Capitalism and
Government Regulations: Why a free market solves problems
It seems like
every day you hear about a new law or regulation that the government wants to
put in place. Lawmakers try to find the exact wording and punishments to make
sure certain mistakes won’t happen again. No one wants another BP oil spill, a
great recession (2008 crash), or a monopoly with all the price setting power.
Working tirelessly to formulate potential laws to prevent any of these things
from happening again seems to be their top priority. But with more laws comes
less liberty and freedom. If only these lawmakers could see that the free
market already prevents the preventable, a lot of sleepless nights could yet be
filled with dreams.
The number
one factor that would keep oil spill and risky investments by banks down to the
minimum is a free market, or supply and demand. The second biggest factor is
GREED. Now, I know what you are thinking. You believe greed was the main reason for these
problems in the first place, so it cannot possibly be a solution. But what is
greed? Would it be fair to define it as a motivation or a lust for money,
power, and fame? I will agree that greed did have a hand in these problems.
Less money spent on pipeline maintenance means more profits. Quick and risky
investments can also increase profits. In a very small amount of time, the
weakness was shown. Oil spilled and banks collapsed. The greediness of the
board members blinded them to the possible negative consequences. But will that
happen again?
Those in Congress think it
might happen again. That is why they create laws and regulations, so as to
prevent a recurrence. A lot of ordinary citizens also think it may happen
again, which is why they call on their representatives to create these rules. It’s
funny to me that people go to all this trouble when there is a much easier way
to get what they want. Look inside your wallet. You see that paper? It’s yours.
You can do with it what you wish. British petroleum and its members of the
board are ultimately interest in one thing: convincing you to voluntarily give
them that green paper. So, do you see the solution now? It’s simple; don't give
them that rectangular piece of paper with a picture and motto on it. That’s it!
Just don't give it to them. Tell BP that if they want your money, they are
going to have to fix some things. Show them that they need to repair all the
damage they caused. And if that still isn't enough for you, just vow to never
give them your money. Problem solved! Let’s create some examples so you can see
what I'm talking about more clearly.
Now is the part where I
show you how greed is the solution. So, most would agree that the head honchos
of BP are greedy. They want as much money as they can get their greedy hands
on. Do you remember how they get your money? They have to convince you to
voluntarily give it to them. They can't force you; they have no army or
personal justice system. You have to agree to hand over your money. In order to
convince you to give them your money they have to appeal to you. BP wants you
to want BP. The more you want or like BP, the more money you will give (trade)
them. Now comes the important conclusion. It is also true that the less you
want or like BP, the less money you will give (trade) them. So, if BP is
greedy, that means they want more money. And if they want more money, they have
to get you to want/like them, so that you will be inclined to give them more money.
Therefore, greedy BP will do what needs to be done to get you, and others, to
want them. But what do you want? Well, according to what you have communicated
to your congressman, you want no more oil spills. This means that the more you
believe BP will NOT be responsible for another oil spill, the more you will
want them. This forces BP to perform some internal functions to show you that
they don't want another oil spill either. And what internal functions would
show you they are serious? Purchasing better pipelines and maintaining them! See
how it all comes around? If you believe the members of the board are extremely
greedy, then you must also believe they will do what is necessary to make
money. And what is necessary to convince the consumer to give them money. And
in order to convince the consumer, they will have to take steps to make sure
their oil does not spill into the ocean again.
We can also look at it
from a simpler angle. Imagine that in 1 month from now there was another BP oil
leak. Tell me, with so many other gas stations, would you buy from BP again?
Probably not. And I bet at least 90% (to be modest) of people surveyed would
say the same. Tell me, what would happen if BP lost 90% of its customers? If it
lost 90% of its revenue? BP would go out of business. That’s what would happen.
If BP had 90% fewer people buying its gas, it would not make enough money to
stay in business, how are those greedy board members going to make money when
almost no one buys their product? They won't. And those board members know
this. They know that if they leak more oil into the ocean it will become almost
impossible to make money to satisfy their greedy desires. So they are forced to
take steps to make sure their oil does not spill into the ocean again.
Next we shall cover the
investment banks during the 2008 crash into the great recession. Yet again
people have no problem admitting they think the CEOs of investment banks are
greedy and will do whatever it takes to make more money. In 2008 this greed was
brought to the public eye when it was shown that risky investments were made
based on valuation models that were rushed into production before they were
complete. The risk of these assets and mortgage backed securities was massively
understated. Whether this was an honest mistake or a chance taken by a boss is
a speculation, but most of us would probably be correct in assuming that a
dollar sign popped into the chief investor's heads when they saw the incomplete
formula and started to run with it. But regardless of whose fault it was or why
it happened I can almost guarantee it won't happen again.
The same reasoning that
applies to BP applies here to all investment firms. That is the beauty of
supply and demand, it applies to all businesses. Investment firms use other
people's money to invest in securities. Without other people voluntarily giving
these banks money to invest with, they would go bankrupt. They cannot make
money without your money. Therefore they must appeal to you in order to entice
you so that you'll give them your money. To be successful they must give you
the feeling that not only will they not lose your money, but that they'll also
increase it. If you fear that they will make the same mistake again then you
will not trade with them. This causes the head investors to check their models
and check them twice because they know if they make a similar mistake citizens
of the United States will not trust them again and will refuse to give these
banks their money. Consumer demand will be low causing the banks to lose
profitability and eventually close down. Can you know see how a free market
works best for everyone?
Let me
explain why I said "I can almost guarantee it won't happen again."
The main reason I say "almost" and not "absolutely" is
because of the federal government. It turns out the same people you cry to for
help are actually the ones hurting you and I’ll tell you why. Does the phrase
"too big to fail" ring a bell? As a capitalist this phrase makes me
cringe. No company is too big to fail! Any business that fails to provide what
the consumer wants should fail. If a grocery store fails to provide decent at a
fair price, it should fail. If a car manufacturer fails to provide quality cars
at a fair price, it should fail. If an investment bank fails to provide a
reasonable return on investment at a fair cost, it should fail. Banks and
insurance companies, like AIG, should have failed, but the government bailed
them out. This warped view of Keynesian economics does more harm than good.
What did big companies like AIG learn from this? That they are too big to fail.
That they can take huge risks because the government will bail them out. They
have learned that no risk, no amount of damage done is too much to shut them
down. They can make whatever unintelligent decisions they want because big
brother will always be there to help them out. With any risk the potential
reward will always be greater than the potential loss. if you could go gambling
at a casino and knew that a great fortune could be made and that even if you
lost your life savings with some bad bets the government would bail you out and
give you a good amount of that money back, would you not be more inclined to
take this risk? Wouldn’t you be willing to gamble all your money knowing the
government would bail you out if you lost it all? So why should these firms
stop risking your money?
If you would like to
see how capitalism plays out, just look at the cell phone industry. This
industry has animal set of regulations and laws controlling it. It is driven by
consumer demand and cell phone supply. The government does not subsidize the
making of the phones. And the competition between the companies leads to a
better product every day. Not only are the carriers competing; AT&T,
Verizon, Sprint, Cricket, Boost, and T-Mobile, but the manufacturers also have
plenty of competition; Motorola, LG, Samsung, Apple, HTC, Blackberry, and
others. Think of all the improvements this industry has made in so little time.
Mobile phones have decreased in size, then we had flip-phones, then sliders,
then touchscreens, then smartphones. The designs just keep getting more
advanced. What can a Smartphone not do now? This is what a free market looks
like. Companies competing to make a better product so more people will buy it
which will earn those greedy CEOs more money. You see how greed is desired?
They want more money, and in order to do that they have to create a phone
better than the rest so people will buy it. This pushes companies to become
better and to make a better product. When the incentive is there (money)
companies will do what they must to obtain it. And that means creating a
product that will persuade you to voluntarily give them your money.
Before we end
with examples, I'd like to point out one more industry: The school bus
industry. This sector is completely subsidized/paid for by the government. There
is only one customer (the government) who has a set budget. There is absolutely
no incentive to create a better product. You never hear of the greedy bus
driver manufacturers. The barriers to entry are high since the government signs
year long contracts with a company. This is not a free market. Now, when is the
last time you saw a newer, better school bus? It's been a long time hasn't it?
That's because without the free market there is no incentive to become better;
and it shows.
