AN OVERVIEW - Part 11

Profits as a realized end-result are crucial to the individual business, but it is the prospect of profits — and the threat of losses — that is crucial to the functioning of the economy as a whole. In the American economy, profits are a minor item, about 10 percent of what the economy produces. But it is a major item as an incentive to efficiency in producing the other 90 percent.

There are many other possible ways of allocating resources, and many of these alternatives are particularly attractive to those with political power. However, none of these alternative ways of organizing an economy has matched the track record of economies where prices direct which resources go where and in what quantities. Anyone who saw East Berlin and West Berlin, during the years when communism prevailed in the eastern part of the city and a market economy in the rest of it, could not help noticing the drastic contrast between the prosperity of West Berlin and the poverty in East Berlin. Indeed, it was hard to avoid being shocked by it, especially since people of the same race, language, culture and history lived in both parts of the same city. An even more dramatic contrast could be found between North Korea and South Korea in the twenty-first century, where malnutrition is so prevalent in communist North Korea that pre-school children there are as much as 5 inches shorter in height than children of the same race — often of the same family — living in South Korea.

Monopoly is the enemy of efficiency, whether under capitalism or socialism. The difference between the two systems is that monopoly is the norm under socialism. Even in a mixed economy, with some economic activities being carried out by government and others being carried out by private industry, the government's activities are typically monopolies, while those in the private marketplace are typically activities carried out by rival enterprises.

Thus, when a hurricane, flood, or other natural disaster strikes some part of the United States, emergency aid usually comes both from the Federal Emergency Management Agency (FEMA) and from private insurance companies whose customers' homes and property have been damaged or destroyed. FEMA has been notoriously slower and less efficient than the private insurance companies. Allstate Insurance cannot afford to be slower in getting money into the hands of its policy-holders than State Farm Insurance is in getting money to the people who hold its policies. Not only would existing customers in the disaster area be likely to switch insurance companies if one dragged its feet in getting money to them, while their neighbors received substantial advances from a different insurance company to tide them over, word of any such difference would spread like wildfire across the country, causing millions of people elsewhere to switch billions of dollars worth of insurance business from the less efficient company to the more efficient one.

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