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How free markets promote the ‘common good’

All industrial sectors produce something and ‘Government’ mostly produces mostly bad ideas.

Consider Sen. Elizabeth Warren’s proposed “Accountable Capitalism Act“. This terrible bit of legislation would require corporations that earn more than $1 billion a year in revenue (not profits) to get a federal “charter” in order to operate. Among other things, this charter would oblige these companies to consider all “stakeholders,” not just shareholders, when making decisions. Also, shareholders would be permitted to sue the company if they felt its actions were driven purely by profit and did not reflect the desires of its many “stakeholders.”

Capitalists are servants, not masters

Lurking behind this is the notion that business owners are only looking after their own interests to the detriment of the general interest of wider society. What people like Sen. Warren fail to understand is that free markets ensure that business owners serve their own interests by serving those of ‘wider society’. As Adam Smith wrote back in 1776, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Entrepreneurs are not generally altruists. Companies like Microsoft, Apple, or Amazon have improved the quality of life of tens of millions by providing better products or at lower costs. But Bill Gates, Steve Jobs, and Jeff Bezos did not establish these companies out of altruism. They did not give their products away. Like Henry Ford before them, they established them to make money. True enough, Bill Gates is now a very charitable man. But that is because he can afford to be owing to the vast wealth he generated in a capitalist economy.

Neither are these people the Masters of the Universe they are often portrayed as. They stand or fall by how well they serve the wants of the consumer. As the economist Ludwig von Mises wrote,

…the main objective of capitalists is to produce for the broad masses…In his capacity as a wage earner, the worker cannot determine what is to be made. But in his capacity as a customer, he is really the boss and tells his boss, the entrepreneur, what to do. His boss must obey the orders of the workers as they are members of the buying public. Mrs. [Beatrice] Webb, like other socialists, was the daughter of a well-to-do businessman. Like other socialists, she thought her father was an autocrat who gave orders to everybody. She didn’t see that he was subject to the sovereignty of the orders of the customers on the market. The “great” Mrs. Webb was no smarter than the dumbest messenger boy who sees only that his boss gives orders.

Private interest or ‘General’ interest?

You might not like this. Many do not. You might wish there was a basis other than pursuit of the private interest upon which we could base our pursuit of the general interest. But, if it exists, nobody has yet found it.

The Soviets looked for it. They eliminated profits and inspired their workers by telling them they were working for the greater glory of the Revolution, the general interest, if you like. This cut little ice with your average Soviet worker. Nobody was incentivised to do anything. As a consequence, few did. The Soviet economy didn’t innovate. What growth it achieved was the result of copying (badly) the production methods of the capitalist countries.

To remedy this, the Soviets introduced rewards which would incentivise workers without bringing back the profit motive. An unusually efficient grain farmer would be awarded the Order of Andropov or some such. These trinkets were little return for the effort. They failed. Eventually, the Soviet economy eventually stalled, then broke down completely, and the whole communist system collapsed.

Why do people oppose free markets?

Why do so many find this so hard to accept?

For one thing, it seems paradoxical that the pursuit of the private interest in a free market should also generate improvements in the general interest. But the evidence speaks for itself. The standards of living for all in free market/free enterprise/capitalist countries are vastly above those in countries where the general interest is explicitly pursued. That is why the capitalist countries are the top destination for the world’s economic migrants. The Soviets, by contrast, had to build walls round the various Worker’s Paradises to stop the Workers from escaping.

For another, it all seems a little hopeful. Can we really achieve improvements in the general interest if we don’t set out specifically to do so? Again, the evidence speaks for itself. Intended or not, that is what has happened. We must judge policies based on what they achieve, not on what they intend.

Sen. Warren’s proposals fundamentally misunderstand business and the free market system. That is why they are so bad. Let us hope they don’t make it out of Washington D.C..

John Phelan is an economist at the Center of the American Experiment. 

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