Capitalism is the best economic system we have, albeit flawed. Previously, I wrote about how it's intrinsically shown to generate the most wealth per capita compared to alternatives. While the aggregated result creates more money on average, we know it's not equally distributed. The gap between the richest and poorest within capitalism is astronomical. For every Bezos or Zuckerberg, there are millions struggling to pay bills. Is that fair? Through taxation and various policies or programs, a government can intervene to redistribute wealth and/or create an equal playing field. But how much "wealth redistribution" is reasonable, and does it really work? I will try to answer this question this week as I continue my series on capitalism.
Wrong kind of fair... but I appreciate the color coordination so much!
Free Markets and the Safety Net
One of the most powerful components of capitalism is the "free market" element, where individuals have the ability to buy and sell without being encumbered by governmental entities. Without restrictions, people are motivated to generate more and be rewarded accordingly. While many can thrive in a free market, there are of course situations where not all can participate. Those without ability to contribute (for example, the elderly, disabled, or otherwise marginalized) are left behind. And since money makes money, the rich tend to get richer while the poor can struggle to get by.
Of course, there is no 100% free market in existence. Governments have laws and regulations that ensure commerce doesn't negatively impact other aspects of society (e.g. environmental rules limiting pollution). Additionally, governments will impose taxes on transactions (which I hope to delve into in a future blog) within their own jurisdictions. In many cases, countries will impose tariffs (taxes on international goods) to either support its own products or as a means to flex political will against another nation. The revenue generated from these taxes, in part, help pay for a "safety net" for those unable to contribute to the economy. "Safety net" programs in the U.S., for example, would include medicaid, welfare, or social security. These programs make up a substantial portion of the overall federal expenditures each year.
If you're looking for a fun time, use this link to the Congressional Budget Office (CBO) and check out the September 2020 projections. You'll see the U.S. spent $3 trillion in 2019 on "safety net' programs, and is projected to spend $5.1 trillion in 2030! That's approximately $9,200 per citizen in payouts in 2019, and based on population growth estimates, about $14,000 in 2030. Relative to economy as a whole, the U.S. spent approximately 14% of its total GDP on safety net programs. For comparison's sake, The World Bank estimates that even European/Central Asian nations on the higher end of the spectrum spend about 2% of GDP on safety net programs! I was pretty shocked by this contrast, and think it provides some perspective on safety net programs in general.
Equal Opportunity
Even with the most robust safety net programs, there's a missing piece in ensuring fairness in capitalism. While safety nets provide a baseline support for those less fortunate, they do not ensure everyone gets equal opportunities to enjoy the rewards of a free market economy.
Governments can implement programs to drive increased participation in the economy - providing free or subsidized training in needed skill sets, for example. For capitalism to succeed, the more we contribute as individuals, the more we all benefit. Helping individuals land opportunities to thrive within the economy is absolutely critical to breaking the cycle of poverty and ensuring the best results. At its root, capitalism is all about rewarding the best performance. Whether that's an individual performing well in their job or a company creating the best product, top producers need to be rewarded for our economy to succeed. But this isn't always the case, and it stifles the positive effects of capitalism.
Cronyism
One of the challenges to ensuring fairness to all citizens in a free-market economy is how to aid those who are born into circumstances more difficult to succeed in than others. Economic systems like socialism (redistribution of wealth) or communism (political control of wealth) use governmental means to accomplish this goal. However, played out in reality, command systems often foster cronyism amongst government ranks. Those in power get special treatment above average citizens, and allegiance to those holding political power becomes the only path to prosperity.
Certainly, there's crony capitalism. Politics and corporations intermingle constantly, with companies contributing to politician's campaign funds, creating cushy consulting/lobbyist positions after political careers are over, etc. In turn, politicians may advocate for a company's preferred legislation. At a more micro level, there are aspects of cronyism within companies. Sometimes, individuals are promoted to leadership roles or get larger pay increases based on familiarity with senior leadership, and not on the merits of their work or experience. Even within families, generational wealth plays a large role in financial success down the line. The Instagram playboy who flaunts his family's wealth without putting an honest week's work into earning is incredibly frustrating for those of us working much harder for much less reward.
But let's take a step back. Crony capitalism is really not capitalism. In a truly free market, competition between independent entities allows for merit-based success. Cronyism tilts the scales to a company (or, at a lower level, an individual) that did not earn the win. In fact, cronyism kills capitalism! By not rewarding the best producers, their motivation to perform at a high level decreases. The accumulated wealth across citizens declines. The incentive to succeed dissolves, with those the best producers lowering their output (in quality or quantity). The economy contracts, and the bar lowers for everyone.
If my hypothetical example doesn't sink in, here's a more relatable situation. Say you work in a job where, regardless of performance, you will never get a raise, bonus, or promotion. Are you motivated to go above and beyond? You may do enough not to get fired. You may love the work and put in extra because you enjoy it - consider yourself fortunate! But, being honest with ourselves, the prospect of a sales commission, tip, or performance-based wage increase keeps us on our toes and putting in a little extra.
Equal Playing Field
All this said, what can be done to create a more fair playing field? Governments need to ensure equal opportunities for all. We need to go to great lengths to maximize all citizens get a chance to participate in the economy. As I spoke about at length in my blog on diversity, we benefit as a whole by bringing unique talents and perspectives to the forefront. At a basic level, most nations have laws ensuring fair hiring practices. In my own hiring experiences, the Human Resources departments I've worked with hold hiring leaders to strict standards to justify fair hiring decisions in part to comply with federal hiring laws. Of course, this is important because even entry-level jobs are a means to financial success. But, even before the interview, so much can be done to create opportunities. Education and training needs to be readily available to help citizens develop practical skills to earn a living in a competitive society. While capitalism can drive some of this on its own, the government can help reinforce.
I know this is a heavier topic than most of my blogs, but I feel it's critical to discuss capitalism at a broader level as it helps us understand personal finance and careers in perspective. I ensure you, I'll get back to lighter topics in the future! Until then, be safe and welcome to 2021. It can only go up from here!
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