A Primer on the Capitalist System

Today Rush Limbaugh tried to explain the purpose and consequences of the minimum wage during his radio show.  Why would he do this?  Because the Senate had hearings in which Massachusetts Senator Warren explained that the minimum wage should be about $22 per hour if it were adjusted for inflation and the increase in productivity since 1960:  In a hearing of the Senate Committee on Health, Education, Labor and Pensions last week on “indexing the minimum wage,” Massachusetts senator Elizabeth Warren inquired of University of Massachusetts professor economics Arindrajit Dube, “If we started in 1960, and we said that, as productivity goes up — that is, as workers are producing more — then the minimum wage is going to go up the same. And, if that were the case, the minimum wage today would be about $22 an hour. So, my question, Mr. Dube, is what happened to the other $14.75?”


So how did we get to a point where a former professor at Harvard Law School is so uniformed about the process of wage development?  Can we ever hope to solve our financial problems if this is the caliber of leadership within the Capitol? Limbaugh went on to explain that the minimum wage costs jobs, which is correct, and is designed for the lowest skilled workers.  He also explained that the labor unions support the minimum wage and want it to increase regularly to encourage higher salaries for their members.  All of this is true, but even this explanation misses several crucial points.


Perhaps more critical is the response that Professor Dube gave to Senator Warren’s question and her retort as reported:  Dube backed up Warren’s math, and even stated that if minimum wage had kept pace with the rise in income of the top 1% of taxpayers that it would have been around $33, before the recent recession.

Warren then went on to question David Rutigliano, owner of the Southport Brewing Company. Rutigliano took the side of small business owners, stating that his business doesn’t run the same way or with the same volume as a McDonalds, which Warren pointed out could weather a minimum wage hike with relative ease. 


After 100 years of progressivism and its influence within the public school system, high school graduates do not understand the fundamental differences between socialism and capitalism.  They have been taught that under socialism the government owns the means of production, but while under capitalism individuals own the productive businesses and valuable resources.  This dated and limited definition plays to the progressives’ and socialists’ ability to accumulate power and increase the growth of government.  It also stifles all efforts toward economic growth and stability.


The growth of governmental influence over productive private entities which is a threat to individual liberty is the aim of statists.  In Europe, this power was consolidated into the monarchy during the Middle Ages.  With the growth of feudalism, the aristocracy grew into a wealthy, privileged class.  Mercantilism reached a height in England in which the king granted individuals commercial and territorial rights.  These entrepreneurial efforts did not respect the value of a meritocracy.  It took our founders to provide this form of capitalism in America.


The socialists and progressives cannot accept their limitation to compel economic behavior.  Progressives, following Marx and Engels, believe that fairness requires redistribution of wealth within our society.  This comes from the socialist principle that “from those that have to those that need” must operate.  Yet, people will endeavor to thwart this aim for their own benefit.  Large corporations have staff that work to move profits to other nations as the tax rate is lower elsewhere.  This defeats the governmental aim to collect greater tax revenue.  Smaller businesses have less flexibility to accomplish this aim, but still endeavor to maintain the greatest profit for themselves.


Smaller businesses have owners that manage their affairs for direct benefit; in contrast, larger public corporations hire managers (CEO’s) that are concerned with their survival as the leader and that results in quarterly stock increases or higher profits for stockholders which are the owners.  Smaller businesses show an independent streak, while the government can solicit larger companies to comply with regulations more easily.  Larger businesses have the means to adjust to onerous rules, which might wreck havoc on smaller businesses.  Statist find the larger businesses more willing to accept their regulations as the CEO’s see these regulations as an inconvenience


A private business pays staff based on the lowest salary that can be expected to elicit the necessary work.  Some may obtain higher salaries as a convenience to the manager, who might want to limit negotiations.  Yet, the job will only be available at a wage that the owner or manager will commit, since they control the money.  If the salary does not solicit enough positive response, then a ne and higher offer will result until the ceiling is met.  The minimum wage is not a living wage because the business does not hire staff to generate income in the community, but rather to generate wealth and profit for the owners.  There must be value in this transaction.


Milton Friedman, in his august work Capitalism and Freedom, argued that “liberalism” in the Enlightenment spirit requires economic freedom.  This threatens the progressives and limits their ability to dominate others.  The European enterprise model evolved from the feudalist past.  The American model rewards individual success.  It cannot protect against failure or deficiencies, but the government can offer a safety net for those unable to manage their affairs.


The hubris that progressives demonstrate can result in accumulations of power beyond the corrupting influence.  Clearly few people can resist the temptation to collect material and wealth along with the power to control others.  Lord Acton warned of this corrupting influence, but still citizens surrender their liberty for a “few pieces of gold”.  Joseph Schumpeter, the Harvard economist, warned of the opportunistic (during crises) grab for power by politicians that would threaten democracy in this country.


Our society may be at risk, but the solution is to educate the populace on the value of the private entrepreneurial system.  Rebuilding the social studies curricula is a must, but this is just the beginning.  One thing to consider regarding the orientation of higher education is the extent to which the left has controlled the agenda.  Austin Goolsbie, the former Chair of President Obama’s Council of Economic Advisors firmly accepts the need for more government intrusion into private business.  He teaches at University of Chicago, the same institution that once housed Milton Friedman.  Could this be any more worrisome?


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