Capitalism is the economic philosophy that all money making entities and resources are privately owned. As a result the wealth created from those entities is privately owned as well.
Capitalism in itself is not a big deal. It's just stating that the government shouldn't own all businesses and people have the right to own wealth individually. I think this is probably something most people can get behind.
However, over the last few decades capitalism in America has become synonymous with ideas like free markets, laissez faire and the invisible hand. These concepts being that in addition to the government not owning wealth and the wealth producing companies; the government will not interfere with the privately held, wealth producing companies or the markets that these companies play in.
The idea is that in a free market, multiple competitors will find the most efficient path to producing a good or service which will ultimately benefit the consumer. In addition the consumer will choose the most beneficial competitor, creating a suitable level of quality. Market conditions and competition will create the best option as opposed to having the government interfere and force options.
For example, lets say Toyota started offering unlimited gas for the life of the car to attract buyers. Other car companies would have to offer the same the deal or something similar to remain competitive other wise the consumer would buy mainly Toyota's and they would all go out of business. This is good for the consumer because they get free gas for life.
Now this would be opposite of the idea that the government stepped in and said that car makers should offer free gas for life because the government sees it as beneficial to the consumer. The government is interfering with the market by requiring a condition, which may have the same result, but will be less efficient if the market was left alone.
What's interesting about all of this is that America has been in a sort of testing stage for the last 50 years or so. We've been toying with this idea that markets should be free and without government intervention and slowly moving more towards this direction. As the markets created wealth in our country and we continued to lead economically it was hard to argue with this approach.
Countries with heavy government intervention like Russia and Cuba failed over and over again resulting in economic meltdowns. This only bolstered the idea that unfettered greed and competition was the best way to go. This hubris ultimately was our undoing and has resulted in the last few stock crashes and now our current economic situation.
The housing crash and subsequent global economic meltdown will be a major part of history. 2008 will be considered the year that the curtain was pull back on American Capitalism and shown to be a fraud. Capitalism in pure free markets may work in theory, but the reality is that there is nothing that is pure, including free markets.
Financial giants that have been around for 85 years have been bankrupted because they bought wholly into this idea. This is a big deal. These are companies that once represented America wealth, stability and superior economic theory. They went bankrupt over night whimpering into the dark like some crappy start up as opposed to the financial stalwarts they were supposed to be.
Now did America's theory of capitalism cause all of this? No not entirely, but this notion that markets shouldn't be regulated definitely helped it along its way. Banks have lots of regulation and there are a lot of rules in place for them to follow. As banks started making more money, the regulators who enforced these rules start backing up. As banks started making mountains of money, the regulators all but disappeared. Poor financial decisions were justified with stacks of money and high stock values. Greed was left unchecked and unregulated and ultimately destroyed many banks and investment firms. We're still dealing with the fall out and there is no telling what other consequences there will be.
What is certain though is that we've reversed our theoretical direction as a country, even if it is only temporarily. Unfettered capitalism has proven to be a loser and we're moving back towards more regulation. Hopefully at some point our leaders and government officials will realize that a balance must be achieved. We shall see.
Next post, my thoughts and predictions on the economy. Where we're at, where we'll be and when will we recover, if at all.