Why Capitalism Matters

Last week I wrote about the voting trends for the 2020 Presidential elections and how each party is going to need to appeal to people outside of its base. The fact that 44.6% of the people in the United States identify as being Liberal/Progressive was a surprise to me. There is a growing movement to support the “Green New Deal,” which propels key socialist ideas to the forefront of the political discussion.

However, why does this failed economic system keep coming back to life when there are so many examples of the system failing – think Cuba and Venezuela? Socialism does not work because it fundamentally ignores human nature and behavior. Collectivism may appear to work at the beginning, but human nature and behavior begin to take over and all people are left within this socialist system is a “shell government” of tyranny and misery.

There are three critical drivers for the capitalist system to work:

1. Incentive (profit motive). Creating and innovating drives the economy – why? Because people believe they can come up with a better product, process or service, and that they will be rewarded through making money (profit). The idea of profit drives people to take risks with their resources because if they are successful, the risk will be rewarded.

On the other side of the coin, if you take away the incentive, there is little desire to take risks because there is no reward or profit.  

2. Market economics. A real market economy disciplines poor performances and rewards highly productive and efficient operations. We are accustomed to the market disciplining and correcting bad ideas. Inefficient businesses or wrong products don’t survive in a free market economy. We don’t notice the power of an open market system because we live it and enjoy the benefits of it every day.

Prices are determined by the market forces, not a governmental entity. When we lose market economics or try to reduce market influences, we create an artificial market altered by policy or government.   

3. Reasonable regulations, taxes, and protection of property ownership. When everyone owns or claims a public domain, people act as if no one owns it. Socialism means common ownership of means of production.  There is no incentive to increase productivity or efficiencies. Peruvian economist Hernando de Soto once said, “You can travel in rural communities around the world, and you will hear dogs barking because even dogs understand property rights.”

Without these elements of capitalism (profit motive, market economies that produce market efficiencies and winners and losers, and reasonable taxes, regulations and protection of property rights), the economy stagnates.

As with Venezuela, no natural resources of a country can correct and stave off economic decline without the profit incentive and reasonable taxes and regulations.

When we fail to foster, develop and promote the potential of people, we deprive ourselves of our greatest asset and innovation engine. Controlled economies may look benign and good but, long-term, they destroy the human spirit and the ability to pursue dreams and opportunities.

Capitalism can appear to be hard and unforgiving, but it creates the greatest prospects and opportunities for wealth. At the McAllen Chamber of Commerce, we still believe in capitalism.