Recently, the United States returned, for the first time since the 2008 financial crisis, to its long-held position as the most competitive economy in the world.
No, it’s not because of Trump. Or Obama. Sorry Kool-Aid fans. Already, the largest economy in the world—the United States according to the World Economic Forum’s annual Global Competitiveness Report—“with a score of 85.6 out of 100”, is number 1 again “due to its vibrant entrepreneurial culture and strong labour market and financial system.”
In a word: capitalism.
What is capitalism?
Capitalism can be defined as an economic system in which capital goods are owned by private individuals or businesses.
The production of goods and services is based on supply and demand in the general market (market economy), rather than through central planning (planned economy or command economy).
The purest form of capitalism is free market or laissez-faire capitalism in which private individuals are completely unrestrained in determining where to invest, what to produce or sell and at which prices to exchange goods and services, operating without checks or controls.
Most modern countries practice a mixed capitalist system of some sort that includes government regulation of business and industry.
In capitalist economies, governments play a minimal role in deciding what to produce, how much to produce, and when to produce it, leaving the cost of goods and services to market forces.
When entrepreneurs spot openings in the marketplace, they rush in to fill the vacuum.
The strength of the American economy is based on the often-reviled and misunderstood tenants of capitalism, buttressed by a legislative system that promotes free trade.
All interstate commerce in the United States is underpinned by a single collection of rules called the UCC (uniform commercial code). The US has a system that encourages free trade amongst its disparate states.
The UCC is a set of laws that provide legal rules and regulations governing commercial or business dealings and transactions.
The UCC regulates the transfer or sale of personal property. The UCC does not address dealings in real property.
On the whole, the UCC standardises business laws in the US and seeks uniformity amongst the states.
The code was first published in 1952 and has been revised numerous times throughout the years.
It is a recommendation of laws that can be adopted by the various states. The code has the effect of law only when it is adopted by different states and has been adopted by all 50 states of the US, although with variations. It is the longest and most elaborate of the uniform acts. The UCC is applicable to small business people and entrepreneurs. The UCC can be considered a statutory programme under the law of administering, legalising, and recording contracts and lien instruments.
Collectively, the UCC can be explained as a comprehensive modernisation of various statutes relating to commercial transactions. This includes sales, lease, negotiable instruments, bank deposits and collections, funds transfers, letters of credit, bulk sales, documents of title, investment securities and secured transactions. The UCC was developed to address two growing problems in US business:
1. The increasingly unmanageable legal and contractual requirements of doing business, and
2. Differences in state laws that made it difficult for business people from different states to do business with one another.
This codification of rules designed to promote free trade amongst the states is what separates the US economy from other large geographical regions which employ protectionist measures and a mismatch of laws that make interstate (or inter-country) trade incredibly difficult.
Despite having a large consumer base, these regions struggle to produce a high standard of living for its citizens. This is what has prompted many former socialist countries around the world to implement free market policies, China is a prime example.
In China poverty refers only to the rural poor since urban poverty has been all but eliminated.
According to the World Bank, in just 30 years China’s poverty rate dramatically fell from 88 per cent in 1981 to 6.5 per cent in 2012, as measured by the percentage of people living on the equivalent of US$1.90 or less per day in 2011 purchasing price parity terms. (http://www.worldbank.org/en/country/china/overview#3)
That’s more than 500 million people being lifted out of extreme poverty by China liberalising its economy and allowing for more economic freedoms, including a higher degree of free trade.
China is now the second largest economy in the world and is projected to eventually threaten the United States for the top spot.
Though some see economic forces as abstract concepts developed in the sterility of economic research, others see these forces as universal laws that cannot be denied without consequence.
The success of capitalism and free market economics in producing wealth even borders on the philosophical for some, for example, Ray Dalio is a legendary asset manager and owner of the world’s largest hedge fund, Bridgewater Associates (US$160 billion in assets under management).
In his book, Principles, he states “though I might sound philosophical, I am a hyper-realist. I believe one needs to deeply understand, accept and work with reality to produce great results and to be happy. Whether it is knowing how people really think and behave when dealing with them, or understanding in detail how things really work.
“Success is achieved by people who deeply understand reality and know how to use it to get what they want. The converse is also true: idealists who are not well grounded in reality create problems, not progress. For example, communism was a system created by people with good intentions who failed to recognise that their idealistic system was inconsistent with human nature.”
What exactly does he mean? As opposed to capitalism, communism asks one to take greater risk without greater reward, work harder and longer for no improvement in personal standing, and to toil where there is no passion. It asks people to place the interest of the whole over their own self-interest. This defies the basic tenants of human nature and has played a huge role in socialism’s almost universal failure.
Adam Smith in his seminal work, “An Inquiry into the Nature and Causes of the Wealth of Nations,” spoke of the Invisible Hand of the market; this theory is built on human beings’ motivation to seek their own self-interest. The Invisible Hand is “a metaphor for how, in a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large.” (https://www.investopedia.com/terms/i/invisiblehand.asp)
This serves as a balance between competing desires because markets distribute the factors of production in congruence with supply and demand.
Capitalism and free market dynamics allow for the efficient allocation of resources, reward for taking risks, compensation commensurate with value added, individual freedom, intense competition where only the most robust and adaptive firms survive, and the ability to dramatically reduce poverty. Sounds great. So what’s the problem?
The major problem with capitalism is the incentive to accumulate wealth at all costs, the inculcation of consumerist values, and the possible polarisation of labour markets.
People with in-demand skills have the potential to make huge amounts of money while those who do not can sometimes barely get by. It all comes down to demand and supply, marginal revenue product and economic rents.
In a free market system labour is compensated relative to value added and not to time and effort spent; a concept which continues to elude many trade unions.
In an economic construct that demands profit maximisation there will always be pressure to minimise expenses.
Salaries and wages are an expense; lowly-skilled employees tend to be modestly paid (commensurate with value added) while highly skilled professionals and business owners earn the lion’s share of the economic pie.
Tensions in labour markets and other challenges have become a hallmark of capitalist economies, but does the bad outweigh the good?
Wilt Chamberlain, a 7ft 1-inch and 280 lb professional basketball player and one of the most dominant athletes of any era in any sport, when asked about his lack of fan support once said “nobody roots for Goliath.”
Despite its track record for creating wealth through the development of resilient, robust, competitive and diversified economies capitalism may have become a victim of its own success.