Capitalism is often lambasted nowadays. Turn on the television, open a newspaper or magazine, attend a lecture or just hang out over a cup of coffee or beer, and, at some point, someone will almost certainly launch into a rant against capitalism and business, following by a harangue about how society should embrace reciprocity and cooperation, not self-interest and competition.
This view is certainly well-meaning, but misses the point that self-interest and reciprocity are not antithetical: competition and cooperation are compatible. In fact, cooperation, driven by self-interest and reciprocity, lies at the heart of capitalism, the greatest and most successful cooperative system humanity has ever devised.
Cooperation through Voluntary Exchange
Capitalism is a system of voluntary exchange: Linda provides something John wants (a computer, a table, rice or meat) if John can give her something she wants in return (oranges, clothes, an education).
Money is just a tool in this system: the real exchange always involves goods, services and intentions. Say Sophie works for Brian and Brian pays her a salary. Sophie’s work is a commodity. When she uses the money Brian gave her to buy some good (a cellphone, for example) Sophie is exchanging x number of hours of her work for a cellphone, using money as a catalyst.
A free market framework allows people to cooperate (sometimes unintentionally) in satisfying each other’s desires. In the end, all needs may be satisfied and all that is left before we can take our share of the pie is to play our part in the system, supplying goods and services other people might want.
Imagine that someone (Henry Ford, perhaps) believes that people would like to own cars and proceeds to offer affordable cars, intending to use the profits from the sales to buy a house, yacht or even expensive wine. He does not need to beg someone to help him build a house or yacht, or to grow and ferment grapes. Instead, he is able do something he is good at for a living (selling cars) and trust that others will produce the things he wants.
Members of capitalist societies work day and night to fulfill each other’s wishes through spontaneous collaboration, even if they are not aware of it.
The nature of this teamwork is explained in Milton Friedman’s 1980 book Free to Choose. Friedman describes each step that goes into making a pencil and the countless things required for its production: wood, rubber, rope, saws and axes, steel, carts, trucks, roads, railroads, etc. Incredibly,
None of the thousands of persons involved in producing the pencil performed his task because he wanted a pencil. Some among them never saw a pencil and would not know what it is for. Each saw his work as a way to get the goods and services he wanted—goods and services we produced in order to get the pencil we wanted. Every time we go to the store and buy a pencil, we are exchanging a little bit of our services for the infinitesimal amount of services that each of the thousands contributed toward producing the pencil.
We must also acknowledge the countless people who had a hand in every cup of coffee the loggers drank. No wonder A. J. Jacobs’ TED talk, “My Journey to Thank All the People Responsible for My Morning Coffee,” was turned into a book with the apt title Thanks a Thousand.
Free market economies are gigantic, voluntary systems of cooperation based on reciprocity, in which people who do not know each other can get what they need or want without excessive waste. As Adam Smith astutely observes, “human society appears like a great, an immense machine.”
Where Does Our Dinner Come From?
Some people oppose free markets because of the self-interest and competition they naturally entail. Many crave a more collaborative kind of cooperation, undertaken by virtuous individuals, who are genuinely concerned about others, rather than by egotistical people, driven by their own interests.
The problem is that such systems do not work. As Adam Smith writes in The Wealth of Nations, “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” We cannot count on someone else’s big-heartedness for our morning cappuccino. But we can count on the interest of every individual in supplying goods and services in a capitalist society because they are interested in the compensation (nowadays a payment in money) they require to satisfy their own needs.
Human beings appear to be inclined towards compassion. After a natural disaster, there are always lots of people eager to help the needy. Countless non-profit organizations around the world prove how collaborative we are. Charity is a noble activity that must be encouraged. The mistake is not in trusting compassion, but in scorning cooperation under a scheme of voluntary exchanges and attempting to create artificial collaboration through legal enforcement.
Need-Based Cooperation Is Not Always Positive
High levels of personal cooperation were reported among people living in the Democratic Republic of (East) Germany after World War II. People in the socialist half of Germany were forced to resort to their social networks for almost everything. To fix a simple problem with the heating system would mean begging for favors. Every minor domestic repair would turn into an overwhelming challenge, since there was little money available and only limited access to equipment, tools and professionals. Inhabitants of the East had to know someone who knew someone who had access to spare parts and know-how. Collaboration was a matter of survival in the face of scarcity.
In West Germany, by contrast, people were not as cooperative. They did not need to rely on friendship to solve domestic repair issues. They only needed to hire one of the numerous technicians competing in the market, who would be able to fix the problem for an agreed price.
We know which Germany achieved higher standards of living.
History shows that disinterested cooperation by itself, in the absence of a social arrangement able to deliver goods and services efficiently, does not lead to prosperity. Need-based aid should be an additional resource, not the rule.
Free societies use assistance as a remedy for misfortune and to help people facing hard times. By failing to provide what people need or want, central planning systems seek to impose fraternal instincts. This leads to a twisted, artificial form of cooperation.
Forced Cooperation Is Not Genuine Cooperation
Ever since the French Revolution popularized the slogan Liberty, Equality and Fraternity, liberty has been regarded as something that must be constrained by social norms and regulations in order to achieve equality, which means state-organized fraternity. Some see this as the ideal form of cooperation.
They would persuade us to replace voluntary with forced cooperation, normally through government measures such as high taxes, minimum wage laws, social security systems, universal healthcare, unemployment benefits, pensions, wealth redistribution policies, protective laws, and other broad social programs.
Socialism and its offspring (the welfare state, social democracy, ordoliberalism, etc.) have been trying to implement schemes of that kind for centuries—although there is a wide gap between their professed intentions and the outcomes they usually achieve.
Legally forced cooperation is not genuine cooperation: it is duress. The cry for more disinterested cooperation is a disguised request for coercion—a wolf in sheep’s clothing. It is an attempt to move society backwards (towards more constraints), when we need to move forward (towards more freedom). Frédéric Bastiat expresses this well:
Mr de Lamartine wrote to me one day thus: “Your doctrine is only the half of my program; you have stopped at liberty, I go on to fraternity.” I answered him: “The second part of your program will destroy the first.” And in fact it is impossible for me to separate the word fraternity from the word voluntary. I cannot possibly conceive of fraternity legally enforced, without liberty being legally destroyed, and justice legally trampled underfoot.
Turning Theory into Practice
One might speculate that more freedom (less legally imposed cooperation) would pave the way to selfishness. Wouldn’t people be concerned chiefly with their own personal profit and pleasure and forget about others?
According to the Heritage Foundation, eight countries head the Index of Economic Freedom: Hong Kong, Singapore, New Zealand, Switzerland, Australia, Ireland, the United Kingdom and Canada. The lowest ranked eight are Bolivia, Equatorial Guinea, Zimbabwe, the Republic of Congo, Eritrea, Cuba, Venezuela and North Korea. The World Giving Index by the Charities Aid Foundation (CAF) shows how much the populations of these countries contribute to charity. Three types of behavior were evaluated: helping strangers, donating money and volunteering time.
The people of the free countries—especially Australia (2nd), New Zealand (3rd), Ireland (5th), the United Kingdom (6th) and Singapore (7th)—are especially generous. Canada (15th), Switzerland (26th) and Hong Kong (30th) also performed well. As for the more restrictive regimes: we have no data for Eritrea, Cuba or North Korea, but the others generally performed badly—for example, Congo (58th), Guinea (70th), Zimbabwe (76th), Bolivia (86th) and Venezuela (107th).
If we are to foster generosity, the free market is the way to do so—not intervention, coercion or restrictions.
And how about prosperity and happiness? Using per capita GDP as a parameter, according to the United Nations, the countries in the free group are among the richest economies in the world. Conversely, the less free countries rank among the poorest.
Obviously, this impacts happiness and well-being. The countries at the top of the list tend to have happier populations. We should feel sorry for the citizens of countries at the bottom of the list—Cuba and North Korea do not even appear in the World Happiness Report.
There is a clear pattern here.
1) Economic freedom—178 countries ranked.
2) Cooperation—144 countries ranked.
3) GDP per capita—192 countries ranked.
4) Happiness—156 countries ranked.
In the IMF data, Venezuela appears in position 121 and Cuba is not listed. UN data on these countries is not clear.
Chart: Countries ranked according to economic freedom, charity, GDP per capita and happiness.
Data are presented along a scale of 1:100, where 1 is the lowest and 100 the highest ranked.
Figures never lie. Capitalism is a cooperative system, under which people are empowered to do things by themselves and for others. It not only unleashes the powerful energies of individual incentives, but makes room for compassion and charity through voluntary aid. Free societies achieve economic prosperity, which in turn catalyzes happiness in their populations (to some degree). Social systems based on coercion generate the opposite outcome.