Why Capitalism Is A Lot Like Magic

Magic is defined as the power to influence by using mysterious forces. The magician on stage bewilders his audience because he knows things about the set-up that the audience does not.

Capitalism is like magic because its powers are seeped in qualities that appear to be mysterious to the majority of the population. Even very prescient minds like those of Adam Smith, David Ricardo and John Stuart Mill were nowhere near envisioning just how this miracle of capitalism would take form.

The magic of capitalism, to the nascent enquirer, is that it appears on the surface to depart from the rubric of one of humanity's great laws - the law of diminishing returns. This is why so many people see capitalism as a zero sum game, and are so regularly confused by the fallacy of the fixed pie - it can be quite counterintuitive. After all, if I have more of something, doesn't that mean someone else needs to have less?

Sometimes, yes. If I buy the last packet of cookies in the local corner shop, the person behind me might have to wait until more stock is delivered. If I give you 2 slices of my pizza, I will only have 6 slices left instead of 8. Nature adheres to similar regularities: one barrel of oil sold in the market is one less barrel of oil in the ground. A potato farmer who digs up his yield has fewer potatoes in the soil.

But imagine a potato field whereby every time the farmer dug up his yield he ended up with more potatoes in the soil than before he started. And suppose that after digging up his mysterious additional yield he found that there were even more potatoes than previously before. If this process kept occurring, we would rightly infer that the farmer has a magic potato field.

Capitalism is like the magic potato field. It is not just a trading of goods and services - it is, at heart, a trading of ideas and innovations, and they do not yield diminishing returns; they proliferate in number, rather like (and also because of) populations increase because of exchanges of DNA through sex. When people think up ideas that go on to become light bulbs, combustion engines, stethoscopes, mousetraps, cat's eyes, cars, helicopters and space stations - the opposite of diminishing returns happens - we enjoy the law of increasing returns.

This is why capitalism is rather like magic - a non-supernatural miracle, if you like. The more we increase our prosperity, our progress and our standard of living, the more we can increase it further; the more ideas we have, the more ideas we will have; the more jobs we create, the more jobs we can create; the more we innovate, the more innovation becomes possible; and the better our standard of living gets, the better it can become.

Not only is this why capitalism is like magic - it is just about the only thing in the world of its kind: where individuals who pursue improvement for their own lives, simultaneously make everyone else better off by doing so. It is the great human cooperative; the greatest democracy; the greatest antidote to corruption and tyranny; and the greatest celebration of talent, diversity, individual sovereignty and equality (yes, equality) the world has ever seen or probably will ever see.

That so many people are its enemy; that they so willfully misunderstand it, distort it, cherry pick at it, formulate so many confused arguments against it, and call for interventions that retard its gravitas, stifle opportunities and impede its magical effects on fellow humans is one of biggest regrets we as a species should have.