wsj: how liberals get capitalism wrong.

"Liberals are right to see through the usual conservative defenses of capitalism, but they are wrong on the big picture. They fail to notice that there is more to capitalism than luck and greed: there is competition--the saving grace of the whole system; the device that turns good luck to social advantage; and, when undisturbed, the source of capitalism's systemic strength.

Competition is the engine that turns the talents of the lucky to the service of all. A baker who offers moldy or bland bread can be driven from the field by a competitor offering a better product. That is the message of Adam Smith. The successful baker, no matter how greedy his motive for baking bread, must unintentionally mimic the very actions an altruistic Rawlsian philosopher would prescribe. The reason is the competitive nature of the capitalist system; the motives of individual capitalists are irrelevant. Competition puts capitalists' different motives, like their different ideas, to the acid test of consumer satisfaction. This tends to give consumers what they want--or at least what they think they want--and it diversifies a capitalist society's investment portfolio. Capitalism thus mitigates both human greed and human fallibility. This is an amazing achievement, but there is nothing magical about it.

Now consider again the alternatives liberals tend to favor--either the regulation of capitalism or its replacement by something more democratic, like an idealized socialism. Since regulators' or citizens' ideas would then be imposed on the whole economy at once, they could not be put to the competitive test--any more than the conflicting arguments of debaters, the conflicting promises of politicians, or the conflicting forecasts of budget analysts can be tested. If the citizens' or the regulators' ideas happen to be good ones, we all gain; if they happen to be bad, we all lose.

The whole system crashed when the financial regulators' ideas about prudent banking backfired, but such failures are inevitable unless modern societies are so ¬simple that the solutions to social and economic problems will be self-evident to a generalist voter, or even a specialist regulator. That modern societies really are that simple is, in truth, the hidden assumption of modern politics. This is why political conflicts get so ugly: neither side can understand why their adversaries oppose what "self-evidently" should be done, so both sides ascribe evil motives to each other. But the financial crisis has exposed this simplistic view of the world for what it is. In the wake of the crisis, nobody can plausibly deny anymore that modern societies are bafflingly complex. The solutions to social and economic problems are thereby unlikely to be self-evident. The theories that seem so obviously true to voters or regulators may turn out to be disastrously false--unless regulators or citizens are infallible.

That surely would be magical. But there is no more magic to politics than there is to markets. The question raised by the ongoing intellectual contest between socialism and capitalism, and the ongoing practical battle between regulation and competition, is how best to guard against human frailties: By putting all our eggs in one politically decided basket? Or by spreading our bets through the only practical means available: competition?"

http://online.wsj.com/article/SB10001424052748704454304575081680480599148.html