Myths of Capitalism (IV)

In this series of blogs I've been trying to address some myths of capitalism. I should start to wind this up and draw out some arguments (or, make some conclusions). But, before doing that I thought I'd repeat a point I've made elsewhere in this blog regarding an important myth of capitalism: that the market is always more efficient. There are, according to capitalists, good reasons to base an economy on market principles. Some of those a reasons are economic, but they require that we think about the economy in and efficiency in a specific way. In other words, what capitalists mean by efficiency might not be what you and I mean by efficiency in common parlance. Before I get to that, however (which I promise to do in my next blog), let me address the question of efficiency and markets. The next blog will be part II of this discussion.

Are markets always more efficient than other forms of economy. The truth is no and, to the best of my knowledge, this point (that markets are always the most efficient form of economic organization) is an argument only made by ideologues. In other words, capitalist economists (and, I work with a number of capitalist economists) don't say this. The first thing they say is that this is an issue to study on a case by case basis. Markets, they believe, have their place. A market organization of the economy provides us with a certain set of choices that we need to make as citizens. These choices involve questions about our aims as a society. But, the market is not written in stone. A society can choose different forms of economic organization if it wishes and depending on its goals. Depending on its goals, for instance, a society might choose to organize its economy on a mixed basis (for instance, some form of state involvement in certain sectors). It might choose a regulated monopoly. It might choose heavy state involvement (say, for military or development purposes). The market is not, then, a deity which must be worshipped and obeyed come what may. It is a choice. There are good reasons, capitalist economists feel, to make this choice most of the time, but to simple default to a market position is to check your brain at the door. It is to avoid the hard work of assessing choices and making decisions and letting democracy work.

The second thing that a capitalist economist will say is that we likely should not talk about the economy as a whole. We likely need to deal with specific sectors of the economy. Thus, for instance, it might be a good idea to have a free market in one sector of the economy (say, consumer electronics) but not a good idea to let an unregulated market go in another sector (say, mass media, where the society might want to preserve a small part of that sector as non-market for national purposes). Thus, generalization is the enemy of thought and choice. There is a need not simply to study the issue but to study into on a sectoral level. What is good in one sector is not necessary the right choice for another.

Third, if there are good reasons to use a market form of economic organization a lot of the time (heck, perhaps even most of the time), there is good reason to not use it at other times. What might this reason be? A couple spring to mind. I might get my wording a bit off here because I am not an economist but focus on the ideas that stand behind my wording.

One good reason to not always use the market is that the market is not always the most efficient way of organizing one's economy. There is the issue of choice. But, there are also historical examples of incredibly efficient non-market economies. I am not arguing for these, btw, just pointing out that we have a fair number of examples of efficient non-market forms of economic organization. The first is slavery. Again, everyone, I am not arguing for slavery. In fact, my goal here is to point out that the argument for a free market in labour rests on ethical grounds and not economic. I am OK with that. In fact, I think arguing that slavery is bad because it is not as efficient as capitalism is a pretty ethically troubling argument. The point, however, is that slavery is really good at producing things. American economic historians in the 1980s -- much to their shock -- when they started seriously studying the efficiency of slavery (by which I mean the GDP produced by slavery) discovered that it was remarkably productive. This went against everything they had assumed and had been taught (on the basis of assumptions). The old argument used to be that the North in the American civil war would destined to win the war because capitalism was much more productive than slavery and so was a superior form of economic organization. As it turned out … not so. Now, this is, of course, not an argument for slavery. It is merely to point out that superior productivity is not inherent element of capitalism.

Other economic systems -- equally immoral -- have also demonstrated amazing levels of productivity. Soviet communism at the end of its days had become a pretty weak economic system. Eric Hobsbawm believed he had discovered why and believed it Soviet communism did not need to be so economically weak at the end of its days as it was. Be that as it may, from the 1920s, when it took full control of Russia, until the late 1960s, Soviet communism accomplished economic wonders. It transformed one of the most backward societies of Europe into an economic powerhouse with an incredibly advanced productive and technological capacity. This is no mean feat.

It is, I sound like a broken record, no reason to argue for Soviet communism. Like slavery, what the Soviet's discovered was that violence works. People really do work hard if you threaten them. In theory, of course, capitalism uses the much looser form of incentive: it tries to bribe people to work harder (wage increases). This works too and in the longer run might win out, but in the short run, the state can accomplish a lot via coercion. Again, our argument against Soviet communism is not economic; it is (rightly) ethical.

But, we don't need to look at Soviet communism to find examples … or slavery. Canada in WW II is a good example that is more ethical. During WW II, the Canadian state regulated everything. It did so for emergency reasons: there was not time  to let the market work and the government not want to take any chances (personally, I don't blame them, but that is a personal view). So, it stepped into the economy in a big thing, regulating everything from consumer goods to labour mobility. It built new industries and created new systems of labour relations. And, it did so to effect. It worked. The Canadian economy emerged from World War II in much better shape than it had been in before the war. What do we conclude: let's not be too quick to assume that economics is a good rationale to oppose unfree systems of labour. And, let's not assume that productivity alone should be our guidepost as to what is efficient and what is not. If we did that … we'd have some pretty shocking and disturbing conclusions. If we assumed that productive alone was what was important … we'd end up in a position where we would have to start looking at slavery and Soviet communism in a different and more favourable light. I'll assume none of us want to go there.

This empirical lense can also be brought to bear on more specific economic problems. Economists tend to argue that there is a legitimate sphere of state intervention in the economy if (a) the state can create a more fair situation by eliminating freeride effects, or (b) empirical study can demonstrate that state intervention is actually more productive than the market. Let's look at (a) then (b).

A freerider effect is when someone gets something for nothing. There could be good cause for this. A friend might make me a meal out of friendship. I'm getting the meal for nothing because my friend wants to be nice. But, there can also be bad reasons for this: someone is taking advantage of the system. Consider fire protection (an example I have used before). I pay taxes and some of those taxes go to fire protection. Why? Imagine a free market in fire protection. Everyone who paid got the protection; everyone who did not, did not. What would happen? Well, if I had neglected to pay, I would have to call the fire department and negotiate a price for their protection should my house catch on fire. This is remarkably inefficient because my burning house is a threat not just to me but to my neighbours, particularly if they paid for fire protection. Fires are indiscriminate. They don't care who paid for protection and how didn't. Thus, my failure to pay is a threat to my neighbours. So, the fire department is going to have to come and put out the fire whether I've paid or not. I become, in this case, a freerider, taking advantage of my neighbours paying for a service for which I did not. The state in this case intervenes. Because they don't want my cheapness to burn the whole town down, the state makes me pay a tax for fire protection so that I can't be a freerider, enjoying a benefit for which I did not pay.

If you pause and think about it, you can think about a range of things from which we derive benefit that would fall into this category. Police protection: I benefit every time the police arrest a criminal because that criminal cannot now rob my house. I benefit, every time the police pull a drunk driver over because I won't be hit by them driving my car in the opposite direction. Health and welfare: I benefit from tests of medicines to make sure they are safe for human consumption or from inspections of chicken production plants (or whathaveyou) that ensure that the product is not diseased. And, we could go on. Some of these might end up being controversial, but I also benefit from schools, whether or not my children are going. In this instance, the state intervenes in the economy, not to ensure productivity, but to ensure fairness.

What about (b)? It amounts to the point I made at the start of this blog. Don't make assumptions. The Canadian medical system is more efficient than the US medical system. (This is not an argument for the status quo but just follow my logic). We know this from various studies that show that Canadians actually pay less for medicine than Americans. They live longer and are in better health overall. By any standard, then, socialized medicine is more productive: it produces a better product (healthier people) at a lower rate (cost).

To sum up: the idea that the market is always more efficient is one of those myths of capitalism that I am trying to point out. The precision of the argument is important. I am not arguing that we should ditch capitalism. I am arguing that we should be informed and think critically about it.

Myths of Capitalism (or, Wages III)

I am not trying to pick on capitalism. I really am not. I'm not a fan of capitalism to be sure, but I am not trying to pick on it. Instead, what I am trying to do is point out some of the myths that surround it. The idea here is that by pointing out the myths people will not make assumptions about capitalism that they should not make, assumptions that are inconsistent with it. Perhaps if we know more about capitalism, we can have a more reasoned discussion of it. The first myth I discussed related to complaints I hear about "lazy" workers. I tried to explain that, for a real capitalism, laziness is not the issue; the issue is labour supply and it has a market-based solution: pay more. The second blog I wrote on this subject looked at the "coldness" (for lack of a better term) of capitalism. A market economy is not a moral economy. Adam Smith, btw, was clear on this point. He noted that capitalism was built on "private vices." I've actually been more generous than Smith. I'm not saying capitalism is immoral. I'm saying it is a-moral. Market based transactions are determined on their utility to individuals; not on their moral worth. Periodically, you do hear capitalists explain this to workers they are about to lay off but the logic applies to all of capitalism. For instance, our small business owner complaining that he cannot get workers to work for such and such a rate and if he can't his business will go bankrupt. Not my concern: it is the logic of the market and what is actually supposed to happen. You and I might think it a drag that someone, say, loses their retirement fund to a bad investment -- say the small business of a relative who begs them to invest so he or she can make a go of it -- but that is actually the way capitalism is supposed to work. Businesses are businesses: the market does not differentiate between one whose capital comes from a retirement fund and one whose capital comes from a venture capitalist. It just determines the viability of the business.

I should also say that when I say "myth" in this context I am not talking about what some Marxists called "false consciousness." (No one does anymore and frankly, I don't actually ever recall hearing a Marxist actually use the term but some capitalists I know claim that Marxists believe in false consciousness so I'll make use of the term here). I am not talking about a conscious effort to manipulate popular views. Instead, what I am talking about just general views: perspectives that people hold for whatever reason (it could be conscious manipulation, but it is more likely just "common sense"). These are things that people happen to believe and which affect their behaviour (for instance, my friend who believes that the problem with the Maritimes is lazy workers). But, they could, and likely do, come from a broad range of sources.

The myth to which I would like to point to day is the idea that what is good for a company is good for consumers. It might be. But, if you ask an economist, they will tell you that you cannot and should not make assumptions in advance. Instead, you should study an issue making as few assumptions as possible.  Thus assuming that what is good for business is good for people is actually an assumption that  runs deeply against the grain of economics. But, even worse, is it s a problematic assumption because it can be demonstrated to be not true.

Generally, the myth works like this: a company wants to increase its profits. To do so, it will lower prices and be nice to consumers in order to attract more consumers. Thus, the interests of the company (profits) and those of consumers (better produce, good customer service) are in sync with each other. This might happen. It really might, but there are other situations where it will not happen, where it is not in a business' interest to increase the number of consumers it has. That sounds really counter-intuitive, doesn't it? The myth of good for business = good for consumer is so deeply embedded that we have a hard time thinking that there is no necessary connection between the two sides of this equation.

The problem with this assumption is that it actually belies a lack of knowledge of economics, in particular of something call marginalism. Marginalism is about what you can charge any one person for product. You might have noticed that some people are willing to pay more for a particular product than other people are willing to pay. My daughter, for instance, is willing to pay more to have an iPhone than I am (andoird user). I might buy an iPhone sometime in the future but the price would need to come down. Not so for my daughter. Now, there is nothing wrong with this, according to capitalism. It is, yet again, the operation of the market. If you run a business, what you are trying to do, in the first instance, is to find that market segment that is willing to pay a lot for your product and sell it to them.

If you are a baseball fan, you could call this the "Prince Fielder Effect." Prince Fielder gets paid,  oh, a bazillion dollars to play first base for the Detroit Tigers. Why? It is not because everyone thinks Prince Fielder is worth a bazillion dollars. In fact, just about everyone did not. But, Prince Fielder's agent was pretty swift. He recognized the did not need to find a bunch of buyers for his product (Prince Fielder). All he needed to do was find one buyer who was willing to pay a lot, and this is precisely what he did. The Toronto Blue Jays would not have paid as much as the Tigers, but so what …? As long as you have one person who is willing to pay a lot … you can sell your product for that amount.  The real term for this is "segmented market."

It is also the same logic behind buy one get one for half price sales. I might be willing to pay, $50.00 for pair of pants, but I won't pay $100.00 for two pairs ($50.00 x 2). So, what the clothing store does is sell offer me a cut rate on the second set of paints. They lower the price of the second pair -- segmenting the market -- to a point where I would consider buying them. In effect, they create two markets for pants: one for those who are buying their first pair and one for those buying their second pair.

Now, let's apply this discussion (which is, btw, basic Econ 101, nothing fancy, basic rules of the game) to an example.We assume the goal of the company is to make a profit. That assumption, in a capitalist economy is pretty fair. If you run a company and don't make a profit, you won't run that company very long. If you own a business that does not make a profit … that business won't be around very long. So, a company wants to make a profit. And, you want to make as much profit as you can, being capitalists. Imagine the product you sell is … let's pick my gig: post-secondary education. If you ran post-secondary education onf a for profit basis … how can you maximize your profit? Well, I'd suggest that what you need to do is pay attention to the "Prince Fielder Effect". What you need to do is find a small number of dumb but very rich kids who are willing to pay a premium for their education. For instance, imagine you normally charge $100.00 for tuition and the costs of running your university is $1000.00.  You need 10 students, in this example, to break even and 11 to start turning a profit. But, imagine that you could find one student -- a real dummy who can't get into any other university -- who is rich and so willing to pay $1000.00 just so they can get a degree.

This is how a segmented market works. To the business looking to make a profit. that one dumb rich studnet has an equal value to the ten regular students you otherwise would have admitted. Moreover, since you have lowered the student body your costs go down. You can lay off faculty, not buy as many books, heck, you don't even need as much toilet paper. Because having only one students lowers the costs of production, you can actually start turning a profit with this one student, whereas before, you needed 11 to turn a profit.

You see what I am saying: consumers are clearly disadvantaged by this. 10 kids who would have gone to university do not go and one who should not go to university does. The society is impoverished because the level of training has, overall, gone down and people have been laid off. But, you get my point. What I am trying to do is demonstrate that because of segmented markets based on marginalism … what I called the Prince Fielder Effect -- the assumption that good for business = good for consumers is just not right.