Capitalism: Moral, Practical, Necessary

 Posted by at 8:51 am  6 Responses »
Nov 282011
 

Capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever the defense they may hear; the only success victorious defense can possibly produce is a change in the indictment.

—Joseph Schumpeter

From its beginning, the common wisdom has been that capitalism is bad. It is claimed that capitalism is ethically wrong, has bad practical consequences, and is unnecessary. But this claim is entirely false—in fact, the opposite is true: capitalism is both morally and practically optimal, and there is no other possible social arrangement compatible with modern society.

It is important to precisely define ‘capitalism’ from the outset to avoid being misunderstood. Capitalism is the free market system, based on property, contract, and voluntary exchange. In a truly free society, where people are free to live as they please, free markets are practically guaranteed to arise as the result of voluntary production and trade undertaken by people seeking to improve their conditions. In other words, capitalism is the default social system of a free society.

Much of the anti-capitalistic sentiment is aimed not at this voluntaristic conception, but at the currently existing system of state capitalism. This interventionist system is characterized by a market that is no longer free but hampered by all sorts of government restrictions, which result in many undesirable and unintended consequences. It is primarily these outcomes that the anti-capitalists—in mistakenly attributing them to free market capitalism—object to.

Morality

A widely held objection to capitalism is that it is immoral. This charge is mainly based on Marx’s claim that capitalists exploit laborers by taking as profits what properly belongs to the workers. This incredibly naive view was exploded long ago, but it persists today among those ignorant of economics—it can hardly be denied that profits are widely considered antisocial and evil.

Marxian exploitation can only exist if goods acquire their value from the labor imbued in them. But this notion—the labor theory of value—was long ago rejected and replaced by the subjectivist notion of prices being determined by the relationship between supply and demand. It turned out that the persistent profit that Marx thought was a sure sign of exploitation was in fact an interest return—compensation to the capitalist for purchasing inputs such as materials and labor up front and only collecting revenue from sales later on. In fact, if the workers wished to earn this interest return, they could arrange to be paid only once the goods are sold. The fact that they do not indicates that they prefer to forgo the interest return in favor of regular, steady pay.

As capitalism has showered the common man with wealth and eliminated mass poverty wherever freedom has existed, the anti-capitalists have resorted to accusing capitalism of corroding virtue. According to them, capitalism breeds consumerism, materialism, and selfishness. While this is manifestly not true, even if it were, what is the alternative? People can only exhibit virtue if they are free to choose so. Forced virtue is not virtue at all. Only freedom—which entails capitalism—can allow people to exhibit virtue.

Capitalism is merely the result of leaving people free to live as they please (provided that they do not infringe on the freedom of others.) If they decide to engage in mutually consensual capitalist acts, who has any right to interfere? Capitalism is the outcome of freedom: any attempts by government to curtail capitalism must do so at the expense of freedom. Capitalism and freedom share the same fate.

Economics

Another popular myth is that capitalism enriches the capitalists and impoverishes the masses. This is flatly contradicted by history—the common person has been lifted out of poverty and has gone on to become fantastically wealthy as a result of capitalistic mass production. Economic science can explain: competition among firms brings prices down to the level of costs, and it also creates strong incentives for innovation. Large scale production has brought the unit cost, and hence price, of most goods down to levels easily within the reach of the common person.

This myth is rooted in zero-sum thinking—that the gains of business come at the expense of the rest of us. But voluntary exchanges benefit both parties, otherwise the exchanges would not occur. Capitalism is positive-sum: businesses earn their incomes by competing to sell goods that consumers want. Capitalists become rich by enriching consumers with better and cheaper goods. They lose their wealth as soon as they fail to stay abreast of the competition to serve consumers.

In fact, the fruits of capitalist efforts largely accrue to workers. Increased capital investment reduces unit production costs while competition quickly eats away any profits that arise. But more capital also increases the productivity of labor, so wages get bid up by competing employers. So, while capitalists earn fleeting profits, workers enjoy a steady rise in wages. Truly, capitalism is good to the common person, both as a consumer and a worker.

Faced with these arguments, opponents of capitalism often turn around and blame capitalism for being unsustainable. Capitalism, they say, is short-sighted. It depletes the earth’s resources without concern for the future. Such arguments are totally wrong, ignoring the fact that prices serve to allocate resources through time. For example, if it was forecast that X would run out in a few years, speculators would buy lots of X now in order to sell it later at a higher price. By doing so, speculators conserve X today for use in the future. The higher present price of X would guide people to use X more efficiently and sparingly, and to find substitutes.

Necessity

Finally, for all their hatred of capitalism, the critics have no workable alternative compatible with modern living standards for the common person. The more the market is hampered by government interventions, the worse off the common person will be. And there are no non-market alternatives that could sustain modern society. Society is a bottom up, emergent order, incompatible with top down management.

Conclusion

But if all these claims of the anti-capitalists are false, why are these ideas so popular? Why have the correct ideas not slowly gained acceptance over time? Evolutionary psychology provides the answer: the aversion to capitalism is an artifact of our evolution in small communal bands. In the world of our distant ancestors, such things as zero-sum thinking and judging actions based on their intentions were pretty good rules to follow. But in the modern world, they are wholly inaccurate and can only serve to stand in the way of progress for the bulk of humanity.

The claims of the anti-capitalists are not only completely false, but totally backwards. Capitalism is the product of a society where each is free to live and associate as they wish. Interventionism and socialism depend on government force and are thus inescapably exploitative. Capitalism, far from impoverishing the masses, enriches them at an incredible rate. Far from being unsustainable, capitalism allocates resources optimally between present and future.

Capitalism is the optimal social arrangement on both moral and practical grounds. But if people are bound to believe otherwise because of their evolved preferences, then a counteracting educational program is of utmost importance. The ideas are simple yet powerful, but the challenge is to get them heard.

 

 Economics, Libertarian Theory  Tagged with: , , ,

Recycling is Wasteful

 Posted by at 10:27 am  2 Responses »
Oct 302011
 

“Everybody got a gri-gri.“ In their Bullshit episode on recycling, Penn and Teller call out recycling for what it is. When I first heard the economic arguments against recycling, I couldn’t find fault with the logic, yet it was extremely difficult to swallow. Recycling just seems so obviously good; to question it seems beyond the pale. But truth trumps feelings, and so I made the tough adjustment to my views on recycling. This gri-gri is so powerful that I still feel a twinge of guilt when I trash recyclables.

In retrospect, the argument that recycling actually wastes resources follows from very basic economics. In the profit and loss system of a market economy, if a firm is unprofitable (and there are no externalities), it means that the resources it uses have more valuable uses elsewhere. Other firms can use these resources to make products that consumers value more highly (they’re willing to pay a price that covers the cost of the resources). In other words, the outputs are less valuable than the inputs—resources have been wasted. These resources could be any inputs: natural resources, land, labor, etc.

Government recycling programs are instituted precisely because it is unprofitable to operate a recycling business (for the typical consumer recyclables: paper, plastic, glass, cans, etc. Industry profitably recycles all the time.) This could be a result of government providing free landfills, which disguises the real cost of trash. But in reality, the cost of landfills is relatively small compared to recycling, so even in a world of private landfills that charged for trash, it would still be unprofitable to recycle. Further, modern landfill technology makes externalities insignificant, so the costs are fully borne by the landfill operators. And landfills only take up an insignificant amount of space relative to the space available on Earth.

Thus, we can conclude that unprofitable government recycling does not save resources; it actually wastes resources! The costs of recycling (labor, truck fleet, processing plant, etc) exceed the value of the recycled materials. We would be better off putting our waste in landfills and using those resources elsewhere, where they can more effectively satisfy consumer wants. So don’t feel bad about using the trash, you’re the one who’s actually saving resources.

Further learning

 Economics  Tagged with:

Expressive Non-voting

 Posted by at 10:41 am  1 Response »
Oct 022011
 

In Bryan Caplan’s book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies, he explains how voters are “rationally irrational”. Since the probability of any single vote influencing the outcome of an election is vanishingly small, there is no incentive for voters to spend time informing themselves in order to vote wisely. So rather than vote for the best policies, voters indulge (rationally) in expressive voting (“irrational”), e.g., showing support for an ideal/party, or being part of the democratic process for its own sake.

Libertarians often don’t vote because there are no candidates that represent their principles. Furthermore, many libertarians dislike voting and would prefer not to participate in a coercive political process even if it is democratic. So libertarians are often expressive non-voters. Since our individual votes won’t make any difference, we may as well not vote—to express our objections to the coercive nature of democracy (as well as its non-trivial practical failings.) This way, when people bring up the topic in conversation, we can explain why we don’t vote (and why they shouldn’t either.) If other voters are going to vote expressively and ruin policy, then libertarians might be most effective by expressively non-voting.

 Economics, Non-voting, Strategy  Tagged with: ,

The Gods and Clods Fallacy

 Posted by at 6:06 pm  6 Responses »
Sep 232011
 

In the South Park episode, “Chickenpox”, Kyle wonders why Kenny’s family is so much poorer than his. Gerald tells him that a functioning society needs “gods” to do the high-skilled work and “clods” to do the low-skilled work (see clip).

This is a fairly common economic fallacy. To prove it’s false, I’ll show that in a society of all “gods”, people would still do the low-skilled work, and furthermore that low-skilled wages wouldn’t be any lower than high-skilled wages.

Assume that everyone is equally highly-skilled and that there are high-skilled and low-skilled jobs on the market. Because of competition, wages are determined by productivity: employers bid wages up to the point where they are equal to the value the employee contributes to the firm (the discounted marginal revenue product). You might think that the high-skilled jobs will pay more since they are more productive, and this is true, but this arrangement can’t last. Since everyone is equally skilled, they will flock to the high-skilled jobs, increasing the supply of high-skilled labor, and lowering its wage (this is because of diminishing marginal productivity: the productivity of high-skilled jobs decreases as their number increases). Similarly, the supply of low-skilled labor will fall, increasing its wage.

This process will continue until the two wages meet. To see why, suppose the low-skilled wage is less than the high-skilled wage. Then it pays for those in low-skilled jobs to take high-skilled jobs by bidding down those wages, which also has the effect of increasing low-skilled wages. So wages will be equal across the board.

But doesn’t this contradict the fact that wages are determined by employee productivity? No, because of diminishing marginal productivity and the prices of the goods produced. As more people take high-skilled jobs, the productivity of each additional worker falls (marginal productivity). This is because, with only a few workers,  they can just do the most productive work. With many workers, they will also be doing less productive work, diluting the productivity of high-skilled labor. Similarly, with few workers in low-skilled jobs, they just do the most productive work.

A further effect comes from changes in the prices of the goods they produce. With many people producing high-skilled goods, their price falls (as a result of increased supply), reducing the productivity of high-skilled labor. With few people producing low-skilled goods, their price rises, increasing the productivity of low-skilled labor. For example, if there were very few gas station attendants, their wages would be quite high, so high in fact that it may become cheaper to automate the job with technology (as has happened with gas pumps and is happening with checkout lines).

So even though the gas station attendant does the same work, he becomes more productive (in the economic sense) as the general productivity of labor rises. As more and more people leave the gas station attendant profession for more productive jobs, the remaining gas station attendants become more valuable and their wages must rise to compensate them for the opportunity cost of taking a more productive job.

In a world with large variations in individual productivity (with both “gods” and “clods”), people do the work they are most productive at and are paid accordingly. And if nobody is willing to take a job at a given wage, then that wage will have to rise, or the job might be automated if that is cheaper. So general increases in productivity benefit individual clods because their opportunity cost, and hence their wage, rises.

 Economics  Tagged with: , ,

Sacrificing the End to the Means

 Posted by at 9:27 pm  5 Responses »
Jan 012011
 

In Economic Sophisms, Bastiat tears the protectionist arguments to pieces and makes a powerful case for freedom of trade. In particular, he exposes the widespread jobs fallacy that pervades so much of the popular press and political discourse.

The jobs fallacy is the belief that job creation promotes prosperity. It just seems obvious that more jobs means more prosperity: more jobs means more income. Politicians are constantly clamoring about job creation. But there’s a subtle error here. Bastiat points out the absurdity of this argument.

Labor is a means to the end of consuming goods. The means is not the end, and all value derives from the end. Labor itself does not make us prosper—the results of labor are what we consider prosperity. Labor itself impoverishes us—it is costly: at the very least we lose leisure time. We only engage in labor because we expect the products of labor to enrich us more than the labor impoverishes us. What we’re after is to make a profit—a surplus of enrichment over impoverishment. We want to maximize the ratio of product to labor, of output to input, of result to effort. Keep reading...

 Books, Economics  Tagged with: ,

Evolutionary Psychology and the Antimarket Bias

 Posted by at 10:11 am  7 Responses »
Sep 152010
 

My article was published today as a Mises Daily. Following Paul Rubin, I argue that the antimarket bias is a cultural universal, a genetic leftover from our evolutionary past. Check it out:

Evolutionary Psychology and the Antimarket Bias

 Articles, Economics, Education, Strategy  Tagged with:

Tariffs are Taxes and Taxes are Tariffs

 Posted by at 8:20 pm  1 Response »
Jun 252010
 

Economists are united in support of free trade. Free trade brings great benefits: productivity is increased due to greater specialization from division of labor and all participants enjoy gains from trade. Any restrictions on trade move us away from this optimum. To the extent that beneficial trades are foregone, prosperity is sacrificed and waste is promoted. But the logic of the argument applies not only on the level of nations—it also applies with full force on the level of individuals.

The argument for free trade is a simple, logical proof. Trade is defined as voluntary exchange. From this it follows that all trades are mutually beneficial (ex ante). In other words, each party in a trade expects to benefit. If this were not so, then the exchange would not occur. Nobody will make a trade that they believe will leave them worse off. One would only make a disadvantageous exchange if it were involuntary—but this violates our definition of trade as voluntary exchange. Evidently, if all trades are undertaken because both parties expect to benefit, then any restriction of trade can only serve to eliminate gains from trade. Unrestricted free trade maximizes prosperity. This follows directly from the logic of voluntary exchange.

Now, if economists contend that tariffs are bad because they eliminate mutually beneficial exchanges and breed inefficiency, then they must also oppose sales taxes. For what is a sales tax but a tariff on trade between individuals? Sales taxes increase the cost of trades, eliminating mutually beneficial exchanges. They discourage specialization and trade, and encourage inefficient self-sufficient production.

Furthermore, this principle applies to all taxes that add to the marginal cost of production and trade. An income tax, for example, increases the marginal cost of producing for trade (a portion of each additional dollar earned is lost as taxes). This discourages production and reduces prosperity. It also encourages inefficient self-sufficient production (they don’t tax the work you do for yourself… yet). The only tax that wouldn’t harm incentives to produce and trade would be a tax of fixed amount unrelated to income or wealth (also known as a head tax). Of course, taking peoples’s money via taxation harms them, but a head tax wouldn’t do the added damage of reducing the incentive to produce and trade. Needless to say, a head tax would never be implemented in practice, as it would effectively end the welfare state.

In conclusion, if economists are to be consistent in their principled support of free trade, they must also oppose sales taxes on exactly the same grounds. If a tariff is a bad way to raise government revenues, then so is a sales tax. By the same principle, they must also oppose any tax related to income or wealth. These taxes harm the incentives to produce and trade. If economists are not willing to accept these conclusions, then they must also weaken their support for free trade.

 Economics  Tagged with:

Localism

 Posted by at 1:58 pm  12 Responses »
Jun 122010
 

The idea that we should “buy local” or that goods should be produced locally is fairly popular, but economically incoherent. There seems to be two main arguments for localism: 1) that long distance transportation is wasteful, and 2) that local spending benefits the local economy and makes people better off. Both arguments are wrong: localism is wasteful and can only impoverish us.

At the most basic level, all goods are produced locally to some people (at least the producers and their neighbors). Why does the location of production matter at all? A head of lettuce moving in a refrigerated truck is the same as a head of lettuce sitting in the refrigerator of the local store. Transportation doesn’t change the nature of the product. Furthermore, “local” is an arbitrary point on a continuum—is local 100 or 1000 miles? Why not 101 or 1001 miles? Taken to its logical conclusion, localism implies that everyone should be a self-sufficient producer and eschew all trade—it doesn’t get any more local than that. To put it bluntly, localism is a bad idea, based on a non-understanding of the economics of trade. Trades are mutually beneficial (else they would not occur) on all levels: from local to global.

Consider an Alaskan and a Colombian trading salmon and coffee. Despite the great distance separating them, this arrangement is the cheapest way of providing the Alaskan with coffee and the Colombian with salmon. If they were to “buy local” they would have to resort to very costly (wasteful) methods of production (such as greenhouses or cold-water tanks) or forgo the product entirely. Needless to say, they are both much worse off without trade.  The general principle I’ve outlined is that cost, not location, is the key factor. Alaskans can produce salmon at a much lower cost than Colombians, who can produce coffee at a much lower cost than Alaskans. If the savings from using efficient production exceed the transportation costs, then they both gain by trading because they can acquire the other product at a lower cost than if it were produced locally. By specializing and trading, they minimize waste and conserve scarce resources. To forgo mutually beneficial trades because of location is to shoot yourself in the foot.

The economics lesson here is about scarcity. Since resources are scarce, we must economize their use in order to maximize prosperity. By using the lowest cost methods of production, we minimize the amount of resources that are used up in producing goods. This leaves more resources for the production of other goods, increasing our well-being. In other words, the least cost method is the least wasteful method. So rather than worry about where the product comes from, just look at its price. If local goods happen to be cheaper, then they were produced less wastefully. Same for faraway goods. (Keep in mind, however, that this only holds in a free market, as government distorts prices which hides true costs). A lower price means that less resources were used in bringing the product to you (including the resources used up in transportation). This is why so many goods are produced non-locally: the savings from producing in a more efficient location exceed the costs of transportation. We all benefit from these savings by enjoying more goods at lower prices.

Globalization is often smeared as evil, but in truth, it is one of the greatest triumphs of human civilization. Localism is the real evil as it engenders waste, which can only bring poverty. Global free trade is the engine of worldwide prosperity and continues to be one of the most important solutions in the eradication of world poverty.

 Economics  Tagged with:

Clear Thinking About the Minimum Wage

 Posted by at 1:38 pm  15 Responses »
May 242010
 

Everybody knows that the minimum wage is a good policy, right? Problem is, they’re all wrong. Economists proved long ago that price controls can’t work—they only create shortages and surpluses. The minimum wage is a price floor: if it is set above the market wage it will create a surplus, leaving some workers unable to sell their labor. The overall popularity of a minimum wage is perhaps the best example of ecognorance, and it can only be corrected through economic education. Some simple reasoning will go a long way towards clearing up the minimum wage confusion.

Consider the following thought experiment: suppose that the minimum wage is raised to $1000/hour. What are the implications? Evidently, most employers can’t pay that much and they’ll go out of business. If that weren’t so, we could all become fantastically wealthy just by decreeing a ridiculously high minimum wage. Now suppose that the minimum wage is lowered to $0.01/hour. Again, employers won’t pay that wage (even though they’d like to) because other firms are bidding for the same workers, and this drives wages up. The reason employers don’t pay the decreed wages is that wages are determined by supply and demand, not government edict. Firms hire workers with the goal of earning profits, while wages are costs. They competitively bid wages up to the point where the wage (cost) equals the benefit or extra profit gained from hiring that worker. So competition for profits practically ensures that workers get paid according to their productivity, according to the value of their labor. (In economics jargon, they get paid their discounted marginal revenue product.)

Now let’s trace out the effects of an increase in the minimum wage on the employers affected (e.g., those hiring unskilled labor). First, the increased labor costs lead some firms to lay off workers and others to shut down, since demand for their goods and hence their prices have not changed. But the downsizing and shutdowns reduce the supply of the goods, increasing their price. This new, higher price justifies the higher wage for those who kept their jobs, since they are now producing a more valuable product. The end result is that some workers lose their jobs, while the rest enjoy the higher wage. Consumers lose because prices are now higher.

Since workers are paid according to their productivity (like all factors of production), all the minimum wage does is to make it illegal to buy or sell labor beneath the price floor. The government is essentially saying: “You must be this productive to legally work in our country.” This is most harmful to the least skilled of workers, the ones we want to help most. They will be the first to be fired, and will be cut off from the chance to gain the work experience and job skills needed to earn a legal wage. Allowing such people to work for lower than minimum wages gives them a chance to work their way to a better life. To deny them the freedom to negotiate their own wages and to leave them legally prohibited from working is a moral outrage.

Some clever economists might argue that the minimum wage can increase the total wages paid to all workers. This could happen if the amount of workers unemployed was more than offset by the increased wage. But what is this except human sacrifice?! They would knowingly unemploy the most needy in order to increase the aggregate income of workers. This position is morally bankrupt and an insult to those who genuinely want to help the less fortunate.

In sum, the minimum wage harms the very people it intends to help. It’s a moral outrage that ought to be instantly abolished. Freedom is the best policy to help the poor.

Recommended learning:

  • Gene Callahan’s excellent analogy, in which he compares the minimum wage with a hypothetical “minimum stock price”. Find it in his book, Economics for Real People (free online), pages 189-194.
  • Roger Garrison’s Mises University lecture. You can follow along by downloading his powerpoint.
  • Mary Ruwart, Healing Our World (free online). A great book for leftists, Ruwart shows how government restrictions hurt the poorest to the benefit of the wealthy and politically connected.
 Economics  Tagged with: , , , ,

Monarchy vs. Democracy and The Decline of Civilization

 Posted by at 6:00 pm  49 Responses »
Jun 202009
 

Social decayDespite incredible advances in knowledge and technology over the past few decades, living standards have actually declined (also see here and here). [edit Aug 2010: In retrospect this statement was too strong, living standards are certainly higher today. It would be more accurate to say that the rate of increase has fallen.] Taken alone, this makes no sense—comparable advances in the past, such as the industrial revolution, have sparked enormous increases in prosperity. On top of falling living standards, civilization is crumbling: war, poverty, crime, debt, disease, social dysfunction, family breakdown, hedonism, etc. Why are so many things going wrong, despite unparalleled advances in knowledge and technology? This is the great unanswered question of our time. Keep reading...

 Books, Economics, Libertarian Theory, Market Anarchy, The State  Tagged with: , , , , , , , , , ,
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