CAPITALISM
Arthur Seldon
Basil Blackwell, 1990, 419 pp., £19.99
(ISBN 0-631-12558-2)

Samuel Johnson put it succinctly: "Political liberty is good only so far as it produces private liberty". It is to be hoped that the European Community will realise that integration of diverse economies cannot be accomplished as a political and bureaucratic process, but can only occur as a result of the withdrawal of the State and its agents - ie, by delegating the task of integration to markets. So far, capitalism has not been allowed to show what it can do, to deploy its potential for fostering prosperity and liberty. This is one of the lessons we can learn from Arthur Seldon's latest book.

Economists call the free private market economy capitalism. A politico-economic system is less capitalist and more socialist the larger the sector of collective decisions by the State relative to the sector of individual decisions in the market. All existing systems thus contain elements hostile to their main character: capitalist systems have socialist State sectors; socialists systems have capitalist market sectors.

A comparison (or contrast) of capitalism and socialism is significant only between both as they are with all their faults or as they could be in an ideal form. Socialists like to contrast imperfect capitalism with perfect socialism. Arthur Seldon invites us to make significant comparisons between capitalism and socialism; and he then asks us to reflect on capitalism as it could be strengthened by its so far unrealised potential.

In the competitive market in tracts on capitalism, (Michael Novak, Charles Murray, Milton Friedman, to name only a few of the best sellers) Capitalism ranks as a catachism for the advanced, interesting for the specialist yet understandable by the layman. Its message is that capitalism is superior to all other systems for welfare and freedom. One of his main arguments indicates the general flavour of the book.

The market, says Mr Seldon, has many advantages over the political process. It allows individuals to express their personal preferences. The freedom of the common man is much greater in the market, where one man has many choices every day, then in the political process, where he has only one choice between few alternatives every one thousandth day.

The principle of private property is indispensible for ensuring responsible exchange and trade. Only when success brings personal rewards, and failure personal penalty, can responsibility be learned. And only thus can effective motivation be created. Extensive private property is the best way to tame the Leviathan of government and check its kleptocratic appetite.

Capitalism promotes specialisation by competition. If the consumer can compare alternative goods and services, fewer people are inclined to produce those in which they do not excel. Incentives to effort produce innovation and improvement in quality. The prices emerging in competitive markets perform the function of signals to what and how much to produce; without them, the information cannot be found. Because socialism lacks free market prices, it cannot promote welfare.

"Selfish" people can serve themselves only serving the wants of others in the market. To quote Mr Seldon,

Even bad men are led by the market process to do good, but good men are induced by the political process to do harm [p10].

The capitalist system promotes moral behaviour: people risk their own money. The political process enables people to buy votes with other people's money.

An order based on a market economy requires only a minimal state that protects private property. property rights can be respected in a 'state of nature', but the legal framework of a private rights society makes it much easier. The more tasts are solved by the market, the less important is the political process.

Mr Seldon rejects the myth of "active citizenship": they typical citizen has more important matters to attend to. He leaves the essential government tasks to specialists. But there there is danger. Governments tend to over-regulation (as in health standards and financial transactions) because the risks of under- regulation are more obvious and therefore less rewarding in votes; but for the general welfare too little regulation is better than too much, because it suppresses new enterprise in services and industries.

Governments tend to raise taxes too high and to extend their remit unobtrusively as far as possible. But for general welfare, too little government is better than too much - because it is easier to enlarge government where essential than to reduce it where excessive.

Most undesirable features of existing capitalism are caused by the political process. Politicians tend to politicise economic problems, bureaucrats to bureaucratise them, and group interests to gain at the the financial expense of others. The result is paternalistic social democracy.

The market is the best way not only to economic growth and efficiency, but also to improve the well-bing of the poorest. Involuntary poverty is better cured by easing free movement from industries and regions with lower to those with higher incomes than by redistributing income by the methods of the political process, which blunt incentives and repress growth.

The common people stand to gain more from capitalism as it could be with less political management than from socialism, which requires extensive political management. It is easier is even up differences in purchasing power in the market than differences in the 'cultural' skills required by the political process. Socialism has not removed inequalities, merely institutionalised them.

For the third world, the fastest way out of misery is to introduce capitalism. For relatively wealthy countries, the fastest way to the economic backwardness of the "third way" (favoured by some in Eastern Europe) between the rejected communist socialism and the liberal market capitalism that has raised living standards for the masses is to implement discredited "social democratic" values.

Capitalism as we know it is by no means free of fault, but it can be corrected. In socialism, every improvement - necessarily capitalistic - makes its less socialist. The market mechanism is far more self-correcting than the state: it is easier to escape from a commercial monopoly than froma political monopoly. Only State protection creates long-lived monopoly. Concentration in State industries (railways, postal services, telecommunications, and so on) is always uneconomic - at the cost of the consumer who they also deprive of freedom of choice and of innovation. As the State monopolist fears no loss of buyers from competition, he has no incentive to respect consumer preferences.

The market is indestructible. If it is forbidden, it seeks welcome environments or the so-called underground economy, where it often stimulates production. But only in the minimal state with private property can capitalism fully realise its wealth-enhancing potential.

Capitalism is in no sense a one-sided hagiography of the capitalist system. The author undertakes a painstaking examination of the criticisms levelled at its economic working and moral foundations - especially from social democratic thinking. There are signs that the social democratic era is slowly coming to an end, and that there is a rebirth of liberal political thought - "liberal" in the sense of classical liberalism. So says Milton Friedman in discussing the change from the "Fabian tide" to the "Hayekian tide". The Thatcher revolution of 1979 is such a sign; so is Reaganomics, the economic creed of which has inspired many books and given the Republicans three election victories.

Arthur Seldon as a founder-President and Editorial Director of the Institute of Economic Affairs, the oldest and most prominent of the market-oriented "think-tanks", has for over 30 years performed a decisive service in the transformation of public opinion in Great Britain to favour the open market economy. This book is the quintessence of his work and the intellectual autobiography of a life dedicated to the idea of the open society.

Gerard Radnitzky