Why Understanding Basic Economics Is Crucial To Maintaining A Free Society

Capitalism’s reputation has taken a beating in recent years. Crony capitalism either via Wall Street bailouts or “green” investments in companies like Solyndra have given people a negative view of what was once known as capitalism. Greedy people who disregard basic human decency has people distrusting America’s big businesses. Rasmussen released a poll in 2010 showing only 60% of Americans thought capitalism was better than socialism, 18% liked socialism better and 21% were’t sure. This result is up from 53% a year earlier but still shocking in the land of the free. As Scott Rasmussen said after the 2009 poll showed low support for capitalism, people looked at what’s gone on in Washington and said “if that’s capitalism, I don’t want any part of it.”

The public however, supports free markets. The idea that a free exchange of goods and services is better than a government run economy is still popular. Nevertheless there are pockets of opposition to this idea. A number of Democrat convention goers liked the idea of banning or capping corporate profits.

If corporations don’t have profits, they don’t survive. If they don’t survive people lose their jobs. If corporate profits are capped you don’t have a free market, you have a managed one and history tells us how that works out. Many of the economic problems we currently have can be traced to greed enhanced by government interference.

It’s time to reintroduce people, especially government officials, to basic economics. I suggest Thomas Sowell’s book Basic Economics as required reading for all elected officials, and Democratic conventioneers.

38 comments

  1. Mike Stucka says:

    You may be neglecting a whole lot of grey areas out there — is it truly unfettered capitalism, or with some level of regulation, and if so, what? I suspect many people would be wary of capitalism that removes, for example, most child labor protections and some environmental controls.

    There’s a great YouTube video comparing Keynes with Hayek. Both are capitalist approaches, but rather different: https://www.youtube.com/watch?v=GTQnarzmTOc

  2. James says:

    Two quick comments:

    1. Using that video to suggest Democrats don’t know anything about economics is about as accurate as using an episode of Honey Boo Boo Child to suggest that conservatives are morbidly obese idiots. One does not follow the other.

    2. “This result is up from 53% a year earlier but still shocking in the land of the free.” Why? Since when did freedom = unfettered capitalism?

    • Two quick responses:

      1) Show me where I said the video suggests ALL Democrats don’t know anything about economics. Clearly the people in the video do not understand how business works.

      2) Show me where I said freedom = unfettered capitalism.

  3. wicker says:

    “Capitalism’s reputation has taken a beating in recent years. Crony capitalism either via Wall Street bailouts or “green” investments in companies like Solyndra have given people a negative view of what was once known as capitalism.”

    Great way to revise history in a not-so-thinly partisan way there, buddy. Capitalism’s current image problems actually go back to the bursting of the dot.com bubble, which first made people question the ethics and professionalism of venture capitalists and fund managers, because they threw away hundreds of billions at flimsy startups with wild schemes that had absolutely no chance of turning a profit. Also, lots of folks made millions on dot.com stocks that they themselves inflated and them dumped just before they collapsed.

    Immediately after the dot.com collapse were the accounting scandals. Enron. Arthur Anderson. Worldcom. AIG. (Martha Stewart). It just went on and on and on. Then came the banking scandals. Not just the subprime mortgage/real estate collapse that took down good banks that had to be bailed out, but criminal activity at places like Lehman Brothers, Goldman Sachs, Bear Stearns etc. And that was just the illegal stuff. There were legal things done that harmed capitalism’s image too. Outsourcing became a huge issue, causing people to wonder if American companies actually had a stake in the American economy and its workers, both white collar and blue collar, whether union or non-union. You had CEOs paying themselves huge salaries and bonuses even as profits and stock prices were plummeting and massive layoffs were occurring. And there was the practice of raiding pension plans.

    Capitalism requires the players to work in a legal, ethical, responsible manner. Otherwise, the amount of regulation required to protect investors, consumers, workers and the market itself makes it unsustainable. Conservatives have spent the last 12+ years tiptoeing around and doing their best to ignore the issue of illegal, reckless and questionable behavior by the private sector. That’s why the Solyndra attacks don’t gain any traction against Obama. Not only does everyone know that Bush (both of them) heavily practiced crony capitalism, but that it didn’t amount to the dust on a hill of beans when compared to the damage that the private sector did, and on such a massive scale for a very long period of time with such a small number of people paying real consequences.

    So, socialism-baiting doesn’t do any good. Neither does trying to blame everything on the Community Reinvestment Act and ACORN. Conservatives have to be as serious about opposing and fighting private sector corruption – and criticizing business practices that while legal are unethical and harm consumers and markets – as they are government corruption, unions and street crime. But their tiptoeing around this issue, doing their best to pretend as if it doesn’t exist, is precisely why Romney is behind in the polls right now, and the ridiculous, irresponsible Obama attacks on him are actually working. The voters remember the financial scandals of the Bush years (not that Bush was responsible for it, just pointing out the time frame) even if the GOP pretends not to, so Romney’s private equity background makes him a suspect from that scene by association.

    • “Great way to revise history in a not-so-thinly partisan way there, buddy.”

      I wasn’t trying to write a history lesson. The Wall Street bailouts took place under Bush and Solyndra was under Obama. Both parties are to blame and I pointed that out.

      That being said I agree with much of what you wrote, especially this bit: “Capitalism requires the players to work in a legal, ethical, responsible manner.”

      • Joshua Morris says:

        “Capitalism requires the players to work in a legal, ethical, responsible manner”… sounds a lot like Russell Kirk to me. He believed that capitalism could “exist and prosper only within a moral order” (Capitalism and the Moral Basis of Social Order, p. 102). I believe that much of that moral aspect, however, must be intrinsic to a society and cannot be forced on it by government, except for the protection of person and property.

  4. David C says:

    As someone with an actual, you know, Economics Degree, I’d recommend you read any actual basic economics textbook (there are countless ones at your local university bookstore, and some in the high schools) that present balanced and intelligent consideration of economic theories (Keynesian, Monetarist, Neoclassical and others), concepts, and models rather than the work of a partisan hack like Sowell.

        • James says:

          +1. For proof of partisan hackery, one need only look at the reviews on the Amazon.com link Buzz helpfully provided. I found this one particularly lulz-worthy:

          “It is must-reading for anyone who wants the truth about how the laws of economics govern so many of the events in our daily lives.”—Arthur C. Brooks, President, American Enterprise Institute and author of The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future.

          • bgsmallz says:

            Seriously?

            Sowell received his bachelor’s degree in economics (magna cum laude) from Harvard in 1958, his master’s degree in economics from Columbia University in 1959, and his PhD in economics from the University of Chicago in 1968.

            Disagree with the man’s work…but respect his pedigree. He’s earned that, I’m sure.

            • David C says:

              Guy can have fancy degrees, doesn’t make him any less of a partisan hack in his chosen field. Instead of taking that education and distinguishing himself within the economic field, blazing a new trail in economic ideas, he’s gone off to be a partisan hack, residing within an enclosed right wing media environ for over 30 years, to the point of recently writing a column comparing the President’s actions to Hitler’s. He’s a hack, plain and simple. If you read him to be informed about economics or what’s going on in the world, you won’t be.

                • David C says:

                  Paul Krugman’s work on international trade (what he won the Nobel Prize for) is superb. Krugman went beyond the standard comparative advantage model to pioneer work on the gravity model of international trade, explaining why countries like the US and Germany, or US and Canada have high volumes of trade despite producing similar products similarly well. He literally wrote the book on how people now think international trade works, which is one reason why he’s accorded great praise in the economics field. He also pioneered examinations of the end of fixed exchange rate regimes and currency crises long before Argentina, and liquidity traps and depressions long before 2008. In economics terms, he’s sterling. And unlike Sowell, he’s actually contributed something to the field besides agitprop.

                    • David C says:

                      There’s a difference between pioneering a revolution in economic thought and turning out right wing tracts at the Hoover Institution. It’s why one has a Nobel Prize and the other doesn’t. There are good Republican economists: Glenn Hubbard, Bernanke, Gregory Mankiw (who actually wrote a great best selling economics textbook) among others. Though I disagreed with Milton Friedman’s political advocacy (and some of his policy prescriptions were far too theoretical to work in the real world) his contribution to Monetarism and monetary policy was landmark. Sowell doesn’t belong anywhere close to them. He’s a hack who hasn’t contributed much to the field of economics. Krugman has, in spades. That’s the difference.

  5. In addition, crony capitalism can be fought at the state levels as well. One 18 year incumbent here in Georgia, for instance, receives a majority of his campaign contributions from the executives, lobbyists and attorneys for the utilities he is charged with regulating… including $10,000 from the very attorneys who were presenting a particular case involving $3.2M worth of outage related costs, just 2 days before he voted on the case…

    http://gareport.com/blog/2012/07/18/its-legal-but-is-it-right/

  6. While the profit motive and maximizing profit is obviously central to our economy and capitalist theory, the maximization of profits at the expense of all other concerns is a somewhat recent phenomenon, and building a governing philosophy and ideology around profit maximization is also a rather recent phenom and dangerous.

    Decades ago, most firms were likely to ask is this good for the community we are part of as well as our bottom line, but extreme capitalist thinkers and their friends in government have largely driven out the “good for the community” part highlighting only the bottom line. They thus view government the same way they view any other resource – how can they strip the most value out of it for their own profitable purposes and the carcass that’s left is someone else’s problem.

    That’s the ultimate problem with Romney’s approach to business and government and why he rubs people the wrong way. Sure he had some successes like Staples, but Romney always used a fee structure that guaranteed his firm would turn a profit (stripping it out of the taken over firm) whether they were successful or not. Yes, they’d make more money if their investment was successful, but they never lost money. There was no risk – just maximization of profit. And then on their taxes, they structured everything to make sure they’d pay as little as possible, even bending the definition of the law to convert as much of their fee revenue as possible into carried interest so they’d pay even less.

    Now, am I arguing that Romney should have paid more taxes than he legally owed? Of course not. But that doesn’t mean he wouldn’t have to adopt the Bill Clinton/Warren Buffet argument of I can afford to pay more so I’ll work to change the law. And on the corporate raider angle, the way Romney ran his business was pretty far removed from Henry Ford’s old adage that he wanted his employees to be able to buy the product they were making.

    Buzz you guys like to pretend that capitalism is some age old thing that’s never changed yet many of the great capitalists that helped build America wouldn’t even begin to recognize today’s extreme branches of capitalism. It’s funny and disturbing to me that most conservatives like to say that about the Founders and what the government has become and are greatly disturbed by the fact that Thomas Jefferson wouldn’t recognize what the US has become, yet have no problem that someone like Henry Ford wouldn’t begin to recognize modern capitalism. I personally don’t think it’s very “conservative” to not acknowledge the changing attitudes about something as “conservative” as capitalism.

    And I say all of this, of course, as a capitalist.

  7. Rick Day says:

    If corporations don’t have profits, they don’t survive. If they don’t survive people lose their jobs. If corporate profits are capped you don’t have a free market, you have a managed one and history tells us how that works out. Many of the economic problems we currently have can be traced to greed enhanced by government interference

    Buzz *clutches pearls* Quick, someone get me a fainting couch! *swoons*
    *recovers*

    A bit over the top regarding your perception of this one moron’s comments, Buzz?

    Statement 1/2: technically correct, albeit ad hominem. Caps do not equal elimination of all profit. It merely calculates what is an obscene amount of pre-tax profit and could potentially pro-rate it into special tax accounts that maintain the basic infrastructure needs a corporation requires in order to generate profit. You know, streets, sewer expansion, power, the basics.

    Major corporations, if calculated ‘by the person’ (business IS a people, yo!) should be executed for the amount of resource they consume. They pay for what they use and they use more than thousands of fellow taxpayers combined. How is it bad for them to pay their share of the overall burden?

    Next statement: “regulation does not equal a free market”. I can’t even begin how one can add any depth to this comment. It just smacks of two dimensional Rush jingoism. THERE IS NO FREE MARKET in a civilized society. You say “well, free of government regulation!” If you want to look me in the eye with a serious look and declare all regulation bad, I’m going to make you look really foolish really quick. I’ll have you agreeing that Blood Diamonds, textile child labor, sex slavery (it’s a BUSINESS, Buzz!) can be lumped into ‘businesses who deserve Free Markets”. Unless you run them through your very VERY selective ‘morals filter’. Then, it’s twist with the wind.

    The largest grossing Free Market commodity in the world exist within the Ultimate Free Market. Yeah the illicit drug trade, the ultimate in non-government regulation. Buzz, there is your future without government control on greed. Next thing you know, GM will be getting Driving permit age dropped to 14. Old enough to bleed old enough to speed! GOVERNMENT REGULATION it screams.

    Your last statement lacks words at the end. “..government interference by Big Business.” There, fixed.

  8. saltycracker says:

    The Wall Street of the highly leveraged investment houses disguised as government insured banks and their minions are not seeking unfettered capitalism but an oligarchy.

    Capitalism with a level of regulation of open markets and limiting oligarchies has driven the U.S. to the largest economy in the world. The emerging markets that increasingly recognize capitalism are booming. Overregulation, sometimes difficult to define, is crushing economies.

    What I recall about Keynes he advocated the public monies to be used to serve the broad public. He would probably roll over in his grave to see it used for individual reward as we do now.

    Obama represents the worst of situations pandering to the oligarchists of the big financials and those like Buffett (Calypso note…..not Jimmy) while the government moves into a position guaranteeing and controling property loans, student loans, health coverage, corporate profits, the financial oligarchists and so on.

  9. greencracker says:

    “Capitalism requires the players to work in a legal, ethical, responsible manner.”
    V.
    “You can’t legislate ethics.” – said often, by lots of people*, re: Ga ethics reform. And, IMHO, true.

    I think we have to work on the “legal” part — at least we can write that down on paper and make a pretty good stab at agreeing on what’s “legal” and what’s “not legal.”

    The other two … ethics and responsibility … lol, we’re not going to agree on what those mean!!

    *This is not a reference to any particular legislator — it was honestly said by a lot of people but I don’t remember who all.

  10. seenbetrdayz says:

    If we spent half as much time using the judicial system to handle cases of fraud as we do letting the legislature try—in vain—to pass legislation to prevent fraud, this post would not be necessary.

    Even some democrats now are starting to realize that well-intentioned legislation can sometimes have devastating effects on small businesses, who are unable to comply with regulations as easily as the big players. What happens is the big players who were meant to be the target (who are sometimes even the *authors* of new regulations through various lobbying groups) actually drive their smaller competitors out of the running.

    The man in the video with the microphone is Peter Schiff. He ran in the Republican primary for U.S. Senate in Connecticut in 2010, against primary challengers Linda McMahon and some guy, to replace Chris Dodd. However, the GOP in Connecticut chose McMahon, likely due to her husband’s celebrity status and vast wealth which could be used to fund her campaign, on the typical belief that you go with the candidate who ‘can win.’ (D) Richard Blumenthal won. Sort of a shame, really. Schiff is a bit of a hot head and I was hoping he’d win it, just to annoy those in the U.S. Senate.

  11. geohot says:

    First, the guy in the video is an idiot.

    But second, Buzz, you too are just wrong. “If corporations don’t have profits, they don’t survive.” If you are talking about “basic economics” as you claim to be, that statement is just plain wrong. Over the long-run in any perfectly competitive market, no profits exist. That is economics 101. Profits ONLY exist in the short term where there is an imbalance of supply and demand – over the long run all market participants produce where marginal cost = marginal revenue. Thus, cost = revenue and “profit” = 0.

    Now, perhaps you want people to understand “mid-level” economics, but I don’t think that was the point of your snark. Besides, I really don’t think you’re suggesting that all markets in the U.S. are (or should be) oligopolies or monopolies – the only markets where a profit can exist. And, incidentally, markets that are by definition inefficient.

    But don’t let “basic economics” get in the way of a good narrative.

  12. docl says:

    I think, this is the most intellectual forum that I have experienced so far. Thanks to many intellectual readers’ comments. Let me contribute some thoughts to readers.

    As far as I know about economics, the global economic crisis in 2008 has been the catalyst to justify the resurgence of Keynesian economic theory. Spending and regulations are two critical factors to rescue the recession and to boost the economy; Obama’s stimulus package is one example. Has it been working. Here are some evidences:

  13. IndyInjun says:

    There can be no free market economics or anything else without this –

    THE RULE OF LAW

    Barring a grim determination to do that…..well we are a nation of 300 million or so, there are about that many guns, and trillions of rounds of ammunition. Enough said.

    Our economy is built upon looting and the looting is bi-partisan.

    The words of Nehemiah 5 and Habakkuk beckon:

    ” Therefore the law is ignored
    And justice is never upheld.
    For the wicked surround the righteous;
    Therefore justice comes out perverted.”

    See MF Global and Corzine. Read up on rehypothecation. See what was forced through with FASB 157. Understand that lying our way back to prosperity is the path to destruction of all that we know.

    Somewhere on the other side of the carnage, I pray that a few good men and women resolve to preserve the Constitution and the Bible. Right now things are not looking too swift.

    • seenbetrdayz says:

      heh. Every once in a while the critters in D.C. go beat up an Enron executive again (again) to make it look like they’re doing something. Let me clarify: I’m happy that Enron got served a dish of justice, but there are other rotten fish in the sea. Trouble is, the other fish got smart and bought themselves some politicians.

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