[First published on Free Life]

The myth that capitalism is exploitative – or rather, that capitalists and entrepreneurs are responsible for the exploitation of both workers and consumers – is almost as old as the history of this political-economic system itself, having been a primary driving force behind the growth of the state and, indeed, of outright socialist and communist revolution. Although much watered down from those early days, the idea that there is some kind of antagonism between the capitalist “class” and the rest of us seems to persist.

As “Austrian” economists we know, of course, that it is absolutely and undeniably true that any free and voluntary exchange, upon which capitalism and private property must rely, only takes place because each party expects to benefit from the transaction. This alone is sufficient scientific proof to dismiss any idea that capitalism exploits one party for the benefit of another. Nevertheless we should, of course, tackle directly the specific incarnations of this myth as they appear today.

The myth has its roots in the Marxian confusion of political castes with economic classes – the idea that the relationship between capitalists and workers, which is free and voluntary, was akin to that of king and subject, or lord and serf, relationships that were involuntary and subjected the masses to servitude. Caste systems were static and designed to keep people in their place; under conditions of free exchange, however, economic classes have a continually changing membership based upon one’s ability to serve consumers.

This ability varies from person to person, of course, but the critical point is that nobody is legally prevented from becoming an entrepreneur and nobody, once they are a successful entrepreneur, has either their wealth or status legally protected. A wealthy capitalist might find his fortune decimated when he loses this crucial ability to serve consumers as the latter turn to other suppliers for their wares; he may have to re-join the ranks of salaried employees if he is to make ends meet. On the other hand, an ordinary worker may see a gap in the market that has been unnoticed by the current entrepreneurs of the day and he may set up a successful business accordingly.

This does not mean say, of course, that political castes do not exist today. We can see quite clearly from bank bailouts and the like that there is a distinct upper caste that is protected from its mistakes and is able to retain its wealth and status at the expense of the rest of us. Indeed all the similar injustices that did occur during the early history of capitalism were not owing to the capitalists’ reliance upon genuine private property and free exchange – rather, they used the power of the state to enforce their illegitimate property interests. The mercantilist Corn Laws, for instance, which artificially propped up the price of corn for the benefit of domestic cereal producers are a good example from the early nineteenth century. Capitalism itself, however, does not produce these injustices.

Moving on to some more contemporary arguments, do businesses exploit the “needs” of consumers for whatever it is that the latter want? Do they withhold “vital” and “necessary” wares releasing them only at extortionate prices thinking only of their selfish greed for profits?

This argument is ridiculous because all trade and exchange relies upon the desires of the trading parties – whether it is for food, housing, cars, computers, or trips to the cinema. The entrepreneurs in business exist to fulfil and satisfy, not exploit these needs. If they are able to charge high prices it is only because the supply, relative to demand, is low and has to be rationed to those who value the goods the most.

This argument regarding exploitation usually surfaces today in one of two situations. The first is during sudden supply shocks or demand spikes that send prices soaring and allows suppliers to book large profits as they obviously paid for the inputs at earlier wholesale prices which were much lower. As these usually occur during times of emergency or crisis, aren’t the businesses exploiting the dire need of the consumers for such staples as water, canned food and fuel?

Such an argument ignores the fact that it is not the businesses driving the demand – it is other people who are willing to pay more to get their hands on the suddenly scarce items. The only options are to a) allow other entrants to be attracted into the marketplace by the higher prices, bringing with them more resources into the production of the scarce goods and thus lower their prices with an increased supply (thus solving the problem); or, b), to fix the prices of the wares below their market clearing level which would lead to guaranteed shortages as the existing supply is simply exhausted. Needless to say, government always opts for the latter.

The second situation that attracts criticism is when the entrepreneur is in the business of providing something “essential” such as energy or healthcare. Yet these businesses are almost always so cripplingly regulated and interfered with by the state that it is impossible to define them as anything approaching free markets.

Britain’s energy market is a case in point. Apart from the vast state bureaucracy that oversees the industry, idiosyncratic interferences such as threats by the government to either freeze or cap energy prices also take their toll upon consumers. One of the criticisms advanced is that firms fail to “pass on” any reduction of wholesale energy prices to consumers in the form of lower retail prices. But apart from the fact that the wholesale cost is not the only factor that suppliers have to consider when setting prices for their consumers, what are the chances of them offering lower retail prices now if they fear that the government will one day lock them into furnishing energy at these low tariffs in a future period when wholesale prices might be rising?

In contrast if you look to any industry that the state tends to leave alone you do not find the same vitriol hurled at the dominant suppliers. Up until now we have seen that supermarkets, although subjected to food standards regulations that no doubt have served to raise prices, have benefited from relatively less state interference. Apart from a few murmurings from food purists and activists promoting local supply and produce, inexpensive food has ensured that they have never been a serious political issue. However, should food prices ever begin to rise, could we expect the state to start poking its nose increasingly into the food industry and blaming the resulting shortages and disarray on “exploitation” by the big supermarkets?

Furthermore, if we follow the logic of the “exploitation” argument, we could also say that, given that trade is always a two-way process, the consumers “exploit” the need of businesses for money. These entities have suppliers and employees to pay and they are often desperate to get their hands on your cash. If some other business offers a lower price they could be left high and dry by your decision to shop elsewhere, threatening the employment and livelihoods of all of those people that work in the business you shun simply because you have the guile to find what you want for less! It is partly for this reason that the supply curve for consumer goods, once they are in stock, is generally vertical, with merchants willing to sell them for any price they can get simply to shift them and bring in at least some cash to meet their future outgoings.

In a genuine free market businesses can never exploit anyone or hold anyone to ransom. A consumer would have the power to take his custom elsewhere if the business failed to meet his needs at an agreeable price. Although businesses as a whole set prices for consumer products and wages, no individual business can do so and each one must be prepared to sell goods for, at most, as much as the next business, and to pay wages at least as high. These boundaries can be crippling if the selling prices are lower or insubstantially higher than the costs that the business must bear. Businesses, unprotected by government privilege, therefore have to be on their toes constantly in case someone comes along with a better offer. The beneficiary of this process is the consumer-employee, who always knows he is paying the lowest price for what he buys and receives the highest wage for his work that can ever be paid.

In the mainstream debate both for and against a free market, one notion that seems ubiquitous is that the free market is predicated upon individual choice. Consequently, those in favour of such a market are likely to argue that the more choice there is the greater the competition between firms, leading to increased economic efficiency as those firms seek to meet their customers’ needs for the lowest possible cost. On the other hand, opponents will counter that choice can be wasteful, costly, inefficient and overwhelming, particularly when it concerns supply of provisions as basic as water. They might suggest further that choice is often an illusion conjured up by private companies that basically operate in a profit-maximising cartel.

Wading into this debate as an Austro-libertarian we can see that the basic statements on each side are not entirely incorrect. However they each misunderstand the true nature of choice in a free society.

The kernel of truth in the pro-choice argument is that voluntary behaviour, in the form of choice and action, leads to market outcomes that provide the most benefit to the consumer. However, pro-choice advocates tend to take a very narrow view of choice: that, for every single industry there must, necessarily, be several suppliers from which a consumer can choose, however basic the product and however costly the splintered operations.

In fact, choice is responsible for the entire economic landscape; people choose voluntarily not only which suppliers, in a given industry, they are willing to patronise, but also the extent of choice itself in a particular industry. In some industries – especially those that are growing and innovative – consumers may be willing to support multiple suppliers offering a large range of different, but roughly interchangeable products. We might say that smartphone manufacturing, in which there are quite a few brands available, is representative of this kind of industry. However, in industries which are, perhaps, maturing or otherwise reaching the culmination of their innovative stage, the benefits to be gained from scaling up the production of simple, straightforward products with little distinction might be what consumers desire. This is particularly true where the only differentiation between one firm and another is price, i.e. the only benefit that one company can offer the consumer ahead of another is reduced costs. This kind of industry naturally lends itself to one or only a bare handful of suppliers. For instance, if one, consolidated firm can manufacture a widget for £4 each whereas two, separate and smaller firms can only do so for £5 each, it clearly makes sense for the players in that industry to merge their operations. On the other hand, insisting on the maintenance of a choice of different firms in such an environment would end up being wasteful and unnecessary. 

Such consolidation does not mean that the combined firm ends up being “uncompetitive”. For competition, like choice, pervades the entire market. If I happen to run the only cinema in town, then, true enough, I won’t have to compete with any other cinemas. But I will still have to compete with everything else that consumers could choose to spend their finite amounts of money on – e.g. bowling allies, restaurants, swimming pools, night clubs, etc. I might even have to compete with travel agents if people decide to save money for a holiday by foregoing weekly trips to my cinema. Anything offered for sale in the market is always in competition with everything else that is offered for sale, however apparently disconnected they may seem.

The misguided focus on a narrow, substantive understanding of choice can also be a dangerous ruse for the reason that it allows states to grant their citizens a nominal degree of “choice” while preserving what is essentially an overarching state monopoly over a given industry. By exploiting the illusion of choice in this way, the state can parcel out the operations of what is essentially a state owned industry to private companies, while at the same time allowing all of the blame for any waste and inefficiency to be directed to the "free market" vestige of the industry in question.

For instance, the privatisation frenzy under the UK’s Thatcher and Major governments was often justified by the need to give "choice" and "competition" to the consumer. One of these official “privatisations” was of Britain's railways, and, indeed, whenever you board a train today you will see a private company's logo emblazoned on both the carriages and the uniforms of front line members of staff. However, the track, stations and signalling are wholly owned by Network Rail, a statutory company that has no shareholders, and is under the de facto control of the government. The train operations themselves are not subject to the forces of natural competition but are parcelled out by the government into geographical monopoly franchises, the private operators of which will be chosen by the government for a set number of years before they must re-tender.

This cauldron of public and private activity blended together led to the UK's railways being judged the worst in Europe from the point of view of cost and efficiency in early 2012. Yet it is "privatisation" and "competition" – represented by those fancy, public-facing corporate logos on the timetables and uniforms – that are lumbered with the blame, rather than the state’s string-pulling.

The presently topical energy industry is just as bad, if not worse. The electricity infrastructure is owned by National Grid, with six dominant, government-licensed suppliers sending their product through the same wires in what is a ridiculously regulated and cost-heavy sector. Indeed the Soviet-style description of the regulatory framework by Energy UK, the industry's trade association, scratches only the surface but is a succinct summary:

In addition to these examples, need we even mention the odious and destructive high street banking cartel?

Given all of this is, is it any surprise that people lay the blame for poor service, for high costs, for inefficiency, for waste, and for private companies lining their pockets not at at the door of state interference but at free marketers' obsession with choice and competition? Is it any surprise that, not realising that it is the underlying control and forcing of substantive choice to the benefit of its favoured friends in "private" industry, that there are calls for renationalisation of public communications networks and utilities? In fact, on could argue that a situation in which private companies operate government controlled services is worse than explicit and outright nationalisation, in regards to both the level of service offered to consumers and the reputation of the free market.

As libertarians who cherish the free market, our devotion to choice is encapsulated by our commitment to voluntary behaviour and interaction, which is itself based on the right to private property. As such, our advocacy for choice is only a derivative of these more fundamental concepts. We do not mean a controlled and enforced, substantive choice in every industry, nor do we mean the illusion of choice created by the state that rips off consumers while leaving the free market to bear the brunt of their ire. Choice must mean that consumers are left alone entirely to express their preferences through voluntary action with their own private property. Only then will we see industries that are genuinely able to meet the needs of consumers by offering ranges of quality products at prices they are able to afford.

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Notes
[1] Emphasis added.