I want to kick this off today with a discussion of the order of precedence – a discussion of the economic chicken vs. egg argument because this is the basis for the “too complex to understand” misconception. As we have said before, you can’t build a truth from a false premise, and you can’t fix a problem by treating a symptom. The first issue with the “we need control” premise is that it is based on the chicken/egg dilemma – that is a false premise because we can determine an order of precedence, a hierarchy of process order in the economy in relation to individuals, firms, and government.
So in this installment of what Republicans should talk about we look at:
Don’t put the cart before the horse –get the order of events right.
Capitalism is self regulating.
Distributed capitalism mitigates risk and absorbs a lot of bad decisions.
Why they get it wrong – the order of precedence.
The main reason that they get it so wrong is that progressives try to change the oil by inflating the spare tire in the trunk. They get the order of events wrong and therefore the cause and effect completely ass-backwards.
The reason that progressives have been, and will always be, doomed when dealing with the economy is that they continue to get the order of precedence wrong – commerce comes first, government second. Their assumption is that government is first and commerce is the result.
A simple method in deducing an order of precedence like this is to ask this question: “If we remove one of the elements of a system, can the remaining elements in the system or the total system survive?” In this case, if we remove government from the system, commerce survives – some would say that it thrives – the converse is not true. If commerce is removed, government cannot survive, not even by force because it depends on money (or in the instance of governmental borrowing, the promise of future money) from taxpaying entities.
So, simplified for the big government set: no commercial activity = no tax revenue = no ability for government to borrow = no government spending = no government. If progressives want funds to pay for their adventures in socialism, you better get on board with the engine that generates the cash for you.
The government then skims off a fee for this transaction called a tax.
What generates that flow of tax revenues? Economic activity generated by commercial transactions by profit seeking individuals and firms. At its most basic level, economic activity only requires two people engaged in a transaction – a good, service or idea that is priced at a point where the seller wants to sell and the buyer wants to buy. This is as simple two people meeting in the middle of a field with no one else around, both having something that the other wants/needs and these two making a decision to trade.
Do these two need government to assure “fairness”?
No, they don’t. “Fairness” is a concept judged by the individuals involved in the transaction, not a third party. Fairness is ensured by the decision to make the transaction; it is based on the perception of value assigned to the trade by both parties.
Capitalism is self regulating.
Another aspect of “fairness” is that in a free economy, the bad actors a punished by individuals refusing to do business with them –they fail and a new person rises to meet the need of the market. This is the “creative destruction” that culls the weak, the cheats and ineffective members of the economy. It self-regulates over time.
Think that you are powerless and you aren’t part of this free capitalist economy because you work for an “evil corporation”? Wrong. You are.
Marxists would have you believe that you are a wage slave but the act of commerce is as simple as your paycheck – you trade your labor at a value that the company wants to pay and you are willing to sell – it is a commercial transaction. In a capitalist economy, if you don’t approve of that trade or the value equation changes, you are free to add to your skills (making you worth more to the company) or to seek other employment – in a Marxist/communist economy, you are not.
Why do we get away with stupid macroeconomic decisions?
The only reason the “experts” have been able to get away with this error over the years is that an economy based on the concepts of capitalism/free enterprise is strong enough to absorb a great deal of abuse without the gears grinding to a halt. When an economy has the freedom to change (the concept of “creative destruction” is one mechanism) it can avoid the abrupt corrections and crashes that a “managed” economy is subject to.
A capitalist economy not only is the most effective way to distribute wealth, it is also the best mechanism to manage risk. By taking risk down to the lowest level, to the individual transactions if possible, the risk is mitigated by spreading it over many smaller segments of the economy rather than a larger collective segment. The best example of the risk of collective economics can be seen as playing out in the EU in the aftermath of the mortgage bust. Prior to the creation of a common currency and financial system, when Greece or Italy had an issue, they could manipulate their own currencies and financial policies to adjust their own economies and if they went down, they didn’t take Germany with them. Germany could make a choice to loan them money (or not) based on an economic decision, not a political one. During the EU’s struggles, with the “unified” economy, Brussels has control over Greek, Italian and German monetary policy and as we saw, if Greece, Italy and Portugal were to go down, they will likely take all of Europe down with them.
Centralization of economies centralizes risk. A downturn doesn’t just affect an individual country or region, it hits the entire entity. America’s risks are still quite diversified as compared to those of the EU and in general, we are seeing individual states with sound fiscal policies recovering faster from the Covid era economic shutdowns than those without.
It is a Red State capitalism/Blue State collectivism battle… and just guess who is winning?
Can a national economy be “managed”?
Tune for our next thrilling episode!
Michael, this reads like what Economics 101 should be teaching.
My only issue to capitalism is that in its survival of the fittest - that usually brings you down to top 3 or 4 companies and shuts down the other mom and pops. For example, how many mom-and-pop stores were shut down by Walmarts, Sams, Costco's, etc. How many smaller car companies shut down by Ford, GM, Toyota, etc. and of course just look at SM with FB, Twitter, Instagram and their failings.
We do need an easier way to take that fear out of the equation, and yes, we have Govt and some laws but usually at a cost that the mom and pops can't pay. Meaning the economic cards are stacked in favor of the big guys.
Beyond that I really like this review and am in agreement.