Why is capitalism to blame?

The lack of equality, equity and even opportunity are all attributed to capitalism. The same happens when discussing gender inequality. Discussions among peers and relatives almost always end up blaming capitalism for it in addition to the so-called patriarchy.People who speak against capitalism, suggest that it must be reformed so that it can provide more of what they want: equality, equity and opportunity. Obviously, someone who wants to manipulate capitalism to do anything does not understand how capitalism works.

Capitalism is often likened to financial inequality or financial injustice, as they call it. But it is quite the opposite. Capitalism has –by its very nature– been a door opener for anyone who, despite not having formal education or coming from very humble origins, focuses all efforts on creating something of value for society.

There are still people who dare to blame an ‘imminent’ nuclear-armed conflict and a supposed anthropogenic global warming process on capitalism, as they forcefully suggest that public investment, public education, and social security –all of which are not creations of capitalism, but of big government– must be maintained because they together represent the mother of all ‘new deals’.

Great New Deals, and more recently, Green New Deals, are the utopia of most Left-wing ideologues and their followers. They think –and clearly state it– that leveraging taxes on carbon credits or carbon emissions will help solve the global catastrophe that, they say, is coming our way like an out-of-control freight train.

In the United States, economists who operated under the Obama administration agreed with the idea that the ‘new laws of economics’ should add or merge resources, social stability and the environment in a realistic long-term framework.

People who advocate for the centralized management of capitalism –which historically has been a free-range animal, governed by ideas and creativity, not by centralized control– as a means to achieve their dreamed goals, intend to legislate and impose their vision of ‘dignity’,’equality’ and ‘opportunity’ on us all.

They warn us about the ‘climate threat‘ and the coming ‘economic instability’ as reasons to reconsider a development model that has worked for hundreds of years: free association, free commerce and the ability to voluntarily exchange ideas, services and products as tools of development. Everything anyone has, from cellphones to cars was created by that process. One cannot say the same about Socialism or Communism.

Yes, capitalist societies are more successful in providing for all its members, but according to their merit and effort, not their gender, ethnicity, or political ideology. Capitalism and free markets have the innate ability to balance themselves out, always favoring the sides that operate within the limits of its theory: create and provide the best ideas, products and services.

In capitalist societies, economic or financial crises do not occur due to the nature of free-market capitalism, but due to the intervention of government, which is the natural creator of imbalances. Free markets do not need help setting prices, tax or usury rates, minimum salaries, currency manipulation or wealth redistribution. It does it all by itself.

Take for example the 2009 financial crisis. What happened in 2008-2009 was the commission of abuses by the financial industry. CEOs and COOs along with their boards abused their position and power in national and international markets to swindle investors into putting their lives’ savings into toxic financial products.

In a free-market economy, those companies, banks and financial institutions should have been liquidated and their assets seized to pay for their debt and obligations. Instead, governments in North America and Europe decided to ‘rescue’ them, using taxpayer money to do so. Governments did not punish their behavior, but provided artificial conditions for market speculators and abusers to thrive.

The 2008-2009 financial rescue of banks was the greatest transfer of wealth from taxpayers to banking institutions in the history of the world, and every government involved in that scheme agreed that banks could not be allowed to fail because it could cause ‘systemic failure’. They said that, if governments had not rescued investment banks that abused their customers, the world’s economy would have collapsed.

In other words, governments intervened instead of letting the market balance itself out. In doing so, they carried out the greatest wealth redistribution in the history of the world. That transfer of wealth and the burden it entailed was put over the shoulders of taxpayers.

It is important to note that many politicians who approved of this practice call themselves fiscally conservative, free-market capitalists, and oppose wealth redistribution to the lower classes. But they saw it fit to transfer wealth to the banks and its richest stakeholders.

The consequences of government intervention in the financial crisis were two-pronged:

1. The world became addicted to free money: Banks and other financial institutions have, since 2009, borrowed money at negative rates, all the while charging clients for holding their money in checking and savings accounts. In addition, when paying back the money, those same banks do not pay interest rates. Instead, they get paid for returning the money. It’s a win-win-win situation for them.

2. Governments that rescued the banks set a precedent worldwide: Even in developing and poor countries, from the day banks were rescued, no country will allow banks to fail. Taxpayer money will continue to be used to ‘rescue’ banks worldwide, because “they are too big to fail”.

In a true free-market economy, be it the United States or Germany, stability and self-balance are in the nature of the system, the model predicts an automatic return to the pre-crisis norm, but not before correcting what is crooked. However, governments, not capitalism, constantly intervene in the free-market with regulations and laws to cause the largest imbalances. In doing so, governments enable themselves to be the sole arbiters of economies worldwide.

So, why does everyone blame capitalism? Why are there still economists and bureaucrats who think that government regulations and interventions are necessary to dictate what the free-market should look like?

The work of governments, if it’s believed that they have any merit to exist, should be that of an auditor, not a judge, jury and executor.

The dilemma of energy development

After the crisis of 2009, with almost no growth throughout the world, common wisdom called for the reduction of financial costs and for facilitating credit to entrepreneurs so that there would be an incentive for small and medium-sized businesses to generate employment and economic growth.

Such growth also depended on low energy costs. Instead of promoting growth through the acquisition and use of cheap energy, Leftist ideologues who are behind the insane deindustrialization initiative, want to impose higher sanctions and costs on energy producers, so that it is more expensive to use it. That is their sole intention. This practice punished poor countries that intended to develop their economies because it made it more expensive to support their production activities.

In the United States and Russia, where energy is abundant, supplies provided access to the most basic raw materials, one thing that would not have happened if Barack Obama was in the White House. Obama intended to close coal plants and block fracking, which would have maintained the US as an oil-dependent economy.

A large economy that enters a period of strong growth will face increasingly high costs due not only to increases in the real costs of acquiring the resources it needs, but also, and above all, speculation in energy markets conducted by powerful investors and hoarders in the short-term.

Following the 2008 crisis, the development of hydraulic fracturing to extract gas and oil from shale oil reserves loosened the noose in the United States. This process greatly reduced the price of energy and had a notable short-term effect on the US economy. American production was partly reactivated thanks to the relatively cheap price of energy and fossil raw materials.

Meanwhile, in underdeveloped countries, which lack industry and production of competitive goods and services, preliminary explorations to study the feasibility of digging for their metal and oil reserves is still a matter of debate. Thus, citizens and their economies are condemned to the volatility, manipulation and speculation of international energy markets; a problem that the United States does not have thanks to the development policy set by the Trump administration.

In Europe, meanwhile, many governments have committed themselves to the introduction of cleaner and much more expensive energy sources, which hinders development, employment and production.

When you invest in what at the beginning is a more expensive way to generate energy, as Europeans have done, there is no choice but to spend more on that and less on everything else. In addition, the final production grows more slowly. It takes a great technological superiority to find a solution to this problem and maintain a strong position in world markets. For example, when it comes to developing solar panel farms, the territory needed to overcome technical and efficiency challenges need to be much larger compared to oil or shale gas.

In most countries, both developed and in development, the high costs of energy prevent long term investment in physical capital, construction, and in the infrastructures that support it. In particular, the part of the total activity corresponding to brick investment has been declining for several decades in both the United States and Europe, which means that investment as a whole contributes less to economic growth than before. In China, aggressive development policies allowed the country to build more infrastructure in 3 years than the US did in a century.

The advent of technology: for good and for bad

The current technological revolution and specifically the rise and diffusion of compact digital technologies show why specialists in economic statistics have the sad reputation of being unable to understand the repercussions of these technologies.

It is clear that many new technologies save labor costs, thus displacing people from office and service jobs, just as automotive technologies displaced horses from transport and agriculture a century ago. New technologies also reduce the costs of a whole series of services, as well as the production and dissemination of information, news and entertainment.

An important part of the activity has been eliminated for practical purposes from the basic growth rate because it has to do with the production of goods and services at a fixed cost with a very low marginal expense for additional consumption.

From the point of view of society as a whole, we are seeing the disappearance of careers. At the same time, educational systems have not prepared professionals for what is coming, mainly because nobody knows what is coming. On the other hand, we are witnessing the social segregation of people in guettos that are as small as their bedrooms. Companies promote convenience everywhere. There is no need to go to the movies, to a restaurant, or to commute to work. People are being slowly but surely encased in their own homes.

New technologies also save capital and, therefore, reduce the share corresponding to investments in total spending. This is not bad, but it means fewer resources for investments, the creation of fewer jobs with those resources and a lower basic growth rate.

The great swindle

Undoubtedly, the biggest scam of all, when talking about free-market capitalism, is to legitimize a system that is not a real free market.

While it is true that there are free-market hotspots, even within tightly controlled economies, no country in the world operates based on a free-market economy, where its government simply fulfills its role as an auditor. Yet, capitalism, not the government, is blamed for inequality, lack of equity, poverty and even gender differences.

Capitalism is spoken of as a predatory, fraudulent and unequal system. But widespread fraud is not committed by capitalism as a model of development, or by the economic freedom that is created in it. In the real world, it happens that the fraudulent are those who use their power to evade the rules of the system, independently of such a system being capitalist or not. The more fraudulent someone is –whether he is a banker, a senator or an entrepreneur– the more successful he will be, at least until someone finds out. There are people like that everywhere, but it is not capitalism that produces them. Their origin is the intervention of the State, which favors some groups over others.

In general terms, once a system built on fraud, personal benefit and bad judgment have been exposed, it is not possible to repair it if it’s not through drastic reforms of broad scope and the administration of justice. In the case of the 2008 crisis, that did not happen. The financial system was patched up and existing institutions were maintained. Nothing was done to reform them, and many of the perpetrators remained in office. Almost none were brought to justice.

Consequently, we have a structurally deficient financial sector that does not provide a strategic direction to the real economy. World finance is a patient of capitalism, and that patient contracted leprosy thanks to a kind of State intervention that doesn’t punish, but rewards abuses committed by the financial sector, the banks and speculators.

Technology, innovation, ingenuity and accountability as the pillars of the New Deal

No development program for the new millennium will succeed if you start thinking about the limitations that exist, or limits that you want to impose. The future can only be bright if you do what pioneers did in the XX century: think about what you want to create, work to achieve it, and follow through.

Governments should not be the cornerstone of any development plan for the new millennium. Innovation, creativity, the promotion of self-sufficiency and the use of technology to solve new challenges should be the base for any new plan.

Equally important will be that each country, based on its reality, seeks and implements the best solutions for its own development, instead of adopting policies suggested by others just because they worked well in other places. There is no one recipe that everyone likes or that will work everywhere. Each recipe should be created and followed according to the needs of each country.

Inequality shows that the policies and practices of the financial sector have been responsible for macroeconomic conditions in the world, but also that they can be controlled. Finance is not the only force that acts on economic results, but if the common trend is eliminated, there is no longer a generalized increase in inequality in countries around the world. The proof is blunt. What we have witnessed have been the consequences of conditions that made financial globalization possible.

A country cannot be developed depending on foreign investments in foreign currency, because the entry and permanence of foreign currency are beyond its control. Ask Argentina. Development, stability and equality cannot be achieved by trying to control currencies and capital markets globally and centrally. That has been tried and does not work.

Growth and economic stability are achieved by producing, creating value, not legislating equality and equity. The only way to ensure that the system is stable and sustainable at the country level is to audit the mechanisms responsible for creating and maintaining a viable economy. This, in turn, can only be achieved with policies and institutions capable of performing the audit effectively.

Controlling finances at the country level is a feat, but it is essential. Today, the driving force behind inequality is the complicity between the government and the financial sector, which governments serve. The effects of this trend have varied depending on the ability of national institutions to oppose it. It is also true that larger or richer countries can be isolated from the consequences of world finance better than small or poorer ones.

The concentration of income in speculative sectors are unsustainable by nature. If we are concerned about environmental sustainability, we also have to worry about sustainability in the economic sector, since instability hinders effective action in the face of the challenges of unemployment, corruption, poverty and economic growth.

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