Reading an analysis of capitalism while on holiday is more fun than it sounds. Eamonn Butler’s new primer, An Introduction To Capitalism, is a comprehensive survey of the virtues, vices and history of capitalism. Not only does it offer a perceptive explanation of capitalism but also a wealth of unarguable facts which can be used to beat socialists in their metaphorical game of ‘capitalism bad, socialism good’.
Butler is an economist and director of the Adam Smith Institute. In this book he makes the apt point that in the last 35 years more people have been lifted out of poverty than in the past 3,500. Living standards have risen and people have more expendable income, which benefits the wider economy. He attributes this to capitalism, not government action. Butler uses contemporary and historical examples to show how capitalism caters to shifting demands and produces goods and services which make lives more meaningful and affordable. Printing presses were invented to accommodate a growing demand for cheaper books. Bananas became ubiquitous in the West when their increasing popularity encouraged farmers in the developing world to produce them for export.
Butler devotes a large chunk of the book to discussing human capital – our knowledge and unique personal qualities, claiming that this is more important than any other form of capital. This discourse on a non-materialist aspect of capitalism is fascinating and pertinent. Singapore is an example of a wealthy nation built on human capital. While living there I was amazed by the industrious nature of Singaporeans. Income taxes are low. One fifth of foreigners who buy property in London are Singaporean.
The book shows how capitalism is compatible with self-interest but not greed. We can choose not to buy from someone who is greedy, cheats or doesn’t follow the rules. Butler’s explanation of how self-interest motivates us to succeed resonates with me, especially when applied to socialism and capitalism.
Self-interest is a very human quality and we need it to stay alive and prosper. Human beings are innately producers, traders, buyers and sellers. We are all governed by self-interest and the desire to provide for our children. Self-interest always overcomes an ideological and unreachable pursuit of equality. Butler points out that the collective farms in USSR and Mao’s China caused mass starvation and death, whereas farms in capitalist societies have not. The crucial difference is private property ownership – in order to invest our own human capital into something we need to have ownership over it. Humans naturally want to be proportionally rewarded for their work.
I agree. Socialism reduces people to equal units of being and ignores the importance of human capital. Human-friendly capitalism empowers us to use our strengths while socialism emphasises our weaknesses. Socialist societies thrive on the hidden and the secret but capitalist societies are free and transparent. Butler makes the essential point that capitalism, for all its faults and foibles, is a practical economic system which works.
All societies, even socialist ones, practice the most basic form of capitalism – exchange. Cross-cultural studies abound with property, ownership and inheritance. In Southern Africa the ancient system of lobolo is still being observed. Lobolo epitomises the concept of human capital. By paying a tribute of cattle and money to his bride’s family a groom signals his commitment to the marriage and respect to her family. The amount of lobolo paid reflects the value of the bride’s human capital.
Yet, as Butler astutely points out, capitalism is not without its problems. He identifies its unfavourable aspects, like cronyism and corporate greed. Laws are needed to temper these. Generally he is in favour of small government as this creates the optimum conditions needed for capitalism to flourish. He emphasises that the natural rhythm of capitalism means that cheats and exploiters will be weeded out because people won’t work for them or use their services. But Butler has not taken into account nearly enough the symbiotic relationship between politics and economics. For example, the government’s ineptitude over immigration has flooded the labour market with unskilled migrants, lowering the wages of unskilled British labourers and leaving them vulnerable to exploitation.
Capitalism’s structure is forever evolving. Butler makes the excellent point that those who advocate redistribution of capital from its owners risk destroying this entire eco-system. But capitalism has its own risks. Capital ownership doesn’t ensure a secure return. Misfortune, illness and bad decisions can transform the strong into the vulnerable in need of help from the State. So perhaps a pared-down welfare state is needed to counteract the damage inflicted by these facets of capitalism.
Butler explains that one of of the reasons why capitalism gets such bad press is that it becomes part of a mixed economy where the state has a monopoly on vital sectors such as healthcare and utilities. Consequently cronyism abounds with large corporations paying for favours from politicians. Chancellor Philip Hammond’s shortsighted response to struggling high street businesses is exactly what Butler also warns against – increased taxation on private business and unnecessary regulation. Perhaps Hammond should read this book to see how excessive state interference endangers prosperity and financial independence.
Capitalism thrives in a democracy. Both are open systems. Butler correctly believes that democracy must be balanced by having a ‘culture of tolerance and self-restraint’. Worryingly, he seems to be against the concept of unlimited democracy as he believes this contrary to successful economic polices.
Having grown up in a police state – the very antithesis of a democracy – I found this reasoning confusing. Butler says that democracy is not an ideal way to decide ‘everything’ because it gives the majority the right to impose on the minority. But this is how democracy works. The alternative is a socialist system in which an elite minority take power and remove our personal agency by making every decision for us. And surely capitalism’s worst excesses are tempered in an unlimited democracy?
An Introduction to Capitalism is precisely written and thought-provoking. Capitalism is the best economic system we have. For it’s not the miserly and exploitative business owner who poses the greatest danger to peaceful prosperity but the socialist, drunk on the politics of envy.