John Singleton with Bob Howard, Rip Van Australia (Stanmore: Cassell Australia, 1977), pp. 31-33, under “Capitalism.”
This is one of the more misunderstood terms in existence today, being used to describe everything from a total, genuine, laissez-faire free-market to a modern welfare-warfare-bureaucratic-State, such as exists in the U.S.A. and Australia (for Great Britain see History).
The differences between a genuine free market and the capitalism of today are much more than a mere difference of degree. There are, it is true, many similarities, but the differences are fundamental and crucial. Because of these differences, anyone who supports genuine free market economics is as much opposed to modern Australian “capitalism” as the most ardent Marxist.
The only “capitalist” economist that most people have heard of is Adam Smith, and in most arguments over the validity of free market economics, it is to his theories that reference is made. This is a most unfortunate, even if understandable, situation.
There is in existence a vigorous school of economic thought, called the “Austrian School” that has developed the body of pure, free market, economic thought far beyond the work of Adam Smith. There is no denying the importance of Adam Smith, just as in physics one cannot deny the importance of Sir Isaac Newton. But we can no more base a final judgement of free market economics on Smith than we can base a judgement of physics on Newton.
The great historical figures of the Austrian School of economic thought are Carl Menger, Eugene von Böhm-Bawerk, and Ludwig von Mises. They form what could be called a “neoclassical” school of economic thought, which kept many of the great ideas of the previous school of Adam Smith and David Ricardo, but also made many changes, some of which were quite fundamental.
We have neither the competence nor the space (especially the competence) to go into the details of these two schools of thought. But we do believe it is necessary to at least point out that this distinction does in fact exist.
Interest in the Austrian School is growing all around the world today — particularly in the U.S.A. Notable adherents of this school of thought are the 1974 Nobel Prize winner, F.A. Hayek, and Murray N. Rothbard, libertarian economist, historian and social theorist.
There has never been a genuine free market economy anywhere in the world. There have only been some close approximations — notably England of the late eighteenth and early nineteenth century, and the U.S.A. of the nineteenth century.
Certainly the system of no government in business and no business in government has never been allowed to operate in Australia.
Insistence on the distinction between a real free market and what is usually passed off as one should not be dismissed as mere nitpicking, for it is a central contention of the Austrian School that it is government intervention that has always existed in some degree that is to blame for the economic problems all so-called capitalist societies suffer today. In other words, when the natural free market forces cannot operate because of legislative restrictions, dislocations in the market cease to act as signals of trouble, and become instead, institutionalised transmitters of trouble. Free market prices, for example, act as a barometer measuring the balance of supply and demand. High demand and low supply will push the price barometer up, and send a signal to suppliers and investors to increase supply. Their motivation for acting on the signal is the prospect of better profits. And obviously, the reverse also holds true.
However, when prices are fixed by legislation, this system can no longer operate. The connection between supply and demand has been severed, so that the relative balance of supply to demand is no longer indicated by the price level. It is, therefore, not only necessary to control the price, but also the supply and the sales. If the price was fixed artificially high, then suppliers, unless controlled, would rush to supply as much as they could in order to benefit from the high prices, but the buyers, on the other hand, would react to the higher prices by buying less, and the result would be a glut.
The reverse again holds — artificially low prices mean fewer people interested in supplying the product and more people wanting to buy because of the low prices, in which case the result would be a shortage.
When the price is fixed at the “right” level, the supply and demand balance out. But this “right” level is the market price — which is where it would have been anyway on a free market.
This same situation can result if, instead of fixing prices, the supply, or the demand, are fixed by legislation (as, for example, the supply of milk, eggs, doctors, taxis, are fixed today). When the supply is fixed, what is created, in effect, is a coercive cartel. The people or organisations within the cartel are able to exploit the consumers by raising their prices, or reducing their service, or both. By controlling the supply and the other suppliers, they are thus immune from competition. The high prices, or reduced service, would, in a free market, act as a signal, indicating that there was a supply demand imbalance. (The reduced service would create a demand for a better service.) In the fixed cartel, these signals no longer operate. Instead the reduced service or high prices transmit trouble, for example, the high prices raise costs and hence prices in associated industries go up, causing such trifling problems as unemployment and bankruptcies. This inevitably leads to a public outcry and demands for — you’ve guessed it — more controls and legislation; thus ensuring more institutionalised dislocations.
This is not meant to be a detailed or an exhaustive analysis of all the factors or all the possibilities existing in these cases. Rather, it is simply meant to illustrate a simple principle: that it is not possible to plan and control a market so as to improve on the free market, but it is possible to make it a hell of a lot worse. One has only to look at the situation existing today in Australia in the milk and egg industries to see very good illustrations of this principle.
A free market will always tend towards equilibrium. It is a stable system. A controlled market will only work if it precisely mirrors a free market — in which case it is totally unnecessary. Any other form of controlled market merely institutionalises distortions and dislocations which reverberate throughout the economy, creating more and more distortions and dislocations as they go.
The market controllers thus become involved in a continuous process of patching up these holes as they appear, but because they always seek to patch by adding controls, they generally create at least two holes for every one they patch.
We see the results all around us — a progressive increase in bureaucratic control, more and more red tape, prohibitions, regulations, quotas, subsidies, tariffs, boards, etc., etc. —and on top of it all, more, not fewer, problems. A controlled economy, in other words, is inherently unstable.
A proper free market is consistent with individual freedom. Today’s so-called capitalism, is not a free market system — it is a system of privilege, a controlled market, and as such, is not consistent with individual freedom.
The free market economists as well as the Marxists, recognize the evils, in this regard, of today’s “capitalism”, and equally deplore them. But, these evils are not the fault of a free market, because the market is no more free than you and us. And we’re not free, we’re just going cheap.
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