Capitalism is the most productive system

Capitalism is also the most economically productive system. Implicit in much of the argument so far, of the philosophical justification of capitalism as an abstract system, is the argument that such a system also happens to be economically desirable. That is, to the philosophical argument that capitalism is capable of delivering human freedom must be added a pragmatic argument that capitalism is a system which is not only capable of, but is also the best suited to, delivering material benefits and has reduced global poverty over the long run. This pragmatic argument receives wider support and is accepted by many as the justification for capitalism, even if they do not embrace all of the philosophical arguments with enthusiasm. As a practical matter, it is argued that the capitalist market system best solves the “coordination problem” and, secondly, that it best provides the incentives for innovation and technological progress. The coordination problem is simply this: how can the production and consumption decisions of millions of agents be organized so that the outcome is desirable rather than chaotic? The coordination problem is resolved in capitalism by the use of markets. Markets – the interactions of buyers and sellers – determine prices which permit goods to be sold for all those willing to offer their goods for sale at the market price and all purchasers willing to pay the market price to buy the goods. In this way, markets, by establishing prices, allow voluntary exchange to coordinate the economy. Central to the claim that this process is desirable, in the sense that it solves the problem well, is the proposition that markets lead to equilibrium. That is, both individual markets and the economy as a whole have a tendency to equilibrium. Capitalist markets are seen as robust and self-adjusting; equilibrium can be expected if the market is allowed to operate freely. Disequilibrium in individual markets – meaning an imbalance between supply and demand – is restored through a change in price. This may be obvious in the case of many goods. However, Friedman (1953) also famously argued that the same mechanism can be relied upon in markets, such as the foreign exchange market, where fluctuations are often the norm. In such cases, the price mechanism should again be allowed to work and the actions of speculators are argued, in general, to be “stabilizing rather than the reverse” (1953: 175).