Has Capitalism Failed Read online

  The perception that confiscated tax money is out of sight and out of mind is not an argument for taxation but an argument for theft. Most people know that some of this tax money is wasted in creating nonproductive jobs. Additionally, giving this money away to people who did not earn it and who have less pride about how they spend the money is seldom part of the conversation. If you are on the dole, you have less pride about yourself; it doesn’t matter how you spend the money because there will always be more for you to spend. If it is true that the poor are exploited by the rich, why don’t they become rich after receiving the money taken from the rich? This is because they consume the money given to them. They have no pride about having earned it and see no reason why this free money should buy them anything other than the pleasure of a meal.

  A lot of tax money is spent on programs that are nothing more than money laundering schemes through which large amounts of tax dollars are taken from taxpayers to achieve so-called “social” goals. This means less money in the hands of the producers and more money in the hands of people who did not earn it. This strains the programs as more people seek to apply for this money, and, in our time, leads to government borrowing against future earnings to pay for the benefits. The strain on the economy means the government must reduce services in order to “spread out” the benefit. Eventually, all government programs require rationing which reduces the quality of services and creates economic “emergencies” that can only be addressed with more spending and higher deficits.

  More importantly, this entire scheme violates what is known as Say’s Law.[5] This economic law declares that production drives an economy not consumption. This means that money cannot just be given to people to spend because it will not spur economic activity. Any money given to people comes out of money that other people would have saved in order to engage in production; that means that this re-distribution actually results in less production and a waste of funds. In effect, taxes destroy the availability of seed money that would cause an economy to grow. If production is restricted by taking away investment capital, then consumption will also suffer. As such, taxes are a drain on society.

  2. Inflation

  As mentioned above, when the government needs more money than it can obtain from taxation, it resorts to monetary inflation. In order to do it and get away with it, it has to create propaganda that denies the harmful effects of printing more money. The people need to think that inflation will stimulate the economy and make everybody richer. They must be sold on the idea that inflation is a good thing.

  But what does it mean to “inflate” the money supply? To understand this, we need to explain what a “stable” money supply means. A stable money supply is a supply of money that grows, generally, only to the extent that production is increased in society. The money supply, generally, needs to match the amount of wealth in society and grow at a rate commensurate with the growth of wealth. When a government prints beyond that rate of growth, let’s say it prints twice as much as the new wealth in society, then the value of money begins to decline and it takes more money (and a faster rate of transactions) to bring in the increasing money supply. This means that what you bought last week for, let’s say $2.00, now costs $2.10 to purchase. This is inflation and represents an artificial manipulation of the value of money.

  Needless to say, this means that the debt incurred by the government which would have demanded payment in yesterday’s dollars has given the government a discount. They are still going to pay $2.00 for yesterday’s debt but (in fact) give to the debtor only $1.90 in actual value. This benefits the government but punishes the citizens who must now pay higher prices for all the goods they purchase. Those on fixed incomes, in particular, will eventually be wiped out.

  Inflation only dilutes the value of the currency in the economy. Although there may appear to be a temporary stimulus from inflation, the dilution of money will eventually raise prices for capital purchases, consumer prices and interest rates as well as the values of homes, buildings, factories and capital equipment. The impacts in these areas are sometimes difficult to detect for a time but the result, eventually, is lower production and unemployment as companies seek to adjust to the higher cost of doing business.[6]

  The more extreme the level of money inflation in an economy; the more extreme will be the results. High levels of inflation have been known to destroy national economies, precipitate wars and create scapegoats, concentration camps and genocide. Money inflation can even destroy entire civilizations.

  3. Regulations

  The purpose of business regulations is to restrict the business activity of smaller businesses on behalf of larger corporations that can afford the cost of regulations. The goal is to reduce the number of companies in a particular industry so the larger corporations can corner the market.

  Often, regulations are offered to the public as a way of fixing a problem supposedly caused by the free market. But corporations and politicians have learned that the best way for them to make money (although it is dishonest) is for them to create regulations that make the cost of entering an industry or market prohibitive. Regulations cost money in terms of time and effort and these costs can be significant for the new or smaller company that is struggling with limited capital.

  Regulations control business practices, create opportunities for criminals and steer business activity toward social goals rather than the goals of businesses to make a profit. Additionally, they interfere in what would otherwise be consensual transactions between parties and inserts a requirement that one party to the transaction must lose something so the other party obtains an unfair advantage.

  The basic justification for economic regulation is the false notion that businesses must be forced to do the right thing. This ignores the fact that businesses are in business to satisfy their customers. The outcome of regulation is to disrupt normal business transactions, criminalize businesses and otherwise give de facto control of the businesses to government.

  Government seldom considers that it is the cause of a poor economy; but it goes without saying that business regulations are the means of introducing corruption and decline into the business world. In order to mitigate the effects of government regulations, large businesses pay politicians directly or make campaign contributions in order to obtain favorable treatment. Yet, the net result is reduced competition, increased prices and fascism.

  4. Nationalization/Confiscation

  After destroying an important industry through high taxes, inflation and regulations, government has only two options: 1) eliminate all regulations of the industry or 2) nationalize the industry.

  Since politicians have an inherent distrust of freedom and they never want to admit that they have caused the demise of an industry, the only logical act, they think, is to nationalize the industry to keep it alive. They begin a propaganda campaign against industry management and its incompetence; they tell us how management has violated the trust of the people through unfettered power grabs and theft. They complain that the capitalist system has failed, then suggest that the only way to save capitalism is to have the government nationalize the industry.

  Once an industry is nationalized it is destroyed. It will never again be a viable business and any products and services it provides will lose value. In addition, in order for the nationalized business to survive, the government must outlaw competition. This is because government intrusions eliminate their ability to compete with other freer companies.

  CAPITAL ACCUMULATION

  Capital accumulation works hand-in-hand with the division of labor and mass production. The society that grasps this crucial economic principle and decides to allow capital accumulation - that is protect property rights - is the most moral of societies. Of advanced economies, Mises tells us:

  “…the difference (between capitalist and non-capitalist societies) is not personal inferiority or ignorance. The difference is the supply of capital, the quantity of capital goods available. In other words, the amount
of capital invested per unit of the population is greater in the so-called advanced nations than in the developing nations.”[7]

  Through capital accumulation, men are able to invest their savings in ever more ambitious projects, and thereby producing hitherto unheard of goods and services. The entire society advances when those few who are able to accumulate vast amounts of wealth are given the freedom to do so. In fact, capital accumulation is not restricted to the rich. Anyone can save his money and invest it. Indeed, it is the small investor, through his banks and savings institutions, who does most of the investing in a capitalist economy.

  The principle of capital accumulation also exposes the lie that the rich get richer and the poor get poorer in a capitalist economy. In fact, everyone gets richer because there are always new job opportunities and new products to improve life and create enjoyment and relaxation. Contrast this to the statist society that is skimming surplus wealth, wasting it and creating poverty in the process.

  Consider the low intellectual level of a government that holds that any kind of profit is exploitation, that only hard labor creates value and that the workers are exploited by the owners of capital and capital resources. Any such society would be for expropriation and re-distribution to such a degree that capital accumulation is destroyed – which means that society is destroyed. This was the low intellectual level of men in the Obama administration.

  “An often unrealized fact about capitalism is this: savings mean benefits for all those who are anxious to produce or to earn wages. When a man who accrued a certain amount of money—let us say, one thousand dollars—and, instead of spending it, entrusts these dollars to a savings bank or an insurance company, the money goes into the hands of an entrepreneur, a businessman, enabling him to go out and embark on a project which could not have been embarked on yesterday, because the required capital was unavailable.”[8]

  The result of this process of efficient use of capital savings is that production is enhanced, new products are made available, wages are paid and more capital savings is accumulated. Needless to say, this is a process that can significantly improve employment and affluence. The workers attracted to new higher wages, become consumers of these new products and their lives are lifted as well. The entrepreneur, on the other hand, grows in his ability to organize profitable businesses and he must be supported by ever more efficient managers, partners and workers. When this process of using capital is restricted, let us say, by high taxation or monetary manipulation, the economy grows at a slower pace or declines.

  Yet, it is not only the entrepreneur who must make efficient use of the capital lent to him by the savings bank. The savings bank must also make efficient use of the funds entrusted to it by making the money available to entrepreneurs with a record of successful use of money; and, finally, the efficient use of capital also rests on the saver who must correctly choose the savings bank as a repository of his money. The idea that the rich get richer and the poor get poorer in capitalism, a basic Marxist tenet, is therefore false. “A country becomes more prosperous in proportion to the rise in the invested capital per unit of its population.”[9]

  LAW OF SUPPLY AND DEMAND

  The Law of Supply and Demand is the fundamental process that is liberated by capitalism. This principle is made possible by a free market where each party has the option to choose his own actions and to interact and trade with other parties who are also freely participating. When people are free to make their own economic decisions, they can negotiate for the lowest price and purchase products that they think will satisfy their needs as well as their ability to pay. This sets up a process whereby the price of a product is set by the demands of consumers and by the number of such products available on the market. Briefly stated, if the supply of the product exceeds the demand for it, the price must fall until the customer wants to buy it. If the supply is lower than the demand for the product, the price must rise until it meets all the demands of consumers that can afford that price.

  But there is more:

  “When it comes to choosing between socialism and capitalism as an economic system, the problem is somewhat different. The authors of socialism never suspected that modern industry, and all the operations of modern business, are based on calculation. Engineers are by no means the only ones who make plans on the basis of calculations, businessmen also must do so. And businessmen’s calculations are all based on the fact that, in the market economy, the money prices of goods inform not only the consumer, they also provide vital information to businessmen about the factors of production, the main function of the market being not merely to determine the cost of the last part of the process of production and transfer of goods to the hands of the consumer, but the cost of those steps leading up to it. The whole market system is bound up with the fact that there is a mentally calculated division of labor between the various businessmen who vie with each other in bidding for the factors of production—the raw material, the machines, the instruments—and for the human factor of production; the wages paid to labor. This sort of calculation by the businessman cannot be accomplished in the absence of prices supplied by the market.

  “At the very instant you abolish the market—which is what the socialists would like to do—you render useless all the computations and calculations of the engineers and technologists; the technologists can give you a great number of projects which, from the point of view of the natural sciences, are equally feasible, but it takes the market-based calculations of the businessman to make clear which of those products is the most advantageous, from the economic point of view.”[10]

  This “socialist” intervention into the market is accomplished by means of regulating the various factors of production within the modern industrial system. Whenever a government intervention takes place, it immediately starts a process of re-distribution which shifts economic power from the market and toward the supposed beneficiaries of the interventions. This destroys all market-based supply and demand calculations and begins a process of deterioration in the market that inevitably results in losses to one party or another, with the cumulative impact of those interventions being the inability of businesspeople to plan their businesses, their production processes and their profits.

  On the other hand, when the Law of Supply and Demand is allowed to function freely, the market sends signals to producers about the demand for their products and this helps them set prices and/or increase production to meet the demand. The Law of Supply and Demand can also signal to a producer that there is no demand for the product, in which case, the producer will go out of business, examine his marketing strategy to increase demand or reallocate his assets toward other productive purposes. These signals sent by the market create a free flow of products and enable consumers to have the products they need.

  The nemesis of the Law of Supply and Demand is interference by government. Government can engage in price controls, other regulations and monetary inflation, all of which restrict the ability of the producer to receive the signals from the market that he needs to make good decisions.

  Monetary Inflation

  Monetary inflation is a cognitive nightmare when it comes to the economy. Business people depend on clear signals from the market place in order to adequately steer their companies. Monetary inflation distorts those signals. First, governments want to deny that inflation leads to higher prices so they report “fudged” numbers so people think there is no consequence to monetary manipulation. Secondly, when inflation hits, the signal will tell businesspeople that their costs of doing business are rising faster than they are able to adjust to those factors. Government will deny that it is doing anything to affect prices and try to blame the pricing situation on businesses or societal malaise, a crisis of confidence, etc.

  Typically, if prices rise naturally, any change in the cost of doing business leaves the businessperson with the ability to tweak the various factors that he manages in order to deal with the rising costs. For instance, he can find new efficiencies
, buy new machines, automate a specific process or hire employees with specific skills that will benefit the company. With government-induced price rises, on the other hand, all factors of running the business are affected so it is difficult to know how to tweak the company. Most often, the only thing he can do is lay off employees and ask those still working to take on new responsibilities.

  This is a dead end because those employees were probably already working very hard. The company has to re-trench and, in many cases, it must reinvent itself in order to stay alive. Many times, this means closing down and starting over somewhere else.

  Price Controls

  In order to hide the impact of monetary inflation, sometimes governments use price controls to force the prices down. Although costs of doing business are going up, companies are thereby pressured to lose money and there is no relief from the government. Businesses start to lose money and the only way to stay in business is raise prices and hope the customers understand.

  Other businesspeople, faced with this situation, decide to take a different approach. They seek government aid in order to mitigate their losses. They ask the government to let them raise their prices, or give them subsidies so they can keep their prices down. Essentially, they prostrate themselves before the government and ask for favors and/or special regulations on their competitors. Sometimes they even ask the government to harm their competitors in some way. This is called corporate welfare.