No One is Worth this Much Money

Robinson Cano  signed with Seattle for $240 million. My son said "at least he was honest. Cano always said it [that is, who he would play for] was about the money." Whenever baseball or football or hockey players sign for these huge sums of money, I inevitably hear people saying "no one is worth that much money." That might be true. But, the fact that people sign contracts for these huge sums of money is a learning opportunity. In particular, it provides us with a chance of learning a bit about capitalism and how it functions because … from a capitalist perspective, the question of whether some is "worth" a certain amount of money is beside the point. It is irrelevant, a non-starter, a no-go discussion because value. Let me explain why and let me explain (or, try to) what is actually going on when someone says "no one is worth X amount."

Capitalist economics values "worth" differently than do ordinary people. For most ordinary people  "worth" is a moral concept. Person X is paid $Y for their job because they work hard, are a good person, never miss a day of work. We hear people say this all the time. "I need a raise because I can't provide for my family." Or, "I have new child on the way so I need a raise." Or, "I have been working for this company for X number of years and so I deserve a raise."

All these things may be true. I've even said them myself, but then I don't subscribe to capitalism. I have to mention "I don't subscribe to capitalism" because however true they are they are all irrelevant from a capitalist perspective. For a capitalist, "worth" is not a moral concept. It is a valuation that is based in assessing how much money someone else will make for me. Thus, for instance, I am willing to pay, say, a clerk $10.00/hr because that clerk makes me money. I don't pay her or him $10/hr because I am nice because, for the capitalist, niceness has nothing to do with it. What I am doing is trying to make money. I am trying to increase my profits and so I pay someone as little as I possibly can (this is called acting in self interest) and still get them to work for me.

This is basically what happened with Cano. The Yankees (his former team) offered him (reportedly) something like $175 million to stay with them and play baseball. Seattle offered him more because they valued his ability to make them more money than they would pay him differently than the Yankees.  Said differently, the value Seattle placed on Cano had nothing to do with his moral worth as a human being, his time of service, his work ethic, etc., even if these things are talked about publicly. Instead, the decision was one that was about cash. A group of very rich people decided that they could become even richer by paying Cano a great deal of money and selling the right to see him (we call these "home games") to tv networks and fans.

Does this mean that Cano is worth something more than the $10/hr clerk. In a strictly monetary sense … yes, that is precisely what it means. Seattle did not pay me $240 million because I can't make them that much money in return. I am less valuable than Cano. The issue is quite straight forward that plain and that simple. If you do not like that … you do not like capitalism. Don't shoot the messenger.

The problem people get into is -- as I indicated above -- that most of us don't use strictly monetary measures of value when assessing the "worth" of a human being. Most of us carry with is some sort of other moral compass that leads us to assess people in something other than a strictly monetary way. Thus, what is going on when people say "no one is worth" is not simply an imperfect understanding of capitalist economics, but competing systems of value. The system that says "Cano is worth $240 million" competes against a moral system that says "it is not right to place dollar values on people's lives and, even if it were, such gross disparities in value are ($10/hr v $240 million) are surely not just. Surely, there is something wrong with a society that will allow some people to, say, lose their homes because they can't pay their medical bills and others to have multiple houses and cars and airplanes, etc."

I don't disagree with this form of reasoning but -- and this is the point I want to make -- it is inconsistent with capitalism. Indeed, from a strictly capitalist perspective, the American medical industry that drives people into second mortgages, needing to return to the labour market in old age, and going bankrupt is doing nothing wrong. They offer a service and charge the highest price that they can get for it. It is only we people who are not capitalists -- who value life on something other than a profit maximizing basis -- who have problems with this. What we need to understand, then, is that capitalism is about money; not morals. Life is valuable to the extent that it makes money; not valuable to the extent that it does not.  

These competing value systems play themselves out daily. They are a matter of a our everyday world. Every time someone says "No one is worth that amount of money" they are actually making a profoundly anti-capitalist statement. Perhaps it is time that we consider such matters in more detail and what they mean for us as a society. I'll try to do that in future blogs.

PS: for those people who support a for profit health care system, I am sure you will be heartened to learn that Rob Ford does as well. You are in good crack-smoking, publicly lying company.

Myths of Capitalism: Markets

This is the last in a series of blogs I've written about myths of capitalism. These myths, I've tried to argue, are not propaganda (although they can and are used that way). Rather, they are misunderstandings about the character and nature of the economic system that has -- and always has -- formed the basis of Canada. This last myth is about the naturalness of markets. Markets are complicated things. They are the basis of capitalism; allowing for optimal distribution, etc. They provide the means through which capitalism is supposed to function: providing incentives to address market shortages (price increases) or overproduction (going out of business).  Markets are such an important part of capitalism that they take on a life that appears, at times, God given. They seem to have a life outside of human beings and independent of them.  They seem natural … as if they have always been there.

This is both is and is not true. First, some markets have indeed been around for a long time. A capitalist might argue that they function well and some markets might, in fact, serve a useful purpose. The real test of the efficacy of a market, as I've explained before, is empirical; not ideological. Markets are not inherently better or more cost efficient than other forms of economic organization and they are not inherently more just. But, in some instances, markets might make sense and might be useful and fair. Consider, as an example, a flea market. Here we have a market in pretty close to its pure form. Large numbers of buyers and sellers compete with each other to buy and sell. If I am a buyer (I used to go to flea markets), I can talk to the seller and see if they will negotiate a different price. I can, in other words, make an offer on a specific good that I might want to buy. This is the negotiation of capitalism and the market. Moreover, this give and take allows me to make up my mind about how much the good that is for sale is worth to me (the real test of its value). I might, for instance, see a piece of furniture that interests me, say a bookshelf. This shelf is listed at $10.00. I won't pay that much for it but I might be willing to pay $5.00 and so I go to the seller and make that offer. The seller can then respond, perhaps telling me that he cannot let it go for less than $7.50. I can, then, make up my mind (I can continue to banter about price or decide yes or no to that new price).  This is how a market is supposed to function: it matches buyers with sellers at a certain price point.

Other markets are so intricate and so long-standing that it is difficult to figure out what we would do without them. Consider the market for cars. It is not near as old as flea markets (which were called different names but which must go back in one form or another thousands of years) but making cars is a complicated business. Parts are coming from all over the place and assembled in various locations. This market might not work as well as car companies would like but it does work. It takes an incredibly complicated productive process and creates a remarkably useful good out of it. Moreover, it does respond, more or less, to market signals. Because of the economic recession, people are not buying cars at the rate car companies would like. They have, therefore, extra stock. As a result, they lower the price, particularly through incentives (free gas for a year, low interest rates, added extras like satellite radio, etc.) to lure buyers into making a purchase.

None of this, of course, means that markets are natural. What I have just said can be an argument in favour of markets, but it cannot and should not be taken to mean that markets are God given … or, existing in a state of nature. As I've pointed out in other blogs (and here, I lean on the work of a great number of scholars), humans have organized their economies in a variety of different ways. Some had markets (even black markets); some did not. In the past, for example, prices were often determined by some combination of tradition and the religious authority. Keeping goods off the market (something that is perfectly natural and acceptable to capitalism) so that the price increased, was viewed as hoarding and was illegal or immoral.  In Canada, the Original Peoples of the Pacific Northwest viewed accumulation as a high moral failing and they prized and honoured those who gave things away … for free! In Christian theology, we are told that the early church fed all who asked from its resources that were given free by disciples. Said differently, they did not use markets to allocate goods. They may have had markets as part of their economy, but their economy was, overall, organized around a different set of values and institutions.

What this means, as you might imagine, is that markets are created by people. And, they are created every day. I'll give you a couple of examples to illustrate my point. Recently, there has developed a whole new industry (or, a dramatically expanded old industry) in financial planning. A friend of mine is, in fact, a financial planner. One of the things they plan is your retirement. You meet with the planner and review your income, how much money you have in the bank, your pension contributions, etc., and a determination is made (using a formula) about how much more you need to put into a savings account (or some other form of savings) so that you can retire comfortably. One of my brothers employs a financial planner. My parents planning is done through their bank.

Now, there have been financial planners for a long time but … they were a small niche market catering to the very rich. They did not deal so much with retirement as tax shelters, investments and the like. The expansion of the market for financial planning into the middle class is, in fact, the creation of a whole new market that did not exist twenty-five or thirty years ago (outside of the rich, as I said, or perhaps self-employed professionals but even here it was new thirty years ago). What has happened? Well, I can't describe all the details but think about how pensions used to be done. One worked and as part of one's employment one earned money that was set aside for retirement. So, when you retired, you had an income. The new approach commoditizes one's retirement. The people who do financial planning (again, industry that did not really exist a generation ago) don't work for free. They usually take a commission (a small percentage of the income you earn from investing with them). In other words, they make their money off my retirement by providing advice to me on how to save for my senior years. My "golden age," said differently, becomes a commodity.

What is more … they can buy and sell this commodity. Don't believe me? Imagine this scenario. A financial planner convinces me to save an extra $100.00 per week toward my retirement. Where do I save this money? No worries, the planner tells me, my company will look after that. We'll create a savings account for you and each time you're paid, we'll set it up so that money is automatically transferred from whatever account your pay goes into to this account. So far … so good. Nothing shocking here. But, a year down the road, the company for which my financial planner works is sold to another company. What is sold … my savings. Now the other company still owes me my money (banking laws) but you see what has happened.  I started working with one company and ended up with another that I did not choose. It purchased the assets of the first company (which included my retirement savings account) and, what is more, it did this not to help me out (to be nice or because it cares about my retirement) but because it is gambling that it can make money off of my retirement. Regardless of what my financial planner thinks (who might be a decent human being), the company that bought out his company sees me -- my retirement -- as a cash cow. My retirement -- to me -- might be my golden years. For this company, it is simply a source of profit in which they will invest as long as they think they can make money out of it. The minute they can't … they will sell me off to some other company or (as we saw in the US) go bankrupt (that is, be driven from the market). What happens to my retirement savings at that point … well, let's hope that there was a government insurance plan that covered them because otherwise, I am not going to retire.

Here is the key: none of this is antithetical to capitalism. In fact, it is the way capitalism is supposed to function. For someone who is about to say … sure, but the profit motive will ensure that the company does  right by you because only by doing right by you … do they make money. This is a version of the harmony of interests argument that I debunked in a previous blog. I won't go into it again (you can read it if you want) but it is just not true. Capitalism is predicated on antagonistic relations; not a harmony of interests.

What I am trying to show, however, is how new markets are created. They do not exist naturally but are called into being by people who are trying to make a living or a profit or whathaveyou. This market might be good and useful; but that is an empirical question. What we need to know, however, is that there is no reason to accept the naturalness of the market. So, every time you hear someone say "the market will decide what is right" as if the market simply existed … you should start to question them because they are recycling a myth.

Harmony of Interests? Myths of Capitalism (continued)

In this series of blogs I have been trying to clear away some of the myths of capitalism, most of which are myths that capitalists hold. One of the things this indicates is that capitalists don't understand capitalism. For instance, the business person who complains about lazy workers has, of course, every right to free speech under the Charter, but he or she is simply a bad capitalist if this constitutes their plan to deal with a labour shortage. As I pointed out, a labour shortage is a labour shortage. The issue, if one is a capitalist, is using the market to address it. Its cause is irrelevant; its solution is known. Yet, a great number of people I know who would self identify as capitalists don't think this way. They think in terms of lambasting workers for not working more.  In other words, they don't really understand the economic system that they claim to support.

Let's get a bit more analytic. Rather than listing more myths of capitalism, let's think about the idea that what is good for the company is good for workers. You hear this all the time, usually from politicians, but also from business leaders. If my company makes more money … everyone benefits because I will hire more people. There is, as it is presented, a community of interest between workers and their employer. This is just not true and stating that it is just not true is not so much BS marxism. Instead, the market and its operation ensures that employers and employees have antagonistic relations. Said differently, antagonism between the boss and the workers is built into capitalism and to pretend otherwise is to engage in one of those myths.

I have my own ideas where this myth came from (I don't think its just capitalist propaganda that is designed to trick people), but I'll leave that off and focus on the issue at hand. Why are there antagonistic relations between workers and the bosses. In a market situation, an employer (or his or her representative) and workers (employees) are, as I have explained, engaged in a negotiation. Capitalists assume this negotiation involved individual self-interest. I've already written about the complexity and problematic quality of this concept, but that is not the point. Negotiations are structured as antagonistic relations.

I'll give you an example just to demonstrate my point. My union is involved in negotiations with Mount Allison University. I don't know all the issues, but I do know how the negotiations are set up. Each side appoints a negotiating team who draw up lists of demands (things they want from the other side, say wage increases or wage decreases) and then they meet and argue about these. From the beginning, then, negotiations place workers (faculty) and bosses (administrators) on separate sides and put them into situations that get very close to winner take all. There are compromises, to be sure, but you see my point: the processes is antagonistic. Now, I hasten to add that I am not making this up and if you don't like it … well … you don't like capitalism. I did not create this system. I'm just explaining it and, truth be told, I have no fondness for it in part because it creates antagonistic relations.  What is more, as a person who is supposed to be self-interested, the system tells me to look after my own interests (whether I am a boss or an employee). So, I go into negotiations with the goal of getting the most that I can from the other "side." For the boss, this might be the most work at the lowest pay; for the worker … precisely the opposite: the most pay with the lowest work. Moreover, because capitalist theory assumes my self interest, I am not doing anything wrong (regardless of which side I am on).  Bosses are right to treat workers as disposable factors of production; workers are right to treat bosses as cash cows.

The result of this process, then, is not a harmony of interests between the boss and the employee but a conflict of interests: we each have antagonistic designs that are realized by subverting the goals of each other. If I am a worker, I get an increase in pay by cutting into profit. If I am an employer, I increase profit by cutting into pay. And, we are each legitimate in doing so because we are supposed to behave in a self-interested manner.

One final thing: the idea of a harmony of interests is, of course, antithetical to the theory of capitalism in another way in that capitalist theory sees the individual as the basic unit of society. Remember Margaret Thatcher once said that there was no such thing as society. Her point was that there were only individuals. Other political theories work with -- in the sense that they accept -- the idea of collective social units of some sort (socialists think about class; nationalists think about the nation; feminists think about gender). Capitalists do not. They think about individuals. In this sense, the idea that there is some greater social unit that can function harmoniously is something that is denied from the beginning by capitalists. There are individuals with their own self interest. The idea, then, that one might ask a worker to buy into a company as a team or substitute family to which he or she owes allegiance and loyalty is something that is said regularly. But, from a capitalist perspective, it does not create a harmony of interests because it cannot. Because it is predicated on individuals and antagonistic economic relations, capitalism is not about harmony. From the get go … its about conflict.

Myths of Capitalism VI (or, self interest)

Last time, I explained how capitalists use the term efficiency and how it is different from productivity. Indeed, an efficient economy, according to capitalist theory, might not be the most productive. There is, of course, more to say about capitalism, but let's shift gears a bit look at the ethics that underscore capitalism. Capitalism is about economics, but that does not mean that it does not carry with it an ethics. Most people -- including a lot of advocates of capitalism - contend that capitalism is about money. If you've watched the Lang and O'Leary Exchange, you know what I mean. One of the hosts -- who is into money -- also defends capitalism as the way to go. Yet, properly understood capitalist economics is not actually about money. It is about, as I indicated in my last blog, the allocation of goods and services as opposed to just producing more goods and services. And, it is also about individualism.

This is the myth that we we need to explore: capitalists believe that everyone is self interested and that means that everyone is greedy (they want more stuff). Remember the movie Wall Street? I have no doubt that there are a lot of advocates of capitalism out there who think that it is all about self-interest defined as wanting more stuff (or, money). But, does this explanation for human behaviour actually work? Does it make sense?

The answer is no. In fact, there are a number of problems with this way of explaining human behaviour. First, in explaining everything -- all human beings are self-interested -- it explains nothing. Think about it. It tells us that we all react in exactly the same way. If that is the case … why are people so different? Why, when given a choice -- pick your issue, oil sands development, shale gas -- do people react in different ways. If we all supposedly just wanted more, there would be no controversies. Instead, there are controversies because people are different.

But, wait, someone might say, sure people are different but they are all reacting out of self-interest. OK, for the sake of argument, let's allow that to be the case … what explains their different reactions? In other words, even if it is true that people are self-interested (and, I'm pretty darned far from convinced that that is the case), it doesn't help us explain behavioural differences. Hence, its useless as an explanatory framework and, as a capitalist might say, therefore becomes inefficient and should be weeded out of the market.  In other words, material self-interest either explains behaviour, in which case it has problems explaining behavioural differences. Said differently, it is useless because all it tells us this that people are self-interested no matter what they do and so it cannot explain why there are differences between people. It is a weak explanation that does not allow us to grapple with the complexity of human behaviour.

What is more, economists don't actually think that everyone is self interested. Sure … we are all introduced to economic man in our Econ 101 text, but if you stop 100 economists in the street, they will tell you that economic man is a modeling device that, at best, allows economists to very conservatively predict specific economic actions if certain policies are followed. The vast, vast majority of economists accept the fact that there is a lot more to people than material self interest. This proposition (that everyone is self interested) is, in fact, not really scholarly economics. Its more in the way of adolescent philosophy.

That sounds insulting, but I hasten to add what I am insulting is not capitalist economists but pointing out the differences between what they say and what they are often reported as having said. The capitalist economists I know have far more sophisticated ethical propositions and conceptions of human nature. In other words, the idea that everyone is self interested is a myth. If we can clear this myth away, we can start to think about what capitalism actually has to say about human nature. And, what it has to say is actually not much. In other words, human nature is not a question that interests economists as economists very much. They use it for modeling but as a philosophy, capitalism is actually predicated on a neutral position on human nature. (You will recall that I mentioned in an earlier blog that capitalism was a-moral.)

What do I mean by this? I mean that capitalists are more than willing to leave choices up to the individual. Now, they clearly believe in human nature to the extent that they believe in individualism. There are people who reject individualism, but … frankly, not many. Individualism is complicated, to be sure, and I'm no anarchist. What I am saying, however, is that in Canada today, one needs to look pretty long and hard to find someone who does not believe in some form of individualism (say, freedom of expression or conscience or due process of law, etc.). Capitalists don't have a great deal to say about individualism except to say that choices about an individual's life are best left to that individual, provided that they are a legally competent adult.

I noted this point in an earlier blog in my comment on lazy workers.  Why a person is not working is, for a capitalist, not all that important because they have the right to make the decision for themselves. I can attempt to lure them into working by appealing for their help or by offering a bribe (more wages) but exactly why then do not want to work is no business of mine. They might have a sick child; they might be lazy. It is irrelevant because as a legally competent adult, they have the right to be lazy if they want. That is their decision to make and not mine. In effect, this form of individualism becomes a deal: I promise not to mess around with your life and you promise not to mess around with mine. We agree to leave each other to make up our own minds about what is best and most important to us. It might be relaxation (let's call it recreation to make it sound better) for me. It might be work for you. Each of us is making up our own minds.

[As a digression, btw, this is the basis for the argument for same-sex marriage (or, one of them). It is none of my business to tell someone else whom they should or should not marry. As long as the people entering that relationship are legally competent adults and are making their decisions freely … my job is precisely *not* to have a view on it because it is none of my affair, so to speak.]

As this is applied to the economy, this becomes a defense of markets in the following way. The market, we recall, is about matching desires and needs with goods and services. Each individual is their own judge about their own desires (needs, let us assume, are at some level fixed). We let the market make this determination not because it produces more stuff but because I should mind my own business. I have no right to tell another individual that they cannot buy, say, a green shirt because green is an ugly colour (I am wearing green right now). A capitalist supports the market, then, not because it makes more stuff but because it allows individuals great scope to make their own decisions. Again, its not about getting more but about efficient allocation. Since I cannot know what another person actually wants … my best option is to leave it up to them to make that decision, hence markets.

Where does this leave us? It leaves us, again, I hope, some distance from mythology. Capitalism is not about money and everyone being greedy but, in its best form, it is about individuals making up their own minds about what is and is not important for them, what they will and will not pay for. Because I cannot tell what an individual might want or desire, my best course of action is to leave it up to them to make their own decisions, which means making their own purchases or, on an individual level, matching their personal desires with their ability to pay for goods or services.

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?

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.

Capitalism and Wages Part II

In my last blog, I was trying to explain something about capitalism and how it functions, at least on a theoretical level. In particular, I was trying to explain the way a market works. I did this because I periodically hear people talking about "lazy" workers who will not work for such and such a wage. I was trying to explain that complaining about lazy workers is, well, bad capitalism. From a capitalist perspective, the issue is not are workers lazy or not. Capitalists begin from the assumption that all people are self interested and for most of us this involves doing something we like a lot better than working. In other words, the so-called lazy worker, from a capitalist perspective, is not doing anything bad or unusual. They are making a choice about whether or not they will work for a certain wage. If they elect not to, they are not lazy, but simply making a choice. We might agree or disagree with their choice but our perspective, in a market economy, is a moot point. Moreover, the issue is not laziness, but how one attracts more workers. Capitalists should not try to get more workers by berating people for being lazy. Instead, they should use market based incentives to expand the supply of labour. The problem is irrelevant; the solution should come from the market.

I also wondered out loud why so many people who call themselves capitalists -- or who support capitalism -- get this wrong. Why do they complain about lazy workers (just as an example that I happen to be working with) rather than doing what the market tells them to do: increase wages. I suggested that this might be because most people, somewhere inside, feel there is something wrong with capitalism. Let's follow Antonio Gramsci and call this a "good sense" perspective on capitalism. The demonstrate the fact that they think there is something wrong with capitalism but thinking in terms that are not capitalist. They think about the morality of working, as opposed to market incentives. This suggests to me that most people see work in moral as well as economic terms and that they don't differentiate that morality too much from the market. In other words, instead of seeing wages as a product of supply and demand, they think of wages in terms of an appropriate wage or a just wage.

Now, again, it is worth pointing out that in a market economy, there is no such thing  as an appropriate wage that we can specify in advance. Wages are determined, theoretically at least, by a market for labour. The boss has as much to do with the price of labour as the workers. There is give and take. If there are a bunch of workers available to work and who will take a lower wage, that becomes the appropriate wage in a market economy. If there are not a lot of people who will work for wage X, then the boss has to offer X+ in order to get labour and that becomes the appropriate wage. Said differently, there is no way to say that $10.00 an hour or $15.00 an hour is appropriate in advance of market determination. Yet, people -- neither bosses nor workers -- do that. Why not?

Let's look at bosses. I also hear friends say "employer X cannot pay more than [pick a figure] $10.00 hour or else they will not turn a profit and their business will go under." Exactly. The problem is that people think that from a capitalist perspective that there is something wrong with the business going under. (Now, to be sure, I am not a capitalist so I am explaining things; not advocating.) This is precisely what is supposed to happen in a market economy. Rather than trying to find a way to get workers to work for less -- importing workers from another country say, or getting the government to pay part of their freight -- what is supposed to happen is that the employer is supposed to realize that they do not have a profitable business and close down, shifting their resources (capital, abilities) to another company. In other words, failing businesses is part of capitalism that is supposed to happen. It is a market signal that that business is not viable. By knocking off unviable businesses, theoretically, the economy is left stronger. Only the viable businesses are left. We might feel bad for the employer but she or he is the capitalist and they  can hardly argue about the rule of a game that they support. After all, if the business was viable, they'd take the profits.

Put in other words, the argument "employer X can only pay amount Y or their business will fail and so workers have to work for amount Y" is a profoundly moral argument, but it is not a market capitalist argument. Labour, for a capitalist, is just another factor of production. To complain that one cannot get labour at the rate of pay one wants is like complaining that minerals don't jump out of the ground for a lower price than it takes to mine them or that trees don't cut themselves. From a capitalist perspective, it is silly. The capitalist has to pay for all factors of production (capital, rent, labour) and if they cannot, their business will collapse. If a refinery cannot pay for oil, it closes down. Likewise, with labour.

Now, I recognize that all this sounds rather cold and heartless. And, it might be. There are moral arguments that can be made for capitalism and I will try to make them in the future. I will try to make them because I think that capitalism is, in part, held up not just by the market but by moral arguments related to individualism and responsibility. But, it is important to note that the market is a-moral. Drugs function according to market logic; prostitution does too. The market does not differentiate between what people find moral and what they don't. It provides goods for which there is a demand when someone is willing to pay for them. It does not matter what that good is (dangerous chemicals, weapons, endangered species, etc.). And, I suppose, this is one lesson I'd like people to learn: people have morality; the market does not. Its moral is "you get what you pay for."

Wages, Capitalism and Morality

A friend of mine recently complained that he could not find workers in Maritimes. He was an employer and he was complaining about everyone else complaining about unemployment. There is no shortage of jobs, he told me, people just don't want to work. He's wrong, of course. There is unemployment -- we can empirically confirm that. The question is why. His argument was that Maritimers were lazy. The truth is actually something else but his question is important because it points to a failure with the way in which wages and work are understood. I thought I'd write a quick blog to explain this and, hopefully, introduce a question or two that might be worth thinking about.

How much should your employer pay you? How much should you pay your employees? Tricky questions. Most of us, I assume, believe we are worth a good rate of pay and most of us who pay people like to believe we pay a good rate of pay. We all like to believe that we treat each other honestly and compensate fairly. This is where the problem begins: compensation, in terms of how much someone is paid, is rarely about fairness and honesty.  Instead, in Canada, it is about the market and the market does not work to ensure fairness or honesty. It operates by other principles. You might like these principles or you might not. That is up to you to decide. My job is just to explain them.

Let's look at the theory first. Canada has a capitalist economy, so let's begin by looking at how wages are determined in a capitalist system.

In a capitalist system: the question -- how much should someone be paid -- is difficult to answer because the market does not specify a single rate of pay. Instead, it is determined by a floating scale that is called supply and demand. In short, wages are a negotiation. If an employer wants workers, he or she offers a certain amount of pay. Those who are willing to work for that rate of pay will show up. Those who are not willing to work for this rate of pay will not. (They could also show up and ask for more money, which is where the negotiation begins.) Now, here is the key thing: neither the employer nor the worker is doing anything wrong. Suppose an employer offers a certain rate of pay. Let's say $10.00 per hour. If someone does not show up to work, what they are doing is deciding that that rate of pay is not enough for them. Exactly why it is not enough for them is none of our business. Provided that they are legally competent adults, they make their own choices for their own reasons. As Joseph Heath has pointed out, this is their right and none of our right to interfere. We must assume that legally competent adults make the choice that is right for them (and, btw, this is how we want to be treated.)

Likewise, the employer's decision is offer a certain rate of pay is neither morally right nor morally wrong. It is a market transaction. We might find the rate of pay low, but that would be for us and so we would decide not to work. Neither the boss offering a certain rate of pay, nor the worker deciding -- in this example -- that it is not high enough and so they don't go ask for the job are being good or bad. They are simply making their own choices for their own reasons in a market transaction. If the boss does not get enough workers, what should she or he do? According to capitalism, the failure to attract workers is a market problem that can be solved through the market. If you offer a rate of pay, for example, of $10/hr and don't get enough workers, the market tells you that you have to increase the rate of pay to attract more workers.  This is how a capitalist economy is supposed to operate.

Now, let's look at how my friend approached this matter. When he said that Maritimers were lazy, what he actually was saying was that he could not attract enough workers at the rate of pay he was offering and was not willing to increase this rate of pay. In other words, he has no idea why he did not get enough workers. Laziness might be reason (and I'll turn to that shortly), but it might not be. He might have had a business that was open at certain hours and people could not make it to work at those hours because of childcare responsibilities. Or, they might simply have had other things to do. According to capitalism, the reason why they did not come to work -- even if it is laziness -- is not an issue. Imagine that it is laziness. According to capitalism, laziness has a market solution: you offer more money and people who are lazy will say "OK, I was not willing to get off my butt for $10/hr, but I am for (say) $15/hr." Said differently, the way one deals with a shortage of workers is to offer more money. This will increase supply.

The problem my friend had was that he was not a very good capitalist. He was willing to only pay $10/hr (or, whatever it was, frankly, I don't actually know). He assumed that since he was willing to work for $10/hr, everyone should be and those who are not … are lazy. Leaving aside the questionable conclusion, he was not doing what a good capitalist should do: respond to the market.

Now, I recognize that I'm describing a theory and that there are a lot of complications but let's conclude on one point and then quickly move to a question. The point is this: you get what you pay for. Why do we find a bunch of teenagers working in McDonald's? Largely because that is who will work for the wages McDonald's (or, some other fast food place) offers. And, teenagers can do this job -- or, most of it  -- and so there is no need to be too concerned about employing a lot of teenagers. But, teenagers will be teenagers. I often hear people complaining about teenagers lack of responsibilities and whatnot. Of course a teenager is less responsible than, say, a middle aged adult. But, at $10/hr that is what you get and a good capitalist knows this. A employer at McDonald's could get me, for example, to work for them and there is no doubt that I'd be a lot more responsible than most of the teenagers in their workforce. But, they would also have to pay me a lot more than $10/hr. In fact, it is likely (because I have another job) that the rate of pay they'd need for me would be prohibitive for them. I'm not bragging. I'm just describing a market "fact."

The point is this: before you complain about an irresponsible teenager at a fast food restaurant, think about capitalism and wages. We all know that teenagers are going to periodically be irresponsible. And, anyone who doesn't, doesn't know teenagers. They are going to make mistakes; forget about work; give people the wrong orders; cook the wrong food. Most of this could be avoided by hiring a different workforce but that would cost more money. So, the people who run fast food restaurants make peace with themselves: to maintain a certain wage rate, they accept the fact that there will be problems with that workforce. If they did not accept this, they would -- if they were good capitalists -- offer more money and get a different workforce. And, again, no one is doing anything wrong or morally reprehensible. This is simply how the market works. You get what you pay for.

Here is the question: if this is the theory of capitalism … why do people (including capitalists) think differently? Why do we say that people are lazy as if there were a moral problem and not a market problem? Or, conversely, why do we call a boss cheap if they don't give us a raise? They might be, but that is not the point, at least under a system of capitalism. I'd suggest that one reason we do this - call people lazy or cheap -- is because most of us don't really think about wages as a market transaction. We think of it in moral terms. Consider the athlete who is paid millions of dollars per year. We often hear people say "no one is worth X amount." But, the fact is that they are. Let me explain: I am not making a moral judgment. The people who run the Toronto Maple Leafs pay players millions of dollars a year because they believe those players will make more money for them.  Evan Longoria received a lot of praise for taking a "team friendly" contract that paid him less than people estimate he would have gotten on the open market. Is he a nice guy? Let's assume that, but his rate of pay has nothing to do with him being nice. He made a decision: living in Tampa and staying with the Rays was more important to him than making even more money. So … why do we insist on thinking of wages in moral terms? Is it because ... capitalism might not be the be all and end of human experience?