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An anti-capitalism poster from 1911, published in the Industrial Worker, a socialist-anarchist newspaper
Fire, the wheel, the printing press...and the capitalist economic system.

When listing all the numerous inventions that improve our lives, one of the most important is usually ignored: the capitalist economic system.  With recent market turmoil causing some observers to claim capitalism itself has failed, it's apropos to take a closer look at the technology behind it.

Capitalism is an invention, no different than the transistor or the automobile. Like those others, it's comprised of many smaller inventions: the corporation, the bank, the stock market, commodities, securities, futures, etc. All together, they are a group of technologies invaluable for efficiently converting labor and resources into goods and services. Nothing we've devised has ever worked so well.  Most of our prosperity and standard of living derives from it.

Take Russia. By far the world's largest country and the richest in natural resources, it has a highly educated and hard-working populace. Yet when Putin took over, their GDP was barely larger than the tiny island of Hong Kong's, and despite quintupling in the last few years, it's still a tenth of the US economy. Or consider China which, after allowing a small bit of capitalist endeavor to penetrate its system, transformed into the world's fourth-largest economy nearly overnight.

One of the reasons so many people (including some misguided economists) have trouble accepting capitalism is its apparent simplicity. It just seems impossible that a system so seeming chaotic can outperform something intelligently planned by trained economists. But that assumption is itself incorrect. Where a planned economy is like a single-core processor, capitalism is a neural-net processor with millions of nodes. A socialist economy is run by a few government-appointed individuals. But in a free market, every time you buy or sell a product, you're adding a calculation to the system. Whether you buy a car, rent a movie, or get a haircut, you're contributing to the price and quantity of goods and services. Cut a trip to the mall because gas went up another 5 cents, and you've input data to force down the price. Go anyway and you've voted to raise the price further.

The system appears simple, but in reality it's an enormously complex, self-regulating, highly adaptive mechanism. And like most mechanisms, it works best when no one pours sand in the gears.

There's a strong theoretical basis that any intervention in a market reduces its efficiency. But still governments keep trying to tinker under the hood. Their shade-tree efforts invariably do great damage. Our current fiscal mess is a marvelous case in point. It's been cast as something too difficult for average people to understand, but it’s really very simple.

Consider.  A couple applies for a loan. They make $60K a year, and need to borrow $700K. Their credit history is poor or nonexistent. The house has doubled in value in recent years-- only because all the other homes around it have as well. And the only reason they can afford the payments is because interest rates are so low and they're being offered a balloon mortgage that, if rates climb or their house depreciates will surely bankrupt them.

Does it really take a rocket scientist to know how risky this is? And that a bank with a large portion of its portfolio in such loans is also in peril?

So why did so many banks take such risks for so long? Here's the key to the whole problem: government intervention. In a free market, interest rates will rise in step with rising risks. They didn't -- thanks to the Fed. And government-sponsored enterprises (GSEs) such as Fanny Mae, Freddy Mac, and the Federal Home Loan banks kept the music playing. With most of the risk ultimately guaranteed by the federal government, no one really cared.

The bailout will ultimately cost a trillion dollars. It's also left us an industry that's effectively been nationalized, and a precedent that will encourage future industries to take more inappropriate risks. But worst of all, we have people on both sides of the political aisle calling for still more government involvement. Capitalism hasn't failed here-- government intervention has.

What goes up must come down. When a market rises too fast, it must eventually decline. The longer one prevents that, the harder that fall will be. Very simple. It's a shame our politicians can't understand that.

But the technology itself is still sound. And if we just leave the machine alone, very quickly it will start working again.



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RE: The worst system except all others
By arazok on 9/22/2008 12:45:44 PM , Rating: 3
quote:
However, the gap between poor and rich is widened and the middle class became poorer. How can this happen if capitalism rewards those who work hard and deserve?

Easy, because the middle class (or the poor) are not getting poorer, only the gap is widening.

The poor’s income is stagnant because of the same things that make them poor to begin with. In 20 years, a bus driver isn’t going to be any better off then he is today. If you don’t ever attempt to do anything other then drive a bus, you shouldn’t expect to be rewarded for it.

The rich are becoming richer because they excel at what they do. They identify what sectors of the economy provide wealth, and they go there. Some get computer engineering degrees and work in that field, others take chances and create businesses.

As the economic pie grows, nobody is getting less, but some are getting more. People only feel poor because they see others with more.


By FITCamaro on 9/22/2008 1:05:52 PM , Rating: 2
Well said. If you never aspire to do more, you deserve nothing more. You don't deserve a big house, a luxury car, and yearly trips to Europe solely because other people have it. But the government is giving them more for nothing (in their minds) each time they raise the minimum wage. Of course the reality of that is that its just getting more people fired, cutting others hours, and made it harder for small businesses to stay in business.

But oh right they're letting people go or cutting hours because they're greedy businesses right? *rolls eyes*


"The whole principle [of censorship] is wrong. It's like demanding that grown men live on skim milk because the baby can't have steak." -- Robert Heinlein














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