Capitalism and free markets work just like your economics professor described unless you go and try to improve things. Free markets and competition are what makes capitalism work, and if you tinker with the profit motive, disaster strikes. I will define socialism as a value-neutral proposition wherein the means of production are owned by the public for the good of the public. I will define capitalism where individuals strive to make a profit in a free market by selling goods and services to the highest bidder. To really get at the pros and cons of each, we need to set our value systems t the side (just for a moment) and examine what drives each. As a matter of tradition, and fierce pride among some, the United States has always been identified as a capitalist system. Some argue that political systems and economic systems are discrete things and should be considered independently, but I argue that they are intertwined to such an extent that this cannot happen except in a theoretical vacuum. In the real world, politics plays a massive role in economics, and political ideologies are the root of the linkage.
By extension, that which is governmental in nature is socialist in nature. As much is it pains some of us to admit, the Constitution contains some socialist elements. We have a military to “provide for the common defense.” The term “common” smacks of socialism, and it is ideological blindness if we say otherwise. The Framers recognized that some things are just too important–or more precisely some desired outcomes are so important–that we shouldn’t let the profit motive distract us from some social good. In the America that the Founding Fathers envisioned, some things are priceless. We aren’t going to give up on ideas like Freedom and democratic representation at any price. Another prime social drive is to protect the economic system, and we are willing to set aside the profit motive to guarantee that free markets will work. Capitalists love free markets, but we are willing to give up some “absolute freedoms” to see that markets remain free. We accept regulation as a part of doing business in America. History teaches us that free market participants, through malicious intent (e.g., Madoff, Enron) or through irrational exuberance, sometimes present a danger to the entire economic system. When we can reach some agreement as to the danger, we tacitly agree to regulation. Traders may not like the SEC, but no loud voices to do away with the regulators are heard. We attack individual policies, but we fear a market where the SEC is absent. When we expend collective resources to produce something that isn’t money, we are engaging in socialist practice.
Few people will argue that bureaucracies are inefficient. It is very difficult indeed to think of a single governmental agency or entity that produces an impressive “bang for the buck.” When we take away the “bottom line” as the metric of success, we erode efficiency. You will not likely find a single soldier that things the Army has too much money. You will not find a single beneficiary that thinks Social Security is overfunded. Nobody seriously argues that the VA has too much money and that veterans are too healthy as a result. Nobody argues that teachers are overpaid, or that our children are just too well educated. One potential solution that arises over and over again to attack bureaucratic inefficiencies is to privatize governmental functions. For the most part, this has been an absolute disaster. When you blend socialist systems that seek outcomes that are not related to generating profit with companies that exist solely to generate profit, you always end up with profits being generated and the stated goals and objectives of the organization being placed on the back burner. Sometimes we see this clearly, and nobody advocates privatization. I’ve never heard anyone say that we should just let General Dynamics field a for-profit Army and disband the military. In other cases, we’ve tried to let the private sector handle our public duties, and that has been an epic failure. When we see blended systems, we fail to realize it is the fact that we’ve blended economic systems that is the root of the problem.
Our public institutions of higher learning are a good example. We have a student loan crisis because we injected aspects of capitalism into the system, and we broke it. Private lenders are in the game strictly to make money. Universities are in the game to be regarded as the best; you can depend on colleges to focus on the things that make them look good. You can depend on private lenders to dole out as much money as possible because the loans are backed by the federal government and they can’t lose. The current system simply cannot work because capitalism requires that lenders face the risk of default to keep them honest. If we remove that risk, we wind up with a trillion dollars in default, a bunch of corporate giants that make billions off of the system, and millions of former students that are financially ruined because they were sold a bad financial product and the government forbids them to de-lever. Other than the massive profits that the loan “servicers” make, who benefits from this system? Certainly not the Universities. In real dollars, higher education in America has reached third world funding levels and a commensurate third world level of quality.
Free markets don’t work when participants can’t say no because they don’t like the offered price, they can’t work when the government is an active participant and can’t control the price offered, and they don’t work when basic human needs create a demand that costs cannot counter. When we combine these elements, we end up with disastrous synergies. We tell young people that they can’t make it in the world today without a good education. We turn the funding for that education over to the capitalists, and shift the responsibility of payment from the public to the individual. Simultaneously, we remove the usual capital inducements from the money market by guaranteeing the loans on the one hand and taking away the right to de-lever on the other.
Guaranteeing the loans and even legally requiring the lenders to lend to all comers completely destroys the mechanisms by which credit is maintained. We keep hearing that borrowers entered into a contract and are morally, ethically, and legally responsible for the debt. As a practical matter, that is of no consequence since we know people will always borrow more than they can afford to pay back if the lenders let them do it. This was one proximate cause of the last major financial crisis. Then, naive investors took on the risks that the banks pawned off, and they acted badly. In the case of student loans, there is even less risk for lenders because the risk is assumed even before the credit is extended and backed by the full faith and credit of the United States government.
Healthcare is a disaster for similar reasons. First, I am not going to let one of my children die because I don’t like the hospital’s price. They have the ultimate leverage, and the profit motive is more powerful than human decency. I’ll sign anything and not even be cognizant of the amount of debt when my loved ones are bleeding. To really understand the degree of the problem, we must consider that Americans are divided into three distinct payment classes. There are those with private insurance, there are those with public insurance, and there are those without any insurance at all. The very idea of insurance tampers with capitalistic cost control because consumers have no idea what the price is, and they don’t really care. Perhaps education by by insurance companies could help with this if consumers feared rising insurance rates when coverage is overutilized (we see this with auto insurance).
The “private payer” group is put in a hopeless situation because of the nature of the insurance company – healthcare provider relationship. In their haggling process, all medical service providers ramp up costs to astronomical levels just so they can offer huge discounts to the insurance companies as a bargaining tool. The insurance company negotiators take the massive discount rates and seal the deal. Noone is there to haggle on behalf of the uninsured, so they get stuck with the massively inflated price and are forced to make huge sacrifices or declare bankruptcy. To add another bullet to the breathless corpse of capitalism, we have a huge swath of the population that are on “public insurance,” which means the government is picking up the tab. Here we come back to the idea that government bureaucracies are notoriously inefficient, so profit motivated businesses bilk those systems for staggering sums. The synergy that develops because of insurance company bargaining and the rape of the public coffers has resulted in a system where life expectancy is going down, and the most powerful nation on earth doesn’t rank in the top ten on metrics like longevity and infant mortality.
My point is not that we should do away with public insurance for children, the elderly, veterans, or any other group. My point is more academic: I am simply pointing out that when you blend elements of socialism and capitalism in the same economic sector, bad things happen. To me, the logical conclusion seems to be that the economy must be bifurcated and not blended. The privatization of public sector services as been weighed, measured, and found wanting. I can’t find a single example where efficiencies were created when we have tried this. Efficiency speaks to economics, and our public institutions don’t have profit as the goal. As a result, capitalistic systems are ill equipped to deal with the issues.
I argue when we can align profit with the desired outcome, then capitalism–pure capitalism–is the way to go (subject to regulation of course). When it comes down to the narrow sphere of basic human rights, profit motivations don’t work because profits are not the desired outcome. When it comes to the military and law enforcement, we want safety and security, and those things can’t be aligned with corporate profits. When it comes to lower education, we want smart kids, and corporate profits cannot be aligned with the desired outcome. The serious problems arise in the gray area between basic human rights that everyone agrees on and human wants that nearly no one wants publicly funded. Human rights are the purview of the government as a representative of the collective, and are thus socialist in nature. Human wants and desires that go beyond safety, security, equal opportunity, and health are the fruits of individual efforts, and are the purview of the capitalist sphere.
If we want to fix social problems, prevent populist uprisings, and balance the federal budget, then we need to draw bright lines and form discrete categories of economic sectors. There can only be two. When we have a third “blend” sector, the results are always bad. Pure socialism always results in a downward spiral toward and then through mediocrity; the “tragedy of the commons” has taken down every system that has ever tried it. Pure capitalism results in excesses and dangerous abuses of basic human rights. This has been so apparent that no society has ever even tried it. We’ve always regulated public safety and the common defense to the commons. Neither system can work in a pure form given the nature of humanity. The best system in practice will be when we force a binary taxonomy on our current economic system.