Capitalism And Ignorance

Every once in a while I read some trash written by some very ignorant soul and I have to wonder where they got their brains.  It is very easy to trash what appears to be a system based on greed and avarice when all you have is ignorant emotion.  Let’s face faces, I can go to any blog or editorial and find any number of people who decry capitalism and the free market who simply never bothered to teach themselves the least measure of knowledge on the subject.  Perhaps that is a bit raw of me to say but I do not tolerate willful ignorance well.

So gentle readers let us examine the facts one by one.  An economy needs a form of investment.  Now if one is living in a system of total government control or direction, the government directors or ministers decide where to spend money, to use the word loosely, to build the means of production.  The problem with a government directed system is that there is no means of measurement.  That is, the government will product any good or service without knowing the cost and the means of distribution.  All manufacture is done by fiat regardless of the cost or the materials, the labor, or the environmental damage.  Think about that for the moment.  An economy needs such things as toothpaste and toilet paper, chicken and tomatoes, wheat and corn.  But how much should be produced?  Where should such quantities be shipped?  And should any individual wants and desires be fulfilled in doing so?  Production by fiat means you, the consumer, must take what is produced regardless of your needs, your wants, and your desires.  There is only one quality provided and you are at the mercy of the state for your consumption.  This great experiment was tried in the USSR and found greatly wanting.  The misallocation was horrific.  Time ti rethink the tendency towards a socialist existence.

The idea of a free market to many people conjures up a firestorm of complaint.  Yet their complaint is not with a free market but with a market that is subject to government interference.  By the way, the allowance of monopolies is government interference as well.  So let us look at what constitutes a monopoly.  One can have a geographical monopoly such as the electric service from a power station to the home or business.  Simply put, it is inefficient to have numerous utility right of ways that provide competing electric service.  A utility right of way is the legal invention accorded to a utility company for the purposes of providing a utility service.  You want half a dozen power poles and buried power lines in your neighborhood?  The amount of investment, or capital, better known ans money invested in physical outside plant is quite substantial.  The state and local governments acknowledge that it is in the better interests of the general public to restrict right of way permits and access to single entities for the purpose of supplying such service under the direct supervision of an oversight group, often called a Public Utilities Commission.  That commission sets the rates for the consumptions of services as well as the quality of service.  No surprise here, the public is generally served in this type of arrangement.

But what about other monopolies?  We consider them bad for specific reasons.  The first is the restraint of trade.  That is, a monopoly achieved by a business that has suppressed  all other competition through any number of tactics means that there is an unfair competition.  The consumer tends to overpay for a good or service.  If we let one oil company explore, produce, refine, and supply the general public with oil products then that means the oil company sets whatever price if feels we should pay.  There is no competition and thus their is no real price discovery.  Ah, that term, price discovery, just what is that?  Price discovery occurs in a free market and it the point at which supply and demand are equalized.  If you grow apples, at what price are you willing to sell your apples and at what price is a consumer willing to pay for your apples.  If you are the only seller of apples then you have a monopoly and what ever price you set is the price paid.  The consumer either buys your apples or does without.  If you are a producer of necessities then you wield an unfair advantage.  Think of a free market as part of the basic social contract among individuals in a society.  It is a necessary service, one that provides the greatest benefit to society.  Do we have free markets today?  Actually, no, for they are generally encumbered with laws and regulations and patents and all manner of other impediments.  And free trade with other nations is often not free trade unless all nations abide by the same rules.  Unfortunately, this is not the case.  But that is another sermon.

So now that we have discovered that a free market is the basic tool used to allocate goods and services in the most efficient method, theoretically or course, for one can always find exceptions.  Let us turn our attention to the idea of capitalism, that much maligned institution.  In an economy there are two courses of actions that every individual can pursue.  He can either choose to use all his income to consume goods and services or he can choose to not spend all his income.  When he chooses to not spend all that income but diverts it to some sort of pool of savings, he is accumulating capital.  Capital is simply the income that is not spent in consumption.  What does one do with this unspent money?  Well, one could hide it under a mattress.  Or one could put it in a savings account.  One could invest this unspent money in a manner that allows one to realize a return on one’s investment.  If you want to own an apple orchard then perhaps you save your unspent money in a savings account.  Years from now when you have accumulated the cost/price of an orchard you can buy said orchard and grow apples for sale.  Your land and trees are the capital investment for your orchard business.  By saving your unspent income you become a capitalist, pure and simply.  Are you some greedy person who is the bane of a right and just society?  Heavens no.  You are a small businessman in pursuit of of your own income through the business of selling apples or furniture or whatever it is that you provide to the public.  How then is the the mark of greed?  Are you suppose to have some low paying job for the rest of your life so you can be considered a good man or woman?  Oh please, what crap.  When you own a business then you are taking part in as free a market as the public allows.  Your business is about meeting demand with the correct supply.  It is about price discovery in its basic form.  Why is this form of capitalism so abhorrent to so liberal and socialist minded people?  I would venture to say that anyone who depends on the public government for his living is doing far more disservice than an individual who owns his own business.  The income for a public servant comes from taxes paid by the public.  The public servant adds little to society, he only takes from the public treasury.

The purpose of capitalism is to provide the investment necessary for an economy to grow.  Where capitalism gets its very black eye is through excessive reliance on debt.  Debt skewers investment for the worse because it borrows against the future.  And when debt is not only tolerated but encouraged to excess then we no longer have true capitalism.  Investment is not speculation.  While much has been made or rent seeking, rent seeking harkens back to that period of time when nobility owned most of the land and the residents paid rent to work and live on it.  This practice grew out of the old serf or bondage to the land.  Those who were born into nobility reaped the benefits of an age old practice without the necessity to care for their position and that of those who depended on their land.  Yes, it was injustice.  We have a new type of rent seeking that accumulates income by means of debt service.  It is the sort of speculation in practice that makes the free market less free.  When one buys a house using debt, the standard is the 30 year mortgage, one is paying almost three times the principle.  That is, sixty percent of the payment goes to debt service or interest.  The free market is impinged when the tax code allows the deduction of property tax and at one time the deduction of interest paid.  Why should we allow the use of insured 30 year mortgages?  Why should you not have to save up to buy that house?  Back in the old day that is what one did.  And if one was lucky one might be able to take a five year note due at the time specified, five years later.  The price of housing would be very low today if we had not let mortgages run to thirty year.  It was under Herbert Hoover, a republican, who authorized the first twenty year mortgage and then FDR came up with the 30 year mortgage.  All that happened was that the American Dream became an inflated value.  The problem with debt is that it is inflationary.  Debt is not capitalism, never was and never will be.  So rather than bitch and moan about capitalism, please direct your anger towards the creation of credit and debt.  That is where the greed truly resides.


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