Capitalism: Moral, Practical, Necessary

 Posted by Toban Wiebe at 8:51 am  5 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 Toban Wiebe at 10:27 am  No 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:

The Gods and Clods Fallacy

 Posted by Toban Wiebe at 6:06 pm  3 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: , ,