Let’s Have a No B.S. Talk About Economics

This has been an interesting year. For the first time in recent memory we’ve had a presidential candidate who was not afraid of the term socialist (precisely “Democratic Socialist”). Historically, the term was considered taboo. It was not uncommon to be called a Russian sympathizer if you even uttered the term. The fact that it can be discussed is healthy and allows for a more robust discussion about what the ideal economic model is.

At the same time, Capitalism has been America’s darling for decades. Countless innovations have been attributed to the capitalism model. The Free market model is based on it and is the standard used around the world.

Both economic models have their supporters, some who are more die hard than others. This post is being written to show the flaws in both models in their purest senses.

Let’s start with Socialism. Socialism is defined as follows:

“1: any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods

2
a : a system of society or group living in which there is no private property
b : a system or condition of society in which the means of production are owned and controlled by the state

3: a stage of society in Marxist theory transitional between capitalism and communism and distinguished by unequal distribution of goods and pay according to work done”

Reference: http://www.merriam-webster.com/dictionary/socialism

In summary, socialism is the collection of all wealth that would be equally distributed to all. The flaw in this model is it assumes that all work and effort is equal, and as a direct result minimizes reward for achievement. It removes rewards entirely for efforts beyond or below the basic required effort, or hours beyond the standard work day/week.

A simplified example is as follows:

“Jane is a farm hand. She and her co-workers plant and harvest to feed their community. Let’s assume the standard work week to get things done and meet their quota is 30 hours.

Jane works 30 hours for week one. As a result, Jane gets $300.

Jane works 60 hours on week two. As a result, Jane gets $300.

Jane works 20 hours on week three. As a result, Jane gets $300.”

Regardless of how much or how little time or effort Jane puts in, she still makes $300. This model relies on the honor system, because there are no rewards or consequences for doing more or less than required.

Those who are less motivated will do less and collect the same amount of income as those who put in more hours or work.This will also lead to frustration with other co-workers who may be picking up the extra work. Eventually, their productivity may drop, and there will be less food to distribute to the community.

Granted, there will always be those who do less, even under capitalism. However, there is no potential reward structure in place for those who do more than their counterparts. The purest model of Socialism isn’t sustainable. It potentially leads to totalitarianism.

Next, let’s look at Capitalism. It is defined as follows:

“1: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.”

Reference: https://www.merriam-webster.com/dictionary/capitalism

In essence, the purest form of Capitalism is all about private ownership and maximizing profit. The problems with this model is that it assumes all things are best run using a for profit model. Because the profit motive is always first, the well being and best interest of those whom it takes advantage of is not a concern.

Here’s a simplified example:

“Joe builds a business from scratch and makes a healthy profit for his investment in his new enterprise. He commands an income of well over $1,000,000 per year. His employees are payed well above minimum wage and are happy. He expands his business to where it’s footprint is in all 50 states.

A year later Joe’s income doubles, his employees that run his operation on the ground level are making a little over minimum wage and morale starts to decline.

6 months later, Joe and his share holders want to increase profits. They cut pay to minimum wage while the executive staff grants themselves a pay hike.

One year later, Joe & the board of directors feel that it’s too expensive make things in the United States. They then cut all of their employees, move to a third world nation and hire cheaper labor. They also grant themselves a pay raise for increasing profitability.”

As outlined here, the profit motive isn’t always the best answer either. The profits will go to those who have the control, while everyone else suffers from the lack of upward mobility and likely loss of work due to cheaper labor being found elsewhere in the world. In other words, Pure Capitalism potentially leads to Oligarchy.

Great, so what is the optimal form of government? The optimal form of government is one that blends the two together. Neither should have complete domination of our economic system. Capitalism should be kept in check by socialism, and vice versa.

Police, roads, the military, national disaster relief, social security, education and the government itself are all funded by all tax payers and provide services from the pools of money collected from it’s citizens. Few would have a problem with these services being granted by the state as they would be too expensive/impractical to be executed on ones own. That’s socialism.

Banks, Supermarkets, 401K’s, and the vast number of employers all run on the capitalist model. The rewards they offer for making profits and putting in the extra time to make deadlines can be a net positive.

It is a good thing to have government oversight & unions (ones that aren’t corrupt) in place to keep the for profit motive in check from abusing its employees. It’s good to have business in place that can offer certain services that government institutions do. This keeps that state itself from having 100 percent control of everything, and offers an alternative to those who may not want to use the public option.

In short, the best economic model is the one that utilizes the best parts of both. The difficulty in doing so is making sure that one doesn’t have more power than the other. That job falls to us as it is our responsibility to not just vote for who we want in power, but to have an active part in it and possibly be part of it.

What are your thoughts? What economic model do you think would make the most sense? Why?