To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.

Smith also recognized that government regulations might be necessary to keep corporate power in check.

When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

Regulations proposed by corporate lobbyists, on the other hand, Smith regarded with suspicion.

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

In the Prager video, Walter Williams addresses criticism of modern corporate power.

But a lot of people ask, "What about giant corporations? Don't they have too much power over our lives?" Not in a free market. Because, in a free market we the people decide the fate of companies who want our business.

And in theory, he's exactly right. In an ideal capitalistic world, neither governments nor corporations would have the ability to interfere with an open and free market. But is that the world in which we live? Or is the culture of mass layoffs and "too big to fail" possibly a hinderance to a genuinely free market?

Perhaps there is a role for government intervention after all.