Understanding Capitalism | Reviews | jonesborosun.com

Everyone claims they are capitalists, President Biden in a State of the Union address, senators on the campaign trail, business leaders who claim the government is killing capitalism by sending jobs to the foreigner and labor leaders claiming that capitalism contributes to income inequality. Listen long enough and you start to wonder how much Americans understand capitalism.

Capitalism is based on the idea of ​​private property, self-interest, competition, markets, freedom of enterprise and choice, and limited government. The American economy is, by definition, capitalist, all resources and production facilities are owned by private citizens. Self-interest adds purpose and consistency to the system. Business enterprises seek to maximize their profits, while consumers seek to satisfy as many of their economic needs as their incomes permit.

Competition exists when many sellers interact with buyers forming a market that sets the price and quantity sold. Freedom of enterprise and choice means anyone can enter any industry or profession and consumers are free to buy what they want, subject to standard health and safety regulations. security. It follows that in theory, prices are set by the market, companies seeking to maximize their profits must produce at the lowest cost, thus generating the lowest possible price for the consumer.

Freedom of enterprise and choice is supposed to eliminate unearned economic profits and help minimize wage inequality. In short, the capitalist system is supposed to guarantee maximum output at the lowest possible price with a distribution of wages which, although unequal due to the unequal distribution of intellectual and physical abilities, is as equal as education permits. and equal opportunity.

These results lead us to believe in limited government. The government sets the rules of the game, but does not actively participate outside of the provision of standard public goods such as national defense and public schools. This is exactly what we teach in Economics 101. But we don’t teach it as a reflection of reality, but as an ideal standard to use in evaluating our current economic structures and performance.

Once we take into account global trade, market power and political influence, the reality of American capitalism is very different from what the competitive model predicts. For example, take the argument that the government is shipping jobs overseas. The government does not own or operate any commercial enterprises. Businesses relocate to locations where resources and labor costs are lower. Decades ago, this led to the relocation of businesses from the Great Lakes region to the South. Today, this same desire to minimize costs and maximize profits is evident when companies establish their supply chains overseas.

As consumers, we are the drivers of this process. If buying “American” was our only goal, companies wouldn’t be looking to go overseas, but we care about price and only price. Keep producing domestically, when rivals produce cheaply abroad, and the company ends up with declining sales, profits, and ultimately elimination from the market. So who is forcing overseas jobs? We do, the American consumer.

Competition, in an economic sense, meaning many suppliers, does not exist in many of our industries. Petrochemicals, pharmaceuticals, defense, consumer electronics and social media are all dominated by a small number of large companies. The sheer size of these companies gives them control over prices that would not exist in a competitive market, and the size of their profits, coupled with the ability to make unlimited financial contributions to political campaigns, gives the companies leverage. in the political decision-making process.

Beyond price controls and political power, companies that control a large segment of the market make it difficult for new companies to enter the industry. Business start-ups are less common than they were a few decades ago. Falling creation rates have had negative effects on productivity growth, with net investment falling to less than half its 1970s level. Unfortunately, our outdated antitrust laws, which focus only on the impact consumer price mergers miss the potential dangers imposed by excessive industrial concentration.

Freedom of choice should ensure that workers who choose to form a union are allowed to do so without any interference from their employer, unfortunately since 2019 American companies have been spending $340 million a year to thwart union organizing efforts, which suggests that to the extent that their efforts are successful, some businesses in corporate America are actually contributing to income inequality.

All of this brings us back to the last principle of capitalism, “limited government”.

Since our economic outcomes are far from what the competitive model predicts, society has the right, through its elected government, to increase the scope of government activity, spending and regulation of the ‘economy. To what end, to “promote the general well-being” of the nation, words found in the preamble of our Constitution.

Gary Latanich, Ph.D., is professor emeritus of economics at Arkansas State University. He can be contacted by email at [email protected]

Gary Latanich, Ph.D., is professor emeritus of economics at Arkansas State University. He can be contacted by email at [email protected]

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