CAPITALISM MAKES SOCIALISM ACCEPTABLE

There has been an upsurge in populism in the years following the financial crisis. The crisis has created a widespread belief that capitalist economies are fundamentally broken and need a reboot. This might be true in some micro sense, but in a macro sense I think this is quite wrong. After all, Capitalism is not a tool that can been used to break society. It is just a system constructed from thin air to organize the division of labor. Whether this system produces equal or beneficial outcomes is entirely up to how we decide to manage that system.

With the rise in populism there has also been an upswell in Socialist style thought. Now, we should be clear. There are exactly zero successful existing Socialist regimes in the world. They simply do not exist in a pure Socialist form. Instead, every economy operating today is some mix of Capitalism and Socialism. And it is demonstrably evident that the most prosperous of those systems are the ones with some degree of government and vast private Capitalist enterprise.

Take, for instance, the world’s most successful economy of all-time – the United States. In just over 200 years this country has risen from less than 1% of global population to the world’s most powerful country. As of 2011 the USA was 22% of all global output. American living standards have soared. The middle class in the USA is in the world’s top 1% of wealth. More globally, poverty has collapsed, life expectancy has soared, the cost of necessities has declined rapidly, violent crime has fallen dramatically and homicide rates are collapsing. Despite the many visible flaws in the world there has never been a better time to be alive.

I came to think about all of this the other night as I was watching an interview with Democratic Socialist and MMT advocate Stephanie Kelton. She said “the national debt is the equity that supports the entire global credit structure”. That struck me as unbalanced. Ignoring the obvious fact that government liabilities cannot be “equity” (equity cannot be printed from thin air) these comments also struck me as giving the government too much credit. For instance, in the USA, government consumption and expenditures are just 19% of GDP. This means that non-government comprises 81% of consumption and investment. And we know that investment combined with consumption adds up to the production of all the things in our world that make life worth living.

Now, don’t get me wrong here. This is not to say that government plays no role in the success of the global economy. Certainly, we need rules and rule enforcers. And government, during the course of its consumption and investment has produced some pretty remarkable things. But it’s clear that free enterprise has produced the overwhelming majority of the goods and services that have added to our enormous growth in living standards. In other words, while capitalism certainly has its flaws there has been a tremendous amount of good that has come from it.

Which brings me to my conclusion. The real “equity” in the system that helps support everything else is not government debt. It is, by definition, the value of the output and enterprises that create actual equity through innovation and diligence. And that equity helps make everything in our financial system sustainable. Interestingly, it doesn’t just make it sustainable, but it makes bits of Socialism more acceptable since the great wealth we’ve created through Capitalism allows us the flexibility to redistribute wealth towards policies that can better benefit society as a whole. This is a good thing and we should be appreciative of the Capitalist system we have since that system will allow us to better leverage our wealth into more thoughtful and beneficial public policy.