Peter Morici gets it right on capitalism

Too many people don’t know the actual definition of capitalism and are more acquainted with the stereotypical presentation taught in schools and in the majority of films that present business owners as evil and government bureaucrats as righteous defenders of the little man.

Capitalism is the voluntary exchange of goods and services between two or more private parties. Needless to say, nowhere in this is the State’s involvement necessary, or even desired. In fact, it is government intrusion and meddling in the exchanges between parties that give rise to the problems that many people associate with capitalism, rather than corporatism, which is the illegitimate relationship between government and politically-connected businesses.

For example, the anti-trust laws passed during the late 19th and early 20th Century, such as the Sherman Antitrust Actwere not implemented due to customer complaints of low prices, but by rival companies seeking to weaken their competitors who had a superior business model. With the free market, you get lower prices and better quality of service because companies are forced to compete for your money. It is only with government subsidies and regulations that inferior companies are able to compete while offering higher prices and lower quality of service.

Peter Morici, an economist and professor at the Smith School of Business, University of Maryland, points this out while critiquing French economist Thomas Piketty’s new book Capital in the Twenty-First Centurywhich deals with problems with wealth disparity. According to Morici, Piketty argues that “capitalist economies naturally concentrate ever greater shares of wealth and income into the hands of a few, leaving less and less resources to pay the wages of ordinary workers.”

Naturally, I would inquire how well this has gone in countries that don’t have capitalism compared to those that have embraced it, but we’ll leave that aside.

Piketty’s solutions appear to be fairly unoriginal, which include an 80 percent tax on incomes over $500,000. This tax revenue is then supposedly to go towards subsidizing government programs, i.e. a small number of individuals hoard the wealth and this wealth should be distributed to the rest of society to make it more “just.”

There is a select number of great films that highlight the futility of socialism and government redistribution of wealth and property in the name of making things more “just.” But none do a better job than Dr. Zhivago, which deals with the Russian Revolution and ensuing Civil War.

One brilliant scene has Yuri Zhivago returning to Moscow after working as a doctor for several years on the Eastern Front during World War I. He arrives to their formerly beautiful home to find it dilapidated and crowded with numerous other families. He is then introduced to the building’s “commissar” who informs him the house was too big for their small family and has been divided into different sections for other families in order to make it more “just.”

Politically naive, Zhivago nods his head and agrees. Everyone else is bewildered by his response, because nobody else, including the commissar, believes it has anything to do with being “just.” The house is later totally ruined and swarmed with people who had no incentive to maintain it, since it belongs to “the people.”

But I digress.

Putting aside the moral issues in Piketty’s solutions in which money is forcibly confiscated from innocent people without their consent, Morici correctly points out the major flaw in his thinking that goes all the way back to Karl Marx’s Das Capital.

Wealth is not a finite source. Wealth can be created, and it is constantly being created by entrepreneurs, inventors, small business owners and others who start out with little and are capable to accumulate capital by offering goods and services people of which are willing to buy voluntarily. But this can only happen in a society where people are able to keep what they earn and decide where they will spend their money or invest their capital.

Morici writes:

Nowadays a good deal of the mega-incomes are not accruing to the heirs of the Rockefeller and Ford fortunes but falling into the hands of middle class offspring who became entrepreneurs or worked hard to become top corporate managers, stars in the media, financiers, and the like.

The founders of Microsoft, Fedex, Facebook and other recently established mega-enterprises were generally not particularly privileged as young adults but rather they had great insight or ideas and the drive to commercialize them.

The huge incomes of top corporate managers, athletes and entertainers may be set by arbitrary forces. For example, the monopolies granted by congress and federal agencies to the cable TV providers permit NFL athletes to receive outsized salaries financed in significant measure by unregulated and ever-rising cable subscription fees. And top corporate leaders do set their own pay by controlling the membership and serving on one another’s boards of directors.

It’s a fool’s errand to try to solve those kinds of problems by simply taxing high incomes and wealth.

Read the rest of his column here.

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