MYTHS OF CAPITALISM / GOVERNMENT

The business cycle results in occasional recessions.

Capitalism has three states of development: Rural, Transitional and the Complex State.  These various states have to do with the division of labor (Number of different job types in simple terms).  In the Transitional State, capitalism is unstable and there are lots of ups and downs.  As jobs become more diverse, the economy becomes more stable.  What we are encountering now (2008-2009) is a government inflicted cycle. As government imposes its will on the private sector the economy becomes unbalanced.  The unbalancing places the private sector in constant turmoil as it assimilates higher taxes and new government programs. When Federal, state and local governments have a substantial and simultaneous impact, the economy enters into a crisis (recessionary) state.

Capitalism is why the rich get richer and the poor get poorer.
Big government is why the rich get richer and the poor to get poorer.  Has there ever been a government program that didn’t make someone rich.  In the private sector when we make things a little more efficiently our total productivity and the number of goods for sale goes up.  In other words life gets a little better.  When Ford brought the assembly line to the auto industry millions of people were able to buy cars and life got a lot better and the workers on the assembly line were some of the best paid workers in industry.  That’s what efficiency does for us, it lesson’s our burden and improves our lifestyle. 

When government passes a regulation it makes things less efficient or adds to our burden.  Big government makes us poorer and reduces our lifestyle.

We depend on the rich for our jobs.
It is just the opposite.  The rich and the entrepreneurs among the rest of us depend on a good supply of skilled and unskilled people to do the work on which we both profit. 

Capitalism is unfair because of the unequal distribution of goods and services
Socialists, socialist followers and just plain freeloaders attach themselves to the successes of an economy and use “fairness” as an excuse to take from the people who contribute to the production of food, clothing, entertainment, and etc., to support people who do very little or nothing to contribute.  Everyone who is not in a productive job must be supported by those who produce.  It doesn’t mean that people not working don’t deserve what they get, but it shouldn’t mean that someone who doesn’t contribute or who hasn’t contributed in a productive manner deserves special treatment because it “isn’t fair.” 

Think of the whole country as a small community wherein the people in the community must provide everything for the community.  The more people in that community that work, the more everyone has to consume.  When certain people are given the privilege of getting but not working, it is only human nature to take what is free.

Capitalist have all the wealth and should share their wealth
Capitalism is the best way to spread wealth by creating wealth.  Everyone has an opportunity to create wealth and as we create wealth we spread the wealth.  Wealth only exists in a society that allows each citizen to own, trade and sell their positions, otherwise, what value is something someone else can just take?

Capitalism is subject to recessions and depressions
The economy is far too complex to be subject to the severe recessions and depressions of the last century which is why recoveries have lasted so long and recessions have become “soft landings.”  Capitalism has gone through stable to unstable and now to a stable phase.  Why?  First imagine what it was like when the world was a rural community.  Individuals had multiple skills and could depend on themselves for their existence.  It was very stable except for all the wars and etc.  As capitalism progressed, it became very unstable as an individual’s skills became limited.  With invention came devices that had the potential of suddenly affecting a lot of workers who worked a single trade.  And, the market was fickle.  A popular gadget that employed a lot of people could become passé or too many manufacturers might clutter the market with a once profitable good resulting in layoffs that likely affected other businesses... 

Things have changed.  Today in the 21st Century no one seems to have the same occupation and there are so many goods to choose from that any one could disappear and no one would notice.  We now live in a “Complex Economy” having gone from Rural (stable) to a Transitional (unstable) to a complex (stable) economy. 

The key here is the Economics of Labor and not the economy in general.  Where once we had workers with multiple skills in the rural stage we made a transition into a period where individuals had very specific skills and their ability to support themselves was highly dependent on that skill. In our Complex Economy workers have multiple skills in industries and businesses that are as varied as sand.  We are no longer dependent on the success of the economy as a whole but rather on our ability to perform a job successfully.  Should our business or we fail or should invention cause layoffs, other opportunities are already waiting. 

There is of course a problem.  Government taxes and regulation has taken too many workers from the productive workforce, to fulfill government demands. This is making us to dependent on imports and vulnerable to currency devaluations.  We see symptoms of this in the constantly widening foreign trade deficit.  Practically everything we pick up at the store these days has a foreign label on it and should our trading partners decide that they have too many dollars and turn their resources inward, high inflation could drive our country into a depression.

The economy is growing and everybody is better off.
Between 1972 and 1992 almost everyone lost earnings.  Excepted group included those with more than 5 years of college which, not surprisingly, would include attorneys and college professors.  Government spending and regulation grew significantly during that period, so that is where we should look for an explanation.  This was a period when inflation was very high and most government employees got raises to compensate for the inflation.  This seems reasonable until we realize that the average worker was actually losing their incomes and that government was placing significant demands on the private sector.  Politicians realized in the early 1980s that raising taxes was out of the questions so instead laws were passed that put the politicians’ desires on the backs of business.  In essence, employees were shifted out of productive jobs toward meeting government demands while government taxes and deficit spending increased to compensate the public workforce.  Since the number of productive workers affects the productivity of a country, it would seem inevitable that someone was going to pay and indeed the private sector suffered. 

One of the reasons businesses have gone to foreign manufactures is that these added government costs make many businesses unprofitable.  So while many goods today are cheaper then 20 years ago despite inflation, the average worker has been forced to take pay cuts... 

PS  It was the less educated individuals who lost the most income.  These are the people for whom government directed the most benefits.  The rich have gotten richer and the poor poorer, because of government not in spite of it.

Raising the minimum wage is at odds with capitalism.
It is just the opposite.  The idea of keeping the minimum wage low is more socialist or communist whose philosophies argue that one goal of government is to create jobs.  Keeping a low minimum wages would accomplish that task, however, it would only encourage low skilled jobs. Government’s responsibility should be to find ways to expand the availability of individuals and skills to the market, not creating jobs. 

Raising the minimum wage would encourage the private sector to replace humans’ with machines thereby making the market more efficient and providing labor to the market.  Long term, efficient devices are several times cheaper than humans but many businesses, especially small ones, are reluctant to make the purchase when cheap labor is available. 

The contrary argument is that if raising the minimum wage is good, why not raise the minimum by an outrageous amount, like say up to $20.  This is an argument of extremes and there are mile posts to signal when best to raise the minimum.  Looking at this from that standpoint, however, suppose you were a student entering high school.  That individual would look at two things.  One, when he/she got out of high school he/she can get a great job.  Two, he/she had better prepare for that job by getting a good education and even considering college.  Businesses, of course, would also be more interested in job training to bring skill levels up to justify wages.

There are allowances that could be made such as having a lower minimum wage for those under 18, in depressed areas or where unemployment is high.  A universal fix is not always a good idea.

Capitalism is unfair and socialism is a good way to spread the wealth and make it fair.
You can’t take from the rich and give to the poor because wealth is only a reflection of a productive community that gives a value to productivity.  Neither socialism nor communism value wealth, so you can’t spread what isn’t there.  Quite simply, you can destroy wealth, but you cannot spread wealth through government taxation. 

Socialists simply attach themselves to a capitalist economy and use “fairness” as an excuse to make people who really contribute to a countries food, clothing, and etc., to support people who do very little or nothing to contribute.  Everyone not in a productive job must be supported by those who are.  It doesn’t mean that people not working don’t deserve what they get, but it shouldn’t mean that someone who doesn’t contribute or who hasn’t contributed in a productive manner deserves special treatment just because it isn’t fair. 

Think of the whole country as a small community wherein the people in the community must provide everything for the community.  The more people in that community that work and the more incentive people have to be more productive, the more everyone will have to share.  When people are given the privilege of getting but not working, it is only human nature to take what is free.

Capitalism is the best way to spread wealth.  Everyone has an opportunity to create wealth and to share in it through investment.  Wealth is spread through creation.

Capitalism is a philosophy.
The apple that falls from the tree cannot defy the laws of gravity.  As with all scientific laws, the laws of economics are natural laws and capitalism, conceived in freedom, is the result of applying the natural laws of economics.  When humankind has unfettered freedom, these laws will guide civilization toward the most efficient means for the production, distribution and consumption of goods.  It is in an individual’s interest to act in the most productive manner so as to create the greatest benefit for himself/herself and in so doing to be the most productive for the community.  Capitalism is a system that evolves because of freedom. 

As mankind may act in defiance of the laws of gravity, government often acts in defiance of the natural laws of economics.  If politicians were to have as complete an understanding of the economic laws as rocket scientists have of gravity, government would be less likely to create the unintended consequences present in so many laws.  For example, in the late 1960s and up to the mid 1980s tax laws persuaded investors to build billions of dollars of unnecessary apartments and commercial buildings.  The result was that many industries went lacking for investment and the labor needed to meet growing demands with resultant high inflation.

Government can act to preserve long term benefits of capitalism by preserving the environment and natural resources, reducing unintended consequences and to enhance the advantages of capitalism by providing or encouraging education.  Government can also act on concerns generated by a free society.   For example, government can provide limited protections for the working population during periods of unemployment or social security at retirement.  Such protections should not restrict employers from hiring or firing nor should employees be inhibited from quitting or seeking other employment. 

Theses natural economic laws should also be applied by government to eliminate its own waste and the wasteful spending in the general economy.  Philosophical concepts are contrived and subject to cultural, religious, administrative and governmental whims, economic laws are not so easily maneuvered.

Capitalists destroy the environment.
It isn’t a myth it is true.  Capitalism can and will if not controlled destroy anything that is in the way of production or distribution of a valuable commodity, but, then so too will a hungry people. When capitalist seek the most efficient means of production concerns for the environment can be totally disregarded.  Capitalist concepts can, however, be used to preserve our environment.  For example, poachers will destroy wild animals unto the last one, but if it is in the financial interest of the inhabitants of an area to preserve the animals for hunting, locals will protect them. 

Capitalism creates the means to preserve the environment. Rich capitalist are often responsible for setting aside environmentally important areas, preserving natural sites or preserving natural habitat.  When art has no value, there is no need to preserve it.  When given a value, all manner of incidentals will be put away.  Given a preference between two evils a well developed civilization is more likely to preserve and protect not only the environment, but everything in it or produced by it.

In a capitalist economy a strong government is needed to protect people from discrimination.
Governments, cultures, religions and philosophies have often existed for the sole purpose of discrimination against alternative cultures, races or religions.  People discriminate, natural laws do not.  A capitalist will only discriminate when it is in his financial interests to do so because of governmental, cultural or religious reasons. 

Natural laws of economics dictate that the most capable will be the most productive and that profits can be earned from whoever has the ability to make the necessary payment.  In sports athletes were selected despite popular discrimination because the athlete was better at what he did than anyone else.  In entertainment black individuals were hired because it was profitable to do so, while those same individuals weren’t allowed to sleep or dine in the same quarters as whites.  In the nothern US manufacturers hired people regardless of race, creed or color and yet communities for each were often separated.  Discrimination in the north was not as obvious as in the south because businesses accepted customers of all races.  It did exist, however, in the beliefs, actions and words. 

Capitalism had more to do with ending discrimination because it put people together. Other than ending slavery, business has done more than government to reduce discrimination. 

Capitalists do what they do because of greed.
It is quite possibly true; however, there are a lot of other reasons.  For example, capitalists like artists often work long hours and act out of craving to create something different and yet both have to make a living.  For whatever the reason the capitalists do what they do, they must produce in far greater amounts than they are capable of consuming.  Big corporation do not get rich selling to the rich.  Their interest is in the creation of a product that will sell to millions. 

Capitalist benefit by finding less costly ways to produce and they can profit by doing so.  But a capitalist system only exists if there is competition and the benefits of higher profits eventually melt into a lower price which then allows the millions of consumers the ability to make other purchases.  Long live the greedy may they be ever more so.  It is government’s job to be sure that greed is not translated into illegal acts while at the same time government must maintain competition not to punish capitalism for perceived greed..

Government acts in the interest of the population.
When government enacts laws in opposition to natural economic laws the economy moves in a direction that is unnatural.   When politicians enact incentives for one type of business, the resultant extra flow of resources often results in over production and waste while other businesses in need of resources go without.  The most obvious example of a failed government action was the assorted tax laws passed from 1969 to 1982 that gave tax advantages to real estate development. The result was over building of apartments, commercial buildings and the eventual failure of many lending institutions that supported the growth. 

Likewise, when a class of citizens is given special advantages, these citizens don’t always produce as abundantly as they might.  When resources are wasted, production needed the population suffers shortages of goods and services that the natural economic laws would dictate.

We need to cut taxes.
We need to cut government spending or at least the share of the economy that government is taking.. What good is cutting taxes if spending just keeps going up?  Tax Cuts have been coupled with the transfer of the Federal burden to state and local governments, borrowing, and in the case of capital gains taxes, higher tax collections.  Some claim that cutting taxes increases tax collections, but if that is true than it could also means increased government spending rather than reduced spending and a reduction in the federal budget deficit.

So named conservatives often talk about how capital gain tax collections go up when capital gains tax rates are cut.  What has to be done is a cut in government waste, unnecessary spending, control of government job expansion, control of government wage increases, an introduction of efficiency in government and elimination of programs that are no longer logical or that duplicate other efforts.

Everybody should get inflation wage increases to catch up.
It can’t happen.  If everyone were to get an inflation wage increase, inflation would spiral out of control because these increases are themselves inflationary. Inflation results when someone gets a bigger share of the economy. Buyers who don’t get a matching share will struggle to keep up and unless there is an offset in productivity, prices will be driven up. Often it is the result of a demand for a product, which means certain producers are going to get a larger share of the economy. Often, however, inflation results when someone within a country receives wage increases without a comparable increase in productivity.  This means an adjustment to the amount and division  of currency in a country  (in other words, a change in what class or occupations of citizens gets what).  If a class of citizens gets a larger share of currency or if government turns on the printing press to expand government spending, the limited goods that can be bought will go up in price. 

Inflation is a natural mechanism by which we adjust the share of products that each of us will get.  Government workers on all levels are typically guaranteed annual inflation raises and more which usually means that the privet sector workers must work harder just to stay even.  Unions, who now only represent about 10% of the work force, once guaranteed its members bigger shares of earnings. Recently, unions have had to lower their demands because union jobs often resulted in strikes and no incomes as businesses with high costs were forced out of business or forced to find cheaper workers due to inflation. Wage increases without productivity increases guarantee inflation.

Lowering tax rates will help cut government
Lowering the capital gains rate meant that more people sold capital assets and collections and spending both went up. The only way to reduce the size of government is to cut spending.

We have equal representation in the US congress
This is the one of the great lies perpetrated on the public.  In fact congress and key committees are controlled by a very few individuals through a seniority system that puts elected officials in key positions based upon their time in office.  Instead of equal representation we have an oligarchy wherein power ultimately leads to a single individual.  Your newly elected representative has little power to present ideas. The only way these congressional toddlers get anything is to sell their vote in return for spending grants. The result is to stifle discussion, foster pork barrel spending and to create laws only supported by congressional leadership and not the majority.  Committee leadership can usually withhold legislation regardless of the wish of either the committee or the congress unless a strong vote by the congress is taken.  Since no one wants to piss off a committee leader, this is rarely done.  Instead important legislation is pigeon holed, corrupted, and distorted. Lobbyists can focus their efforts on the few powerful congressional members, giving lobbyists more power over government.  Legislative attachments are often designed for campaign contributors by congressional members selling their votes.

Proponents say it is the best way to get things done.  Historical comparisons don’t support that position.  For example, the most important documents in history the Declaration of Independence, the Constitution, the Magna Carta, and the Bill of Rights were all agreed to without seniority.  We may pass less legislation without the seniority system, but it will likely be less prejudiced.

George Orwell wrote a book called the Animal Farm in which the animals rebelled against the farmers and took over the farm.  The book was interpreted as a reference to totalitarianism, but it is more similar to our political system.  In the book the pigs eventually take administrative positions and when the other animals remind them that everyone was supposed to be equal, the “senior” pig replied that everyone is equal except that “some are more equal than others.” 

It has been suggested that term limitations would make government more responsive, but if only applied by individual states, that would just give more power to “senior” members not so restricted.  If applied to everyone, it would mean more power to the bureaucrats whom our representatives would be dependent upon.  Our constitution intended that each representative would be equal to all others; some should not be more equal then others.  If those who wrote the Constitution are any example of the leadership in a governance reflecting equality, we might also be better represented.

The government provides jobs
Government creates burdens not jobs. Through their wages government workers get a share of what private workers produce. Every time the government starts a program or passes a new regulation a member of the private workforce becomes a public servant even when in the private sector.  That means one less worker producing and one more public employee to burden private sector workers.

The rich pay taxes
Yes and no.  The average worker suffers the consequences of government spending through lower wages.  The rich are mostly conduits for tax collections.  The rich may complain that they pay most taxes and they do write the checks for about 60% of the individual federal tax collections.  The rich also earn profits on the share of their costs that government created through taxes and regulation.

Here is how it works.  Anyone old enough may remember back in the days when utilities were heavily regulated by state agencies.  They may also remember seeing two or three big trucks and 10 utility workers standing around watching one man dig a whole.  The reason for this was that state agencies who controlled the utility rates allowed utilities to earn a profit on its costs.  So, whatever the utility spent, the state allowed utilities to earn a percentage profit.  Politicians thought this was a good way to keep the utilities, which were given a monopoly, from charging high rates. Utility companies took advantage of this ratcheting up the cost and their profits.  The system did assure us the best electrical service in the world.

Government spending works the same way with businesses except businesses don’t need the state to tell them how much they can earn.  Just like a utility, a business must earn a profit and recover its costs to survive and in the end all those costs show up in the goods and services we buy.  It doesn’t matter whether a business pays a wage, pays a tax or pays the cost of regulation a business must earn a profit or go out of business.  So, what the rich pay in taxes comes out of the pocket and the livelihood of the average working individual and family.  When government taxes and regulation go down, profits will go down and wages will go up.

The government computed Gross Domestic Product allows us to compute an accurate estimation of the size of government.
The biggest lie perpetrated on the people is the measure of Gross Domestic Product (GDP).  The method used grossly exaggerates the contribution of government.  Whether the lie is or was intentional, it doesn’t matter.  The error in the computation is not one that would still give an accurate assessment of what the economy is doing given that government’s contribution is added twice.  The result overstates GDP and understates the size of government when compared to total GDP.  This means that GDP may not be increasing as much as the Fed says it is and that government taxes take more out of each purchase than we thought.  A reward is offered for anyone who can prove this wrong.  See details elsewhere at this site or request a copy.

Here is basically how GDP is computed.  First all the final sales of the country are added, then government costs less transfer payments (social security-welfare and such) is added, then business investment is added and then adjustments are made for imports and exports.  The problem is that the total sales figures include an allowance for private investment and all taxes and regulatory costs.  In other words, total taxes from which government spending is derived is added to the total government spending and GDP is suddenly bigger than it really is.  A similar thing happens with the inclusion of private investment. This also means that according to the government when it grows, the economy grows.

Taxes only increase the price of a product by the tax.
I don’t know who thought of this, but they never ran a business.  If I buy a 10 million dollar crane and the people building the crane pay federal, state and local taxes, pay environment costs, meet Federal safety requirements, incur legal costs and insurance for accidents and etc., these cost become normal cost of producing the equipment.  Now I have to finance the equipment and not only pay the interest and amortize the loan, I will make a profit on the entire cost.  Government costs are a part of the cost of doing business and I must earn a profit or go out of business...

Public workers deserve special protection and special benefits.
Private sector employees usually don’t receive even half the benefits of the public sector, while the private sector produces the economies goods.  The private sector does this in the face of government taxes, regulation and a government bureaucracy that depress wages and leads to lost jobs.

People who work for the Federal Government receive from 7 to 10 weeks of paid time off including 13 work days of sick leave, 13 to 26 work days of vacation and 10 paid holidays.  In addition to their salary they are likely to receive automatic annual raises, retention allowances, relocations bonuses, incentive awards, recruitment bonuses, a defined retirement benefit program based on salary and years of service, and a lot more. Not only are government jobs and benefits warranted by the good faith and strength of the Federal Government, their jobs are strictly protected by civil service laws whereby government employees are protected against the whims of changing political control.  In addition to these laws, a third of government employees belong to unions which demand additional job protection. 

Bottom line, unlike the private sector which offers no unconditional job protection, government employment at least in the United States have the most secure employment possible, plenty of time off and rates of pay exceeding comparable positions in the private sector.  Rather then cutting employees in a recession, government often increases taxes and increases employees.

Politicians and government employees like to boast that they serve the public but their service is paid for way beyond any merit found in the private sector.  Government employees can also be so difficult to fire that any reason must usually go beyond job performance. 

Civil service jobs were originally protected against the whims of a politician who might use their office to replace existing employees with political cronies.  This was known as the spoils system and it is appropriate to install a merit system and job protection for some public employees.  Politicians have been benevolent bosses and like to give raises, benefits and job protection to their employees.  Unfortunately politicians have the deep pockets of taxpayers to go to.  Even more unfortunate, is that the burden falls on those who can least afford to pay. For this reason, this site supports only private sector workers.

Taxes are only about 35% of the economy.
Oh if it were only so.  Unfortunately the method of computing GDP creates a GDP figure that is overstated and thus total tax collections appear smaller than they really are.  The computation includes the contribution of government twice and thus if government increases spending, it would appear that the economy is better off.  The way the computation is made if taxes were $1.00 for every $1.00 of sales government would still be less than 50% of GDP.

Socialism is a good way to spread the wealth and make it fair.
You can’t take from the rich and give to the poor because wealth is only a reflection of a productive community that gives a value to productivity.  Neither socialism nor communism values wealth, so you can’t spread what isn’t there.  Quite simply, you can destroy wealth, but you cannot spread wealth through government taxation. 

The rich should pay all the taxes.
Not a chance.  To begin with, the cost of taxes and regulation is somewhere close to 10 times the profits of the rich.  Believe it or not, the high cost of government falls right down on the 97% of those of us who aren’t rich.  So, if government spending increases and if you work in the private sector, you will be cutting your own wages.  Here is how it really works. 

Whether it is a federal, state or local tax or regulation a business can’t lose money or it will go out of business in which case everyone loses their job.  When taxes go up or a regulation is imposed on a business it can’t just raise prices because 99% of all consumers only have so much to spend.  Government costs are fixed costs that an employer is forced to pay, only the worker’s wage can change so when the government raises costs, somewhere a worker is going to lose a job or end up with less pay. 

Since it is the worker’s wage that goes down when government spends more money and businesses still earn a profit, the rich are getting richer and the poor are in fact getting poorer.  But don’t blame the rich, blame your politicians and their propensity to spend someone else’s money. 

To put things in simple terms, when government spending goes up, wages go down.