Much discussion has been taking place over the last two or three years as to what model our economy should follow. With the financial crisis of 2008 and the subsequent recession, many political pundits are telling us that capitalism has failed and we should change our economic philosophy to mirror the socialist countries of Europe and elsewhere. It is my belief that capitalism hasn’t been given a chance and that those loudest of detractors are also the biggest beneficiaries of the wealth generated in a free market system. As we see daily in the news, the European economic model of centralized control and massive government spending and regulations, has led to the crumbling of the European Union’s economy and high unemployment and low production.
American history is full of examples of the success of capitalism and free markets and the failures of the more collectivist economic policies. From when the Pilgrims first landed on the cold, rocky shores of Plymouth, through the roaring 20’s and into the Great Depression, and onto today; our rich and colorful history can teach us many lessons that will help us rebuild our economic greatness. History is a wonderful teacher, if we would only listen to her story. Too many people today have no understanding of the various economic philosophies and tend to follow the winds of popular thought.
Capitalism is the economic theory whereby the means of production are privately owned and operated for profit. Adam Smith considered the father of modern economics and capitalism, wrote An Inquiry into the Nature and Causes of the Wealth of Nations (generally known by the shorter title The Wealth of Nations) in 1776 during the beginning of the Industrial Revolution. In it, Smith argued that free market economies were more beneficial and productive to society. He believed that in a laissez-faire economy, where business transactions between private parties are free from government intervention, an individual pursuing their own self-interest would lead to the greater common good. Today, The Wealth of Nations is considered one of the most important works on economic thought.
Smith’s work gave birth to more modern economists Friedrich von Hayek and Milton Friedman. In his 1944 book The Road to Serfdom, Austrian economist and philosopher Friedrich von Hayek “warned of the danger of tyranny that inevitably results from government control of economic decision-making through central planning,” and challenged the belief that fascism was a capitalists reaction to socialism; instead claiming that fascism and socialism both relied on central planning and control of the individual by a central government. He argued that abandoning individualism, liberalism, and freedom led to oppression of the individual and tyranny of the government. Milton Friedman was considered “the most influential economist of the second half of the 20th century… possibly of all of it.” As a member of President Ronald Reagan’s Economic Policy Advisory Board in 1981, he was instrumental in turning around the slumping economy of the early 80’s. His belief in free markets and political libertarianism set the stage for President Reagan’s policy of trickle down economics that led to the economic boom of the 80’s and 90’s.
On the other side of the economic philosophical spectrum were the ideas of Marxism, Fascism, Socialism, and other bastardized forms of capitalism. The common foundation of collectivist economics were the writings of 19th century German philosopher Karl Marx. His beliefs are summed up in the first line of his 1848 book The Communist Manifesto: “The history of all hitherto existing society is the history of class struggles.” He believed that capitalism would create tensions between the rich and poor that would lead to its eventual destruction, creating a classless society. His philosophy of Communism was the economic and political foundation for revolutions in Russia and China and many other nations around the world in the 20th century. Communism’s goal was to create a state of equality among the citizens by eliminating private ownership of property and the means of production; instead holding ownership by the state for the common good. The eventual clash of the opposing ideologies, capitalism and communism, led to wars in Korea, Vietnam, the Middle East, and Central and South America. As the two major political and economic powers of the 20th century, the United States and the Soviet Union fought via proxy for control and influence around the world.
Fascism became popular in Italy after the end of World War I and was a “governmental system led by a dictator having complete power, forcibly suppressing opposition and criticism, regimenting all industry, commerce, etc., and emphasizing an aggressive nationalism and often racism.” It is commonly remembered as the political and economic leanings of Benito Mussolini and Adolf Hitler during the 1930’s and 40’s and having complete control of the economic system by a dictator, and ownership of the means of production being awarded to the politically connected and favored. Socialism is “a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.” Very similar in scope to communism, Karl Marx believed socialism was the transition stage between capitalism and communism. Today, socialism and communism have become politically incorrect and have been masked behind terms like State Capitalism; but it is still a form of centralized control and is commonly used to refer to the Chinese economic model.
Keynesian economics, named after British economist John Maynard Keynes, argues that the private sector is sometimes inefficient and requires active public policy by the government to stabilize the economic cycle and is the basis for much of our current economic system today. As demonstrated by the trillion dollar plus bailouts and stimulus spending by the governments of the United States and European Unions, the results of government intervention are dubious at best. As the saying goes, the current policy of the government is to throw good money after bad. History demonstrates that an active government in the private economic sector only leads to longer and more severe downturns in the economy. The contrast cannot be demonstrated better than by comparing the administrations of Warren Harding and Calvin Coolidge to Franklin Delano Roosevelt.
When Warren Harding took office in 1921, the economy was in the depths of a depression with unemployment around 12% and soaring inflation. After the end of World War I and the high tax policies of the Progressive Era administration of Woodrow Wilson, Harding cut income taxes and reduced government spending by 50% and reduced the national debt by 30%. This led to what is called today the Roaring Twenties. It was a time of great economic growth in the US with an average unemployment dropping from its high of 12% in 1921 to an average of 3.3% for the rest of the decade. After his death in 1923, his policies were continued by his Vice President Calvin Coolidge until 1929. In October 1929, the bubble burst and the stock market crashed sending the world into the Great Depression that lasted for 12 years in the United States.
Franklin Delano Roosevelt took office in 1933, winning the White House from incumbent Hebert Hoover who was ineffectual in turning the economy around. During his first hundred days in office, FDR introduced the New Deal which was designed to bring relief to the unemployed and suffering primarily by creating government jobs and massive federal spending. The economy did grow from 1933-1937, but soon went into another deep recession. During that time, unemployment never fell below 14% and was as high as 24.9% in 1933. In 1938, unemployment rose to 19%.
UCLA economists Harold L. Cole and Lee E. Ohanian are among those who believe the New Deal caused the Depression to persist longer than it would otherwise have, concluding in a study that the “New Deal labor and industrial policies did not lift the economy out of the Depression as President Roosevelt and his economic planners had hoped,” but that the “New Deal policies are an important contributing factor to the persistence of the Great Depression.” They claim that the New Deal “cartelization policies are a key factor behind the weak recovery”. Lowell E. Gallaway and Richard K. Vedder argue that the “Great Depression was very significantly prolonged in both its duration and its magnitude by the impact of New Deal programs.” They suggest that without Social Security, work relief, unemployment insurance, mandatory minimum wages, and without special government-granted privileges for labor unions, business would have hired more workers and the unemployment rate during the New Deal years would have been 6.7% instead of 17.2%.
After the end of World War II and the following economic recovery the world was facing another clash of powers. The economic and political spectrum was divided into two camps; the capitalists led by the United Sates and the communists led by the Soviet Union. While these two countries never fought each other directly, they did in fact clash ideologically by backing sides in various conflicts around the globe. The animosity between these two super powers became known as the Cold War. The Soviet Empire was ruled by the iron fisted Communist Party that took power from the Czars in the October Revolution in 1917. With centralized control and ownership of all things the people of the Soviet Union had little incentive or ability to create wealth and innovation. As with all dictatorial regimes, only the most connected and powerful were allowed the luxuries and pleasures of a finer life. While the citizenry waited on long lines for food and toilet paper, the elites were drinking vodka and eating caviar. The abject poverty and corruption led to a black market for goods and tendrils of a capitalist system weaving its way into Soviet life. In 1991, the Soviet Union finally collapsed.
Russian born philosopher and novelist Ayn Rand wrote extensively about the struggle between collectivist and capitalist ideals. In her best known novel, Atlas Shrugged, Rand explores a dystopian United States where leading innovators, ranging from industrialists to artists, refuse to be exploited by society. As society crumbles without the brains and drive of the industrialists, the government steps in to fix and stabilize the system without success. Published in 1957, the story could have been ripped from the headlines of today. The government, in an effort to fix problems they have created, steps in with solutions designed to repair a broken system, leading to more unforeseen problems. Today we face similar questions as those in the book. Do we want to be free and wealthy or do we want to be taken care of by the state?
Freedom and prosperity do not come without risk. In fact, taking risk is the basis of wealth creation. Someone needs to take a risk to start a business, begin a new career, or spend their hard earned money on a product or service. Life is about taking risks, not just in business, but also in our personal endeavors. Without risk, there can be no reward and the greater the risk, the greater the reward. All we need to do is look to the great innovators of today, Bill Gates and Michael Dell, or from our past such as Thomas Edison and Henry Ford to see what determination and perseverance will do. Each man started with nothing and rose to lead their particular field. Capitalism rewards their effort with riches and opportunity to create whatever they desire. Because they have the ability to own the business and the products they create, they are motivated to create more and more.
Today we hear a lot about the greed of the evil capitalist from men like Michael Moore and George Soros. Both of these men have made millions (in Soro’s case billions) of dollars exploiting the capitalist system. Michael Moore makes movies that you can choose to go see or not. If his movies are no good, or you do not like his particular message, you as the individual can choose to spend your money elsewhere. The same is true for businesses. Capitalism fosters competition and allows people with new and better ideas to enter an already developed market. Take for example Michael Dell. At the time he was in college, IBM was the predominant manufacture of personal computers. Michael, seeing a need for more customizable and upgradeable computers, began building systems in his garage. Today, Dell Computers is one of the largest manufactures of personal computers in the world and Michael Dell is a billionaire. Because of his success, his company employs thousands of people worldwide. Without the “greedy capitalist” there would be no jobs or innovation.
Imagine for a moment the government was the sole manufacture of cars. During the days of the Soviet Union, there was only one company that was building automobiles. They were all the same size, color and quality; bad. You as the consumer would have no choice as to what you wanted to drive. They would be built for utility and as with all things done by the government, they would be built poorly. If you didn’t like it, what would you do? Today, under a capitalist system, you can choose to drive a Honda or a Mercedes Benz, depending on your tastes and budget. If a company does something wrong and gets bad press, such as Toyota did earlier this year, consumers will speak with their wallets and buy the competition.
Competition also leads to new and better products. Take the iPhone as an example. Apple had the market cornered in the smartphone world for a few years until the introduction of the Droid. Now there is a battle between Apple and Motorola and the customer is benefiting with new and better products. In an effort to win your money, companies look for ways to beat the competition.
Capitalism is about choice. You as the consumer have the choice of who you want to do business with, what products you want to buy and at what price. When you make decisions based on your own self-interests, everyone benefits. As companies betray your trust and bring bad products to market, they are destroyed by other companies that understand you have that choice. Our country is facing hard times economically and they are only going to get harder. Everyone is going to have to make hard choices. Do we allow our government to dictate to us who we can do business with, what we are allowed to buy and how much are we going to pay? If we do not stop the fickle hand of our politicians from reaching into every aspect of our lives, we will loose more than just our economic freedom. Jobs will be lost due to businesses shutting down or leaving for foreign shores. Wealth will be drained to keep a bloated bureaucracy in power and redirected to those who have no desire to make their own way all in the name of fairness. What is fair about taking your hard earned money and giving it to someone else? What would the incentive be then? To feed some other family than your own?
Unleashing the creative spirit of the American people and the capitalist system is really the only way to true and lasting prosperity. As demonstrated in the 1920’s and again in the 80’s, lowering the tax rate and cutting spending gives the entrepreneur confidence and allows them to create jobs and wealth. It’s only through the power of the individual working toward there own goals for their own purpose can we build a strong and prosperous nation.