Joseph Schumpeter is one of the most influential economists of the 20th century. He was, in 1919, Austria’s finance minister and from 1932 to his death in 1950, a professor at Harvard. From the time he was 23 until his death at 67, he published 36 books.
One of them , Capitalism, Socialism, and Democracy, published in 1942 included two important observations.
“Unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest,”
“For such an atmosphere [of social hostility to capitalism] to develop it is necessary that there be groups whose interest it is to work up and organize resentment, to nurse it, to voice it and to lead it.”
Simply put, there will arise a class of people whose role is to attack capitalism
How familiar is that.
The recent election of Alexandria Ocasio-Cortez in New York is an example of how capitalism allows and creates its oppressors. Bernie Sanders, Justin Trudeau, Pierre Trudeau, Barack Obama, the UN, and San Francisco city politicians, come to mind.
It is important to notice the permission they have to act as they do.
What economics is about
Economics is the study of how society allocates scarce resources. Capitalism is not a political system, it is a way to carry out economic allocation. Those who contribute most, receive most. By this simple fundamental, great wealth is created because people deliver great value and are incented to do so.
Prior to capitalism, wealth grew slowly and making even enough to live was both difficult and tedious. Child labour was common because a family could not feed and shelter itself without their help. Abject poverty was the normal condition as recently as the early 19th century. As capitalism gradually gained a place, such poverty became much less common. Wealth sufficient to live and have opportunity, became the norm. Today, abject poverty is the lot of fewer than 15% of the people of earth as opposed to more than 85% in 1800.
Follow the purpose
Some see distribution of wealth as the primary factor, while others see creation as paramount.
The wealth of capitalism allows those who most value distribution to exist. If everyone still worked seventy hours a week to provide for themselves, there would be fewer rallies about the evils of wealth. As Schumpeter pointed out, wealth is a requirement for those “groups whose interest it is to work up and organize resentment, to nurse it, to voice it and to lead it.”
Similarly, unchecked capitalism cannot exist. We can recall a time when businesses obliterated the environment and abused people.
There must be a joining of interests.
Merging creation and distribution
You cannot distribute that what does not exist and the “educated elites” create no tangible wealth. Socialism is for that reason a self-defeating concept. It lacks a wealth creating incentive.
Governments and capitalist enterprises are less effective when working apart and profoundly useful when working together. The roles become:
Governments to regulate business in the interests of society as a whole and to provide some share of unearned wealth to those who cannot survive without it.
Business to create wealth within that labyrinth of rules and practices.
The trick is to decide where lies the boundary between those interests.
When must distribution be subservient to creation? Government must recognize that business needs an environment where incentives are maximal and regulation minimal.
When must capitalism be subservient to the reasonable needs of society? Capitalism must recognize the value of a wealthier and safer group of consumers and workers.
Not an easy problem. It is certainly one where honest, well-intentioned people might disagree. More seriously, the common ground changes with time and circumstances.
The Laffer approach
We should aim for a world that optimizes the interaction of our needs, skills and resources. Rather like Arthur Laffer’s approach to an optimal tax rate. Beyond a point a higher rate raises less money.
Tax revenue is a function of two things. Rate and the base to which it applies. The distribution/creation problem is similar. How far can you push distribution and regulation without reducing output? Are you willing to pay the price to reduce some output for a greater societal good?
Defining the boundary will not create a perfect world because the world has many conflicting interests. We know with certainty though, attacking the problem from a single variable position loses. You must see and understand both sides to create optimal.
We should settle for optimized, but imperfect. The same rule applies in personal finance.
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