Capitalism: The Relationship Between Politics and Economics

By: Adrian Nardella and Luke Rebecchi.
Edited by: Jonathan Burns and Benjamin Virkus

By now, after decades of incessant repetition, free markets and capitalism are inextricable. Taken together or standing alone, these words sanctify a tradition of economic thought and political action. We consider capitalism a synonym for free markets and freedom. But might there be unspoken benefits of capital and its owners? As noted by Karl Marx, capitalism implies an imbalance that favors business owners to the dismay of laborers. The revolving door between big business and politics may explain why this balance emerged. More appropriate are its effects as seen throughout the modern world today.

Recent policy reflects the imbalance mentioned above. In the same year Bill Clinton signed the North American Free Trade Agreement (NAFTA), which promoted trade across the southern U.S. border, construction of a border across Mexico commenced. The message is clear, and continues to resonate: we do not grant labor the same rights as the owners of capital. Last week, The New York Times ran a three-part series on state/local government-issued tax expenditures for businesses. In order to attract ‘job-creators’ to their district, local governments have annually forgone over $80 billion (a conservative estimate) in taxes. When governments grant big business money to turn the lights on, it is done under the guise of protecting ‘job-creators’; conversely, when governments grant poor laborers money to work, it is condemned as buying votes and sustaining lazy welfare mothers. Through the use of political rhetoric, politicians justify the promotion of job creation as an acceptable tradeoff to forgo revenues (taxes). These are the same revenues used to fund social and economic programs which provide assistance to the under-privileged “laboring-class” of society. In essence, our current political system is designed to contribute to the underlying imbalance embedded within a capitalistic system. The fact that corporate America might be receiving favorable treatment, dare I say welfare, is anathema.

As Milton Friedman noted in the first sentence of Capitalism and Freedom, “It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem”. At some point, the curious must question why capitalism deserves to be the predetermined derivative of free markets. Unfortunately, (as Friedman further elaborates) politics and economics are an interconnected and powerful vehicle. Although our current political system favors big business above all, it is an interesting concept to conceptualize a declaration of allegiance to free market labor amongst America’s elite policymakers. Rectifying this thought against the classical theory that equates the power of capital with labor within the same function, might provide more power to the lower classes of society. Only then, will local governments be forced to provide ‘job-creators’ with incentives other than those that solely impact the same laborers politicians claim to protect.

Discussion (0) | December 9th, 2012 Categories: Government Policy, Money

Gold vs. Fiat

Gold vs Fiat

By: Michael Kopelman and Luay Kanaan.

“I just want to make it clear to everybody that our policy has been and will always be...that a strong dollar is in our interest as a country, and we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners” (U.S. Treasury Secretary Timothy F. Geithneron) On august 15th 1971 Richard Nixon cut the ties between gold and the US dollar. It has been 41 years since the United States has moved from the gold standard, to fiat money. In essence this means that the banking standard moved from something far more tangible(the price of gold) to something far less tangible (trust in a countries currency among investors). As is everything in economics, there remains debate today whether or not the switch to fiat money was truly the best idea for the United States economy in the short run as well as the long run.

One of the advantages to using the gold standard is evaluation. A constant universal commodity such as gold allows a country to look at current and past numbers and evaluate them. With gold being a common denominator throughout you can get a far greater understanding of how your economic standing of today compares to that of previous years. This comparison is not nearly as easy under a fiat money system.

Another advantage for the gold standard is that it is more stable than fiat money, this is because fiat money is based on trust in a government and not a set standard(ie gold). In its most basic element, a lack of confidence caused Greece’s financial crisis. Investors feared Greece’s ability to pay back its debt leading to a full out crisis where greece now stands.

Due to the instability of the financial system in recent years, embedded risk has been increased through currency wars, the debasement of the dollar, and leverage in the too-big-to-fail banks. The failure of banks such as Lehman Brothers in 2008 and other corporations has been due to fiat money. If an underlying security is priced in dollars and the dollar is collapsing, then the value of that security is collapsing too, forcing traders to sell everything! Markets in the dollar and dollar-based securities collapse while markets in commodities and non-U.S. stocks begin to spike. A solution to these problems however can be realized through the adoption of a gold standard.

One of the disadvantages of the gold system is the creation of larger amounts of money. While the gold standard would allow for the creation of credit through the exchange of money for a receipt which indicates a fixed quantity of gold, it would not allow for the creation of money beyond the amount of gold on deposit. Since gold is a scarce resource it could seriously limit the growth of an economy.

Another disadvantage of the gold standard can be thought of in light of the Great Depression. The gold standard limited the flexibility of the central bank’s monetary policy by limiting their ability to expand the money supply, and thus, the U.S. was unable to lower interest rates. Higher interest rates intensified the deflationary pressure on the dollar and reduced overall investment in banks. Therefore, a limited supply of gold reserves in central bank vaults would lead to a deliberate tightening of monetary policy, higher labor costs, and weaker securities.

A flexible gold standard should be adopted to reduce uncertainty about inflation, interest rates and exchange rates. Once investors have greater certainty and price stability, they can then take greater risk on new investments. Inflation, interest rates and exchange rates act as barriers standing in the way of innovation. The U.S. economy has seen asset bubbles, booms and busts, and crashes in the forty one years since it left gold. Gold produces the greatest price stability in asset values and therefore reduces the volatility for entrepreneurs, who are the real source of wealth creation.

Discussion (2) | September 30th, 2012 Categories: Money