Capitalism vs. Socialism

As we wrote last week, it's not possible to analyze the economy these days without focusing heavily on what government is doing. Between the Federal Reserve, fiscal policy, and COVID-related restrictions, little in our lives avoids governmental influences.

The easiest way we can describe the current environment is that in the short-term, forecasting is easy. As the virus wanes and the U.S. rides a wave of easy money and debt, the economy, earnings, and equity values will rise. Inflation will too, and so we favor hard assets and equities over longer duration fixed income.

As we look out further, forecasting becomes much tougher. Certainly government has grown, in sheer size, and also in power. When the CDC, a health agency, can impose a moratorium on evictions (in violation of property-owners rights), the U.S. has moved a long way from its historic roots. If, after passing $5 trillion in emergency pandemic spending, the government can be talking about $4.5 trillion more, we have entered new territory.

The history of the world has been a battle between two competing ideologies of how resources should be distributed: Capitalism and Socialism.

Capitalism distributes resources to the most productive use through markets and competition, while at the same time putting brakes on greed and selfishness. In order to accumulate resources in a capitalist system, you must provide goods or services for which someone else is willing to pay. If your cost of production is greater than what the market is willing to pay, you will not create much wealth. Or, if a competitor can provide the equivalent or better for a lower price, you will lose market share and therefore your wealth.

As a result, while it may be true that some people in a capitalist system become extremely wealthy, they do it by creating goods or services that people want and in a way that competitors have a difficult time copying.