Thursday, March 25, 2010

Capitalism And Socialism

      Capitalism: An economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth.*

      The basic idea underlying a capitalistic system is that of individual ownership and control of the assets of commerce. Using one’s innate abilities, energy, ideas, etc. to better oneself is the driving force, and success or failure is measured by the bottom line. The “rugged individual” and the “small entrepreneur” are the natural heroes. Individual freedom is paramount.
      Unfortunately, unbridled incentive can lead to unbridled greed, which if followed far enough, can bring down the system. Let me give you an example:
      When you buy a life insurance policy, you are buying a contract under which the insurer agrees to reimburse you for loss of income, or economic value of the insured, in the event of death. You cannot legally insure anyone for more than your loss. You are not allowed to insure a person with little or no economic future, e.g., a child or a paraplegic for $10M. You are allowed more than one policy on an individual, but the total value of all policies is supposed to be limited to the economic value.
      During the recent real estate “bubble,” mortgagors resold their mortgages to people who packaged them into packages of “mortgage-backed securities,” similar to stocks or bonds. These securities were then resold to others, on the premise that the interest income would be shared among the buyers, and the original investment would be returned as the mortgages were paid off.
      That was OK as long as the securities were sold for the true value of the underlying mortgages. OK, that is, if they were sold once. But some unscrupulous people sold the same securities time and time again, as many times as they could find buyers. After all, investors couldn’t lose because real estate prices were going up, up and away.
      But they didn’t – the bubble burst. The underlying mortgages were worth pennies on the dollar, and the same pennies were owed over and over again to all those people who bought the same security over and over again. The system was a hair’s breadth away from collapse - George Bush’s financial bailout was all that saved it. According to this morning’s paper, the real estate bailout has run out, and without another stimulus the system is again in danger of collapse.
      It is apparent that some controls are necessary.

      Socialism: A theory or system of social organization that advocates the vesting of the ownership and control of the means of production, and distribution of capital, land, etc., in the community as a whole.*
Many people deny that there are some systems that cannot operate efficiently unless they are under community (state) control. But can you imagine how successful a campaign in Afghanistan, Iraq or anywhere else would be if we had to field privately owned Armies, Navies, or any other armed forces? How would an interstate highway system operate if individuals or corporations decided when and where to build highways, or what construction standards should be set for them. Imagine what air traffic would be like if controllers worked for various private companies.
      I know that some people would like to eliminate certain federal programs, e.g., Social Security, Medicare, Medicaid and Civil Rights, but they are here, and like it or not, that’s not going to happen, These programs have all been established under the “promote the general Welfare” phrase of the Preamble to the Constitution, and all are socialistic in nature.
      But the question is: What types of functions are best performed by such socialistic systems? At what point does promoting the general welfare take precedence over individual liberty? Is the dividing line flexible? If so, who decides where it is for any particular case?
      The recently enacted Healthcare plan is a hybrid of the two systems – government will control it to some extent through private corporations, tax policies, etc. Undoubtedly the most controversial provision is the condition that individuals will be required to purchase health insurance policies.
      Does it fall within the range of the general welfare clause? This will be debated vigorously in the courts over the next few years. Several states’ attorneys general are already bringing suits to determine exactly that.
      Stay tuned.

      * The above definitions are from Webster’s Encyclopedic Unabridged Dictionary. Both terms have been bandied about during the past several months, and I thought it might be a good idea to clarify what we mean when speaking about them, including some of the advantages and disadvantages of each.

      To read excerpts from “The Spirit Runs Through It,” click here.

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