Why Capitalism Works, and Other Systems Don’t


People, in general, are self-serving.  Much as we would like to be fully selfless, spending all of our time doing for others, the fact is most people are first concerned with themselves and their families, then extended family and friends, then finally people they don’t know.  This is necessary for survival, since people would be unable to have enough of the necessities – food, water, shelter, clothing, etc… if they spent all of their time doing things solely for others.

And yet that is what many see as good and noble.  Ayn Rand uses a good example of this in her “perfect man,”John Galt’s, speech about two-thirds of the way through her classic work of Objectivism, Atlas Shrugged.  John Galt notes that a mother who gave the food for her own baby to another’s baby would be considered noble by a society focused on selflessness.  Yet her baby would starve, so the process is in fact suicidal.

One would think that with this selfish, every-man-for-himself behavior, capitalist societies where the government does not step in to take resources from those who produce a lot and provide for those who do not, we’d have only very wealthy and very poor.  You would also think that the poor would be absolutely destitute since the wealthy would be selfish and keep everything.  And yet, places like America do have a thriving middle class driving SUVs, living in 3000 square foot houses and taking nice vacations.  Even the poor in the United States are rich compared to many other places, most having shelter, at least one car, several televisions, ample food, at least one cell phone, and ample clothing.

Other places like China are also seeing the virtues of Capitalism.  After the Tienimen Square protests and massacre, the Communist Party realized that they could not continue repressing their people through force and also that under Communism they were not able to provide enough resources to their people because few were working.  They therefore began to allow some capitalism, albeit with the understanding that the government was still in charge and could step in and take your business if they felt like it.  As a result, China is seeing a manufacturing boom and an increase in the wealth of its people.  Some of the manufacturing is even shifting to other countries and away from China because the people are doing so well that they are demanding higher wages.  As with America, the way to keep manufacturing in China would be to increase the quality of the goods produced and the skill of the workforce to make the higher wages worth the cost.

Looking at socialist and communist countries, just the opposite is seen.  The USSR was extremely poor under communist rule.  There were chronic shortages of goods with famously long lines for bread and milk.  Corruption ran wild, as it still does today in Russia.  There was also a general atmosphere of hopelessness and despair.  Indeed, even the architecture reflects this with buildings being built during the Soviet period being boxy and grey without ornament; purely functional with no spirit or life.  Conditions in Cuba, North Korea, and Vietnam are similar, if not more desperate.

Monarchies and dictatorships see similar poverty among the people.  The king may live in a palace and have large amounts of wealth, particularly if the United States and other countries provide aid to try to help the poor in the country, but overall the country is far poorer than are Capitalist nations.

Beyond just the level of wealth in capitalist societies is the availability of goods and services.  Rather than having one brand of corn flakes some of the time, there are three or four varieties with different quality levels and different prices.  There are ten brands of toilet paper rather than not even having one.  A socialist may see this as wasteful, to have so many different brands of products, but obviously people are buying the different brands or they would not be there, given the fierce competition for shelf space.  The competition also motivates companies to do things better and find less expensive ways to produce their products.

The difference between capitalist nations and those with central control – communist, socialist, monarchies, oligarchies and dictatorships is three things:

1)  Personal interest is aligned with common interest.  Free enterprise provides motivation for people to identify the needs of others and do something to meet those needs.  Individuals who are willing to get up in the morning, dress appropriately,and spend 8-10 hours a day doing something that helps someone else can easily earn enough to provide for their basic needs.  Those that identify a need and work to provide for that need get rewarded for doing so in proportion to the criticality of the need being met and the number of people they help.  A hotdog vendor on a street with a dozen other vendors makes enough to eek out a living.  One in a crowded place with no other vendors does quite well.  One who sets up a chain of hotdog stands in locations where a lot of people need something to eat gets very wealthy.  One that sets up a hotdog stand where people do not like hotdogs just because he wants to goes out of business.

In the other systems, the incentive to meet the needs of others is quashed by limitations on how much reward you can get.  If you make a lot of money in a socialist society or a monarchy, people from the government will confiscate a lot of it – either for the King or for others who did not make as much money.  In the case of Socialism and Communism, people can also get enough to survive upon without doing anything for anyone.  Indeed, those who have greater need receive more and those who provide for their own needs are taxed to provide for the needs of those who do not.  Both of these factors motivate people to do only as much as they must and in many cases to do less than needed to provide for themselves.

2)  Capitalism involves individuals trying to meet local needs.  Stores in New York City sell different things and sell them in a different way than do stores in El Paso, Texas.   All over the country, individuals are looking at their local communities and determining what is needed and how to best provide for those needs.  This is not out of civic duty but because it brings the most profit.  In large cities, delivery services may be critical so the cost may be included in the price, while in rural areas many will have a truck and would rather save the cost of delivery.

With centrally planned economies a central group must decide what is best for everyone.  Even if they have the best intentions, it is impossible for a small group to decide what is best for so many different people in so many different situations.  For this reason, what ends up happening is that blanket processes and blanket rules are created that fit few people well.  You end up with snow tires in Phoenix and beach chairs in North Dakota because it is easier to create one list than it is to create one for every area.  It is also difficult for a small group to create and control the logistics for getting goods to everyone, causing shortages and surpluses.

3)  Capitalism limits the effect of corruption.  In a Capitalist society, while there can be some bad actors, the effects of corruption are generally limited.  Store owners who cheat their customers generally lose customers and go out of business.  Likewise, employers who mistreat their employees lose the better employees and fail in business.  Because there is choice, both in where to buy things and where to work, corruption is limited.

Corruption is rampant with central management.  Because there is scarcities and because there is generally only one choice, individuals use the system to solicit bribes.  Individuals are also chosen for high positions not because of competence but because of political connections (see the roll-out of Obamacare, as an example).   Finally, the ability for officials to choose who gets what contracts and goods allows them to setup system where those who help them get rewarded and those who don’t get penalized.  In some cases some of the public money ends up coming back to the leader.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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