Recently, the communists have been out in force on campus dedicating a lot of time and vocal chords excoriating the failure of capitalism and how communism is the eventual answer. Capitalism, however, has overwhelmingly been a force for raising the standard of living across all levels of socioeconomic status.
The recent financial crisis has less to do with capitalism, and more has its roots in human nature. One important economic term comes to mind that helps explain a lot of what went wrong: moral hazard.
Moral hazard arises when people do not fully pay the price when something goes wrong. People act according to incentives, so if a friend of mine gives me money to go gamble in Las Vegas, will I really be as careful as if it was my own money?
In the financial sector, many of the complex securities, derivatives, mortgage backed securities, and other financial instruments were so heavily insured, creating moral hazard, that the only way that people could ever pay the price for making risky decisions was if the whole housing industry tanked very quickly. And then it did.
The communists will tell you this is a failure of capitalism. The real question would be why wouldn’t communism make it even worse? Marxist communism is based on common ownership. But that would create the type of moral hazard that caused the most recent recession, except instead of affecting mainly complex investments, it would take place in every decision.
If each member of society only owns a small and equal share of everything, they will have such perverse incentives, that they will not bear the consequences for anything that they do. As long as they are spending someone else’s money and eating someone else’s food and driving someone else’s car, why would they care at all if they waste the money, gorge themselves on the food, and get all sorts of nicks and dents in the car.
Robert Heinlein, a science fiction writer, explained how dirty public restrooms illustrate a dying society. If people use their own restroom, they keep it clean and take care of it. As soon as they visit a public restroom that they will never see again, they care much less about the condition it is in when they are through using it.
Communists argue that everything should be public, while most capitalists would say that government only needs to get involved when the free market cannot make something privately owned.
When people do not have a personal stake in something, they will care less about their actions. Moral hazard helped cause the recent financial crisis. The solution is to try to avoid moral hazard and make people take responsibility for their risks. Capitalism is fully functional and is responsible for an unprecedented growth in standard of living for United States citizens.
Communism would turn everything into a dirty public restroom.