What’s Wrong with Capitalism?

I had a question from a reader the other day. You may have thought the same thing. To wit, “You say you're an unabashed capitalist, but your articles pan the financial industry and the way business operates in these United States.” What's up with that?

I'm glad you asked.

Before any large enterprise can begin, there needs to be some financial support, capital, that provides for startup costs and allows it to operate until revenue can pay those costs. A person may homestead a property and work the land until he has a surplus he can offer for sale, but if he didn't need any funding before he created the surplus, then he was an entrepreneur and a pioneer, but he was not a capitalist and his business, the sale of surplus crops or wagon wheels or whatever is not a form of capitalism.

Capitalism, and I'm not relying on any dictionary for this so this is just a basic definition, is a system of economic development and business that relies on some quantity, sometimes a huge quantity, of money, or capital, to begin.

Imagine you want to build airplanes to compete with Boeing and Airbus. Years before you sell a single airplane you're going to have to acquire land, build manufacturing facilities, purchase raw materials, and pay a large, skilled labor force. Billions of dollars are going to flow out into the economy before a single dollar flows into your airplane business.

Where does this money come from?

Let's go back to our farmer. He cleared land, built a place to live from trees he cut down to make room for crops. He planted, cared for, and harvested crops to feed himself and his family. He built the implements required to care for the land and animals. At some point, with skill and hard work, he may produce more than he needs for his own sustenance. He can sell this surplus for money that he can save for later use. This farmer can put the cash in a mattress, or he may choose to put it in a bank, or he may lend it directly to a person or business.

If he puts the money in a bank, the bank may have an agreement with the farmer that his money will not be available for some specified period of time. If the farmer does not put his money into a demand deposit account (where his money is available any time upon demand) but puts it in a timed deposit, with the agreement that the bank will have use of the money for some specified period before he may withdraw it, the bank, then, can lend that money to the airplane manufacturer as startup capital.

The farmer also may directly lend the money to the manufacturer. If he does so, he becomes a capitalist. He has become part of the capitalist business system. If he puts his cash directly into the hands of the manufacturer he can either purchase a part of the enterprise and become a part owner — a shareholder — or he can lend the money to the manufacturer and become a bond holder. Either way, he is providing capital for an enterprise and is a capitalist as much as the person who has started the manufacturing company.

I, personally, find nothing wrong with this setup. In fact, allowed to work, it creates a sound economy and wealth for a large portion of the populace.

The problem enters the equation when the political process gets involved. This is better called “crony capitalism.” Now laws and regulations are created to benefit politically connected people and other entities that skew the orderly working of the capital markets.

People make financial decisions based on information at their disposal. Available information should concern the ability of the business to turn a profit, pay interest or dividends as the case may be, and to continue doing so into the future.

But when secret deals are made behind closed doors by people who hold the power to make laws that force others to do what they would not, or not do what they would, and when the rules of the game may change at the will of a very small number of persons who have the power to help themselves to the hard-earned wealth of others through the machinations of unaccountable government, then crony-capitalism becomes a blight on society.

Crony capitalism is what we live with in The United States.

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