People do not know what capitalism is

Even though the video has made its rounds on other blogs, I had to post it here because I think it’s really good.  I credit Speedmaster at The Pretense of Knowledge for directing me to it.

It’s called Top 3 Common Myths of Capitalism from Jeff Miron of Harvard.

Myth 1: Being pro-capitalism is the same as being pro-business.

Miron says:

The point of capitalism is to make sure that businesses have to be compete vigorously against each other.  That benefits consumers.

It’s not good for the businesses, per se, because they have to work really hard.  Many businesses understand this and they hate capitalism.  They’re constantly trying to get government erect various rules, restrictions, regulations that help them, but they are not in the interest of the consumers [though they will say otherwise].

I believe one cause of this myth is that many people don’t fundamentally know what capitalism is.

Just this morning I heard radio DJs criticizing capitalism.  Yet, they were really criticizing disingenuous commercialization.  On that I agree with them.  That bugs me too.  Other things bug me.  Whiny millionaire football players, cheesy car salesmen and endless customer service touch tone menus are not my faves.  But these aren’t capitalism either.

These have emerged from capitalism.  So have many other things.  Things that I like and love and have made my life better than my ancestors and even better than my younger days.  On net, we all come out far ahead.

And, I know that I can turn the channel when it shows whiny football players, I can find a professional car salesmen and I’ve noticed those phone menus getting better.

I also noticed that those DJs didn’t criticize their advertisers.

Another cause of Myth 1 is that few people differentiate between profits earned by capitalism, through competition, and those earned by rent-seeking or politics.

We need to get better at asking if the profit came from providing valuable products that people voluntarily buy or rent-seeking or politics?

For example, sugar tariffs increase the price consumers pay for sugar and results in a higher profit for domestic sugar companies.  Those higher profits are passed to domestic sugar companies directly from consumers.  Those sugar companies should thank their friends in government.  They do.

Without the tariff, sugar and things made of sugar, would cost less and we would spend our savings on something else that could make our lives even better and create more jobs.  That’s rent-seeking.  It’s anti-capitalist and anti-consumer.  But is viewed by most folks as capitalism itself.

Myth 2:  Capitalism results in an unfair distribution of income.

Miron explains that capitalism rewards people based on what they contribute and produce and admits that a downside to capitalism…

…is that some people have very little skill.  They are not able to earn very much, left on their own.  Some reasonable people support anti-poverty spending, but that’s completely different than interfering with capitalism–regulating prices, limiting quantities, etc — those make the economy less productive, give us a smaller pie and makes it harder for us to operate programs that help those who are less fortunate.

I’d add that the anti-poverty spending does not have to be (nor is it an enumerated power) conducted by the Federal government.

Myth 3:  Capitalism was responsible for the recent financial crisis and recession.

Miron explains that we didn’t have unbridled capitalism in housing prior to the meltdown.

We had enormous government interventions — subsidized risk, encouraged over investment in housing.  If one is going to draw a conclusion, it seems to suggest much more clearly that interfering with capitalism generates financial crises…

…because what happened was a result of the market distortions created by government interference.

This goes back to causes of Myth 1, primarily that people do not know what capitalism is.  People see private, for-profit companies operating in the housing and mortgage industry and stop there assuming that’s capitalism.

They don’t understand that those private companies — and private individuals — were responding to incentives distorted by government.

Consider Speedmaster’s example.  If we believe owning a Porsche cause folks to become well-off (which it doesn’t), then government will do things (distort incentives) to make it easier for people to buy Porshes.

Government can tell banks to not worry about lending on Porsches, because if anything happens, the government will help out.  Government sends subsidies to Porsche to encourage them to produce more cars (though they don’t have the capacity to keep up with demand caused by the incentives distorted by government).

Porsche prices rise from the increasing demand.  People buy more because it seems like, even if you can’t afford one, you can sell it two or three months later for a profit.  Why buy just one?  Buy two, maybe three.

It’s not hard to imagine what happens next.  First, few will have achieved success by simply becoming a Porsche owners.  The original thinking was flawed.

Second, prices rise well beyond normal, capitalism-driven, prices for awhile as everybody gets one or two.

Then they look around and wonder, who’s going to buy my Porsche?  Everyone seems to have one of their own now (which also makes it uncool).  They realize they can’t afford to keep it (plus it’s suddenly uncool), so they panic and rush to sell it before anyone else realizes what’s going on.  Supply skyrockets relative to demand.  Prices collapse.  Everyone says this was capitalism’s last hurrah and governments pays off loans with taxpayers money and becomes the proud owner of millions of Porsches.

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2 thoughts on “People do not know what capitalism is

  1. Pingback: Occupy Wall Street | Our Dinner Table

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