Thoughts on economics and liberty

My unequivocal advocacy of capitalism

An extract from the draft manuscript, The Discovery of Freedom:


Let me assert (at this stage without the necessary proof) that capitalism is marvellous and socialism appalling. This book thus continues my unequivocal, unambiguous and proud advocacy of capitalism, an advocacy I had started in BFN, although not necessarily of the sort that many people have in mind, but capitalism in which our freedoms are bounded both by self-restraint and accountability. I therefore talk only about accountable freedom, a concept I introduced in BFN. I definitely do not talk about unbridled freedom. And because there is no unbridled freedom there is no unbridled capitalism.[1] Capitalism cannot, by virtue of this definition, be exploitative, for every action is voluntarily undertaken, and no harm is caused. Anyway, that is the type of capitalism I advocate. (I sometimes wish that a less emotive name had been given to the system of freedom, perhaps freedomism. But that name doesn't sound good. So we are stuck with capitalism for better or worse. Just harder work, trying to distinguish between what it is in some places and what it should be.)

Note that capitalism doesn’t ask or expect anyone to be perfect. It does not preach. But by establishing and enforcing the right incentives (rewards and punishments) it nudges the society towards ethical outcomes. In addition, it defends our equal freedoms through constitutional democratic frameworks. As Paul Starr notes, ‘By opening up courts, legislatures, and political debate to the public at large and insisting on public justification of decisions, constitutional liberalism [i.e. capitalism] has made power more transparent and subjected it to scrutiny and disagreement. Power in the liberal state has …been questioned, criticized, resisted, and constrained – and, as a result, made more legitimate.’[2]

I advocate capitalism for two reasons: because it is a moral system built on accountability and therefore desirable in itself (the deontological reason[3]), but also because its application is beneficial, for instance it eliminates systemic and structural poverty (this is the consequentialist, or instrumentalist reason). While the deontological reason stands alone, moral benefits alone don’t seem to be sufficient. People say: show us the benefits. And that freedom has in abundance, by making entire societies richer. In addition, it punishes criminals and the corrupt. Even more importantly, it allows divergent views to flourish: Capitalism is a pluralistic democratic garden of human thought and expression. What more can one ask for in life?

My glowing praise for capitalism is quite possibly at severe odds with many commonly held views in India (and even, surprisingly, in the Western academia). This word ‘capitalism’ conjures negative images of (an imagined) free-for-all market economy where the rich exploit the poor. Of course, that too does happen in mafia-driven mercantilist anarchies of the sort found in Russia (and to some extent in Italy and Greece, and now India). In such cases the government is effectively controlled by the rich and corrupt.

But that is not capitalism! Instead, it is the travesty of capitalism. Where freedom becomes license, capitalism doesn’t exist. The genuinely free society has clear lines of accountability leading from government (as agent) to the citizens (principal), and from each citizen to the others. Capitalism gives us only liberty to do good. There is no liberty to harm. The defence of liberty can’t be applied to undertake evil, corrupt enterprises. Note, however, that even the best-governed free society can only minimise deviant behaviour. It cannot eliminate it altogether, such being human nature. Therefore some exploitation and unscrupulous behaviour could well occur even in the best managed form of capitalism. However, and this is it the key, when it is properly established, capitalism nips such things in the bud. Cheats are quickly identified and punished.

Thus, the capitalism I refer to cannot be extrapolated from corrupt mercantilist societies. Also, bad eggs in semi-capitalist Western societies do not represent capitalism, but point to flaws in governance, flaws that need to be fixed. In the vast majority of cases (as I will show in chapter 14 in the context of the financial crisis of 2008), it is socialist, welfare-statist, and Kenyesian ideas that have created the governance flaws we often hear about. These flaws are not created by accountable freedom but because of its absence. And at times libertarian anarchists claim to advocate liberty but they merely ask for license, not liberty. Their ill-thought out schemes, allegedly of freedom, are unworkable. They, too, do not represent capitalism in the classical liberal sense that I talk about.

The capitalism I talk about is based on a deep, empirically sound theory.

[1]See my article, ‘Unbridled Capitalism’, published in Freedom First in October 2009.
[2] Starr, Paul, Freedom’s Power, New York: Basic Books, 2007, p.31.
[3]There are debates in the philosophical literature whether these distinctions are sensible. I think they are.
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