Why capitalistic systems can fail.
Repeat of article posted in beginning of 2015.
The Utopian capitalistic systems are in a crisis. How can it be?
Why are capitalistic systems now faltering after all the years of success in democratic Western cultured countries? If economists analyse the economic problems encountered in Western Europe over the last couple of years, what reasons do they come up with? What are the core mistakes or flaws?
Unsound decision making: For a private company to break even, total income must at least be equal to total cost. The law of productivity is that for productivity to be positive (more than a ratio of 1), total income must be more than total cost.
Although not measurable, it implies that the impact of labour on income (like all other cost categories), must also be more than the total cost of labour to company. If this principle can be broken down for each employee, it also implies that the CEO of a company must have a positive effect on profits (meaning his/her impact on total income must be more than his/her total cost to company).
The same view should be held about the remuneration of a Minister and Director of a Government department.
Now, if a private company has used up capital reserves and keeps on spending more than income, it will go bankrupt relatively fast, not so? If the Government of a country keeps on spending more than its income, it can print more money, borrow more in some or other form or simply raise taxes in many ways; but if it goes on for too long, it can drive a country into bankruptcy. The underlying reasons for the problem under discussion probably can be found in both the private and public sectors, but which one is the biggest culprit?
In the private sector we measure productivity of operations, processes, machinery & equipment in sophisticated manners. We call it productivity of cost of capital outlay and measure it in terms of payback period, return on investment (ROI) and net present value (NPV), to help us make wise economic and profitable decisions.
However, when it comes to measuring the productivity of human talent (capital), we are suddenly out of options, at a loss for words so to speak. The only remote and known measurement method we can use to encourage higher productivity in humans is by means of a performance management system. A proper performance management system can also regularly show up pockets of idleness and over-employment. To what extent do Governments use these methods?
The true basis of capitalism: The purest form of capitalism requires that a Government be as small as possible. It must be lean and mean (small, efficient and effective, with minimum taxes) so that private enterprise can flourish to create needed employment opportunities under conditions of free competition, with minimal distortions. These distortions usually start when stupid decisions are made by ruling political parties to entice more votes for an upcoming election process.
Governments moved away too far from true capitalism: It seems that ruling Governments have been allowed to become bloated and grow out of proportion, as if they wanted to create Kingdoms for themselves, enhancing individual positions to that of fat cats, instead of trying to fulfill the role of servants to their countries. They have slowly encroached as dictatorships, disguised under the umbrella of democracy. On the other hand, banks in the private sector have led Governments by the nose for too long.
Pertinent questions: If the above statements, assumptions and theories are found to be sound and true, or only partially true, one can begin to ask further questions about Governments, like:
1. Have they constantly ignored the advice of brilliant Economists in their countries?
2. Do they still chase the goal of minimum taxes?
3. Do they make use of a proper performance management system?
4. What methods do they apply for sound decision making?
5. Why have citizens allowed their Governments to grow out of proportion?
Future outlook: Some Economists are predicting that it will take Western European countries and the USA at least 30 years to recover from their present debt crisis. It is a pity to find the USA in the same boat, as we need them in the battle of expanding democracy on the worldwide political playing field.
For those who still live in a dream world, thinking nothing can go wrong with capitalistic systems, see further opinions on these pages:
Conclusion: If the present situation are not regarded as a cruel wake-up call by the citizens of the countries in crisis, all the utopian visions and improved political systems developed over centuries, may turn out to have been in vain. Surely these Government have let them down in a big way.
What is wrong with capitalism nowadays?
Governments have created economically sick countries.
Article posted in beginning of 2015.
What is wrong with capitalistic systems in western cultured countries today? Capitalism started out great a few decades ago and brought about enormous economic growth, prosperity and development. Then gradually, over the past ten to fifteen years or so, the blooming apple started to turn sour. What are the reasons for this turnabout for the negative?
1. What we know is that Governments have become too big in employee numbers, salary and benefits increases and ambitious expansions of infrastructures. In short, Government expenditures have outgrown optimum levels. Governments have strived to become powerhouses like Kingdoms, with bloated kings and princes in charge.
2. They have forgotten the golden rule of capitalism, which is to keep taxes as low as possible to stimulate free enterprise activities and growth in the private sector. That is how job creation takes place.
3. Higher Government expenses must be financed with higher taxes in some or other form, so they start to tax individuals and businesses to a standstill. Add to that huge amounts of theft of public funds through corruption by Government officials and you have a surefire way of creating a fast rolling wall of economic recession or even depression!
This is what Robbie Plugh wrote several years ago:
“America is in deep trouble. Dead broke in fact. If America were a listed company, the plug would have been pulled long ago. The receivers would have checked out the books, pronounced the company dead and called time.
Like a family whose expenditures exceed income and then makes up the difference by borrowing on credit cards, the US government`s own deficit spending is largely financed by Asian central banks, notably China and Japan.
Did you know that just twenty years ago America was the largest creditor nation the world had ever known? Now it lays claim to being the largest ever debtor nation. After years of spending like a drunken sailor, America’s net foreign debt now approaches a staggering three trillion dollars.
Under the Bush administration the deterioration has been particularly rapid. Soaring government expenditures, greatly boosted by the Iraq war, tax give-aways, homeland security, all further undermine the financial well-being of the country.
Now you won’t hear much talk of this from government spokesman, nor from much of the sold-out mainstream press and business media. You certainly won’t hear it from the hucksters on Wall Street. To listen to them you would be forgiven for believing all is hunky-dory. They have managed to stage a mock recovery in the stock market and even pulled the dollar back a tad from recent heavy falls.
But, believe me, this is a smokescreen, a scam, much like the tale of the emperor’s clothes. A great nation brought to its knees while its politicians look on, seemingly helpless.
Alas, it gets worse. You see, five separate events are gathering strength and, like a perfect storm, will soon converge, causing massive economic turmoil. All of which leads inexorably to a major economic downturn
EVENT #1 – The “Twin Deficits” – the US Trade and Federal Budgets – spin mind-numbingly out of control and long-ago surpassed all records. To finance these deficits, the government relentlessly continues borrowing. Throughout history all great empires have collapsed, not at the hands of their enemies, but from within. They all went broke. It appears a tall task for America to avoid a similar fate.
EVENT #2 – A Dollar Collapse. Desperate for money the government turns to the printing press. The dollar bills get churned out, inflation takes hold, interest rates soar. No longer do the financial markets dissect the weekly money-supply figures. But the foreigners do. You can bet your boots alarm bells are ringing. They will stop lending, they will stop investing in US assets. The dollar has been dropping in the currency markets for three years now. It will continue. The dollar is doomed.
EVENT #3 – Housing Bubble Finally Bursts. For some years easy money brought a runaway jump in prices to near ludicrous levels. But times-they-are-a-changing. Mortgage arrears grow, as do foreclosures. Across the nation prices are weakening. Higher interest rates bring increased mortgage repayments, causing further foreclosures. Prices decline more, bringing with it the dreaded “mortgage deficit” – the mortgage exceeds the house values. This brings on more home sales. And so it continues.
EVENT #4 – Job Losses Pile Up. As our glorious “Captains of Industry” close or down-size plants throughout America, lured by slave labor in China, massive lay-offs ensue. The government loudly boasts new jobs are being found. Yeah, right. A once well-paid factory job replaced with a low-paid job at a Walmart store near you or at Pizza Hut. Economists call this the “employment gap” which simply results in less disposable income. In turn, company profits decline, more lay-offs … an endless cycle.
EVENT #5 – Stock Market Crash! Despite the best efforts of Wall Street’s finest to persuade you otherwise, the stock market is in trouble, there is no way back. With all the other events in play the market is poised to collapse. We shall be witnessing the mother of all crashes.
So what in the blazes can you do to protect yourself? In the second part of this article, I recommend five steps you should follow. In the meantime I would like to very briefly share one thought with you that will be greatly expanded upon in a next article: Vitally, get a second income. Work for yourself. If your job disappears at least you have a safety net. If this means working all the spare time given you, tough! What you do is your decision. Just make sure you are equipped to make it successful. The favored way must be to start an online business, probably the cheapest and simplest way to go. But do something. Get online and get your second income starting right now!