Applied Capitalism - Part II
Sound Economics Needs Sound Ethics
The previous essay titled Applied Capitalism - Part I started with the idea that capitalism is a big, complex idea that means different things to different people. It is true that modern economies are extraordinarily complex, so much so that it is destructive for any committee, agency, or think tank to intrude by trying to plan and manage one. Yet, the purpose of this series is to simplify the concept of capitalism so that individuals can apply it to their daily lives with confidence.
As discussed, it is the socioeconomic system most commonly associated with money, markets, and profits, but those are financial and economic characteristics - and they don’t appear out of nowhere. There must be moral and practical ideas and actions that cause money, markets, and profits. And there must be opposing ideas and that inspire fear among the countless critics of capitalism.
But capitalism is unique. While the supporters of socialism, communism, fascism, progressivism and every other collectivist scheme are not their own detractors, capitalism’s supporters are among its most effective critics. The reason is simple - they share the same moral ideal: self-sacrifice for the common good. And they share the same fear: independence. The difference is upon whom or what they choose their dependence. That’s how wars begin, but I digress.
In Applied Capitalism - Part II, I will highlight five institutions that are popular across the American political spectrum: Protectionism, Antitrust, Climate Change, Income Tax, and Government Schools, and relate them to the economic fallacies of Part I. And because anyone can find fault, I will offer five principles that you can take to the ballot box: Capital Formation, Rational Self-Interest, Scientific Discovery, Consumption Tax, and Montessori Education.
Protectionism
The goal is to protect the domestic manufacturing enterprises of a country from its foreign competitors, and the commonly used economic tool is tariffs charged to the importers of goods. In America, the legal precedent can be found in Article I, Section 8 of the US Constitution that states, “to regulate commerce with foreign Nations, and among the several States, and with the Indian Tribes.” The underlying principle was to prevent the imposition of tariffs between the States, but the vague term of “commerce” and the three political entities mentioned have allowed for gross misinterpretations of the Commerce Clause.
Fundamentally, free trade among the States has been such an overwhelming success that only the proponents of antitrust, climate change, income taxes or government schools can find fault. Yet somehow, the concept of tariff-free trade across state lines does not apply to tariff-free trade across national boundaries. To rationalize the practice, artificial economic constructs need to be taught: gross domestic product (GDP) as the universal metric for national economic health, trade deficits as the component for political rhetoric, and countries as “trading partners” to satisfy the public policy think tanks.
Bear in mind, governments produce nothing, they have nothing to trade they didn’t coerce or confiscate, and they are consumers - meaning destroyers of wealth. In addition, tariffs disrupt the price mechanism, are a barrier to the free flow of capital, increase a government’s ability to take on more debt, contribute to the decline of declining industries, and encourage crony corporatism through “regulatory capture.” All of which leads to the expansion of the regulatory state and its protection racket.
For the objective investor, the essential question is: “at what cost?” What innovations, new products, and time for the values that make life enjoyable could have been achieved by now if the money confiscated by the State had been invested efficiently by the people who earned it?
Antitrust
On January 16, 2025, a bill was introduced in the United States Senate to: “reform the antitrust laws to better protect competition in the American economy . . . to deter anticompetitive exclusionary conduct that harms competition and consumers, to enhance the ability of the Department of Justice . . . to enforce the antitrust laws, and for other purposes. Its sponsor is Senator Amy Klochubar, there are 13 cosponsors, all of them are Democrats, none of them are friendly to competition, they know nothing about free market economics - and they don’t care.
To be fair, it is important to define economics, competition, and fairness. For this purpose, economics is the social science of efficient production and distribution of goods and services through voluntary trade. Economic competition is two or more sets of producers engaged in the distribution of goods and services to the same sets of potential customers. Fairness is a common understanding of the rules and the equal application of law that protects the rights and property of every participant.
In contrast, the federal government is a monopoly, and economic monopolies are impossible without the protection of the State (see subsection above). Naturally, this new antitrust legislation has one target - producers, it has one constituent - consumers, and it has one purpose - to enforce. And it has one glaringly obvious defect: “reform the antitrust laws to better protect competition.”
After a century of ambiguous, contradictory and destructive antitrust regulation and prosecution, it is not enough and they need more, by golly!
If Klochubar’s enforcers think your prices are too low, you may be charged with predatory pricing. When they think your prices are too high, you may be prosecuted for monopoly. And if they believe neither, you may be guilty of collusion. Make no mistake, her cabal is replacing the justice of economic power with the force of political power, as stated in Item 6 of their Findings: “the presence and exercise of market power makes it more difficult for people in the United States to start their own businesses, depresses wages, and increases economic inequality, with particularly damaging effects on historically disadvantaged communities.”
To quote comedian Rodney Dangerfield getting a letter from Publisher’s Clearinghouse, “you may already be a loser!” However, their incompetence belongs to them, and the economic science to which our rational self-interest subscribes is:
Production creates wealth. Supply creates demand. Prices are information. Markets are elegant. Profits attract capital. Capital finds talent. And talent obeys reality.
Climate Change
Like market failure is the rationalization for antitrust enforcement, externalities are the economic category for the climate religionists. In particular, the negative externalities of water and air pollution, but that has been extended to a multitude of “injustices” such as climate justice, food security, housing stability, income equality, etc. However, it must be understood that “climate change” is an invalid concept in the same way that “externalities” is an invalid concept. Climate is always changing and externalities are always off the financial records.
Regardless, the climate change movement has the same purpose as antitrust - to repudiate capitalism because it is the decentralized system of independence and integrity. And to the climate religionists, the air and water pollution of authoritarian states like China, India, Russia can be ignored because they are not guilty of the sins of independence and integrity.
But like before, let’s define our terms. Ethical independence is the predicate for political independence - and it means thinking rationally, being responsible for your actions, and earning your self-esteem. Integrity means adopting rational principles and having the courage to act accordingly.
This is the benevolent universe premise: a natural world with laws that are free of contradictions, chaos and catastrophe that is managed and rare, and a clean environment because it is in everyone’s self-interest. That is the kind of society that America’s founders discovered and put into motion in the 18th century and accelerated into the 19th century.
In fact, the previously unimaginable achievements in machinery, medicine, music, literature, and ethics were so extraordinary that it left the feudal warlords and their priests out in the cold. However, nationalism and communism were the collectivist responses to your independence, which led to World War I and the Cold War.
Today, it is the climate justice crowd with their horribly expensive and environmentally destructive green energy projects that wreck the price mechanism and the free flow of capital.
Income Tax
Growing up in a politically conservative, blue-collar American family. I was familiar with the phrases, “the power to tax is the power to destroy” and “if you want more of something, you subsidize it; if you want less of something, you tax it.” But I also looked forward to earning my first paycheck as a teenager and contributing to the American experiment through tax withholding. Looking back, I was more aware than nearly anyone about how lucky I was to have been born in America in the 20th century, but I was also naive and trusting of the federal government.
Words like independence and liberty sounded great, and I knew that a place like Soviet Russia had to be a hell hole, but I did not realize how the income tax was a massive invasion of property rights, personal privacy and political liberty. I certainly didn’t realize it was created, grew and metastasized under the supervision of Americans who were sympathetic to the Soviet experiment of slavery and mass murder - all for “the common good.”
Only recently have I learned how more tax revenue to the federal government only increases the borrowing capacity of the State, increases the federal debt load, the annual deficit, the debt service - and all of which demands higher tax revenues.
Of course, there’s more. The internal revenue code is a weapon of the State and the IRS is the enforcement mechanism. Tax audits are routinely ordered against political opponents, the ever changing and contradictory rules demand expensive compliance practices, and all of that diverts capital that could have been invested efficiently for results that are not known because they never saw the light of day.
Optimistically, there is an alternative that is just and efficient for the administration of legitimate government services. Naturally, those are limited to the protection of rights, including property rights, the enforcement of contracts, stable currency, and national defense. A federal sales tax to replace the entire income tax regime - and only on end-user goods and services, not a value-added tax, would give everyone the ability to anticipate, control and plan their futures for a more productive and prosperous society and culture.
Government Schools
The economic lockdowns of 2020 shone a bright light on the priorities of America’s teachers’ unions - and it is not students or education. It is unearned wealth and political power. At the same time, the economic corruption of union leadership and the pedagogical corruption of teacher’s colleges has been visible for decades.
History has been taught as events disconnected from each other, disconnected from the ideas that are their cause and effect, and disconnected from the people who lead with ideas that influence entire cultures. Reading has been taught with the see and say method that is disconnected from phonics, which is disconnected from learning the cause and effect of learning new words and the abstract concepts they symbolize, and disconnected from linguistic skills for a lifetime of learning.
Instead of causality, which is a component of logic, public schools teach the determinism of class struggle, the ethics of identity group determinism, and dependency on social acceptance and social status for their borrowed self-esteem. Naturally, this leads to the victimhood mentality of medicine, housing, food, education, manicures, and dope as rights that are not equally distributed by markets driven by the sinister profit motive.
For many State school educated students, capitalism is a socioeconomic system to be condemned and replaced, but there is a superior system of childhood education that teaches cognitive skills, self-determination, concept formation, personal responsibility, and celebrates life-long learning for productive achievement in the pursuit of happiness - the Montessori Method, when done properly.
Principled Action
Hopefully, Applied Capitalism is coming into greater focus. First, identify the contradictions of popular economic, political and social precepts. Second, replace them with solid ideas that stand up to evidence and logic. And what I recommend are the free flow of capital, rational self-interest, the scientific method, the consumption tax system, and privately owned schools.
But good theory is good practice, and the moral is the practical. Part III of Applied Capitalism will discuss your personal milieu diversification, risk tolerance, market projections, mean reversion and manager selection - and replace them. All in the spirit of reason as an absolute, independence as a virtue, and capitalism as the ideal system to practice before preaching it.