A Case for Capitalism
Now that we have a socialist mayor running the financial capital of the world, it seems like a good time to remind ourselves why free markets actually work. You wouldn’t have to explain this to my parents’ generation that grew up in socialist India and saw the rationing of milk. You wouldn’t have to explain this to people fleeing Cuba and swimming across the ocean to Miami.
It seems like every generation has to learn this lesson on their own. It’s almost like you have to try out socialist policies that sound good on paper before everyone REALLY understands why they are a disaster. People tend to learn from their own experiences rather than from historical events.
Profit is good
Let’s start with a word that often makes people uncomfortable: profit. Far from being a sign of greed, profit is fundamentally a sign that value has been created.
Consider buying a cup of coffee for $5. You make that purchase because, at that moment, the coffee is worth more to you than the five dollars in your pocket. You’re happily making an exchange to be better off. On the other hand, the cafe owner is also happy. He took raw ingredients that were worth $1, added his labor to get $5 in return.
He created value with his labor and kept some part of it ($4) as profit. It was a double thank you moment where both cafe owner and customer got value out of that exchange. They both came out ahead.
In order to make a profit of $4, the cafe owner had to create value greater than $4. The profit he gets to keep is only part of the value he created for the society.
When you demonize profit, you demonize value creation. You essentially tell everyone that adding value to people’s lives is evil.
Price Controls are Evil
One of the campaign promises made in the New York election is Rent Control. Imagine a city where house rents are expensive. The high price is a signal, it tells developers that there’s huge demand for housing and not enough supply. This creates a powerful incentive for them to build more housing. In the long run, this new supply helps stabilize or even lower prices.
Now, what happens if the government steps in and puts a cap on rent? The immediate effect seems positive: current tenants are happy they don’t have to pay more. But the second-order effects are disastrous. First, because rent is artificially cheap, no one wants to move out, making it nearly impossible for new people to find an apartment. Second, developers lose their incentive to build new housing because the price cap makes it unprofitable. Third, landlords stop maintaining their buildings, why invest in repairs when you can’t raise rent to cover the costs? Just look at Stockholm, where artificial price ceilings have created 20 year long waiting lists. In San Francisco, landlords responded to regulations by converting rentals into condos to escape the rules, leaving even fewer homes for actual tenants. Berlin saw its rental listings virtually vanish overnight as owners simply withheld their apartments rather than leasing them out at a loss. In Cairo, entire neighborhoods into abandoned, crumbling shells that collapse and kill people every year.
“Short of bombing, there is no better way to destroy a city than rent control” – Freaknomics Podcast
By trying to “fix” the price, the city destroyed the very signal that would have naturally solved the problem. Prices aren’t arbitrary numbers – they’re a discovery mechanism that communicates crucial information about supply and demand. When politicians artificially control them, they don’t eliminate the underlying problem; they just create new, worse ones. This principle applies to everything from minimum wage laws to price caps on goods.
Regulation is often counterproductive
In a healthy, competitive market, the prices tend to fall over time. Competition and innovation make things cheaper and better. Think about the cost of computers, televisions, and clothing compared to a few decades ago. Yet, some areas defy this trend entirely. The costs of healthcare and university tuition, for example, have consistently skyrocketed.
What do these fields have in common? They are among the most heavily regulated sectors of our economy. While most regulations are created with the goal of protecting consumers, their practical effect is often the opposite. Excessive regulation creates huge barriers for new competitors to enter the market. This lack of competition means existing institutions have no pressure to innovate or lower their costs.
If you want to see a perfect example of how regulation kills competition, watch Bill Gurley’s presentation: 2851 miles. Beyond the argument itself, it’s also a masterclass in how to present complex ideas clearly.
TL;DR
Free markets work. Voluntary exchange, clear price signals, and open competition create wealth and improve lives. It’s not complicated.
My parents’ generation learned this lesson watching milk get rationed in socialist India. Cubans learned it so well they had to swim across the ocean to escape. East Germans watched West Germany thrive while they stood in bread lines. Venezuelans went from the richest country in South America to eating zoo animals. North Koreans still starve in the dark while South Korea became a global powerhouse.
Of course this is happening again. Of course people who’ve only known abundance think price controls and heavy regulation will make things better. They can’t learn from history. Every generation of comfortable, privileged people who’ve never lived through socialism thinks they’ll be the ones to finally make it work. It’s like a cycle of nature, you have to touch the hot stove yourself.
