Market economy and private capitalism – two pairs of shoes!

Critics of our social and economic system often lack in accuracy when it comes to argumentation. At the same time defenders of the status quo sweepingly prejudge those critics and ignore the details of their argumentation in the first place. In order to advance the discussion it may be helpful or even necessary to capture and explain the most important institutions defining market economies and private capitalism in a metaphor about their evolving:

There was a tribe. Every year the eldest of the tribe decided about the roles of the individual members. In principal they spilt up the tribe into hunters and farmers. All food produced was collected by the eldest and then distributed equally among all members of the tribe.

Some members of the tribe were not quite satisfied with the mixture of meat and vegetables. Some of them preferred meat, others preferred vegetables. So they had the idea to exchange their goods in order to increase satisfaction. The institution called market was born and provided the possibility to bilaterally increase individual as well as total welfare. Every sensible economist has to acknowledge the basic potential trade principally offers to a society which is institutionalized by the markets thereby created.

The members of the tribe also acknowledged the improvement, but at the same time recognized that even after the goods were exchanged some still were not perfectly satisfied with their mixture of goods but perceived a shortage in meat. So these members asked the eldest, whether he may adapt the allocation of productive efforts in order to produce more meat. The eldest considered the request and reallocated some members from farmers to hunters. However, he overestimated the demand for meat and soon they observed a shortage in vegetables. Members preferring vegetables now asked the eldest to reallocate some hunters in order to increase the production of vegetables again. Members preferring meat, though, feared that the eldest once again fails to estimate correctly. So they proposed that the tribe votes about the aspired mixture of meat and vegetables. The eldest agreed and to some extent direct democracy was implemented in terms of indirect consumer sovereignty.

After having achieved two big reforms some of the members considered to go further. They proposed to also vote about the type of meat and vegetables. The eldest, though, declined and argued that the allocation would become far too complex considering an increased variety of goods. He neither had the capacities nor the information to centrally plan their production in such a detailed way.

The members however did not give up. Instead they proposed to delegate the allocation of effort to the individual members. They should know best about their preferences and skills. So why should they not decide individually whether and how they want to react when facing a shortage. Finally, the eldest agreed. He provided a sufficient amount of tools and then let the members of the tribe coordinate themselves. Following the argument of efficiency, from now on both consumption and production were decided decentrally.

The improvements in total as well as in individual welfare made the idea of self-organization well-accepted. At the same time the idea also sensitized the tribe with regard to productivity. Soon, some members started to complain about those that, in their opinion, contributed less to the output collectivized so far. So they proposed that it should not be equally distributed anymore. Instead, members should have the right to directly trade based on the output individually produced. The eldest was skeptical about such a big change but feared the dissatisfaction of the most productive and influential members. So he agreed again and the tribe finally headed towards a meritocratic market economy.

As their ambition increased further discussions evolved. All wanted to be the first when tools were allocated. Hunters argued about who has seen or shot an animal first. Farmers could not agree about who has sowed and groomed which acre of land. The fight about rights and resources had begun. Again some members came to the eldest for the sake of a proposal. They suggested to allocate the available resources to the members once for all. From then on, every member should have the property rights with regard to these resources as well as to all that is produced with, by or on them. Then the welfare of any member of the tribe should finally lie entirely in its individual hands. Everyone would have the incentive to make the best out of its own resources and thereby also the tribe in total benefits. The eldest had to admit the logic consistent to the previous reform and agreed. This is the point where private capitalism came on the board.

However, the eldest obviously did not consider that the consistency with previous reforms depends on the assumption of a stationary state. Once the resources are fixed on the individual level, the praised flexibility of members is at least partly lost. Threats and potentials implied by changes in preferences, changes in the variety of goods or changes in the set of available technologies are not shared equally or fairly any more. Instead, members are affected differently depending on the resources originally allocated to them. Some may benefit from changes which may imply losses for others. In contrast to the previous argumentation, the welfare of individual members does not entirely lie in their own hands but strongly depend on developments determined by all the others. In addition, this lack of self-determination is inherited to future generations. When born they face an allocation of resources as well as a distribution of output they so far could not determine at all. They may have the incentive to make the best of what they possess, but this may be not much or even nothing.

What this metaphor finally shows is that decentralized democracy, efficiency and meritocracy are not the result of the institution of private capitalism but may even be threatened by it. Therefore, critics of private capitalism are not necessarily critics of market economies, neither do they necessarily argue in favour of an equal distribution. They rather just address the lack of self-determination implied by the once and for all privatization of productive resources. Who dares to fundamentally contest this very liberal perspective?