Economic Systems Within Political Systems
Types of Capitalism, Free Trade, Tax Havens, Gold Standard, Education
Today I write about a variety of economic philosophies that organize and distribute available resources, services, and goods across a geographic region or country. Economic systems regulate the factors of production, including land, capital, labor, and physical resources. How resources are distributed is heavily linked to economic stability, power and the welfare of a nation’s citizens. Economic systems vary depending on philosophical thought and who has political power. There are lots of elements, which make or break a political system. Each of the subtopics covered here are complex, so this is my usual synopsis in my goal to describe what constitutes a political theory. My previous three articles on Search For Truth News are part of the grand picture and go along with this article.
Six Types of Capitalism
Capitalism describes any economic system that is based around the private ownership of capital. It’s usually associated with free enterprise and pro-business government policies. It is ideally meant to function as a free market economy in which everyone freely competes against each other for the purpose of creating the cheapest and highest quality products. However, the degrees of free competition differ between various types of capitalism.
1. Oligarchic. A small group of wealthy, privileged elites control both the economic and political system. They own a large percentage of the nation’s wealth and property. Oligarchs use their power of the few to rule the many. They stifle competition and control prices like cartels and monopolies. They buy off competitors and politicians to maintain control and status. Because of their power and legal privileges, they live above the law that ordinary people live by. Example: Russia
2. State. The economy is mostly controlled by the government through a mixture of regulations and direct activities such as owning and operating commercial businesses and NGO’s. The state controls major means of production. It owns most or all of critical infrastructure, such as railways, power plants and universities. There is still some private economic activity, unlike in socialism in which the government owns everything. When the state intervenes to protect and advance the interests of big business, it has been called state monopoly capitalism. Example: China
3. Corporate. Large companies and corporations have a controlling interest position in the market with diverse stockholders. Unlike oligarchic capitalism, these interests are run by legitimate companies, although multiple oligarchs may own significant amounts of stock as investors. In both cases, the wealthy will use their wealth and market size to stifle competition and influence politics. If they are able to avoid paying taxes, paying decent wages, and maintaining safety or not damaging the environment, they are referred to as “crony capitalism.” Example: United States
4. Entrepreneurial. This is based on free market entrepreneurs, who have typically small-scale businesses. It is a pure form of capitalism. However, it is difficult for small businesses to compete against large sale corporations. Protecting them requires state intervention. Example: Germany and Japan
5. Laissez-Faire. Means “let do” in French. Its philosophy is to let people do whatever they want, with little intervention from the state, which is a Libertarian viewpoint. It’s based on the assumption that free markets naturally manage the economy, meet social needs, and allow fair competition. There is trade freedom. It has also been called anarcho-capitalism. The paradox is that eventually small companies merge into larger ones and government intervention is needed to preserve fairness. Example: Singapore, New Zealand, Australia
6. Welfare State. The state plays a major role in redistributing wealth and resources to disadvantaged people. The purpose is to establish social institutions to provide basic economic security for its citizens. It is based on priorities for equal opportunity, fair distribution of wealth and public responsibility for the disadvantaged. Resources include unemployment insurance, social security, child care benefits, healthcare and education. High taxation is used to finance the welfare state. Example: Sweden and Norway
Free Trade Agreements
Free trade means that countries agree not to have tariffs between them. Tariffs are a type of tax that people pay when transporting products from one country to another in order to sell them. The purpose is to protect local industries from competition. A free trade region removes tariff taxation when goods move over national borders.
NAFTA, the North American Free Trade Agreement, was set up between Canada, United State and Mexico, taking effect on January 1, 1994 during the Clinton administration. It was the largest trade block in the world by gross domestic product. It was promoted to the people of each country with grand promises.
Because of opposition to ratification, two side agreements, the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC) were added. President Trump later replaced NAFTA with the United States-Mexico-Canada Agreement (USMCA), which was ratified by all three countries and took place on July 1, 2020.
Free trade has the benefit of making products cheaper for consumers, giving them more access to goods from around the world. It increases competition by forcing local industries to lower their prices in order to compete with overseas competitors. It favors large companies over smaller entrepreneurial business. It spurred a surge in trade, investment and production in Canada and Mexico. However, there were both winners and losers.
Free trade agreements can have significant negative effects, the subject of many political disputes regarding issues of employment, fair competition, environment, and economic growth. Trump railed against it. NAFTA was beneficial to large corporations but harmful to workers and small businesses. When small farmers and workers lost their jobs, it had a secondary indirect effect of stimulating drug trade, exploited by the cartels.
The agreement made it easier for American manufacturers to move their factories to Mexico where labor costs were much less, causing job losses in the US. Production was also outsourced to China and other Asian countries using separate free trade agreements. It is one of the reasons the US does not make many things now and is more dependent on imports. In the US it resulted in large trade deficits, factory closures, and job losses in manufacturing.
Mexico was the biggest loser in numerous ways, which can be reviewed here. Mexicans had been promised higher wages and elevated standards of living closer to that in the US. But within two decades, real wages were down, over 2 million farmers lost their lands, and tens of thousands of Mexicans went bankrupt.
The tariffs on corn and other commodities were eliminated by NAFTA. Then cheap corn from the US flooded the Mexican market, causing farmers to lose their farms. Meanwhile the price of tortillas rose 279 percent over ten years. Manufacturing jobs in the new factories paid workers less than $2/hour and there were few health and safety measures. Mexico’s GDP dropped to a lowly 1 percent. The environment suffered from deforestation and heavy use of fertilizers by corporate farming.
Instead of reducing illegal immigration by providing jobs, illegal immigration from Mexico to the US nearly doubled from 1990 to 2000. The Mexican economy went into recession, farmers gave up farming rather than planting lucrative crops, and the government did not follow through with promised infrastructure investments. Below is a graph of Mexican immigrants in the US between 1980 and 2019.
Corporate Tax Havens
Falling corporate tax rates have continued worldwide for decades. The tax burden then falls on the working class, rather than wealthy stockholders. One issue is when corporations move their headquarters overseas to the lowest-tax jurisdiction, called tax havens. The effect is compounded when other countries are then forced to drop their tax rates to prevent corporations from moving in a race to the bottom. Making it worse, money that could be spent on health and safety, environmental protections and employee compensation is retained by the stockholders.
The British Virgin Islands and Cayman Islands were the world’s most popular corporate tax havens in 2021. They are followed by Bermuda, Netherlands, Switzerland, and Luxembourg. The last two are major secrecy jurisdictions as well.
The State of Tax Justice 2022 (tax justice.net) reports that at least one of every four tax dollars are lost to tax havens, amounting to over $483 billion per year by multinational corporations. Another way corporations hide profits is when they are only required to report profit and losses on a global level but not by the country where it is earned. This way they can move money around to make it appear they didn’t make any profit there. A third form of tax evasion is to park funds in other countries. Switzerland is the most often cited for this destination. In the US, the state of Delaware is tax free for companies registered there. It’s called the Delaware Loophole for income tax and also does not have a sales tax.
The Gold Standard
Near the end of WW II in 1944, allied nations met in Bretton Wood, New Hampshire and signed the Bretton Woods Accord, which pegged the US dollar to the fixed price of gold at $35 as the dominant international reserve currency. It also established the International Monetary Fund and the Bank for Reconstruction and Development, part of the World Bank. The accord, called the gold standard agreement, governed how the currencies of the world’s currencies were valued against each other using exchange rates.
In 1971, US President Richard Nixon chose to unilaterally quit the Bretton Woods system and float the dollar, ending the gold standard and replacing it with a floating exchange rate, known as the Nixon Shock. The dollar could no longer be converted to gold. This was preceded by French President Charles De Gaulle demanding gold for its dollars in 1965 and sending its Navy to pick it up in retaliation to the American Exorbitant privilege. Other countries followed suit, draining the US gold reserves. The cost of the Vietnam War and inflation made it impossible to back expenditures with available gold reserves. Printing money was the solution.
By Executive Order (EO) 6102, signed by President Franklin D. Roosevelt in 1933, Americans were forbidden from owning gold in excess of $100 within the continental US other than jewelry. The Emergency Banking Act forced all Americans to convert their gold coins, bullion and certificates into US dollars. Roosevelt also changed the gold content of the dollar from $20.67 to $35 per ounce, thereby raising the amount of paper money it took to buy one ounce. That value remained in effect until 1971, when Nixon announced that the US would no longer value the US dollar with a fixed amount of gold. The EO was repealed by President Ford in 1975.
Currencies have different exchange rates relative to one another. One US dollar will be a different amount in Russian rubles or Chinese yuan. A floating exchange rate is determined in foreign exchange markets depending on demand and supply, which generally fluctuates constantly and can have periods of instability. In response to the US action, the rest of the world had to subsequently adopt market-based rates for their currencies as well.
The action allowed the free printing of dollars by the US Treasury, referred to as fiat money. Fiat money is a currency backed by the government that issues it and it not backed by any physical commodity. The best example of fiat money is paper currency. The paper itself has little intrinsic value, so fiat money can only serve as money if its production is tightly controlled.
Private Versus Public Education
A country’s educational achievements by its citizens is directly tied to its long-term economic strength and power. Education can be funded either through the state, by capitalism, or by a mix of the two. In the US, both types are unsatisfactory currently with lots of controversial debate. State departments of education regulate both types of schools. Opponents of state funding for private schools claim that it undermines resources for public schools.
Traditionally, public schools work by enrolling students who live in the nearby area. They are free and anyone can get in, provided the family and student lives nearby. A government agency, such as a local school district, will own and manage the schools. Because funding of primary and secondary schools is local, wealthy regions tend to have the best schools compared to schools located in lower economic areas, which tend to be of lower quality. Increasingly since the pandemic, public schools also offer home schooling, online learning and tutoring program options with curriculum and teacher support, but it requires more parental involvement.
Charter schools are publicly funded but operated privately, representing a mix. They are not supposed to set admission standards. Church sponsored schools are privately owned and operated, sometimes for profit or to support the founding organization. They charge tuition fees, paid for by parents or government education vouchers, educational savings accounts or tax credits. The students come from a wider area and apply for entrance. The charter schools often offer some type of specialized education or training. They are generally are of higher quality than public schools. Children from well to-do families usually attend private schools.
Whether private or public, schools need to incorporate academic testing, other accountability measures, and reporting to justify academic quality of education. They must adhere to state education regulations. School districts in Republican areas are taking measures to empower parents in directing the education of their children in order to circumvent woke, transgender and critical race theory agendas. At least 32 states have proposed legislation to expand or create tax funded programs for private education, expanding it from children with special needs to all children.
Since the 1990’s, American college and university tuitions have become quite expensive compared to earlier decades when the schools received more government sponsored funding. Student loans can financially burden graduates and non-graduates for many years. Many schools admitted more foreign students than American students because they could pay higher out of state tuitions. University education is increasingly becoming out of reach to students not from wealthy families as a result of cost, poor educational preparation in public schools and diversity quotas.
According to a 2017 UNESCO report, the number of students worldwide attending higher education institutions increased from 100 million in 2000 to 207 million in 2014. Assessment of which countries are the most educated is a matter of interpretation because "most educated" is an imprecise term. For example, which would be considered more educated: A country in which 50% of the residents have completed secondary education and 25% have attained a tertiary degree, or one in which 100% of residents have completed secondary education but none have a tertiary degree?
One of the highly regarded analyses comes from the Organization for Economic Cooperation and Development, or OECD. But lately they have been excluding Russian statistics on many of the maps and charts. Other sources and data can be reviewed at 2023 World Population Review.
Below is one map of the most educated countries in the world. Russia is second to Canada for the top position in 2023 according to OCED. The United States has fallen to sixth position.
One of the most telling (and important) measures of a nation's development is its education system. Frankly, the US is falling behind and Americans need a major reset for how children are educated, including their tertiary opportunities. Parents have a right to have a big voice in how their children are educated, opposed by American modern liberalism and woke agenda. I don’t believe that private funding of education can ever be totally equitable, but perhaps full state funding of private schools could be a workable solution, which is the growing trend. An excellent article on educational issues can be read here.
Final Thoughts
Thanks for reading. My next article in this political philosophy series will focus on more conservative political theories and a few newer, lesser-known ones. Stay tuned.