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different types of capitalism

Types of Capitalism

there are at least four types of capitalism but only one is good for the people
 
Katrina.Tuliao, CC BY 2.0 , via Wikimedia Commons
Katrina.Tuliao, CC BY 2.0 , via Wikimedia Commons

Overview

There are at least four types of capitalism with very different effects on mankind, including Laissez-faire Capitalism, Free-market Capitalism, Crony Capitalism and State Capitalism.  All produce material inequality with wide variations in income and wealth, but only one has as its primary objective the improvement of the lives and standard of living of the poor and middle class as well as the rich.

Laissez-faire Capitalism

http://en.wikipedia.org/wiki/Laissez-faire

“Laissez-faire” means literally “leave it alone.”  It came from the response of French businesses to the questions about what their government could do to help them.  The response was, “leave us alone.”  Complete laissez-faire capitalism resulted in large companies, such as the East India Company, having their own armies to enforce their monopoly on trade.  This form of capitalism is clearly unfair and justly criticized for its oppression of the poor.

In the modern world, however, where coercive power resides in the state, this type of army wielding laissez-faire capitalism is no longer possible.  It has been replaced by two more modern forms of capitalism, one beneficial to society and the other abusive:  Free Market Capitalism and Crony Capitalism.

Free-market Capitalism

Modern free-market capitalism is a system under which entrepreneurs must compete on a level playing field to invent or produce the goods and services that people are willing to pay for because they consider what has been produced to be of greater value than the money they must spend for it.  In this system, businesses have no power to coerce people to buy their products and they must bear all the investment risk of trying to produce or invent what they think people will want.  The only road to success and profits is the creation of better goods and services at lower cost, providing a bonanza for consumers. 

For free-market capitalism to work, entrepreneurs must be denied the tools of crony capitalism.  The state must leave them alone to succeed or fail on their own in a reasonable regulatory environment governed by rule of law where all businesses and entrepreneurs are treated equally, where all pay the same taxes and live by the same rules, without bailouts or government provided loans or tariff protections.  Within a framework of reasonable regulation and rule-of-law, government needs to practice “Laissez-faire”, without trying to promote or discourage one investment or business over others. 

Competition must be allowed to work, rewarding those who provide the best goods and services to the people with profits and consigning the losers to start over without government assistance.  Historically, the more free-market capitalism has been allowed to function, the greater has been the development of prosperity for all because it creates more wealth rather than trying to redistribute a shrinking pie. 

But this process of creating prosperity for all also creates increasing inequality as the few who produce the greatest good benefit from their creative efforts.  But they always benefit in a very small way compared to the benefit they have provided to the world.   Where would the world be without Steve Jobs?

Crony Capitalism

Crony Capitalism is very similar to the Early Laissez-faire Capitalism in that it uses coercive power (force) to ensure its profits.  Denied direct use of force in Western democracies, crony capitalist’s must access the power of government through close relationships with politicians who wield that power on their behalf. 

By providing politicians what they want, crony capitalists (businessmen, investment bankers, etc.) get politicians to pass laws that restrict their competition, require purchase of their products, give them cheap money, or insure their success by bailing them out when their bad management or gambling results in failure. 

The process is by no means unidirectional.  It is not just business men who seek out politicians to create these relationships.  History is filled with politicians who sought out business leaders with offers of monopoly power or threats of extortion to get what they wanted from the business men.  FDR for instance created the National Industrial Recovery Act which sought to curb competition, create big business cartels (monopolies), and raise prices to guarantee profits in exchange for higher wages.  

Crony capitalism is rampant today in the United States as virtually all big businesses and labor unions lobby politicians to pass laws that given them competitive advantages over smaller rivals and foreign producers.  It was why the big banks, Chrysler, GM, Freddie Mac and Fannie Mae were bailed out, allow their CEOs and top executives to take home tens of billions of dollars in bonuses in 2008 and 2009 while the people were struggling to survive the economic collapse they and their crony politicians had engineered.  And it is the people, everyone who has to pay for their own food and shelter, that end up paying for the unearned profits and political power that result.

Greed, being the desire for unearned wealth or power, is alive and well in the offices of crony businesses and halls of political power. 

State Capitalism

State Capitalism, state ownership of major businesses supposedly run as if they are privately owned, is a growing trend in Europe and countries exiting full blown Communism such as China.  But this attempted hybrid of free and controlled markets breeds corruption and encourages rent seeking.

China’s major industries are run in close cooperation with the state and in some cases are owned by the state.  This creates many opportunities for rent seeking which may be why there are 83 billionaires in Chinese parliament.  Meanwhile Russia, after its communist collapse transferred many of the state assets into politically influential private hands, many of which were former high level officials in the KGP and/or the Communist Party like Vladimir Putin.

Recommended

Freedom and Equality  Both sides of the political divide use the same words to mean exactly opposite things.  Just as you won’t know the players at a football game without a program, you won’t understand the political debate without a guide explaining what each side means when they talk about equality, inequality, freedom, liberty and human rights.

Crony Capitalism in Wikipedia

Government & Greed  Greed, taking something you didn’t earn is not possible for long in a competitive free market.

 

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