Capitalism Can Fix This Mess

By Austin Hill
Sunday, August 05, 2012

America is in fiscal trouble, and seems determined to making matters worse for itself.

That’s why it’s long past time for an honest discussion about the “C-word.”

Capitalism – an economic system that is based on the private ownership of property, as opposed to government ownership of property, and the creation of goods and services that are sold for a profit - can restore our country to fiscal sanity, and save the rest of the world. It has lifted roughly half of the world’s estimated 6 billion people out of poverty (much of this has happened over the course of my lifetime), and has produced unprecedented levels of wealth for common, ordinary citizens.

Yet today, an economic idea that was birthed in the year of our nation’s founding (Philosopher Adam Smith’s groundbreaking work “The Wealth of Nations” was published in London in 1776) is scarcely taught in the United States. The very word “capitalism” is vulgar in the minds of many, and America’s current governmental leadership, starting primarily with President Obama and his party in Congress, has done a great job demonizing capitalistic ideals.

So to begin resuscitating the American economy with more capitalism-friendly economic policies, we need to first address some of the key falsehoods surrounding the idea of capitalism. Once Americans begin to better understand economics, generally, and capitalism specifically, the road will be paved for making better choices for our leaders and policies.

 So let’s start with falsehood #1: Capitalism is an economic system “based on greed” - Nobody doubts that greed is real, but today many American governmental leaders speak as though profits and economic success are evidence of greed. Others argue that “greed is good” and that it should animate our capitalist economic system. Neither one of these assumptions is accurate, or true.

Adam Smith made a distinction between greed and “rational self interest,” and argued that while being greedy is destructive and bad, human individuals are naturally “self-interested” creatures, and as such, we all seek to ensure our self-interests with our economic choices. As an example of this, think about the computer used to view or print this article. When you purchased it, did you shop around and find the best possible computer available for the lowest possible price? It was within your rational self interest to do so. It was also rational for the retailer to sell you the computer at the price you paid, and it was rational for the manufacturer to sell it to the retailer. Maximizing the benefits of one’s economic resources is not in and of itself evidence of greed – it is evidence of human rationality.

And then there’s falsehood #2: Capitalism is an economic system that is un-regulated – In truth there is no economy anywhere in the world that is completely “un-regulated.” The notion of an un-regulated economy exists only in people’s minds, on paper, and on hard drives, but nobody is trying to implement such an idea as official governmental policy.

Consider, again, your computer. It was designed and built under close scrutiny from governmental regulators. The electricity that powers it is generated under heavy governmental regulation. And if you’re reading this indoors, the structure that you’re in was built under heavy governmental regulation.

President Obama likes to say that Republicans “drove the economy in the ditch” and caused the economic crash of 2008, because they de-regulated banking, lending, and Wall Street. And while it is true that several of the complex if not clever financial instruments that sparked the financial meltdown were not adequately regulated (things like derivatives and mortgage-backed securities), it is false to say that a lack of government regulation caused the crash. Indeed, the crash was caused in no small part because of government regulation itself. Laws that either required or incentivized lending institutions to issue mortgages to unqualified borrowers were a huge part of the problem. And government guarantees that offered to “bailout” lenders if they got in trouble with their sub-prime borrowers incentivized even more reckless lending.

Notice the “fixes” that are implied, as we seek the truth about capitalism. If, for example, our governmental leaders quit demonizing financial success as being “greedy” and began implementing policies (and rhetoric) that encouraged it, then the wealthy among us may be incentivized again to invest in businesses and to grow the labor market. And what if politicians got out of the way and actually allowed the health insurance markets to be competitive nationwide, and allowed consumers to purchase health insurance from across the country (current law forbids this currently)? If your health insurance provider knew that you might quit and go to a competing company, they’d likely want to treat you better.

Capitalism can restore our nation to greatness. But will Americans embrace the facts, and abandon the falsehoods?