Money & The Economy

AOC Does Not Understand Capitalism or the Profit Motive

Recently, Alexandria Ocasio-Cortez, D-N.Y., said, “Capitalism is the absolute pursuit of profit at all human, environmental and social cost.”

AOC was just out in Texas campaigning to turn the state Democrat “blue.” While the 32-year-old Democratic Socialist is correct that profit is the sole motive for business, the costs — of all kinds — are always taken into consideration.

AOC simply doesn’t understand capitalism. Let’s try to explain it as simply as possible.

There are two economic philosophies. Each philosophy is based on the assumption of the primary motivation of the people. Capitalism believes people are motivated primarily, although not necessarily entirely, by self-interest. In planned economies, like Communism or Socialism, the assumption is that people are motivated primarily by the interests of society as a whole.

An examination of human behavior reveals that the self-interest motive dominates.

The main functional difference between the systems is how the output (income) is divided. As a simple example, suppose 100 people produce 1,000 units of output. How should that output be divided?

In planned economies, the theory is that an equal distribution of output is appropriate, regardless of an individual’s contribution. As such each person would receive 10 units of output. This follows the view of, “Contribute according to ability, paid according to need.” Since all people have similar needs and, in this scenario, are motivated by what is good for society, people accept this equal distribution.

Capitalism, a Merit-Based System

In Capitalism, a person is paid according to the value of their contribution. So, if one person works more and figures out how to increase production, that person may receive 15 units of output. A person who works very little and produces very little, may receive only 2 units of output.

That’s not an equal distribution of income, but it is (arguably) a fair distribution since each person is paid according to their contribution.

In planned economies, no matter how much more an individual contributes, no more income is earned. This eliminates the incentive to contribute more, which explains why these economies tend to stagnate, while Capitalistic economies tend to grow and prosper.

In any economy, a number of economic questions must be answered. These include: What products are produced? How are the products produced? How much of each product is produced? And what will be the price?

In a planned economy, a central planning agency of the government would answer these questions, usually by conducting an input-output analysis. This allows government to decide what they believe is the optimal answers for society. That’s consistent with the philosophy that people are motivated primarily by what is best for society.

The result may, or may not, be what the majority of people actually want.

Laissez-Faire

In Capitalism, the market answers all of those questions. For instance, what to produce is determined by the consumers’ overall demand which interacts with businesses’ ability to supply. If the resulting market price is high enough to yield a profit, that product is made. If there is low demand and a low market price, the product won’t yield a profit so the product is not made.

It is a very democratic system. When consumers purchase a product, they are essentially casting dollar votes. The products with the most dollar votes are the most profitable, so those products are made.

It is true that the sole self-interest of business is to earn a profit. Business knows the largest profits are earned when they give consumers exactly what they want at exactly the price they are willing to pay. This sounds like a fair and equitable system.

If business ignored any “human, environmental or social cost” and consumers were concerned about this, the consumers would not cast their dollar votes for these products. That means the product would not be profitable so it would no longer be made.

It is the consumers interacting with business in the market that set the price. It’s not as AOC says a, “very small group of actual capitalists (that) have the ability to control labor and markets.”

Total Government Control

She also says Capitalism should be replaced by, “democratic socialism, a system where ordinary people have a real voice in our workplaces, neighborhoods, and society.” In her system, people would actually have less of a voice. It would be representatives of the people who would decide what’s best rather than having the people actually decide for themselves.

AOC’s real problem with capitalism is that those who have contributed very little to the economy receive very little income. The solution is not, as AOC would suggest, to take income away from people that earned it and give it to people who haven’t earned it.

Rather, the solution is to make sure there is sufficient opportunity for all to increase their contribution. Of course, that means individuals must take responsibility for themselves so they are prepared to take advantage of the opportunities.

The US went from the birth of a nation to the largest most prosperous economy in the world in about 150 years. That happened because there was an emphasis on individual freedom, individual responsibility, low rates of taxation and a limited role for government.

AOC’s social democracy would limit individual freedom, replace individual responsibility with social responsibility, have higher rates of taxation and a large role for government.

That’s exactly opposite to what made America great.

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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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Michael Busler

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