The Second Law of Economics Capitalism for the people

Part 1 of the Why We Vote series

Capitalism for the People

The Second Law of Economics

There is no such thing as a free and fair market; all markets are rigged.
The quality of the rigging determines the efficiency of the market.
The rigging includes the rules that run markets and distribute power.
We can change the rules with Representational Democracy. Therefore we vote.^[1]

Adam Smith wrote:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Supply and demand move prices in a search for equilibrium. Rules and customs decide who gets the best deals. Mr. Smith’s invisible hand helps imperfect markets work reasonably well, but it does not remove the thumb from the scale.

How Bad Is It?

Why do so many Americans struggle to pay rent and buy food? Why can’t young people afford college, houses, and children?

Even billionaires suffer; on paper, they have more money and a much larger share of the pie. But they, like us, live in a nation filled with resentment and lacking in harmony. People mistrust and blame the billionaires, not without reason.

The Birth of Modern Capitalism

Once upon a time, only the lords of the manor, wealthy merchants, and the church had access to capital.

Fractional reserve banking, (banks creating money by making loans) enabled the Medici Bank (established in 1397) to finance the start of the Italian Renaissance. Over time fractional reserve banking expanded the European economy by providing capital to farmers, craftsmen, and middle-class merchants.

Other societies practiced banking centuries earlier than Western Europe. But three European innovations created modern capitalism. First was the rise of corporations, led by 17th century colonial trading companies. Second, the establishment of national banks, led by the Bank of England in 1694. Third, the Industrial Revolution, which was financed in part by fractional reserve banking.

Capitalism for the People

Wealthy Americans are industrious and creative. You may know them as good neighbors, friends, and relatives. They use wealth to create organizations that do great, ordinary, and terrible things, sometimes all at once.

Capital formation and entrepreneurship are important, but are we too generous to the rich? After all, entrepreneurship is found everywhere and the rich often misuse resources.

Fractional reserve banking can create plenty of financial capital from the savings of the middle class, unless we allow the rich to hoard the wealth. It is an insult to capitalism to say we must favor the wealthy. The pie gets larger when people have money to spend and invest.

Capitalism works best with competition, not monopolies and oligopolies.
Confident business owners know they can flourish in an economy with fair and efficient rules. If people have money, they will spend most of it, and business will prosper.

If you work hard and smart, you should make more money. Markets should reward investors who use capital efficiently, but we have no need, nor reason, to give the lion’s share of the wealth to the elites.
Capital should be cheap and serve the interests of working people.

Abraham Lincoln said it best:

Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights. Nor is it denied that there is, and probably always will be, a relation between labor and capital producing mutual benefits.
Abraham Lincoln, Message to Congress, December 3, 1861

When America was Great

Back in the 1940s–1960s America built prosperity with high taxes on the rich, strong unions, antitrust enforcement, and fair markets. The two-party system worked because the two parties could work together.

Capitalism worked for us, then corporate greed and the donor class broke it.
Read all about it in “When America was Great” the next article in the “Why We Vote” series.