Howard Yaruss - Understandable Economics: Because Understanding Our Economy Is Easier Than You Think and More Important Than You Know

What do Helen Keller, Adolph Hitler, Oscar Wilde, Joseph Stalin, and Nelson Mandela have in common? They all called themselves socialists. Meanwhile, former president Donald Trump, who broke all conventions and radically departed from the status quo, is called conservative; people who fault the media for not sticking to the truth are called liberal; and sycophants who make a living by cozying up to politicians are called capitalists. Clearly, many of the key terms used to describe economic and political systems have lost their meanings. Labels like capitalist and socialist have become so distorted and politicized over time that they serve more often as insults than as a succinct and accurate summary of someones worldview. Therefore, they arent particularly useful in helping us to look fairly and objectively at our economic system and gain insight into how it actually works.

In order to start understanding the economy, we need to begin with the most fundamental economic questions: Who gets what? and Who does what? Today, with so much stuff to allocate (such as cars, phones, college educations, and books on economics) and so many things to do (such as building cars, assembling phones, teaching, and writing books on economics), countless decisions have to be made. How can we make these decisions?

On one hand, these decisions could be made collectively by the government. In this scenario, the government owns everything and makes all the decisions. It decides how much food to produce (and who produces it) and how much coal to mine (and who mines it). It decides who gets the mansion on the coast and who gets stuck with a cramped apartment near the factory. Karl Marx wrote about this collectivist system, which is often summed up as from each according to his ability, to each according to his needs. This system is similar to communism and Marxism, as defined in textbooks.

On the other hand, these decisions could be made individually. In this scenario, everything is privately owned. Each person is free to do whatever they want with their time and resources. Clearly, these decisions are linked, since what you choose to do with your time greatly affects how much you can afford to buy and vice versa. But the government has no, or a very limited, role in these decisions. In the extreme version of this system, government doesnt even exist. In the less extreme version, the government has a limited ability to intervene if your actions cause direct harmlike if you pollute the environment, make hazardous products, or decide to practice medicine with no medical knowledge. This system is similar to libertarianism and laissez-faire (French for let it be), as defined in textbooks.

You can think of all economic systems that actually exist in the real world as being located somewhere along a spectrum between these two extremeswhere decisions are made collectively (on the left side) to where decisions are made individually (on the right side). So, what kind of economic system is capitalism?

The textbook definition of capitalism is an economic system where businesses (the means of production) are owned and managed by private individuals, rather than collectively by the government. The United States and most Western nations are often called capitalist, yet they fail to meet this definition since their businesses fall far short of being truly owned and managed privately. These nations regulate how, what, where, and by whom products are produced; serve as a partner in every business through the income tax system; directly produce and provide a variety of goods and services from education to housing to food; decide whether businesses can merge with or acquire their competitors; and control how employees can be treated and paid. Any system that permits completely free and unfettered private control of business and fully meets the textbook definition of capitalism would lack the ability to protect consumers from being cheated, the environment from harm, and workers from being exploited. It could not be successful in the real world.

Conversely, every communist nation, including North Korea, has some private enterprise and therefore meets the definition of capitalism to some extent. In particular, Communist China has innumerable entrepreneurs, some of whom have become multi-billionaires by building successful businesses. Why do all nations have at least some form of private enterprise? If the government owned and controlled all production, it would have to figure out what each person needed, how to produce all of it, and what each persons contribution to that production would be. Furthermore, in a system where the needs of all people are met, regardless of what they do or dont do for work, motivating each person to do all the tasks necessary to make that possible would be difficult, to say the least. The level of government control in such a system and the ethical and logistical issues of getting everyone to do what the government needed them to do are unimaginable. It would be just as unworkable as a system in which there is no role for government and collective action.

Therefore, what we have in the real world today is a hybrid system. On one hand, businesses in the vast majority of nations are rarely owned and controlled by the government. On the other hand, the legal system and the governments countless rules, restrictions, and incentives greatly influence what businesses produce and how they produce it.