By Dr. Jeffrey I. Kim
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Young students tend to compare capitalism and socialism on a parallel basis. But they seem to have misconceptions about capitalism. Some people say capitalism is unethical because it is for the capitalists, or others say it is only for the rich people.
According to historical records, the idea of capitalism originated from Adam Smith's work. Smith is called the father of modern economics. He was the first to introduce the competition-led free market system in his book, "The Wealth of Nations" (1776).
He states that the self-interest of market participants works in such a way as to yield the most efficient allocation of resources to produce the maximum output.
About 100 years later, Karl Marx, the father of communism challenged capitalism. He stated in his book, "Das Kapital" (1867) that capitalism would fail and be eventually replaced by communism. But his prediction turned out to be wrong.
Through the Bolshevik revolution, Russia became the first Marxist country in the world in 1917. In 1992, however, the Soviet Union was completely dissolved due to the total failure of its economic system.
Despite its outstanding merits, capitalism still has many faults. Competition can become too excessive and can get out of control. The safety net for losers from competition needs to be further strengthened; and fair competition should be the backbone of free market capitalism.
Since the eruption of the global financial crisis of 2008, "socialists" have raised their voices globally and criticized capitalism. They have a strong belief that it has contributed much to the widening of income disparity between the rich and poor. But their accusation is not fully justified.
In a capitalist economy, a person with an innovative mind and creativity can bring numerous jobs, higher incomes, and other benefits back to their society. So they should be rewarded appropriately. If the government prevents the people with talent from receiving such reward, the entire economy will go backwards.
The late Apple CEO Steve Jobs made people on earth extremely happy. No one would oppose rewarding him with a great fortune. In this context, one can say, "Income equality is absolutely unfair."
Nevertheless, it should be noted that crony capitalism impairs free-market capitalism. Crony capitalism refers to corrupt business dealings conducted by government officials in a capitalist country. This is a common practice in less developed countries.
If a politician becomes a minister, they help their family members and friends make money by awarding them government contracts, legal permits and other favors.
South Korea no longer belongs to this category. The Korean economy operated remarkably well during the period from the mid-1970s until the 1997-98 Asian financial crisis. In the aftermath of the Asian crisis, South Korea has conducted various economic reforms and shaken off much of the image of crony capitalism.
However, young people began to worry about the adverse effects of a new mode of "fake capitalism," namely "rent-seeking capitalism."
Gordon Tullock (1967) and Ann Krueger (1974) developed the concept of rent-seeking by businesses. Rent-seeking occurs when a company lobbies the government for grants, loan subsidies or tariff protection.
Young people in Korea also seem to worry that rent-seeking capitalism will impair free-market capitalism. The scope of rent-seeking in South Korea is a lot more comprehensive than that of the rent-seeking Tullolck was concerned about.
The rent-seekers pursue not only economic rent but also social rent. By using their connections, they can create new economic or social rent by setting up a high wall to maintain exclusive benefits.
The social rent includes access to high-ranking positions in government and the public sector. By using social connections such as school, provincial and bureaucratic ties, they unethically take socially important positions.
The rent-seekers can be private individuals, special interest groups, corporate firms and civic groups. Rent-seeking capitalism is really bad and its practice should be stopped as soon as possible.
People innately dislike stiff competition in the market. But young people should be able to welcome competition. Besides, there is no such thing as a free lunch. They have to pay for what they get.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.
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