Laissez Faire Capitalism

We should note that contrary to myth, Adam Smith notion of the invisible hand was not intended as an endorsement of greed or laissez faire capitalism. In a poorly regulated market economy, greed is just as liable to lead to predatory behavior as productivity boosting innovations. But all the same, under the right conditions, the profit motive can bring out the best in people and result in wealth creation that benefits all. We can look to the historical example of East and West Germany prior to the fall of the Berlin Wall. Communist East Germany had a Soviet style command economy that dictated a high degree of equality and sharply restricted property rights. West Germany had a mixed economy with a healthy market based private sector. The result was less equality in West Germany. But still, the least well off were substantially better off than the least well off (pretty much everybody) in East Germany. What this indicates is that while, on the one hand, the market economy with its institutions of private property inevitably generates inequalities, it is so much more effective at generating wealth that the least well off can be better off in spite of the inequalities. But this is likely to happen only under the right conditions. West Germany had then, as Germany has now, a mixed economy where a vibrant private sector market economy is supplemented with a substantial system of social benefits. The profit motive is harnessed and the well to do are quite well off, but taxes are higher and those who don’t fair well in the market economy still get decent health care, modest but safe and comfortable places to live, access to education etc. Compare this America where the private sector market economy dominates and the least well off are much worse off than the least well off in communist East Germany. Again, it is ultimately the system as a whole that gets evaluated according to the difference principle.

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