Why Some Of You Despise Capitalism

I define capitalism as a social order where claims on the profits of businesses are protected by private property, and can be bought and sold. If you accept my definition, there was no capitalism before the 19th century, and the stock market is the key capitalist institution. A capitalist economy is a special case of a market economy. Capitalism is often defended using arguments that apply to most or all market economies, not just capitalist ones.

The problem with hating capitalism is that the cures proposed to date are worse than the disease. Popular resistance to the proposed cures has had a tendency to degenerate into civil wars and mass murder.

Most of you out there don't so much hate capitalism per se, but hate being employees, that is, working for a middle manager. If there were more opportunities for self-employment, and health care were socialised, I suspect that a lot of you would make your peace with our market economy.

The environmental record of the former Soviet block economies is worse than that of western Europe and North America. Hence I do not blame our environmental and climate change problems on capitalism.

I submit that most dissatisfaction with the economic order all of us live in has 4 sources:

1. Economies of scale in manufacturing and financial services. Few of you deeply object to businesses whose annual sales do not exceed, say, 50-100M/year and whose managing directors are all related by blood or marriage and mostly live in your community. Trouble is, economies of scale mean that small closely held businesses of this size cannot compete with large capitalist firms. In particular, small locally owned banks are not viable. Businesses with large production runs can sell their products more cheaply.

2. Concentrated ownership of private property. Before 1920, the ideal society was seen as one where a majority of people earned their living as freehold farmers, shopkeepers, self-employed tradesmen, and principals in small firms. What's left of this mindset is our reverence for home ownership. If the typical American family had 100K in a bank and retired with 1M in retirement assets and a mortgage-free residence, and there were no billionaires, few of us would complain. Capital per se is not the evil, but the fact that many of us own so little capital.

3. A bipolar credit system. There is a recurring tendency for lenders in the world's leading economy, the USA, to lend money to parties that are unlikely to be able to pay it back without serious hardship. So when hard times come, a lot of these loans are NOT paid back. Loan losses are written off against capital. The decline in capital forces the lender to reduce the amount of loans outstanding, so that people who previously qualified for credit no longer do so. Small businesses close, mortgages are foreclosed, consumer goods are repossessed, sales and profits decline, employees are laid off, business expansion plans are shelved, state and local tax collections fall, public services are cut. All in a vicious spiral. If the Federal Reserve had not purchased about $850B of bad debts in the second half of 2008, paying for them much more than they were worth, the FDIC would have become insolvent and we would probably now be in another Great Depression.

The way forward? Require a minimum 20% downpayment for a home purchase. Outlaw lines of credit based on home equity. Finally, abolish the deductibility of mortgage interest. The USA is the only country that does this. Deductibility encourages people to borrow more than they can afford, and gives much more tax reduction to the well off than to the modest. I agree with Dambisa Moyo, who says that the only way the US govt. should subsidise mortgage borrowers is by helping them make their downpayments.

4. Instability of employment. To reduce layoffs, make 1/3, say, of annual pay take the form of a bonus that would be a function of profits. In lean times, such as was the case in 2008-09, the bonus would be suspended. The bonus would be free of income tax if paid directly to a tax-deferred rainy day fund. The only way such funds would be taxed would be when they are withdrawn.
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3 Responses Jul 9, 2010

Wow, we all can be rich? You can do better than that. Today the rich have disappeared inside investment portfolios and board rooms. They have marginalized everyone else and tend to make believe, they are the good guys? I see no such proofs.

I find it hard to understand how people think it is OK to "rob" a person of their hard earned money. Do you realize what you're saying? A person works hard to build a successful business that is making money and you want to tell him how much he can keep and that the rest of his money will be divided up and given to people who didn't earn it? Are you serious? That makes no sense. First of all, if I owned that business, I'll be damned if I'm going to want to be successful. I'll work only as much as it takes to earn what I can keep. If I'm the person guaranteed to have all you state, then why should I work at all? If I do, I'm not working to the best that I can. I'll do just enough to get by. Our country would not have become the great country it WAS, had we lived by this philosophy. In order to function, a country must have a thriving economy in order to survive. This is achieved through the supply and demand of goods and services people need and want in their life. Someone must produce these goods and services needed in order to provide the people with the things they need and want. People who can do this form companies and become employers Employers provide the means of doing this, (the building,the equipment, etc) so that these products can be produced. They do this by employing people. The employee, in turn, takes his earnings and buys the goods and services he needs and wants to make his life comfortable. In return, the creator of this company makes money which he uses part of to keep his company in business. Over and above that, is where his earnings come from and the economy thrives. <br />
What you are proposing is that the employer gets what amounts to a paycheck and the rest goes to provide others with a piece of the pie, equal to what the employer has, regardless of his contribution of the company. So, taking all of this into account, then why should the employer or anyone smart enough to build a company, work that hard to be a success? And why should an employee work very hard to try to advance in his work when he's never going to get more or less than all the others? Now what? And you know what? Our country, the good old U.S.of A., who did have a thriving economy, is slowly sinking. Why? Simply put, we have sent our economy and it's ability to survive over seas so that other countries economies can thrive. Why? Because labor is cheaper elsewhere? At what cost to our country & to it's citizens? If Americans would have said, "lets rein in out of control costs.", maybe we could have kept our edge. Instead, it's all going down the drain, and we pulled our own plug. So, even if your theory could work, it can't. Our country has no more industry, no companies to speak of and no way to compete with those we gave it to.<br />
You did have a well thought out plan though. I congratulate you on a paper well written.

Surely you can come up with something besides "make the rich, richer".