There’s a lot of talk about socialism and capitalism in the media lately. Yet — nobody seems to be able to define either. People who want higher taxes are called socialists while people who believe in free markets and low taxes are called capitalists. The dictionary does a terrible job of defining them both.
Capitalism vs SocialismCapitalism is defined as the private ownership of production. That is the case in most places, but there are always exceptions in every country. Socialism is defined as economic social systems and workers owning production. Every country that has a government has a social system. Self-employment is a rapidly growing category in the United States. Small businesses, including the self-employed, represent 99% of the jobs — and therefore production — in America. Despite this, America is not a socialist state. In fact, all countries that have governments have both socialist and capitalist elements.
The Tax, Spend, and Borrow CycleHigh or low, taxes have zero impact or influence on how capitalistic or socialistic a country is. The Free Markets rule.
TaxesThe invisible hand of the free market, economic uncertainty, productivity, and growth all occur in similar ways in any type of country. Socialist, communist, capitalist, democratic, or republican… they all describe the same thing.
- Governments levy taxes while people work and pay them.
- Governments borrow from people and other governments.
- Governments spend money… they have to, or there is basically no government.
SpendNaturally, all governments have to spend money. If they don’t, they would be powerless and pointless. Therefore, taxes are essential to raising the money that the government spends. Borrowing is optional, but most countries take advantage of the low interest rates provided by banks. As a result, global debt is skyrocketing after decades of falling interest rates. No country can spend money without levying taxes. Even Venezuela, Argentina, and Zimbabwe did not just print money and spend it. Instead, they borrowed the money. The Roman empire did not borrow money, but they still collapsed because they stopped using pure gold as money. They kept adding filler to the coins, so each coin had less gold. Everything just kept getting more expensive, and the Roman empire fell. What the Romans couldn’t figure out is that it wasn’t about the gold. It was about the number of coins. With more coins in circulation, the value of the money was lower. That’s why countries can’t borrow too much money. Too much borrowing causes money to lose value just like in the cases of Venezuela, Argentina, and Zimbabwe.
BorrowGovernments only have two choices:
- They can spend money collected in taxes.
- Or they can spend borrowed money.
BankismA new word needs to be penned for the global economic system that has homogenized governments around the world. The common connector is the banks.
- It’s the banks that need free markets and its freehand to do the dirty work.
- It’s banks that cause economic uncertainty.
- It’s banks that are responsible for productivity, unemployment and economic growth.
The History of BanksThe first bank was established in 1464, and it still exists today. The same bank has existed for 550 years like some kind of vampire (hint – that’s a good description). This alone should make you pause.
Imagine the first loan ever made.
- A person with money makes an agreement with someone who needs money.
- The rich man agreed to lend the money for a period of time and to have it returned.
- The rich man wanted extra money returned as payment for letting the poor man use the money — called interest.
The bank was in for a nice surprise.After making a contract to lend out the community’s money to one of the citizens, that citizen spent the money on a better home. This put the money right back in the bank’s big safe vault. The banker must have looked around with big ‘cha-ching’ eyes. The banker had made a loan agreement and wound up getting all the money back. The bank was ready to make another loan with the community’s money. One-by-one, the bank loaned out money to all the citizens. They all got nicer homes and nicer stuff.
Time for the first business loans.After all the citizens had been levered with debt, the banker set his eyes on the local community businesses. The businesses had noticed a nice uptick in business since the banker set up shop. So, thinking that times were good, they all borrowed money to expand their business. Now the community had better stores and better products to buy — it seems like real progress.
Municipalities start taking out loans.After all the businesses were fully levered with loans, the banker set his sights on the local community municipality. The town had seen all the nice homes being built, the nice stores, and all the new products and services available. So, the town decided to borrow money to pave the roads with sidewalks and upgrade the town. The bank was a magical progress machine, at least, so it seemed.
Everyone is in debt to the bank.At this point, the banker had all the people, all the businesses, and the town municipality fully loaded with debt. But — debts have to be paid back.
- The municipality had to raise the property taxes to help pay off the debt.
- The businesses started raising prices to pay off the debt.
- And the people started spending less because they had to pay off the debt.