Sunday, March 23, 2008

Anti-Market Fallacies pt. 2

In my second installment of economic sophisms, I want to tackle the claim that free market capitalism is only for the rich because it makes the rich richer and the poor poorer. The answer to free market capitalism, they say, is that we need some degree of socialism in order to protect the poor from the exploitative rich.

Many people, even in the United States, believe this to be true. That's why they are Republican's, and that's especially why they are Democrats.

However, the great irony of this sophism is that it is actually impossible for the poor to become poorer under free market capitalism(FMC), and the only way for the poor to continually become poorer is through socialism.

The reason is that under FMC, the rich cannot get wealthier unless they exchange their wealth with other people. For example, Bill Gates is a very rich man. How did he get rich? He got rich by inventing and then starting a company that sold computers. Bill Gates had to sell his goods in the market economy, which means that he had to exchange his computers voluntarily with another individual who voluntarily gave up money (or something else) in return for the computer.

Now, let's look at the nature of this exchange between Bill Gates and the individual. Let's imagine that Bill Gates receives $1500 for the computer. This means Bill Gates has increased his stock of money by $1500 and decreased his stock of computers by 1. The individual on the other hand has decreased his stock of money by $1500 and increased his stock of computers by 1. To reiterate, because he must work within the market economy, the only way Bill Gates is able to increase his stock of money is to offer something in return.

Because Bill Gates makes this transaction millions of times, his stock of money greatly increases. At this point, the anti-capitalist may make the claim that because Bill Gates has, say, $45,000,000,000, this means everyone else has $45,000,000,000 less and are thus poorer. This is how rich people get rich, and as we can see, this is why the poor get poorer and the rich get richer.

But the anti-capitalist has made a grave mistake. (S)He has confused money with wealth. If money is wealth, imagine this scenario: tomorrow morning you wake up and everyone in the world has twice as money in their pockets than they had the day before. Ask yourself this question, "is everyone now twice as wealthy?"

The answer is: of course not. If everyone in the world all of a sudden had twice as much money, all that would happen is the price of everything would double and no one would be better off. Again, if money was wealth then we could just print up enough money so that everyone in the the world had $1,000,000,000,000,000,000 and poverty would be eliminated, everyone would drive fancy cars and live in mansions. Of course that's silly though, because money is not wealth it just facilitates exchange.

Real wealth is tangible, useful things. Anything from spoons, carpet, machinery, buildings, cars, food, ect. Real wealth is the stuff that we use money to buy, not the money itself.

Go back to the exchange with Bill Gates. Given what has been outlined above, is the individual poorer after decreasing his supply of money by $1500? No. In fact, the individual has just increased his wealth by increasing his supply of computers by 1. Bill Gates has helped the individual become richer, and the individual has helped Bill Gates get richer. Bill Gates is now richer because he can use the money he received from the individual to buy things he values more than the computer he gave up. The individual is richer because by buying the computer he shows that he values the computer more than the alternative things he could of bought with the $1500. Under FMC, both parties benefit and increase each others wealth simultaneously and mutually.

So, as can be seen by the above analysis, it is impossible for the rich to increase their wealth under capitalism without exchanging something and increasing the wealth of someone else in return. Therefore, it is not possible for the poor to get poorer if the rich want to get richer.

Over time, if the rich want to get richer they need to compete with one another in order to get more people to exchange with them instead of someone else. These competitive forces cause prices to fall and quality of goods to go up. AS prices fall, and goods become cheaper to manufacture, this allows the poor to begin affording goods that could not before, further increasing their wealth.

This fact can be seen in that many poor people today have luxuries that kings of only a few hundred never dreamed of. Anyone can observe that the wealth of the poor as increased many ways. For example, when cars first came out only the rich had them, but now the poor have better cars than the rich did. Same with TV, computers, and cell phones all since the 20th century. Obviously the poor have become richer over time because they have increased the number and quality of goods that they have. We can further note that the poor have increased the number of people who have electricity and indoor plumbing, which almost all poor people do today (in the Industrialized nations), but which the rich did not possess at all, all that long ago.

Question: What if the rich ignored the poor?

If the rich ignored the poor so that they did not have to exchange with them and thus increase the wealth of the poor, it would not be possible for the rich to be rich. If the rich only exchanged with the rich it would not be possible for them to increase their wealth because the poor must perform labor to make goods or do services (wealth). Without the poor, the rich cannot be rich because the more people you exchange with the richer you are. Ignoring the vast majority of the population would relegate you to a life of poverty.

Also, keep in mind that "rich" and "poor" are relative terms. If we compared the poor of today with the rich of 1000 years ago, the poor of today would be wealthier than the rich 1000 years ago in many ways.

What about socialism?

Socialism is the only way in which the rich can become richer while the poor become poorer. Under 100% socialism, the distribution of goods is not based upon voluntary exchange but by the dictates of a central governing authority. The socialist leaders under this system can use their monopoly on the use of violent force (the police) to distribute goods to themselves and away from everyone else since they do not rely on exchange. In the end, only a government uprising can stop them.

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