February 13, 2020
My Dear Reader,
With Bernie Sanders surging New Hampshire and presumably cutting into Joe Biden domain in Nevada and South Carolina, are we really at a point where an avowed socialist could be the Democratic nominee? That being said, and wanting to take a business look at it why is it that top-down economies typically don’t work?
As with anything that we examine on this site, we will take a historical example and studies first. How to understand how top-down economies work, we need to understand a supposedly defunct economic thought process. When the global economy began to expand past the borders of individual states, and colonies were developed in America, the ruling economic theory was known as mercantilism. The basic premise of mercantilism is the idea that there was only a limited amount of resources in the world and in order to make the most money from those resources, governments must control the entirety of the supply. It also means that in order to best your rivals, your people must buy your products. In order to achieve this, excessive tariffs on foreign goods are necessary. The Mises institute describes Mercantilism as economic nationalism in an article titled Economic Nationalism: From Mercantilism to World War II
“Mercantilism evolved for the first time in history a more or less consistent body of doctrines explaining and justifying state action to regulate, control, and restrict various elements of international economic relations.1 These doctrines are inspired by a primary concern for national power and a secondary concern for national well-being. In the 19th century, the world having moved very far in the direction of free trade and of economic internationalism, the mercantilist tradition seemed to be relegated to the historians’ domain, while the economic doctrines of mercantilism were looked upon as discredited and discarded curiosities from the past.”
Typically, due to the bureaucracy needed to put such limitations on the market, a government with authoritarian societal controls is needed. So it’s no coincidence that mercantilism rose up in the age of absolutism. but unfortunately one of the many drawbacks of mercantilism is inflation, as Andrew Bloomenthal writes in his article from July of 2019:
“The British government demanded trades were conducted using gold and silver bullion, ever seeking a positive balance of trade. The colonies often had insufficient bullion left over to circulate in their markets, so they issued paper currency instead. Mismanagement of printed currency resulted in inflationary periods.”
The other negative when it comes to mercantilism has to be it’s mandate on monopolies. In order to ensure that products are created from the state’s resources, the government has the responsibility of issuing legal monopolies. Perhaps the most famous example is the British East India Company which was formed to regulate the commerce and products created in the United Kingdom’s Indian territories. Monopolies are decidedly anti-capitalist, and hurt the consumer in nearly every way. Because there is no competition, or no allowed competition the price of any good is subjected to inflated price, because Supply is controlled by one entity. This means that there is also no incentive to make the product more cost-effective in order to gain more market share and this leads to the average family spending more on any given product. In the US The best example of this was the train monopolies of the late 19th century.
At first, because of America’s Economic Policy, there were many railroad companies competing to connect east and west with the greatest technology of the 19th century carried but do do economic crashes in Mich management, many of these companies merged in the late 1800s.
“In the financial crisis of 1893, the Union Pacific Railway, like 153 other American railroads, went bankrupt. The trains continued to operate, but the bondholders lost their investment. In 1897, a new Union Pacific Railroad (UP) was formed and absorbed the Union Pacific Railway; this new railroad reverted to the original Union Pacific name of the original company, but now pronounced “Railroad” and not “Rail Road”. Empire builder E. H. Harriman (1848 – 1909) purchased the UP for a song. He upgraded its 3000 miles of trackage, modernized its equipment, and merged it with the Southern Pacific, which dominated California.”
This company was so powerful, that entire political movement in the midwest rose up to oppose them. These were known as populists, with a powerful speaker by the name of William Jennings Bryan at the helm. In 1910, the Supreme Court was forced to break up the monthly, as the cost of shipping grain from the Midwest to the coasts Had increased the cost of even just a loaf of bread. It was not until the Teddy Roosevelt administration that the Gilded Age and Gilded Age monopolies were broken apart.
Essentially by nationalizing Industries, the government becomes its own Monopoly, or there’s one company that is sanctioned by the government. The government has complete control over what that company provides and the quality of its services. This is funded by tax dollars and then sold to the public. much like the Mercantile systems of the colonial era, the people produce a product, and that are forced to buy back that same product while also pain attacks that it takes to refine the materials that go into said product. This will lead to a great inflation of cost, without enough economic advancement by the average citizen to cover it.
This is just scratching the surface regarding the failure of nationalized economies. free trade drives down costs and allows the general populace to better themselves through competition and personal achievement. Hopefully this clears the air before the election, and helps you better make an informed decision.
To your creation and potential,