Economics: 3 Myths of Capitalism

Jeff Miron,

Release Date
April 16, 2016


Basic Economics

What is capitalism? Why is it controversial? Dr. Jeffrey Miron from Harvard University breaks down 3 myths of capitalism. 

IHS Summer Seminars: Apply to a attend a free seminar this summer and explore ideas in economics, philosophy, history, law, and more. 
Uber, Airbnb, & Feastly vs Government Regulation (video): Professor Chris Koopman explains the sharing economy and the consequences of government regulation. 
Free Market Economics (playlist): Learn more about capitalism and free markets. 

>> If we look at the history of the world, a huge fraction of the improvements in standard of living have come because private businesses have created new products, have given people jobs, have generated profits that raise people out of poverty and allow them to live fruitful and productive lives with reasonable standards of living.
We can have much more of that, and it will have beneficial effects around the world if we step back from the excessive regulation and have a much more capitalistic system. My name is Jeff Miron, and I’m Director of Undergraduate Studies in the Department of Economics at Harvard University.
I wanna talk about three myths about capitalism, the first is that being pro-capitalism is the same as being pro-business. Nothing could be farther from the truth. The point of capitalism is to make sure that businesses have to compete vigorously against each other and that benefits consumers. It’s not good for the businesses per se because they have to work really hard, so many businesses understand this, and they hate capitalism.
They are constantly trying to get government to erect various rules, restrictions, regulations that help them, but they’re not in the interest of the consumers. So pro-capitalism is good for consumers. That’s whom we’re ultimately trying to help. A second myth is that capitalism generates an unfair distribution of income.
What true capitalism does is rewards people who are productive, people who work a lot of hours, people who have a lot of talent. People who come up with good ideas, they get big rewards under capitalism, and people who don’t do those sorts of things get less. The one negative one might be concerned about is that some people are not able to earn very much left on their own, and so very reasonable people support some anti-poverty spending.
But that’s completely different than interfering with capitalism. Regulating prices, limiting quantities, imposing all sorts of things on businesses, those make the economy less productive, give us a smaller pie. And make it even harder for us to operate programs, which help those who are less fortunate. The third myth is that capitalism was responsible for the recent financial crisis and the recession.
That, again, is almost exactly the opposite of what is true. First of all, nobody who is being intellectually honest thinks that we had unbridled, serious capitalism before the crisis hit, before the subprime build up occurred, before we had all the housing problem. We had enormous government interventions that subsidized risk, enormous government interventions that encouraged an overinvestment housing.
If one’s going to try to draw any conclusions, it seems to suggest much more clearly that interfering with capitalism generates financial crises, generates recessions. Because what we experienced was directly related to the incentives for excessive risk taking, the incentives for overinvestment housing that were created by government. The private sector responded to those incentives, so of course, the private sector can’t be completely absolved of being involved.
But in the sense of causing, it is the bad policies that caused it, not what the private sector or capitalism did by itself. Most importantly, whenever government bail out people who took excessive risk, it encouraged people to do more of that in the future. And we unfortunately went a huge way in that direction via the TARP, and via all the Federal Reserve policies, which helped Wall Street and the risk takers not have to pay the true price for all the excessive risk taking they engaged in.