Freedom Implies Capitalism

If people are free, they must be able to voluntarily choose to do most of things that they do.

The human condition imposes all sorts of limitations on our freedom. No one is free to give up breathing, or consuming water. In fact, we are basically condemned to toil to live as we have many needs to survive.

Some leftist said that people are born free but everywhere in chains. If you think about it, you are not born free for at the moment of birth you need everything and are not able to provide yourself anything. You need food and water every few hours, shelter from the elements constantly, love, nurturing, stimulation.

It is more hones to say that people are born in chains (to their needs) and the challenge of life is to make themselves free.

Over time the amount of toil a man had to do to subsist has gone down due to technological progress and accumulation of “capital” which make people more productive. A man with an acre of land and his bare hands has to work longer each day to eat than a man with an acre of land, a horse and a plow. A man with the full modern set of farming tools could probably feed himself with half a days work or work all day and sell the surplus.

There is a totally different type of limitation on freedom. That is the actions of other people who seek to impose their will on you. That limitation on freedom can be reduced or increased depending on the type of society in which you live.

 

 

Uses of Money

We are all familiar with one use of money: spending it to buy something we want.  it might be a new car, kitchen appliances, a nicer home in a nicer place.

There are other uses of money.  I sort of think of money as distilled power. We all know powerful people. The cop who stops you is powerful relative to to you. Your boss is powerful. Your children’s teacher is powerful in some ways. Heck, the receptionist at your doctors office is powerful.  That is why she talks to you with such disdain.

Money equalizes the playing field. People who sell their beloved businesses console themselves by saying, “Now I not have ‘fuck-you’ money.  If I don’t like what anyone is saying to me I can say ‘fuck-you’.”

That takes care of the boss.

Police? OJ showed what money does when the police get in a pissing contest with you. No money? It could get nasty.

Teacher? In a private school they are always concerned about a parent taking little paycheck out of the class. If the school is super prestigious it will not be moved by your implicit threat to dis-enroll little Johnny, you need to apply the carrot – that you are thinking of endowing a teaching chair, but there is this one little problem.

Doctor’s office disrespect?  Come on. There is concierge medicine available for a (hefty) price.

Money is a great incentive, and if you have it you can incentivise many people and institutions around you

Thank Goodness The Government is Helping us Afford Housing, Education and Health Care.

The Government has many programs to help us acquire affordable housing, affordable health care and affordable higher education.

Thank goodness.

Think how painfully expensive these things would be if we let the free market deliver them, like we pretty much do with food, household consumables, clothing, shoes, transportation, electronics and energy.

What thirty year old has not run up $ 50,000 of debt to feed, house and clothe themselves for the last four or five years? You know, like the debt they had to run up in order to get a undergraduate degree and be taken seriously in the job market.

Who does not rage over their weekly grocery bill like they do over the payroll deductions and the unaffordable co-pays for health insurance  that recently appeared?

Who is not driven to despair each time an article of clothing or an automobile wears out and they need to buy a new one? Like they are when they discover that it is time to buy a house and a house in a safe neighborhood with decent schools is beyond their reach. Not a luxurious house, just in a safe neighborhood with decent schools.

What’s that? You say food, clothing, transportation, electronics and energy are not very expensive relative to our paychecks. Exactly.

In 1976 it took 3.5 times the average income to buy a house. In 2012 it took 5.0 times the average income to buy a house. Good work.

a camel is a horse designed by a committee

In the early days of the Internet people connected to it over their ordinary telephone lines. They were called POTS lines, standing for “Plain Old Telephone Service”.  It required use a modem, a device like a fax machine that turned digital data into modulations of sound that traveled over voice lines.

Everyone wanted speed, because the connection to the Internet with a modem was painfully slow.

Engineers and others would find ways to make the modem more efficient but for many people to use a device required standards. You would not want you modem to work if you called “X” but fail to work if you called “Y”.  So there was some international agency charged with approving standards for modem protocols. I think it was called something like “IEEE”.

There was v.32 then v.32bis, then something better. One problem was the IEEE always took years to agree on an international standard. People wanted the speed as soon as it was obtainable but the IEEE took years. So the modem manufacturers started selling modems with the latest technical speed booster before standards were agreed upon and put their firmware in flash memory which could be upgraded to the standard if the IEEE got around to it before the next better flavor was invented.

My business got a truly high speed connection to the Internet. A brand new Cisco 2500 router (called 2500 because they basically sold at $2,500) and a CSU/DSU (a sort of digital modem). I leased a dedicated line from the local Bell, no POTS service nothing. Basically dry copper over the phone network so the CSU/DSU did not have to convert digital to analog sounds.

I could not speak cisco, so my connection supplier provided an internet connection up to the Ethernet port of the Cisco. In other words, he programmed the router.

He told me an entertaining story. I can’t remember everything but I got the gist.

Internet Protocol (“IP”) was developed by a US Government agency to connect supercomputers (very expensive and very few) to university, military and government users in geographically distant locations. The point being, it was never developed by an international committee to serve countless masters.  It networked different types of networks together.

It was open source so anyone could use it.

Unix operating system designers started including it because, heck, lots of Unix workstations were in universities and research facilities and it was useful to be able to join the IP networks.

It started growing like crazy and eating every other network protocol. Do you remember Novell? It was not the best networking protocol lacking in security and other enhancements but it was free, had major market share and open development.

My Cisco guru once told me, and this is the point of the story, that people started using Cisco routers to connect using IP to other networks. It was becoming the universal language. European authorities finally said “you may not sell Cisco routers in our countries unless you include the INTERNATIONAL NETWORKING STANDARDS in you operating system.” Our protocols were designed by consensus and are much better than IP but are frozen out by established base. So Cisco included all the IEEE whatever protocols carefully designed by committee and no one used them.

Which means, don’t try to design from authority a perfect or even better standard. In the rough and tumble world a leader will emerge, it may not be perfect or even the best, but it is almost impossible to impose a technologically best solution. The failings of the leading technology will be reduced over time as they are discovered and hurt users.

 

 

 

 

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.

Businesses Do Not Exist to Provide Jobs

If you listen to any politician, the reason we have businesses is to provide good, stable, well paying jobs for the voters.

Absolute nonsense. A business exists for one reason and one reason alone. It exists to add value to the world. A business takes value out of the world. It uses real estate, spending on rent. It consumes people’s time, paying for labor, and creative and administrative services. It uses up energy. It uses or borrows capital (money). Then, if it is an ongoing concern, it adds value to the world. It places a product or service on sale for the voluntary purchase by anyone. Each purchase is a provisional addition to the value the business is adding, until the magic day that the incoming revenue from purchases exceeds the outgoing revenue and the business shows a profit. At that moment the business has added value to the world. Its customers who could have purchased everything it purchased at the same price it paid, or anything else with their money that they desired more, were willing to pay for what it produced more than its costs of producing it. A total net gain of value.

Businesses exist to make us all richer, to offer us more ways to satisfy our needs and wants, to promote innovation (because it requires effort and creativity to produce a profit), and to make the dollars we earn so valuable that countless people think day and night about how to  convince us to part with a fraction of one of them. And we are never required to do so unless we are sure what we get is more valuable than the dollars we give up.

Another way of looking at it is, businesses exist to meet people’s needs and wants. There is no revenue if you do not meet  people’s needs and wants.  Under capitalism, the buyer is king; the producer is a poor naive bowing and scraping. Just look at how powerful companies bow and scrape in America for customers.

Now you may want businesses to provide “good jobs”. What that translates into is you want someone else to identify a need or desire of other people, to devise a thing or service that meets it, to risk capital, effort, and time in setting up an enterprise, to manage expenses so that the good or service produced is something people will buy, to pay the taxes, take responsibility for regulations and laws, etc.

You are not entitled to any of that. If you want to earn money that allows you to buy things you need and want, you need to somehow give value to other people so they will give you their money. A job is simply a way to join someone else’s team in that project. As Peter Shiff says, nobody wants a job, everyone wants money. A job is a avenue to money, but the way to get money from others voluntarily is to do something for them. Do it yourself or join a team but the essence of the project is serve others so that others will serve you.

In the former Soviet Union, businesses existed to provide jobs. There, they used to say “we pretend to work, they pretend to pay us.” Because the businesses had no concern about the customer, after you were paid your money would have little power. In America, when you get your pay in your wallet, countless people court and flatter you.

In Latin American socialist countries, businesses exist to provide jobs. The Mexican state owned oil monopoly was used to give high paying jobs to friends of the elite, and lesser jobs to the public to quell unrest and poverty. The state run oil companies are poorly run (as you would expect) and the state is appropriating the value of the natural resource wealth and dissipating it. If Mexico simply sold the rights to drill oil, the state would get great revenue and private enterprise would manage it for a profit, a net value gain to the world.

 

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?