Understanding Socialism Socialism is an economic system based on the premise that some, if not most, basic businesses (e.g., steel mills, coal mines, and utilities) should be owned by the government so that profits can be more evenly distributed among the people. Entrepreneurs often own and run smaller businesses, and individuals are often taxed relatively steeply to pay for social programs. The top federal personal income tax rate in the United States, for example, was 35 percent in 2009, but in some socialist countries the top rate can be as much as 60 percent. While U.S. shoppers pay sales taxes ranging from 10.25 percent in Chicago to zero in Delaware,15 socialist countries charge a similar value-added tax of 15 to 20 percent or more. Socialists acknowledge the major benefit of capitalism -wealth creation- but believe that wealth should be more evenly distributed than occurs in free-market capitalism. They believe the government should carry out the distribution and be much more involved in protecting the environment and providing for the poor. The Benefits of Socialism The major benefit of socialism is supposed to be social equality. Ideally it comes about because the government takes income from wealthier people, in the form of taxes, and redistributes it to poorer people through various gov- ernment programs. Free education through college, free health care, and free child care are some of the benefits socialist governments, using the money from taxes, may provide to their people. Workers in socialist countries usually get longer vacations, work fewer hours per week, and have more employee benefits (e.g., generous sick leave) than those in countries where free-market capitalism prevails. The Negative Consequences of Socialism Socialism may create more equality than capitalism, but it takes away some of businesspeople’s incentives. For example, tax rates in some nations once reached 83 percent. Today, doctors, lawyers, business owners, and others who earn a lot of money pay very high tax rates. As a consequence, many of them leave socialist countries for capitalistic countries with lower taxes, such as the United States. This loss of the best and brightest people to other countries is called a brain drain. What countries are raising taxes now? Imagine an experiment in socialism in your own class. Imagine that after the first exam, those with grades of 90 and above have to give some of their points to those who make 70 and below so that everyone ends up with grades in the 80s. Would those who got 90s study as hard for the second exam? What about those who got 70s? Can you see why workers may not work as hard or as well if they all get the same benefits regardless of how hard they work? Socialism also results in fewer inventions and less innovation, because those who come up with new ideas usually don’t receive as much reward as they would in a capitalist system. Over the past decade or so, most socialist countries have simply not kept up with the United States in new inventions, job creation, or wealth creation. UNDERSTANDING FREE-MARKET CAPITALISM Basing their ideas on free-market principles, business people in the United States, Europe, Japan, Canada, and other countries began to create more wealth than ever before. They hired others to work on their farms and in their factories, and their nations began to prosper as a result. Business people soon became the wealthiest people in society. However, great disparities in wealth remained or even increased. Many business people owned large homes and fancy carriages, while most workers lived in humble surroundings. Nonetheless, there was always the promise of better times. One way to be really wealthy was to start a successful business of your own. Of course, it wasn’t that easy—it never has been. Then and now, you have to accumulate some money to buy or start a business, and you have to work long hours to make it grow. But the opportunities are there. The economic system that has led to wealth creation in much of the world is known as capitalism. Under capitalism all or most of the factors of production and distribution—such as land, factories, railroads, and stores—are owned by individuals. They are operated for profit, and businesspeople, not government officials, decide what to produce and how much, what to charge, and how much to pay workers. They also decide whether to produce goods in their own countries or have them made in other countries. No country is purely capitalist, however. Often the government gets involved in issues such as determining minimum wages, setting farm prices, and lending money to some failing businesses—as it does in the United States. But capitalism is the foundation of the U.S. economic system, and of the economies of England, Australia, Canada, and most other developed nations. The root word of capitalism is “capital.” The Foundations of Capitalism Under free-market capitalism people have four basic rights: 1. The right to own private property. This is the most fundamental of all rights under capitalism. Private ownership means that individuals can buy, sell, and use land, buildings, machinery, inventions, and other forms of property. They can also pass property on to their children. Would farmers work as hard if they didn’t own the land and couldn’t keep the profits from what they earned? 2. The right to own a business and keep all that business’s profits. Recall from Chapter 1 that profits equal revenues minus expenses (salaries, materials, taxes). Profits act as important incentives for business owners. 3. The right to freedom of competition. Within certain guidelines established by the government, individuals are free to compete with other individuals or businesses in selling and promoting goods and services. 4. The right to freedom of choice. People are free to choose where they want to work and what career they want to follow. Other choices people are free to make include where to live and what to buy or sell. One benefit of the four basic rights of capitalism is that people are willing to take more risks than they might otherwise. President Franklin Roosevelt believed four additional freedoms were essential to economic success: freedom of speech and expression, the freedom to worship in your own way, freedom from want, and freedom from fear. Do you see the benefits of these additional freedoms? Adam Smith and the Creation of Wealth Rather than believing fixed resources had to be divided among competing groups and individuals, Scottish economist Adam Smith envisioned creating more resources so that everyone could become wealthier. Smith’s book An Inquiry into the Nature and Causes of the Wealth of Nations (often called simply The Wealth of Nations) was published in 1776. Smith believed freedom was vital to the survival of any economy, especially the freedom to own land or property and to keep the profits from working the land or running a business.6 He believed people will work long and hard if they have incentives for doing so—that is, if they know they’ll be rewarded. As a result of those efforts, the economy would prosper, with plenty of food and all kinds of products available to everyone. Smith’s ideas were later challenged by Malthus and others who believed economic conditions would only get worse, but Smith, not Malthus, is considered the father of modern economics. How Businesses Benefit the Community In Adam Smith’s view, business people don’t necessarily deliberately set out to help others. They work primarily for their own prosperity and growth. Yet as people try to improve their own situation in life, Smith said, their efforts serve as an “invisible hand” that helps the economy grow and prosper through the production of needed goods, services, and ideas. Thus, the phrase invisible hand is used to describe the process that turns self-directed gain into social and economic benefits for all. How do people working in their own self-interest produce goods, services, and wealth for others? The only way farmers can become wealthy is to sell some of their crops to others. To become even wealthier, they have to hire workers to produce more food. So the farmers’ self-centered efforts to become wealthy lead to jobs for some and food for almost all. Think about that process for a minute, because it is critical to understanding economic growth in the United States and other free countries. The same principles apply to every- thing from clothing to houses to iPhones. Smith assumed that as people became wealthier, they would naturally reach out to help the less fortunate in the community. That has not always happened. Today, however, many business people are becoming more concerned about social issues and their obligation to return to society some of what they’ve earned.
Posted on: Mon, 07 Oct 2013 05:48:03 +0000
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