Why Capitalism Has A Bad Reputation

One of our readers forwarded me an article the other day which I think is worth discussing because it raises some very interesting questions. The article was written by Charles Murray of the American Enterprise Institute and it discusses why capitalism has such a dirty reputation at the moment. He makes some excellent points, but I think he’s missing something crucial.

Murray begins by noting that capitalism should be praised all over the world because it’s lifted the world out of poverty. He notes that everywhere capitalism takes hold, countries become prosperous, and all that entails, but wherever capitalism has been rejected, poverty has increased. So why has the word “capitalist. . . become an accusation” and why do so many people now believe that for one person to become rich, someone else must become poor?

According to Murray, there are two problems with modern capitalism. The first problem is what he calls “collusive capitalism.” This is crony capitalism where “the people on top take care of each other at shareholder expense.” He speaks specifically of golden parachutes. He also points out that crony-capitalists use the government to create “industry wide potential for profit that would not exist in the absence of government subsidies or regulations.” Here he mentions ethanol and low-interest mortgage loans. And he notes that this has become the face of capitalism.

The second problem he observes is the “emergence of great fortunes made quickly in the financial markets.” He notes that while the American public loves people who get rich creating products and services, too much wealth today seems to be generated by “insider knowledge [in the financial markets], arcane financial instruments, [and] opportunities that aren’t accessible to ordinary people.” He also notes that part of the problem is that these modern capitalists, particularly bankers and silicon-valley types, are unwilling to defend capitalism because their political views tend to be leftist -- he gets this from a zip code study.

I think Murray is right, but I also think he’s missing something even more fundamental. See, I’m the perfect example of what Murray has missed. I love capitalism, but I despise most modern “capitalists.” And the reason is they aren’t capitalists. To the contrary, the people wrapping themselves in the cloak of capitalism are anti-capitalists.

Capitalism is about seeing an opportunity. . . a want or need. . . and risking your time, money and energy to try to satisfy the need in exchange for some amount of profit. If you are successful, then the seller and the buyer are happy and everyone benefits. If you aren’t, then you lose your investment. It’s that simple. And it’s the fact that everyone ends up better off that makes us all so happy to love capitalists.

But think about the people getting rich today: bankers, lawyers, health insurers, etc. Look closely. Do these people actually take risks? Do they make anyone besides themselves better off? Hardly.

Consider bankers. The country’s biggest banks dominate the economy. They make risky loans which are backed by the taxpayer. They can draw upon money from the Fed at any time, where they get much better deals that you or I ever could, and they were even allowed to swallow savings banks so they would have a steady supply of cash. . . again, taxpayer backed. Essentially, these are risk-free operations, only they get to keep all the profits they generate. That’s like forcing taxpayers to back people playing roulette.

Moreover, a lot of these banks make a killing on trading in the stock market. Only, they aren’t trading like you or I. They are engaging in rigged markets and microtrades – this is a key point. The economic justification for a stock market is that it is the most efficient allocator of resources. Basically, as millions of people make their guesses about the future, resources slowly shift from companies who are wasting them to companies who can exploit them. But when Goldman Sachs or Morgan Stanley engage in microtrades, what they are doing is spotting the trades people are offering and using their much faster computers (a privilege for which they paid the stock exchanges) to basically intercept the trades. This does nothing to further the allocation of resources, it’s just playing the float. That means, what they do is outside the very economic purpose of the stock market and is more akin to unnecessary middlemen.

And that’s the key word – middlemen. Observe.

Lawyers claim they help the economy because they structure deals. But the reality is that anyone could structure any deal if it weren’t for the legal climate created by lawyers. Think of it this way. It’s as if a food grower’s association took over the legislature and then passed laws requiring you to have a food grower’s agent before you could order off the menu. Then they defend their actions by claiming they are making the menu ordering process smoother. That’s lawyers in a nutshell.

What about health insurers? (Notice that I’m not mentioning other forms of insurance, which remain distinctly capitalist and which no one hates.) Rather than insuring patients to protect them against loss, these companies have become buyer’s agents. And through their regulator friends, they have set up the system in such a way that you basically need them to navigate the system for you or you will be broke. Again, imagine going to McDonalds and not being told what things will cost until you get home again and then being charged an obscenely high price because you didn’t have a food grower’s agent to smooth the process.

This is the problem. These people hide their sponging behind the word “capitalism” when they are the exact opposite – they are extortionists who have used the government to forcibly create an environment that allows them to act as mandatory middle men. They take no risks. They share no rewards. And everyone is worse off because of them, not better off.

This is why capitalism has such a bad name at the moment. This is why 66% of Americans believe crony connections drive most government contracts, why “by a 3-1 margin, voters believe elected politicians routinely provide help to favored companies,” and why “seven out of ten Americans believe government and big business work together against the rest of us.” This is also why the American economy has stalled and why so much more money is flowing into the banking, the legal and the healthcare sector. They have become giant vacuums sucking up American prosperity.

This needs to change. It’s time for a return to capitalism.