Why Capitalism is Superior to a Controlled Economy.

This financial crisis has demonstrated an economic truth that can no longer be denied by those who think a controlled economy is not only possible but superior to a free market. The politicians in large part are conceding that something must be done by government even those who say they are proponents of a free market such as our president. The fact that they do not know what to do and how much money is needed ( if any) indicates the "science" of regulating the economy is no longer something they are comfortable with. I hope to show by this essay that this confusion and indecision is exactly what they should expect by distorting the market. Further I want to explain the practical consequences of even trying to outguess the market with regulation.

I was out raking up apples in my yard today and I thought about how so many apples ( as it is a bumper crop) will be wasted and thrown away because of the surplus supply and no economically method of distribution that could turn them into something I could use by way of a trade or a sale. If you substitute me for the government and apples for money you have the same issue. The government has loosened credit by way of Freddie Mac, Fannie Mae and the Fed with guarantees and the printing press until money was awash in the economy. Many bad loans were made because the money was there to supposedly guarantee poor credit risks. When the reality of the bad loans turned to default, the guarantees were excessive and failures of institutions who attempted to invest in these poor loans found the investment was not only risky but demolished their asset value. This is not something the government foresaw and is why the government cannot control an economy. The lenders in a free market have no guarantees and they must rely on proven lending principles to not only survive but prosper. They cannot take a regulator´s nudge with a ´guarantee" that violates lending principles in favor of political pandering. This is why the government should stay out of trying to outguess the market no matter what the commodity or service. The government cannot keep its eye on the ball while pandering for voter approval.

Take for example the government stepping into the apple market. Suppose the government decided to favor the apple growers because a group of constituents lobbied and thought an apple a day should be available for all. First there would be subsidies for apple growers and those in the business would expand to maximize their subsidies and those who saw a way to enter the market and get a subsidy would borrow and plant apple trees. In a free market the individual apple suppliers would gauge their entry into the market by their knowledge of what they could sell and gradually learn to manage for an expected demand. When the government subsidizes and dictates the market is no longer based on actual demand but the revenue the government can supply. Soon the country is awash with apples and like the cheese the government subsidized there is a huge need for storage, the price of apples is dirt cheap and apple farmers say they need price supports to keep their operation going. Lenders may not plant apples but the same principle is at work. Lenders who have used up their subsidy in placing bets on bad loans want help because they took the government´s word that the market was available and demand was good (for loans to people who had a high probability of default), The government realizing their bad loan policy will disappear and the poor risk constituents will be disappointed have no choice but to either face economic reality or distort the market further by bailing out the lenders they encouraged to make bad loans and those who took the loans for an investment. Again the government must decide whether to let the lenders make decisions based on sound lending principles or distort their judgement with incentives to make risky loans or investments. The government must either retract and let the companies fail for trusting the government´s creation of a poor market that normally would not be pursued or the government will further subsidize and bail out these failing companies which will further distort the market and eventually reach the same position. The savings and loan bailout was a prelude to the bigger crisis of today. Another bailout will lead to an even bigger crisis in the future. This is the nature of market distortion by government interference.

A free market relies on private market judgement and if an individual or company doesn´t understand their market they will fail but the economy will not fail. Others in the market who do more extensive market research, know how to effectively reach their markets and make accurate estimates of their markets will succeed. This is how markets work when they are not legally distorted. This is why they cannot function properly if there is a dictate that muddles up supply and demand. Excessive money in the market has another flaw the government cannot correct. That flaw is inflation. In a free market based on a gold standard the printing of money cannot be done by whim or political expediency and create deficits and eventually worthless currency. A free market will have some fluctuations in supply and demand based on the imperfect forecast of some suppliers but the distortions will be minor compared to the volatility of hyperinflation or the collapse of a depression that comes from a government "controlled" economy.

There has never been a controlled economy that did not experience inflation or a depression. it is in the nature of the beast. The government tries to micro and macro manage and usually gets it wrong. To make up for this lack of judgement and the distortions more controls and subsidies appear which calls for more oversight and more regulation and more government employees and enforcement agencies and agents. These costs increase daily as the bureaucracy grows, the budget balloons and the debt climbs beyond the ability of the taxpayers to cover.

In a free economy ,which by the way is not a system that is in operation on this planet, government has no input into how the market operates. The government is an agency with a limited job. It cannot print money and run up huge deficits. It cannot regulate and distort supply and demand. It is limited to its proper nature which is an agency that protects the individual rights of the citizens from the initiation of physical force. This is what a private security force is hired for and it is what a government is hired for on a large scale for all citizens not just those who can afford a private bodyguard. The lip service politicians give to capitalism is negated by their ability to defend it. They speak of capitalism and free markets as if they exist with minor government regulation to tweak the imperfections they perceive. Using the word free negates bullying by government in any degree. A market is either free or it is government controlled to some degree. We have never seen a free market but the nature of it is such that it can only work effectively if it is not interfered with by dictates and laws that distort or discount the suppliers and consumers judgement.

Those who denounce the extreme need for unbridled economic freedom end up with a heavily bridled totalitarian socialized system that is politically driven and leads to shortages, rationing, inflation, deep depressions and every imaginable distortion in the market. The politicians are dreaming if they think they can make a controlled economy work for very long and today´s events prove they are in disarray, have no solution they are sure will work and are gambling with the future of millions of person's lives because they are promising they can do what no controlled political system can do. That impossibility is to invade and distort the market to match the stability it most closely reaches when those most attuned to the many requirements of their individual market can make rational judgements without interference.

Capitalism is mouthed but not practiced because it has been and is distorted to mean a market that is somewhat free but not sufficiently regulated. This is always the political argument trying to tell us that if only there were enough regulations and enough government oversight we would have the best possible system. This is political drivel and is proven most emphatically by this fiasco we are experiencing. Trial and error bailouts are not the answer and surely show no planning. The American people have a choice. Either trust the market which includes the best judgement of the producers or trust a bunch of befuddled politicians who talk about free markets but fall back on nationalization when the distortions they have set in motion put the economy in crisis. It is a stark clean choice and will take a reeducation process where the incentive to be elected is based on understanding and advocating a limited government and a free market. Or the other option is a hyper-inflationary economy bouncing from deep depressions to worthless currency and collapse. It really is worthwhile to consider these two choices because there are no others.