Adam SmithJohn Maynard Keynes

Adam Smith                                           John Maynard Keynes

My last post, “What Is Socialism” was written with the anticipation of contrasting it with capitalism, especially the American concept of capitalism.

Socialism and capitalism are at the opposite ends of the economic spectrum. As is characteristic of a spectrum, the two concepts degrade from their puristic definitions as they approach the center. Toward the center of the socialism side of the spectrum is what we term today as democratic socialism. And, toward the center from the capitalism side is what I would call regulated capitalism. But let’s begin by considering capitalism in its most pure state.

Over a thousand years ago, some merchants in various societies owned properties and traded in certain goods. But, most of the world’s economy consisted of feudal systems with agricultural workers receiving their subsistence from working the land of the aristocracy. Around the 14th century, as roads and maritime shipping came of age, payment for labor and trade among nations became the norm. Mercantilists began to market goods purchased from producers beyond local communities, and the seeds of capitalism began to sprout.

Capitalism as we know it today began around the time of the birth of our nation. In 1776, an English economist named Adam Smith wrote the book, The Wealth of Nations, which espoused his philosophy of a free market economy as the best way to promote economic growth and raise the standard of living in a society. His theories advocated individual property ownership with all people interacting in their own interest to produce goods and services in a totally free market uninhibited by government authority. He coined the term laissez faire, the doctrine of “government, leave it alone.”  Our nation’s forefathers adopted Adams’ theories as they began to establish the business and economic policies and laws of the new experiment called America. They ensured that this was going to be a nation built on ideas and ideals rather than on authoritarian rule. This was the new nation’s economic model.

The most basic fundamentals that distinguish capitalism are:

  • Private ownership of property, capital, and production inputs
  • Production of goods and services for profit
  • Production and receipt of goods and services based on free market supply and demand rather than any central government plan
  • Conduct of business through open competition for consumers’ purchasing decisions
  • Labor paid by producers

Most developed nations of that day were beginning to thrive on this capitalism concept, but, by the early 19th century, the most successful capitalist nation was the United States. Capitalism was the main reason for the rapid economic growth of this nation in its first years. Innovation and high productivity fostered by capitalism thrust the U.S. through the Industrial Age to become the international seat of business and finance by the early 20th century.

Even the most successful economic model, however, had a downside. Capitalism is always vulnerable to greed and public overreaction. The decade of the Great Depression that began in 1929 was due primarily to consumer panic over a slowing economy. Consumers curbed their buying, investors stopped investing, and the abrupt reduction in money supply put banks out of business. This implosion that started in the U.S. spread throughout the global capitalist economy.

Enter, John Maynard Keynes (pronounced “canes”), a British economist of that day who postulated that pure Adam Smith, Laissez faire capitalism could not work in the long run. He proposed that capitalism would only be permanently successful if effectively regulated and supported by some degree of central management. His theory, based on the circular flow of money, was that when spending increased in an economy, earnings also increased as production increased. His answer to a slowing economy was to infuse government spending, cut taxes, and lower interest rates. These actions put additional money into the pockets of consumers which would recharge the economy. His interventionist theories prompted economic policies eventually credited with ending the Great Depression.

For the last eight decades, our economy has been characterized by an ebb and flow between the concepts of Adam Smith and those of John Maynard Keynes. Generally, conservatives line up more with Smithian free market purity, while liberals favor more of a Keynesian government intervention in the economy. Our recent Great Recession resulted in considerable Keynesian government involvement.

America’s economy, with all its flaws, is still the greatest economy in the world by far. In my lifetime, I have seen a steady trend toward more government involvement in the free market. Some regulation is necessary since the economy has grown so complex. We can’t go completely back to Adam Smith. But, we must be very careful to not cross the center of that economic spectrum into even the slightest grips of socialism as many other developed countries are doing. Our present weakened economy is still a juggernaut in comparison to the rest of the world. We are economically blessed for a reason. We must protect American capitalism from too much government control and intervention.