Across the roughly 206 countries in the world, there are economies. Every economy subscribes to a certain economic system.
Capitalism is an economic system in which the production of goods and services are owned by private companies or individuals. In capitalism, the government stays out of the economy, leaving the continued success of the economy to the forces of the free market.
The free market forces of a capitalist economy are based on supply and demand, where the market determines who and what succeeds or fails. A business produces something which the consumer has a demand for. It is based on private ownership and property rights. The force driving people to participate in the capitalist system is the profit motive. Within the concept of profit, each party involved has something to gain from the transaction.
Socialism is an economic system in which the production of goods and services are owned and run by the public. This public ownership can be either an oligarchy (state socialism) or a democracy (market socialism) – either a select few in the government or the people. The cost of goods and services in a socialist economy are not determined in the same way as they are in a capitalist economy. The price mechanism is hardly relevant here. The cost of goods and services are determined by the planning of the economy. Any socialist economy, having said that, requires the involvement of the state in a limited manner at the very least. Any economy not formed naturally requires a force to keep it organized as a socialist economy — otherwise it inevitably shifts toward a more capitalistic system.
A few questions need to be answered. Is the United States truly capitalist? Have we ever had laissez-faire? Are there any examples of laissez-faire at work in history?
The United States economy could be described as a mixed economy. It is based on capitalism, yet it includes a plethora of socialist policies. The government is involved in the economy, and it even runs several industries, such as public utilities. Indeed, most countries have implemented a system like this, with a mix of free market capitalism and regulation of the markets and the economy. Because the United States government imposes regulations, a vast multitude of taxes, subsidies, bailouts, and other interventions in the economy. We do not have full capitalism, but did we ever?
People often look back to 19th century America as an example of laissez-faire. This time period, the Gilded Age, is referred to as a time where business regulations were cut, vast amounts of wealth were created, and the rich became richer at the expense of the poor. Was this really the case, though? Was the government really staying out of the economy?
The problem with this assertion is that while there were few regulations on businesses, the government still had its roots embedded deeply in the economy. When government policies are used to the advantage of certain businesses, the principles of the free market are thrown out the window.
What the United States had during the Gilded Age were men like Andrew Carnegie, JP Morgan, John D. Rockefeller, and Cornelius Vanderbilt who used the power of the government to monopolize their businesses and make more money than the kings of history could have ever imagined. People assume that monopolies form out of an unregulated free market, but the reality is that no monopoly has ever existed without the help of a government. Benjamin Tucker, a late-nineteenth century writer and anarchist, spoke of the four monopolies the government grants people access to: Money, land, tariffs, and patents.
The government is the biggest single consumer of them all. When a government picks a company to buy a certain tool from, that company rakes in billions of Dollars. The government also grants land to companies, often real estate companies. Any company that has to buy land is left at a disadvantage. Carnegie made his fortune investing in railways built for the Department of War. The government also has the power to impose tariffs. A tariff always benefits one side and screws over the other side. When the government imposes a tariff for the benefit of a specific company, competition is pushed out. The government also grants patents, which are monopolies on the right to produce a certain product. When you hold a patent, you have no competition. Many companies will take out patents on products they do not even produce, just to cut out competition as much as possible.
This system is called cronyism. In a book by Hunter Lewis, called Crony Capitalism, Lewis discusses how free economies have been corrupted and controlled all throughout history.
“[C]ronyism is as old as history and has always been the dominant system,” Lewis says. “This is precisely why the human race has made so little progress in overcoming poverty. For most of human history, there has been no economic growth at all. People born poor died poor. Whenever economic capital began to be accumulated, it was generally stolen by rulers or their friends or allies.”
As time has gone on, we have managed to move farther from cronyism than we were before, yet we still suffer from it. Cronyism builds on itself, as critics of capitalism view the state of the current economy and make the false assumption that capitalism is the only factor at play. This is false, however.
When the government gets involved in the economy, especially in banking, chaos ensues. Take Wall Street in 2008, for example. Government sponsored mortgages were mostly responsible for the housing crisis, and let us not forget that it was Paul Krugman who advised former Federal Reserve Chairman Alan Greenspan that a housing bubble would stimulate the economy.
Government involvement on Wall Street “was all the more regrettable,” Lewis says, “because, in a crony capitalist system, the huge gains of the few really do come at the expense of the many. There was an irony here. Perhaps Marx had been right all along. It was just that he was describing a crony capitalist, not a free price system, and his most devoted followers set up a system in the Soviet Union that was cronyist to the core.”
When the government is involved in the banking industry, it becomes a relationship I like to call “banking socialism.” Banking socialism is a system in which the government and large banks engage in a predatory partnership for mutual benefit. When the government will bail out any failed bank (be it big enough), there is no longer any point to engage in reasonable business practices.
Our economy is controlled by the government far too much to be considered truly capitalist. Government intervention has ultimately created a cronyism and banking socialist system that damages the economy is keeping the class warfare Marx spoke of alive. An economy cannot continue to be intervened in and then “fixed” by more government intervention. Eventually, the forces of the market will have to take over, or severe recessions and depressions become inevitable.
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