Capital represents the resources and labor used to produce goods and services.
Ism is a system.
Capitalism is an economic system based on the private ownership of the means of production and the incentives that drive for-profit operation.
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Capitalism differs from other economic systems as it allows for the private ownership of production and the resulting profits. Most other economic systems rely to varying degrees on the government to decide how resources and labor are used and how profits get distributed.
The word “capitalism” defines the United States economy. Unfortunately, the U.S. is straying from capitalism. The United States government and Federal Reserve increasingly pick winners and losers by dictating how resources and labor are employed and how profits and losses get distributed.
This article focuses on one facet of government interference: The Fed has distorted the price of capital, which have driven negative economic and social consequences.
Productivity is paramount
Before harping on the Fed, it’s worth appreciating productivity, the most critical cog in any economic engine and a vital element of capitalism.
A country’s economic growth and the financial well-being of its citizens are directly linked to how effectively an economy deploys capital. In a purely capitalistic economy, the incentive for profit is the leading factor promoting the most effective use of a nation’s available capital, labor, and resources.
Economists use the term productivity when discussing said effectiveness.
The greater the productivity, the more wealth generation occurs, with the fewest resources requiring the least amount of labor. The more productive society is, the wealthier its citizens are.
Conversely, if there is little to no productivity growth, economic growth is limited by the amount of labor and resources. In developed economies such as ours, labor and resources have finite growth. As natural resources become scarcer and more expensive and demographic contributions to growth weaken, flat or negative productivity growth becomes likely.
Measuring productivity
Like many economic measures, productivity is impossible to measure precisely, but there are ways to gauge it. For instance, total factor productivity (TFP) is widely considered a reliable measurement of productivity. It may not be exact, but it provides valuable insight into productivity trends over various time frames.
TFP boils down to the ratio of GDP to its inputs. The greater the proportion, the more the economy grows per its usage of resources.
The San Francisco Federal Reserve provides historical TFP data.
Read the full article here by Michael Lebowitz, Advisor Perspectives.
