Political Economy: Capitalism Makes Life Better, Big-Government Socialisms Make Life Worse (First in a series)

First Principles

As we suffer disastrous consequences of big government and socialism—which include why Governments Were Obviously Wrong from the Start about COVID-19, raging inflation, soaring crime, social and personal disintegration, and hot military war—it’s worthwhile to look at what could improve matters enormously.

Capital and Capitalism

“Capitalists” are routinely portrayed as greedy rich people getting richer at the expense of workers and the poor, by cruelly cheating and/or exploiting their labor. And “capitalism” is portrayed as an unstable financial system that has to be tightly regulated to prevent both cheating and financial collapse. 

This picture is at least as old as the saying that arose in the Great Depression of the 1930s that Franklin Roosevelt (and Democrats) saved America from capitalism, and saved capitalism from itself; but a look beneath the surface reveals a very different picture. Capitalism creates prosperity and gets blamed by big-government, Marxist, and other types of socialists for the ills they themselves create.

Capital

“Capital” is defined, and enforced by free markets, as wealth that has already been invested to create new net wealth.  If profits from those investments don’t pay back the original investment, the net negative amount is written off as a loss; it is gone, never to be gotten back; as in the example of a factory that runs up huge losses and can only be sold at low scrap prices.  Also, a  hoped-for profit is required, to compensate for not spending that wealth on personal gratification and instead putting some or all of it at risk of loss.

In practice, the original capital investment can only be gotten back, and hoped-for profits gotten, by making new, or better, or cheaper products that people want and can afford, with accompanying good jobs. Working people can share financially from those profits too, via low-cost mutual funds and ETFs.

Capitalism

Capitalism is the system within which wealth is invested as capital.  It consists only of private wealth put at risk in free markets, because only this process, of individuals watching carefully how their investments are put to work, has ever created the new, high-quality information needed to produce ever newer and better goods, services, and jobs. 

In capitalism, and only in capitalism, the “evil rich” buy expensive, buggy new products and act essentially as experimental guinea pigs testing and choosing among the products, until improvements get made and volumes of production go up, producing better products and falling prices in successive stages. Eventually the rest of us get fine, affordable new products—refrigerators, automobiles, TVs, personal computers, smartphones, etc. Further, as noted, these “evil rich” put their own money at risk of loss, when they could have spent it on themselves, to invest in companies making those products, thereby creating good, well-paying jobs for the rest of us. Hooray!

On the opposite end, countless individuals, families, and small circles of people invest their hard-earned savings and life’s energies in the smallest of small businesses, providing many personal services and products and jobs for the rest of us, even at great risk of losing it all if costs and sales fail to make sufficient profits to keep them working.  Hooray for them too!

And in between are businesses that grew into having tens to hundreds to perhaps thousands of employees—the largest of which might be called “small-cap” or “microcap” companies in financial markets.  They must get their credit lines and loans from banks that specialize in local lending or from other investors.  They all make life better.

Not to be ignored, too, are the money, time, and effort people invest in building their personal skills so that they can earn more in the future. This is a form of capital too because the invested funds cannot be gotten back except by working at gainful employment.

Capitalism’s Virtues

1. Capitalism is the great emancipator. It seeks the most able people, regardless of arbitrary prejudices. And human abilities are so varied that far more than just elites can improve their lives. Companies that are foolish enough to discriminate on arbitrary grounds get their lunches eaten by competitors who hire superior talent in free markets.

2. Capitalism is the great equalizer—in quality of life. It raises the lowest the most in what matters most: secure and ample food, shelter, clothing, opportunity, and other advantages of modern life.  

3. Capitalism is the peace and prosperity economy:  Economic growth means that far more can be gained by building than by taking.  

4. Capitalism fosters constructive behavior, because capital investments require the exercise of many virtues for them to bear fruit.  And capitalism provides the promise of a better life, which pulls people into practicing those virtues—and pulls people towards politicians who make a full-throated advocacy for free enterprise and capitalism. 

What Capitalism Is Not

1. Capitalism coexists with many other human activities and shouldn’t be confused with them.  For example, the “private enterprise” of theft and other criminal activity isn’t capitalism because it doesn’t create new net wealth at all (the singular goal of capital investment, enforced by free markets), much less society-wide new net wealth.

2. When private businesses become too much involved with government, especially when government allows and rewards only those private businesses that serve the government’s interests, that is a hallmark of fascism, not capitalism, for the political imperatives of government destroy more wealth in the long run than is created by private free-market actions.

In other words, a private-sector business might operate in some ways in free markets (capitalism) and in other ways as a colluder with government or political interests (fascism), but if the latter is substantial, fascist interests eventually destroy much more throughout society than the capitalist activity creates in goods and services.

A high involvement of big business, especially, with government makes fascism a form of socialism, though historically it has not been viewed as such, and it is prevalent in the U.S. political economy.

3.  Some people say that when government spends on making goods and services, that is “state capitalism,” but it really isn’t capitalism at all; it is “central planning” in which governments own or control parts or all of the economy, with disastrous economic consequences, typical of Marxist forms of socialism, especially of communism (no private property allowed).  It too is active in the U.S. economy. Bernie Sanders is the best-known proponent for it, and he is far from alone.  New York Times columnist and Nobel Laureate in Economics Paul Krugman opined (while lushly praising “AOC” for her tax views) that top taxes on the rich should be 80% because “they don’t need the money” (as if capitalism doesn't—or shouldn’t—exist).   Yet history shows this approach is even more ruinously destructive than is fascism (no small feat).

Three Definitive, Naturally Occurring Experiments Showing Marxist Big-Government Socialism Produced Famine, but then Capitalism Produced Plentiful Prosperity

Karl Marx wanted to abolish private property and treat people “from each according to his ability, to each according to his needs.”

Roughly 250 years earlier, at the Plymouth Plantation in the early 1620s, the colonists famished under a virtually Marxist collectivist agricultural policy—in the name of the common good, everyone was supposed to work the land and everyone was to share equally in what food was produced—but they ate plentifully after they introduced private property and free enterprise to work the land: Every family got its own plot of land and lived on what it could produce on that land, whether to use for themselves or trade for other items. (William Bradford’s history, near the end of the year 1623, “made all hands very industrious").  

Similarly, villagers working in an agricultural collective in Maoist Communist China in the 1970s produced little or no food at all, but produced relative cornucopias of food when they secretly adopted free-market private enterprise. This free-enterprise approach for business was then picked up and promoted by Deng Xiaoping, (“The Quiet Revolt that Saved China,” Michael Meyer, WSJ, op ed, 4-17-19), starting China on a path of steadily rising prosperity (now in question under Deng-hating, Mao-admiring Xi Jinping). 

Here is an account by the Pacific Legal Foundation describing a similar transformation from famine into plenty at the Jamestown Virginia Colony, 1607+.

These three experiments span 360 years, half the globe, “race,” and religion. The results enjoy the great virtue of comparing outcomes for the same people who try one method, then the other (“self-controlled”). It’s as close to a rigorous scientific experiment, with confirmation in a second case, that we can ever get. This evidence is proof positive and definitive of the superiority of capitalism over Marxist big-government socialism.

William Bradford’s explanation of why the new system worked better goes into deep aspects of human nature that are at the core of capitalism.  He wrote that husbands shirked on work in the collectivist system because they didn’t want to work hard to feed other men’s families; and mothers of young children cited the need to care for their children as reasons for not working in the fields.  Yet once the families had to work—and were allowed to work—for themselves, the men worked very hard indeed; and mothers took their children with them as they worked in the fields.  As William Bradford showed, the switch to free enterprise and free-market trade—capitalism in microcosm—“made all hands very industrious” and very smart.

And the results in China discredit all big-government socialisms, including fascism, because they all work by making big-government, system-wide decisions: central planning by self-serving absentee managers, as if bureaucrats and distant “experts” know better than people managing their own lives.

Eight Ways Big Government Is Hurting Us Now:

First is the medical mishandling of the COVID-19 pandemic, noted above.

Second is the economic mishandling of the COVID-19 pandemic. Governments locked down large parts of their economies, creating shortages of goods and labor, and doing enormous harm to children, businesses, workers, and their families. Then the U.S. government printed trillions of dollars in the name of compensating workers for losing employment income. This produced too much money chasing too few goods, raising prices.

Third, extremist views on climate change have suppressed the production and use of gasoline, natural gas, and heating oil, further raising prices.  They have also shut down coal and nuclear power plants that generate electricity, making electricity much more expensive and much less reliable, with rolling blackouts now predicted to threaten much of America this summer.

Fourth, power hungry bureaucrats have tried other ways to command the economy, producing further shortages of food (most notably baby formula) and other items.

Fifth, productive workers, including nurses who had been hailed earlier as heroes, were fired for not getting a COVID vaccine injection when they were medically advised to avoid the injections, for reasons varying from being allergic to the ingredients, to having had bad reactions to the first injection, to having gotten natural immunity after recovering from the virus, to the young being at very, very low risk of serious illness (not to mention reasonable doubts about long-term health consequences of an experimental vaccine rushed through under “emergency use authorization” without the usual waiting period of at least several years for symptoms of injury to emerge, while no vaccine has ever been developed that could get approved by the FDA for corona viruses that cause the common cold).

Sixth, the virus causing COVID-19 was created, beyond a reasonable doubt, in a Chinese government lab, funded in part by the U.S. government via Dr. Anthony Fauci.

Seventh, downstream effects of reducing supplies of gas and oil have been horrendous:

a) They financed Vladimir Putin’s war on Ukraine, by doubling the price of the oil and gas that Russia sells.

b) They make major European countries so dependent on Russian oil and gas that they are reluctant to do much to aid Ukraine.

c) The war in Ukraine has cut off supplies of fertilizer, foodstuffs, and minerals that come out of Ukraine, while sanctions on Russia have produced similar shortages.  All this adds to food and energy inflation globally and points to possible starvation and resultant riots and political upheavals in poorer countries.

Eighth, big government has fostered group identity politics and the cancel culture it spawns, a new form of socialism. It allows and requires only group—collectivist—identity, no personal identity allowed. Such group-identity thinking destroys information and impoverishes everyone affected by it by denying individual identity and merit, and suppressing or punishing achievement.

More Devastations Caused by Big Government And Marxist Socialism

1. Big government actions have created virtually all the economic crises and sufferings one can name, which big government and its media allies blame on capitalism, including:  

      —The Great Depression (too tight money and trade, then too much regulation)

      —The Great Inflation of the 1970s (too loose money)

      —The Savings and Loan crisis of the late 1980s-early1990s (government deposit guarantees too high)

      —The “Asian Contagion” of the late 1990s: Local companies were borrowing dollars, which the U.S. was deliberately devaluing (the Plaza Accord of 1985), and selling to booming Japan with its rising currency; doubly profitable. Then it all reversed, forcing the companies to dump their own currencies to buy dollars to repay their dollar-denominated loans.

      —The “dot-com bubble and crash” of 2000-2002

      —The stock-market collapse and “Great Recession” of 2008+

      —Today’s second Great Inflation, as noted above, and

      —The mess in health care (see my posts in my Health section of this substack: Allopathic Medicine vs. Complementary Health, A Fuller View of Natural Anti-Infectives, When “Following the Science” is NOT Science, Gov. Obviously Wrong).

The economic collapses of 2000-2002 and 2008 have been especially demoralizing and damaging, as media and politicians convinced whole generations of younger Americans that capitalism caused the problems and big-government solutions were needed, even though big government actually did the damage. 

The 2000-2002 recession and stock market collapse occurred because the Telecommunications Act of 1996 promised “an information superhighway” across the entire nation; but, to protect local telecoms, local regulators prevented wide broadband connectivity from reaching people’s homes and small businesses—a roadblock at what is called the “last mile.” Vast sums of dollars were lost as the dot.coms couldn’t sell their wares, and major telecoms couldn’t profit from their hugely costly buildups in telecom infrastructure.

Concerning 2008, I counted 14 major government actions that first inflated housing and mortgages, then crushed everything in them and much of the economy, the good as well as the bad. Here’s a humorous hint listing some of the crushers: naked shorts, the uptick rule, client No. 9, and black holes.

The “black hole” in 2008 was the self-feeding—pro-cyclical—collapse caused by inappropriate regulatory use of “mark-to-market” accounting, which was reinstated in late 2007 after having been suspended by FDR in 1938. If you search for Brian Wesbury, Steve Forbes, and mark-to-market accounting, you will get to source material on explaining this concept. Here’s what was happening, in broad terms:

With mark-to-market accounting, when someone sold dicey mortgages at a loss or just sold good mortgages at fire-sale prices to raise money to pay debts, bank regulators started making banks in general mark down the mortgages they held to what the market discount was on the dicey or fire-sale mortgages.  Then regulators started taking over banks that didn’t have enough invested capital reserved to cover the losses represented by the markdown in the paper value of the mortgages. The regulators declared that those banks were insolvent and should be taken over even if the mortgages were paying in full and the banks were decidedly profitable, which many mortgages and banks, respectively, were.

Because the assets of banks that regulators took over were effectively frozen (by regulatory bureaucracy), other banks that had lent to the banks being taken over suffered a loss of availability of the assets they had lent, so banks stopped lending to other banks. As bank lending dried up, financial markets began to freeze, because they depended on bank lending to provide “liquidity” (aka, readily available short-term money).

This in turn deprived countless companies of short-term loans they needed to cover short-term mismatches between money coming in from sales and money going out for expenses. This caused panic, steep stock market declines, recession, more selling of mortgages by banks needing to raise capital, and more regulatory takeovers—a self-feeding financial collapse; hence “black hole.”

I can report that mark-to-market was effectively suspended between 2:55 PM and 3:25 PM on March 9, 2009, and that’s exactly when the stock market bottomed and began to recover, permanently.  I know this because I was listening to the half-hourly stock-market reports on WCBS radio.  At 3:25 PM, Ray Hoffman reported that Barney Frank, the powerful House Democrat, had just said that mark-to-market had to end. By 3:55 PM, the market was higher than its values at 3:25 and 2:55 PM, beginning a very long new bull market. 

2. European-style socialist policies (Second Socialist International; Marxist) give overgenerous wages and pensions to government workers and have been bankrupting Brazil and many U. S. cities and states, while Peronism periodically impoverishes once-prosperous Argentina.

3. Communism (Third Socialist International; “Marxist-Leninist;” “Stalinist”) produced mass deaths and sufferings, numbering 100 million or more deaths alone, under such as Stalin, Mao, Pol Pot, Castro, Chavez + Maduro in Venezuela, Salvador Allende in Chile (until stopped by Gen. Pinochet), and North Korea’s Kims.  Now Mao-admiring chairman Xi of Communist China is widely reported waging genocide on the Uyghurs.

4. Marxist and big-government socialists’ influence in the Democratic Party has led to freeing criminals and rioters to run amuck, while trying to keep or get guns out of the hands of law-abiding women and men who fear they need guns to protect themselves when the police are hogtied politically.

5. Anti-capitalists in the U.S. punish growth by taxing—or trying to tax—investment (“capital gains”) at 60%+. They justify this by demonizing the people who make those investments, but all that does is suppress all the products, jobs, and mortgages that result from private-enterprise investments.

6. The World Economic Forum (a clique of rich and politically powerful people, led by Klaus Schwab in Davos, Switzerland) is pushing forward with its “Great Reset,” in which “You will own nothing, and you will be happy.” This smacks to me of Marxist goals and fascist means, if it is behind the trend in the U.S. for private investors to buy up huge tracts of farmland and large numbers of homes (which they rent).  Further, their huge push for electric cars—while the electric grid is already at the rolling-blackout stage, with more fossil-fuel capacity to be removed—coincides with predictions that people will rent cars by calling them by app as needed, no ownership required.  Warnings already arise that governments will be able to wirelessly reprogram electric cars’ computers to override your choices and decide where and when you can travel by car (and live, and work, based on where you are allowed to travel).   

Capitalism Must Be Taught to Everyone to Counter Socialism

Capitalism is actually a 500-years-long inventive work-in-progress of human activity.  While freedom is intuitively obvious at a personal level, a lot of what happens with corporations and financial markets is not intuitively obvious at all, unless one studies them carefully or is taught well. That kind of teaching hasn’t happened in my living memory, going back to the mid 1950s. (Oh, Barry Goldwater, Ronald Reagan, Rush Limbaugh, etc., and Donald Trump preached to the choir in broad terms, but didn’t teach in broad public addresses or advocate teaching capitalism in schools. “Anticommunists” didn’t teach capitalism at all; Richard Nixon was a big-government guy.)

Instead, socialists of various types have taken over schools, from K to graduate school. Ditto for the media and big-government politicians, Republican as well as Democrat. Now, indoctrinated graduates are filling political, corporate, and governmental bureaucracies.

They appeal to the social parts of human nature and family life to make capitalists look like greedy bastards who are cruelly exploiting workers and who periodically put the whole economy at risk in financial meltdowns—which the socialists actually cause. 

Exposing the socialists can’t be left to “Aren’t the advantages of capitalism obvious? Wait for people to be turned off by socialism’s failures. What’s wrong with people who don’t see it?” Each “red wave” has been followed by a “blue wave” because the fundamentals of capitalism were not planted, nurtured, and replanted deeply and widely; and because Republicans were often big-government types themselves. While Democrats such as John F. Kennedy did explicitly support capitalism as a pro-growth agenda for workers (cut taxes because “a rising tide lifts all boats”), Democrats now compete for who can be the most socialist. And they always say “we have learned our lessons, we are different this time, we are better than Republicans.” 

So capitalism needs to be taught vigorously, extensively, today, and to every generation, as must be taught the true histories of the evils of big-government and socialist and communist regimes.

Champion Capitalism, Win Big

Capitalism occurs in the area where free markets and private enterprise operate within strong but limited government. We will always need government strong enough to protect human life and property and to respect individuals’ constitutional rights, but too much can sterilize or kill the golden goose. It’s long past time for rebalancing.

The wonderful advantages of free enterprise, and of capitalism’s wealth creation within free-enterprise and free markets, must be driven home to very large numbers of people as a matter of great self-interest, posed—properly—as prosperity vs. great suffering.  And it most certainly can be done, for it is a “target rich” environment, as I hope this post demonstrates.

Click here for other posts in the Political Economy Section, including “Political Economy: Big-Government Socialisms, NOT Capitalism, Caused Economic Disasters in the 1930s, 2000-2002, 2008, and the 2020s (Second in a series).”