The Hall of Creative Destruction
Brian Gongol


It's not uncommon to hear dismissive talk when an individual self-identifies as a capitalist or a free-market thinker. In some circles, it's downright fashionable to disclaim "free market" thinking, even while enjoying its benefits. The usual argument is that private firms inevitably concentrate their power until they can exploit consumers at will, and that they must be actively controlled:
"Given that we all still live under the shadow of capitalism and its affects our behavior and psyches, we know that it is necessary for us to put great amounts of energy and thought into structuring egalitarian and provocative conversations, ones in which all of our voices and ideas can thrive."
- "Life After Capitalism 2004" (conference website)
"If we take this as only one instance of Corporate Theft and compare it to the estimated 9 - 12 billion dollars in Consumer Theft estimated yearly, we see that there is much work to be done to liberate capital when the corporate criminals go unpunished and shoplifters face harsher prison sentencing."
- "Corporate Theft,"
"Global resistance to capitalism is finally on the rise again! After events like June 18, 1999 and N30/Seattle, momentum is growing to overthrow the corporations and start building a better planet."
- "Fighting the Octopus,"
If only their analytical thinking skills -- or even their ability to read history -- matched their anger.


The following is a common response from anti-capitalists upon hearing someone advocate "free markets":
"How can you believe in a free market? The government has to keep businesses from exploiting the people!"
The free market advocate is often struck dumb (in the sense of "like a mime"...unable to speak) by this argument, precisely because it is so ludicrous. Free markets are not without laws. This essential point is entirely ignored by the anti-capitalists. In fact, laws are an essential feature of free markets; without laws, free markets fail miserably. Some laws that are necessary to the function of every modern-era free market: It's true that some advocates of profoundly unregulated markets (sometimes called "anarcho-capitalists") will suggest, correctly, that even these laws can be dispensed with in favor of private agreements among individuals. However, the nature of public goods like national defense requires that, at least for the foreseeable future, humans will continue to organize themselves into nation-states. Understanding that nature means recognizing that it's generally more efficient for all parties within a nation to agree upon the above laws in order to promote economic growth. The amount of effort saved by the imposition of a minimum of law in a large-scale free-trade zone (such as the United States, in which the states are Constitutionally obligated to adhere to a certain sets of standards and measures and to uphold contracts formed in other states) is usually quite enough to justify at least a little government everywhere.


Even if anti-capitalists were to properly understand that free markets are not without laws, they would still oppose market economics on the assumption that business, by its nature, is out to exploit its customers.

This blind hatred of markets illuminates a terrible and fundamental misunderstanding of the nature of commerce. Exchange only happens when both parties benefit. It is, in fact, a necessary condition that both parties leave every voluntary exchange better off than they were before.

A simple illustration: Suppose you wish to purchase a car. Your demand for a car is shaped by what you perceive the value of the car to be. That value is the accumulation of all of the good things that car ownership can do for you: It takes you to work, allows you to transport groceries, permits you to attend social events, and makes it possible to enjoy leisure time at the beach or on the ski slopes. In deciding to purchase a car, you make an internal decision about how much those values are worth to you.

When purchasing a car, you evaluate the expected worth of all of those things that the car can do for you, and then you purchase some vehicle that will allow you to achieve those things at a cost lower than the value of what it will allow you to do.

If it's difficult to imagine how every consumer makes this evaluation every time he or she decides to purchase a car, imagine what would happen if most cars didn't cost $15,000 to $45,000, but rather $150,000 to $450,000. Naturally, if the price were to rise by a factor of ten, many consumers would not buy autos and would instead find alternative means of travel. Barring insanity or threats of force, we do not purchase things for more than they are worth to us.

There are only two exceptions to the rule that both parties in a voluntary exchange only take part when both of them leave the transaction better off than they were before: dishonesty and monopoly.


Some businesses will conceal information or obscure the truth in dishonest ways, and that such dishonesty may hurt the consumer. If an automaker knowingly sold a car that exploded on the third start, but promised a ten-year warranty, then that automaker would be clearly violating the presumption of honest exchange that makes it possible for commerce to function. Fortunately, though, dishonesty is usually punishable under contract laws. Thus, to those whose strongest argument against "free markets" is that businesses sometimes lie, the simple retort is this: Dishonesty isn't exclusive to free markets, but free markets always feature contract law, and contract law punishes dishonesty.

In fact, free markets do a much better job of punishing dishonesty than command economies. In the history of America's free market, we've seen many prosecuted for real or perceived dishonesty in business, including Samuel Insull, Ivan Boesky, Michael Millken, Kenneth Lay, and Martha Stewart. Insull, in fact, was acquitted of the legal charges against him, but still suffered severe financial punishment in the market. It's a sign that the free market system works. No one was punished under Communism for lying to consumers, but you can be sure it happened. Free markets, on the other hand, have a very active system for identifying and punishing misdeeds against consumers.

The only other case against free markets, then, is monopoly.


When anti-capitalists claim that the private sector always tends toward monopoly, they illuminate their fundamental misunderstanding of how the markets work -- not to mention their ignorance of history. No monopolist or even near-monopolist in the industrial era has survived at the top of any market for more than a generation or so. The reason: In any market, the larger any firm's share, the smaller its incentive to grow any further. Multi-millionaires don't play the lottery, because they can't do much to improve their standard of living by adding a few more million to the pot; poor or middle-class people, though, see jackpots as a way of gaining many times more than what they already have.

The same holds true for firms in a market: To the firm already holding a controlling share of a market, there's little to be gained from an incremental fraction more of that market. Monopolists (and here we use the term very loosely -- many people think of firms as "monopolies" when they have as little as 15% market share) lose the incentive to grow. A firm with just one percent of market that gains just one more percent has doubled in size, while the firm with twenty percent grows just by a small margin when it gains that same percentage point of the entire market. Thus, the incentive structure in a market system is always tilted in favor of the smallest firms. This means that healthy free-market systems should be characterized by what Joseph Schumpeter called the "creative destruction" of the marketplace.

What makes sense in theory is vindicated in practice. Observe that what were once great powers in their respective markets simply do not survive the war waged upon them by competitors who have relatively more to gain:

Firm Market What Happened
Western Union interstate communications Western Union once was the dominant firm in the interstate telecommunications market. It lost its technological edge to the telephone and, later, e-mail. Western Union now has almost nothing to do with telecommunications.
AT&T interstate communications Like Western Union, AT&T lost its market dominance to technology. After years of protection by the government, the introduction of competition to the market for long-distance telephone service, along with the rise in cell phone use as a substitute for traditional long-distance service, has endangered AT&T's future.
Sears retail and direct-to-home merchandise sales Despite innovating the field of direct-to-home merchandise sales, and despite its one-time dominance of major retail sales, Sears today is in trouble. Its share of the apparel market is being consumed by discount retailers, and home-improvement stores are sacking its core appliance business.
Montgomery Ward retail merchandise sales Despite being the first to dominate the catalog sales market, Montgomery Ward failed to sell and advertise as effectively as Sears. The company fell behind Sears in catalog sales at the start of the 1900s, and by the 1960s, its core mail-order business was in a tailspin. The company closed in 2000, after losing out to JC Penney and Wal-Mart.
IBM personal computers IBM created a personal computer based on existing technology and an open architecture, allowing for rapid product development and widespread acceptance -- 40% market share by 1985. But competing manufacturers found ways to make "cloned" machines faster and cheaper, and ten years later, IBM's market share was just over 7%.

Similar cases can be made about passenger rail service, K-Mart, and even McDonald's. The point is that even when firms dominate their markets, they simply cannot hold on to that dominance indefinitely. In most cases, monopolies and near-monopolies don't require governments to break them; the market breaks them. While much can be made of the supposed damage done to consumers by big firms, the damage is almost universally overstated, especially when viewed in the long term. Healthy, competitive free markets naturally brew their own anti-abuse elixirs by giving innovators every reason to break the grip of the monopolist.


What most anti-capitalists fail to realize is that, far from being their enemy, a free market is the best way to achieve worthwhile goals like human development, improvements to the quality of life, and the alleviation of poverty. Humans cannot legislate resources into existence. No matter what laws we pass, no matter how actively we prosecute, there is no way to create widespread wealth through legislation. Wealth is only generated by the productive activity of human beings. Legislation can influence how that wealth is distributed, but it rarely has a positive impact on the generation of new ideas, new products, and new methods that can improve how humans live.