Guest post by Kel Kelly
Few people understand what Capitalism actually is and how it works. If they did, they would almost certainly not continue to vote for the policies they currently support, and they would not experience today’s economic problems.
Capitalism is blamed for most of our economic ills. But in fact it does not exist. Capitalism is defined by free markets. But markets are not free when they are taxed, regulated, subsidized, mandated, hobbled, and otherwise manipulated. Government interventions in the economy were not for the purpose of fixing so-called “market failures.” They were implemented for political gain. But these interventions necessarily caused more problems due to the law of unintended consequences. Today we are “fixing” so much that our economy is breaking down.
Examples of these fixes are as follows: In the field of healthcare, government-driven spending, monopolies, licensing, incentives and mandates result in an artificially increased demand and an artificially restricted supply, which causes prices to rise at twice the rate of inflation. Similar dynamics apply to college tuition costs. Union legislation and minimum wage laws that price labor artificially and unprofitably high cause unemployment. Taxing the wealthy in the name of helping low income earners consumes capital that would otherwise fund and sustain businesses, including paying worker salaries. Less capital means fewer things produced at higher prices. Thus poor workers have fewer, lower-paying jobs and more expensive costs of living. At the same time, the government prints money, further increasing the prices of goods, as well as of stocks, bonds, and commodies. These inflated asset prices increase incomes of the wealthy, widening the gap between rich and poor. Government manipulation of the quantity and price of money—which links everyone and everything in the economy—causes stock market and housing booms and busts (since prices could never rise unless the government/banks add more money to the economy), as well as economic boom and busts.
Economic growth consists of increasing the supply of goods and services available. This causes living standards to rise, since the increased supply lowers prices relative to incomes. And there is only one source of having more goods: an increase in worker productivity and production brought about by an increase in capital per worker (think tools, machines, computers, and factories). But taxes, inflation, government spending and regulations reduce the amount of capital per worker, or, the output per worker. They do not, as commonly assumed, reduce inequality and help the disenfranchised; they lower standards of living and make (most of) us poorer than we would otherwise be.
What counts is whether we are able to produce more wealth—more stuff—each year than we consume. Though the true production of services is difficult to measure accurately, the production of goods is not. According to the U.S. Census Bureau’s 2012 Statistical Abstract, we produce fewer durable and non-durable goods today than we did in 2000. Until 2000 the industrial production index consistently rose—even through the economically troubled 1970s. And according to the U.S. Energy Information Administration, total energy consumption—a reliable indicator of overall economic activity—was slightly lower in 2010, the year of the most recent data, than ten years prior. This decline has occurred while the population has increased about 10%, meaning that production and energy consumption levels per person are even lower. This apparent decline in productivity and production is almost certainly responsible for the lower real wages we have witnessed over the last decade or so. Most people assume that economic growth is inevitable, that no matter what one throws at it, the economy can absorb it and keep chugging along. This is false. Economic retrogression is not only possible, it has happened to many countries and is likely happening here now. But such a decline is gradual and is noticed only after some time, not year by year.
Politicians and the voting public are led to think that spending is better for an economy than saving; that government consumption is better than private investment; that rising prices are better than falling prices; that government programs, not private jobs and production, create wealth. These backwards, but politically appealing notions have caused our current problems and have no place in capitalism. Inflation, unemployment, recessions and financial crises could never occur if markets were free (absent rare forces of nature).
If people were sufficiently exposed to a sound education in the principles of capitalism, they would understand which policies actually improve their lives and which diminish/degrade them. Equipped with this understanding, they would likely be in the streets demanding that politicians reverse most government policies currently on the books. These immoral and harmful policies have not changed for over one hundred years. Indeed, they have grown over time. Decade after decade these same tired policies fail to solve poverty and inequality, but instead give us recessions, financial crises, unemployment, and lower standards of living. The real and only cure is not more government control, but more true capitalism. A capitalism-based solution is not only a just one based on voluntary exchange instead of on the threat of physical force of the state, it is also a morally, ethically, economically correct solution that would result in higher—if unequal—standards of living for everyone.
Kel Kelly, an economist at an energy and agribusiness firm, is the author of The Case for Legalizing Capitalism.
He can be contacted at email@example.com.