The Benefits and Drawbacks of the Capitalist Economic System

Capitalism is a system in which the means of production, distribution, and exchange of wealth is determined by the individual or corporation (individuals via stock ownership) rather than a state run command and control method. Due to greed and human self-centeredness this type of system, capitalism, is the worst method known to man, except all the others.

It is a simple fact is that economies that are based upon the capitalist model have the highest standard of living. These societies also generally have the most liberty and real growth in the economy. A simple and dramatic compare and contrast can be made of the Korean people. A people and culture have been separated into a test and control group, North and South Korea. It does not matter, which for arguments sake, is the control or test group. The real difference lies in the two systems which distinguish this once homogenous group. The South, as of 2008, has the 15^th largest economy; slipping from 13^th after the left leaning government declared war on the rich.[1] Even with this slippage the arguments are still valid when contrasted with the pure command and control of the North which ranks at 179^th.[2] So stark is this contrast that after decades, those living in the North are averaging one foot less in height than their brothers to the south. How can one people, in one geographical location, sharing the same culture, result in two distinct outcomes each diametrically opposed to the other?

Even with such dramatic differences it seems as if capitalism has never been under greater criticism. Beneath the back drop of the latest economic meltdown is the criticism of capitalism’s so-called “inequality” and accusations that it promotes greed.

In a recent Rasmussen poll only 53% of Americans believed that capitalism is superior to socialism. Of those 30 and younger only 37% favored capitalism with 33% favoring socialism.[3] This does not bode well for the future. In truth, many high school graduates and college students have a gross misunderstanding of capitalism which is a major issue in its self. With this in mind, and quite possibly the future of the US, we will look at what happens when command and control governments supersede capitalism.

Venezuela who at one time was a fairly free society with a 60 rating on the world freedom scale, the world average, has now declined to a 39.9 rating under Hugo Chavez.

Chavez did cut the poverty rate from 55.1% to 27% via subsidies and social spending reaching 20.9 percent of GDP in 2006^[1], but at what cost? The economic rating is 28 out of 29 for the region, coming in at 174 for the world, just above North Korea[4]. Inflation is at 18.7% and unemployment at 8.5% as the middle class and foreign companies flee the country. The only reason Venezuela is not in a complete shambles is due to its abundant oil reserves, without which the country would implode.

There have been other economies that shifted from free market to a more control and command style. This shift occurred in Great Britain and Europe after World War II. Due to the mass destruction and no private sector left standing, as well as the lingering effects of the depression that preceded the war, governments took ownership of many industries and exerted fiscal control over most others. These measures coupled with a large welfare state were geared to combat unemployment, seen as the great evil. While this and the Marshall plan allowed Europe to rebuild, the ramifications of this shift loomed large into the future.

One of the understated issues is that there is a right to a job, even if it is not profitable. This was the situation Margaret Thatcher inherited when she became Prime Minister of England. The country was broke, high inflation ruled and government money was subsidizing various industries just to keep people working. The unions insisted upon keeping a coal mine open as long as coal was there, even if the cost to get it was higher than the open market would pay for it. The cost for low unemployment was high inflation. Little actual wealth was being created. This, coupled with the government subsidies resulted in fewer taxes being collected and an increase in government expenditures. This was not a sustainable process. Under Mrs. Thatcher the proper balance between employer and workforce was restored, industries were returned to the private sector, inflation was tamed and the dogs of entrepreneurialism were unleashed.

The model for unleashing these dogs of enterprise in a democracy was pioneered by Gonzalo Sánchez de Lozada, or otherwise known as “Goni” as he helped to shepherd Bolivia out of 25,000 % inflation. In Bolivia’s case the government borrowed too much. A fixed exchange rate crippled exports while conversely encouraging imports. This set the Bolivians up for a nasty fall when the commodity prices on the materials they exported fell. Again the government over spent and were issuing bank credits as the tax basis was depreciated. This is where Goni likened inflation to a tiger where you only have one shot to kill it and you have to give it your best shot. His “shot” was shock therapy where prices were liberated, government payrolls were frozen, and government spending was limited to what it actually had. While Bolivia is still poor, it whipped inflation without social unrest and became the model for turning a command and control economy into a market based economy. So successful was this approach that it was applied to Poland resulting in democracy and free markets leading to true economic growth and strength.

Despite irrefutable evidence of the effectiveness of market based economies as noted earlier, the free market economy is under attack. One of the criticisms is the fact that free markets are by definition pro foreign trade. What I mean to say is that the free market paradigm is exemplified wherever products can be produced affordably and sold profitably. Those locations where the input cost is higher lose out. This is painful. If protections are put in place to protect these workers, how is it different from the coal Miner’s Union in England where they felt they had a right to work despite the fact that their work was unprofitable?

I myself am a living example of this. For 18 years I made a very comfortable living selling industrial products to various manufacturers. As manufacturers left for greener pastures (more profitable), it became increasingly difficult to make a good living. I was faced with two choices. One I could continue on and complain about how awful things are, or I could reinvent myself, which I did with a college degree. My old colleagues have seen their fortunes continue to decline; all the while I have a more optimistic future. In a dynamic economy change is inevitable and those who work in it must adapt to survive.

While the shifting of jobs has caused pain it has also resulted in cheaper products for everyone, particularly the less affluent. In fact, 85 percent of the households designated as poverty stricken in the US owned at least one microwave oven in 2005 according to University of Chicago Prof. Bruce D. Meyer.[5] This job shift has made many common items far more affordable, unfortunately this is rarely acknowledged. Another benefit, albeit not for those displaced workers has been the lift out of abject poverty for those who reside where the business shift came to rest.

With the advent of computers and the internet, the technology genie is out of the bottle. People are connected all over the world via the internet with real time exchange of knowledge and ideas. There is even real time communication from the top of Mt. Everest. The internet is probably the new commanding heights as it is bigger than any country and it blurs all barriers. This new interconnectedness may even be responsible for bringing down one of the most evil regimes on earth, the Iranian government. No matter how hard the government tried it was impossible to shut down the flow of information from individual PDAs and cell phones. As soon as one portal was shut down many more were opened up through various proxies.

This demonstrates the true interconnectedness of the world resulting in wider opportunities as well as stiffer competition. So strong is this new paradigm that regulatory systems and national monopolies are being altered by these new technologies. It also makes protectionism far more difficult. The future is technology with globalization the natural trend bringing great hope to all mankind as long as it is freely available to all.

The reality is that capitalism is a natural system for people as pointed out by Hernando de Soto. It is the desire of people to better one’s self that led to trade or barter which was one of the foundations of all of civilization. Black markets are nothing more than the free market satisfying this natural system when the social structures fail. Despite this reality the free market ideas remain under assault.

This assault claims that greed and inequality are brought about by the free market system. Equality is the driver of those most opposed to free market systems. While it makes a great bumper sticker, the enforcement of equality results in the loss of liberty in its enforcement. Where there is liberty there is inequality. Even where there is no liberty, there is still inequality; the inequality is just hidden by political means. For example Kim Jong Il of North Korea enjoys a lavish lifestyle of Hennessey cognac, a fleet of sports cars, with a personal troupe of female strippers for his entertainment, while his people starve.[6] In other words inequality is a natural state in the real world whether in a command control or free market economy. The main difference other than the fact that inequality is more open and visible in a free market is that in a free market society there is social mobility. To force equality through legislation only reduces revenue and growth; it brings no one up, only down. The choice is clear, inequality with a high standard of living, or equality with a lower standard of living.

No society has had more opportunity to move up in social class than those in the US free market system. Because of this possibility there is an almost insatiable desire to immigrate here for the opportunity to do better. It is a part of our culture as evidenced by the popularity of Horatio Alger’s rags to riches stories. The TV series Beverly Hillbillies is only believable because it takes place in the US. We root for the underdog because we know it is possible.

The other complaint of free markets is greed. This too is a natural human tendency, so much so that throughout human history greed has been classified as one of the seven deadly sins. Capitalism does not breed greed; it just allows it an efficient venue to display itself. It is most conspicuous when money and things are made into an idol or a God. Those that worship money generally are the greediest and the ones that are brought down by it, like Bernie Madoff for instance. Money is an awful God, but a great servant for those that understand the difference.

The issues affecting capitalism are mainly issues of human nature. The very traits that make us human transcend all borders and all economic systems. Only the free market system can reward and stimulate creativity giving the highest standard of living in human history.

---

[1] http://www.dprkstudies.org/2007/07/31/s-korea-falls-in-gdp-ranking/

[2] http://www.heritage.org/index/country/NorthKorea

[3] http://spectator.org/archives/2009/05/12/students-confusion-about-capit

[4] http://www.heritage.org/Index/Country/Venezuela

[5] https://www.policyarchive.org/bitstream/handle/10207/14860/ba640.pdf?sequence=1

[6] http://www.dictatorofthemonth.com/Il/Jul2005IlEN.htm