Political Ideologies About Freedom, Growth, and Equality
I will try to explain the frame of mind of each of these in condensed and perhaps unfairly “oversimplified” terms so that all can at least get some idea of the basic principles of these ideological schools.
A super-crash-course on capitalism
Here is an economy in a nutshell. Do continue reading after, as I will add some nuance and qualifiers to the somewhat over simplistic picture…
“The Economy”
We want goods and services. To produce these, we need to “do something”, which means coordinate work effort with work organization, machines, etc. This coordination is done by groupings of individuals in forms we call “firms” or “the State.” The State gathers its income mostly from taxes, while firms gather their income from sales. In the process of producing, firms and the State must pay for “factors of production” such as wages to workers, profits to owners, etc. The payments eventually land in the pockets of individuals (now or later), which can then be spent on goods and services or saved, which goes into financial markets and through the process of usage of those saved funds via loans or other forms of financing to the private or public sectors.
The State does not face the necessity to “make profits” due to its special status. This renders it generally less “efficient” due to less incentives and lack of competitive pressure. The private sector does not deal well with goods or services that have special characteristics such as “public goods” or markets with “externalities,” scale effects that create monopolies, and information problems pertaining to risk or quality or whatever else. You create “economic value” by producing goods and services that people WANT. This is important. We could bring the unemployment rate down to zero by hiring the entire population to dig holes and shuffle paper around, but this would be wasted resources and would not generate an improving material standard of living.
Productivity and economic development
Productivity is the economic value produced per hour of work relative to the “resources” used (time, natural resources, etc.). If you can produce more stuff or better stuff (or both) using less people and/or natural resources, you are “better” (more efficient, or more “productive”) at producing that thing.
Since increasing productivity increases economic value created, it increases profits and real wages of workers in the industries with those productivity gains. This happened for about 200 years, between 1800 and 2000. This process is why we were 75% of all workers working in the fields a few hundred years ago and we were gradually replaced by sophisticated farming techniques and machines, but over time, due to the increasing purchasing power and profits, extra demand emerged and jobs were created in other industries and the average real purchasing power in all economies increased. Unemployment remained “normal” and median purchasing power increased. This happened under “capitalist” social systems.
Capitalism vs Communism
Essentially, in a capitalist system, everyone does whatever he/she wants within the law. You decide what you buy and how much, how you spend your time and efforts, etc. There is a “government” that “oversees” the process with Rule of Law, and “helping” with market failure, thus requiring taxation, but the private sector remains the main driver of production and jobs, and the price and wage system is mostly decentralized: workers “offer themselves” to work for employers, and their relative scarcity and “special traits” (skills, talents, etc.) determine their relative incomes.
The allocation of “resources” (people, time, effort, money, etc.) is “decentralized” and people can start and own a business, a house, etc. Capitalism inherently admits that an economy is a VERY complex system of moving parts over time and that no central planning could ever possibly manage it in anything close to optimality.
Communism refuses the inherent inequality of income that comes with capitalism and prefers to set determined quantities and choices of stuff to people, determine in large part who does what and how, and what is produced, how and where it is produced. This system tends to generate lots of waste and inefficiency, as History has proven time and time again. It does “create” lots of jobs, but the economic value of the work effort is low, on average. This gives a generally low standard of living with low innovation and growth, coupled to lots of efforts to “get favors” from the State, which is typically a political monopoly. Based on what we can see from History, people suffer and want out and seek freedom for what they do with their lives, forcing the State to even kill its own population to prevent mass exodus — perhaps a sign that the system fails quite badly!
Capitalism can also cause quite a bit of problems, but, on average, less so than communist systems. Capitalism also puts great emphasis on personal freedom, which means that the money you earn from your work or entrepreneurial effort mostly should remain in your pocket, not taxed by the State by force to be used “by everyone.” This is logical, but it could also bring unfair situations, where it is impossible to have a “decent” living (define “decent” — that is a long debate) for masses of people who may get priced out of markets that level the playing field such as education and health, to name only 2.
In other words, even the most convinced capitalists will admit that at least some form of equality of opportunity is important.The ideological differences pertain to how much of your income you should keep and how the State should handle the tax income it gets from the economy. The answers to these questions will base their reasoning on efficiency, fairness, chance, merit, socio-economic mobility, individual freedom, and more.
There are no right or wrong ways to see these debates, but there ARE plenty of wrong conclusions and justifications for both, as well as real-world consequences of high inequality, excessive taxation, State efficiency, and private sector failure in many contexts. Failing to understand these nuances could bring about both extremes that I humbly feel are not at all desirable. There is a reason why States have grown after a long period of extreme inequality in many countries and also reasons why communist countries systematically fail…
Taxes, redistribution, and the State
To make the capitalist game a bit “fairer” and to even reduce the problems that come with extreme income inequality, most countries tax the general population, with proportionally higher taxes on the upper incomes, even in the USA.
There are several aspects to this, but we can “oversimplify” the debate into 3 categories: 1) how much taxes is “acceptable?”; 2) how much more should the rich pay in proportion of their incomes than the rest of the population?; 3) how should the proceeds of those taxes be used?
The forms of redistribution are: 1) in cash (you get a payment by the rest of the population via the State; 2) in kind, which means you get “free” (or low-priced) goods and services that are paid by the general population via the State, such as education, health care, drugs, daycare, etc.
Liberty-oriented people see almost all of this as unacceptable, because people should “get what they supply” — if you don’t do anything special, you should not get extra goods or services financed by others. If you want more, find a way to give more by supplying highly valued and demanded work or goods or services. Liberal-oriented people (“progressives”) respond to this that the no-state market creates unfair odds to succeed and unfair income distribution due to rent seeking and positional advantage of the upper incomes that self-perpetuate and reinforce over time due to contacts, higher incomes that allow them to get passive income in financial markets, etc.
These 2 camps have good points and this debate has many people raging, finger pointing, and saying quite ridiculous oversimplifications of the issues and details that lay behind the scenes and beyond the simple picture. One thing that must be clearly stated is that “anti communism” does NOT have to be libertarianism: the state is not all bad and not all good, and some things are indeed improved upon by state intervention, but the devil is in the details. I hope this post helped to clarify somewhat. We explore more in-depth and honestly in my book on the challenges and risks about Trump Policies! Like and share.
Pascal Bedard
contact@yourpersonaleconomist.com
Originally published at www.yourpersonaleconomist.com.
