Wednesday, September 24, 2014

Capitalism is first and foremost about people

Let's be clear: capitalism is based on meeting people's wants and needs, not short-term profit and growth. The focus many put on the actions of companies ignores the situation surrounding these companies: unfair and unbalanced access to markets, monopolization of capital, and utilization of the government to restrain competition.

Production in capitalism is aimed at the creation of surplus value -- and the transformation of a part of that value back into capital, that is returned to the shareholders of the company. That "surplus value", in the form of dividends, is free to be used by the shareholder as he or she sees fit. This freedom of choice is why capitalism is a lynchpin of American values.

Of course there is nothing wrong with making profit a company's goal. What is important is how one achieves it -- leaders of the most profitable corporations, in my opinion, treat profit as the result of other efforts, efforts they devote most of their attention. Steve Jobs had a focused strategy to deliver outstanding products to carefully-selected customers. Marissa Mayer pursued policies and practices to leverage results over costs, hiring people with the right attitude. Google does this: find the smart people who fit with the organization's culture, and good things will come. Matthias Müller looked for proper training and teams work to achieve success with Porsche.

In all these cases, profit naturally comes from the efforts of the organization. But remember, capitalist markets are an expression of the value of individual freedom, organized around voluntary exchange between people. Nobody is forced to engage in any particular exchange or trade. And free markets are an extremely effective mechanism for coordinating complex economic systems; they accomplish this remarkable result through supply, demand, and the autonomous price mechanism.

Adam Smith cautioned us that “the man whose whole life is spent in performing a few simple operations...” will be unable to solve problems and to think for himself, and “...generally becomes as stupid and ignorant as it is possible for a human creature to become.”

Free markets demonstrate efficiency of allocation. When suppliers and consumers have completed their transactions, the market reaches a state of “pareto optimal” – no one can be made better off without someone being made worse off. We see that capitalist markets create incentives for risk-taking and innovation (why capitalism is an engine of economic growth). But government regulations of firms and markets interferes with these virtues. There is clearly a balance to be struck between regulation (the needs of the many) and freedom to choose (the needs of the few).

No comments:

Post a Comment