This paper will review the book “The Politically Incorrect Guide to Capitalism” by Robert Murphy. The book provides a very comprehensive defense of free market principles and philosophy. The book looks at how free market is the best way to organize both national and international economic systems. While Keynesian economics is vogue these days, the book advocates the view that markets are the superior way of achieving not only economic efficiency but also social justice. Many things that are conventionally believed to benefit the society have exactly the opposite effects, Murphy says. Profit taxes, labor unions, affirmative action, and business regulation make all of us worse off in the longer run.
Governmental institutions entrusted with the mission of oversight of the economic system are ill-suited to address macroeconomic concerns. For example, Federal Reserve is a cause of greater instability and volatility than greater order and confidence. Cutting or raising interest rates in with a view to pumping large amounts of liquidity into the financial system or, on the contrary, restricting money supply prevents market mechanisms from setting the correct price of money and allocating capital efficiently. Furthermore, it is not even accountable to the public, as it is elected indirectly and accountable to public-at-large through a long chain of delegation. Financial markets can misinterpret Fed’s comments, which may cause market panics and disrupt the normal functioning of the economy. Expectations in the market and reaction to events should only be the function of the behavior of market participants. Market factors influencing interest rates should be the foundational economic principles and trends that help to predict interest rate fluctuations over a long period of time, while governmental interference only makes things worse. Real interest rate is determined by a number of macroeconomic indicators, including the amount of money saved in the economy, business demand for these funds to be used to finance new development, and the government’s net supply of funds or demand for funds. On the other side, inflation rate is a function of unemployment rate, employment cost and productivity, consumer price index, producer price index and the gross domestic product. Federal Reserve, by regulating national money supply through influencing the amount of reserve funds available to banks and interest rates as well, prevents markets from pricing capital and investors from taking sound long-term decisions.
Commitment to the principles of liberalism is hailed as an important virtue by Murphy. This commitment should translate into resisting trade barriers, supporting tax cuts, and moving federal government to play a smaller role in the U.S. economy.
Freedom of capital flows is actively defended by Murphy. Today, when the world is becoming closer under the effect of globalization, we see that the first sphere to be greatly affected by the globalization phenomenon is finance. Modern technology and information flows have broken down natural barriers to free movement of money. As economies become more open and integrated with the rest of the world, countries have received record high levels of capital flows.
Controversial issues concerning degree of international financial integration, the economic impact of capital mobility, and the potential role of capital controls in the emerging international financial architecture are actively debated by the economists nowadays. Murphy lists several positive consequences of free capital flows, and the most important of them is better allocation of resources that leads to faster economic growth. The ability to borrow from abroad has enabled successful emerging market economies to double or triple the speed at which their productivity levels and living standards converge to the industrial core.
The gains from free trade are large, and especially on the international scale. While exchange rate risks, the consequence of massive international capital flows, can be harmful, the potential dangerous consequences are offset by considerable gains in welfare.
The book is very topical nowadays. There is a concern that looms larger than any – the backlash against capitalism and free market. Overwhelming support for restrictions on executive salaries and bonuses among consumers is a mere manifestation of schadenfreude, yet the growing distrust of anything with an adjective “Anglo-Saxon” among the high and mighty is troublesome. The French President Nicolas Sarkozy made a sweeping statement on the financial crisis: “Self-regulation is finished. Laissez faire is finished. The all-powerful market that is always right is finished.” However, governments’ actions like bank bailouts are aimed precisely at keeping capitalism functioning though propping up credit, the thing that keeps the system alive. In fact, the present situation is a crash test for the Anglo-Saxon model: if it succeeds in recovering from the crisis, it is indeed as efficient as its most passionate defenders argue. In the past, there were cases of market panics and downturns, yet growth caught up eventually to deliver decades of prosperity and confidence. Uninterrupted growth is too much to ask of from any economic system: anyone who went to college knows about the cyclical nature of economic activity. Prolonged periods of growth, low inflation and cheap capital provoke riskier behavior on the part of all, from consumers to multibillion dollar banks. Thus, crises of confidence should be regarded as a natural phenomenon in a capitalist economy. No system’s perfect. A more fundamental question is what capitalism can be replaced with. Marxism? Anarchism? There is not even a viable alternative to Anglo-Saxon capitalism, with German and Japanese models discredited more than a decade ago.
In the American context, the book is topical because of Obama’s election. His acclaimed polices such as massive tax cuts or daring welfare initiates will be hard to carry out under the present conditions. The U.S. is entering a painful recession, and unpopular measures might be needed to get the economy running. These unpopular measures should be free market based. Obama also vocally opposes free trade unless it is in America’s best interests. Obama’s emphasis is on “fair trade” rather than “free trade.” He believes that labor rights and environmental standards should be an integral part of any trade deal. He is determined to reform NAFTA and revise several other trade agreements. In fact, the inclusion of non-trade related provisions in trade agreements has long been America’s ploy to make outright protectionism look plausible. However, Murphy shows that free trade is in the best interest of all market participants. The prices on factors of production and economic resources vary greatly across the globe. For example, the cost of producing an item in South East Asia differs considerably from the cost of manufacturing the same item in the United States. Therefore, businesses move outside the country to seize the benefits of this phenomenon, and this provides for efficient resource allocation.
Therefore, Murphy argues that outsourcing is actually good for the economy, although American workers bemoan job losses they believe are the cause of outsourcing. Many economists and politicians agree that outsourcing poses a significant danger to the employment prospects of Americans. While the U.S. does not face any shortages of qualified workers in any field of economy, they argue that Americans should get access to jobs in the first place. Yet international labor specialization is for the benefit of both developed and developing nations. As manufacturing jobs migrate abroad, developed states receive an opportunity to concentrate on knowledge-intensive fields or services. Loss of manufacturing jobs was a concern for the American economy in early 90s when the jobs outsourced were concentrated in manufacturing. Nowadays offshore outsourcing extends to a far greater variety of processes and services, giving the opportunity for countries and businesses to specialize and achieve greater economic efficiency.
Thus, migration of jobs abroad is beneficial for American businesses. While short-term negative consequences, such as unemployment, are regrettable things, long-term gains, namely access to markets, can outweigh negative sides of outsourcing. There are numerous benefits of outsourcing that eventually maximizes the benefit of all. Competitive advantage is reached through specialization. If different units are situated in different locations, they specialize on activities that come at a smaller cost in that particular region.
Outsourcing was historically used for downsizing and cost reduction, but at the moment businesses are opting for it to gain access to specialized expertise in order to serve new markets. Businesses that suffer from overregulation or heavy taxation in one country are choosing to move out to reduce the costs. That is the reason why liberalism makes countries more competitive internationally, and the American government should be more committed to these principles, Murphy agues.
Politically correct critique of capitalism assumes that laissez faire damages the environment and results in extreme income inequality. However, government intervention is to blame for many of the problems attributed to the devastating effects of irresponsible business behavior. For example, Western corporations, accountable to their consumers, are more environmentally friendly and accountable to local communities than governments of those countries.
Market is well-positioned to solve any problems, including environmental ones. Murphy argues that if trade in endangered species were allowed, businesses would be interested in maintaining supply and fund conservation efforts.
Therefore, Murphy’s defense of the principles of capitalism, free market and free trade would be of interest to economists and public-at-large alike. The book dispels many myths and corrects certain misconceptions about the aforementioned concepts.