Tag Archives: capitalism

Markets and Inequality

Those of us who believe in the efficacy of markets (a fundamental tenet of capitalism) must be prepared to accept a certain degree of inequality. Your invention of a better mousetrap will cause my older model to lose market share; your admirable work ethic will earn you a higher wage than my preference for taking long weekends.

Theoretically, in a genuinely capitalist system, the market will reward merit more liberally than it will reward mediocrity.

Of course, a genuinely capitalist system will not be rigged to benefit the powerful and/or well-connected at the expense of others. America has long since morphed from capitalism to corporatism, a system in which lobbyists for powerful interests are able to ensure that government regulations favor their well-heeled clients.

In capitalist systems, the theory is that the promise of greater rewards is an incentive for innovation and diligence; advocates justify the resulting inequalities by pointing out that everyone benefits from the resulting entrepreneurship. A rising tide, we are told, lifts all boats.

When capitalism devolves into corporatism, only the boats of the powerful and well-connected get lifted, and it becomes much more difficult to sustain the pretense of meritocracy.

In capitalist/corporatist systems, rampant inequality poses challenges that ideology cannot satisfactorily address. Social scientists and historians tell us that when the gap between rich and poor widens too much, there are very negative consequences for social and political stability. In order to manage the size of the disparities, most first-world countries today have “mixed” economies; governments socialize the services that markets cannot provide (public safety, environmental protection, healthcare, etc.) and—importantly—recognize the existence of an obligation to citizens who for one reason or another, cannot earn a living wage.

In the United States, we have a number of elected officials—in Congress, certainly, but also in statehouses around the country—who reject the logic of mixed economies, and refuse to recognize the threat that extreme inequality poses to social stability and national cohesion. Paul Ryan’s attacks on the Affordable Care Act, Trump’s brutal (kick ‘em when they’re down) budget proposals, the persistent efforts to defund organizations like Planned Parenthood that provide critical medical care to the needy, are assaults that strike many of us as indefensible—especially since they are almost always accompanied by tax giveaways to the rich.

Those arguing on behalf of these measures insist that their purpose is to defend market economics. Most of them know better; the rhetoric is an effort to divert attention from the fact that government is doing the bidding of powerful, rich and very greedy special interests.

Perhaps the most pernicious aspect of this assault on the poor is the not-so-subtle characterizing of needy Americans as “Other.” “They” are immigrants, living off the sweat of “real” Americans; “they” are lazy people of color. If “they” are female, they’re immoral sluts popping out babies in order to qualify for the public dole. It doesn’t matter that none of these characterizations are remotely factual; the dog-whistle references and dishonest descriptions find a willing audience among people who see themselves as part of an America that is rapidly losing cultural hegemony.

The “Other” is the shiny object that distracts attention from corporatist wheeling and dealing.

If current levels of material inequality are bad for America—and they are—this cynical effort to distract our attention by widening our social divisions is even worse.

The Words We Use…

Last night, I spoke to the student Economic Club at Ball State. Since numbers aren’t my thing, I focused on theory….Here (slightly condensed)are my remarks.

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Terms like conservative, liberal, socialist, progressive get used these days as accusations and insults rather than ways of defining a political or economic philosophy.

On today’s political spectrum, I consider myself liberal, but given the state of current discourse,  it might be worth explaining what I mean by that term—and why my kind of liberalism is compatible with genuine market capitalism, although not necessarily with what passes for capitalism in today’s America.

I am basically an 18th Century liberal, by which I mean a product of Enlightenment values like empirical inquiry, science, and the importance of facts—including facts I may find inconvenient.

It also means I place a high value on both individual autonomy and the common good. And that means I tend to analyze government’s activities through the hypothetical of Locke’s Social Contract.

The United States’ Constitution was crafted by men heavily influenced by Enlightenment ideas. Their belief in protecting a marketplace of ideas owed a debt to Adam Smith’s description of economic markets, a description supported by the experience of the colonists, many of whom were small merchants. Good ideas would win out over bad, in much the same way as that better mousetrap would win market share.

I believe market principles remain sound, but they have to be applied to “facts on the ground” that the Founders could never have anticipated.

There were around 4 million people scattered along the east coast when America won independence; there are now over 300 million. Technology, diversity, and globalization have changed the national landscape. Our job is to craft policies that protect the essential values of the Constitution and Bill Of Rights in new and very different environments. People of good will can disagree about how to do that –but I would argue that in order to disagree productively and civilly, we have to begin with a common basis in fact and history, and we have to agree on the definitions of the words we use.

For example, I consider myself a capitalist; I believe in markets—in those areas where markets can work properly.

Economists often define a free trade as a transaction between a willing buyer and a willing seller, both of whom are in possession of all information relevant to that transaction.

Understanding how markets work is important, because it defines the proper role of government in a capitalist system—as an “umpire” or referee, ensuring that everyone plays by the rules.

Teddy Roosevelt reminded us that monopolies distort markets; if one company can dominate a market, that company can dictate prices and other terms with the result that  transactions will no longer be truly voluntary. There are other behaviors that undermine markets: If Manufacturer A can avoid the cost of disposing of the waste produced by his factory by dumping it into the nearest river, he will be able to compete unfairly with Manufacturer B, who is following the rules governing proper waste disposal. If Chicken Farmer A is able to control his costs and gain market share by failing to keep his coops clean and his chickens free of disease, unwary consumers will become ill.

Most economists agree that in order for markets to operate properly, government must act as an “umpire,” assuring a level playing field.

Government also responds to what economists call “market failure.” There are three situations in which Adam Smith’s “invisible hand” simply doesn’t work: when monopolies or corrupt practices replace competition; when so-called “externalities” like pollution harm people who aren’t party to the transaction (who are neither buyer nor seller); and when there are “information asymmetries,” that is, when buyers don’t have access to information they need to bargain in their own interest. (Health care is an example.)

Since markets don’t have built-in mechanisms for dealing with these situations, most economists argue that regulation is needed.

Economists and policymakers can and do disagree about the need for particular regulations, but they agree that the absence of appropriate regulatory activity undermines capitalism. Unregulated markets lead to corporatism, where special interests can “buy” government regulations favoring them. You might think of it as a football game where one side has paid the umpire to make calls favorable to that team.

Socialism refers to the collective provision of goods and services, usually through government. There are some goods that free markets cannot or will not produce. Economists call them public goods, and define them as both “non-excludable” –meaning that individuals who haven’t paid for them cannot be effectively kept from using them—and “non-rivalrous,” meaning that use by one person does not reduce the availability of that good to others. Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems and street lighting. If we are to have these things, they must be supplied or protected by the whole society, usually through government.

Obviously, not all goods and services that we socialize meet the definition of public goods.  We socialize police and fire protection because doing so is generally more efficient and cost-effective, and because most of us believe that limiting such services to people who can afford to pay for them would be immoral. We socialize garbage collection in more densely populated urban areas in order to enhance the livability of our cities and to prevent disease transmission.

Getting the “mix” right between goods that we provide collectively and those we leave to the free market is important, because too much socialism hampers economic health. Just as unrestrained capitalism can turn into corporatism, socializing the provision of goods that the market can supply can reduce innovation and incentives to produce. During the 20th Century, many countries experimented with efforts to socialize major areas of their economies, and even implement  socialism’s extreme, communism, with uniformly poor results. Not only did economic productivity suffer, so did political freedom. (When governments have too much control over the means of production and distribution, they tend to become authoritarian.)

Virtually all countries today have mixed economies. The challenge is getting the right balance between socialized and free market provision of goods and services.

There’s lots of room for disagreement about things like how much regulation is too much, what level of national debt slows economic growth, what the tax burden should be and who should pay what. But in today’s America, these discussions tend to be all ideology and no understanding—all heat, no light. I wish I had a dollar for every TV pundit who clearly did not understand the difference between the deficit and the debt, or the difference between marginal and effective tax rates. We have people in Congress who quite obviously don’t understand what the debt ceiling is and isn’t.

It’s actually a good thing that Americans disagree—thoughtful disagreements often lead to better results. But it is really, really important that parties to a debate know what they are talking about. That is a lot harder today, thanks to the Internet and the collapse of that quaint exercise we used to call journalism. We live in an era of cherry-picking and confirmation bias—and our preferred realities are only a click away.

At the end of the day, policies based on ideology or wishful thinking just make things worse. And arguing about economics without agreeing on the meanings of the words we use is worse than useless.

 

 

The Problem Isn’t Capitalism

‘Tis the season to bemoan crass capitalism. But we should think before joining that chorus.

Markets are wonderful things; as Adam Smith explained many years ago, the “invisible hand” channels self-interest toward socially desirable ends. Market competition has given us better goods at lower prices, and has demonstrably been a “rising tide” lifting many boats.

Why, then, is America’s capitalist economy generating so much criticism? What is the cause of the country’s growing and very worrisome inequality?

Two reasons are pretty apparent.

First, the system we currently have in the U.S. is not market capitalism. It is corporatism. Corporatism has been defined as the organization of society by major interest groups, specifically corporations. It isn’t exactly a secret that the last thing many of our captains of industry want is genuine competition. The legions of lobbyists sent to Washington and state capitals are not arguing for open markets; they are vying for competitive advantages and taxpayer subsidies.

The second reason is less obvious, but no less consequential. Markets don’t work for everything.

In the areas of the economy where market competition is appropriate—in the production of consumer goods and services, most obviously—markets operate as Smith’s theory suggests. But as every student of economics learns, there are areas where competition is unworkable.

Historically, for example, America has regulated utilities, and (at least since Teddy Roosevelt) tried to prevent domination of a market through monopolistic practices. (As technologies and markets change over time, these categories may shift, and it isn’t always clear that our governing institutions keep pace, but that is a subject for another day.)

What doesn’t change, however, is a foundational premise: In order for a market to function, there must be a willing buyer and a willing seller, both of whom are in possession of the necessary relevant information. When there is a significant and unavoidable asymmetry of knowledge or information, a true market cannot exist.

Health care is the poster child for that asymmetry. Not only does the consumer lack the information and expertise necessary to “shop” for a seller/provider, the realities of illness make it likely that she will lack the time needed to evaluate her options. Add to that the way in which the health insurance industry has developed, with “in network” and “out of network” providers, and you don’t have to be an economist to recognize that market principles are simply inapplicable.

Most Western nations came to that conclusion many years ago, and most have national health care systems. Here in the U.S., even the modest movement toward government-insured access to health insurance has met with hysterical resistance—and lots of rhetoric about creeping socialism and the superiority of markets.

The immorality of this refusal to make important distinctions was most recently highlighted by the actions of one Martin Shkreli, who bought the rights to a drug and raised its price 5500%. As several commentators noted, America is the only developed nation that lets drug-makers set their own prices — maximizing profits the same way that sellers of chairs, mugs, shoes, or any other seller of manufactured goods would.

Shkreli’s behavior underscores the irrationality—and yes, the immorality—of America’s healthcare system, where corporations set our public policies and insist upon market principles in an area where, by definition, genuine markets cannot function.

The moral of this story: don’t blame capitalism. This isn’t it.

 

 

 

Fair Trade

Lest the title of this post confuse you, I’m not talking about the fair trade goods that stock the shelves of shops run by well-meaning nonprofits. That movement—to insure that craftspeople abroad are paid fairly for the goods they make—is well intentioned and important, but it isn’t the subject at hand.

The operation of a market economy—capitalism—rests upon a definition of what constitutes a fair trade. It is usually framed as the amount that a willing buyer and a willing seller, both of whom are in possession of all relevant information, agree is a fair price for the goods or services in question.

There are, rather obviously, economic areas where markets don’t work. Health care (no matter what GOP congressmen insist) is one of those, because the buyer and seller do not both possess all relevant information. Economists call this “information asymmetry.” As a practical matter, when one party to a transaction has important information that the other party doesn’t have, the party with the information has an unfair advantage.

There are other situations where markets can be manipulated. One of the most common involves externalities.

Economists use the term “externalities” to refer to the costs of an economic activity that aren’t paid by either party to the primary exchange, but are instead “offloaded” to someone else—typically, taxpayers. The most common example is pollution: a local factory produces a toxic chemical in the process of manufacturing its widgets, but rather than properly and safely disposing of that chemical and including the cost of disposal in the price of the widget, the factory owner dumps it in a nearby river.

The seller makes a bigger profit, and the buyer gets a better deal on his widget purchase. Meanwhile, we taxpayers pay to clean up the river.

Most of us have no problem identifying this as unfair all around. Such practices distort the marketplace, allowing people who break the rules to profit at the expense of the rest of us.

In today’s economy where the lines between public and private are being increasingly blurred, where private-sector companies ask for—and receive—government subsidies and favorable regulations, where the corporations that can afford well-connected lobbyists enjoy privileges that are unavailable to the mom and pop store on the corner, externalities are harder to detect.

America is in real danger of losing real capitalism. Increasingly, what we have is corporatism, and that’s a very different animal.

Corporatism has been defined as the socio-political organization of a society by corporate interest groups. And all signs are that we aren’t stopping there; the words “oligarchy” and “plutocracy” are more frequently heard in American political discourse these days.

Today’s plutocrats and oligarchs are the rich and superrich who effectively dictate economic policy. And they make the widget factory guy look like a piker.

When markets work as they should, where they should, they really do operate as Adam Smith described; the “hidden hand” improves life for all of us. When the system has been corrupted—when, in transaction after transaction, we socialize the risks and costs and privatize the profits—the only people who prosper are the “haves.” And the greedy.

And that’s not fair trade, by any definition.

Capitalism? Or Corporatism?

Inequality has become the topic du jour–and as with so many other topics Americans debate, what anyone means by “unequal” and if and why inequality matters depends on one’s perspective.

In a capitalist system, some people will do better than others. There is nothing wrong with that; the promise of a bigger reward for building a better mousetrap spurs innovation and benefits us all. It’s only when the disparity in rewards becomes disproportionate and  especially when those rewards become disconnected from actual economic productivity that things get seriously out of whack.

When what people make is a reflection of their connections and/or the success of their lobbyists, it’s time to consider whether we still have a capitalist system, or whether what America  currently has is corporatism–a system where power is exercised through large organizations in pursuit of their own economic agendas, to the detriment of the common good.

Capitalism creates opportunity; corporatism keeps it “all in the family,” exacerbating inequality. Consider the following statistics and draw your own conclusions:

Between 1947 and 1972, the average hourly wage, adjusted for inflation, rose 76%. Since 1972, it has risen 4%.

In 2011, the poverty rate for female-headed families with children was 40.9%

In 2009, CEOs of major corporations were paid a wage that was 269 times the average compensation of American workers.

Between 1979 and 2007, wages for the top 1% rose ten times as fast as those for the bottom 90%–156.2% versus 16.7%.

There’s much more, but you get the picture.

The question is, how do we return to a system where the market actually decides the winners and losers, rather than the oligarchs?