Monday, March 2, 2009

Laissez-faire Capitalism Doesn't Work

Every year millions of students are taught in their economics classes that Laissez-faire market capitalism is the best path to prosperity... well I'm here to tell you that Laissez-faire (unregulated) capitalism doesn't work! It's a patently flawed economic policy.

Laissez-faire capitalism is tantamount to having no lines, dots, stop signs/signals on the highway. Not only is it reckless and negligent for our government to endorse this economic policy, it is inefficient and doesn't achieve its sought-after goals of optimal resource allocation. Just like having an unregulated highway creates an environment for car crashes, Laissez-faire capitalism inevitably creates over and over again the same economic environment that leads to financial collapse and stock market crashes.

If the Bush Administration for example enforced the laws enacted by congress to regulate the stock market via the SEC and oil manipulation and speculation through the FTC and CFTC and regulated the mortgage-backed securities market for excesses and the mortgage brokerage industry they would have averted this whole financial mess we're in today.

And if the Bush Administration would have shored up the mortgage-backed securities market by buying as little as 10% of the outstanding mortgage-backed securities at par-value that had dropped from 100 to 27 cents on the dollar, the mortgage-backed securities market wouldn't have collapsed which was the catalyst that initiated this massive financial catastrophe we're now experiencing.

The justification the Bush Administration used to defend their negligent economic policies - Laissez-faire market capitalism and the "invisible hand" would solve these major systemic problems in the financial system. Well like any major problem we ignore... it doesn't get better on its own, it actually gets much worse.

Laissez-faire capitalism just doesn't work! It is totally irresponsible in a sophisticated economy like ours. It is supposed to be impartial/unbiased and yet it favors the powerful over the weak, the informed over the uninformed - it is impartial to the compassionate needs of humanity and the social goals of the citizens its supposed to serve. Markets are easily manipulated, information is censored/concealed and not evenly distributed, and except for supply/demand theories drafted on paper, in reality equilibrium is rarely ever achieved.

Laissez-faire capitalism leads to a phenomenon known as "creative destruction" that actually wastes valuable resources and productive capacity - where the total cost of the entire industry's production is calculated and attributed against the total value of the units sold and the results are a net loss for the entire industry. For example, when the auto industry was born there were 100s of automobile manufacturers all with extensive infrastructure startup costs. With all these manufacturers seeking to recover the costs associated with production as soon as possible, this led to the over-production of automobiles and 95% of the automakers went bankrupt - only 5% were profitable. If you took the sum total of the entire cost of manufacturing all the automobiles in the industry - even those unsold vehicles - and compared that cost against the total revenues of all the automobiles sold, you'd have a net loss for the entire industry! This phenomenon leads to a highly inefficient and an ineffective allocation of resources and use of vital capital. Even though there are individual winners in this and pretty much every economy, most of America's industries today looked at in their entirety are losing money!

Laissez-faire capitalism doesn't work and belongs on the trash heap of history... to be learned from but never used again.

For those of you reading this who are confused into thinking that if I'm not a Laissez-faire capitalist I must be a socialist or communist, I will state very clearly that I'm am neither. That is the propaganda of the ultra-elite who espouse Laissez-faire capitalism.

In closing - regulation is good. It keeps us from taking medication that is ineffective, makes people sick or with severe side-effects, or even worse kills. Regulation keeps our food supply safe for consumption. Regulation keeps utility companies from abusing their monopoly power. Regulation keeps the ordinary investor protected against fraud. Regulation keeps the environment clean. And regulation keeps the rich and powerful from abusing the economic rights of the under-privileged. Regulation is good.

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