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Jeffrey Friedman on Capitalism

1:08 PM, Dec 7, 2009 • By MATTHEW CONTINETTI
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There's no better day than Monday to read a thought-provoking treatise on capitalism by University of Texas scholar and Critical Review editor Jeffrey Friedman. The article covers a lot of ground, but here's my favorite part:

In addition to their unfortunate romanticizing of capitalists, conservatives have done badly to adopt the economists' standard explanation for the success of capitalism: self-interest. Self-interest is supposed to be the "magic of the market," but we can safely assume that Chuck Prince was every bit as self-interested as Jamie Dimon. Both of them had equally strong incentives to save their banks, but that didn't help Citigroup. UCLA economist Armen Alchian showed in 1950 that capitalism would succeed even if capitalists weren't motivated by self-interest-and many capitalists, such as the founders of Google and Whole Foods, were not motivated by self-interest.

Unfortunately, economists have only grown more obsessed with self-interest, i.e., "incentives," since 1950. This has led many conservatives to embrace the idea that "greed is good"-a woeful misreading of Adam Smith (or Ayn Rand). Smith's parable of the baker, to whose benevolence we do not appeal when we buy our bread, is actually a lesson in unintended consequences, not in the wonders of greed.

The baker intends to make money, but he can do so only by providing his customers with bread. In his case, greed is indeed good. But that doesn't mean that greed is always good, or benevolence bad. Nor does it mean that greed accounts for the success of capitalism.

Don't worry: Friedman goes on to outline how liberals misunderstand capitalism, as well. Check it out.