Friday, March 25, 2005

Economics Lesson No. 6: Remind Me: What's Capitalism Again?

If you've read through the previous Economics Lessons, you have arrived at some understanding of the minimal basics of economics, and of the evolution of our present fiscal mess.

In order to gain a better grasp of free market capitalism, let's look at the difference between capitalism and all the other 'isms, like socialism or communism. It's not what you might think.

Contrary to public opinion, capitalism is not one of many viable alternative economic systems. Free market capitalism is in fact the bare bone structural economic system upon which all other 'isms are dependent.

To develop the bone metaphor, capitalism is the skeleton upon which is superimposed either our original US Constitutional libertarianism's lean athletic musculature, Europe's heavy but pleasingly plump socialist curves, or the obese and bed-ridden paraplegic dead weight mass of communism.

I repeat: Capitalism and socialism are not viable alternatives, as most people think. Today, many liberals will deny this, either pointing to Europe as an example of a successful socialist system, or calling themselves capitalists, when in both cases what they are in fact referring to is what could be called the "Third Way," or what they see as a compromise between the two. (See my articles at The Return of the Third Way and Brooks's Not-So-New Idea.)

They are wrong. Third Wayism is simply socialism feeding off capitalism. Incapable of surviving on its own, socialism, like a worm mutated into a bloodsucker, has revitalized itself by sucking on capitalism's lifeblood. Without capitalist underpinnings, all forms of socialism are doomed to fail. As my friend Professor John T. Wenders of the University of Idaho says:

"Socialism may have failed as a productive enterprise, but it thrives as a parasitic redistributive system attached to a market economy. ... Socialism in microcosm, with capitalism as a productive host, can survive and prosper. It is a measure of the power of capitalism that it survives while still supporting so many parasites."

Capitalism, therefore, is robust and strong, and can take a lot of abuse; yet, alas, there is no example today of any country that has a pure capitalist economic system. (Frankly, no country has yet had the guts.) On the other hand, there are many where capitalism is present albeit heavily encumbered, and this is the case now in America.

In spite of its recent worldwide attempt at a comeback, capitalism has long had to withstand a bad rap as the bogeyman, its reputation being sullied as a raw, mean, treacherous and profiteering free-for-all. This is evident right down to today's Webster's definition, which is as follows:

"An economic system in which all or most of the means of production and distribution, as land, factories, communications, and transportation systems, are privately owned and operated in a relatively competitive environment through the investment of capital to produce profits." (So far so good, but that's not all. Get this:) "It has been characterized by a tendency toward the concentration of wealth, the growth of large corporations, etc. that has led to economic inequality, which has been dealt with usually by increased government action and control."



Characterized by whom? Capitalism does not in and of itself have that tendency, on the contrary. It is governments that do.

Allow me to reword the last sentence more correctly: "Capitalism has grown to be characterized, in the words of power-seeking politicians and academics, and therefore in the minds of much of the public, as the primary cause of disproportionate concentration of wealth, growth of large corporations, and economic inequality; whereas in fact the real causes of these ills are inappropriate government interference via lobbying, special interest favoritism, grandstanding, and ineffective and costly oversight, in turn causing unhealthy reduction of corporate, labor and market competition, which are the principal factors that could truly control concentration of wealth and economic inequality."

This would be a much more accurate statement.

It's funny, Webster's itself has changed its tune over the last decades. To illustrate my point, here is Webster's definition of capitalism from the 1975 edition, which I much prefer and will use in future:

"Capitalism: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision rather than by state control, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market"

That's more like it. Webster's, shame on you!

In my next post, Government Lesson No. 2, I delve a little into the history of the present distortions of capitalism in the US and Europe, and discuss the various stages of evolution of these modern democracies.

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