In a truly excellent column for the Financial Times today, John Kay lays out in a few hundred words a clear defense of the market economy against central planning. What I like most about it is that he tackles the question of “greed” (these days, it seems, the only deadly sin) head on:
The difference between North Korea and the US is not that one society offers more scope for greed than the other. In both countries, as in many others, there are greedy people and many who are not, and those who are greedy are disproportionately represented in the controlling elite. The difference lies in the channels of greed – the degree to which the quest for profit is directed towards the creation of new wealth rather than the appropriation of wealth already created by other people.
A successful market economy emphasises the former and restricts the latter through rules and institutions, in a structure that has evolved slowly and requires constant defence against those who would use economic and political power to subvert it. Success or failure in that endeavour is the central explanation for why some societies are rich and others poor. Crony capitalism is very different from the market economy.
The point about institutions is important. Law and regulation alone cannot sustain a market economy, and indeed too often send an economy down the road to central planning. The institutions of liberty such as the rule of law, due process, high trust (lack of corruption, confidence in institutions, and so on), and lack of regulatory barriers to innovation are all necessary for a market economy to flourish.
Crony capitalism offends these institutions. Kay’s piece should be required reading for Occupy Wall Street demonstrators — and for presidential candidates.