Matt Ridley delivered an excellent lecture in July addressing a generally unappreciated distinction: markets and free enterprise vs. corporatism. Many don’t seem to know the difference. Ridley offers an insightful discussion of the very radical and liberating nature of free markets. The success of the free market system in alleviating poverty and increasing human well-being is glaringly obvious in historical perspective, but it’s become too easy for people to take market processes for granted. It’s also too easy to misinterpret outcomes in a complex society in which producers must navigate markets as well as a plethora of regulatory obstacles and incentives distorted by government.

I agree with almost everything Ridley has to say in this speech, but I think he does the language of economics no favors. I do not like his title: “The Case For Free Market Anti-Capitalism”. Free Markets are great, of course, and they are fundamental to the successful workings of a capitalistic system. Not a corporatist system, but capitalism! Ridley seems to think the latter is a dirty word. As if to anticipate objections like mine, Ridley says:

“‘Capitalism’ and ‘markets’ mean the same thing to most people. And that is very misleading. Commerce, enterprise and markets are – to me – the very opposite of corporatism and even of ‘capitalism’, if by that word you mean capital-intensive organisations with monopolistic ambitions.“

No, that is not what I mean by capitalism. Commerce, free enterprise, markets, capitalism and true liberalism all imply that you are free to make your own production and consumption decisions without interference by the state. Karl Marx coined the word “capitalism” as a derogation, but the word was co-opted long ago to describe a legitimate and highly successful form of social organization. I prefer to go on using “capitalism” as synonymous with free markets and liberalism, though the left is unlikely to abandon the oafish habit of equating liberalism with state domination.

Capital is man-made wealth, like machines and buildings. It can be used more intensively or less in production and commerce. But capitalism is underpinned by the concept of private property. You might own capital as a means of production, or you might operate an enterprise with very little capital, but the rewards of doing so belong to you. Saving those rewards by reinvesting in your business or investing in other assets allows you to accumulate capital. That’s a good way to build or expand a business that is successful in meeting the needs of its customers, and it’s a good way to provide for oneself later in life.

Capitalism does not imply monopolistic ambitions unless you incorrectly equate market success with monopoly power. Market success might mean that you are an innovator or just better at what you do than many of your competitors. It usually means that your customers are pleased. The effort to innovate or do your job well speaks to an ambition rooted in discovery, service and pride. In contrast, the businessperson with monopolistic ambitions is willing to achieve those ends by subverting normal market forces, including attempts to enlist the government in protecting their position. That’s known as corporatism, rent-seeking, and crony capitalism. It is not real capitalism, and Ridley should not confuse these terms. But he also says this:

“Free-market ideas are often the very opposite of business and corporate interests. “

Most fundamental to business interests is to earn a profit, and the profit motive is an essential feature of markets and the operation of the invisible hand that is so beneficial to society. Why Ridley would claim that business interests are inimical to free market ideals is baffling.

I hope and believe that Ridley is merely guilty of imprecision, and that he intended to convey that certain paths to profit are inconsistent with free market ideals. And in fact, he follows that last sentence with the following, which is quite right: capitalism is subverted by corporatism:

“We need to call out not just the worst examples of crony capitalism, but an awful lot of what passes for capitalism today — a creature of subsidy that lobbies governments for regulatory barriers to entry.“

And, of course, crony capitalism is not capitalism!

Now I’ll get off my soapbox and briefly return to the topic of an otherwise beautiful lecture by Ridley. He makes a number of fascinating points, including the following, which is one of the most unfortunate and paradoxical results in the history of economic and social thought:

“Somewhere along the line, we have let the market, that most egalitarian, liberal, disruptive, distributed and co-operative of phenomena, become known as a reactionary thing. It’s not. It is the most radical and liberating idea ever conceived: that people should be free to exchange goods and services with each other as they please, and thereby work for each other to improve each other’s lives.

In the first half of the 19th century this was well understood. To be a follower of Adam Smith was to be radical left-winger, against imperialism, militarism, slavery, autocracy, the established church, corruption and the patriarchy.

Political liberation and economic liberation went hand in hand. Small government was a progressive proposition. Insofar as there was a revolution during the Industrial Revolution, it was the weakening of the power of the aristocracy and the landed interests, and the liberation of the bulk of the people.“

Do read the whole thing!