The lines of capitalism and socialism are blurred in our society today. So let me spell it out, cut and dry definitions, straight up.
Capitalism: or a free market economy
An economic system in which the means of producing wealth, and wealth itself are privately owned.
This is another way of saying private ownership of resources (land, labor, capital, and entrepreneurship.) In this system the distribution, pricing, income, production, supply of goods, services and commodities are set by voluntary private decision due to market demand.
Government's role is limited to enforcing the basic rules to protect the market. Although the government can provide goods and services where necessary (ex. natural monopolies, national defense.)
The system is based on incentive, and that is the force driving one to produce a better product at a lower price. Prices are set by the demand and supply in the market.
Another key component of capitalism is markets close to perfect competition.
Here are key characteristics of perfect competition.
Many buyers/Many Sellers – Many consumers with the willingness and ability to buy the product at a certain price, Many producers with the willingness and ability to supply the product at a certain price. (Many defined by five hundred or more sellers.)
Easy Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly competitive market.
Perfect Information - For both consumers and producers.
Firms Aim to Maximize Profits - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
Homogeneous Products – The characteristics of any given market good or service do not vary across suppliers.
It is possible in very few markets to achieve perfect competition due to the slight manipulation of these above principles. (None more obvious as Perfect Information.)
Summary of Capitalism:
-Private ownership of resources
-Incentive based system
-Decision is in the hands of the voluntary individual - Freedom
-Works best when markets operate near perfect competition
Socialism: or a planned market economy
An economy with public/government ownership and administration of resources and the means of producing wealth. Also the centrally planned distribution of goods and wealth. Characterized by equal opportunities (or means) for all citizens, compensation is based on what is fair and decided by the central planning body.
Another characteristic is wealth and power are distributed more evenly based on the amount of work expended in production.
The governing body decides the goods and services to make and provide, how they are to be produced, the quantities, and the sale prices. (A headache of details)
In a Socialist economy there is no/zero competition.
Summary of Socialism:
-Public ownership of resources, and wealth (this includes the media)
-Centrally planned production and distribution
-No competition and no incentive (which leads to poor quality and efficiency)
-No freedom for individuals to chose
There you have it Capitalism and Socialism bare bones. Free market verses the planned economy. If you wish to contemplate some examples of each look to the U.S.S.R. for socialism. Then the USA before 1913 when the 16th Amendment was passed and the income tax was first instated. Today America is defined as a mixed economy, but is progressing closer to Socialism.
Thoughts...
Coming soon: the importance of Prices
-(Sources, F.A. Hayak, Adam Smith, Thomas Sowell, Wikipedia.)
Wednesday, May 27, 2009
Monday, May 25, 2009
Wealth is for the Wealthy
There is a prevailing issue in our American idea of wealth, and i don't know where we went wrong.
Somewhere along the way we have gotten this idea that, if someone is wealthy its because they have taken things away from the rest of us. This is almost entirely false.
Sure there are nasty people who create pyramid schemes, and there are thieves. But the prevailing majority of the wealthy are that way for a good reason. These people are the people who pinch their pennies and work really hard. These people are people who didn't allow themselves to get into debt. This allows them to save their money and invest, instead of making payments and staying behind. These people made sacrifices, like comfort and having brand new things.
This leads me to a question for all Americans; do we believe that someone who works hard to earn their living and lives frugally should be aloud to keep accumulated wealth? I say duh, but many of us are inclined to say no. Why is that you say? Because we have this idea that wealth is finite. We think of it like rare baseball cards, there are only so many Babe Ruth cards in circulation. This is what gives those cards their value. This is not how wealth works.
There are a specific number of dollars in circulation yes, but there is not a limited amount of value in this world. The saying "it takes money to make money," is right on. When an entrepreneur opens a business it takes money. They might have saved up for it, or they might have taken out a loan. Either way it took money to make money.
This is where understanding wealth gets exciting. When resources are correctly used to meet a demand with a supply, when that balance is achieved, you end up with more value that you started with. This will be better explained with an example. Lets say i have saved up enough money to open a coffee shop. Lets say it cost me $250,000 to start the coffee shop.
After six months of booming business i break even, because people love my coffee that much. Two years later my coffee shop is bringing in $400,000 a year in net income. Now the question is asked how much can i sell this business for? Well it depends on who would be buying it from me, but chances are i can make a sale at $1,000,000.(These numbers are completely for example are are not intended to resemble a coffee shops real monetary values.) Now if you consider my initial investment of $250,000, and the sale of the coffee shop at $1,000,000. I have a gain of $750,000, that is delicious profit my friends.
Not only did i come out on top, but the surrounding community did also. Now they have high quality coffee to drink at reasonable prices. Because of this they were able to focus on their work better than before and are more productive. Each individual who is a regular to this coffee shop also enjoys the friendly greeting from the baristas making their coffee. Then thay start their work day in a good mood which also helps them get more work done in less time, then they have a sense of pride in their accomplishment.(I might be getting a little carried away, but its possible.) All this to say that each individual customer that is effected positively creates more value because of the good or service. This community therefore has more value, and the standard of living goes up. This is an example on how wealth encourages more wealth. Another valid point to observe is all the employees of the coffee shop, now they are making radical lattes and white mocha frappachinos. Before this there was no job for them, now they can earn a living. Their income will now get spent in that community and pay local taxes for schools and roads... and so on
I hate/love to point this out but when government creates jobs they don't create wealth 99% of the time. Some of their jobs are necessary, some could be done by private companies. Here is the main reason, these jobs are not run efficiently because the "owner" is not footing the bill, the people are, you and I. There is no incentive for those jobs to be economical, because there is no competition. For an owner of a business who doesn't have to pay the bills, why would he search for the best price on materials. Why would he require a level of excellence from his employees. Their is no incentive, and our entire system is built on incentive. Socialism has no incentive, everyone remember the USSR and how high quality all their buildings and equipment were? Nothing but the best(little sarcasm) things falling apart and exploding left and right. That was socialism my friends. Government run anything ultimately is inefficient, look at the railroads, and the education system that has mysteriously lost millions over that last few years.
The reasons are the tax payers(that's us) are paying, and the government has no incentive.
So to the strange ones out there who would prefer the government taxes them 80% and then acts in their best interests, you should know the best interests of the government is to let the wealthy keep their wealth. Because that will grow the GDP and the standard of living for all of America. A growing desire to live off of the state was a chief reason the Roman empire fell.
Would you rather not have to make any decisions, or would you like to live somewhere things are growing? How nice would it be to turn on the TV today and hear "the American economy is booming as usual!"
Let the wealthy keep their wealth, it does not belong to us. Redistribution of wealth = stealing.
This leads to the death of capitalism, so keep her alive, thrive, incentivise.
Somewhere along the way we have gotten this idea that, if someone is wealthy its because they have taken things away from the rest of us. This is almost entirely false.
Sure there are nasty people who create pyramid schemes, and there are thieves. But the prevailing majority of the wealthy are that way for a good reason. These people are the people who pinch their pennies and work really hard. These people are people who didn't allow themselves to get into debt. This allows them to save their money and invest, instead of making payments and staying behind. These people made sacrifices, like comfort and having brand new things.
This leads me to a question for all Americans; do we believe that someone who works hard to earn their living and lives frugally should be aloud to keep accumulated wealth? I say duh, but many of us are inclined to say no. Why is that you say? Because we have this idea that wealth is finite. We think of it like rare baseball cards, there are only so many Babe Ruth cards in circulation. This is what gives those cards their value. This is not how wealth works.
There are a specific number of dollars in circulation yes, but there is not a limited amount of value in this world. The saying "it takes money to make money," is right on. When an entrepreneur opens a business it takes money. They might have saved up for it, or they might have taken out a loan. Either way it took money to make money.
This is where understanding wealth gets exciting. When resources are correctly used to meet a demand with a supply, when that balance is achieved, you end up with more value that you started with. This will be better explained with an example. Lets say i have saved up enough money to open a coffee shop. Lets say it cost me $250,000 to start the coffee shop.
After six months of booming business i break even, because people love my coffee that much. Two years later my coffee shop is bringing in $400,000 a year in net income. Now the question is asked how much can i sell this business for? Well it depends on who would be buying it from me, but chances are i can make a sale at $1,000,000.(These numbers are completely for example are are not intended to resemble a coffee shops real monetary values.) Now if you consider my initial investment of $250,000, and the sale of the coffee shop at $1,000,000. I have a gain of $750,000, that is delicious profit my friends.
Not only did i come out on top, but the surrounding community did also. Now they have high quality coffee to drink at reasonable prices. Because of this they were able to focus on their work better than before and are more productive. Each individual who is a regular to this coffee shop also enjoys the friendly greeting from the baristas making their coffee. Then thay start their work day in a good mood which also helps them get more work done in less time, then they have a sense of pride in their accomplishment.(I might be getting a little carried away, but its possible.) All this to say that each individual customer that is effected positively creates more value because of the good or service. This community therefore has more value, and the standard of living goes up. This is an example on how wealth encourages more wealth. Another valid point to observe is all the employees of the coffee shop, now they are making radical lattes and white mocha frappachinos. Before this there was no job for them, now they can earn a living. Their income will now get spent in that community and pay local taxes for schools and roads... and so on
I hate/love to point this out but when government creates jobs they don't create wealth 99% of the time. Some of their jobs are necessary, some could be done by private companies. Here is the main reason, these jobs are not run efficiently because the "owner" is not footing the bill, the people are, you and I. There is no incentive for those jobs to be economical, because there is no competition. For an owner of a business who doesn't have to pay the bills, why would he search for the best price on materials. Why would he require a level of excellence from his employees. Their is no incentive, and our entire system is built on incentive. Socialism has no incentive, everyone remember the USSR and how high quality all their buildings and equipment were? Nothing but the best(little sarcasm) things falling apart and exploding left and right. That was socialism my friends. Government run anything ultimately is inefficient, look at the railroads, and the education system that has mysteriously lost millions over that last few years.
The reasons are the tax payers(that's us) are paying, and the government has no incentive.
So to the strange ones out there who would prefer the government taxes them 80% and then acts in their best interests, you should know the best interests of the government is to let the wealthy keep their wealth. Because that will grow the GDP and the standard of living for all of America. A growing desire to live off of the state was a chief reason the Roman empire fell.
Would you rather not have to make any decisions, or would you like to live somewhere things are growing? How nice would it be to turn on the TV today and hear "the American economy is booming as usual!"
Let the wealthy keep their wealth, it does not belong to us. Redistribution of wealth = stealing.
This leads to the death of capitalism, so keep her alive, thrive, incentivise.
Thursday, May 21, 2009
The American Dream
I remember growing up in public school, and teachers telling us about the American Dream. They would say "you can be what ever you want!" Or "you can go from rags to riches." They had us read Horatio Alger stories, assuring us that our country makes all this possible. It did, the free market was mostly alive then, and the people of the USA believed in their country.
Today many people have lost belief, and rightly so. I am a hopeful person and i believe you can reasonably become what you want to. In a free market system if there is a demand for the career you yearn for, then by all means meet that demand with the supply of your labor.
In a free market that is how it works. I have however seen it fail for this reason.
Lets imagine a woman named Christy, she loves to collect CD's and share music with her friends. Christy out of her passion for music and CD's decides to open a music shop. She names it "Christy's CD Crib." Christy has no previous knowledge of how to run a business, but she has passion. Christy with the help of friends ans family opens her shop and after a year fails to break even. This is somewhat normal for a new business, it takes time to develop a customer base. Christy's after a year and a half decides she is loosing too much money and cant foot the bill anymore. So she has to fire the employees that are all her friends, and sell this place she has become so fond of.
Her critical mistake was this: the reason to go into business is to meet a demand with a supply. She did not do this, Christy in her passion open a business for herself. She was serving herself not a demand. This can only last while she foots the bill. She also needed to do some market research because sales of music albums from iTunes is off the charts. The convenience of downloading the music you want right now precedes driving to a brick and morter store to buy a CD, no matter how cool Christy is.
All this to get to a much greater issue, in a free market this scenario is possible. In a socialist, or communist market it is not. A few important things happened in this example. First Christy, no matter how ill researched had the choice left to her if she would like to open a business. The second is that she was allowed to fail, which is ridiculously important.
The basic law of economics is this "The allocation of scarce resources, that have alternative uses." The law implies that resources are limited, and they are. A resource can be land, labor, capital, and entrepreneurship. Three of those are self explanatory, capital is sometimes confusing to people. Yet it is just this: goods, or means to produce goods.
Now when Christy opened her "Christy's CD Crib" she was miss allocating scarce resources. (Resources include: her own entrepreneurship, the labor of her workers, the product itself, and the land/building her business was on/in.)
The free market operates best when all resources are being allocated correctly, to make a profit. If Christy was to decide her business was so important and it is a service that her town could not live without she could ask for a bailout. Here is why bailouts are completly the opposit to a free market. For one reason or another her CD business is failing, these resources should be allocated to something productive, not squandered. Yet her local government grants her bailout and she can continue to run her CD Crib. Now two problems immeadiatly immerge, first Christy is no longer the owner of Christy's CD Crib, her township is. Second she is no longer footing the bill for her failure, her neighbors are. So her business that she no longer owns is costing all her neighbors $10 a month. All the while tyeing up resources that could be put to better use elsewhere.
Without the ability to fail, the freedom to chose, and the freedom to privatly own, are lost.
When this happens on a large scale, say AIG the reprecussions on the economy are gigantic. Wonder how much of AIG's bill you are paying? The bailout of 150 Billion dollars can't be that much divided amoung all of America you say.
I don't know about you but im pretty fond of $500. Let them fail (nothing personal), i don't want to waste my resources on their failed company. I also don't want to be forced to pay this $500, but that is the power of government, socialist government. A Government of a free market economy trusts the people with their own resources, it's called private ownership. Socialism is known as public ownership(or government ownership.) Note that for the $85 billion in september the government gained a 79.9% stake in return, also know as purchasing a controling share in the company (only a 51% stake is needed for control.)
When the government owns something that means we all own it, all pay for it. So as AIG continues to fail we continue to pay for it, more and more.
That $500 i now have to give to AIG can no longer go toward my education, there are many other productive things i can do with $500. I could invest it at 5% in a money market account and in a year have $525 instead of $-500. A difference of $1,025.
We have to chose between a business failing or a people recessing to a dyeing economy i always pick a business failing. Lift your head up high make the tough decisions, be a free market man or woman. Don't pay for the loss of your freedoms, don't voulentarly(faliure to act is voulentairy) let the government control you. They have a name for not being free it's called slavery, socialism leads to slavery.
I was tought the American Dream was to chose your life, decide a career, go from rags to riches.
I did'nt realise the tough truth of the day is slavery.
Today many people have lost belief, and rightly so. I am a hopeful person and i believe you can reasonably become what you want to. In a free market system if there is a demand for the career you yearn for, then by all means meet that demand with the supply of your labor.
In a free market that is how it works. I have however seen it fail for this reason.
Lets imagine a woman named Christy, she loves to collect CD's and share music with her friends. Christy out of her passion for music and CD's decides to open a music shop. She names it "Christy's CD Crib." Christy has no previous knowledge of how to run a business, but she has passion. Christy with the help of friends ans family opens her shop and after a year fails to break even. This is somewhat normal for a new business, it takes time to develop a customer base. Christy's after a year and a half decides she is loosing too much money and cant foot the bill anymore. So she has to fire the employees that are all her friends, and sell this place she has become so fond of.
Her critical mistake was this: the reason to go into business is to meet a demand with a supply. She did not do this, Christy in her passion open a business for herself. She was serving herself not a demand. This can only last while she foots the bill. She also needed to do some market research because sales of music albums from iTunes is off the charts. The convenience of downloading the music you want right now precedes driving to a brick and morter store to buy a CD, no matter how cool Christy is.
All this to get to a much greater issue, in a free market this scenario is possible. In a socialist, or communist market it is not. A few important things happened in this example. First Christy, no matter how ill researched had the choice left to her if she would like to open a business. The second is that she was allowed to fail, which is ridiculously important.
The basic law of economics is this "The allocation of scarce resources, that have alternative uses." The law implies that resources are limited, and they are. A resource can be land, labor, capital, and entrepreneurship. Three of those are self explanatory, capital is sometimes confusing to people. Yet it is just this: goods, or means to produce goods.
Now when Christy opened her "Christy's CD Crib" she was miss allocating scarce resources. (Resources include: her own entrepreneurship, the labor of her workers, the product itself, and the land/building her business was on/in.)
The free market operates best when all resources are being allocated correctly, to make a profit. If Christy was to decide her business was so important and it is a service that her town could not live without she could ask for a bailout. Here is why bailouts are completly the opposit to a free market. For one reason or another her CD business is failing, these resources should be allocated to something productive, not squandered. Yet her local government grants her bailout and she can continue to run her CD Crib. Now two problems immeadiatly immerge, first Christy is no longer the owner of Christy's CD Crib, her township is. Second she is no longer footing the bill for her failure, her neighbors are. So her business that she no longer owns is costing all her neighbors $10 a month. All the while tyeing up resources that could be put to better use elsewhere.
Without the ability to fail, the freedom to chose, and the freedom to privatly own, are lost.
When this happens on a large scale, say AIG the reprecussions on the economy are gigantic. Wonder how much of AIG's bill you are paying? The bailout of 150 Billion dollars can't be that much divided amoung all of America you say.
- Sept. 16: The government extends AIG a two-year loan of up to $85 billion, and gets a 79.9% stake in return.
- Oct. 8: Bailout loans increase to nearly $123 billion due to problems in AIG's securities-lending program.
- Nov. 9: The rescue package increases to $150 billion, including a new $40 billion federal investment.
I don't know about you but im pretty fond of $500. Let them fail (nothing personal), i don't want to waste my resources on their failed company. I also don't want to be forced to pay this $500, but that is the power of government, socialist government. A Government of a free market economy trusts the people with their own resources, it's called private ownership. Socialism is known as public ownership(or government ownership.) Note that for the $85 billion in september the government gained a 79.9% stake in return, also know as purchasing a controling share in the company (only a 51% stake is needed for control.)
When the government owns something that means we all own it, all pay for it. So as AIG continues to fail we continue to pay for it, more and more.
That $500 i now have to give to AIG can no longer go toward my education, there are many other productive things i can do with $500. I could invest it at 5% in a money market account and in a year have $525 instead of $-500. A difference of $1,025.
We have to chose between a business failing or a people recessing to a dyeing economy i always pick a business failing. Lift your head up high make the tough decisions, be a free market man or woman. Don't pay for the loss of your freedoms, don't voulentarly(faliure to act is voulentairy) let the government control you. They have a name for not being free it's called slavery, socialism leads to slavery.
I was tought the American Dream was to chose your life, decide a career, go from rags to riches.
I did'nt realise the tough truth of the day is slavery.
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