capitalism

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

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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.

Economic Nonsense: 28. Capitalism brought about the financial crisis and should be replaced

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Opinions differ on the causes of the financial crisis; some economists suggest it happened because of a combination of several causes. In the US sub-prime mortgages were involved, in that mortgages had been given to some who were poor repayment risks. When these were bundled into other securities, an unknown risk was being marketed, with some institutions heavily over-extended with potentially bad debts. It should be pointed out that it was US government policy to extend home ownership to low income people. The two agencies Freddie Mac and Fannie Mae were both encouraged to do this. The process of 'red-lining,' drawing lines around city zones inside which no mortgages would be given, was outlawed. It might also be noted that most of those who received mortgages, including low income people, continued to pay their mortgages payments and successfully became home owners. Only a tiny proportion were defaulters. It was the unquantifiable nature of the risk that caused problems.

Others have pointed out that the Federal Reserve Bank made a policy of cheap credit. They did this to weather crises and prevent economic downturns. The Bank of England did some of the same. When money was cheap, so was risk, and the message encouraged financial institutions to undertake riskier ventures. It was as if all the traffic lights were stuck on green, and everyone pressed ahead at speed.

The lesson is that governments and central banks were at fault, as were reckless traders taking huge risks to bring greater returns. It was not capitalism itself that brought about the crisis, but rather the inappropriate behaviour of some of the parties involved, including government. Neither was it regulation. With the possible exception of the pharmaceutical industry, the financial sector was among the most tightly regulated in the world. It was unsuitable regulation that sent the wrong messages and brought about wrong behaviour.

Capitalism has not been replaced and almost certainly will not be replaced, in that no-one has found a better way of generating wealth or of improving living standards over the long term. It experiences shocks and crises from time to time, and it is partly a learning process. After each crisis it is modified to prevent the same happening again. But there may well be new and different crises in the future, and new ways will have to be found to deal with them.

Economic Nonsense: 18. Capitalism is disreputable because it is based on greed

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This is a misinterpretation. Capitalism is based not on greed but on the legitimate aspiration of people to better their lives. Adam Smith spoke of "The uniform, constant, and uninterrupted effort of every man to better his condition," and of course it applies equally to women. It is this desire to better their circumstances that leads people to forego present consumption in order to achieve greater returns in the future. They invest in order to increase their wealth. That investment supplies funds to companies and provides the capital which they turn to advantage for the benefit of their investors. This is not greed; it is one of the most benign things that people have done. Far from showing greed to the detriment of others, it gains its returns by providing the goods and services that people want and need at prices they are prepared to pay. It is based not on selfish greed but on co-operation to mutual advantage. The investors make it possible for consumers to satisfy their wants, and they themselves make gains in the process.

Capitalism is benign because it is based on trade, and every act of trade is an exercise in co-operation in which people exchange what they have for what they prefer. Capitalism has to be social; that is how it works. Greed is selfish, not social.

The desire of people to better their lives is part of what it means to be human. We do not adapt to the environment as other animals do; we adapt the environment, and we do it in ways that are calculated to improve our lot. We seek greater security, greater command of the essentials of a decent and acceptable life. Capitalism is the most efficacious way we have yet found of achieving these objectives.

Oxfam, capitalism, and poverty

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After Thomas Piketty's Capital in the 21st Century told us about rising inequality, it's perhaps unsurprising that a new report from Oxfam tells us the global 1% will soon own half of all the world's wealth. But things are not quite as they seem. Oxfam's figures look at net wealth, implying that Societe Generale rogue investment banker Jerome Kerviel is the world's poorest person, and Michael Jackson was afflicted by the direst poverty before he died.

Ivy League graduates about to start a job as an investment banker at Goldman Sachs are judged far poorer than rural Indian farmers with the tiniest amount of capital.

Seven point five per cent of the poorest tenth of the world live in the USA, the figures say, almost as many as live in India.

And the claim that 85 own as much as 3.5bn is even more misleading, since the bottom 2bn don't have nothing, but negative wealth—something like $500bn of it.

What's more the global 1% probably contains more Times readers than CEOs or oil sheikhs—you need own a house worth around £530,000 to enter it.

All these facts skew Oxfam’s figures to make them astonishingly misleading.

Better figures tell a completely different and far more optimistic story.

Global poverty has actually fallen enormously with the rise of global capitalism. The fraction of the world's population living on less than $2 a day (measured in constant dollars) has crashed from 69.6 per cent in 1981 to 43 per cent today.

Even if you take out India and China, where the most spectacular improvements have been made, and look only at Sub-Saharan Africa, the worst-off region, there have been improvements. From 1981-2006 8.6 percentage points fewer were living on under $1 a day and 4.9 percentage points fewer were living on under $2 a day.

In virtually every respect global poverty is falling and poor people are living longer, better lives. That is less sexy than Oxfam’s claims, but at least it is true.

Where should one go to glory in the wonders of the world?

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We were rather taken aback by one of those listicles telling us all about which roads we should drive along as part of that bucket list of experiences before we die. Here is it, you know the sort of thing. Pacific Highway in California, Skyline Drive, yadda yadda. And it's fair enough, they are trying to give a list of scenic routes. And there's many such lists and sure, many of the things on such lists are worth looking at: the Amalfi Drive for example. However, the bit that always takes us aback with these things is that they're always about going to look at Nature. And always Nature, not nature. Those bits of the world that could be and almost certainly were viewed and possibly even enjoyed by our Australopithecene ancestors.

And while nature's (or Nature's) often fun and even impressive it's not that at all which we regard as the glorious thing about the world that we inhabit. Rather, it's the cities of the world that are. A wander down Cannon Street past St Paul's and into the beating heart of the world's markets that is The City. A drive down Park Avenue perhaps, or to view the commodities of the world easily available and reasonably priced upon Oxford Street. Or, dare we say it, a visit to the food section of a shopping mall where more calories are available, at trivial cost in effort and time, that one of those Australopithecenes would have seen in an entire short lifetime.

What really is a wonder of the world? The scrapings in the rocks that the glaciers have left behind or the civilisation that we have built in the past 10,000 years on that rubble?

If that latter, what, in the comments, would be your example of that one piece of it, the apotheosis of it, that all should place upon their bucket list?

Why is Polly whining about Downton Abbey?

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La Toynbee is whining about Downton Abbey. How it shows the appallingness of old English society and how we're coming back to that masters and servants type world again. Hmm:

To control history by rewriting the past subtly influences present attitudes too: every dictator knows that.

Well, yes, quite.

What we never see is bedraggled drudges rising in freezing shared attics at 5.30am; slopping out chamber pots, heaving coal, black-leading grates, hauling cans of hot water with hands already made raw by chilblains and caustic soda. We never dwell on the hardship of scrubbing floors, or scrubbing clothes, or scouring grease; in pre-detergent days, they were up to their elbows all day long. And yet they had virtually no water or time for washing themselves. Servants were often sooty and dirty. They smelled strongly of sweat, with few clean clothes, says Dr Lucy Delap, author of Knowing Their Place: Domestic Service in Twentieth-Century Britain. She says they used patchouli oil to cover the sweat, the identifying aromas of hard service. In Mrs Woolf and the Servants, Alison Light records Virginia Woolf observing “Mabel sweats when she is making jam”. Even the somewhat more enlightened and sometimes embarrassed Bloomsbury set wrote of their “inferiors”, Woolf talking of “that poor gaping imbecile, my charwoman”.

True.

Modern capitalism promotes the myth that we are all masters of our fate and birth is not destiny, as proof that swelling wealth at the top has been earned.

And that's where it jars. For it is modern capitalism that has stopped people having to carry water in chilblained hands. Stopped the scrubbing over the boiling laundry, the wrestles with the mangle. This is what both Hans Roslin and Ha Joon Chang, quite correctly, refer to as the technology of the washing machine. It's possibly the outstanding achievement of modern capitalism that it has managed to mechanise all of these domestic chores, freeing up large portions of the human race to do something more interesting and less exhausting.

The bits that are left out of Downton Abbey are exactly the bits that justify capitalism itself: the reduction in human drudgery. And no, socialism didn't do this: your humble author has been the less than proud owner of a Soviet washing machine and it did not remove said drudgery. This is exactly what is meant by the complaints that the Soviets concentrated upon heavy industry rather than consumer products.

There is, of course, something else that Polly's left out. Historically, in Britain at least, being a servant was more akin to an apprenticeship than anything else. Something done between puberty and marriage for the vast majority of those who did it. Only those who went on to become the senior servants (housekeeper, butler and so on) were likely to make a "career" of it. Being in service was, for most, a phase, not a life sentence.

No, we most certainly don't want to bring back mass service. Quite apart from the fact that the capitalist technology makes it irrelevant as an institution. But perhaps we could do without those who try "To control history by rewriting the past"?

Err, yes Mr. Naughton, this is entirely the point

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John Naughton, over in The Observer, is very worried about, err, capitalists being capitalists. Something of a pity really for someone, let alone a journalist, of his richness in maturity should by now have realised that this is the damn point of it all:

The real lesson of the Uber exposé, though, is that it’s time to discard the rose-tinted spectacles with which we have hitherto viewed these Silicon Valley outfits. For too long, they have been allowed to trade fraudulently on the afterglow of the hippie libertarianism that supposedly infected the early days of the personal computer industry. The billionaire geeks who currently run the giant internet companies may look and talk like a new species of entrepreneur but it would be more prudent to view them as John D Rockefellers in hoodies.

And the economic philosophy that’s embedded in this new digital capitalism is neoliberalism red in tooth and claw, which is why they minimise the number of “ordinary” (ie non-geek) workers on their payrolls, outsource everything they can, despise trade unions, view regulators as barriers to “innovation” and are outraged by the temerity of European institutions that seek to curb their freedoms of action.

Yes, exactly. Companies operate to the benefit of their shareholders. They're also pretty red in tooth and claw when they do so. And if that were all the economy were about then agreed, we consumers might not enjoy the experience all that much. Which is why we do our darndest to make sure that that's not all there is in the economy. The other magic ingredient we look for is competition. This means that we've any number of red in tooth and claw capitalist institutions trying to do the best for their owners and for their owners only. But they can only do this by offering us something that we think is worth it. Their proposition must offer us value: both in the simple sense that no one buys anything at all that they don't think is worth more than they are paying for it and also in the more detailed sense that competition means that the offering must be better than that of those others.

It's competition in the market that tempers that profit lust. Just as it's competition that tempers the inherent inefficiencies and producer capture of formerly monopolistic and non-profit making state services.

On that capitalist side of it this is the very point of the entire system. We want them to be sharp elbowed, nothing but profit seeking, neoliberals. Because only by producing something that we both desire and are willing to pay for can they become those billionaires (geeks or not).

The Civilisation of Capitalism

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In Joseph Schumpeter's (1942) Capitalism, Socialism & Democracy , Chapter 11 is entitled ‘the Civilisation of Capitalism’. There, he argues that the culture fostered by Capitalism has been responsible for the ‘rationalisation’ of society, as we know it. Rather than quoting Schumpeter word-for-word, I’d encourage people to read that short chapter. We can derive inspiration from Schumpeter’s thoughts in making the case for free markets and a free society. Intuitively, one would expect the individual living in a free society to be more intelligent and rational than his counterpart in a hypothetical, centrally planned Utopia (like Plato’s Republic). In a predominantly centrally planned economy, where there is deprivation of civil liberties, choices have already been made on our behalf whereas in a free society, people have more choices. The typical individual in the former will, most likely, be more naïve than his counterpart in a freer society and in the latter more rational. The freer society is, the greater the sphere in which people can develop the appropriate mental faculties for optimising outcomes.

Therefore, total freedom of thought is only really attainable in a free society with free markets. Restricting individuals’ freedoms prevents them from being the best people they can be and therefore prevents the best possible outcome for society as a whole.

It is a fundamental premise in Economics that all economic problems are rooted in the scarcity of resources. In Physics, understanding how to manipulate matter is considered somewhat of a holy grail. A certain depth of understanding with respect to matter would solve the problem of scarcity completely. However, if we indirectly restrict individuals’ thoughts by preventing them from living in a freer society that is conducive to such scientific discovery, we are shooting ourselves in the foot twice since Economics necessarily deals with this problem of scarcity that the other sciences might be able to relieve us of.

In a free society, the enhancement of mental faculties that accompanies increased freedom of thought enables individuals to deal with the problem of scarcity more intelligently, creatively, innovatively and rationally.

This is a case of too little capitalism, not too much

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The latest outrage that the Guardian tells us we should all be upset about is how the poor villagers of Nejapa, in El Salvador, get done over by the greedy capitalists taking all the water: Water everywhere for profit in Nejapa, but few drops for local people to drink While big companies make millions from El Salvador’s water-rich Nejapa municipality, locals have little or no access to water Hmm, gosh, that's bad. There is one very interesting little line in the piece though: Najarro says she pays $7 a month (£4.38; almost 10% of her salary) for municipal water, even though her taps often run dry and the water that runs from them may not be safe to drink. It's the local council that she gets her water through? And a quick look around tells me that pretty much all of the country gets its water through the government. And as Wikipedia itself says:

Tariffs and cost recovery ANDA tariffs ANDA tariffs average US$ 0.30/m³ and are below levels found in many other Latin American countries. Furthermore, ANDA tariffs are not socially equitable since the subsidies implicit in the low tariffs predominantly benefit the non-poor. First, users without access to the network, which are usually the poorest, do not receive the consumption subsidy. Second, users served by other providers than ANDA do not receive a subsidy for consumption. Third, among users that have ANDA service, the poor receive fewer subsidies than the non-poor as a consequence of the tariff structure. Tariffs are for both water and sewer services. As a result, there is a cross-subsidy from users without sewer connection to those with a sewer connection who are usually better off. For political reasons, adjustments of ANDA water tariffs have been infrequent. Between 1994 and 2006 ANDA tariffs were only adjusted twice, in 1994 and 2001. The inflation-adjusted tariff, however, barely changed. Tariffs by other service providers Tariffs paid by water users in rural areas do recover financial operating costs, since no direct subsidies are available. They are often much higher than tariffs paid by ANDA customers. Some rural water users in pumped systems receive a subsidy through the Fondo de Inversión Nacional en Electricidad y Telefonía (FINET), which subsidizes electricity tariffs. Cost recovery of ANDA The financial situation of service providers in 2006 did not provide any more for self-financing of investments. ANDA's working ratio was close to 1, indicating that the company barely covers its operating and routine maintenance costs. The reason for the reduced self-financing capacity is a significant increase in the unit costs of ANDA from US$0.21/m³ in 1994 to US$0.46/m³ in 2001, and US$0.63/m³ in 2004. The reason for the important increase of the unit cost in 2004 is not clear, but it could be due to the inauguration of the energy-intensive Río Lempa system that pumps water from the Rio Lempa to San Salvador in that year.

So, the government charges very little for water but this doesn't help the poorest as they're not even on the water system. And so little is charged for water that they're not able to actually build out the water system simply because they've not the money to do so. And this might also have an effect upon how much water there is to go around:

It is estimated that 90 percent of the surface water bodies are contaminated. Nearly all municipal wastewater (98 percent) and 90 percent of industrial wastewater is discharged to rivers and creeks without any treatment.

They "treat" sewage by dumping it in the nearest river. This is not a problem of excessive capitalism: this is a problem of too little capitalism. Recall what happened in our own water systems, here in Dear Old Blighty, when the nationalised water companies were sold off. Investment went up, water quality went up, environmental degradation went down. It's entirely true that in theory a government could, possibly, determine the optimal investment levels in a natural monopoly like water and sewage services. And that there's an argument why government should do so. Actual experience though seems to show that governments tend to allocate less than that optimal level. Which is why privatised systems almost always show a rise in the level of investment. Too little capitalism here, not too much.

Something a little odd in Russell Brand's Revolution

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We clearly weren't going to get a deep and complex understanding of economics in Russell Brand's little manifesto for a better world, Revolution. Nor, given that his amanuensis appears to be Johan Hari, should we have expected one. But to get the result of one of the more famous psychological/economic experiments the wrong way around is still pretty impressive:

Slingerland explained, between great frothing gobfuls of munched hazelnut, that this inherent sense of fairness is found in humans everywhere, but that studies show that it’s less pronounced in environments where people are exposed to a lot of marketing. “Capitalist, consumer culture inures us to unfairness,” he said. That made me angry.

The anger there is justified. For all of the experimental evidence points entirely the other way, that capitalist, consumer (the two being linked because only this capitalist free marketry has ever produced a society where consumerism is even possible) cultures show vastly increased senses of fairness. It's actually one of the things that makes them work.

In the closely related ultimatum game one player is given some sum of money to split (say, $100). Player one can decide how that split is to work, 50/50 or 99/1 and anything inbetween or the other way, their choice. Player two the decides whether to accept that split at which point both participants get their cut of the cash. If player two rejects the split as being "unfair" then no one gets anything.

The standard results (usually those results come from rather rich Ivy league students playing each other as that's the group that professors tend to have access to) indicate that there is an inherent "fairness" bug built into human behaviour. If player one moves to something like a 70/30 split (and it's worth noting that no one ever offers better than 50/50, there's just no 40/60 splits out there) then the odds of the deal being rejected soar.

People really are willing to punish themselves to enforce some idea of fairness.

And that's where the usual analysis stops: people are fair so capitalism Yah! Boo! Sucks!

However, some researchers have started to play this very same game with people who are not rather rich Ivy League students. And the results in non-capitalist, non-market and non-consumer societies are very different. Here people act more like the conventional game theory would expect: when offered a 98/2 split player two will take it. Heck, it's 2 free dollars, why not? People in non-capitalist and non-consumer cultures do not seem willing to pay a price themselves to punish perceived unfairness.

All of which shows us that capitalist consumerism brings with it (or, as certain researchers posit, the behavioural change is what makes capitalist and free market societies work, that understanding about the quid pro quo) a heightened sense of fairness and equity, not a lowered one.

As I say, we'd not expect Brand (or Hari) to get their economics correct but to get it 180 degrees the wrong way around is still pretty impressive.