Capital, Capitalists, and Capitalism

Most people do not think of themselves as capitalist.  The word capitalism seems so ponderous and large that many citizens don’t think of themselves as involved in any way in that system of economic activity.  The big majority of us don’t think we have any “capital”.  All those thoughts are superficial and really do ignore the reality of that system and the role in it of the average Joe.

Capital is money or other assets that are not needed for immediate consumption.  You probably don’t think of your savings account with $10,000.00 in it as capital but that is exactly what it is.  You are a capitalist and a part of that capitalist system.  The amounts that most of us control or own are seemingly very small compared to the numbers we see bandied about by governments and the large corporations.   But we put them in a bank account or with a broker in our money markets or 401ks.   My small savings is not enough by itself to make a dent in the economy or most likely it is not enough to even start up a small business.  If an entrepreneur puts up $50,000.00 to start his book store he most likely will also borrow $250,000.00 from the bank for his lease improvements and initial inventory.  The bank holds our capital for the big majority of us. 

I couldn’t finance much of anything with only my savings.  Theoretically if I got a 100 folks to give me say $20,000.00 a piece  I would have a very tidy sum at my disposal.  But would you want to trust me with your money?  Would I trust you?  We give it to the bank and then the bank makes the investment decision for us when it loans out that money to the start up company.  We and the bank are partners in fact in that investment.  We and the bank are part of that capitalist system.  We both are trying to earn a profit on our money.   If you aren’t trying to earn a profit then you must have your money in cash and hidden under the mattress.   The alternative is to allow Big Government to control all the capital and make all the decisions.  The profit then belongs to Government, Inc. to decide how to parcel it out among its favorite constituencies.   Which I suppose is great if you know you are one of those favorites and will remain so.   Historically, the US has opted for a system that rewards merit and yes, risk taking rather than having merit and value determined centrally by technocrats.   I do posit that by any measure you wish to use over the 225 years of our history that our capitalist system has served us very well.  Sure, there have been downturns and even panics and loses along the way but the trend line and the curve has always been up.  Does anyone seriously question that the capitalist system has given us the highest overall standard of living in the modern world? 

You are a capitalist whether you acknowledge that or not–at least at the moment.  There are those who are making an effort to diminish or eliminate that system.  The attacks on capitalism are both subtle and direct.  Two of the most direct attacks being talked about now are the increases in the capital gains tax and the tax imposed on each stock transaction.  I don’t do many stock transactions at all and most of you don’t either.   But others do and certainly all the large hedge funds and brokerage houses do.  There is also much talk about raising the capital gains tax to maybe 30%.   Remember that anything you tax you will get less of that item.  If you bought a stock, say Google or US Steel and it is worth $100.00 on the open market and the capital gains tax is 20% then it value to you is $80.00, not $100.00.   If that tax rate goes to 30% then its value is only 70%.   That factor is taken into account every day when people and companies make stock investments. 

If a transaction tax is imposed on the market then you can rest assured that there will be less transactions.  Does that matter to you even though you don’t buy or sell stock on a regular basis?  You bet it doe3.  All those hundreds of thousands of transactions each day are the barometer of our economy and the markets daily analysis of an individual company.  When you slow down that process you limit the knowledge for intelligent investing by everyone, not just the big boys on Wall Street.  I am not a big boy and don’t cavort with any who are but they do a valuable service for our capitalist system.  They provide data and opinion.  Those opinions may be wrong or right but they are out there for us to make our own conclusion.  That tax will slow a vital part of our economy and that can never be a good thing.

If a capital gains increase is passed then the value of all stocks will take a hit.  Your 401k or IRA or private investment in Ford will diminish in value because the market will discount that additional tax into the value of the shares.  I am not nearly smart enough to know how much it would be and probably it will not be on a one to one ratio.  But decline it will.  That is simple math and there are millions of folks our there who can figure that out.  The collective private balance sheet of individuals and companies will decline.  That can’t be a good thing.  The only balance sheet that theoretically would increase would be Government, Inc. but that will be an illusion because the data and history show that the increase in tax will reduce revenues not increase them.

Let’s hope the winds of destruction of our capitalist system don’t turn into a gale that sweeps away our value and permanently reduces our standard of living.  There are a number of economists around now who think we should accept a lower standard of living for the  indefinite future and that it is our destiny.  Oh, ye of little faith if only  Government, Inc. is reined in so our dynamic and innovative nature can be sustained.   And inflation still looms due to fiscal nymphomania as Kudlow calls it.

“There are plenty of good five-cent cigars in the country.  The trouble is they cost a quarter.  What the country really needs is a good five-cent nickel.”  Franklin Adams.

 

 

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Filed under business, Economics, government, Politics

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