Wednesday, June 19, 2013

Myths of Capitalism V (Or, Productivity)

Let me start to draw a few conclusions. These might be more controversial than the points I've so far made regarding the myths of capitalism. If you disagree … feel free to write in and explain where I have erred.

There is an old argument that has become common sense: the market is more efficient than non-market forms of economics. Most people assume that by this we mean productivity. The more capitalist a society is, the more stuff that society will have. And this is often the way that neo-liberal politicians and advocates present the argument and the way it is, therefore, reported in the news. It is this way of thinking that leads to tax cuts. I've made this argument before and so I won't make it again, but there is no necessary reason why cuts in personal income tax will cause increased productivity or increased spending (that is, what economists called aggregate demand). Indeed, modest cuts in personal income tax likely cannot increase aggregate demand and hence have no effect on macroeconomic growth.

In my last blog, I tried to show that the market was not the paragon of productivity that a lot of people think it is. But, this does not mean that the market is inefficient. What we need to understand is that capitalists used the word "efficiency" in a particular way. As Joseph Heath has explained, productivity is not about more stuff, but getting the right stuff to the people who want it. In other words, it is about matching needs and desire with goods and services. The more effectively, these needs and desires are matched with available goods and services, the more efficient is the economy. Get it? For example, if I want to get a haircut and there are five barbers in town but none have available spots (thus, my hair goes uncut) that is inefficiency. It is an indication that desire is not matched with available services. Likewise, if I own a company and I make a lot of stuff (say, coffee cups) but that stuff is sitting in a warehouse because no one wants to buy it, this is inefficiency. The economy has produced stuff (it has been productive) but that stuff has no buyer and so goes unused (inefficiency).

Capitalists believe that the market is efficient because it naturally corrects itself so as to better match desires/needs with goods and services. If I have a warehouse loaded with coffee cups, I will lower the price until I can sell them. For instance, if I sell these cups for $2.00 and no one buys them, I will need to lower the price to $1.00 at which point, buyers might come forward (they were unwilling to pay $2 but are willing to pay $1). The market, the negotiation of prices, creates efficiency, matching buyers with sellers at a price to which both can agree. The market is efficient, then, not because it creates more stuff than some other economic system (which it might or might not) but because it naturally corrects through price negotiation and so matches buyers and sellers (desires/needs and goods/services). Its great virtue, then, is not its ability to generate more stuff but to allocate the stuff it does produce to those people who both want it and are willing to pay for it.

What happens if I need to sell my coffee cups at $2.00 to make a profit? Selling them at $1 will cause me to lose money and my company to go bankrupt. As I pointed out in an earlier blog, this too is efficiency. My company goes bankrupt because of a market decision: it could not produce a good that people both want and for which they are willing to pay at the right price and so I am driven from the market. Here, the market creates efficiency not by creating more stuff but scaling back on the production of a specific product. In other words, efficiency is not the ability to create more stuff but to actually reduce the amount of stuff produced because there was no use or desire for it. To those who own businesses and those employees working for the business, this sounds rather cold. The owner goes bankrupt and loses their investment and the workers lose their jobs. But, as I pointed out earlier, that is how the market works. Its goal is not to be nice to me (as an employer) or my workers but to be efficient. Since my company was inefficient (making stuff for which there is no market), it must go. So, efficiency can actually be about the opposite of productivity. It can be about less productivity, hence less stuff.

You can see that we are moving pretty far from the efficiency = productivity paradigm with which a lot of people work and which forms our common sense of capitalism. Most of us like to think in terms of productivity as the marker of a good economy. There is some environmentally based reason to question this, but the point is that this is not necessarily so. Efficiency, from a capitalist perspective, is about getting stuff to people who will buy it; not about more stuff.

Is this a good thing? On one level, it is. There is no earthly reason to produce stuff that no one wants. Yet, most people also seem to have some sort of moral qualms about this conclusion. We might all agree on the principle, but what happens when it is us who is losing our job? Or, our neighbour whose life savings are going down the tube because their business failed? Are we that easy to state "well this is just efficiency?" Should we be? And, herein, it seems to me, lies the problem for capitalism. Efficiency is good but what of its human costs? Are we willing -- as a society -- to pay that?
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