If Markets are Unfair and Wall Street is Corrupt, Why Invest?

This article published with permission from InvestmentU.com.

The truth is a casualty in almost any election. But especially this year, perhaps due to the tightness of the presidential race.

However, it’s not just the candidates getting tarred and feathered by political bombast, heavy-handed rhetoric and over-the-top political ads. It’s the free-enterprise system itself.

If you’ve paid any attention at all this year, you’ve heard four things:

1. Wall Street caused the financial crisis

2. Capitalism hurts the poor and middle classes

3. Markets are driven by selfishness and greed

4. The free-enterprise system is inherently unfair

This is a troubling development, one that has serious implications for our economic future and your investment portfolio. So let’s take a closer look at these claims.

Are Wall Street firms responsible for the financial crisis? In part, yes. Chief Executive Officers Jimmy Cayne of Bear Stearns, Dick Fuld of Lehman Brothers and Hank Greenberg of AIG all failed to understand the huge risks their firms were taking. Shareholders and employees suffered mightily as a result. There was plenty of collateral damage, too.

But these business leaders — and others like them — aren’t solely to blame. Politicians on both sides of the aisle spent years weakening lending laws to allow almost anyone to buy a home whether they could afford one or not. The Federal Reserve took interest rates too low for too long, making mortgages dirt-cheap and priming the real estate bubble. And plenty of Americans got caught up in the hoopla, figured they could get rich in a hurry by flipping a house using borrowed money they couldn’t reasonably repay. There is plenty of blame to go around.

Capitalism hurts the poor and middle class? Nothing could be further from the truth. Hundreds of millions around the world have been pulled out of poverty by the free-enterprise system. The evidence of history is clear. There is nothing that creates prosperity like capitalism.

Have “the 1%” benefited more than most? Yes; but not because they somehow cheated the rest of us. Over the past 100 years, the U.S. has evolved from an agricultural economy to a manufacturing economy to a knowledge economy. Those with higher education and more technical skills are in greater demand.

This is a particularly nasty downturn, but when the economy recovers — as it will — demand for all sorts of jobs will increase. In the meantime, how do you raise up the wage earner by pulling down the wage payer? As a young man, I worked maintenance on a truck terminal, the night shift in an auto-parts warehouse and a lot of other unglamorous, low-paying jobs for high-net-worth individuals. Yet never in my wildest dreams did I believe that sticking it to them would somehow benefit me.

The idea that markets are driven by greed is another misnomer. When does self-interest become greed? And who — in a free society — should tell you when you have enough?

Of course, it’s never you or me who is greedy. It’s always the other guy. The truth is all markets are driven by rational self-interest. This is “the invisible hand” organizing society that Adam Smith praised more than two centuries ago.

“It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest,” he wrote in The Wealth of Nations.

There is nothing the least bit immoral about this. Free markets are about voluntary exchange for mutual benefit. Capitalism promises that you can have anything you want if you just provide enough other people with what they want.

But is the free-enterprise system unfair? It is undeniable that the rewards of capitalism are unevenly distributed. And some income redistribution is necessary to pay for the state and to finance a social safety net for the needy. But let’s also talk about the fairness of keeping the fruits of your labor. If the top federal income tax rate returns to 39.6% and you add in the average state income tax of 6%, plus Medicare and Social Security taxes, the government will take over 50% of many entrepreneurs’ income.

When you start or expand a business, you are taking a risk, one that could generate a loss for which you are solely responsible. But if you work hard or are smart (or both) and are successful, is it fair for the government to take most of what you earn? (And that’s before sales taxes, property taxes, sin taxes and so on.) I don’t believe that’s the kind of republic the Founders had in mind when they pledged their lives, their fortunes and their sacred honor in what was largely a tax revolt against the king.

I mention these widespread misconceptions because if you truly believe the economic system is rigged, financial markets are unfair and Wall Street is corrupt, why invest? And if we don’t have a dynamic, growing economy to throw off hundreds of billions in tax revenue, where will we get the money to pay for essential government services?

I understand why candidates in both major parties are under attack, but I don’t get the hostility toward the free-enterprise system itself. What do we do after we strangle the goose that lays the golden eggs?

Alexander Green is the chief investment strategist at InvestmentU.com. See more articles by Alexander here.