Welfare State, Tax Revenue, Tax Base, Abortion, Population Gains, Keynesian Policies, Communism and Capitalism

Posted by PITHOCRATES - January 22nd, 2013

Week in Review

Their Welfare Programs continued to Expand even while their Tax Revenue was Falling

Many of the world’s mature economies are having financial issues.  Including chronic deficits, growing debt and skyrocketing spending obligations.  The Eurozone has been mired in a sovereign debt crisis for years.  The UK is trying to slash billions from their costliest entitlement.  The National Health Service.  France tried to raise the top marginal tax rate to 75%.  Japan is spending twice their GDP and their aging population will require even more spending.  And in the United States Democrats and Republicans are getting ready for another round of debt ceiling debates.  To raise the debt ceiling once again.  To yet another record high.

What causes these problems?  A couple of things.  A growing welfare state.  And falling tax revenue.  Not because tax rates are too low.  But because they are too high.  Creating a business-unfriendly environment.  Reducing economic activity.  Which reduces tax revenue.  They further compound their problems with Keynesian economic policies.  Which include massive borrowings to pay for deficit spending.  And expanding the money supply.  Which devalues the currency.  This creates inflation.  Further reducing economic activity.

These countries have a spending problem.  Their welfare programs continued to expand even while their tax revenue was falling.  Often introducing new programs based on the best of economic times with the rosiest projections of continued economic good times.  But once a recession hits, and they always do when using Keynesian economic policies, these governments run massive deficits.  That said there is a revenue component to their financial problems.  Abortion.

An Expanding Welfare State needs an Expanding Population Growth Rate

To increase tax revenue you need to expand the tax base.  To get more taxpayers paying taxes.  And where do taxpayers come from?  Babies.  There is no other way to get a taxpayer.  Even with immigration.  Because those immigrants first have to be born.  So the more babies you have the more taxpayers there will be paying taxes.  The more abortions you have, though, the fewer taxpayers there will be paying taxes.  The following table summarizes population gains and abortions for the years 1970 through 1990 for 12 countries.

Sources: Historic, current and future population of Europe; Abortion statistics and other data;

These dates are important for had these abortions not happened they all would be in the workforce today.  Just to get an idea of what that means to tax revenue consider the United States.  During these 20 years there were 26.7 million abortions.  Assuming a median salary of $50,000 and 33.3% in federal taxes (18% effective federal income tax rate, 12.4% for Social Security taxes and 2.9% for Medicare) that comes to $444 billion in one year.  Or $4.44 trillion over ten years.  It may not have been enough to pay for the massive new spending of President Obama.  But it would have prevented the credit downgrade from S&P.  Who were looking for $4 trillion in spending cuts over ten years.

It’s these aborted taxpayers that are pressuring these welfare states.  For an expanding welfare state needs an expanding population growth rate.  And abortion doesn’t help populations grow.  And if the population doesn’t grow then tax revenue doesn’t grow.  In fact, if you divide the population gain by the number of abortions you can get a feel of a country’s financial health.  And their future health.

A Command Economy cannot Provide for the People like Laissez Faire Capitalism Can

Abortions reduce population gains.  So when you divide population gains by the number of abortions the higher the resulting number the better.  For higher population gains and fewer abortions mean more tax revenue.  The lower the number indicates a high level of abortions that reduces tax revenue.

Spain is one of the countries in trouble in the Eurozone.  With a rich Catholic history that frowns on abortion.  So it is no surprise to see such a large number when dividing population gains by abortions.  But their debt crisis is.  For this number indicates a lot of taxpayers.  Which Spain has.  Yet they have some serious financial problems.  Why?  Because they also have very high unemployment.  Their economic woes began with Keynesian policies keeping interest rates artificially low.  Creating a housing bubble.  And when it burst it created a very bad recession.  So having taxpayers is important.  But they also have to have jobs.  With some good economic policies (i.e., non-Keynesian policies) Spain should be able to rebound into an economic juggernaut.  For if all those taxpayers find employment they can reduce tax rates to very low levels.  Which will explode economic activity.

Greece went on a spending binge.  Including lavish spending for the 2004 Olympic games.  Their problem is a bloated public sector.  And a large welfare state.  That their private sector can no longer fund.  Like Spain Greece may be able to rebound with some sound economic policies (i.e., non-Keynesian policies).  A little privatization.  And a little weaning from the public teat.

At the other end you have the United Kingdom.  Whose abortions exceeded their population gain.  Which wasn’t much for 20 years.  They are currently going through a baby boom.  But it’s this baby dearth from 20-40 years earlier that is depressing tax revenue today.  Requiring those spending cuts in the NHS.  And higher tax rates on the fewer remaining taxpayers in the workforce.  Which, of course, leaves people with less spending money.  Further depressing the economy.

China’s economic miracle is not as miraculous as it once was.  And their Keynesian policies will catch up to them.  As they have with every other country using them.  Their authoritarian regime has been able to keep wages down to help their export economy.  And they have no social safety net despite a rapidly aging population.  Which they will have to take care of.  Eventually.  Either by expanding the money supply so the government can spend more money.  Which will create inflation and hurt economic activity.  Or they will have to raise taxes.  Which will also hurt economic activity.

China has had 171 million abortions from 1970 to 1990.  Which even exceeds the number of deaths in the Great Chinese Famine.  Not uncommon in a communist regime.  Survival.  As their command economy cannot feed or provide for the people like laissez-faire capitalism can.  In a command economy those abortions are seen as a good thing.  A kind thing.  For that’s fewer mouths to feed.  Hence China’s one-child policy.  While in laissez faire capitalist countries their children have obesity problems.  And look at these abortions and see loss tax revenue.

While China is enjoying prosperity in their eastern cities thanks to their export economy fueled by low wages little has changed for the hundreds of millions of peasants in the rural interior spaces.  Where famine is still a real concern.  Some will cite China as an example of out of control population growth.  Like locusts the people will consume all of the available resources.  And leave behind a scorched earth.  Of course what these people don’t understand is the power of laissez faire capitalism.  For across the water from China is Hong Kong.  An Island with no natural resources.  A barren rock.  Yet they were part of the British Empire.  They embraced-laissez faire capitalism.  And flourished while mainland China suffered under communism.  Hong Kong is one of the world’s strongest economies.  With some of the greatest population gains.  During these 20 years their population grew by 43.67%.  The greatest of these 12 countries.  While having the lowest number of abortions.  Yet despite having this massive population gain and few resources this crowded special administrative region (SAR) of the People’s Republic of China (since 1997) prospers.  Suffers no famine.  And is one of the best places in the world to live.

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The American Left loves the Chinese Economic System despite its Inefficiencies, Income Gap and Crimes Against Humanity

Posted by PITHOCRATES - January 6th, 2013

Week in Review

The American Left looks at China with awe and reverence.  They see that huge export economy and they know how they did that.  Massive government control over the economy.  And Keynesian economics on such a grand scale that it would  even impress Paul Krugman.  Nobel-winning Keynesian economist who’s constant refrain is that the government just never spends enough.  Something no one can say about the Chinese Communists.  And that’s why the American Left loves China.  For when it comes to the economy they wield dictatorial power.  If the American Left had those powers they could accomplish so much.  Beginning with the arrest of the Republican opposition and deportation to reeducation camps.  Then they could make our economy hum.  Just like in China.  Where brilliant government bureaucrats educated in the finest Ivy League universities called all the shots.  For only those who despise free market capitalism would know how to truly optimize economic output (see Game Over for China’s Photovoltaic Manufacturers by Gao Zitan & Frank Fang posted 1/6/2013 on TheEpochTimes).

It was in October of 2011 when the U.S. and European PV companies decided that enough is enough. Over the last years they had to compete against Chinese companies selling their products below cost. As a result many European and U.S. companies had to close down. The remaining ones chose to appeal to regulators to stop the unfair practices.

Note once again who is complaining about companies selling things too cheaply.  It is not the consumer.  For the consumer never complains that they aren’t being charged enough.  It is always another business requesting antitrust protection against a company they cannot compete against.

The Chinese regime viewed solar photovoltaic production as a promising industry with rapid scalability and production, and high profits. It could add to GDP growth and employment. This is why the regime greatly promoted the growth in the domestic PV market through business-oriented regulations and incentives. Banks, local governments and other financial agencies were ordered to heavily subsidize the solar industry with cheap loans.

Starting in 2009, the regime sponsored some large-scale national PV projects. The Solar PV building program comprised 111 projects and the Golden Sun program included 275 projects. Provincial or municipal funded programs provided the framework for many other PV related projects.

This is exactly what the Left wants to do.  What the Obama administration did.  They want smart government bureaucrats to tweak market forces to make things better.  At least this is what these government people think.  Because they are so smart.  Even though they have no business experience.  So the American Left wants to do exactly what China did.  What the Americans did but on a much grander scale.  Because their communist government had the power to do it on a grander scale.  Something the American Left laments that the American government doesn’t have that kind of power.  Yet the Americans want to penalize the Chinese for unfair practices.  Despite constantly championing the Chinese way.

In 2008, there were less than 100 PV enterprises. But by the end of 2011 there were more than 500 PV companies, a five-fold increase, according to Guangzhou-based business newspaper 21st Century Business Herald…

On the surface, Chinese companies were doing well. Revenue of the PV industry was more than 300 billion yuan ($48 billion) and Chinese companies occupied five spots in the top 10 of global solar cell manufacturers, according to the report. However, the fast expansion of PV production capacity did not match domestic demand.

According to statistics of EU ProSun, in 2011, China reached a total PV production capacity of 45 GW but domestic consumption was only 2 GW. The production capacity spurred by massive subsidies and state incentives was over 20 times higher than actual demand for solar powered electricity. The only way out was exporting the surplus production…

As a result of lower subsidies in Europe and tariffs in the United States, the overproduction stimulated by state subsidies can no longer be exported. One indication is a rapid growth in inventories. Sixty-six listed Chinese PV companies of the Shanghai A-Share Stock Market showed a 20 percent increase in inventories compared with the same period of the previous year…

President of EU ProSun Milan Nitzschke said, “Chinese subsidies shield manufacturers from insolvency, and are pumped into solar companies even if they are unprofitable. Most Chinese solar companies would have gone bankrupt a long time ago if not for endless government subsidies.”

This is what happens when you have ‘smart’ government people take over the free market economy.  You build a lot of stuff no one will buy.  Just like the Soviets built a lot of tractor parts that sat on store shelves unsold while people stood in line to buy soap and toilet paper.  This is why the command economies of communism failed.  And while the command economy of the Chinese Communists will fail, too.  What Friedrich Hayek of the Austrian school of economics called malinvestments.  Which directs resources from making things people want to making things people don’t want.  Creating shortages of the things people want (like soap and toilet paper in the Soviet Union).  And overflows inventories with things people don’t want (like solar panels in China).  All because a government bureaucrat decided to make more tractor parts and solar panels instead of soap and toilet paper.

And if that wasn’t bad enough there are other costs for the Chinese way (see Never Mind the Fiscal Cliff, China is Headed For a ‘Real’ Cliff by Michelle Yu posted 1/6/2013 on TheEpochTimes).

China is dangerously close to a catastrophic political, economic, and social meltdown, according to a Chinese business scholar, who cites China’s growing income gap as one of its serious crisis indicators…

Rural versus urban inequality has long been recognized as a key factor in China’s income gap. Not only does the rural income level fall far below the urban level, but the income inequality is also more obvious within rural regions…

Another notable factor is high unemployment rate. The SUFE study suggests that China’s national unemployment rate was 8 percent in July 2011, suggesting an unemployed population of 27.7 million, which is almost twice as high as what authorities have admitted to. The unemployment rate doubles for 51-55-year-olds, reaching 16.4 percent, and is attributed to mergers and standardized bankruptcy of state-owned enterprises in the early 2000’s. (An explanation of mergers and standardized bankruptcy are available here  and here.)

Surprisingly, the unemployment rate for 21-25-year-olds who hold college or above degrees is also 16.4 percent—the same as for the 51-55-year age group. By contrast, the rate for 21-25-year-old poorly educated migrant laborers from rural areas is only 3.4 percent. A shortage of cheap labor has affected some of China’s key export industries such as apparel and electronics, especially on the east coast.

But the root cause of the income inequality and a battery of other economic problems in China can be found in the communist regime’s overexploitation of social wealth, according to Winifred Tung, an attorney and commentator from Taiwan.

The exploitation has been realized largely through preferential policies in favor of state-owned enterprises and suppression of the private sector, Tung told NTD Television, citing recent data, which says that the GDP of large-scale state-owned enterprises (SOEs) accounts for 60 percent of China’s overall GDP. However, among the different culprits of tax evasion in China, SOEs came in first place with 26-28 percent.

So this is why they can make so many solar panels (and other export goods) so cheaply.  By exploiting poor rural laborers in their big city factories.  Resulting in something the American Left say wouldn’t exist if they had control over the economy like the Chinese do.  An income gap.  Income inequality.  Something that is apparently worse in the country where the government has the power to make life fair.  But it’s more than just an income gap.

The Chinese factory workers aren’t like UAW workers.  They have low pay, no benefits and often live in dormitories in the factory compound.  And these have it good (see The Difficulty of Smuggling a Slip of Paper From a Chinese Labor Camp by Guo Jufeng posted 1/6/2013 on TheEpochTimes).

Like the person whose plea made headlines around the world, I was also in Liaoning Province, China. Twelve years ago, I was imprisoned in Huludao City Forced Labor Camp, Liaoning, for 2.5 years for practicing the meditation discipline of Falun Gong. My companion Cao Yuqiang, who was eventually tortured to death, and I were watched 24 hours a day by two criminals, so that we could not exchange information regarding the persecution of Falun Gong.

One day, I came up with the bold idea to find a way to communicate information about the persecution to the outside world.

The first obstacle we faced was that we didn’t have pen or paper. So, as more and more information was passed on to me, it became quite a challenge to memorize everything! To improve my memory, I repeated the information to myself every day, since I couldn’t communicate regularly with Cao Yuqiang.

One day, out of the blue, Cao told me he had found a refill for a ball-point pen. I suspected he must have gone through a great deal of trouble to procure it, but I did not have the opportunity to ask him for any details at that time.

Now I had a pen, but there was still the question of what to write on. I finally realized that the only possibility was toilet paper, and to avoid being caught, I would have to write the message after midnight.

I had to keep strengthening my mind to overcome fear and anxiety as any negative thoughts could lead me to give up. Questions and doubts plagued my mind: “Would this work? How could we get the information out? Would I be able to withstand the torture if it was discovered? Had other prisoners found out about my plan? Were they waiting to catch me in the act?” I was certain that if my plan were discovered, I would be tortured mercilessly with electric batons.

This is part of that Chinese economic system the American Left so admires.  An economy that is based on cheap labor.  In some cases even slave labor.  And it’s no secret.  Which is odd for the American Left who are champions of the labor movement.  Who bankrupted countless businesses (GM, Chrysler, Hostess, etc.) by demanding ever higher pay and benefits packages.  Yet here they are.  Admiring an economic system that just exploits labor in the worst ways.  Even using torture.  And it bothers some.  Maybe not the American Left.  But the Chinese themsleves (see A Young Chinese Man’s New Year Wish for His Father by Gao Zitan posted 1/1/2013 on TheEpochTimes).

As 2013 begins with an atmosphere of joy welcoming in the new year, a young man from Hubei, China, is worried about his father who is a member of the Communist Party.

The term “San Tui” in Chinese refers to the three distinct renouncements. It means to quit the Chinese Communist Party (CCP) and its two affiliated organizations: the Communist Youth League, and the Young Pioneers, which people are made to join in their youth.

In recent years, “the three renouncements ensure safety” has become a well-known saying in China, and many consider it a rational choice for mainland Chinese to guarantee themselves immunity from all the crimes perpetrated by the Communist Party when the day of reckoning comes. So family members of those who refuse to consider the wisdom of this option are very worried for their loved ones…

“The three renouncements ensure safety” has been widely recognized by the Chinese public since 2004, when The Epoch Times published the truth about the CCP in “Nine Commentaries on the Communist Party” in 2004, and began registering those wishing to make the three withdrawals.

As of Dec. 30, 2012, more than 130 million people had registered with The Epoch Times to quit the CCP and its affiliated organizations.

The American Left may be enthralled with the Chinese communist way just as they were enthralled with the Soviet communist way but those living under those oppressive regimes weren’t.  And aren’t.  China is not the China it was under Mao.  But the hard-line communists are.  But even some of these committed their crimes against humanity for a higher purpose.  To prevent the anarchy that followed in parts of the former Soviet Union when the Soviet Union collapsed.  So some may commit their crimes for good.  While a lot no doubt just enjoy the privilege that comes with being in the party leadership.  And the very comfortable lifestyle.  Much like liberals in this country.  But not the average Chinese.  At least 130 million of them.

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The Cuban People are Moving their Country towards Free Market Capitalism

Posted by PITHOCRATES - July 28th, 2012

Week in Review

Cuba’s National Assembly is meeting to discuss Raul Castro’s economic reforms.  And people within and without Cuba are watching anxiously.  To see if Cuba will throw off their socialist/communist shackles.  So the Cuban people can breathe liberty and enjoy prosperity.  Where all Cubans can live the good life.  Not just the inner party members (see Cuban parliament meets on Raul Castro’s economic reforms, budget, tax system by Peter Orsi, Associated Press, posted 7/23/2012 on The Washington Post).

Islanders and Cuba-watchers will be seeing if the assembly takes any action on long-promised measures such as the easing of travel restrictions, increased private farming of state-controlled land or the approval of cooperative businesses…

And last week the island’s burgeoning small business class was dealt a blow with the low-key announcement of new, stiff tariffs on imported goods.

The entrepreneurs say that without access to wholesale markets, the only way they can supply their businesses is through “mules” who transit between Cuba and places such as Miami, Ecuador and Panama with their bags stuffed with food, spices, clothing, electronics, diapers and other items tough to come by on the island…

It made no mention of the small businesses, however, and insisted that the measures were necessary because excess baggage is slowing down service at the airport, making it resemble a cargo terminal.

By 2015, Cuban officials are gunning to have removed 1 million workers from bloated state employment rolls and have transferred more than 40 percent of the economy into private hands, compared with about 15 percent today.

Import tariffs don’t protect domestic business.  They hurt domestic business.  By raising their costs.  Which forces businesses to raise their prices.  Which hurts their sales because people buy less when prices are high.  So they find ways around paying those high tariffs.  So they can keep their prices low so people can afford to buy their wares.  And the Cuban small business owners turn to “mules” to bring in what the command economy of Cuba can’t.  Goods at free market prices.

The command economy of socialism/communism doesn’t work.  Free market capitalism works.  Free trade works.  As proven by the Cuban black market.  People were jamming their bags so much with the goods that are in demand that it was turning the airport into a “cargo terminal.”  The government may not know how to supply businesses in a free market.  But entrepreneurs do.  And the Cubans are ready, willing and able to advance Cuba into the 21st century.  All they need is for the government to let them.

The Obama administration could take a lesson from the Cubans.  In what works.  And what doesn’t work.  The Cubans are trying to move towards free market capitalism.  While President Obama is moving America in the other direction.  The Cubans want less government in their economy.  Because it clearly doesn’t work.  And they have the scars (economic and physical) to prove it.  While the Obama administration is trying to put more government into the economy despite this not working anywhere it has ever been tried.  Even our one-time Cold War nemesis is admitting this.  And when they do perhaps it’s time for our president to do likewise.

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Marx, Engels, Communist Manifesto, Capitalists, Bourgeoisie, Proletariat, Private Property, Soviet Union, Iron Curtain and East Berlin

Posted by PITHOCRATES - May 1st, 2012

History 101

Nationalism, Socialism and Communism forced a more Fair, Just and Equitable Society onto the People

Karl Marx and Friedrich Engels published the Communist Manifesto in 1848.  Launching a war against capitalism.  And private property.  Intellectuals and those in academia loved this stuff.  And labor leaders.  Because it was a path to power.  Especially for those who could not create wealth.  Unlike the great wealth producers.  Like the industrialists.  The entrepreneurs.  Small business owners.  The productive middle class.  That is, the capitalists.  Who work hard and achieve success.  By using their talent and ability to create wealth.  Moving up the economic ladder.  Creating income inequality.  The ultimate sin of capitalism.  According to Marx and Engels.  Intellectuals.  Academia.  And labor leaders.

In the Communist Manifesto Marx and Engels single out the accumulation of private property as the source of all our problems.  The capitalists, the bourgeoisie, have an insatiable appetite for private property.  They just can’t get enough of it.  And therefore oppress their workers, the proletariat, to maximize their property.  By paying them less and less to maximize their profits.  So they can use those profits to buy more and more property.  Which keeps the proletariat in perpetual and abject poverty.  And concentrates all the wealth into the few hands of the bourgeoisie.  And the only way to correct this great inequity was through a worker’s revolution.  Where the proletariat rises up and takes the private property of the bourgeoisie and gives it to the state.  So it belongs to everyone.  Especially to those who did not create it.  A very popular idea among those mired in perpetual and abject poverty.  Who are easily swayed to support this more fair, just and equitable distribution of other people’s wealth.

These progressive views enthralled Europe.  Especially after the Industrial Revolution created some appalling conditions for workers.  And they took this opportunity to put them into practice.  It was the 19th century that gave us the ‘fair’ political systems of nationalism, socialism and communism.  That began the process of transferring wealth from the capitalists to the anti-capitalists.  Precipitating the economic decline of Europe.  Making America the new economic superpower.  Which still maintained the principles of free market capitalism throughout the 19th century.  Until the anti-capitalistic teachings of Marx and Engels took hold in the progressive government of Woodward Wilson.  Bringing back the federal income tax Abraham Lincoln used to pay for the Civil War.  But unlike Lincoln Wilson had no intention of repealing it.  The federal income tax was here to stay.  As progressives began building that more fair, just and equitable society.

The Soviet Union Depended on the West for Food because their Forced Collectivized Farms couldn’t Feed their People

But the equitable movement in America was not as intense as it was in Europe.  Or Russia.  Which was taking the teachings of Marx and Engels to their logical end.  They had a worker’s revolution.  They became communist.  And forced that more fair, just and equitable society on their people.  Whether they wanted it or not.  And those who objected they systematically killed.  Or exiled to a Siberian gulag.  For Joseph Stalin’s rise to power was brutal.  As was the Soviet Union.  Even making a deal with Adolf Hitler to split Poland after the Nazi-Soviet invasion of Poland that launched World War II.  Then Hitler double-crossed their Soviet ally and attacked the Soviet Union.  And the Nazis nearly overran them.  The Nazis were in Leningrad (present day St. Petersburg).  At the gates of Moscow.  And in Stalin’s city.  Stalingrad.  The Soviets were unable to resist the Nazi onslaught.  The only thing that saved them was material aid from the capitalist West.  The Soviet T-34 tank (the best in the war).  And, of course, the millions of Soviet people the Soviet generals could throw into the Nazi killing machine to wear the Nazis down.

No one suffered like the Soviet people did during World War II.  The US and the UK each lost about a half million people.  A terrible loss.  The Soviets, though, lost about 25 million people.  A number that just numbs the mind.  This was the second Russian invasion that had brought an enemy to the gates of Moscow.  The first were the French a century earlier under Napoleon.  There wasn’t going to be a third.  Wherever their armies were at the end of World War II they pretty much stayed.  Turning Eastern Europe into a communist bloc.  And to make the Soviet Union a mightier nation they embarked on a rapid industrialization program.  To make it a modern power like those great nations in the West.  But unlike them they were going to do it the ‘smart’ way.  With their command economy.  Where their brilliant state planners would marshal their resources and do what the free market economies did in the west.  Only instead of taking about a century their Industrial Revolution would take only 5 years.

With no industrialists, entrepreneurs, small business owners or a middle class it fell upon the state planners to industrialize the Soviet Union.  As well as feed the Soviet people.  Well, they industrialized the Soviet Union.  But never brought it up to par with the industrialized West.  Worse, they couldn’t feed their people.  Despite having some of the most fertile farmland in all of Europe in the Ukraine.  The Soviet Union depended on the West for food.  Because their forced collectivized farms didn’t work like Marx and Engels said they would.  And they didn’t work in China, either.  Where another brutal communist dictator, Mao Zedong, killed tens of millions of his people by starving them to death.  By forcing a more fair, just and equitable society onto the Chinese.

Time Froze behind the Iron Curtain and People Lived pretty much Forever in the 1940s

At the end of World War II, like at the end of World War I, no one wanted to think about war anymore.  Winston Churchill, though, did.  For he saw what the Soviet Union was doing.  And saw the spread of their communism as a threat to Western Civilization.  He gave a speech at Westminster College in Fulton, Missouri, in 1946.  And said, “From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe.”  There was now an Eastern Europe.  An East Germany.  And an East Berlin.  All behind the Iron Curtain.  All in the Soviet sphere.  All communist.  Where they all suffered under a more fair, just and equitable society.  Whether they wanted it or not.  And they clearly did not.  For the Soviets had to build a wall in Berlin to prevent those in East Berlin from escaping to West Berlin.

The intellectuals, academia and labor leaders loved Joseph Stalin and the Soviet Union.  They thought communism was the enlightened future.  Probably because they didn’t have to live in it.  But what is surprising is that a lot of college students have this affection with communism.  To this day they still wear t-shirts emblazed with the beret-wearing Che Guevara.   Who helped Fidel Castro bring that more fair, just and equitable society to the Cubans.  Who have been trying to escape it ever since by practically swimming to Florida and free market capitalism.  But the college students and their professors still yearn for a Soviet-style economy in the United States.  And condemn capitalism as they sit in coffee bars sipping their lattes.  Enjoying social media on their smartphones.  Wearing the latest fashions.  Enjoying the latest movies.  The newest music.  And dream of that more just society.  Where they redistribute wealth fairly and equitably.  And the rich pay their fair share.  Just like in East Berlin.  Where life was fair.  But it was nowhere as enjoyable as in the unfair West.

Time froze behind the Iron Curtain.  When West Berlin enjoyed the best Western Civilization had to offer in music, fashion, food, entertainment, etc., East Berlin didn’t.  For they were frozen in the 1940s.  Western music was decadent.  So instead of rock and pop music you listened to classical music.  Instead of the latest Hollywood movies you went to the ballet.  You didn’t watch Western television.  Read Western books.  Or newspapers.  No.  You only saw things approved by state censors.  And that were patriotic.  Why?  To prevent their people from seeing how much better life was on the other side of the Iron Curtain.  Where they enjoyed the latest and the best of everything.  Whereas inside the Iron Curtain you went to the black market for any real luxuries.  Like a pair of blue jeans.  Which they didn’t sell in East Berlin.  Because they were decadent.  Why, they wouldn’t even sell a t-shirt with a communist icon on it.  Because you just didn’t wear something like that in the 1940s.  But college kids will attack capitalism.  And support the fairness of socialism and communism.  Even though the things they enjoy come from free market capitalism.  And are simply not available in the communist command economy.  Because the accumulation of private property is the greatest sin of capitalism.  And not allowed under communism.

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The Invisible Hand

Posted by PITHOCRATES - April 16th, 2012

Economics 101

A Command Economy Reduces the Overall Economic Output because those Managing the Economy don’t Understand It

Command economy?  Or free market capitalism?  Which works better?  Well, let’s find out with a little experiment.  Let’s go back in time.  Say ancient Mesopotamia.  Just after they developed mass farming.  And produced some of the first food surpluses.  Allowing the rise of a middle class of artisans.  Now let’s look at what could have been the first two of these artisans.  A potter.  And a winemaker.  Who probably weren’t the first two artisans.  But will suffice for our little experiment.

The winemaker needs some pottery vessels to store and sell his wine in.  And the potter enjoys drinking wine.  They each have something the other wants.  And because we’re so far back in time there is no money yet.  We’re still only bartering at this time.  Trading the goods we make with each other.  But in our experiment the high priest of the civilization is also the economic planner.  This priest communicates to the civilization’s gods.  And guides the civilization in pleasing their gods.  Which he is very good at.  For he knows all of the old teachings and rituals.  But he doesn’t know a thing about pottery or winemaking.  But he looks at an empty pottery vessel and a pottery vessel full of wine and sees that the vessel volume equals the volume of wine.  And deems the price of one pottery vessel is the amount of wine one pottery vessel holds.

Well, the potter is quite happy with this price.  Because he is skilled.  And can dig up some clay.  Throw it on the potter’s wheel and knock out vessel after vessel.  Glaze them and fire them in the kiln.  Even working by himself he can achieve some economies of scale.  By repeating this process every day.  Something the winemaker isn’t quite able to.  For he makes wine by the batch.  Because each step in the process takes a lot of time.  Maintaining his grape vines.  Then picking the grapes.  Carrying them back to his winery.  Putting them into his winepress.  Squeezing the juice out of the grapes.  Putting the grape juice in large vats to ferment.  Monitoring the process.  When he determines the process is complete he fills the small pottery vessels with wine.  When it was finally ready for ‘sale’ and consumption.  Considering all the work it took him to make one vessel of wine the winemaker was not at all happy with the price the high priest set.  And instead builds his own potter’s wheel and kiln to make his own vessels.  Greatly increasing his workload.  And reducing his winemaking output.  While the potter loses a potentially large customer.  Thus reducing the amount pottery he makes.  Reducing overall economic output in the command economy.

The Invisible Hand makes sure we use our Limited Resources Efficiently to Make the Things People want Most

In this command economy the civilization suffered a deadweight loss.  Economic resources went unused.  They could have created more economic benefits with the available resources.  They could have made more pottery.  And made more wine.  Perhaps even creating some jobs to help with the economic output of efficiently using the available resources.  But they didn’t.  Because of the fixed prices economic resources went unused.  Thus creating a market equilibrium lower than where it could be.  Hence the deadweight loss.  Now let’s look at the same example with only one difference.  The high priest does NOT set prices.

In a barter economy people agree to trade the goods they make.  And now the potter and the winemaker are free to determine what they think is a fair trade.  That is, they set the price of pottery in wine.  And the price they agree on is one they find mutually acceptable.  Where the potter agrees to trade an amount of his pottery for an amount of wine.  And the winemaker agrees to trade an amount of his wine for an amount of pottery.  Everyone wins.  For the potter gets an amount of wine he values more than the pottery he traded for the wine.  The winemaker gets an amount of pottery he values more than the wine he traded for the pottery.  And the civilization wins because at this mutually agreed upon price both the potter and the winemaker increase their production.  Providing the civilization with more of their goods.  The potter and the winemaker may even hire people to help them produce more goods to meet this higher demand.  Thus increasing the level of happiness in the civilization.  By increasing the amount of economic activity.  Moving the market equilibrium to a higher level of economic output.  And thus reducing the deadweight loss.  By using the available resources in the most efficient manner.  As determined by these mutually agreed upon prices.

This is the Invisible Hand in action.  An economic concept put forth by Scottish economist Adam Smith (1723-1790) in his The Wealth of Nations (1776).  In a competitive market place where traders set the price for their economic trade (not a command economy) two things happen.  First, resources flow to where we demand them most.  That is, to the buyers willing to pay the highest price.  Second, because of the competitive market place only those companies that sell at the low prices the market demands stay in business.  Which means that they have to use those resources as efficiently as possible.  Especially when they’re paying the highest prices for them.  And all of this happens because of the Invisible Hand. 

History has Proven that no Government Bureaucrat can do a Better Job than the Invisible Hand

Those who favor a command economy (or more government intervention into market forces) say the economy is too complex for us to leave it to its own devices.  That without a smart government bureaucrat managing this complex thing we cannot reach a market equilibrium that maximizes economic output.  Whereas Adam Smith says it is because the economy is so complex that no one is smart enough to manage it.  Just as a high priest doesn’t understand pottery or winemaking a smart government bureaucrat cannot hope to understand all the intricacies of a complex economy.  Nor can they ever hope to understand what millions upon millions of consumers want to buy most.  But the beautiful thing is we don’t have to.

The multitudes make individual decisions just like our potter and winemaker.  Where everyone is looking to maximize their own value.  And when they agree on a mutual acceptable price all parties in the trade win.  While making sure our resources flow to where they are demanded most.  And that we use these valuable and limited resources most efficiently.  Thus maximizing overall happiness in our country.  Reducing deadweight losses to a minimum.  And obtaining a market equilibrium that maximizes economic activity.  All of which happens with no one in charge.  As if an Invisible Hand guides us in the market place to make all the right decisions to maximize this economic output.  And our happiness.

So which is better?  Command economy or free market capitalism.  Well, if you’re being honest you have to choose Adam Smith’s Invisible Hand and free market capitalism.  For history has proven that no government bureaucrat can do a better job than the Invisible Hand.  Not the Soviets.  Not the Chinese Communist (under Chairman Mao).  Not the Cubans.  Not the North Koreans.  Even the Americans failed when their government actively intervened in the private economy.  Something that President Jimmy ‘one-term’ Carter knows only too well.  So based on our hypothetical Mesopotamian example, and history in general, free market capitalism is, and always has been, and always will be, better than a command economy.

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FUNDAMENTAL TRUTH #66: “In socialism you don’t get what you want. You settle for what you get.” -Old Pithy

Posted by PITHOCRATES - May 17th, 2011

Beggars can’t be Choosy

Imagine if you will some outdoor summer event.  By the lake.  Or the beach.  Someplace nice.  But a long way from any restaurants or stores.  It’s a day of fun and games enjoyed by all.  A rather long day at that.  And the people get hungry.  Lucky for them there’s food.  Over at the concession area there are two lines.  One long.  One short.  At the long line it says free food.  The short line says $250 per plate. 

There are also menus.  For $250 per plate you can get almost anything you want.  New York strip steak.  Crab legs.  Lobster tails.  BBQ ribs.  Corn on the cob.  Baked potatoes.  You name it and it’s there.  The free line is serving watery, lukewarm macaroni and cheese.  And they make it with an artificial cheese product.  One cup per person.  It tastes horrible.  But, hey, it’s free.  And you know what they say?  Beggars can’t be choosy.  Oh, and they run out before everyone is served.

Now everyone would rather have the steak, ribs, crab, lobster, etc.  But not everyone can afford $250 per plate.  Or wants to pay.  Some say it’s not fair.  But the people enjoying their steak aren’t complaining.  The line’s short.  And there’s plenty of food for them.  It’s just those who can’t or don’t want to pay the $250 per plate that complain.  Because they not only want something for free, they want something good as well.  But life doesn’t work that way.  Because everything costs.  And it’s just too expensive to give away steak, ribs, crab, lobster, etc.  But by selling these at a high price allows them to give away the macaroni and cheese to everyone else.  Which allows everyone to eat.  Until they run out.

As an interesting exercise, substitute ‘health care’ for ‘food’ in the above exercise.

The Free Market is most Efficient 

We can get a broad understanding of economics from this example.  In free market capitalism you can pretty much buy whatever you can afford.  Innovation and the profit incentive provide a lot of competition for your money.  Giving you a lot of choices.  There’s always a new company out there saying, “Hey, look at me!  Look at the new thing I have to sell!”  And if we like what we see we just may buy it.  Perhaps making another millionaire entrepreneur in the process.  While making our life better to boot.  Not too shabby.  This would be the ‘short’ line in our example.

Socialism is a command economy.  ‘Smart’ government bureaucrats direct the economy to maximize market efficiency.  And its objective is egalitarianism, not profits.  Because people should come before profits.  So the socialists decide who gets what resources and what prices should be.  Of course, when you do this, ultimately someone has to decide for the masses.  Because you can’t put 60 million people into a room and ask them what they want.  Sports cars or fuel efficient hybrids?  More tractor parts or more toilet paper and soap?  Grain crops used for food or fuel?  So not only do they decide how to do things more efficiently, they decide our choices for us as well.  This would be the ‘long’ line in our example.

In our example, the free market capitalists are happy.  And sleepy after eating a huge and delicious meal.  The socialists on the other hand are not so happy.  The food wasn’t that good.  And they had to ration it at the end of the day to feed everyone.  And yet they still ran out before everyone ate.  And this happened why?  Because it is the free market that is most efficient.  Not the command economy.  The free market is what fills up store shelves with things we want to buy at affordable prices.  Not the command market of socialism.  If you don’t believe me, talk to someone who lived in the Soviet Union.  Ask them what was on their store shelves.  They probably saw more tractor parts (which they didn’t want to buy) than toilet paper or soap (which they did want to buy).

Egalitarianism leads to Low Quality and Rationing

In theory, socialism sounds wonderful.  Egalitarianism.  Income redistribution.  From those according to ability to those according to need.  Sticking it to the rich.  What’s not to like about that?  I mean, if you’re not rich.  And that’s the catch.  Rich can be a relative term.  If someone has more money than you they’re rich and should pay more in taxes.  And those who make less than you will feel the same way about you.  Which, of course, you’ll probably reply by saying something like, “Hey, wait a minute.  I’m not rich.”  But anyone poorer than you would disagree.

So the middle class will only want to tax the ‘rich’ rich.  And the poor will all be for taxing the middle class and the rich.  Ultimately, though, because there are so many ‘poor’, you have to tax the middle class in any income redistribution scheme.  Because even though the middle class is far from being rich, they are far more numerous.  And the numbers add up. 

Besides being taxpayers, the middle class and rich also have something else in common.  Jobs.  The rich provide startup capital for new businesses.  That creates jobs.  And the middle class start up most small business.  And they, too, create jobs.  In fact, small business creates the majority of the jobs.  So high taxes on these people provide a disincentive to do what they do best.  Create.  Jobs.  And things people want to buy.  So higher taxes reduce incentive.  And this reduces economic output.  Less stuff on the market means higher prices.  Lower quality.  Or simply less stuff.

Some People are more Equal than Others

And this is why beggars can’t be choosy.  Egalitarianism sounds nice but there is only one way to achieve it.  You can’t give everyone steak.  It’s just too costly.  So you give everyone watery, lukewarm macaroni and cheese.  Everyone is equally miserable.  And hungry.  But you don’t complain.  Because it is either that.  Or nothing.  Unless you’re part of the inner circle.  The ruling elite.  For them there is always steak and lobster.  For it’s a small price to pay for all the selfless service they do giving us our egalitarian society.  They have a lot of stress in their life optimizing market efficiency.  So they need a little pick me up.  I mean, who could begrudge them fine steak and caviar after all they’ve done for us?

Socialism is not about market efficiency.  It’s about lowering quality (to make things cheaper).  And rationing.  So you can try to spread less stuff around to more people.  But taxing the creators raises costs.  And reduces economic output.  Which means there is less stuff to distribute to the people.  Which means they have to raise taxes to keep giving the people the same stuff.  Or reduce the quality further.  Or ration more.  It’s an endless downward spiral. 

And once you’re in the system, you are dependent on the system.  You beg and plead for less rationing and cuts but to no avail.  Sure, there’s enough steak for the ruling elite, but not for everyone else.  So there has to be fair-shared sacrifice.  By everyone.  Everyone that’s not in government, that is.  For in an egalitarian society, all people are equal.  Only some are more equal than others.  (A little George Orwell there.)

As an interesting exercise, substitute ‘health care’ for ‘food’ in the above exercise.

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FUNDAMENTAL TRUTH #39: “Socialism is easier said than done.” -Old Pithy

Posted by PITHOCRATES - November 9th, 2010

Capitalism vs. Socialism

Socialism as a political/economic theory is pretty involved.  With an involved history.  And if you’re suffering insomnia one night I recommend reading some of it with a glass of warm milk.  Should put you right to sleep.

Let me simplify it a bit.  To begin with, by ‘socialism’ I mean any form of collectivism (socialism, communism, fascism, statism, social democracy, etc.).  They’re all similar.  Just variations on a theme.  And they all suffer the same defects.  Three of which I summarize here:

  • Public (instead of private) ownership of the means of production, distribution, and exchange
  • Put the common good before individual wants or desires
  • Equality of outcomes

That’s not everything.  But it’s the 3 big reasons why socialism fails.  Basically, socialism is the opposite of capitalism.  In fact, socialism was created to defeat capitalism.  The East-West rivalry during the Cold War was the final showdown between the two systems.  And we know how that turned out.  (In case you don’t, capitalism won).

Public (instead of private) ownership of the means of production, distribution, and exchange

Mikhail Gorbachev asked the great Margaret Thatcher how she fed her people.  Her reply stunned him.  She did nothing.  The Soviet Union was struggling to feed her people with their socialist command economy.  And they couldn’t do it.  They who had great tracts of some of the most fertile farmland in the world.  And yet they still had to import grain from their arch nemesis.  The United States.  To keep famine at bay.  The free markets of capitalism didn’t have to struggle to feed her people, though.  The United States had food to spare.  And even though Great Britain is an island nation that had to import much of her food, there were no famine fears in Great Britain.  The socialist just couldn’t understand how that was possible.

One of the problems with socialism is that it ignores market forces.  And perverts the economic decision making process.  In a free market, market forces maximize the use of scarce resources that have alternative uses.  The market does this through the laws of supply and demand.  And prices.  Things high in demand but low in supply have high prices.  This ensures there is enough of that supply available for those who really need it.  Anyone who pushed a car to the gas pump during the gas shortages in the 1970s understands this.  When the Nixon administration kept prices artificially low, everyone bought and used gas until the supply ran out.  If we had let prices rise to their true market price, those who didn’t absolutely need gas would have cut back on their purchases, leaving gas available to those who really needed it and were willing to pay a high price for it.

When the state takes over the economy, politicians make economic decisions for political reasons.  They ignore the ‘invisible hand’ of the market place.  In the Soviet Union, the state boasted about its industrial output and filled stores with tractor parts no one wanted to buy.  Meanwhile, people stood in line for hours in hopes of buying soap or toilet paper.  And no matter how hard they tried they just couldn’t increase the yield of some of the world’s most fertile farmland.

Put the common good before individual wants or desires

Doing what’s best for the common good sounds noble.  And easy to do.  We all agree our children should be safe.  And should have enough to eat.  And that our schools should serve them breakfast each morning.  And teach them about contraception.  Well, okay, it’s not that easy to do.  Because different people want different things.  And different people think different things are better for the common good.

This is the problem of putting the common good before our individual wants or desires.  Few can agree on what the common good is.  We know our own wants and desires.  But we have no idea what other people want or desire.  Unless we ask them.  But does that even help in determining the common good?  Get a group of your friends and family together.  Make it at least 10 people.  Now get the ten of you to agree on a movie to see.  You know what will happen?  First of all, you’ll waste a lot of time saying, “I don’t care.  What do you want to see?”  Then people will start suggesting movies.  And for every one suggested, someone will vote it down.  This will go on until you finally arrive at a movie that no one wants to see.  But because it’s the movie everyone hates the least, everyone’s willing to settle for it.

Now imagine that little exercise with a thousand people.  The agreeing process will be even more difficult.  In fact, it may be impossible.  It is very unlikely that one thousand people will agree to anything.  And if they try they will waste an enormous amount of time in the process.  No.  Someone will have to decide for the group.  Someone will have to weigh everyone’s opinion and decide what is best for the common good. No matter how many people disagree with this one person’s decision.  F.A. Hayek wrote a book about this.  The Road to Serfdom.  He said socialism ends in dictatorship.  Because there’s no efficient means to determine what’s best for the common good.  He predicted this would happen in Germany with their creeping state socialism.  And Adolf Hitler proved him right.

Equality of Outcomes

If a business has a good year, they tend to be more generous at the holidays.  Let’s say a business owner wants to give out some Christmas bonuses to thank her employees for all their hard work.  She goes to her accountant.  Asks what’s the maximum she can give out without giving herself any cash-flow problems at the beginning of the new year (taxes, insurance, etc.).  The accountant crunches some numbers and says $50,000.  If she has 15 employees, that’s about $3,300 each.  Which should make for a pretty Merry Christmas.  Now, let’s say she has 125 employees.  That works out to a $400 bonus per employee.   Which won’t be quite as merry.

The lesson learned?  The more people included in the getting of something, the less each one gets.  And so it is with socialism.  The only way to get equality in outcomes is to give everyone less.  Sure, we can afford to give Congress people a Cadillac health insurance plan.  But we could never afford to give the same coverage to everyone.  To be able to give coverage to all the people, each person will have to get less.

And they will continue to get less.  As costs go up, it is difficult to maintain the same level of government benefits.  Eventually, they’ll have to raise taxes to cover the higher costs.  And when they can’t raise taxes anymore, they’ll have to reduce the amount of benefits.  Or, in other words, they’ll have to ration benefits.  A bureaucrat will have to decide who should get what.  Which could easily turn health care into politics.  A political opponent needs an expensive cancer treatment?  So sorry.  We’ve already reached our quota this year.  Try again next year.

Socialism is Slavery

What it comes down to is this; socialism really fails for one reason.  It goes against human nature.  It only works when we sacrifice our wants and desires so that others may have their wants and desires.  It’s not trying to keep up with the Jones.  It’s helping the Jones get ahead of you.  It’s living your life to serve others.  And there’s another word for that.  Slavery.  Hence the title of Hayek’s book.  The Road to Serfdom.  For socialism to work, the state must become a dictatorship.  And we must become its slaves.  But few willingly volunteer for servitude.  So, given the choice, we will ultimately choose to make socialism fail.

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FUNDAMENTAL TRUTH #11: “Before you condemn capitalism, imagine a world without professional sports, movies, cell phones and tampons.” -Old Pithy

Posted by PITHOCRATES - April 27th, 2010

PEOPLE HAVE SOME strong opinions about capitalism.  Both good and bad.  So what is it?  What is capitalism?

Merriman Webster OnLine defines it as:

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.

To explain this let’s start by explaining what it replaced.  In fact, let’s go further back.  A few hundred years when life truly sucked by our standards.  During the Middle Ages, people barely lived.  People worked very hard and had little time off.  When they did they usually spent it sleeping, being sick, dying or being dead.  You grew or killed what you ate.  You built your own house.  You made your own clothes.  You died probably no further than a short walk from where you were born.  And you worked your whole life somewhere in between.

Think of peasant or serf.  That’s what most were.  Tied to the land.  You had no choices.  If you were born on the land you worked the land.  Until you died.  The land owned you and someone owned the land.  You worked the land at the grace of the owner.  You helped produce his food and, in return, he let you have a small parcel of land to grow your food.  There was a bond of loyalty between landlord and tenant.  Land and protection in exchange for backbreaking, never-ending labor.  Doesn’t sound good until you consider the alternative.  Death by famine.  Or death by murder at the hands of roving bands of outlaws.

Improvements in farming led to more food production.  Eventually, there were food surpluses.  This meant not everyone had to farm.  Some could do other things.  And did.  They became specialists.  Artisans.  Craftsmen.  Cities grew in response to commerce.  People went to market to trade for things they wanted.  Then they started using money, which made getting the things they wanted easier (it’s easier to go to the market with a coin purse than with a sack of grain or a side of beef).  Life got better.  People enjoyed some of it.

THUS BEGAN THE rise of a middle class.  Those city folk making things or doing something.  They were good at what they did and people gladly paid for what they did.  These specialists then improved what they did and thought of new things to do.  They created things to make their work easier.  These individual specialists grew into manufacturing shops.  The cost of production only limited their output.  And banking solved that problem.

Alexander Hamilton, one of America’s Founding Fathers, was a capitalist.  And he thought big.  Money is nice but what can it get you?  A few things for the home?  Something for the wife?  Maybe some new farm tools.  Good stuff, yes, but nothing big.  Lots of little sums of money all over the place can buy lots of little things.  But when you pool lots of little sums of money you get one big-ass pile of it.  That money is now capital.  And you can do big things with it.

And that’s what banking has given us.  People with ideas, entrepreneurs, could now borrow money to bring their ideas to market.  And this is, in a nutshell, capitalism.  The free flow of ideas and capital to make life better.  Making life better wasn’t necessarily the objective; it’s just the natural consequence of people mutually partaking in a free market.

BUT WHAT ABOUT the Soviet Union?  Didn’t they do big things, too?  They built jetliners.  They had a space program.  They had factories.  They did these and other things without capitalism.  They did these things for the good of the people, not for profits.  Isn’t that better?

Talk to someone who wiped their ass with Soviet-era toilet paper.  Let me save you the trouble.  It didn’t feel good.  Unless you enjoy the feel of sandpaper back there.  And to add insult to injury, you had to wait in line to get that toilet paper.  If it was available.

When you think of the Soviet economy you have to think of stores with empty shelves and warehouses full of stuff no one wants.  This is what a command economy does for you.  Some bureaucrat, not the consumer, determines what to sell.  And one person simply cannot figure out what a hundred million plus want.  To get an idea of how difficult this is, pick a movie that 4 of your friends would love to see.  Pick a couple of guys and a couple of girls.  For diversity.  And remove the possibility of sex completely from the equation.  Now pick.  Not so easy, is it?  Now try to pick a movie a hundred million people would love to see.  Can’t do it, can you?  No one can.  Because people are diverse.  One size doesn’t fit all.

Soviet president Mikhail Gorbachev asked Margaret Thatcher how she made sure her people had enough food to eat.  The Soviets were having difficulty feeding theirs.  In fact, they were importing grain from their archenemy.  The United States.  The answer to Gorbachev’s answer was that Thatcher did nothing to feed her people.  The free market fed her people.  Capitalism.

As far as those other big things the Soviets did, they acquired a lot of the knowledge to do those things through an elaborate network of espionage.  They stole technology and copied it.  And they were the first into space because their captured Nazi rocket scientists did it before our captured Nazi rocket scientists did.  (The seed of the space industry was the Nazi V-2 rocket that reigned terror on London and other cities during World War II).

(Lest you think that I’m ripping on the Soviet/Russian people, I’m not.  Just their economic system during the Soviet era.  Their people have suffered.  And persevered.  It was them after all who first threw back Napoleon in Europe.  And it was them who first threw back the Nazis in Europe.  They gave us Pyotr Ilyich Tchaikovsky, Sergei Rachmaninoff, Leo Tolstoy, Fyodor Dostoyevsky, Mikhail Dolivo-Dobrovolsky and, of course, Maria Sharapova to name just a few of the greats.  Good people.  Just sometimes bad government.  As in most nations.  Even in the U.S.)

SO WHAT IS the basic difference between capitalism and a command economy like that of the former Soviet Union?  Probably the freedom to take and accept risk.  Bankers take a risk in loaning money.  They analyze the risk.  If the return on the loan is greater than the risk, they’ll make the loan.  It’s their call.  And they’re pretty good.  Their successes are far greater than their failures.

Some loans are riskier than others.  There’s a greater chance of failure.  But it could also be the next, say, Microsoft.  Or Apple.  If so, even though there’s great risk, the potential of reward is so great that people will want to loan money.  They’ll buy junk bonds (high risk/high yield) or an initial public offering of stock.  They’ll risk their money for a greater return on their investment.  If it pays off.  And they don’t always do.  But good ideas with potential typically find financing.  And investors typically make more money than they lose.  It’s a pretty good system.  Capitalism.

WHEN YOU HAVE risk takers who choose to participate in the free flow of ideas and capital, great things happen.  Modern AC electrical power that we take for granted is invented (thank you Nikola Tesla for the genius and George Westinghouse for taking the risk).  You develop modern commercial jet aviation (thank you Boeing for the 707, 727, 737, 747, well, you get the picture).  You transform the world when you add impurities to semiconducting material and sandwich them together (thank you John Bardeen, Walter H. Brattain and William B. Shockley for the transistor).

These great things, along with others, give us professional sports (stadiums, transportation to and from the stadium, jetliners to take teams to other stadiums, oil exploration and refining for jet and car fuel, etc.).  They give us movies (financing, cameras and production equipment, special effects, theaters, popcorn, DVDs for home viewing, etc.).  They give us cell phones (cellular towers, switching networks, compact and long lasting batteries, interactive handheld devices, voicemail, email, texting, etc.).  And they liberated women to do whatever they want wherever they want by making feminine hygiene protection portable and plentiful (mass production, rail and truck transport, retail and vending outlets, etc.) and by providing convenient privacy (public toilet facilities with vending machines and disposal bins). 

Imagine any of these things provided by the same people who renew our driver’s license.  Do you think any of it would be as good?  Or do you think it would be more like Soviet-era life?  There’s so much we take for granted in capitalism because we can.  It’s a system that works on basic human nature.  It doesn’t require sacrifice.  It doesn’t depend on consensus.  It just needs the free flow of ideas and capital.  And great things follow.

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