What Makes Capitalism Work – Or Does it?

Aug 16 2011 Published by under Uncategorized

Republicans say they are big fans of capitalism – and of a  laissez faire approach to economics – that is, opposed to government interference. A laissez faire approach fits low-wage Republicanism very well as a descriptor, with its opposition to such things as minimum wage. Michele Bachmann, for example, said in June she would eliminate the minimum wage, claiming it would stimulate the economy and “virtually wipe out unemployment.” Never mind that even with minimum wage people are having a hard time making ends meet.

George Stephanopoulos asked her after she declared her candidacy if she meant to stick by that position and her response was 100% Republican mantra:

“I think we need to look at all regulations, whatever–whatever ones are inhibiting job growth,” she said.

All regulations,” she reiterated when asked if that meant minimum wage as well.

Conservapedia defines capitalism in these terms:

Capitalism is a free market economic system based on private ownership and entrepreneurship. The investment of capital, and production, distribution, income, and prices are determined not by government (as in socialism) but through the operation of a competitive market where decisions are voluntary and private rather than regulated and mandated by government (see law of supply and demand).

Rick Perry epitomizes the Republican position:

“America is not going to move forward until we remove restrictions of over-taxation, over-regulation and over-litigation on the job creators and free them so the jobs can be created.”

To find any fault at all with capitalism is heresy for Republicans. As Paul Krugman explains, Republican propaganda asserts that “any effort to mitigate poverty and inequality was highly irresponsible and that anyone who suggested that unmitigated capitalism was unjust and could be improved was a dangerous radical, contaminated by European ideas.”[1]

Conservapedia claims,

Historically, capitalism has fostered freedom and an increase in the standard of living and human rights, and vice versa. Societies that have tried non-capitalist systems inevitably fall into tyranny.

There are obvious problems with this claim. For example, socialist countries Denmark and Finland (whom we shall meet again below) are not tyrannies). But Democrats are not advocating an end to capitalism, whatever Republicans argue; they are arguing for a regulated capitalism.

Timothy Ferris argues that Adam Smith’s Wealth of Nations “may be the one book between Newton’s Principia and Darwin’s Origin of Species that actually, substantially, and almost immediately started improving the quality of human life and thought.”[2]

And in fact, Smith did not argue against regulation, saying that such restrictions are appropriate when required to keep the market fair and free. But folks, fair has been thrown under the bus. Capitalism in America isn’t true capitalism anymore because left alone it ceased being fair (look at the evils of the Gilded Age). It’s still free but (as with the rise in gas prices) no longer fair – demanding government intervention. Without it, we will certainly see Gilded Age 2 and that is the effect of Republican control of the economy, to drive a greater wedge between the haves and have-nots, while Democratic control of the economy narrows the gap.

Unsurprisingly, given the conservative penchant for co-opting and redefining, Conservapedia cites Adam Smith to buttress Republican rhetoric on the subject but as John Paul Rollert explains in Salon, Republicans get Smith all wrong:

It [Republican rhetoric] is founded on a bedrock belief about the free market, one that answers What makes capitalism work? by addressing a different question: Who? For that is what is at stake in the term “job creators,” a vision of capitalism’s essential players, one very different from the original account provided by Adam Smith. His account of who makes capitalism work is at odds with the one we are used to. The essential players are found at the base, not the apex, of the economic pyramid.

Citing the example of Andrew Carnegie and Ayn Rand, Rollet points out,

Instead of “the assistance and co-operation of many thousands,” it is an elite caste that provides the vision, brains, and organizational savvy that ensure a thriving economy. They are the Visible Hand of capitalism, and for Carnegie, Rand, and others like them, if you want to know who makes capitalism work, simply stand at the base of the economic pyramid and look up. You’ll find the “job creators” at the very top.

Obviously, these job creators are not creating jobs, thus making mockery of Republicans claims about the virtues of unfettered capitalism. If it worked it would be…well, working. They’d be creating jobs. Manifestly, they are not. The Republican House hasn’t created even one since 2010. The job creators, with the tacit support of Republican legislators at both the state and federal level, are hoarding capital, investing it abroad, dodging taxes, and shipping jobs overseas.

And blaming Obama for it.

And much as Republicans like to decry the evils of socialism, Denmark and Finland, both socialistic, are among “the ten most economically competitive nations in the world.” Ferris’ conclusion is (and he points out that Smith anticipated this) that “there is no one right solution for all peoples when it comes to the proper economic role of government.”[3]

So ignore the example of the Danes and Finns if you will, but in the United States the economy has functioned better under the Democrats than the Republicans, spending less, growing government less, and all the while (1948-2007) producing a per capital GDP of +2.8 percent compared to 1.6 percent under the Republicans. Not only that, but the Democrats have produced higher family income growth. Consider the fact that $10,000 invested in stock market index securities during the forty years that Democrats have occupied the White House (1929-2008) and you end up with over $300,000. The same $10,000 invested during Republican administrations will give you just $51,000.[4]

Do the math.

Let’s return to Paul Krugman:

As Adam Smith saw, and many generations of economists have elaborated, markets often have a way of getting self-interest to serve the common good. Individuals seeking only gain for themselves are led, “as by an invisible hand,” to produce goods that other people need, when they need them.[5]

But, as he points out, “sometimes markets don’t work.” The Great Depression is incontrovertible evidence of this. In stepped the government, setting things to right and pulling the nation out of the Great Depression. Hitler followed the same course, spending Germany out of the Great Depression. It worked. Just as the stimulus spending at the end of Bush’s second term and the beginning of Obama’s administration, worked to stabilize the economy.

Other than government spending, another essential source is consumer spending – the demand schedule of the supply and demand model. If people don’t have money to spend (i.e. jobs that pay enough to keep a family’s needs met) it doesn’t matter how much the public “needs” a good or service; they can’t purchase it. And you need a job to purchase anything at all – remember, the guys the Republicans place at the apex of capitalism aren’t creating those, no matter how much money we give them.

Remember, it was the laissez faire approach of the Bush administration and unfettered capitalism that caused the Great Recession in the first place. Just as they did after the Great Depression, some economists wanted to, in Krugman’s words, “return to the old faith.” Milton Friedman even offered the ridiculous claim that it was the government that caused the Great Depression. This “free-market fundamentalism” is a danger to us all.[6]

Once burned, twice shy, you’d think, but we’ve been burned twice and if the Republicans have their way, we’ll be burned a third time. Will the American people ever learn? It should be abundantly clear to all that the Republicans will not. Their ideology insists on the rightness of their course; reality doesn’t enter into it. And so we will ride the same horse over the same cliff for a third time expecting different results – Einstein’s definition of madness made manifest.


[1] Paul Krugman, The Conscience of a Liberal (W.W. Norris, 2007), 32.

[2] Timothy Ferris, The Science of Liberty: Democracy, Reason, and the Laws of Nature (HarperCollins, 2010), 174.

[3] Ferris (2010), 185.

[4] Ibid.

[5] Krugman (2007), 115-116. See Paul Krugman, “Who Was Milton Friedman?” New York Review of Books, Feb. 15, 2007.

[6]Krugman (2007), 116.

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