Whenever the subject of capitalism comes up among friends, I usually find myself having to contend with a barrage of impassioned and somewhat clichéd assaults from all sides.
The most common one is the Gap Fallacy, and it goes something like this:
Unfettered capitalism has created an unequal society where the rich get richer and poor get poorer. Inequality is the cause of poverty and social disintegration. Government should redistribute this wealth back down.
Like many fallacies, Gappers are partially correct but for the wrong reasons. Their first error is in confusing monetary wealth and purchasing power.
Purchasing power, simply put, means bang for your buck. Let’s say the price of bananas has dropped 50%. Score! Suddenly you can now buy twice as much bananas. Which means as far as bananas are concerned, your purchasing power has increased by 100%. Capitalism is a system which allows entrepreneurs to increase production, compete with other entrepreneurs and increase efficiency. When "unfettered" this means that goods which were once considered outrageous luxuries become available, in one form or another, to nearly all levels of income.
Let’s take flying for example. Three decades ago the price of an airline ticket from Dublin to Paris would have cost about 600 punts on Aer Lingus. But over the years, as competition and economies of scale were added into the mix, Aer Lingus was outcompeted by the more nimble Ryanair. Now it only costs little more than the price of a taxi cab for the same journey. Even the so-called “poor,” can now afford the luxury of intercontinental travel.
The same, you will find, has happened in food, clothes, computers, mobile phones. The only industries where private sector prices have remained costly are the ones with the most interference from government, particularly the education and healthcare industries.
"Trickle-down economics" is a vastly maligned term, mostly because it is vastly misunderstood. “Trickling down” does not mean money is literally passed from the rich to the poor. What trickles down is purchasing power, so that even those on low incomes can afford a much higher standard of living than before. The higher the purchasing power, the sooner the living standards of the rich and the poor begin converge.
But the intuitions of the Gappers are correct in one regard. There has indeed been a massive redistribution of wealth from the poor to the rich. But this is not caused by capitalism.
This special brand of theft is facilitated by two policies:
1. Fractional reserve and central banking.
Funny enough, it is government-protected, centralized monetary policy that has facilitated this great scam. Legal tender laws allow central banks like the Federal Reserve to counterfeit money, creating inflation. Where capitalism increases the purchasing power of your income, inflation decreases it and therefore hurts the poor more than the rich.
When central banks engage in monetary stimulus, it is usually the biggest banks who benefit from this money before inflation kicks in. In America, the Federal Reserve has printed as much as $4 trillion over the last 4 years, which mostly went into the pockets of the highest bankers.
This is the root of Paul Krugman’s complaint that the financial sector now accounts for over 41% of the economy. He is wrong however to characterize it as the natural result of a free market: if it weren’t for government bailouts, Wall Street would have contracted considerably during the recession as the correction filtered through the economy. There is also the element in which the state is bought up by special interests, further proving that the biggest businesses actually need big government to make protectionist laws in their favour. True capitalism is based on the idea that by exchanging a solid good or service for money, both parties benefit. It is not a win-lose situation as it is often characterized. But dishonest monetary policy undermines this process.
The solution is to for the first time in history apply the laws of economics to money, by opening up currency competition and choice. Denationalize the dollar! This may seem unthinkable, but the market would tend to choose a currency that will retain its value over time. Free market digital currencies like Bitcoin are also coming into vogue. The combination of a stable currency (gold anyone?), free and decentralized banking as well as laws banning fraud in all its forms (including fractional reserve banking) will create the only environment in which the vast benefits of laissez-faire can operate free of the government-created downsides such as the boom-bust cycle.
It is inconsistent for Gappers to condemn the rich for using the force of monetary policy to plunder the poor, while thinking it is just fine for the poor to plunder the rich using the force of the state. In a civilized society, no one should be allowed to plunder anybody. Government should guarantee property rights for all citizens equally, not be the one to violate them.
There is all the difference in the world between being equal and being the same.