A Millennial’s Quick Guide to the Economy.
Series: What is Liberty and do we have it?
What is capitalism and why did our founders allow it to become the economic
engine for our country (and why does it matter to Millennials today)?
Espresso + White Chocolate = Deliciousness. I go to Starbucks because I want
something. Starbucks exists because they want something. I get my sugar and caffeine
fix and they get my money (that I worked for). This is capitalism.
Capitalism is based around the idea that an unrestricted, free marketplace is the
best way to supply goods and services to the consumers. The end result of a transaction
in the free market is that both parties get what they want.
If there is a huge need for good coffee then someone will work hard and compete
to make good coffee so that they can make money off of the need. Adam Smith gets the
credit for enlightening our founding fathers on the concepts on capitalism. Smith wrote
in his book The Wealth of Nations, “It is not from the benevolence of the butcher, the
brewer, or the baker, that we expect our dinner, but from their regard to their own
interest. We address ourselves, not to their humanity but to their self-love, and never
talk to them of our own necessities but of their advantages.”
The great benefit of having sellers incentivized to provide the best goods is that
the competition drives advancements. The iPhone was so successful because we wanted
a better phone and Steve Jobs worked hard to give it to us at a reasonable price. Electric
cars haven’t yet taken off because although we want them, they are not yet able to be
delivered to us at a reasonable price.
Capitalism allows for the population as a whole (including global population) to
decide what goods should be made available and what price should be required for the
exchange of those goods. If iPhones were priced too high then we wouldn’t buy them
and instead would have purchased a phone from another supplier that was more
reasonably priced. This also applies to my labor. If you are willing to pay me $5 for an
hour of work but someone else is willing to pay me $15 per hour but to get that job I will
have to learn a new skill, then – assuming I am willing to learn the new skill – I will take
the higher paying job.
Now what does this have to do with Liberty or politics?
Governments can affect the economy in three basic ways: regulation, taxing, and
spending.
By regulating an industry (price setting, minimum wage, licensing requirements,
zoning laws) a government restricts the ability of a buyer and seller to agree to exchange
goods or services. If the most I want to pay for a coffee is $5 and Starbucks agrees to the
price but the government imposes a $20 tax on the coffee then the purchase won’t happen. If the most I can pay someone to work for me is $15 but the government says I have to pay then $50 an hour then I won’t hire them.
Most of the time there is a public interest that is attached to the regulation. For example, we as a society have decided we want our surgeons to go through medical school before performing a heart transplant (licensing). Inherently though regulations do choose a winner and a loser (I lose by not being able to conduct surgeries if I so choose – which is a good thing in this example).
By taxing citizens and businesses a government restricts the resources available for future purchases. Taxes during WWII were as high as 90%. This means that the citizen was only left with 10% of their income to invest in new companies or buy new cars or purchase coffee. Every tax takes money away from what the consumer would have been able to purchase (or give away to a struggling neighbor). Of course, we do like some taxes (we need police, courts, national defense, etc. to protect our inalienable rights).
By spending, the government takes the money generated from taxes (plus IOUs from Millennials and our children) and becomes a participant in the free market. The government buys stuff (buildings, supplies, weapons, roads, schools) and gives stuff away (Medicaid, Food Stamps, Social Security Disability, grants, special projects, etc).
Most of the time the government requires purchases to be made through a bidding process to get the best quality at the lowest price. But, the government does not always follow rules of capitalism. Government contracts will often require a percentage of their purchases to be from minority business owners – even if the minority business is charging more for the product.
Government intervention in the economy often has the effect of reducing the number of producers. For example, if the government is providing $40,000 in unemployment benefits then why would someone get a job where they make $40,000?The benefit destroys the need/desire for people to work. That person no longer becomes involved in producing something of value for the economy as a whole.
If everyone becomes a consumer and very few people are the producers then the wealth will only be held by a few (unless the government intervenes to take it away from those who earned it). Also, if the government takes away all of the property and is the sole provider for all the people (communism), then the economy will lose all of its producers (and all of its taxes).
Money taken by the government is not redirected into the market as its producer would have wished. Money spent by the government often has the effect of incentivizing the markets away from capitalism.To study this topic more visit FEE.org, buy their cheap book on pencils and follow them on Facebook. Also, compare the differences in John Maynard Keynes and Adam Smith.
Source: Where Keynes Went Wrong
