In the United States we have a mixed economy. Contrary to what some may think we do not have pure capitalism. Our government intrudes on the economy in a number of ways including regulation and social policy laws such as minimum wage. Democrats made the case for government last night, and traditionally Republicans haven’t done much to stop the march towards a more socialistic country. If you do believe that government can and should manage the economy the debate really becomes how much. The benefits of capitalism vs. socialism or mixed economics can be debated theoretically but lets look at history and results.
The largest and best example of a socialistic managed economy was the USSR. This society utterly and completely failed and dissolved within 100 years. China is an example of a socialistic country embracing capitalism. The more free China’s economy becomes the better it does. China still manages its’ economy today in many ways however as it has allowed for more free market reform and private business its economy and the lives of its’ citizens have dramatically improved. Hong Kong is widely considered the freest economy in the world. It takes less than a day to start a simple business. Hong Kong has very little natural resources but has been an economic superpower for many decades. Singapore like Hong Kong is also a former British colony and has had similar success. Countries on the opposite end of the spectrum in economic freedom also tend to be among the poorest such as Cuba and North Korea. People vote with their feet and freedom wins hands down. South Koreans aren’t trying to get into North Korea and East Germans used to try anything to get over the Berlin Wall into free West Germany.
Other mixed economies have tipped the balance to government faster and sooner than the US. Japan poured almost a trillion dollars into its’ own economy after growth stalled in the late 80’s and early 90’s. Despite all the spending GDP grew only .2% from ’96 to ’02. In Europe countries like France, Italy, Greece and Portugal have been the most socialistic and have had the worst results while countries like Germany with more freedom have faired much better.
Very few Democrats and progressive will say they support socialism; but they favor socialist policies arguing that we need some government intervention and they can decide how much. The problem is that markets are infinitely complex and no one person or committee no matter how experienced or educated can manage them. Mixed economy proponents believe that without government intervention free markets will become destructive and hurt people. Governments cannot alter human behavior or reality and frequently miss crucial unintended consequences as their policies are adjusted to by markets. For example: the federal government wanted more Americans to own their homes so they created Frannie and Freddie with a mandate to buy mortgages and strongly encourage banks to loan to people with lower standards. The banks, heavily regulated complied and became more and more creative and risky both to stay in line with regulators and because they knew they could sell their mortgages anyway. This altered the healthy supply and demand curve and lead to an unsustainable bubble in prices. It hurt the very people it was intended to help as people bought way more home than they could afford and paid far too much because of the easy government money flooding the market. The result was disastrous and the single biggest factor in the recession.
I am not suggesting zero federal government or anarchy. Government has a vital role to play. The US federal government as the constitution brilliantly laid out exists to enforce laws against force and fraud, maintain a national defense and specifically regulate dealings between states in the union. In the example of Hong Kong the British brought strong and simple rule of law and then left the native Chinese to mostly do as they pleased, the same is true for Singapore and Taiwan. With basic safety and a society that protected against force and fraud these colonies thrived. We need to stop expecting our federal government to fix the economy. The best thing government can do is to get out of the way.