Capitalism isn't that hard to understand


Let’s use buckets to illustrate.

The actual total wealth of the citizens can be represented as water in a bucket. And an example wealth is $10 trillion.

First Image

Let’s say that the water on the left side of the bucket belongs to those who make less than $250,000 and that on the right make $250,000 or more. Let’s say that the government decides to take $1 trillion of the wealth out of the bucket. The level of the wealth goes down. What if we just take it from the side that belongs to side on the right? What happens to the level of the wealth?

If we assume that the $1 trillion goes to the operation of government, then, regardless of what the government does with the money, it is out of the control of the citizens and restricts their freedom to purchase needs (food, housing, transportation and the like), luxuries (TV sets, houses, gormet foods, eating out, vacations, and cars) and savings (stock investment, bank savings, retirement funds)

How do we replace the wealth that the government takes out of the bucket? In the United States we depend on the capitalistic system.

Here are the basics.

Some one, usually called an entrepreneur, has a idea for a product or service that is of value to a number of other citizens. The entrepreneur, usually using a part of his own wealth, develops the idea and sells it to supporters with the hope that their investment, called capital, in making the product will return to them more money than they invested. That capital pays for the raw materials, tools, initial labor to produce the product and services. Add to that, the labour, and we have a product, and we know how much it costs.

Next Step —

The product and services are placed on the market. The gamble is that the purchasers recognize that the product is worth more to them than the wealth that they have in cash. To the entrepreneur, the key is that the product or service is worth more than it costs. He MUST make a profit or go out of business.

He MUST return the investment plus a dividend to his investors.

But the important part, the profit ends up as increased wealth for all. And even though the “rich”, who have invested the most in this venture may get the most out of their risk, note that the overall wealth goes up.

Excessive Profit

And while we are on the subject of profits, how much profit is excessive profit? First of all it is improper to measure profit merely in the amount of $ as some do when trying to make the case for excessive profit.  You must use a percentage.  A large company is expected to make a larger amount of $ than a small one.  The real measure is in percent (the profit divided by the revenues times 100) to give a good measure of its performance.

A rule of thumb is that the return on an investment should be higher than an investor can receive from a savings account plus about 5% to attract the investor. For an established company today 6-7% dividend is the minimum return on investment required to be attractive to an investor. Then a 9% profit is reasonable, even if paid to Exxon-Mobile and is in the billions of dollars. And this must be the profit on a years revenues, not just some small period. To put the 9% profit in perspective, in fiscal year ending 2008 Microsoft realized $17,681 million on $60,420 million of revenues or 29% profit. Exxon-Mobile realized $22,570 million on $254,926 million revenues during the first half of the 2008 or 9%.

Comparatively, who is gouging their customers? Neither.  All that is shown is that Microsoft performed better.  Yet, to hear the news reports, Exxon-Mobile is gouging its customers while Microsoft is not even mentioned.

The .pdf files listed below give charts showing the flow of wealth in each system. The first, "Capitalism.pdf" shows pure capitalism. The second, "CapitalismWithTaxes.pdf" shows leaks in the system caused by current government taxes on the system.

As the leaks increase in size, as they have during my life-time, the growth of wealth in our nation is reduced. That is evidenced today by the fact that so many of our citizens have dropped out of the work force because businesses can no longer afford to pay employees enough to cover their expenses and their taxes.

The third chart, "Socialism.pdf", is the representation of a pure Socialist or Communist economy. Note that there is no growth in such a system. Even Cuba, adhering mostly to this philosophy, must have some capitalism, to survive. However, many of their most talented citizens escape to the United States for opportunities unavailable to them in Cuba.