Occupy Wall Street & Capitalism: A Professor's Response

Release Date
November 28, 2011


Free Markets and Capitalism

The Occupy Wall Street movement expresses valid frustrations, but do the protesters aim their accusations in the wrong direction?
Economics Professor Chris Coyne draws the distinction between crony capitalism and legitimate capitalism. Crony capitalism is government favoritism fueled by handouts and is responsible for the plight of the 99%. Legitimate capitalism, on the other hand, uses competition to align consumer and producer interests and serves to improve everyone’s standard of living.

Occupy Wall Street & Capitalism: A Professor’s Response
“We have to be careful, I think, with some of the words. You know, this capitalism is not working at all.”
“And we need to rework how capitalism works. We need to either end the Fed or do some drastic change.”
“And the huge companies screw up and then get a free pass.”
Well the anger and frustration of the Occupy Wall Street movement is justified, and they’re rightfully angry at what’s happening in the United States today. But, unfortunately, they have confused capitalism and crony capitalism, and they have misdiagnosed the cause of their frustration.
Under a system of capitalism, the way you earn your wealth is by producing goods and services which make people better off. Under this system, the way you become wealthy is to produce more and more of what people value, and they purchase more and more and more of it, and you earn wealth.
A system of crony capitalism, in contrast, eliminates competition. And instead of producing goods and services that people value, what businesses do is turn to government to seek handouts and favoritism. What we need to focus on is ensuring that the system of capitalism is such that producers earn wealth by making people better off instead of seeking handouts from the government.
“It’s tough because, of course, in capitalism, there’s going to be winners and losers. But the thing is that the losers don’t have to be losing that badly.”
The problem under the current system is that large corporations are able to keep profits that they earn and spread out losses among the tax payers, among what’s called the 99 percent. And that is ultimately what the source of frustration is. What those in the Occupy Wall Street movement have to realize is that government is the problem and therefore can’t be the solution. So if they want to summarize their message down to one short statement it would be, don’t let the fox guard the henhouse. If you put the fox in charge of the henhouse the hens are going to get killed. Put a different fox in charge, you’re going to get the same outcome.
So ultimately, what we need is constraints on government. So that they can’t give handouts, whether it’s to bankers or any other group, because the minute you open the flood gates of government handouts, people are going to start lining up to grab them. And the people that are going to tend to get those handouts are those that have money and political connections.
So the solution to this is simple. Instead of spreading out losses, what we need to do is allow people to earn profits when they produce things that people value and suffer losses when they fail to do so. And when you have that type of system, the only way to earn wealth is to improve people’s standards of living. And you suffer losses when you fail to do so.