Metrics of Capitalism

Posted by Jeff Carter
on May 21st, 2012

There is a raging debate on the outcomes of Republican Presidential candidate Mitt Romney’s investments at Bain Capital. Romney did pretty well. His investors made money. In most cases, the companies he invested in made money and added to the GDP of the economy. In traditional capitalistic terms, that’s a success.

However, not when viewed through the lens of values driven capitalism-or normative capitalism. E.J. Dionne writes, “In this election, we’re not having an argument that pits capitalism against socialism. We are trying to decide what kind of capitalism we want. It is a debate as American as Alexander Hamilton, Andrew Jackson and Henry Clay”.

Somehow, I don’t think any of those guys would be on the side of Obama when it comes to capitalism.

People of Dionne’s persuasion fail to understand how capitalism truly works. If you look at certain data points, capitalism can be merciless. Some people wind up out of work, some lose money. There is risk in capitalism. But, without risk there isn’t reward.

But when you look at a capitalistic society in sum, it raises all boats faster and improves entire societal standards of living more quickly than centrally directed government programs. Critics of the US welfare state like to say that we have the richest poor people in the world. They are correct. It’s no fun to be poor in the US, but it is a lot better being poor here than it is in India, China, Brasil, Russia, or anywhere else on the planet. That’s because of capitalism.

Creative destruction and risk are two elements that scare the Luddites that decry capitalistic methods to improve society. Older businesses get ripped apart by new innovation. To start a new business involves assuming risk. Will it work? Will it get overwhelmed? Will older businesses innovate faster and crowd out the new business? There is a lot of uncertainty in capitalism. But uncertainty breeds opportunity.

There isn’t a hard and fast scoreboard for capitalism. It’s not like a government budget where one scion of bureaucracy decides who gets what and how a fixed pie is divided. Capitalism is an amoeba. It goes where incentives and market forces take it. That’s why Milton Friedman said if the government ran the Sahara Desert, after a few years we would be out of sand. Governments don’t have to respond to the market.

Think of it in terms of transportation innovation. Centuries ago, we travelled on foot in sandals. Then we harnessed animal power, camels, donkeys and horses to travel. On oceans, we rowed, then harnessed the power of wind to move around. It wasn’t until the last half of the 18th century that we used an engine to efficiently move people around. That engine has been consistently improved to the point I can go anywhere in the world within hours if I am in a jet. What force developed those engines? Government or people trying to solve problems?

My argument is that if government were tasked with the responsibility of developing the next mode of transportation, we’d be arguing about who’s leather tannery to use to make the strap on a new sandal model.

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