Saturday, July 28, 2007

Capitalism Needs Help

The United States economy is alive and well, but capitalism isn’t. According to the theories of capitalism, an economy grows through competition. We are currently in a prolonged period of low competition. So, worldwide economic growth is slow.

Competition requires a huge number of firms competing in each market and ease of entry for new firms. Of course, ease of entry must also mean ease of leaving the market. Right now, however, almost every market is dominated by a few gargantuan firms.

A solid capitalist system protects us all. A central control economy, like the former Soviet Union, fails due to a lack of decision makers. It only takes one man to make a bad decision and the market can fail. The beauty of a capitalist system is the great number of decision makers. Even if some bad decisions are made, enough entrepreneurs will make good decisions to protect the market.

Three steps could promote the wide open markets envisioned be Adam Smith. The key is to make small firms competitive with huge firms. Right now, a large company has an advantage in research and development and providing health care and pensions to their employees.

The first step is national health care and national pensions. National healthcare and pensions will allow smaller companies to compete with large firms in providing basic benefits to employees. If the Government were to contract out healthcare and pensions to a multitude of firms, with mandatory goals, capitalistic innovation could be maintained. Plus, foreign firms could no longer hide behind national healthcare and pension systems in their home countries to undercut American companies.

The second step would be graduating the corporate tax code. A proper graduation of the corporate tax code would promote small business, and thus, greater competition. A nationally backed foreign firm could be taxed based on the size of the government funding it. Foreign firms, selling in the United States, would have to be smaller companies too.

Third, to account for expensive research and development, small businesses should be allowed to create R&D consortiums. Such R&D consortiums need to be protected from antitrust laws. Generally, beyond promoting small business, antitrust laws must be strictly enforced, however.

We believe small business is the engine of our economy, so why don’t we act like it? Properly configured and aided, a system of small business competition and innovation will propel our economy into the next age.

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