Backing the 1%

I spoke last Thursday in the Cambridge Union on the motion, “This House Believes We Need the Richest 1%.”  I spoke in favour, giving 6 reasons for my support.

1.  The richest 1% feature many people who have provided things to improve our lives. 

These include Google, Amazon, Facebook, Paypal, YouTube, etc.  We use them regularly and have propelled their developers into the top 1%.  They made life easier, more interesting & more rewarding by providing services of value to others.  Even the much-derided bankers have made capital work more effectively and made it more available.

2.  The richest 1% act as an example to others. 

People look at the careers of Elon Musk, Bill Gates, Steve Jobs, & Mark Zuckerberg, and are themselves inspired to develop goods and services that will similarly be of use and value to others. 

3.  The top 1% pay taxes. 

In the UK the 1% pay nearly 30% of all income tax.  The top 3,000 UK earners pay more between them than the bottom 9 million.  Their taxes support schools, hospitals and essential public services.

4.  They give to charitable causes. 

They are the mainstay of many medical & cultural charities.  They fund art galleries, museums & symphony orchestras.  They are helping to conquer disease and suffering.  The Bill and Melinda Gates Foundation is funding the eventual conquest of malaria, a disease that kills an estimated 2m people annually, including 500,000 children.  Warren Buffet has issued the Giving Pledge, for rich people who pledge to give or leave half their fortunes to charity.  Hundreds, including Bill Gates, have signed it.

5.  The top 1% are early adopters. 

They can afford to buy the new gadgets and try out the new processes.  The ones that fall short of expectations drop by the wayside, but successful ones go into mass production, fall in price and become generally available.  It was the 1% who bought the first large flat screen plasma and LCD TVs that are now commonplace and within reach of most people.

6.  The top 1% include those who accelerate the pace of technological advance by putting their money behind adventurous developments. 

Paul Allen made his fortune with Microsoft, and put $25m to back SpaceShipOne, winner of the X-Prize for the first private vehicle to carry people into space.  Elon Musk made his fortune from Paypal, and used it to fund Tesla because he believes that electric cars can enable a cleaner world.  He funded SpaceX, which sends Dragon capsules to the Space Station and is testing ways of landing and refueling its boosters.  He does this to speed up accessible spaceflight.

With more time I could have added more reasons, such as the fact that the 1% help create most of the new jobs that replace ones automated or outsourced.  I concluded by saying that the 1% help make the world a better, more colourful and more interesting place, and that the goods and services they make available enrich our lives.

FIFA and the wider problem of corruption

Sepp Blatter, re-elected as head of FIFA, gained so many first round votes that his opponent withdrew.  Many of those votes came from Africa, Latin America and Eastern Europe.  Not many came from Western Europe and North America.  How could the man be re-elected after presiding over an administration that for decades has involved bribes to delegates and illegal payments by sovereign governments? 

The answer may be simple.  In many of the countries whose delegates gave him votes, corruption is a normal part of everyday life.  You want to do business?  You bribe a bureaucrat.  You want to move goods across the country?  You have cash ready at the police checkpoints.  You want to win a government contract?  You transfer funds into the secret foreign bank account of the President’s sister.  Corruption is endemic, and their people suffer its consequences.  This could be why so many delegates seemed relatively sanguine about its exposure in FIFA.

That corruption is so widespread is a major factor holding back economic growth in developing economies.  The Organization for Economic Co-operation and Development estimates it at more than 5% of global GDP, with the World Economic Forum putting it at US$2.6 trillion, and the World Bank putting the amount paid annually in bribes at over US$1 trillion.

It adds costs to business activity.  The kickbacks have to be factored into production costs, raising prices and therefore reducing the volume of activity.  Less wealth is created than there would be without it.  Corruption is like a tax, but a particularly toxic one because of its covert and unpredictable nature.  Tax incidence is public; it can be calculated and taken account of; but no-one publishes tables of bribes that will have to be paid.

Corruption causes resources to be misallocated, with contracts being awarded to firms that would not have won them in open competition.  Bribes to ministers lead to construction projects for which there is no genuine market demand.  Those with access to decision-makers, and with resources to bribe them with, are advantaged at the expense of those lower down the social scale with neither influence nor resources.

Because corruption is illegal, its prevalence undermines respect for the law.  It also corrodes the public trust that is part of the background of successful market economies.  The only antidote to it is a government with the moral integrity to uphold the law, and for a legal system that remorselessly exposes and punishes the perpetrators.  The FIFA scandal is about more than football; it gives us another glimpse into a worldwide problem.

The immigrant’s pledge

I wonder if would-be immigrants to this country might find a readier acceptance if they were to undertake a voluntary pledge similar to this one.  I think most would readily do so.

“I am grateful that you have allowed me into your country to seek a better life.

I promise in return that I will respect your culture and your customs and I will learn your language.  I know that your ancestors fought for centuries to establish freedom of speech and I will support that freedom.  I promise that I will respect the right of others to seek to improve their lives, without regard to their sex or sexuality. 

I will do my utmost to be a good citizen.  I will do my best not to be a drain on your resources, but to make a positive contribution to your economy and to your essential public services through the work that I do and the taxes that I pay.

I will respect your laws and I will respect my fellow citizens and do what I can to prevent harm coming to anyone.

I will try to live my life in such a way that I will be a credit to my new country, so that those who allowed me to come here and contribute to its future will be glad that they did so.”

Debating the death of capitalism

I took part last Friday in a debate at Durham University Union on the motion that “This house welcomes the death of capitalism.” I opposed it, of course, arguing that capitalism has not died, is not dying, and probably will not die. I argued that two of its central elements went with the grain of human nature: investment and exchange. I suggested humorously that the first caveman who fashioned a bone hook invested time he could have spent happily hunting mastodons in order to gain greater rewards in future. This is like the child who chooses two chocolates tomorrow rather than a single chocolate today, or the investor who forgoes the pleasures that spending £100 might bring in order to have £105 to spend next year.

Investment is one way in which people better their lot. Another, I said, was exchange. When the caveman swaps one of his bone hooks for a fur offered by a hunter, both gain something they value more in exchange for something they value less. Each gains value and wealth is created. It was these two elements, I remarked, that had enabled capitalism to generate unparalleled wealth for humanity, the wealth that has lifted billions out of starvation and subsistence, and has paid for medicine and sanitation, the arts and education. It has doubled life expectancy within a century, and has meant that far fewer children die in infancy, or mothers in childbirth. Capitalism survives because of what it enables us to achieve.

I dealt with two things that capitalism is not. The first is cronyism, where big business gets into bed with government to secure special measures that enable it to exploit the public instead of competing fairly for their custom. The second is fraud, where bankers illegally fiddle interest rates, where Enron swindles its shareholders out of billions, or where Bernie Maddoff steals from his clients. This is not capitalism; it is criminality, and both of these practices need vigilance to thwart them.

People have asked “What will come after capitalism?” I replied, “Capitalism,” pointing out that after each crisis it is modified so the same mistakes are not repeated. It evolves and learns, as humans themselves do. We should not applaud its death, I said, but celebrate its continued life.

The students came down on the side of capitalism by defeating the motion.

Economic Nonsense: 50. Capitalism is unstable, subject to periodic crises, and should be replaced

Capitalism is not a fixed thing, but rather a process which develops and changes in response to changing conditions, and especially changing technology.  To say it is unstable is basically to say that it changes.  It is not by its nature stable.  The capitalism of the 21st century is very different from that which prevailed at the beginning of the 19th century.  It evolves as circumstances change, adapting itself to cope with the new realities that present themselves.

It is certainly subject to periodic crises.  The business cycle has long characterized it, with economists divided as to its ultimate causes.  Periods of growth are followed by periods of a sluggish or even contracting economy, with some observers suggesting that this is a good thing, helping to weed out underperforming businesses and redirect their capital to newer and more successful ones.

Over and above this cyclical behaviour, there are occasional crises that seem to threaten the whole basis of the capitalist economy.  The Great Depression was one such period, and the 2008 recession was another.  Critics look for some alternative that lacks these wild and damaging fluctuations.  No-one has yet produced a better system.  For all its flaws, capitalism is the best way humans have found to generate wealth and to allocate resources.  Even including its great crises, it has still produced steady average growth in developed economies for the best part of two centuries.  In less developed economies it has recently produced growth and wealth on an unprecedented scale.

Capitalism learns from these crises.  It adjusts itself.  Governments learn from the mistakes that led to them, and devise new rules to prevent the same happening again.  Capitalism develops and adjusts, renewing itself each time.

When the 2008 crisis came, critics prematurely celebrated capitalism’s decline and wondered what might follow it.  The answer was capitalism, modified to prevent countries repeating the mistakes of the past.  It is certainly imperfect.  Most institutions made by humans are subject to the frailty and imperfection of humanity.  But they can improve by learning from their mistakes and adapting, and this is what capitalism does and why it endures.