The Scottish economist Adam Smith is sometimes called the “father of capitalism.” He published his greatest work, The Wealth of Nations, in an interesting year—1776. I wonder if anyone on this side of the pond read that book when it came out?
Very likely. We date the birth of our nation to the publication of the Declaration of Independence in 1776. However, the United States of America really began with the ratification of the Constitution in 1788. It was written in 1787, some 11 years after the publication of Smith’s book.
The United States economy is based on the concept of a free and open marketplace. Those foundational ideas can be directly traced to Smith.
Perhaps the most important concept of Smith’s work is the idea of the unseen hand—greed. The deep desire to get rich is the unseen hand that is working behind economic changes. Do you think Thomas Edison invented the electric light bulb just because he liked to tinker? He was a tinkerer, absolutely. But tinkering alone cannot explain the 2,700 experiments he conducted until he finally arrived at a working prototype.
And even if you are willing to ascribe 2,700 experiments to obsession, what happened next explains so much. Edison set about getting rich. He founded the General Electric Company.
The Wright brothers were tinkerers who founded the Wright Company. Steve Wozniak was a tinkerer, who, along with his partner Steve Jobs, started Apple.
There have always been tinkerers, but because tinkering became a means of getting rich, we have electric lights, air travel, smart phones, and so much more.
If you manage to get rich, you have created an income inequality. Income inequality drives innovation. The very possibility of it inspires people to go to great lengths in their quest to get rich. This is Adam Smith’s “unseen hand,” and it works. It works better than almost anything ever invented.
But it also creates a problem. Left unregulated and uncontrolled, income inequality results in too much concentration of wealth, and that’s a problem.
As capitalism was gaining steam in the early 1800s, a few people got very rich. The resulting concentration of wealth resulted in large numbers of poor and miserable factory workers in the U.S., and especially in England. Anyone who’s ever read a Charles Dickens novel has an idea of what urban poverty was like at that time.
In 1848, Karl Marx published The Communist Manifesto. It’s an interesting read full of sentences with ALL CAPITALS as he shouts at you from the page. The book was written in reaction to the ills of capitalism, and it was not wrong. The other side of people getting rich is that people get left behind. And those getting left behind wanted greater participation in the wealth being generated in their industries.
Marxism was the tragic overcorrection of capitalism. The idea was for everyone to share the wealth equally. What they forgot were the generators of that wealth—greed, incentives, and the ability to get rich from your ideas.
It took seven decades for the Soviet Union to crash and finally accept that communism simply doesn’t work. The only thing they were sharing was poverty, because they had removed the engine of generating wealth.
But they were attempting to correct a real problem—too much concentration of wealth.
The United States today is neither a pure capitalist country nor, of course, a communist country. It is a country of regulated capitalism. It is a country that benefits greatly from capitalism but which also enjoys a sprinkling of socialism everywhere you look.
Consider the small Iowa town I live in. Throughout the summer, there are free concerts and other events in the town square. Everyone has equal access to sit and enjoy the park. Public parks like this are, by definition, a socialist creation. We all pay for their upkeep through our taxes and we all get to enjoy them. We do not restrict it to only those who have paid taxes.
The same is true of every street and highway in our town, the police and fire departments, and so on. In our capitalist country, we have some important ways in which we share the wealth. Sharing is the basis of communism, but do we ever think when we use our parks we are being good comrades? Of course not. Because what we are doing is enjoying the fruits of our capitalist wealth-creating engine.
Families are, for the most part, socialist organizations in which we share our wealth. Businesses adopt wealth-sharing in a fascinating hybrid in which profit sharing also creates incentives for the workers.
And finally, there are capital markets. These are more commonly known as stock markets. One of the driving ideas behind communism was that everything would be better if the workers owned the companies. But as we well know, going to the extreme and dismantling capitalist ownership and management was the great communist overcorrection that resulted in a crash.
In modern America we have another fascinating hybrid. We all have a chance tobe owners of great companies because we all have access to the stock market where we can buy part ownership. Gallup estimates that 61 percent of Americans own at least some shares of stock. So through the great engine of capitalism, we are realizing the Marxist dream of workers owning at least a part of the companies that create our wealth. A fascinating virtuous cycle.
The quote “Everything in moderation” is sometimes attributed to Oscar Wilde (1854–1900). The United States can be seen as the triumph of moderation. It is a magnificent tribute to the power of capitalism moderated by regulation, with a sprinkling of socialism.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri.com These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.
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