As we move even closer to the big election, I continue to hear people voicing opinions, often in angst, about how big business and big banks are evil. Many point to the idea that capitalism is evil because it is a system that takes advantage of people and operates on greed. I find these notions absolutely astonishing, but at the same time, I can understand how people could arrive at these conclusions.
Capitalism is a system that is fueled by what some may call "greed." While I prefer to call this motivating force "self interest," the money or satisfaction attained from pursuing self interest is simply a measurement of earned success. The word greed implies taking something that does not belong to you, but the free market operates on a system of voluntary transactions. Those who prosper by providing goods and services must do so by satisfying the needs and wants of their customers. However, some people fail to realize that innovators put themselves in jeopardy by trying to provide new goods and services to their consumer base. This is where risk comes into play.
When an entrepreneur wants to develop a new product or service, they must take on risk by underconsuming and saving in order to invest in the development a new product. They temporarily take on risk with the hopes that their new product will be successful, or they face a failed investment and the consequences that come along with that. If they do succeed, they get the benefit of profiting from their business venture and these profits symbolize a measure of earned success. The system works quite well, but the United States has seen great decline in true capitalism.
Unfortunately, the federal government and Federal Reserve are undercutting the risk that businesses are supposed to take on. Keeping interest rates for investment banks at 0%, subsidizing risky companies, and bailing out failed companies makes it much easier for entrepreneurs to attempt business interactions that would be far too risky in a free market. Since the Federal Reserve is continuing to give out money at 0% interest rates, it allows big banks to keep loan rates fairly low. This sounds like a great thing, but in actuality it is a form of price fixing. Sometimes the market needs to raise rates to encourage saving instead of rampant spending. If money is too easy to attain, it is less risky to invest.
We have seen just recently that the federal government thinks it knows what companies should have the burden of risk removed, but they have once again illustrated that government intervention rarely works. In the case of A123 Systems Inc., the $249.1 million dollars granted by the Obama administration was not enough to prevent this company from filing for bankruptcy. Although instead of A123 Systems dealing with the consequences of a failed investment, it is the American tax payer that bears the burden. Government subsidies prevent companies from restructuring into efficient business models.
We also see very low risk in the banking sector, which make consumer's decisions about who will hold their money far too easy. When the FDIC is ready to refund you if your bank goes under, you do not really care if they are making bad investments with the leverage they get from your deposits. This leads consumers to make uninformed decisions about what banks they should be using. The Federal Reserve and federal government also played an obvious role in reducing the risk of investment banks when they decided to bail them out after the banks took on too much risk and their investments failed. By bailing them out, the government essentially erased the consequences of their malinvestment, which will likely lead to further moral hazard in the future.
By listening to people attack capitalism, it becomes clear that they do not really seem to understand it. Many of the problems that people attribute to capitalism actually arise due to government intervention in the system. There are countless more examples of how government intervention in free markets negatively impacts the American people, but these problems are near the top of the list.
-Bob
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