Capitalism as an Ideal

Timothy Ash, a professor of European studies at Oxford, in the Globe and Mail makes the comment:

What is the elephant in all our rooms? It is the global triumph of capitalism.

Maybe in his room - most of us don't really care or don't even notice. And that's how markets have developed and thrived; not explicitly or intentionally, but because governments loosened their collective grips after experiencing stagnation and failure. This isn't a condition that governments have sought, but have simply happened. For those of us who do care, to accept his view is dangerous.

One can almost sense Ash's level of futility and desperation in making such an admission, except for the fact he's wrong. Ash begins by attempting to define capitalism:

Is what Russian or Chinese state-owned firms do really capitalism? Isn't private ownership the essence of capitalism? One of America's leading academic experts on capitalism, Edmund Phelps of Columbia University, has an even more restrictive definition. For him, much of what continental Europe has, with its multiple stakeholders, is actually corporatism. Capitalism, he says, is “an economic system in which private capital is relatively free to innovate and invest without permissions from the state and green lights from communities and regions, from workers, and other so-called social partners.” In which case, most of the world is not capitalist. I find this much too restrictive.

Hmmm, let's clarify. Let's go to an expert in "capitalism", ask them to define it and then when we don't like the definition, make one up? And make it up in order to suit his argument, he does:

Surely what Europe has is multiple varieties of capitalism, from more liberal market economies such as Britain and Ireland to more co-ordinated stakeholder economies such as Germany and Austria. In Russia and China, there's a spectrum from state to private ownership. Other considerations than maximizing profit play a larger part in the decision-making of state-controlled companies, but they, too, operate as players in national and international markets, and increasingly they also speak the language of global capitalism. Granted, China's “Leninist capitalism” is a very big borderline case, but the crab-like movement of its companies toward what we would recognize as more rather than less capitalist behaviour is far clearer than any movement of its state toward democracy.

It's not difficult to find those like Ash who long for an alternative (or maybe it's just a charm of being in Canada). The average German apparently even believes that it's better to inherit the wealth you have rather than earn it! They find capitalism far too disruptive, they associate it with greed, manipulation, and consumption and even find it impolite. They're willing to use Cuba as an example that socialism can work pointing to its healthcare system despite American oppression/hegemony keeping it impoverished, (nevermind that Taiwan, an island embargoed by a far more hostile neighbour, has thrived).

But basically what it comes down to for those like Ash, is that it's possible for socialism and communism to have an "ideal" but capitalism must be flawed at its core. With the growth and prominence of the environmental movement, they can now point to another reason to reign in the "excesses" of capitalism. Where apparently Marx had it wrong on why capitalism would fail, Ash apparently knows better:

They are not precisely the famous “contradictions” Marx identified, but they may be even bigger. For a start, the history of capitalism over the past 100 years hardly supports the view that it is an automatically self-correcting system. As George Soros (who should know) points out, global markets are now more than ever constantly out of equilibrium — and teetering on the edge of a larger disequilibrium. Again and again, it has needed the visible hands of political, fiscal and legal correction to complement the invisible hand of the market. The bigger it gets, the harder it can fall.

This is a favorite strawman of the anti-capitalists: to them, anarchy is apparently the ideal state for free markets, nevermind that free markets require rule of law and property rights as noted by everyone from Milton Friedman to Adam Smith. Governments are needed to protect us from each other - the problem is when governments attempt to protect us from ourselves or blur the line between the two. What is perhaps a bit galling is that Ash prefers we forget many of these "disequilibriums" are caused by brutish (though often unintentional consequences of) government interventions. Ash goes on:

Then there is inequality. One feature of globalized capitalism seems to be that it rewards its high performers disproportionately, not just in London but also in Shanghai, Moscow and Mumbai. What will be the political effects of having a small group of super-rich people in countries where the majority are still super-poor? In more developed economies, such as in Britain and North America, a reasonably well-off middle class, with a slowly improving personal standard of living, may be less bothered by a small group of the super-rich — whose antics also provide them with a regular diet of tabloid-style entertainment. But if a lot of middle-class people begin to feel they are personally losing out to the same process of globalization that is making those few fund managers stinking rich, while at the same time outsourcing middle-class jobs to India, then you may have a backlash.

This seems more to do with wishful thinking. To Ash, apparently the fact that wealth is accumulated and stolen by oligarchies and corrupt governments who don't care to enforce rule of law can all be blamed on free markets. Further, Ash implicitly makes the equivalence of the "super-rich" in developed countries with those in developing countries - as if self made billionaires like Rupert Murdoch and Bill Gates can be compared at the same level as oil sheikhs. To those like Ash it seems that wealth can only be distributed rather than made and earned. Wealth to them is a "fixed pie", not one that grows with innovation. I often wonder how they reconcile their reality with the continual growth in per capita GDP. Economics mumbo jumbo perhaps?

Above all, though, there is the inescapable dilemma that this planet cannot sustain six and a half billion people living like today's middle-class consumers in the rich north. In a few decades, we would use up fossil fuels that took 400 million years to accrete — and change the earth's climate as a result. Sustainability may be a boring word, but it is the biggest single challenge to global capitalism today. However ingenious modern capitalists are in finding alternative technologies — and they will be very ingenious — somewhere down the line, this will mean richer consumers settling for less rather than ever more.

Finally, it's the argument most in vogue by redistributionists - using the environment - claiming that we don't have enough resources. They use words like "ecological footprint" and "inevitable" to scare us into compliance. But these Malthusian arguments aren't particularly new but as they have been for the pasts 300 years, they are still wrong. Ash however does acknowledge that technologies have been the solution to resource constraints but he treats these solutions as mere tricks by "ingeniuous modern capitalists". The genius of free markets is that scarcity is signalled to ingenious modern (and even stodgy) capitalists through higher prices and therefore greater incentives to develop more efficient ways to use resources and develop alternatives. The evidence is quite clear - commodity prices fall over time.

There's an elegant truth to the markets. With prices having consistently fallen in the long run, it suggests resources are becoming more abundant rather than scarce. What makes this fall even more remarkable is increased population and increased wealth allowing more people to afford what were luxuries mere decades ago. There are however those who have been willing to bet that this wouldn't be the case, putting their money where their mouths have been.

But back to why accepting Ash's belief that capitalism has "won" is dangerous. Consider a doomsday scenario of what might happen when China ultimately falters. Who to blame? I'll bet that those like Ash won't be pointing fingers at government policy (and the extreme levels of bad bank debt). According to James Waterton:

I fear a worldwide economic slump prompted by the collapse of China and its supposedly free market will provoke a popular backlash against globalisation and the liberal market reforms carried out in the 80s in the most successful economies of the West. Capitalism and liberalism will be blamed if people create a nexus between China's collapse, its market reforms and its intertwining with the greater world economy. There is no shortage of people who will quickly jump to the fallacious conclusion that the free market sunk China - those who protested in Hong Kong and other places would grab plenty of (misguided) ammunition from such a catastrophic event. Ask any one of those economic curmudgeons about post communist Russia's economy, and I will bet you penny to a pound that their standard response would be "capitalism failed Russia". This is about as sensible as saying that modesty failed Paris Hilton, for anyone who knows anything about post-Soviet "free market reforms" will know that they were in fact nothing of the sort. This type of thinking could very well gain traction because it makes sense prima facie. Policy reversals may follow and suddenly we're staring down the barrel of a neo-Keynesian revolution. Consider what the average person knows about China's economy. We're all told about China's free market reforms and its burgeoning capitalist class in the mainstream media - we're not told about the Chinese government's meddling in the economy and its mandating of compulsory totalitarian-style imposts on big private companies like internal "political cells", its retention of control over huge swathes of industry, its equity market (there is currently a ban on IPOs on Mainland bourses) which is stuffed with companies who are controlled by local governments and even the military, rather than shareholder, the board and a CEO. Most importantly, we're not told about the largely intractable problems with China's banking sector. Most people truly think China operates under a free market economic system. If the dog's breakfast that is China Inc fails with all the accompanying pain and fallout, there's a real danger that free market liberalism will be made the scapegoat internationally.

Let's not forget the words of a Frenchman:

"When goods do not cross borders, soldiers will." - Bastiat

Some argue quite convincingly that this led to World War I.

The Worst Job in America

I thoroughly enjoyed Steven Levitt's Freakonomics - and in this Youtube, he talks about his research project into the economics of a drug gang which, for its lowly members was "the worst job in America". (R-Rated: Language). Hat Tip: Simon @ Classical Values.

Are CEOs worth it?

Here's an interesting position (I seem to like contrarian and unpopular positions for some reason); Jerry Taylor and Jagadeesh Gokhale from Cato make the argument that CEOs may be underpaid:

A 1997 study by Harvard economists Brian Hall and Jeffrey Leibman examined 15 years worth of data relating to CEO pay and corporate performance. Messrs. Hall and Leibman found that, for 1994, every additional dollar given to a CEO translated into an average return of $3.90 for the company. While subsequent studies have highlighted the ambiguities associated with studies like this, the evolution of CEO compensation arrangements strongly suggests that corporate boards are increasing compensation packages for a reason -- to improve performance.

[...] The inference from Mr. Bush's statement -- that rising CEO pay is fueling income inequality -- thus begs the question about whether rising CEO pay is improving corporate performance. If it is, then workers might well be better off if CEOs were paid even more. And if it isn't, then the market will either punish firms that are overpaying for executive talent, or shareholders would lose. To us, the only excess here is the attention politicians are "paying" to the issue.

I tend to agree - the onus of responsibility of ensuring that the investment in strong executive talent is the responsibility of shareholders, who delegate responsibility through directors, who in turn have a fiduciary responsibility for representing their interest. If I recall this whole mess with options is the direct result of Congress tinkering with what they deem fair in executive pay.

'The Real Crisis in Public Education'

More on Steve Jobs' speech from the Wall Street Journal:

The real crisis in public education, he noted, has nothing to do with the amount of technology in the classroom. It's the fact that union work rules prevent principals from firing the bad teachers and rewarding the good ones. "Here's the problem," said Mr. Jobs, using a business analogy: "What kind of person could you get to run a small business if you told them, when they came in, they couldn't get rid of people they thought weren't any good in the first place? Or they couldn't pay people three times as much when they got three times as much work done?"

Corporate Taxes and What's "Fair"

TCS Daily makes the argument that fair corporate taxes is no corporate taxes. As a small business owner, I'm all for it, though I'm not sure how practical or politically feasible that is (ie it isn't). But it raises an interesting point since double taxation has always been one of those bizarre things that governments do. Practically speaking though I wonder how you deal with people who use businesses to pay their personal expenses? I suppose you're not allowed to do that anyway. Or even the accumulation of assets within corporations so it isn't taxed?

The Effect of Unions on Productivity

In general, I can't say that I am a fan of unions. I believe they served a purpose that is now largely unnecessary, at least in the developed world. Economic choice has reinforced this with union membership dropping steadily. The Economist though has a thoughtful article that references Stephen Bainbridge on the subject who argues that rather than being negative, the net result on productivity of unions may be closer to zero. Hat Tip: Instapundit.

Nobelist Polanyi on Innovation

In a followup to a Globe and Mail article last week, Nobelist John Polanyi makes the argument that what's stopping innovation isn't either the lack of engineers/scientists as advocated by Bill Gates, or even business people as argued by Roger Martin and James Milway. Polanyi argues that, in fact, it's over/poor management:

The damage is done when the manager takes ownership of the pig before whisking it off to the market. The health of the pig, we are told, is to be assured by rules of husbandry. Research, in order to qualify for support, should abide by a multitude of rules.

Ignoring for a moment that the case as made by Martin & Milway wasn't that there wasn't adequate management at the government level, Polanyi errs by ignoring where innovation comes from. What started it all, was Bill Gates' assertion that America's prosperity was dependent on innovation. Where he goes wrong is in thinking that this innovation must come from scientists and engineers, Martin and Milway go wrong thinking that it's the business grads and Polanyi goes wrong thinking that innovation must happen at universities - or even driven by universities.

There's little doubt that innovation drives prosperity. It's easy to see that a given product is worth more than the sum of its parts, and the difference, after taking into account the cost of capital is almost always the direct result of innovation. But innovation isn't always as radical as the development of the lightbulb, the microchip or hopefully, eventually, fusion. The vast amount of innovation is incremental - or evolutionary, as pointed out in a study in 2000, for Duke Law Professor Lewis Branscomb by Booze, Allen, Hamilton. It's adding a new menu item at McDonald's, or making cars in colors other than black.

In fact, Booz Allen makes the observation that:

Almost all GDP growth is due to evolutionary growth of existing markets, services, and production processes. $200 billion in R&D was funded by private industry. Of this only about $16 billion funded R&D for radical innovators.

From this innovation was economic activity (gross profitability for an economy) of nearly 10 trillion dollars. So to recap: prosperity is the result of profitability measured by GDP (as an aggregate) which in turn is the direct result of largely incremental innovations. Understanding the problem is probably the first step to building a solution. As in the case of labor markets, in promoting innovation in private industry, governments need to learn less is probably more.

Barack Obama isn't Black?

Racism apparently isn't just for white people despite what those at the UN might think. Here's a hilarious interview from the Colbert Report (despite being partisan Democrats, Colbert and Stewart can be quite funny).

Life and Times of Milton Friedman

Read it here.

Setting Labor Free

The Wall Street Journal is reporting that "economies in the Nordic region are surging" (subscription required / Congoo):

From almost every angle, the economies of Sweden, Norway, Denmark and Finland look much stronger than those in the euro zone. In Sweden, double-digit growth in consumer sales last year helped to produce the country's best year of economic growth since the 1970s. Labor-market overhauls have helped push unemployment to near record lows in Denmark, Finland and Norway.

In Sweden, the new center-right government, which won power in September after 12 years of Social Democratic rule, has cut income taxes and employer fees and reduced unemployment benefits to increase both labor demand and supply. One result: Retail sales in Sweden jumped 10.9% in December from a year earlier.

Governments can do more by doing less. It's remarkable how long it can take for governments to realize that the only thing the've been protecting people from are jobs.

Heh... Slapdown of Robert Reich

Greg Mankiw points out the hypocrisy of Robert Reich on minimum wage and trade.

Solar at Half the Cost of Oil?

I have my doubts but I certainly hope so. According to Ambrose Evans-Pritchard in the Telegraph:

In a decade, the cost may have fallen so dramatically that solar cells could undercut oil, gas, coal and nuclear power by up to half. Technology is leaping ahead of a stale political debate about fossil fuels.

I have few doubts that something will ultimately substitute oil. Though statements like this strike me as premature:

Needless to say, electricity utilities are watching the solar revolution with horror.

Horrified all the way to the bank no doubt. I would suggest the days of high oil prices are limited. Commodity prices drop with time because of technological substitutes and improved extraction technologies but in the short run, however temporary prices remain high is anyone's guess.

More on the Limits of Microfinance

As most people know, I'm fairly enthusiastic about microfinance but I believe there are some significant limits to what it can do. This reinforces the idea that though they may be provided with the best of intentions subsidies and soft loans to microfinance are ultimately unhelpful to target recipients/clients. A recent study from Cato:

Microfinance—the provision of financial services such as small loans to the world’s poor—has grown in the past decade, extending billions of dollars in credit to tens of millions of people. A major aim of the microfinance movement is to provide funds for investment in microbusinesses, thus lifting people out of poverty and promoting economic growth.

Recent experience and the economic history of rich countries, however, suggest that those expectations are unrealistic. Most people, poor or otherwise, are not entrepreneurs, so there is little reason to think that mass credit would in general lead to viable business start-ups. Today as in the past, business start-ups in the advanced countries depend predominantly on savings and informal sources of credit; past forms of microcredit never played a role in small business development, and much microcredit is actually used for consumption rather than investment. In the history of today’s rich countries, moreover, economic growth occurred first, then came credit for the masses. That credit was and is predominantly for consumption rather than investment.

There is no reason to believe that the nature and sequence of growth and mass credit are fundamentally different for poor countries today than they were in the past. We should not expect microfinance to noticeably affect growth or successful business development.

Don't like inflation numbers? Make them up.

I could have also titled this why countries stay poor/get poorer. From the Wall Street Journal (this link needs subscription but according to Richard in the comments, you might be able to access the same editorial at http://news.congoo.com):

Just when you think world economic policy might be moving in a more sensible direction, along comes Latin America. This month's lesson in how not to create prosperity comes from Argentina, which has decided that the way to whip inflation is to throw out inconvenient statistics.

Recently the Peronist government of President Nestór Kirchner sacked an official at its National Statistics and Census Institute for refusing to agree to alter the "methodology" used to calculate inflation in January. Armed guards then escorted a political appointee to replace her.

Theory of Government

Funny but true. According to Jane Galt:

The post below also applies to behavioural economics, which the left seems to believe is a magical proof of the benevolence of government intervention, because after all, people are stupid, so they need the government to protect them from themselves. My take is a little subtler than that:

1) People are often stupid
2) Bureaucrats are the same stupid people, with bad incentives.

Interesting... Labor Law & "The Office"

This is for fans of the mockumentary The Office (US). I didn't watch this show for the longest time because I thought it would be a watered down version of the British one but I am finding it pretty funny. Here's an HR lawyer's blog who estimates Dunder Mifflin's litigation costs associated with what Michael does using broad examples from her practice. Pretty educational - perhaps more so for those who get the humor of the show.

Teachers Unions

I've had some pretty great teachers. I've also had some pretty miserable ones. With the (seemingly) increased militance of teachers unions making unreasonable demands/comparisons and from purely anecdotal evidence, I have been wondering if the latter has been flourishing more than the former. Is the economic power of the US (and Canada) in spite, rather than the result of our education system (and as a corollary, teachers and their unions)? Apparently Steve Jobs and Michael Dell (both on the same stage no less!) think so.

When globalization isn't for you...

To Brink Lindsey, the biggest mistake that Thomas Friedman (author of The World is Flat and the Lexus and the Olive Tree) makes is in believing that globalization is inevitable and governments are powerless. Lindsey's book after all, is titled "Against the Dead Hand: The Uncertain Struggle for Global Capitalism". Countries apparently willingly check out of the global economy all the time.

Which brings us to Venezuela and Zimbabwe. Zimbabwe inflation reached an annual rate of 1281% in December according to New York Times. But here's their prescription, as quoted by Greg Mankiw:

The central bank’s latest response to these problems, announced this week, was to declare inflation illegal. From March 1 to June 30, anyone who raises prices or wages will be arrested and punished. Only a “firm social contract” to end corruption and restructure the economy will bring an end to the crisis, said the reserve bank governor, Gideon Gono.

Now comes Venezuela (hat tip Instapundit) where Daniel Drezner reports "things are beginning to fall apart". What is a bit galling, is that while their problems are entirely predictable (i.e. if you print money ad infinitum, its value goes down), their ideological allies agree with the view that their problems are caused by some American conspiracy.

Same thing with Cuba in that sense. I don't know how many people who have said the whole reason Cuba is an economic basket case is that the Americans have had them embargoed for all this time. I've even agreed to a certain extent, but PJ O'Rourke, does a good job of reminding us of another small island that's been embargoed by an economic giant and in spite of it all, has done quite well for itself - Taiwan.

Travel Blogging - Pet Peeves

I think this is a post that I'll keep adding to over time just to gripe about, and hopefully at some point, someone who can actually make a difference will pay attention.

Hotels

Plastic wrapped soap - for the life of me I can't figure out why even five star hotels wrap their soaps in plastic. I instinctively reach to wet my hands before grabbing the soap - which is a problem when it is wrapped in slippery plastic and sometimes even double wrapped! Hotel Harbour Plaza Metropolis (HK) does this as does Novotel (Guangzhou).

Toilet paper dispensers that require gymnastics to reach - I was surprised the Novotel does this. You have to do a near 180 behind you if you're sitting on the throne in order to reach the toilet paper. It's a flippin' new hotel too. The dispenser sits immediately next to the flush chamber or whatever it's called.

Employees who care more about their own convenience than those of their customers - Admittedly I haven't seen this at any 0f the five star hotels I've stayed at but it's a costless thing that all employees in hospitality should know - i.e. hold the elevators for customers particularly when you're the only one in there and particularly when there's only one elevator and it's slow as heck.

Airplanes

Unexplained in-flight acrobatics - Sometimes turbulence causes you to drop a few feet out of nowhere - which I am told is not unusual, but it would help if the pilots came on to explain it to the frightened passengers afterwards. Plus side - unusually compliant passengers for the rest of the flight .

People who don't care about the people in front and behind their seats - I'm one of those people who don't think it's worth travelling business class in general. Hook me up with an aisle seat and an electrical plug (yes! they have those now in AC economy), and I'm pretty happy. But it's annoying when people in front of you are fully reclined, they get up and they slam themselves back on the seats - it's even more annoying when you're fully reclined sleeping and the person behind you struggles pulling themselves up using your seat as leverage.

Hotel Blogging - Novotel Guangzhou

An employee of mine has a membership at "elong" in China which is something like a travelzoo and gets pretty good deals for hotels across China. This five-star Novotel in Guangzhou was nice (and like the Guangzhou airport that it sits conveniently and immediately behind, it's quite oversized). At 588 RMB/night (about $75 USD/night), it was an introductory offer (opened Jan 15 apparently and the pool and a few restaurants on second floor weren't open yet).