capitalism

Wealth and Poverty 539
create more value by shifting some of the labor and
resources being used in its production to the production of
other goods. This shift will continue to be motivated by further
changes in market prices until no additional value
results. In like manner, productive resources would move in
the opposite direction in response to price communication
if the cost of producing the good decreases. In either case,
the spontaneous coordination between producers and consumers,
informed and motivated by market prices, creates
wealth by directing resources into their highest valued uses.
Producing something as simple as an ordinary wooden
pencil is beyond the ability of any one person and requires
extensive communication between producers. As one economist
has explained, pencil production requires the coordinated
efforts of highly specialized workers from all over the
world, employed by a long chain of firms and using a large
variety of widely dispersed resources and sophisticated
capital equipment. Yet wooden pencils are conveniently
available at prices so low that they are commonly given
away as advertisements. Coordination among the many
producers that are needed to produce a wooden pencil, not
to mention far more complex goods, at the lowest possible
cost would be impossible without the information communicated
by market prices. Market prices inform producers
which part of the productive process is most profitable for
them to specialize in—that is, that part of the productive
process where the most net value is added. When a producer
has added as much net value as possible, the result is
that it becomes more profitable to sell this output to another
specialist, rather than to continue production. This marketmotivated
coordination results in far more wealth creation
than would be possible were central planners to attempt to
impose coordination.
The tremendous wealth from the freedom and coordination
of the market does come at a price. Markets make
freedom possible by imposing discipline on the use of
freedom—discipline necessary for the coordination of markets.
Those whose decisions are inconsistent with the desires
of others, who are not using their labor and resources to serve
others as well as possible, will have their jobs and personal
wealth competed away by those who create more wealth by
making decisions more consistent with the decisions and
well-being of others. This discipline takes the form of bankruptcies,
layoffs, and other types of financial losses. Such
discipline is painful and commonly blamed on the harshness
of market economies. Although it is easy to see the pain
imposed by markets, it is difficult to make the connection
between the information and discipline causing the pain and
the wealth and freedom that result. As Machiavelli observed
in another context, “Thoughtless writers admire [the]
achievement..., yet condemn the main reason for it.”
The freedom and economic coordination made possible
by market information and discipline constantly expands
wealth by unleashing the creativity of entrepreneurship.
Entrepreneurs are interested not just in making the best use
of existing knowledge and resources, but in discovering
new knowledge and resources by pursuing what most
people have not thought about and might consider impossible
if they had. Many, probably most, entrepreneurial ventures
fail to create wealth, but without the freedom to try
those that fail, there will be far fewer discoveries that succeed.
Only when entrepreneurial freedom is guided by
the information and ruthless discipline communicated and
imposed by market prices will the entrepreneurial ventures
that do not increase wealth be quickly identified and terminated,
with resources redirected into the expansion of those
that expand wealth. This process of entrepreneurial discovery
explains not just the wealth of a market economy at any
moment, but the growth in wealth that turns one generation’s
luxuries into the next generation’s necessities and
finds the goods limited to the wealthy of one generation
widely available to the nonwealthy of the next. As Joseph
Schumpeter pointed out, “Queen Elizabeth owned silk
stockings. The capitalist achievement does not typically
consist in providing more silk stockings for queens but in
bringing them within the reach of factory girls in return for
steadily decreasing amounts of effort.”
Unfortunately, although few recognize the connection
between the discipline of the market and the wealth of the
economy, we all are perfectly aware that our personal
wealth would be increased if we were exempted from that
discipline. If our jobs were protected, if our firms did not
have to face competition, or if compassionate and wellintended
policies were enacted to reduce the economic pain
inflicted on us, we would be wealthier. More accurately, we
would be wealthier if we were among the favored few who
received such exemptions while everyone else had to continue
coordinating their actions for the benefit of others
even when that coordination required losing their jobs,
going out of business, or giving up on their entrepreneurial
dreams. However, any serious attempt by government to
universalize these safeguards, to protect everyone from the
discipline of the marketplace, would quickly convert
wealth into poverty by suppressing the communication,
coordination, and freedom of the market.
See also Classical Economics; Division of Labor; Free Trade;
Globalization; Kleptocracy; Smith, Adam
Further Readings
DRL
Buchanan, James M., and Yoon, Yong J. The Return to Increasing
Returns. Ann Arbor: University of Michigan Press, 1994.
Hayek, Friedrich A. “The Use of Knowledge in Society.” The
American Economic Review 35 (1945): 519–530.
Machiavelli, Niccolò, Quentin Skinner, and Russell Price, eds. The
Prince. Cambridge: Cambridge University Press, 1988.