Competition:
Because a capitalist economy is competitive, what will always happen is that whoever has an edge over the competition will end up making more money. But making more money does not mean spending more money. A man who makes $35,000 per year will probably have a car and a house, the two most expensive things he owns. A man who makes ten times as much -- $350,000 -- will not own ten houses and ten cars. So what happens in this economy is that more and more money ends up in fewer and fewer pockets.
Because a capitalist economy is competitive, what will always happen is that whoever has an edge over the competition will end up making more money. But making more money does not mean spending more money. A man who makes $35,000 per year will probably have a car and a house, the two most expensive things he owns. A man who makes ten times as much -- $350,000 -- will not own ten houses and ten cars. So what happens in this economy is that more and more money ends up in fewer and fewer pockets.
So, true capitalism will always fail in the end, because you can only get richer if there are other people who can pay you, but the richer you get, the poorer other people become, because there is only so much money to go around. Sooner or later, the money must stop changing hands. (Anyone who has played Monopoly knows what I mean.)
Where Money Comes From:
This is why our economy today uses an infinite supply of money. When the economy starts to slow down, the Federal Reserve (the Head Bank in the US) buys bonds from big banks (a bond is a note that promises to be paid back with interest). Those big banks can then give out loans to smaller banks and companies based on how much money they received for these bonds. This is where most money comes from: It's loaned to us.
But loans need to be paid back. If too many loans go into default, the whole economy can crash. So, banks depend on people and businesses to pay back their loans. People usually get their money by working at a business. And businesses get their money by selling things to people. But when you put businesses and people together, where does all their money come from?
The Poor:
There are plenty of people who can't sell things to other people and also can't find a job. In fact, the economy needs to have these people, because money comes from banks, and even if a poor person could get a loan, how would he pay it back? These people cannot get a job either, because if everyone had a job, the businesses that pay them will not be able to make a profit. For example, imagine there are only two businesses in the world; Business A pays its workers $100 for every box of clothes they make and Business B pays its workers $100 for every box of food. If a box of clothes and a box of food cost $100 each, then each business makes 0% profit and goes bankrupt. If each box costs $110, then each business is making 10% profit, but not for long, because the workers won't be able to afford to buy any boxes at this rate. So instead of raising the price, the businessmen just lay off some of its workers. How does this fix anything? I'll tell you.
Welfare:
Our economy needs people to buy things so that businesses can pay back the banks, so that the banks can make good on their bonds. But businesses cannot hire everyone. That's where the state comes in. The state gives "free" money to the poor, who use this money to buy things, so that businesses can keep making money and pay back their loans. Where does the government get this money? Well, the national debt is incredibly high. But that's ok.
Real Capitalism Has Not Been Tried?
But hold on! If the whole economy is dependent on state welfare, is this real capitalism? The simple answer is "no." At least, this is not what many people think capitalism should be. But we have seen that if a competitive economy is too simple and too honest, then it will fail pretty quickly. We need an infinite supply of money from the top and we need poor welfare recipients to fill in the cracks at the bottom. Notice what the key role of the government is: It declares that the money which the Federal Reserve creates is good money, it forces people to pay back their loans, and it hands out money to the losers at the bottom. Without the government's constant support, the whole system would collapse. This is the way we make capitalism "work" -- by force.
Welfare:
Our economy needs people to buy things so that businesses can pay back the banks, so that the banks can make good on their bonds. But businesses cannot hire everyone. That's where the state comes in. The state gives "free" money to the poor, who use this money to buy things, so that businesses can keep making money and pay back their loans. Where does the government get this money? Well, the national debt is incredibly high. But that's ok.
Real Capitalism Has Not Been Tried?
But hold on! If the whole economy is dependent on state welfare, is this real capitalism? The simple answer is "no." At least, this is not what many people think capitalism should be. But we have seen that if a competitive economy is too simple and too honest, then it will fail pretty quickly. We need an infinite supply of money from the top and we need poor welfare recipients to fill in the cracks at the bottom. Notice what the key role of the government is: It declares that the money which the Federal Reserve creates is good money, it forces people to pay back their loans, and it hands out money to the losers at the bottom. Without the government's constant support, the whole system would collapse. This is the way we make capitalism "work" -- by force.
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