Capitalism is not an ism at All

To me, capitalism is simply the absence of force in human economic relations. If you wanted people to be able to deal with each other freely by voluntary agreement, you would get private property and capitalism.

It is not an “ism” at all.

Alright. I have to fend off some common attacks. Capitalism requires private property. All property is theft.  How does someone acquire legitimate title to property?

In law school I learned the first way was appropriation from nature. Sort of like mixing your labor with something that was freely available in nature to anyone who could take it. Deer hunting, for example. No one says the hunter who bags a deer on public land is not entitled to his venison chops.  Or if I picked up a tree branch and carved it into an exquisite statute. I took something from nature, available to anyone, and made it valuable by mixing in my skill and effort and then own it.

In the field of real estate, mixing your labor with nature is adverse possession. If you take a tract of land (lawyer talk) that someone else is not actively using and use it like an owner and your use is notorious (not hidden – visible to all), exclusive (you act as if it is ours – prevent others from using it) and continuous (for a period of years), the land becomes your property.  That is still the law in the USA. It has been the law in common law countries for centuries. You created private property by taking something from nature and mixing in your labor and you made it your property.

The other way to legitimately acquire property is to get it in a voluntary exchange from the previous owner.  Buy it.

Here is a problem. I buy a house and land from “X”. Only he got it from someone who got it from someone who stole it from an Indian tribe. I don’t have good title! If you are forever open to examining the providence of title, or you are willing to accept new evidence about the validity of title forever, then no one has good title.

The solution is you pick some date that all titles to property existent on that date are recognized as valid. No secure property title means you might find that someone else owns the land you just spent millions to develop.  Do the Indians who sold Manhattan have a claim to the property or do the Indians who lived on Manhattan before them and were forced off by Indian war? In the future will we discover an even earlier user of that land who lost it by war? One must simply set a date and say all titles to land at this date are legitimate no matter how arrived at – otherwise it is a never ending examination and no one can invest to improve land sure tha tthey own it.

All property is theft from an absolute justice point of view. In practicality, as the centuries of unjust appropriation of land recede most property becomes something purchased instead of stolen. Cosmic justice is impossible for mortals. I would like capitalism and private property with perfectly just determination of who has title to every square inch of the Earth, but it ain’t going to happen.

So, once title to property is established, capitalism means you do not have to enter into any agreement that you do not want to. Generally, that means you do not enter into any agreement that does not benefit you. So each agreement, each transaction, everything, makes you better off.

Another objection. The hungry man cannot negotiate to voluntarily trade with the rich man. The hungry man has to take what he is offered. The sick patient cannot negotiate price with the life saving doctor. The average intelligence man cannot negotiate fairly with the genius.

Well, your needs and limitations are just facts of nature. If I develop a shopping center at great expense on land I own and an earthquake destroys it, nature took its toll. I can insure or otherwise provide for it, but it does not mean other people have to make up my profit. My misfortune is mine, not an argument that people should not be able to make free agreements that they desire designed to improve their economic standing. I may have less freedom to contract because of circumstances. I may need money more than the other party. That is no reason to destroy freedom to contract which does so much good.

So if you set aside the argument “all property is theft” which really means human knowledge is limited and imperfect. If you set aside the unequal bargaining power argument, which really means, we won’t allow some people to act freely because of our paternalistic attitudes. Then you get capitalism.  Legally protected ownership of private property and the ability to voluntarily make enforceable agreements with others regarding it.

In relatively capitalistic twentieth century America, very average people progressed their material well being fantastically. They did not need smarter people to protect them by taking control of their lives. The middle class grew to undreamed of proportions. Human kind no longer was a small rich elite and a giant poor underclass, as it was for most of the history of mankind.

A large middle class was a product of free market capitalism. It was an American phenomena for tha most part. More socialistic mixed economies failed at that.

 

The End of Work

Conventional economic wisdom is that the world suffers from a lack of [aggregate] demand. In plain words, people and businesses are not willing to purchase as much stuff as can be produced.

There are many suspected causes. Past debt may be causing people to not take on new debt. Stuff purchased with borrowed money is also stuff purchased so reduced borrowing reduces [aggregate] demand.

Another suspected cause is wage stagnation. Wage earners are more likely to spend whatever they get in a paycheck. Wealthier people might save or invest extra money. Less in wages, more in investment returns leads to less spent and more saved and invested.

If these are indeed causes, the proposed solutions are things like asset purchases by central banks to put money in the hands of banks (TARP), or lower interest rates to encourage borrowing, or even negative interest rates to cause savers to spend. A higher minimum wage will place money  in the hands of people who have a propensity to spend.

Still, I can’t help wondering: how did we get to a place where demand is lacking, after so many decades where there was lots of demand supporting the creation of great industries? I mean, human wants are infinite. Introspection shows me that I have lots of demand. Well, I guess it is not demand unless I have the dollars to do something about my wishes. The 2008 stock crash ruined my plans. My assets are returning to 2007 levels today, nine years later. By normal growth expectations my funds would have doubled in nine years. I certainly don’t want to borrow since I have so much less today than I reasonably expected to have. At current projections I have many more years to work after age 65. Looking at things “from the other side” so to speak, my lack of demand is merely a lack of assets/income. If I had more money I would demand more stuff.

So let’s look at ways I could have more demand, i.e., get more money. As I previously said, more borrowing is out of the question, Americans are leveraged up to the hilt.

I could drive for Uber on my days off. People around here actually make good money driving late Friday and Saturday nights so that other people can enjoy a drink or two in the evening safely.

Maybe it is a lack of opportunities to make more money that limits my demand. Why are there a lack of ways to make more money when people all around me desire things and services?

Uber is an example.  Uber fills many people’s desires or needs, and allows others to make money doing it. Obviously where Uber operates more people use it than use cabs where it does not operate. I laugh at the idea of getting a cab in the suburbs at a private house party where I had a few drinks. It would be an hour or more from calling a dispatcher to seeing a ride, if they arrived at all. Yet local governments are waging an ongoing war against Uber in many areas. The existing cab companies have a monopoly and give poor service at low cost, skimming the most valuable customers while ignoring all the others. Millions of dollars of potential commerce are stifled in preserving the  monopoly rent of a few established players. Millions of dollar value units of demand are never created because the potential providers are prevented from providing value to other people.

Those people around here who are making good money driving for Uber could never get a job with the local cab company. The demand for the crappy service they give is limited.  The pay is poor (I don’t know why, when the Uber pay is good for a hustler). The positions are not just when you want to work but you need to fit schedules and shifts and maybe give up other employment opportunities.

There are many other ways to make money that are effectively banned. Peter Schiff reports that financial regulation has become so oppressive that he today could not form his financial firm. I started an ISP in 1987 with a Unix server and a dozen modems in my basement. There were very few regulations applying to someone who wanted to run a computer in his basement and allow other people connect to it over a public telephone line with a modem. I closed down my ISP when the federal government created a law that required me to keep copies of every email my friends and neighbors sent through my system for some months in case they wanted to spy on them. Could you imagine starting an ISP today? What are the net neutrality requirements and where do I get software to implement them? Only a giant corporation could follow the rules.

Right now, in America, it is very difficult to compete with any established business. Big companies are C corps and pay a top tax rate of 35%. A small business or start up is an LLC and pay as an individual at a top federal tax rate at 39.5% A big company can have an HR and a legal department that allow it to navigate regulations. A small business is often a one or two person shop. A big company can get a special tax deal on pain of moving jobs out of the community. A small company does not get its phone call returned.

Main Street, small business, local start-ups are all suffering under our current political system. There is less growth and innovation, which comes mostly from small business and start-ups.

So I think a contributing factor to the lack of demand is the smothering of competition against entrenched interests.

 

 

 

America is Japan

What ails America is obvious. You will never hear it from the media, academia or the US government.

We have the Japan disease.

Japan had a huge  asset bubble, probably caused by its central bank but definitely caused by its government. Rents per square foot in Tokyo prime districts exceeded rents anywhere on earth. Homes were selling with 50 year (two generation) mortgages. A twelve year old son was on the hook for payments the rest of his productive life.

When, as is always, the bubble burst, banks and everyone owning assets faced staggering losses. Real estate, stock, bonds, everything.  The government, being the agent of the status quo, stepped in to stem the losses of the elite.  No Japanese bank or large conglomerate failed. That is what happened in the USA. When the financial system imploded from bad loans and other obvious crimes the Federal Reserve bought a trillion dollars worth of worthless real estate securities to stop one bank after another from failing.

Great, few financial  institutions failed. We got instead the Japenese economy. If you try to run capitalism where whoever has a profitable business is guaranteed to continue in business, you get frozen capital, misapplication of resources and stagnation. Thirty years and counting for Japan, Inc.

Protectionism

Some debates keep going on forever. Does the minimum wage hurt, or help, poorly skilled workers? Do gun control laws reduce “gun violence,” or do permissive carry laws reduce violent crime? Is free trade a good or an evil?

Surprisingly, there is a lot of empirical evidence to help us evaluate these claims. As Thomas Sowell keeps pointing out, before minimum wage laws unemployment among black youth was lower than unemployment among white youth. After minimum wage laws, the opposite was true: black youth unemployment is higher than white youth unemployment. States that changed to a shall issue gun control scheme often had a reduction in violent crime.

A huge experiment in protectionism versus free trade has already taken place.

Many of the United States States have economies the size of European nation states. The US Constitution through the Commerce Clause gives exclusive jurisdiction over interstate commerce to our Federal Government. The Federal Government has never permitted States to impose tariffs against the goods of other States, but it could. Consider it a huge experiment in free trade.

At one time the US economy probably had half the World GDP, and there was a huge free trade zone comprising all of it.

What do the advocates of trade restrictions claim as benefits? They say well paying US manufacturing jobs are “exported” to low paying Mexico or China or Vietnam. Isn’t the same true of Michigan and South Carolina?

Just think, if New York put up a $ 100,000 tariff on cars imported from any other State, the automobile industry in New York would flourish. The Corzone-Trablant factory would have many high paying jobs. Only New York residents could not buy a Telsa, or a Porsche, or a BMW, or a Ford Focus.

Of course other States might, or would, impose a tariff on New York jewelry and paintings.

Could you imagine having to buy everything you buy from producers in your home State? Why limit your choice to products from producers in your home country?

The United States free trade zone has sometimes hurt individual States when they had to complete with more productive higher capital people from other States, but, all in all, it has been a blessing in capitalistic competition and productivity. Allowing the citizens of each state to produce and specialize in what they excel at has made all of us richer.

The largest experiment in free trade of all time has proved itself. No politician even advocates intrastate domestic trade barriers. Yet every claimed benefit of international trade protectionism is available on the State level. All the unheralded detriments are there also.

Why do Politicians Promise Affordable Health Care

Often we have no choice but to buy health care services.  No one likes to pay money for a purchase forced upon them.  The need for health care may strike arbitrarily due to no fault of the sufferer.  Health care can be ruinously expensive. It all makes it seem unjust and painful to devote lots of money to it.

So should the price be reduced by all the means available to the modern state?  The state could put a lot of pressure on health care providers to force a lower price.. There could be tax incentives for insurance plans that keep price increases lower than a goal.  There could be ceilings on annual price increases, limits on the number or MRI’s, government panels to approve treatments and drugs, mandated end of life counseling, penalties for hospitals that have higher than average readmission rates, cash payments to doctors whose patients use fewer services, etc.

What purpose does the price of something have in a capitalistic system, besides extracting your hard earned money?

Price allocates the current supply to those who value it most.

The money you spend on something can be viewed as a willingness to give up all the other things that the money could buy for you. So more accurately price allocates the current supply to the people who relatively value it more among their options.   No one can make it possible for you when making purchase decisions to have the options of Donald Trump, but you can make it possible to allocate the resources that you do have among your competing wants, thereby valuing some things more and some things less.  Donald Trump probably does not move the demand curve for any medical care, because people like him are very rare. I could charge $100 for an aspirin and would sell very few aspirin. If I were sitting next to Trump in the jury room and he had a headache and wanted an aspirin I might make a $100 sale.  The entire supply is what determines the price, and that has to take into consideration people who are more reluctant than Trump to part with $100.

Price also communicates information to the entire economy.

Price signals to suppliers, producers and sellers, how valuable their “things” are. A high price signals a willingness to buy it in preference to lower priced things. A high price also invites more supply. In NYC twenty five years ago you could get a cup of coffee on nearly every block. It was served in a paper cup from a large urn, not good. Enter Starbucks, introducing west coast coffee to NYC.  Not only did Starbucks open a store seemingly every block but also thousands of independent coffee shops sprung up, eating places started sprouting European espresso machines, and even McDonalds entered high end coffee.  Why did that happen? For decades New Yorkers were offered the same coffee urn product (except at high end restaurants). Suddenly, millions of dollars were voluntary invested by private citizens to supply great coffee. How did they get the idea that escaped them for decades? Did New York citizens not appreciate good coffee while the West Coast did? Later developments showed the demand for good coffee in NYC was as great as in Europe or Berkeley, but the darn suppliers did not know it. Starbucks charging five times the price of a cup of swill, and selling like hotcakes, convinced them, drew capital and effort, and increased the supply of great coffee overnight.

So price under capitalism has an important function of transmitting information. If you suppress the price you short circuit the information.

Why would politicians and bureaucrats think that they can make health care more affordable to people who can order their allocation of money as they see fit without causing over consumption and underproduction  of health care?

 

Trade or Comparative Advantage (cont.)

Last post I claimed that trade could improve the lot of all participants, be they more productive or less productive, higher cost producers or lower cost producers, advanced or backwards.

I even claimed that if you are better then me at every productive activity, I can benefit from trade with you. This is the opposite of the wisdom that capitalism and voluntary exchange allows the “stronger” to take more from the “weaker”.

To simplify everything I imagined a shipwrecked pair, Mr. A and Mr. B on an island. Their little economy was focused on survival and the main element of GDP was fishing and gathering fruit. Reality compels them each to somehow obtain four fish per day and four small fruit to thrive.  I claimed that if Mr. A was better at fishing and Mr. B was better at gathering, if they traded the products of their effort they could get the same output for less work because they could specialize at that which they were best.

As a baseline we could imagine each of Mr. A and Mr. B had to work four hours each day at fishing and four hours at gathering to get their requirements. Now suppose Mr. A has some sort of absolute advantage over Mr. B.  Mr. A. can not only catch his four fish in three hours but is a killer at gathering, getting four fruit in two hours effort.

Of course, Mr. A could work five hours per day getting everything he needs (3 hrs for 4 fish, 2 hrs for 4 fruit). He could with satisfaction watch poor Mr. B work eight hours a day for the same. Or he could be smart and realize that if he traded with Mr. B, he could spend all his time on his most productive activity – gathering fruit. He could gather enough fruit for all their needs in four hours instead of personally meeting his fish and fruit needs in five, but he could only do it if Mr. B joined in an agreement with him. Mr. B had to give him some of his fish for Mr. A to specialize in fruit. Even though Mr. A is better at fishing then Mr. B, he is even more better at gathering fruit. Obviously they would come to some agreement that splits the gain for Mr. A (five hours work reduced to four hours work) with Mr. B in exchange for Mr. B allowing him to specialize in his best field.

Mr. B stops gathering fruit and spends all his time fishing. Even though he is no more productive fishing than gathering fruit, his specialization enables Mr. A to produce more at less effort. His reward for enabling Mr. A is some of Mr. A’s higher productivity.

That is why the lawn care guy benefits from the brain surgeon. When I was a kid in a working class neighborhood nobody paid to have their lawn mowed.  Well maybe a few people did as favors to enterprising kids or when facing declining health.  Where I live now, people make lots of money when they are working. In fact most would trade money for a little free time for themselves and their family. Their high productivity makes it possible for very low productivity people (perhaps someone who can not read or write or speak English) to get a little of the higher productivity person’s production.

Far from the strong taking advantage of the weak, capitalism and voluntary exchange spreads the wealth. If Mr. A with his higher productivity did not exist, poor Mr. B would be stuck working eight hours a day to live. When higher productivity Mr. A arrives, there is surplus available for them to split. If Mr. A tries to claim all the new surplus for himself, Mr. B can simply decline to trade with him being no worse off then before.

Trade or Comparative Advantage

Trade, voluntary exchange, is now controversial, particularly international trade. Are we being taken advantage of by the Peoples Republic of China?  After all they have lower labor costs and fewer expensive pollution controls. Or, as in most areas of life, is it a trade off between benefits and detriments? Free trade with the PRC gets American consumers cheaper Iphones but causes other Americans to experience a loss of high paying manufacturing jobs.

I contend that trade creates a free benefit for all parties involved, be they more or less productive, higher or lower cost producers, developed or underdeveloped economies. Interestingly when trade occurs, the stronger benefits the weaker, as well as itself.

Imagine two castaways on an island.  In abstract, an economy

I will postulate some reality constraints on them.  Each has to eat to survive.  There are two categories of food available to them: fish and fruit.  If one ate only fish he would die of scurvy, if one ate only fruit he would lack protein and starve,

Our castaways, Mr A and Mr B, each need 4 small fish per day and 4 fine fruit to meet their caloric requirements. Mr A and Mr B can meet their requirements by each fishing 4 hours per day and each gathering fruit 4 hours per day. Under these conditions there would be no trade between them.

In the real world, some people are better than others at tasks.  Anyone who ever played a pick up game of sports knows some people are better than others at any given task. Suppose Mr A is a better fisherman and can catch his 4 small fish in three hours.  Suppose Mr B is a better gatherer and can gather his 4 fruit in three hours.

Without trade

Mr A      3 hours fishing (4 fish)      4 hours gathering (4 fruit)     7 hours work to survive

Mr B      4 hours fishing (4 fish)       3 hours gathering (4 fruit)      7 hours work to survive

Now suppose it occurs to Mr A and Mr B to make a trade.  Mr A could trade 4 fish to Mr B for 4 fruit.  Now the situation is:

Mr A     6 hours fishing (8 fish)   0 hours gathering fruit  (no fruit)      6 hours to survive

Mr B     0 hours fishing (no fish)   6 hours gathering fruit (8 fruit)     6 hours to survive

Our little economy just achieved the same output with two fewer hours of work per day, for free.

Next entry: what if Mr A is better at both fishing and fruit gathering than Mr B?

Profits Are Good

When I got to college I was surprised at how much disdain capitalism and the bourgeoisie were held in.  I was a small town unsophisticated kid.  To me, a law abiding person who served the wants of fellow people and supported a family seemed good. The way life was ordered, with shopkeepers, tradesmen, doctors, clerks, was not only familiar but correct.

Professors didn’t agree with me. In fact, it was implied that my thinking was shallow. The bourgeoisie were exploitative, secretly dishonest, depraved, and above all boring.  The artist, the academic and the world historical individual were the ones who deserved respect. Don’t think too much about the trail of blood left by the world historical individual.

Anyway it is a story for another time how I came to decide that capitalism is good. I have decided to start a blog defending capitalism. To defend capitalism one has to defend profits.  For under capitalism no business exists and grows unless it is profitable.

Continue reading “Profits Are Good”