I’ve had an interesting series of conversations recently with people that are coming down hard on capitalism. The argument was that this evil system of economics is directly responsible for the current global economic downturn.* There’s two things interesting about this argument. First, none of the people I spoke with seemed to understand what the word “capitalism” means. Second, it is the very features of our system that defy capitalism that led to this mild mess we’re in.

What is capitalism? Simple. It’s the economic freedom of all people. Seriously. Wiki it. And hurry, before somebody edits my entry.

All capitalism means is that the people own their own stuff. We can possess our own land, we can start our own business, we can determine the price of goods we create, and we can enter into binding contracts with one another. That’s it. This is a system that creates economic freedoms of potential (if not outcome). How can people be against freedom? Because they don’t like the choices other people make and would really like to have complete control over someone else.

Before we get into that, let’s talk about why the US economy goes through a constant cycle of boom-and-bust. It’ll also explain how very un-capitalistic our economy is at the core. That’s right, the most basic and fundamental elements of any capitalist economy do not exist in the United States. And that’s the value and valuation of currency.

A side-note on what money is, for those that seem to hate or distrust it. Money is a token used to represent work. It’s the stand-in, the go-between, for a cobbler and a butcher. One man trades shoes for another’s sausage. Even when they don’t need each other’s wares at the exact same time. Hating money is like hating trade between two free peoples, or hating the idea that a person’s work has any intrinsic value. I usually find that people who hate money are misplacing their hatred of greed (or expressing their own envy and materialism).

When the Federal Reserve tinkers with interest rates, they alter the valuation of money. They dictate what a dollar is worth, rather than allowing the markets to decide (read: “people” for “markets.” Same thing). When they want the economy to go into a boom phase, they lower interest rates. To zero, if need-be. What is the effect of this government interference in the market? People learn that they are fools to save. Money in the bank earns no interest. Besides, money is so cheap to borrow, you’re crazy not to grab as much as you can and gamble with it somewhere. If you can buy a tech stock, or flip a house, or move some Florida property and make an easy 15%, well you’re borrowing at 5%, so you might be insane if you don’t jump onboard.

By aiming for economic excess, politicians that know nothing of economics create a boom that will later correct itself. People applaud the booms as if they’re good things, but they are the problem. Downturns and recessions are the solution.

Here’s what would happen in a purely capitalist economy: A new investment fad pops up, the tulip-craze of the decade. Fiscal idiots (the first to react. Always) rush to their banks and borrow tons of cash to invest in this fad. The interest rate, which had been at a sensible 7%, begins to climb. Why? Because demand has gone up and supply has gone down. Money is being borrowed at a faster pace as these early-adopting bozos grab cash at seven and make fifteen on the second wave of suckers. But, as the rate climbs all the way up to 12% or 15%, the margin disappears on the wild investment. There’s no easy cash to be had. However, since rates went up, moderately minded fiscal rationalists flock to the bank to save away their cash. Now they are making an easy 5% or 7% on the backs of the gamblers.

With a floating interest rate, all booms would temper themselves before fiscal conservatives found themselves tempted to join. The saving rate would be much higher, and we would enjoy slow growth, rather than a boom and bust cycle. The Federal Reserve knows this and they attempt to perform the movements in rates themselves, but a quarter jump every three months, when what we might need is a five percent jump overnight, creates a problem. And, this highlights what anti-capitalists miss. We live in a MANAGED economy. A PLANNED economy. It is the un-capitalist features that get us in trouble.

“But what of the Bernie Madoffs and the Enrons?” you might ask. To which I say, “What do those people have to do with economic freedom?” That’s like saying human liberty sucks because some people commit murder and others steal. There is nothing capitalist about robbing people. That’s a violation of someone else’s economic liberty. Any trampling of someone’s liberty should be punished, just like any other violation of the law. This also goes for insider trading, collusion between government and business, subsidies, tariffs, inequities of taxation, etc… None of these are features of capitalism; they are the antithesis of it!

The current thinking on economic freedom seems to be this: Human liberty occasionally results in abuses of human liberty. Free people often use that freedom to trample the freedom of another free person. In order to make sure the latter has freedom from the former, we need to remove ALL human freedom. That is, in order to make sure nobody murders anyone ever again, we need to all be locked up in our individual cages. This is what’s best for mankind.

That’s the argument being made by otherwise intelligent people these days. The only way to have economic freedom is to remove it from everyone. Place it in the hands of a few, even though the power they already wield is the very thing that got us in this mess!

I have a better solution. Let’s fight to ensure that everyone has as much economic liberty as possible. Any violation of that liberty will be prosecuted with extreme justice. Let’s not bail out big banks, but leave them free to fail. Let’s not bail out the auto biz, but leave foreign car makers free to out-do us. Let’s not tax goods from other countries, but leave them free to prosper if they can out-compete us. Let’s stop paying farmers to not grow crops, let’s get rid of the tax incentives to have big houses and lots of babies, let’s let interest rates go up so we’ll learn to save, and let’s allow gas prices to soar so we’ll learn to walk.

And let’s stop being so envious. The very people who say, “Money can’t make you happy,” seem to be the ones miserable over other people’s wealth. Who cares if a board gives billions of dollars to a CEO? Let that guy ruin his life with cocaine and Ferraris wrapped around telephone poles. If those billions were generated by free people willingly purchasing billions of iPods, the board can do whatever they want with it. Stop being motivated by envy. Prosecute those stealing, whether it’s your cubicle-neighbor taking office supplies or Bernie Madoff building a pyramid. Learn to distinguish between freedom and tyranny instead of assuming it aligns with losses and profits.

Remember: Capitalism is synonymous with human liberty. Freedom for the little people. It’s something we could use more of, not less. Seriously, Wiki it. And hurry.

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*Okay, I typed “crisis,” and then deleted it and used “downturn” instead. It’s hard to be both a pessimist and a historian. Ten percent unemployment? That’s what many European economies have as a baseline in the best of times. And everywhere I go, people seem to be overweight and lugging shopping bags and babies. Sorry, but I use “downturn” loosely.