Capitalism

You may have heard the word 'Capitalism'. This word has defined our country and set us apart for over 200 years. CAPITALISM created the wealth, the freedom and the opportunity that exists in this country today. What is it?

According to Random House Dictionary, capitalism is "an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth." Capitalism is synonymous with the words "free market."

This means that individuals, or corporations (separate entities run by groups of individuals) decide what to make, how to make it, and how much to charge for it. These same individuals and corporations also have the option to buy or not buy goods and services from other companies. Within this model, prices are controlled purely by supply and demand. In the most basic sense, prices will rise and fall based on the suppliers ability to produce at a certain cost and buyers ability to buy at a certain cost. Everyone has experienced supply and demand.

- You demand food.
- A grocery store has set out food that they have been able to produce at a cost lower than they think they can sell it for.
- You go to the grocery store and select food.
- The grocery store tells you the price of the food.
- If the price is high, you find other food that will suit your needs.
- If the price is low, you buy lot of that item because it's a great value.
- Whatever the price, the grocer has set it so that they will make some amount of money on the purchase.

Seems like a good system. If you see problems with this system, let's discuss them.

The problem with capitalism is that it leaves individuals and corporations with the power. One person or company who supplies a product controls, to some extent, the people that demand that product. This would force the person demanding a product to either find another supplier, or create their own supply by making the product themselves. Now we can see that evil people and corrupt corporations are controlling everything, only concerned with their own benefit. In most cases (minus the evil and corrupt part) this is true, businesses exist to make a profit and increase value for the owners. Also, you could technically say that supply and demand is also at work in other systems that have more government intervention, but in those systems, the market is not the only factor in supplying and demanding goods, I am simply highlighting how it might work within capitalism.

In steps the government to save the day.

Don't forget, businesses also create jobs and provide benefits to employees. Any successful business will have added value to anyone purchasing products or services from them as well, for if they had not added value to their products, no one would have purchased them. It is the circle of life.

I have written about some of these topics before, but I feel compelled to write further and clarify more about how I see things working, and to defend the system that has created the greatest country of our age. Thanks Laura for prompting this post.

Take for instance the mortgage industry. Apparently this thing has failed lately, so it's in the news. Within capitalism, mortgages should work like everything else. Lenders provide large sums of money up front to borrower, in return for smaller sums of money paid back to the lender including an agreed upon interest rate over several years. If lenders don't have money to lend, they don't lend it, if it is determined (by the lender or borrower) that the borrower cannot pay back the loan, the deal is off. This should work fine. Risk is assumed by the lender (for fear they won't get their money back), and the borrower (for fear that if they don't pay, the lender will take something back of equal value and ruin their "credit", or the ability to borrow money from another lender).

Our wise and knowledgeable government decided in 1938 that it wasn't fair. Everyone should be able to get large sums of money for things like houses, even if they might not be able to pay back their loans. So the government created something called Fannie Mae. Fannie Mae says to the lenders, "go ahead and give more loans out to the higher risk borrowers (low income families), we will subsidize your losses if they occur." So lenders start lending, borrowers start borrowing. A NEW SUPPLY of money has been discovered. But where does this money come from? Since more money is available, the demand for housing increases. If you have been paying attention to how supply and demand works, when everyone is demanding something, the suppliers can get away with higher prices. So, guess what, housing prices climbed. This has been happening for decades.

The mortgage industry is one example. Similar examples can be found in every area of the economy that the government touches. There is no regard for where the money comes from, and the "tax and spend" mentality will continue to inflate prices and create a false economy that cannot last.

Why can't it last?

In the case of mortgages we see that everything went pretty well for a while. People bought houses, paid for them, values kept increasing because of the good supply of money. Then one day, when there were more houses than families who needed them, and when the seemingly infinite supply of money backing these risky loans showed signs of weakness, everything collapsed. The free market began to push back on the inflated prices. People realized that the prices were too high, so they stopped paying the high prices. Home values fell; people couldn't sell their home for anywhere near what they paid, that is where we are now.

The Solution. Abandon the free market. The government is the only entity that can stop the crisis. Right? According to many of our leaders, intervention is the only way out. They argue that we must fight to keep the prices inflated.

Does is matter that the government is the reason for the inflated prices in the first place? Shouldn't we stick to our guns and let the prices fall to where the market says they should be?

Are we being setup for a bigger collapse later?

Charlie Rose interviewed Tim Geithner, President Obama's Treasury Secretary. Here's a snippet:
[CR]Will capitalism be different?
[TG]I think capitalism will be different, and the financial system will be dramatically different. It’s already dramatically different. Again, if you look at the scale of adjustment and restructuring in the financial system, it’s already happened.
http://www.editorandpublisher.com/eandp/news/article_display.jsp?vnu_content_id=1003949930Capitalism will be different?

So far we have seen the government become part owners of some banks, car companies and insurance companies. Is capitalism really different? Can we just change the definition of capitalism, or should we find another word that defines what is going on?

Without spreading fear and conspiracy, would you consider with me what is really going on?

Socialism: Any of various theories or systems of social organization in which the means of producing and distributing goods is owned collectively or by a centralized government that often plans and controls the economy.

Is abandoning the system that created the most prosperous nation of our age a good thing? Is poverty for all better than poverty for some? Our past leaders failed to acknowledge the direction we were headed, our current leaders think it is a good thing, that is the change we were promised. We all need to be aware of what is going on and why. We all need to decide where we go and how we get there. Our government must be reminded that they are for the people and BY the people, not for themselves or their own ideals.