Monday, July 4, 2011

Is capitalism politically sustainable?

We all know that communism doesn't work. While the basic idea may seem nice, there are so many flaws one post wouldn't be enough to do them justice.

One of them is that communism isn't politically sustainable - while in theory it's all about worker's rights and power, at the end of the day, it's the politicians - the planners - who decide.

Therefore, what is supposed to be a worker's utopia of equality and justice, soon turns into a nightmare of centralized power and dictatorship.

So communism is not politically sustainable - it falls apart because of politicians and interest groups hungry for power (and that's just a few of the reasons). While the point is that workers should get to decide what is produced and not produced as well as being able to elect their bosses (all in democratic order), that's never been the outcome. The system deteriorates quickly.

The question I would like to ask is; is capitalism any different? Consider that in the 19th century, both the UK and US were dominated by capitalistic ideals, free trade (tariffs were lowered) and entrepreneurship. This changed in the 20th century, in particular during the first half, with the introduction of the federal reserve (and equivalents in a lot of countries), income taxes etc.

Is capitalism politically sustainable? Or is capitalism bound to end up in "crony capitalism"?

The big problem with capitalism is that no-one really wants it. Not even the capitalists themselves. Capitalism is a tough system you know; it's evolutionary and the weak are constantly weeded out. Therefore, some people and companies - the weak - will always have an incentive to oppose capitalism. People who lose their jobs because computers are taking over, or because of outsourcing (free trade is an essential part of capitalism), will always vote for non-capitalist parties. Companies who feel they cannot compete on the free market will always have an incentive to pay off politicians to regulate in their favour.

Every company would like a monopoly, and none would say no to politicians regulating in a way that would give them that, even though it's against the rules of capitalism. Capitalism is at the most a "necessary evil", not something any business owner would like. It's a tough system where competitors can come from nowhere, customers are notoriously unreliable and you constantly have to come up with improvements to your products or services if you want to keep your share of the market. It would be much more comfortable for any company if the government would just save them the hassle and just grant them a monopoly.

But such is the nature of capitalism; it doesn't have any end point. It is an evolutionary system, unlike communism, which does have an end point (where everyone is equal and all the means of production are owned by the workers).

It's not just business owners; consumers would probably much rather be alone than having to compete for a (in the short run) limited supply. Wouldn't it be nice if Walmart and all the other companies could only sell to you (monopsoni)? They would all have to bid below each other to gain access to your wallet, and you as a consumer would be better off.

So while everyone can agree that capitalism is a good system, everyone has an incentive to vote for and in some cases bribe (through campaign donations etc) politicians who promise to tamper with the system in their favour. It's kind of like a prisoner's dilemma, where what's good for the group isn't the best for any single member of the group, and so the optimal solution can't be reached.

And when some companies send their lobbyists to Washington and manages to get the legislators to interfer with the market to their favour, of course all the other companies (that can afford it) will follow and do the same thing. Soon, we will end up with an overregulated and corrupt crony capitalist system that is way worst than we had in the beginning, that no-one really desired but which happened because everyone did what was best for them in their own narrow perspective.

Being a strong supporter of capitalism, I'd love for capitalism to be "politically sustainable". But without some important measures, it isn't. These measures mainly concern the constitution: We need a balanced budget amendment, that will stop politicians from destroying the market through deficit spending, yet be flexible enough to allow deficit spending when absolutely necessary. Therefore, I'm sceptic to the balanced budget amendment in its current form (even though it would be an improvement). However, we definitely need to rein in spending over the long term; an amendment which required the budget to be balanced over 5 or 10 years (meaning, if you run a budget deficit the first five years, you have to run an equally big surplus over the next five year) would be more reasonable. Many states in America (Arkansas for example) has similar amendments. One problem with balancing the budget every year, is that you cannot know for certain how much revenue you will get in each year before it starts. In a worst case scenario, if economic activity is lower than expected one year - and speaking as a future economist, I can tell you economic activity is notoriously hard to predict - tax revenue may be lower than expected and the government may have to raise taxes during the year to get the required revenue. In a worst case scenario, your november pay cheque could be significantly smaller than you expected it to be after taxes have been deducted. Would you like to explain to your kids that the only gift they will get from Santa this year is a balanced budget?

Also, a simple tax system and a repeal of the 16th amendment would make capitalism more sustainable. The complicated tax structure of the US is a perfect breeding ground for crony capitalism where the government picks winners and losers by allowing some companies to get through loopholes in the system, while others are crushed by the high rates and the bureaucracy.

The FairTax is a good example. Don't punish people for working, investing, or saving. Just tax them when they do what we all love to do: Shopping. Because we'll consume anyway. We have to and we love it, so it's a stable tax base.

To summarize: Capitalism can be politically sustainable, but it takes tough measures to keep it that way, because (nearly) everyone has an incentive to deviate from it. As of now, it's not, and we can already see the effects of that.

Thanks for reading,

John Gustavsson

1 comment:

Anonymous said...

I agree with your points about capitalism and fear that crony capitalism will make it politically a whipping boy for followers of Marxism. However, I cannot fault a company for making a rational decision to support a certain politician knowing said corrupt politician will knowingly tilt the market in that companies favor.

As I see it, capitalism is not the problem, it is the corrupt politician and that is what needs attention from the public since the politicians will not, just as they are not willing to address term limits.