Capitalism: Friend or Foe?

By Frederick Regnery, Walter Block
September 01, 1997

"The evil machine of capitalism." Numerous sociologists, leftist liberals, and social ethicists give detailed, convincing explanations on how the evils of free enterprise are responsible for the majority of our national and international problems (Bauer, 1991). They describe how profit is the driving engine of the corporate machine and claim that the self-interested businessman will stop at nothing to attain profit maximization (Novak, 1986). He will keep wages down, exploit workers, and take advantage of Third- World resources all in the name of profit and greed. Unfortunately, social ethicists fail to reconcile self-interest and greed with the common good.

At last, the beauty of a free-market economy: Can there be a more perfect system that harnesses individual greed and selfishness, and puts them to work for the common good? Socialists fail to realize that were it not for free markets, many of our national and international problems would be accentuated rather than contained. These same liberals and sociologists point to Third-World conditions to exemplify capitalism's course of destruction (Sowell, 1983). They cite foreign investment, trading, and multinational corporations as tools that entrepreneurs use to exploit less developed economies. However, a common-sense analysis of this system and the mechanisms behind it show that the "invisible hand" of greed and profit actually supports the common interest.

An economic analysis searching for the root causes of poverty and economic underdevelopment in Third-World countries points not to foreign investment, or trade with First- World capitalistic nations, but to outmoded policies of the Third World itself. While, with some exceptions, the United States rewards innovation, creativity, and efficiency with profit, many Third-World countries are collapsing under a centrally planned economy. Instead of allowing Adam Smith's "invisible hand" to dictate people's needs and wants through supply, demand and consumer purchasing power, these economies entrust their needs to a single dictator or panel of experts (Novak, 1993).

Many critics of corporate policy, particularly in the U. S., center on trade with underdeveloped nations. They feel that since the U . S. is economically powerful, any trade is inherently unequal and exploitative. But if these trades did not benefit both parties, they would not be made. In economic terms, any trade is mutually beneficial in ex-ante sense. These critics unwittingly insult Third-World countries by seeing them as incapable of recognizing a bad deal. If the trade did not benefit them, they would not make it. More importantly, trade is a necessary instrument for increasing people's standard of living. Envision a world void of trade. We would all need to be self-sufficient, with each person producing everything he needed. Obviously, this is economic lunacy—all people do not and cannot know how to do all things. Trade allows for division of labor and specialization, encouraging countries to allocate their resources to produce goods they have a comparative advantage in. This explains why so called cash-cropping is an economic benefit rather than a tragedy for many underdeveloped nations. When describing the causes of malnourishment, a sociologist recently said that "because of government incentives and foreign pressure, Brazil is abandoning traditional crops such as potatoes and black beans, for more exotic, export-orientated crops" (Rodney, 14). He obviously fails to comprehend the basic concept of comparative advantage. By producing the crops they are most efficient at farming and then trading for staples, they end up with more food than had they stuck to traditional foods. The Brazilians are not as stupid or easily manipulated as one might think.

Apparently, any economic foreign relations are manipulative and unfair. The "humanitarians" are quick to criticize foreign investment, and multinational corporations in particular. In their view, these corporations overwhelm and exploit their economy and politics by underpaying workers to produce products the country does not need. In the words of an eminent social ethicist,

the political costs of foreign aid and investment may be higher than the economic benefits they bring. Indeed, many of the arguments for corporate investment, while reasonable in theory, do not apply in a region like Latin America, where the governments have neither the will nor the means to control or guide a transnational empire.... (Lernoux, 121)

Her argument is counterproductive. Common sense dictates that the "invisible hand" provides for the common interest much better than a dictatorship. With supply and demand dictating resource distribution in a free market, dictators would no longer have the opportunity to make irresponsible economic decisions. Government intervention cannot compete with the checks and balances inherent in a market economy. A dictator stays in power by killing competition, which leads to inefficiency, increasing prices, and underdevelopment. On the other hand, multinational corporations stay in power by beating competition, and this results in increased efficiency, lower prices, and greater consumer choice. Profit maximization leads to consumer satisfaction. Multinationals should be a welcome alternative to a dictatorship's counterproductive motives. Yet another economic fallacy promoted by Lernoux and other "ethicists" concerns the types of industry promoted by multinationals as counterproductive to economic development:

Do you make refrigerators and air conditioners or shirts and shoes? Do you build sophisticated hospitals or rural clinics? By choosing to encourage foreign investment in such technologically sophisticated industries as television sets or computers, a Latin American country may actually be postponing any real hope of development, (ibid., 143)

This confused logic, when implemented, only stunts economic growth. Any profits these corporations realize from cheaper production costs will be passed along. For example, production costs are cheaper for televisions in Latin America than in the U.S. If produced there, prices will fall, output will expand, and profits will increase. With U. S. citizens now paying less for a television, they will have more disposable income to spend on foreign goods. This increase in demand for foreign goods expands output in Latin America. This increased output means an increase in jobs. With more companies competing for labor, wages and the standard of living will rise. Although Latin Americans may have not needed televisions, they reap the benefits of the increased efficiency.

Finally, does labor exploitation occur when corporations take advantage of low-wage rates? Critics contend that corporate America constantly applies a downward pressure on wages to achieve profit maximization. Once again, this theory fails to take into account the most basic economic principles (Hazlitt, 1979). Prevailing wages are determined by the simple laws of supply and demand. A corporation can offer a wage either above, below, or equal to the current wage. If the wage is above, the worker is better off. If it is the same, his situation is unchanged. If the offered wage is below current wages, he will refuse the job, and corporations will have no option but to raise wages in order to entice workers.

In dispelling many of the myths accompanying foreign investment, multinational corporations, and capitalism, economic logic prevails over economically ignorant social ethicist rhetoric. While supposed experts attribute world poverty to the exploitative capitalistic machine, even an economics 101 student can understand that Third-World poverty actually results from the lack of free markets. A dictator or centrally planned economy in no way substitutes for a market economy whose "invisible hand" steers self-interest to the common good. Whereas self-interest and common interest are at odds for a dictator, the two complement each other in capitalism. The argument for foreign investment as exploitation is false. On the contrary, we desperately need a global economy where market forces determine production and consumption.

  1. Peter Bower, The Developmental Frontier, Cambridge, MA.: Harvard University Press, 1991.
  2. Peter Bower and Basil S. Yamey, Cambridge Economic Handbooks, "The Economics of Under-developed Countries."
  3. Walter Block, The U.S. Bishops and Their Critics, Vancouver, B. C : The Eraser Institute, 1986.
  4. Henry Hazlitt, Economics in One Lesson, NY: Crown, 1979.
  5. Penny Lernoux, City of the People, NY: South End Press, 1989.
  6. Michael Novak, The Catholic Ethic and the Spirit of Capitalism, NY: The Free Press, 1993.
  7. ___________Will Liberate?, Mahwah, NY: Paulist Press, 1986.
  8. Walter Rodney, How Europe Underdeveloped Africa, NY: Random House Publishing, 1975.
  9. Peter Sowell, The Economics and Politics of Race, NY: Morrow, 1983.

Topics: Economics, Socialism, Statism, Government, Justice

Frederick Regnery

More by Frederick Regnery

Walter Block

More by Walter Block