It is important to know precisely what economics is and what it’s all about.

Thankfully, it’s very simple.  Economics is all about “stuff.”

Professors might make it more complicated.  The news and media might make it so much more complex.  And politicians will insist only they are smart enough to understand it.  But all of the books, all of the formulas, all of the statistics, and all of the research that economics entails is simply about one thing, and one thing only.

Stuff.

This might be a bit confusing at first, as most people think “money” or “riches” is what economics is all about.  But participate in a simple mental exercise and imagine:

a world with no stuff, but… 

tons of money.  

Precisely what would you do with the money?  Nothing, because there’s no stuff to buy with it.  You could be sitting on top of a billion dollars and two billion in gold, but without anything to buy or services to purchase, the gold and the money are completely worthless.  Ergo, economics is not about “money.”  It is 100%, COMPLETELY ALL about the stuff it can buy.  Money simply serves as a tool of exchange.

Elon Musk: “Some people have this absurd view that the economy is like some magic horn of plenty. Like it just makes stuff. There’s a magic horn of plenty and the goods and services they just come from this magic horn of plenty. And then if somebody has more stuff than somebody else is because they took more from this magic horn of plenty.

Now let me just break it to the fools out there: If you don’t make stuff there’s no stuff. Yeah. So if you don’t make the food, if you don’t process the food, you don’t transport the food, medical treatment, getting your teeth fixed… there’s no stuff. I would become detached from reality. You can’t just legislate money and solve these things. If you don’t make stuff there is no stuff.” 

Therefore, the true measure of how “wealthy” or “rich” an economy is, is not the amount of money it has. It is the ability of that country to produce stuff or what economists call “wealth.”  This is why Adam Smith wrote “The Wealth of Nations,” not “The Money of Nations” (though I would have preferred “The Stuff of Nations”).  He was not speaking to a country’s ability to mint gold or print currency.  He was talking about the country’s ability to produce things that would support and improve the lives of its people.  If you can understand this, then you already are light years ahead of most people when it comes to understanding economics.

The next step is how do we produce the stuff?  What is the optimal economic system that produces the most amount of stuff and therefore enriches the most amount of people?

And it is here there is a bit of debate.

Capitalism vs Socialism

In the olden days, understand, there was no debate.  Wealth was gained either through theft or slavery.  You would be working in your village one day and the Vikings or the local warring tribe would come in and take your goats, bread, and a lot of times, your women.  Or, you would be in your village, and soon a raiding party would grab you, drag you off to some faraway land and force you to build their stuff for them for free.  But after the Enlightenment, the American Revolution, the Civil War, two world wars, and other significant historical events, society has evolved to the point the debate about producing stuff falls into two general camps today – capitalism and socialism.

Capitalism is the idea that the individual produces the stuff and gets to keep the vast majority of the stuff he produced.

Socialism is the idea that everybody should produce as much stuff as they want, but then all the stuff is redistributed equally or at least “more fairly.”

And to be blunt, one is based in mature adult reality and the other in child like idealism.

The reason for such a confident and patently biased statement is because capitalism stands up to logic, history, empirical data, and evidence, whereas socialism does not.  And if you try to understand economics through socialism, you will simply fail.  Economics and the road to a rich and prosperous society will forever elude you.  This is not to brainwash you one way or another.  Nor is it to advance a political agenda.  But it is to have the decency and respect to treat you like a full grown man, not waste your time, and tell you how the real world works.  You should, by all means, confirm and verify everything I state here (even try to prove me wrong) for your own convincing, but in the meantime, for the sake of expediency, we cannot treat socialism with the same level of impartiality and dignity as capitalism.  It just doesn’t hold muster.

1. Incentives

First, the most obvious failing of socialism is logic. You don’t need to be getting your Master’s in Logic (real degree, not kidding) to quickly realize that if all the income is spread around to the point everybody makes the same, then why would anybody work?  You’d make just as much money as a janitor as you would a surgeon, so why try?  The natural consequence of these perverse work incentives is people pursuing easier professions or just refusing to work at all, which further translates into little to no stuff being made. This is why there were always shortages of bread, cars, toothpaste and everything else in the Soviet Union, while American grocery stores were filled to the brim.  Since it didn’t matter how much or how little you worked, most Soviets logically chose to work less which lowered the overall economic production of their economy and gave them standards of living a mere third of Americans.

2. History

Second, you just have to look at history.  Bar some Scandinavian countries, socialism has a horrible track record.  It has killed more people during peacetime than the Nazi’s purposely did during war.  And for those people it didn’t kill it severely lessened their standards of living compared to their capitalist counterparts.  

East Germany suffered standards of living 2/3rd’s less than their Western German counterparts.

China experienced economic growth of only 3.65% per year under communism vs. 8.24% post Deng Xiaoping’s capitalist reforms. 

Cuba only enjoys a GDP per capita of $9,500 vs. another Caribbean island, Bermuda, which has $69,000 in GDP per capita.

And perhaps the “purest” comparison we have in the field of economics is the Koreas. North Korea has an abysmally low GDP per capita of $1,800, while the South enjoys a standard of living 18 times that $32,800. 

3. Statistical evidence

Third, statistical evidence.  While the above figures are indeed statistical evidence, they are anecdotal (though compelling unto themselves).  When you look at all the countries with enough historical economic data and compare the size of their governments (as measured by spending as a % of GDP) to their long term economic growth there is a negative relationship.

Additionally, within the United States, as the government has grown larger (again, as measured by spending as a % of GDP) our long term economic growth rate has slowed.  

Both data sets only make sense because as the government consumes a larger and larger share of the economy, it by default must crowd out the private economy and thus slow economic growth.

4. Morality

Fourth, morality.  Realize the only way genuine, tyrannical oppression of people can occur is through the “state” or the “government.”  Yes, one person can individually oppress another (say a possessive husband, or an overbearing wife), but the only entity capable of oppressing an entire nation of people is the government because it is the ultimate monopoly of society and (more importantly) controls the military.  Our American forefathers knew this and is why they wrote so many rules into the Constitution and Bill of Rights, limiting the power of government.  But when people vote for socialism, regardless of what the constitution might say, they consciously or not give the government more money and more power.  Sometimes (though rarely) this power isn’t abused (e.g. – the Scandinavian countries), but more often than not it is.  The Soviet Union’s KGB was no different than the Nazi’s Gestapo, arresting and killing people for merely disagreeing with socialism.  The East German “Stasi” would regularly spy on its citizens, murder dissenters, and even have children spy on their parents.  North Korea flagrantly oppresses its people when it’s not too busy killing them in concentration camps.  And Cuba celebrates a mass murderer like Che Guevara.  This isn’t to say voting for socialism guarantees a country will immediately devolve into a totalitarian dictatorship, but that historically governments have been so predisposed to become tyrannical, that in voting for socialism you do at least enable them to do so.

5. Faith in the state

Finally, there is a gapping flaw in socialism.  It simply puts the cart before the horse.  Ask yourself the question – what came first?  The government or the people?  You’ll logically conclude that people came first and not government, because without people, why would you have a government?  What would it govern?  Where would it get its taxes?  Therefore, it is the government that relies on the people, and not the other way around.

This is an important point to make because it shows that people are the ultimate source of production, economic growth, and success.  Therefore, if you are going to have an economic system it needs to focus on the people, not the state.  Socialism simply fails to do this.  Socialism believes the state is not just the source of economic growth, but the solution to all of society’s problems.

Economic growth is slowing?  

“The government must do something!”  

Poverty is increasing?

“The government needs to give more money to the poor!”

Oil prices are too high?

“The government needs to stick it to Big Oil!”

It is never the people that must do something.

Capitalism, however, does the opposite.  It realizes the government is merely a tool of the people.  That the only role government should serve in society is that of “governance” and not “engine for economic growth,” simply because it can’t.  Capitalism, therefore, focuses its efforts on incenting the people to produce with things like low taxes, economic freedom, property rights, and other things enumerated in our founding documents.  It is, therefore, no surprise that capitalist economies, which are based in reality, always manage to produce more wealth than socialist ones, which erroneously put their faith in the state.

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Psychology of socialists

If you take what I’ve said at face value, you may ask why is there even a debate?  If capitalism is so patently, empirically, and obviously superior to socialism, then why are most western nations drifting towards socialism?  Why is there so much passion, argument, debate, even violence on the news and in society when it comes to the debate as to “how to produce stuff?”

And it is here psychology enters the equation.

Realize while you may have the intellectual honesty and temerity to study economics, conduct your own research, and unbiasedly discover the truth for yourself, most people don’t.  Most people are too lazy to study economics or put forth the effort required to thoroughly and fully think through their ideology.  Worse, some of these people start to take on an emotional attachment to their political beliefs.  These people usually live inadequate lives, have nothing else to offer society, and find a mental solace, even purpose or meaning in political ideologies much like zealots do in religion (for example, environmentalism, feminism, veganism, organic, etc.).  Thus, when you encounter them, be it in person or watching the news, it is a guarantee they are going to disagree with you, often violently.

But understand why there is disagreement.

It’s not because you’re right and they’re wrong.  Or that they have the right data and you don’t.  It’s because you are arguing from empiricism, logic, fact, and math, while they are arguing from feelings, emotions, simpleton logic, even a zealous faith.  In other words, it’s like mixing oil and water.  You’re not even on the same page and therefore will never be able convince them, just as they will never be able to convince you.  

The reason I bring up this impasse between capitalists and socialists is because if you don’t realize this it can be maddening to try to understand economics and politics.   You will have all the data, you will have all the research, you will have thoroughly thought through your economic philosophy to the point it’s airtight.  But you will still get vehement resistance from your socialist counterparts.  This will make you think they’re either insane or you completely missed something in your economic analysis, when in reality, the entire debate about economics is couched not in empiricism and research, but emotion and psychology. 

The truth is economics is quite easy to understand.  Just takes a little research, a decent understanding of the basic principles of “stuff” and “wealth,” and an intellectually honest mind.  The hard part, and where the forefront of economics and politics is being played out, is in understanding the emotions and psychology of socialists, leftists, and people in general.  That is where you will cut your teeth as an economist.

Source: Aaron Clarey – Bachelor Pad Economics: The Financial Advice Bible for Men