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Commentary: Capitalism Is Not Causing The Crisis

linder6580 | sxc.hu

“Capitalism is the crisis.” So read a banner hung off of an overpass on eastbound Interstate 44 heading toward downtown St. Louis. But what did it mean?

Capitalism is characterized by private as opposed to government ownership of the capital used in the production and distribution of goods. This is done in the pursuit of profit.

Businesses in the U.S. are generally owned by individuals or stockholders. Other than the provision of certain goods, such as police protection, defense, and roadways, the vast majority of what we consume is produced by the private sector. The over-whelming success of the private sector in meeting our needs and wants questions the wisdom of letting the government maintain its near-monopoly in the provision of some goods (education comes to mind), or expanding its control into other areas (health care).

It should be clear to most people that market-oriented capitalism describes how the U.S. economy works. It largely explains why our standard of living tanks among the highest in the world. If the crisis is the failure of the economy to sufficiently recover from 2007-09 recession, that is not the market’s fault. Much of the blame lies with government policies undertaken since the end of the recession that has kept economic activity in check. 

Is the crisis of capitalism the unprecedented creation of wealth for a vast number of people?  If so then would it be better to increase the government’s role in the provision of goods?

The forces that produce winners and losers in the private sector are ineffectual for government-run businesses.  Facing no bottom line, a government business is released from the discipline of having to satisfy a paying customer and make a profit. Bad managers (bureaucrats) would make bad decisions with unwanted products stacking up in government warehouses and resources that are miss directed no longer available for more socially desirable purposes. 

History is strewn with failed government businesses. Soviet manger-bureaucrats ordered the production of many items (chandeliers, for instance) for which there was no demand.  Our own postal system perennially loses money. If UPS or Fed-Ex experienced such continual losses they’d be out of business. Yet it is the government’s umbrella of protection against market forces that explains why proposals for privatizing the postal system, already done in other countries, are attacked as an assault on the employees, ignoring current inefficiencies and mounting costs to taxpayers.

Capitalism allows millions of independent buyers and sellers to somehow coordinate exchange in low-cost ways that improve their economic well being. Capitalism promotes our freedom to engage in exchange, to buy and sell virtually any good or service. Curtailing capitalism curtails freedom of choice. When you buy a favorite brand of soup you give little thought to the complicated process that placed it on the store’s shelf. When you buy a certain soup because you like it, a signal is being sent to the grocer and downward through the production process that this good should be produced. 

My guess is that the crisis referred to on the banner is an oblique statement about what some believe is capitalism’s manufacture of an undesirable distribution of income. 

A natural question to ask in response to that is: What should the distribution of income be? That is a very complicated question to answer. A simplistic response from the left, such as “one that is fairer,” is vacuous. I suggest that it would be grossly unfair to impose an even distribution of income that takes no consideration of relative skills or contributions to society. Isn’t it fair that a heart surgeon makes more than a professor of economics?

It is misguided policy to alter the current distribution of income by increasing taxes on the successful. Throttling back rewards to success would inhibit the willingness to undertake new and risky ventures. A better approach is to not punish the successful and risk-takers but to improve the opportunities available for everyone. 

Education is the primary factor explaining why most people move up the economic ladder. And measuring educational success by simply counting years in school must not be the accepted metric: Education must be assessed by the real value added to individuals’ innate skills.

Raising the standards of living for everyone occurs with a healthy, growing economy. The best recipe for that outcome is not one of increasing taxes on a few or expanding existing welfare programs or more government intervention in the market.

R.W. Hafer is a research professor of economics and finance at Southern Illinois University Edwardsville and is a research scholar for the Show-Me Institute.

Rik Hafer is a distinguished research professor in the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.