Top Three Common Myths of Capitalism

Release Date
August 22, 2011

Topic

Free Markets and Capitalism
Description

Is being pro-business and pro-capitalism the same? Does capitalism generate an unfair distribution of income? Was capitalism responsible for the most recent financial crisis? Dr. Jeffrey Miron at Harvard answers these questions by exposing three common myths of capitalism.

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Top Three Common Myths of Capitalism
If you look at the history of the world, a huge fraction of the improvements in the 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 want to 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’re 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 who 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 have very little skill. They are not able to earn very much left on their own, and so very reasonable people support some antipoverty spending. But that’s completely different than interfering with capitalism, regulating prices, limiting quantities, opposing 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 that help those who are less fortunate and because they were unlucky.
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’s being intellectually honest thinks that we had unbridled, serious capitalism before the crisis hit, before the subprime buildup occurred, before we had all the housing problems. We had enormous government interventions that subsidized risk, enormous government interventions that encouraged an over investment in 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 over investment of 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 was the bad policies that caused it not what the private sector or capitalism did on its own.
Most importantly, whenever government bailout people who took excessive risk, they encourage 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 of the excessive risk taking they engaged in.