This is the final article to wrap up the series on economics and wealth. Our country was founded on capitalism as the main economic system and we have created the greatest wealth among all nations and have lifted the most number of people out of poverty and produced the largest number of the middle class. This did not come about by accident. It is the free enterprise system combined with our Constitution that has delivered the results we see today.
- April 2020
Why Is Capitalism the Best?
First of all, there is no perfect economic system. Let's just dispel the myth. However, among all the competing systems of capitalism and socialism and communism, capitalism wins by a mile. Despite the shortcomings, capitalism offers the best path to prosperity for the greatest number of people.
What is the magic?
The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand. Description: The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth of Nations'.
Another way to explain it is from Milton Friedman, the Nobel Economist who said it is the freedom of each individual acting in their own best interest that will collectively produce the best outcome for society as a whole. The problem of central planning is that - who gets to decide? Who has the wisdom and knowledge to dictate what to produce and in what amount that will best serve society as a whole?
The answer is no one. Therefore, what is left is the free market system where with minimum government intervention, the system will let the market drive production and set prices based on supply and demand.
What Can Go Wrong?
Capitalism is evolving. Over time, we have encountered problems and we have overcome them. Knowing human nature, it is inevitable. For example, one such problem is monopolies. This is when a company got so successful and so large, that it dominates one industry and drove away all competition. Either by undercutting prices or takeovers, one by one, the competition goes away or are bought out. Once that happens, the consumer is left without a choice. It must pay whatever the company set as the price and there is no reason to innovate. Therefore, our government had to intervene and pass anti-monopoly laws to stop this practice.
Another problem which exists today, is what is called crony capitalism. This is when a company hires lobbyists and donate in excess to a political candidate to help that person win elections. Once elected, he is beholding to that company and works to pass legislation that favors that company or a sector of the industry by receiving special tax credits or provides subsidies. This is favoritism which hurts other industries and the America people as a whole. We already have laws on the books that sets limits on political donations and lobbying activities. However, people and companies have found ways around the laws.
What Is Good?
Some good aspects about our economic system.
- It allows for competition
- Competition drives innovation and efficiency
- It is a level playing field. anyone can participate regardless of your class or education or religion
- It allows for upward mobility
- It is compatible with human nature
- It is forgiving, even when one fails, he or she is allowed to try a new venture...
- It is a fair system
- It is commerce for the masses
- there is no upper limit, only limit by the imagination of people
- It is contagious, more and more nations are adopting it.
How Else Can It Be?
It is a fair criticism by someone like Bernie Sanders and Elizabeth Warren about some of the problems of wall street. However, their cure is worse. They want to throw out the whole system and adopt socialism to replace it. Or a new term coined by Sanders, "Democratic Socialism." This is a false concept. There is no democratic socialism. The two concept are incompatible. Democracy is what we have, elections by the people to chose our leaders who will govern with our consent. Socialism by definition is government ownership of means of production.
Bernie Sanders like to point to the Nordic countries as model economies. However, they are not socialists as detailed in this article in Foreign Policy Magazine. What they do have is a vast social welfare system achieved with high taxation. Their economy is private enterprise just like ours. Here is Denmark's Prime Minister saying the same.
It is a fair question to ask why can't the US be more like Denmark? The problem is freedom. When you provide more social services, you loose a little freedom. It is inevitable. Are we willing to give up pieces of our freedom for security?
This question is not new. It has been debated for a long time.
Here is what President Barack Obama and Benjamin Franklin have to say:
There are many good ideas and I will just mention three. On the political front, what will make a huge difference is adopting term limits. This would require major legislation or perhaps an Amendment to the Constitution. We need term limits for Congressmen and Senators. This one single change would reduce the corruption that comes with cronyism and election fraud and endless fund raising efforts. It will make sure that these positions are reserved for public service and not a life long career. This was how our Founding Fathers had envisioned.
A second improvement is to revise the Federal Reserve. As it currently stands, it is more of a political entity rather than an economic one. We cannot have the Federal Reserve set interest rate based on the stock market. We also cannot have fiscal irresponsibility by allowing the Federal Reserve to print money at will with the quantitative easing.
Finally, we need a balanced budget Amendments. There seems to be a lack of will on the part of both parties to keep spending in check. Year after year, administration after administration, we consistently spend more and add to our national debt. This happens in boom times and in recessions. It happens under Democrats and Republicans. Meanwhile, the government, gets bigger by the day. That is not limited government. We and our children and our grandchildren are going to have to pay the price.
On a positive note, our economic system is sound. It has some problems that can be fixed or tweaked. We don't need to throw out the whole system and start from scratch. We evolved over time and have made it more robust and prosperous for most Americans. Economics is tied to wealth. Understanding how the system works is the first step towards financial security.
it is my hope that these tutorials will get you inspired to learn more. To educate yourself to be better informed and better positioned to benefit financially. Wealth is good. It allows for independence especially in our golden years. It will allow us the freedom to travel, to experience other cultures, to donate to charitable causes and to volunteer to make the world a better place.
I will end with a quote from the Bible. This quote is often used to denigrate people with money. "The love of money is the root of all evil." It is often abbreviated to "money is the root of all evil..."
There is a huge difference between having wealth and hoarding money. In the first case, wealth is good, while hoarding money is just greed.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2020 Jack Lee