1. The Myths and Misperceptions of Markets
James P. Davenport, Rose State College
“No society can surely be
flourishing and happy, of which
the far greater part of the
members are poor and
miserable.” – Adam Smith
Capitalism

2. This session relates to the following content standards for Social
Studies:
• High School Economics
– Content Standard 2: The student will evaluate how societies answer the
three basic economic questions: what goods and services to produce, how
to produce them, and for whom are they produced?
• 1. Compare the world’s basic economic systems of market (free enterprise), command,
and missed market economies identifying countries that have adopted each and
comparing and contrasting the results those economic systems have produced in those
countries as measured by GDP, national prosperity, and individual income and wealth.
– Content Standard 5: The student will describe the role of economic
institutions including banks, labor unions, corporations, governments, and
not-for-profits in a market economy.
• 1. Evaluate the impact of government ensuring the protection of private property rights
and the rule of law in a market economy.
Content Standards

3. – Content Standard 9: The student will evaluate the economic role of
government in a market economy.
• 1. Explain the role that government has in dealing with issues such as poverty, pollution,
and medical research.
• 2. Describe the costs and benefits of government assistance programs, education, and
other government funded services and projects.
• High School World History:
– Content Standard 4: The student will evaluate the global transformation
brought about by the Industrial Revolution and the World Wars
• C. Summarize the impact of massive social and economic changes as a result of
industrialization including Marxist criticisms of capitalism – U.S. History
Content Standards Continued

4. A Brief History of Economics

5. Capitalism is an economic system predicated on:
• Private Property
– Locke: The right to property predates government
– Smith: The ability to develop, improve, & exchange
property creates wealth
• Voluntary Exchange
– Attempts to force certain exchanges or
unnecessarily limit exchanges are “anti-capitalist”
• Absence of Coercion or Fraud
Defining Capitalism

6. Capitalism is not:
• “Pro-Business”
– Adams Smith: Any collection of business interests will try to distort the
market to their benefit
– Dr. Jeffrey Miron: Capitalism requires businesses to compete with one
another, which they would prefer to avoid. Benefit goes primarily to
consumers more than producers
• “Anti-Government”
– Dr. Greg Mankiw: Need a government that can develop a system of clearly
identified property rights
– Dr. Greg Mankiw: Need government to enforce contracts
Un-Defining Capitalism

7. • Capitalism is not opposed to helping the poor – nor is it opposed to
the government helping the poor.
– Adam Smith
• As the wealth of society grew, the resources collected by the government would also
grow
• As wealth in society increased, so would benevolence
– Friedrich Hayek, Milton Friedman, Charles Murray: All proposed some form
of basic guaranteed income provided through the government
– Capitalism does require the consideration of trade-offs for various means of
providing assistance
• Work Incentives
• Efficiency (least market distortions)
• Effectiveness (provides needed resources to the people who need them)
Un-Defining Capitalism Continued

8. Prices Communicate
Information
Markets
Spur
Innovation
Markets Create
Wealth
Markets
Reward
Those
Who Most
Benefit
Society
• Unlocking the Power of
Markets
– Hayek: Prices rapidly
communicate information that is
widely dispersed in society
– Schumpeter: Markets constantly
require producers to improve
– Locke: The use and development
of private property improves its
value
– Smith: Markets direct self-
interest to socially beneficial
endeavors and create positive
social behaviors

9. • Smith: Markets cannot provide many of the things needed by a
modern society
– National Defense
– System of Justice
– Infrastructure
• Hayek: Markets allow for significant disparities in wealth as some
will be more “resourceful” than others.
• Hayek: Because capitalism is rooted in human nature, as long as
human nature is flawed, capitalism will be flawed.
• Schumpeter: The “creative destruction” of capitalism – what
modern economists might call innovation – tends to make skills and
industries obsolete.
The Limits of Markets

10. • Dr. Jerry Muller has identified five areas in which versions of
capitalism differ from one another.
– Democratic or non-democratic
• All liberal democratic societies have had capitalist economies, but not all capitalist
economies have been liberal and democratic
– Welfare-State Capitalism (all systems that combine democracy with
capitalism have developed into welfare-state capitalist systems)
• Conservative – stresses job protection, high wages, and the ability of a male to be the
sole breadwinner of the household (many Catholic countries)
• Social Democratic – stresses government provision of social services and income
supports for greater income equality for men and women (Nordic countries)
• Liberal – Offers government support to those who can’t work in the market. Has less
stringent labor laws making it easier to hire/fire employees. (Anglo-Saxon countries)
Variations of Capitalism

11. – Strategies for National Development
• Smithian – Combines competitive free markets with international free trade
• Hamiltonian – Stresses protectionist policies (high tariffs, subsidies, etc.) in the
transition from agrarian to industrial economy
– Types of Businesses and Relationship to Government*
• State-guided Captialism – government attempts to guide the market; offers support to
favored industries
• Oligarchic Capitalism – The bulk of wealth and power is held by relatively few
individuals, families, or clans with close ties to the government
• Big-firm Capitalism – Most significant economic activity is performed by established,
large enterprises
• Entrepreneurial Capitalism – small, innovative firms play a major role in economic
activity
(U.S. is a combination of Big-firm and Entrepreneurial Capitalism)
* Taken from the Book Good Capitalism, Bad Capitalism, by William Baumol, Robert Litan, and Carl Schramm
Variations of Capitalism Continued

12. – Extent of equality or inequality in society
• Variations can be explained in part by:
– Ethnic Homogeneity
– Size (population)
– Cultural Traditions
• National differences are reflected in the variety of welfare states
Variations of Capitalism Continued

13. • There have been many non-democratic capitalist countries,
but no liberal democratic, non-capitalist countries.
– Most Western nations became capitalist before becoming
democratic
– Some liberal thinkers worried that democracy would lead to the
destruction of capitalism (John Stuart Mill)
– Three ways democracy supports capitalism
• Elections tend to make people more accepting of government
• Democracy tends to reduce the more extreme elements of capitalism
• Democracy provides an informational feedback mechanism
Capitalism’s Tensions with Democracy

14. • Rising standards of living produced by economic growth is
conducive to democracy
– Modern democracies derive much of their legitimacy from their ability to
provide increasing standards of living
– Growing economies tend to minimize political conflict
– Democracy without economic growth tends to exacerbate distributional
conflict
Capitalism’s Tensions With Democracy
Continued

15. • With economic stagnation occurring during the 1970s, with
increasing government expenditures and inflation, led some to
rethink the relationship between democracy and capitalism.
– James Buchanan – Public Choice Theory
• Focused on “government failure” rather than “market failure”
• Key Insight: Politicians pursue their own self-interest and appeal to voters’ self-interest
while doing so
– Revisiting Keynes in light of democratic processes
– Elected officials get more support when they spend money that yields benefits to
constituents than when they cut back on spending
– This leads to ever larger deficits
Capitalism’s Tensions with Democracy
Continued

16. – Mancur Olson – Logic of Collective Action
• Politicians and other government officials are self-interested actors
• Well organized small groups have an advantage in lobbying the government for policies
that benefit them at the expense of the rest of society.
• Each group seeks protection from market competition for the commodity or service it
produces. As protection is gained, efficiency and production in the market are reduced.
According to Dr. Jerry Muller, the stagnation of economic growth in
the 1970s, coupled with these powerful criticisms turned both
capitalist and non-capitalist countries toward more market oriented
policies beginning in the late 1970s and early 1980s.
Capitalism’s Tensions with Democracy
Continued

17. • Many institutions and practices that work well in one national
context may not be easily produced in another because of cultural
and historical factors
– Different societies have different preferences for risk versus security,
mobility versus stability, and equality of outcomes versus inequality of
achievement
– These differences can be difficult to change by deliberate policy which can
limit the options available to policymakers
Limits to Comparison and Analysis

18. • Questions?
• Comments?
Questions or Comments

19. If you would like more information or a variety of resources to help in
your teaching of economics to your students, please contact:
100 N. University Drive, Box 103
Edmond, OK 73034
(405) 974-5343
Additional Information and Resources