Most relatively capitalist countries are engaged in a massive wealth redistribution scheme: corporate subsidies. In 2015, the University of Sheffield estimated that the UK government was giving British companies £93 billion ($118 billion) in corporate subsidies each year. In 2020, companies in the agricultural industry received $46 billion in subsidies (aggregate numbers were not easily available for the United States). $8 billion went to companies that produce wind and solar energy in 2016. Countless other sectors and companies receive similar subsidies.
Many consider this an example of capitalist exploitation. But is the government seizing money from hardworking taxpayers to give to business concerns really capitalism?
The Trader Principle
Capitalist systems operate under the trader principle, a moral precept articulated by philosopher Ayn Rand, which explains that trading value for value is the just, rational way for people to interact. Rand applies this principle to both material and spiritual values.
Consider a theme park. The visitor voluntarily pays a fee for admission to the theme park owners, in exchange for access to the park they’ve built, insured, staffed, and maintained. The park’s attractions were built by workers, such as ride engineers and construction workers, who offered their services (designing and building rides and adjacent structures) in exchange for wages. The park is maintained by a whole host of people, from landscapers to customer service employees to cleaners, all of whom receive wages for the values (a clean, pretty park, sales, answers to customer inquiries) they offer the park. All of these relationships operate under the trader principle.
And all these relationships are just. As Rand explains, justice requires never giving nor seeking the unearned. Visitors must first earn the fee they exchange for admission, and the staff must provide physical labor and/or intellectual work to earn their wages. Everyone must earn value to be able to offer it in trade. By contrast, if someone at the theme park receives wages despite not doing his job, he is receiving value for doing nothing—he has received the unearned, so his earnings would be unjust.
Finally, the trader principle does not allow the use of force. As Rand explained, traders benefit each other through “free, voluntary, unforced, uncoerced exchange[s].” Trades require mutual consent and mutual benefit. And the only economic system that is able to operate entirely under the trader principle is capitalism.
Capitalism and the Trader Principle
Economist Murray Rothbard explained, “Free-market capitalism is a network of free and voluntary exchanges in which producers work, produce, and exchange their products for the products of others through prices voluntarily arrived at.” In capitalist countries, people maximize the value of their labor by trading their products with others—by choice. The theme park owner offers admission for a certain price; if people aren’t willing or able to pay it, they simply don’t attend. Nobody forces them to pay the admission, and they don’t force the owner to offer it to them for less. The situation is slightly more complicated for necessities such as food and housing, but even in those cases people can go elsewhere if prices at one supplier are too high (or, in the case of food, grow their own).
Further, under capitalism, people are usually rewarded proportionately to the value they offer (if they are unappreciated, they can go elsewhere or start their own business), creating an incentive for people to produce more value. Imagine an employee at our hypothetical theme park was hired as a ride operator and learns how to run all the rides in his section. But after a while, he begins to learn not only how to operate all the rides, but also how to fix them when they break down. In time, he can negotiate for a promotion and a raise, or go work for a competitor who will pay him more.
With the trader principle, people who produce more value receive more value in exchange. Such incentives have enabled and encouraged people to increase production and innovate, which has led to soaring living standards and plummeting poverty rates in nations with mostly capitalist economies. Such incentives are also based on the trader principle: those who make, distribute, and improve on the things people want and need reap their just rewards.
Subsidies Violate the Trader Principle
Subsidies, wherein a government redistributes taxpayers’ funds to another party (usually a business), however, stand in stark contrast to the trader principle. Such redistribution involves force and no value for value trade occurs. Suppose our theme park successfully lobbies for a subsidy, which is financed by taxes. The government would then be taking money from taxpayers without their consent and using the threat of force (“pay your taxes or we’ll throw you in jail”) to coerce citizens into giving the park owners money. Rand recognized such behavior as looting—forcibly taking value from others. The theme park, in this example, is receiving (after lobbying the government) value for nothing; Rand described such behavior as “mooching.”
Often, subsidies are dressed up to curry public favor for the politicians handing them out; for example, in 2021 the US government issued $315 million in subsidies to airlines that offered to fly to sparsely populated rural areas. The airlines provide some benefit (service in rural areas), but it is a coerced exchange, and the value they provide is not equal to the value they receive.
The companies who lobby for—and the politicians who grant—subsidies are not acting on the trader principle, and thus such actions are not compatible with capitalism. Subsidies exemplify cronyism, in which a government rewards companies according to proximity to power, not the value the company creates. Cronyism—an economy of “pull”—almost inevitably leads to stagnation. Subsidy seekers (moochers) benefit in the short term at the expense of everyone else. Subsidies are not only unjust, they also undermine the incentive structure that has led to progress and prosperity around the world.
Corporations who lobby for subsidies (and often, politicians who grant them) are putting their own short-term gain over justice and economic sense. Subsidies are morally corrupt and anti-capitalist, and are therefore not good for the consumer or for business in general. Capitalism relies on the trader principle, which is essential to its functioning. People create the most prosperity and flourishing through just, voluntary, mutually beneficial exchanges. Any deviation from that principle results in lost potential, wasted wealth, and often rights violations.
Subsidies, like any other form of government redistribution, undermine the trader principle and are anti-capitalist and unjust.
The post Are Subsidies Capitalist? was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.