Capital determines whether a society will be prosperous or poor, well-fed or not, populated by independent and self-reliant citizens or dependent subjects. An abundance of nutritious food, clean water, sturdy homes, safe modes of transportation, reliable sources of heat and power, modern medicines, and many other products and technologies that improve the quality of human life are impossible without capital.
A teacher can help students understand what capital is by encouraging them to think of capital as an individual’s “starter pack” for being productive and getting things done. Capital includes the tools, money, and other valuable resources a person needs to create something of value, or to solve a problem in order to create wealth.
For example, if you wanted to start a lemonade stand, the money you use to buy cups, lemons, water, and a sweetener is capital. While money is an important form of capital, capital can include other resources that help you create wealth for yourself by producing value for others.
Other Kinds of Capital:
Capital is anything you can use to “build” something that will provide experiences of value for other people. Money is the most obvious example of capital, but creativity, friendships, and even your honesty and intelligence, can be just as important, maybe even more important in some circumstances.
So, yes! Capital is cash and more: Capital includes any resource that helps you be more productive. Ask students: What kinds of capital do they have? Maybe it is their energy, ideas, or even their ability to make people laugh. Remind them that everyone—even people with little or no money—have important capital over which each person has much control: A person’s own reputation, honesty, and trustworthiness.
Evaluating incentives
One of the most important questions within any society is: Who will allocate capital? One possibility is that individuals choose whether, how, when, where, and why to spend their own money and invest their own capital. Another option is that political elites within government will tax citizens and confiscate the wealth that others have created, and then those in government will choose how to allocate other people’s their capital.
Individuals choosing how to invest their own capital have strikingly different incentives than politicians and bureaucrats in government spending other people’s money.
As we discuss in another section, profit is the happiness of other people. When individuals and business owners make their own choices about how to allocate and when to invest their own capital, they aim to earn a profit—they want a return on their investment—which is another way of saying they’re trying to make other people happy by producing value for them.
When those in government choose how to spend other people’s money, they serve their own interests, usually by expanding the scope and power of government. That is worth repeating: Business owners allocate their own capital in order to make a profit for themselves by making other people happy; government allocates other people’s capital in order to extend the power and control of government.
Every new government spending program, after all, requires expanding the class of unelected bureaucrats, adding new levels of control over what citizens may do, and adding new kinds of taxpayer-funded government competition to businesses and other private organizations.
Incentives of Allocation
For politicians and bureaucrats, resource allocation often means achieving political ends or aiming for short-term gains. Without direct knowledge of costs or profits, these decisions can be quite unpredictable.
When private individuals choose how to invest or spend their own money, they have strong incentives to make careful, strategic decisions. If they invest wisely, they personally reap the rewards; if they invest foolishly, they suffer the losses. This direct link between decisions and consequences encourages efficiency and accountability. Individuals are motivated to seek the highest return (or best use) for their funds, and they also bear the risk of losing their capital if a project fails.
By contrast, when those in government take capital from citizens through taxation, politicians and bureaucrats end up allocating resources that are not their own. As a result, several distortions can arise:
In short, when individuals allocate their own funds, they have personal incentives—financial risk and reward—to be careful stewards of their capital. When governments collect taxes and decide how to spend them, officials are allocating other people’s funds and often do so under weak or no incentives for efficiency, with less direct accountability for mistakes, and with political or bureaucratic considerations that can overshadow the goal of maximizing societal well-being.
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Everyone who remembers the old Schoolhouse Rock video knows how a bill becomes a law: A majority of the elected members of the House of Representatives and a majority of elected Senators vote in favor of a bill, which is then typically signed by the elected President of the United States, and the bill becomes a law.
The process of making laws is similar within state governments: Elected legislators vote for a bill, which is then usually signed by an elected governor.
At both federal and state levels, those empowered to create laws are elected by those to whom the laws apply. This is an important check on government power. If elected legislators and government executives (like the President or state governors) create laws that are unwise, unjust, or unconstitutional, citizens have an effective recourse at the next election: They can vote others into office, thereby removing from office those elected officials who were responsible for the bad laws.
Moreover, laws are passed, enforced, and judged by three separate branches of government. This, too, is a check on government power. If a legislature, for example, passes a law that provides some illegitimate advantage for legislators, it will be enforced by the executive branch and judged by the judiciary, both of which are independent from the legislative branch of government.
Regulations, however, are not passed by any elected representatives or officials. Regulations are rules issued by unelected bureaucrats who cannot be removed from positions of government power in the next election.
This is deeply problematic because while regulations are not, technically, laws—they’re neither voted on by elected legislators nor signed by an elected executive—regulations have the power of law when enforced by government agents and adjudged in courts (or quasi-judicial administrative hearings).
Regulations are binding on citizens—regulations prohibit citizens from doing certain things, and command citizens to do other things—as if they were laws. Yet, regulations are not laws.
To boot, regulations are typically issued, enforced, and judged by the same regulatory agency. There is no separation in the realm of regulatory power.
For ordinary citizens, in the course of ordinary civic life, violating a regulation is no different than violating a law. A citizen can be fined, punished, even imprisoned, simply for not being in compliance with a regulation.
Presumed Innocent or Guilty?
The premise of typical, statutory laws—both civil and criminal—is that a citizen is presumed to be innocent until someone else proves that he is guilty of some illegal act or causing some kind of harm or injury.
Whether it is a case involving civil or criminal laws, the laws command action only after it has been proven that someone has acted criminally or has acted in ways that make them accountable under civil laws.
The premise of regulations, however, is that a citizen is presumed to be guilty unless and until he proves that he is not guilty. The process of proving one’s own guiltlessness is called: compliance.
Failure to be in compliance will likely result in the government punishing you, perhaps harshly, as if you had been convicted for some criminal offense or found by a civil court to have caused great harm to someone. You might be fined by the government, or you might lose your professional license, or your business might be shut down, or worse—not because you violated anyone’s rights, but simply because you did not prove to the satisfaction of government bureaucrats that you are compliant with their regulations.
The entire premise of regulations is that you, the citizen, are presumed to be guilty until you prove that you are not guilty by demonstrating that you are in compliance.
Burden of Proof
In the case of civil and tort laws, the burden of proof is on the person accusing someone else of causing damage or violating a contractual agreement. The accuser must prove in civil court that the other person actually did what he is accused of doing.
If you, for example, sue someone for failing to do some work they contractually agreed to do, the burden will be on you to demonstrate what the contractual agreement was and that the work was not done in the way it was agreed to be done.
In the case of criminal laws, the burden of proof is on the government. The government must prove—beyond a reasonable doubt—usually in front of a jury—that the citizen accused of violating criminal laws did indeed violate criminal laws.
Whether a person accused of crimes actually committed those crimes or not, he walks free if the government cannot prove that he committed those crimes. That is why the verdicts are either “guilty” or “not guilty” in criminal cases. There is no verdict of “innocent.” The government either proves that a person is guilty of a crime, or the government fails to prove that a person is guilty of a crime.
With regulations, however, the burden of proof is upon you, the individual citizen. Further, you do not demonstrate that you are compliant once, or twice, or three times. The process of proving one’s own guiltlessness to unelected bureaucrats and regulators—the process of compliance—is an endless process.
As every business owner knows, being in compliance last reporting period means nothing for the next reporting period. You must prove your guiltlessness by being in compliance over and over, without end.
In the modern United States, at the federal level alone, government agencies create tens of thousands pages of new regulations each year. This fact presents an important question to be discussed with students: Is a bureaucratic regime of regulations compatible with the idea of the rule of law?
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