Michael Moore stated in his documentary Capitalism: A Love Story that capitalism is a system of “giving and taking, mostly taking.”  The ridiculous definition demonstrates Moore didn’t bother trying to understand the topic of his film.  Before anyone can go forward on criticizing an economic system or proposing solutions, at the very least they should know what capitalism is, and how popular definitions or conceptions of capitalism are wrong.

The U.S. has a flawed capitalist system.  Recent years it has become infected with a government-dominated cronyism that has distorted the market causing pain for American families.  The free market has steadily become more tainted by government intervention.  If nothing is done, the U.S. may endure years of stagnation, even decline.

Capitalism is about empowerment of the individual.  In the state of nature, every individual decides what they will do with their time and energy.  Their time is spent gathering food, building a shelter, and protecting themselves and their family from predators…or other people.  It is a primitive existence with no promise of progress.  Societies formed offering individuals shared security. This shared security eventually evolved into the rule of law, and the protection of rights of each individual.  Government is meant to provide protections for these natural rights.  Among these natural rights, is the right to own property.

Several ideas are attributed to capitalism, but the most important are private property and private ownership of the means of production.  All individuals can own property.  No monarch, church leader, warlord, or deity controls what you do with your time or your stuff.  It is yours.  Such a system was extremely rare in ancient and medieval times.  Feudalism granted all land and all things produced on that land to the king, who could then grant it to nobles.  An enormous class of landless peasants existed with no control over the fruits of their labor and no opportunity to own or manage land of their own.  Only those of noble blood had rights, even then the monarchy protected very few of them.

During the Enlightenment, a revolutionary new idea emerged: that all men are created equal and endowed by their Creator with certain inalienable rights.  Monarchs or nobility could no longer rightfully deny the most basic rights to people.  No longer did one have to be of noble blood to own property.  Land and means of production could fall to the hands of a peasant.  These rights eventually expanded to cover more than just men.  Today all individuals can own property.

Individuals are endowed with natural, inalienable rights, but they also have ambitions.  They want better lives, not only for themselves but for their children.  When they work, they aren’t just collecting a paycheck to cover their living expenses.  Most people want to better themselves, their standard of living, and create more opportunities for their children.  They are saving money, buying more goods to improve their standard of living, investing in education, training, or other things that will allow them to earn more.

Whatever it may be, they aren’t content with just paying the bills.  So we come to another major core principle of capitalism: profit as the primary motivation of business operations.  It is the opportunity to profit that drives individuals to work harder, to improve their skills, better themselves, and innovate.

Some believe profit is bad or evil.  Some like use the quote “money is the root of all evil.”  However, this is not the complete quote.  The actual Biblical quote is “the love of money is the root of all evil.”  It is a feeling, an emotion, an attachment of value by an individual that is the evil, not the object itself.  Money or profit in and of itself is not evil.  Possession of either does not make one evil.

If a person operates a business for profit, does that mean he loves money?  Does being successful automatically make you greedy?  No.  Conversely, being greedy doesn’t guarantee you will become successful or wealthy either (Thomas Sowell quote).

Successful businesses use profit to increase productivity through investment, expansion, research & development, or simply hiring more workers or buying new equipment.  All of this benefits those around him.  Profits can also be distributed to others through dividends to stockholders, helping to entice them and others to invest more in the enterprise.  More investment usually means more jobs, more productivity, and more wealth creation.  It creates jobs for others, provides more goods or services that people want, and improves the standard of living for the society.

Profits are not stuffed into the pockets of the wealthy, to be hoarded in giant money bins away from the unwashed masses.  This is not reality and certainly is not capitalism.

Where is the giving and taking?  Does an individual that hires more workers or buys equipment from another company “giving” to them?  No, he is doing it for his own benefit.  In a capitalist system what benefits him, also benefits those he is transacting with.  The new worker has a job and the other company completes a sale.  It is not giving, it is a transaction.  This is why human beings have traded with one another since the beginning of time.  There is mutual benefit.

Michael Moore is completely wrong.  Capitalism has nothing to do with giving and taking.  His definition implies one-sided transactions, whether it be charity or theft.  That is not capitalism.

While Enlightenment figures were advocating freedom and opportunity, many ambitious and greedy men looked for shortcuts to wealth.  Government officials in particular wanted a piece of the action.  With a growing middle class and more wealth being created outside the control of the state, many in power saw opportunity.  If they could not control the means of production and pocket all profits, they would ensure they received some piece of the profit earned by private enterprise.  The most obvious means of getting a piece is through taxes.  The more successful the enterprise, the more taxes there are to collect.  As such the government intervened to ensure the success of the most profitable companies while working to eliminate foreign competition.  This is called mercantilism.

Mercantilism came before democracy therefore the beneficiaries of this system were a small group of wealthy businessmen, nobles, or well-connected families.  The government showed favor by granting monopolies, using military force to protect corporate assets, and taxing foreign competitors.  As a result, mercantilist policies limited competition, strangled economic opportunity for the lower classes, and kept commodities expensive.  In this system, the government and wealthy benefit greatly, but no one else does.

When government enters the market, giving favors to one business or another, it is almost never to the benefit of the country as a whole.  This is due to one simple fact: we are all human.  Politicians, bureaucrats, and even kings are human.  They have personal biases, family bonds, friendships, rivalries, and a healthy ambition of their own.  They also lack the knowledge and intuition to guide an entire economy.  The amount of knowledge, foresight, and analysis necessary is beyond the grasp of a single person or group of people.  As such, an entire country suffers from the chronic mistakes of a single person or group.

Mercantilism is not true capitalism, at least not in the sense that most advocates view the concept.  It has some elements (private property) but many of the key principles of capitalism are blatantly violated.  First, there is heavy government intervention in the market, distorting incentives and shifting resources where they aren’t most efficiently used.  Second, prices are artificially set or manipulated instead of allowing the market to set the price of goods and services.  Third, only some parties enjoy protection under the law, while others are ignored.

In a pure free market, capitalist system there is minimal government intervention. The state is only required to provide the rule of law, a means of protecting property rights.  It also provides a civil court for people to get redress for grievances and demand compensation from others who have wronged them in a transaction.  Crimes such as breach of contract, fraud, misrepresentation, theft, destruction of property, and infringement of intellectual property are all enforced.  This basic level of government is only to make sure all play by the same set of rules.  In addition, prices are set by the market, not government.

There are no subsidies, favorable loans, monopoly licenses, or other favors for any private entity.  The market has proven time and again to be the superior allocator of resources over the government.

So what is crony capitalism?  It is when the government sets the laws and rules to unfairly favor a certain set of actors.  The decision of which actors is often arbitrary, or worse, made on a purely political basis.  In most cases it is the largest and wealthiest corporations.  This is done through direct government investment, heavy regulation, and heavy taxation.

Complying with federal regulations cost money.  Larger corporations have the money and staff to comply with new regulations, while smaller competitors do not.  They lack the funds to hire lawyers, accountants, regulatory experts, or lobbyists to help them with adhering to new laws.  The more complicated the regulatory regime, the fewer companies that can compete.  In reality, large corporations usually welcome more regulation.

Taxation is another method.  Like with compliance costs, larger corporations have the means to pay higher taxes.  Smaller companies often have smaller profit margins and must therefore raise prices to uncompetitive levels.  Meanwhile, larger corporations lobby the government to carve out loopholes and exceptions in the tax code, easing their tax burden.  Smaller competitors lack the resources to lobby the government, let alone battle with big corporate lobbyists over which gets the tax break.

These methods are all new forms of government intervention.  These interventions taken together are what make up crony capitalism.

Michael Moore believes this big business-government alliance is capitalism.  It is not.  Crony capitalism is a deeply flawed, “sick” version of capitalism.  Free market advocates strongly oppose such interventionist policies.

Those that rail against capitalism don’t realize that many of the worst scandals and controversies of the last few years are not failures of private enterprise, but failures in government.  It is government that decides to increase regulation and taxes.  It is government that establishes new regulatory agencies and bureaucracies, allowing them to intervene in the economy.  It is government that feeds the cronies.  It is in government where cronyism can be stopped.

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