Modern Economic Conundrum


Figure 1.--This 1930 photo was captioned "Boy at window of house waiting for his father to come home with something to eat." We do not who took the photograph. One of the problems associated with capitalism is periodic econmic downturns. Not often mentioined is the fact that government intervention in the economy has often as in the Great Depression of the 1930s been responsible for turning these downturns from recessions to depressions. The conundrum of modern economics is that expanding social welfare systems in the West designed to ensure affluent lives are undermining the private capitalist sector that is needed to finance the 'social justice' programs promoted by socialist politicians.

Western countries today face a major conundrum. Socialist welfare systems and the generous benefits paid have now not only reached unsustainable levels, but are undermining the viability of the productive private sector needed to support them. Capitalism has clearly been shown as the economic system which creates and generates wealth. All of the modern states with high living standards had capitalist economies which generated that wealth. No country has created a prosperous economy with a socialist economy. The prosperous countries all include the countries of Western Europe, North America, and Japan, as well as the Asian Tigers. Capitalism in ease case is how these countries developed both high living standards and democratic systems. Developing countries in Africa and Asia that employed socialist policies during the de-colonization process are now mostly poorer than they were as European colonies. The attempt to associate capitalism with poverty is absurd. Capitalism generates wealth and is the source of wealth around the world. Some countries generate wealth by exporting oil and mineral resporces (Russia, Saudi Arabia, Venezuela, and other countries), but it is capitalist sectors that generate sustainable wealth around the world. Countries with economies based on state-owned enterprises (Cuba, North Korea, and Vietnam) are without exception poor countries. Now it is true that there are two major problems associated with capitalism. First, there are variations in wealth distribution. Second there are business cycles which included periodic down turns that cause economic distress. An important note here is that government intervention in the economy has resulted in turning downturs into serious economic crises. Because of these elements of capitalism, two socialist alternatives developed--totalitarian communism and democratic socialism. All of the countries which implemented totalitarian communism (the Soviet Union, Soviet Eastern European satellites, China, North Korea, Cuba, Vietnam, and others) all with out exception had failed economies using police state methods to force their populations to live at very low levels. Another alternative has been the democratic socialism of Western Europe. Gradually the Western European countries adopted a series of often costly socialist reforms like nationl health care and high benefit old age retirement systems and placeing increasing restrictions and controls on private business. Socialist politicians win elections by promising the populations higher benefits. Conservatives questioning the cost of these programs are called mean and uncaring, Britain's Primeminister Thatcher warned that 'Socialism is fine until they run out of other people's mondey to give away.' That is now coming to fruition in the European Union with countries on the perifery going bankrupt (Greece, Ireland, and Portugal) and major countries (Britain and France) having to curtail social benefits to prevent nationl bankruptsy and this is only the beginning of the crisis the EU faces. Other countries (Belgium, Italy, and Spain) have unsustainable welfare systems. The United States faces a similar problem with expanding Federal social welfare entitlements and free spending states (especially California, Illinois, Michigan, and New York) facing bankruptsy. The economic condundrum is nor only are the benefits offered and expanded public employee sector unsustainable, but they reduce the incentives to work in the productive private sector. A basic law of economics is people respond to incentives. If you pay people not to work you will get people working less. And if you tax investors more you will get less job creating investments. All this and other 'social justice' policies undermines the efficency of the private sector needed to finace all the social benefits.

Capitalism: Generating Weath

Western countries today face a major conundrum. Socialist welfare systems and the generous benefits paid have now not only reached unsustainable levels, but are undermining the viability of the productive private sector needed to support them. Capitalism has clearly been shown as the economic system which creates and generates wealth. All of the modern states with high living standards had capitalist economies which generated that wealth. No country has created a prosperous economy with a socialist economy. The prosperous countries all include the countries of Western Europe, North America, and Japan, as well as the Asian Tigers. Capitalism in ease case is how these countries developed both high living standards and democratic systems. Developing countries in Africa and Asia that employed socialist policies during the de-colonization process are now incredibly mostly poorer than they were as European colonies. The attempt to associate capitalism with poverty is absurd. Capitalism generates wealth and is the source of wealth around the world. Some countries generate wealth by exporting oil and mineral resporces (Russia, Saudi Arabia, Venezuela, and other countries), but it is only capitalist sectors that generate sustainable wealth around the world. Countries with economies based on state-owned enterprises (Cuba, North Korea, and Vietnam) are without exception not only poor countries, but among the absolute poorest counries in the workld. The most striking illustration of the wealth generating potential of capitalism is what happened in China and India after free market, capitalist policies were introduced. The reason that capitalism generates wealth is thast capitalism is essentially economic freedom and unleashed the talents and abikities of the individual. And as individuals suceed and prosper so does the nation as a whole.

Problems with Capitalism

Now it is true that there are two major problems associated with capitalism. First, there are variations in wealth distribution. And as people are freed to pursue their capabilities, a wealth gap is likely to widen even as people at all points of the economic spectrum become more wealthy. For example there is a widen weaklth gap between the rich and poor in America. But even the poor in America are often more affluent than the well-to-do in countries like Cuba and North Korea. The wealth gap was an especially severe problem in the 19th century before Progressive legilation was enacted like child labor laws and compulsory school attendance laws. Notably, the countries able to pass this legislation were the wealthy countries where capitalism generated the wealth needed to pay for the costs. Poorer pre-capitalist countries could not afford such laws. Second there are business cycles which included periodic down turns that cause economic distress. These down turns include both recessions and more rarely depressions. An important note here is that government intervention in the economy has resulted in turning downturns into serious economic crises.

Socialist Alternatives

Because of problems assocuated with capitalism, two socialist alternatives developed--totalitarian communism and democratic socialism. All of the countries which implemented totalitarian communism (the Soviet Union, Soviet Eastern European satellites, China, North Korea, Cuba, Vietnam, and others) all with out exception had failed economies using police state methods to force their populations to live at very low levels. Another alternative has been the democratic socialism of Western Europe. Gradually the Western European countries adopted a series of often costly socialist reforms like nationl health care and high benefit old age retirement systems and placeing increasing restrictions and controls on private business. Socialist politicians win elections by promising the populations higher benefits. Conservatives questioning the cost of these programs are called mean and uncaring, Britain's Primeminister Thatcher warned that 'Socialism is fine until they run out of other people's mondey to give away.' That is now coming to fruition in the European Union with countries on the perifery going bankrupt (Greece, Ireland, and Portugal) and major countries (Britain and France) having to curtail social benefits to prevent nationl bankruptsy and this is only the beginning of the crisis the EU faces. Other countries (Belgium, Italy, and Spain) have unsustainable welfare systems. The United States faces a similar problem with expanding Federal social welfare entitlements and free spending states (especially California, Illinois, Michigan, and New York) facing bankruptsy. Interestingly, the Tea Party Mopvenent has risen in America to promote more fiscally responsible government policies, but nothing of the kind has occurred in Europe.

Economic Laws

The economic condundrum is not only are the benefits offered an expanded public employee sector unsustainable, but they reduce the incentives to work in the productive private sector. A basic law of economics is people respond to incentives. If you pay people not to work you will get people working less. And if you tax investors more you will get less growth and job creating investments. All this and other 'social justice' policies undermines the efficency of the private sector needed to finace all the social benefits.

Human Needs

We have been struck with a comment made by a an American TV talk host on CNBC (I think it was Joe Scarborough). He said that the trouble with Obama care was that it did not go far enough. He wanted a single payer system operated by the government like many European countries have. He justified this opinion because as he said, 'health care is a basic human need' (2011). CNBC for several months ran this clip, stressing the basic human need argument. Of course this sounds nice. We all want people to have quality health care. The problem with this argument, however, is that 1) health care is not the only basic human need and 2) the state providing these needs is the least efficient approach. Health care is not even the most umportant basic need. Other basic needs are food, housing, decent clohes, and fuel for heating. Now using Scarborough's argument. All these basic should be provided by the government because they are basic human needs. Actually this is not a novel idea, it is a classic Marxist doctrine. Karl Marx wrote, "In a higher phase of communist society, after the enslaving subordination of the individual to the division of labor, and therewith also the antithesis between mental and physical labor, has vanished; after labor has become not only a means of life but life's prime want; after the productive forces have also increased with the all-around development of the individual, and all the springs of co-operative wealth flow more abundantly—only then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banners: From each according to his ability, to each according to his needs." [Marx] And we do not have to test in America. This approach has been attempted in the Soviet Union, Eastern European, sattelite countries, China (before free market reforms), North Korea, Vietnam, and Cuba. And the results were all the same, economic failure. None of the countries were successful economically, many were economic disasters. There were a variety of factors involved as all of these countries were different. But the basic economic principle is clear. If the state provides individual basic needs, there is less incentive to work. And if rewards are based on needs rather than accomplistments, there is less innovation and the society as a whole is less productive and less wealthy. As a result, capitalist countries have royinely more effectively fulfilled basic human needs than Communist countries with socialist economies. This dynamic is now playing out in Venezuela when people find hospitals without medicines and food stores with empty shelves.

Sources

Marx, Karl. "Critique of the Gotha Program". (1875).









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Created: 4:56 AM 12/16/2010
Last updated: 4:56 AM 12/16/2010