WASHINGTON, Sept. 24, 2015 − Today there is a massive, ongoing, full-scale attack against capitalism. From President Obama to Hillary Clinton to Bernie Sanders to Pope Francis, capitalism is being blamed for most of the country’s economic problems, particularly the plight of the poor.
The reality is that America’s movement away from the rigorous principles of capitalism under the current administration has led to increases in poverty and greater economic inequality than has been seen in recent memory.
In theory, there are two basic economic philosophies, whose differences can be seen in the following simple example. Suppose we have 100 people in a society who get together to produce 1,000 units of output per day. At day’s end the output must be divided among them. The amount each receives determines his or her income.
One choice is to divide the 1,000 units equally among the 100 people so that each receives 10 units. This equal distribution of output completely eliminates the income inequality problem.
Supporters of this method would say that each person is motivated primarily by what is good for society and that the equal distribution model serves society best. The rationale for this kind of distribution is that people should be paid according to their needs. Since each person has similar needs, each person should receive a similar income.
History reveals that this system is not successful in the long term. While it has had some success when the society is concerned with satisfying lowest level needs like food, shelter, safety and basic survival, the system still fails once those needs have been satisfied.
The reason for the failure is easy to see. There is no motivation for anyone to work smarter or harder in order to increase output, because no matter how much more a worker produces, he or she earns exactly the same as a worker who produces very little.
As a result, as output stagnates the economy does not grow. And a government entity then has to be established to regulate production and distribution of output. For long time users of this system, like Cuba and North Korea, the stagnant level of output has led to a consistently low standard of living and high poverty rates.
The alternative system would pay each of the 100 workers according to his or her contribution, so that those who make large contributions would receive 60 or 70 units of output, while those who, for whatever reason contribute little, receive only one or two units of output.
This leads to an unequal distribution of output and income. Supporters of this system argue it is fairer, since each person is paid according to how much each contributes. The more a person contributes, the more the person is paid, which provides an incentive to produce more and grow the entire economy.
Some argue this leads to greed, which distorts the system. Economists say this is “rational selfishness” rather than greed. Since human nature indicates people are motivated primarily (not necessarily entirely) by self-interest, this system works best in the long term. That explains why the American economy grew from its inception to become the largest economy in the world after about 150 years, easily surpassing the economies of countries that are many hundreds or even thousands of years older.
One problem in any methodology is how to treat people who do not contribute to the economy and therefore receive no income. The solution, for compassionate Americans, is to recognize their social responsibility. Most Americans will gladly share a portion of their income with those who are truly in need. This is accomplished through social programs that transfer income from those who have earned it to those who have not.
The debate in this case focuses on determining how much income to transfer. Many high achievers believe today that too much of their income is being taken from them. Some see more than half of their marginal income taken and redistributed to those who haven’t contributed anything to the nation’s productivity. This high marginal take rate discourages high achievers from contributing more to grow the economy and provide additional opportunity to others.
By providing some individuals with unearned income and unearned benefits, we provide them with a strong disincentive to contribute. The solution for those who are able to contribute but do not do so is to insure that each has opportunity to eventually become self-sufficient. This relieves these individuals of chronic dependency on others for survival and thus leads to economic growth.
While there are other economic issues that must be equitably resolved, such as deciding the exact role for government in this century, if we simply return to the principles that originally made America great, we would all be better off. Capitalism, even with its flaws, is still the best economic system because it encourages freedom and individual responsibility while greatly benefiting the majority of the people it ultimately serves.