On Tuesday night, Kentucky Senator Rand Paul appeared on Sean Hannity's Fox News show. During his interview, Senator Paulcalled out liberals for "having no idea how capitalism works."
Actually, it's Senator Paul who has no idea how capitalism works. That's because, like most Americans, he confuses capitalism with free enterprise.
Let me explain. At its core, the economic system we have here in the United States is based on two basic things: 1) the right of any person or group of people to run and operate a business and 2) the right of any person or group of people to buy goods or services from the business of their choice.
This system is called the free enterprise system and is designed to give people the broadest choice of goods and services possible and reward those people (we call them entrepreneurs) who provide the best goods and services.
If you ask someone like Rand Paul, he'd say somebody participating in this sort of system is a "capitalist." But the cleanest definition of a capitalist is someone who uses their money – their capital – to make more money. Some capitalists do this by investing their capital in the stock market; others do it by investing in other people's start-up businesses: they are called venture capitalists.
These kinds of capitalists do play their part in our society. Sometimes, they help small businesses get off their feet. But here's what you won't hear on Fox Business or CNBC: capitalists aren't that productive and they aren't actually necessary. Many are just like Paris Hilton: they sit around on their butts by the pool all day waiting for their dividend checks to come in. They make money while contributing absolutely nothing to the rest of society.
And here's the thing: free enterprise works just as well without capitalists, capitalism, or even venture capitalists. Worker-owned cooperatives are just as successful as any business backed by a massive Wall Street loan. The Mondragon Cooperative in Spain, for example, employs more than 90,000 people, includes more than 250 companies, and generates a yearly revenue of around $25 billion. There are NO capitalists involved; it's entirely owned by its workers.
As long as the people running a business are committed and customers like what that business sells, it will succeed. Again, free enterprise works whether capitalists make money or not.
Too much capitalism is actually dangerous. All the major economic crises of the past 200 years were caused by capitalists on Wall Street trying to use their money to make more money.
Here in America, we've forgotten this fact and we've forgotten the difference between capitalism and free enterprise.
Wall Street and its allies in the Republican Party have taken advantage this to gut the regulations that kept out-of-control capitalism in check between the New Deal and the Reagan Revolution. And they've done so all while paying lip-service to free enterprise to make it seem like deregulating the banksters helps everyday people.
Of course, what's good for bankster-capitalists isn't good for the rest of us. That's why America is the most unequal country in the developed world and poverty is at an all-time high.
Capitalists even have their own tax rate as if they were divine beings. The top capital gains tax rate is 20 percent, whereas the top earned in come tax for working people is 39 percent. To add insult to injury, working people pay payroll taxes on top of that; most capitalists don't.
The way to fix this is pretty obvious to anyone who understands the difference between capitalism and free enterprise. If we're going to have an economy that works for everyone, we need to diminish the role of people who only want to make more money – the capitalists – and increase the role of the everyday entrepreneurs, the people who actually keep our economy running.
We could do this naturally if we stopped giving capitalists special treatment in the tax code. Right now, thanks to low capital gains taxes, predator capitalists like Mitt Romney and spoiled heiresses like Paris Hilton pay less tax on their income than working Americans do, just because they make their money from investments instead of actually working for a living.
There shouldn't be a bigger incentive to make money by investing than making money running a bakery. If we stopped rewarding capitalists for just being capitalists, that would go a long way towards evening the playing field.
If we combine that with say, more Small Business Administration loans, then entrepreneurs would get an even bigger advantage.
There are a bunch of different ways to make the economy more equal, but if we really want to have a society that works for everyone, not just the bankster-class, then we can start by doing one thing: abolish the capital gains tax altogether and make capitalists pay the same taxes as regular people.
Let's ditch capitalism and embrace free enterprise.