Applied Capitalism - Part I
Sound Money Deserves Sound Economics
To most Americans today, Applied Capitalism sounds like something vague, unreachable, or sinister. After all, capitalism is a big, complex idea that means different things to different people. Accordingly, it is best to begin with a shared baseline of understanding.
Most likely, everyone agrees that capitalism is a socioeconomic system of some kind that it applies to entire societies or to large corporations. Yes, it does. But the purpose of this essay is to explain how it applies to you. Or more importantly, how you can and ought to apply it to yourself.
Let’s start with capitalism as a socioeconomic system. Normally, it is associated with money, markets, and profits. That is all true and good – or is it? If you listen to the intellectuals at most universities, government agencies, financial media, think tanks, investment banks, and religious institutions, all three aspects of capitalism have tragic flaws that demand their expertise.
Bear in mind, socialism, communism, fascism, progressivism and every other collectivist economic scheme needs money, markets, and profits, but there is a lot less of it and nearly all of it is in the hands of these institutional players.
But for you, I will highlight five ways in which they demonize money, markets and profits: Gross Domestic Product (GDP), Inefficient Markets, Externalities, Stimulus Spending, and Money Supply. And because anyone can find fault, I will offer five principles that you can take to the bank: Gross Output, Price Discovery, Say’s Law of Markets, Mass Prosperity, and Money in Circulation.
Gross Domestic Product
GDP is widely accepted as the best measure of the economic vitality of a country – and it can be summed up by geographical region or style of governance. Basically, it is the total of consumer, government, and business spending minus net imports. In the realm of economic science, GDP falls in the category of macroeconomics, which is focused on aggregate, large scale consumption activity and trends.
Essentially, it boils down to aggregate demand. There is no such thing - everyone has different values, aspirations, and resources, but to a collectivist, its works. Another way to think of GDP is bottom-line economic activity that is grounded in spending – or consumption. Top line would be supply - or revenue, but GDP’s focus on the demand side poses at least two problems.
To have consumption, there must be production. Accordingly, an objective measure of economic health would be on the supply side. More insidious is the government component. More spending increases GDP, which gives the State the justification for any redistribution scheme that proves their relevance to the economy of the country. It doesn’t matter that bottom-line spending is wealth destruction – by definition.
In contrast, Gross Output, which was adopted by the Bureau of Economic Analysis (BEA) in 2014, is the more revealing macroeconomic measure that includes top-line revenue generation.
Market Failure
When spending becomes the top measure of economic strength, it is natural for consumers to become the protected group of the economic central planners who need to stay relevant. In essence, this stages a conflict between the interests of “consumers” and their suppliers – and it only benefits the opportunists who staged the conflict. Private businesses are set up as predators, “consumers” are recruited as prey, and markets are demonized as inefficient because they don’t protect the interests of “the little guy.”
But if free markets are not efficient, at what do they fail? Wealth distribution? Income equality? Racial justice? Housing affordability? Medical access? Educational opportunities? Environmental protection? Free markets and capitalism are blamed for all of this, yet free markets and capitalism gave us greater wealth, income, justice, housing, medicine, education and environmental protection than any collectivist system the world has ever known.
Yet, in a culture that believes public service to be noble, the common good to be ideal, and sacrifice to be a virtue, the profit motive is demonized as the cause of market failure. Despite that, the root causes of mass prosperity must be exposed, defined and defended to the teeth: 1) Reason as our sole means of survival, 2) Your life as your highest value, and 3) Voluntary production and trade for mutual profit.
Markets are efficient because prices are embedded with decentralized information that is controlled by millions of people with skin in the game.
Externalities
All economists and wannabe economists like to use “externalities” as the basis for regulatory agencies, stimulus spending, and redistribution schemes, but what are they? External to what? External to the financial reporting systems of private sector enterprises. Never mind that the financial reporting systems of public sector agencies are exponentially worse, but that’s another matter. The incompetents get to make the rules for the people who pay for everything.
Briefly, “externalities,” like “consumerism,” is not a valid concept. The first contraction is any transaction by a business entity that was never implemented is not recorded on their books. As a result, anything can be an “externality,” and they will have untold effects that reverberate silently and forever. Furthermore, all producers are consumers, production creates consumption, and the positive “externalities” of mass prosperity, personal agency, leisure time, and thriving cultures are impossible to capture in the general ledger.
And perhaps most insidious is the unseen. It is impossible to know and impossible to measure the positive, future effects of capital flowing to its most innovative, productive, and profitable uses if it had not been extracted by the force of the State.
For example, in Economist magazine’s 2025 survey of the wealthiest countries by GDP per capita, Norway was ranked #1. Not reported was that 49.3% of their GDP was government spending. In this small economy, that amounted to $240 billion that was coerced by the State – and assuming 20% of that was necessary for the protection of rights and property, $192 billion could have been invested for future prosperity or used by its rightful owners for their own private needs and desires.
The innovation, prosperity and time that could and should have been discovered may be the most egregious “externality” of them all.
Stimulus Spending
Now we have the compounding effect of demand-side economics, market failure, and negative externalities – all fallacies that nearly everyone believes to be reasonable assumptions for central economic planning. But how have the economics professors, corporate journalists, and their “public servants” in government been able to pull this off so convincingly?
When an entire society loses respect for the virtues of money, then limitless spending by government is rationalized by “the greater good.” In that environment, causality is disregarded, failures are ignored, their salaries and pensions are funded, and all because there is no market accountability or profit motive.
As a result of the spending, GDP is enhanced, regulated businesses collaborate, non-profits and green energy operators become flush with cash, and campaign contributions to incumbent politicians maintain the cash flow. Yet no one knows how the money was spent or what the measurable benefits may be. The rationalization is that people were “served.”
Humanitarians need as many in need as possible, and there’s nothing like economic recession, price inflation and monetary devaluation to justify more spending.
Money Supply
Markets exist wherever there are people transforming the material of the natural world into goods that exceed their subsistence needs for survival. As this transformation becomes more specialized, productivity increases, trade expands, and certain commodities become stores of value for future exchange. But let’s not get ahead of ourselves. Man must produce to survive. Man’s only means of survival is reason.
By this moral and practical standard, money is production. Production is money. And money is the legacy of someone’s productive effort. But not just any money. Only money that producers will accept in trade. Only money they reasonably believe can be converted into someone else’s productive effort - meaning goods, services and labor. Accordingly, producers and owners of marketable assets will determine the money supply that matters, and that is money in circulation.
This has nothing to do with the Fed, as it should be. Sure, they buy bonds in their QE funhouse and they provide liquidity to bank balance sheets, but ultimately it is money being exchanged by producers and investors that determines the money supply - not the wealth destroyers in government. Money is not stupid. Of course, central banks will devalue the currency in many ways. It’s who they are; it’s what they do. And it is the extraction of wealth through spending by the State; wealth that is diverted from its most efficient use, that leads to price inflation, especially during a government induced recession.
Ultimately, we need a newly discovered respect for money’s cause and purpose to fully understand money in circulation as the money supply that matters.
Principled Action
Hopefully, Applied Capitalism is coming into focus. First, identify the contradictions of popular economic concepts. Second, replace them with solid ideas that stand up to evidence and logic. And what I recommend and explain in The Moneyball Method are Gross Output, Price Discovery, Profit Motive, Capital Formation, and Money in Circulation.
But good theory is good practice, and the moral is the practical. Part II of Applied Capitalism will discuss the political milieu of the faulty economics and Part III will be in the context of your personal financial decisions. In other words, principled actions in a whole of life and builders’ mindset. Specifically, Part III will evaluate the fallacies of Diversification, Risk Tolerance, Market Projections, Mean Reversion and Manager Outperformance and replace them all.
And all in the spirit of reason as an absolute, independence as a virtue, and capitalism as the ideal system to practice before preaching it.