Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Pro-Capitalism Does Not Mean Being Pro-Business

Written by johnleemk on 10:11:31 am Mar 18, 2007.

There is often a lot of confusion about what being a supporter of free markets means. Often, the assumption is that because a capitalist philosophy recognises that businesses have an important role to play in the economy, it is a pro-business philosophy.

Nothing could be further from the truth. True capitalists who believe in a laissez-faire approach to the economy would not support overt measures designed to protect business. Such interventionism is merely a perverted form of protectionism.

Normally, protectionism and central planning are just misguided ways of looking after the welfare of society. But an overt pro-business approach, with subsidies and tax breaks and outright handouts to industry, is simply protectionism and central planning cloaked in the guise of capitalism.

The sole difference is that this protectionism isn't even well-meant. It's simply intended to protect business, which, of all entities in the world, does not need any protection more than that already afforded by the market.

In a true free market, consumers play an equally important role as firms. Firms may produce goods and services, but it is consumers who decide what to buy and how to spend their money. The capitalist system is dependent on the public.

Under an ideal market system, where there is what economists term "perfect competition", consumers actually are more powerful than firms. Because they punish any firm that over-prices its product, and because they shift their income to goods that yield the greatest benefit (utility) to them, they enable society to achieve the most efficient possible outcome in the long run.

If governments want to strengthen their economy, the key is to strengthen the market, not strengthen industry. By building a better market, the government benefits both consumers and producers. That is what capitalism and free markets are about.

Subsidies and taxes exist mainly to correct failures of the market, such as externalities. If the market is not making any obvious mistakes, why bother with subsidies? Why should the government protect industries but actually kill them in the long run by making them more inefficient?

Obviously, a full laissez-faire philosophy is inadvisable in the real world. A totally free market is essentially anarchy, and anarchism has rarely proven to be a viable philosophy. Supporters of a completely free market without any government intervention are often basing their support on a misunderstanding of economic principles.

Nevertheless, they are at least not as misguided as those who would seek to prop up business by direct protectionist measures such as unwarranted subsidies or tax breaks. These pro-business measures have nothing to do with capitalism, and should not be recognised as such.

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