Distribution of Costs

November 30, 2010 | MAX'S OPINIONS

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“Capitalism is like a nuclear reaction.  Both have many potential benefits and both, uncontrolled, can cause much death and destruction.  Social safety nets like unemployment insurance, social security and aid for dependent children are to capitalism as control rods are in a nuclear reactor – they control the immense force and channel it for good and peaceful uses.”  Me in a conversation in 2004

Redistribution of Costs

There has been a debate and a war between the forces supporting Capitalism and those supporting Socialism.  In the past there were ideologues in both camps.  The ideologues in the socialist camp have come to realize that pure socialism doesn’t work but in the capitalist camp, the belief in the power of pure capitalism persists.

I believe that truly the best economic system is a blend of capitalism and socialism.  I believe in Keynesianism.  There are a number of life experiences that reinforce my belief, but a distinct classroom example is reading Upton Sinclair’s “The Jungle”.  The Jungle was a turn of the century book about the horrible working conditions and unsafe food processing in Chicago slaughter houses and how an immigrant worker who came to America to find a better life was used and chewed up by the horrible working and living conditions in American cities and factories at the turn of the 20th century.  It was a dramatic but not unreal example of life in laissez faire capitalism.

Being in the workforce, I learned two things about wealth in a capitalist society; 1) in general, people with a little money were more likely to take risks than people with a lot of money; and 2) business people with a lot of money had a huge advantage in the marketplace.  Concerning the first bit of knowledge, I’ve tried to raise money a number of times in my life.  It’s the fate of us poor entrepreneurs – getting other people’s money to invest in your business ideas.  It was much easier and I had much more luck getting capital investment from people that had $10,000 to $100,000 to invest than people who had millions.  When you have a little money, you want to get into the millionaire status -when you have millions, you are afraid of losing your fortune.  As for number 2, it should come as no shocker that capital is an advantage in a capitalist society.  You can make mistakes and keep on going.  You can take advantage of new technologies easier than poorer competitors, you can hire the best and you can use your money to drive out competition.  Just recently, a company came into Washington State and bought two properties in my market.  The company didn’t know enough about our specific industry and made many mistakes.  They just closed the two properties, losing probably over $1,000.000, and plan on “retooling”.  To them it was just a bump in the road.  To me, it would have been terminal.  Many good companies have failed because of being “under Capitalized”.

Consider two companies in the identical business – say lumber mills.  Both companies pay the same for raw materials, power, and shipping.  Both companies have the same number of employees.  Company C decides to save some money so they turn the heat down to save utility costs, pays 25% less and stop vacation and sick pay.  Company S keeps the working conditions comfortable, and pays more including vacation and sick pay.  Company C reduces cost so reduces finished lumber prices and starts to outsell Company S and pay more profits to their stockholders.  Company S’s stockholders start to scream.  Not only are they not making profits but they are in danger of going out of business.  Even though management would like to keep the work environment and wages high, they are forced to cut benefits and pay or go out of business.  Sometime later, Company C isn’t making the profits they are used to; so the pressure is on to reduce pay and benefits further and so on until the workers are squeezed to the bare essential minimum.  If this seems far-fetched, it’s not.  It happened all through Capitalist history and exists in much of the world today.  The system is grinding.  Businesses are always forced to cut costs, to get more out of their workers – squeeze their workers.  Stockholders demand profits, competitors are looking for a weakness, customers are more demanding.  The business that can get more production out of their employees for less pay can charge less and control the market.  The business that can get away with dumping their waste products on an unsuspecting society, rather than environmentally responsible ways, has a cost advantage.   Laissez faire capitalism is brutal and it squeezes middle class income so people don’t have as much money to spend.  Capitalism without controls reduces the middle class and increases the disparity in the distribution of income – which also decreases consumer spending.

Another issue is the lack of central planning.  When a new market presents itself, many competitors surge in, irrespective of what others are doing and the market becomes overcrowded.  Many of the herd then fail.  I know that’s considered a strength of capitalism but all the losers lose their capital – capital and labor that could have been used productively in other ventures if there was some central “clearing house” for entrepreneurial ventures.  Think of World Com and other world wide communication providers.  They were all laying inter-continental fiber optic cables irrespective of what their competitors were doing.  Before you know it, we have excess international communication capacity and companies can’t pay their debts – huge bankruptcies shake the world financial system.  Some sort of industrial policy could prevent this waste but at what cost.  All-in-all, I think this waste is a fair cost for letting the magic of the market place, instead of a government bureau, determine our direction….. but keep in mind; it’s not a clear cut choice….. think of China.

Another big problem with pure capitalism is the huge booms and busts it creates in the economy.  When times are good they are very good but without government regulations, soon some economic scandal threatens to bring down the whole system.  Without government regulation, too big to fail companies can get “too big to fail”.  Unfettered capitalism results in big companies swallowing up little companies.  A “dirty secret” of the rich is that many of them actually like booms and busts; they like a good recession now and then.  Sure they take a hit on some of their investments, but they are liquid enough to more than offset any losses by buying up properties, businesses and stock for pennies on the dollar.  In Snowball, Warren Buffet tells of some losses when the economy goes bad, but he always emerges much richer after a period of expansion than he was before the business cycle.

In a pure capitalist society, the rich get richer.  As the rich get richer, they become more “risk averse”.  In a pure capitalist society, the distribution of income becomes more divided.  As the divide grows, the middle class shrinks.  The wealthy have little need to risk their fortunes on new business projects and the economy stagnates.

Right Blend

So what’s the right blend?  In the early 1900s, amid social strife and class warfare, some nations moved to socialism/communism and some nations moved to fascism.  Keynesian economic theory led to a third way; a way to save capitalism by modifying capitalism with social controls and safety nets; by redistributing tax burden on those that received the greatest benefit. 

Most people will prefer some government and some free enterprise rather than an extreme economic system of all government or all free enterprise.  Most people feel the government should run the military.  Most will agree that the public school system has produced a legion of educated citizens that would not have happened in a private system where only the rich could afford schooling.  Most people like our national highway system and the electricity from a dam system and rural electrification.  Most people think the government should stay out of the commercial market place, let small business flourish, or fail unfettered.  Let’s not have an “Uncle Sam’s” restaurant.

Most of the time people are for free markets – except farmers when they want price supports or when business wants subsidies or trade barriers or big defense suppliers who want “no-bid” contracts, and guaranteed profit margins.  Except people who live next to or downstream from waste plants.  Except people who work in unsafe industries or plants. 

Let’s face it, most people want government off of their backs, but they want government watching the other guy.  Just like most business people are against monopolies, except for themselves.

Who benefits most from government, you or Bill Gates?  Who should pay the most taxes?  Do high tax rates on the rich make them work less, or more?

Microsoft/Gates benefits from our education system (more schools teaching how to use computers), from our infrastructure, roads and airports to ship products, a graduated income tax so more people can afford Microsoft products.  Micro/Gates even benefits from military spending – defense protects Micro/Gates’ $100 billion dollar empire… as well as your $150,000 house.  Who should pay more…. And whose kid is more likely to die in the military.  We don’t see the former Haliburton CEO’s kids going off to war.

Instead of income redistribution, what we’re really talking about is redistribution of costs – those that have gained the most, pay the most.  The magical thing, the “Keynesian miracle”, is as the beneficiaries of our system pay their share and more people become educated and more positive infrastructure projects get built like the federal highway system, rural electrification, and the internet, the more everyone benefits – rich as well as poor.  A rising tide does lift all boats, but supply side trickle-down theory is more like a rain storm that sinks the poorer boats.

Government works….. sometimes.  When was the last time you heard someone worry about the depletion of the ozone layer?  Government worked.  What about air and water pollution?  Where would we be environmentally without government intervention?  Did you use the internet today?  Among others, thank Al Gore for sponsoring the internet funding bill in Congress.  The internet as we know it was largely a government program.  Do you trust that hot dog, steak, can of corn or container of sour cream?  Government works, we just don’t think about it when it works.  We complain about the pothole, we don’t praise the smooth pavement.

Could government be better?  Absolutely.  As a liberal, I am harder on the bureaucracy than conservatives.  I want that bureaucrat to work and be efficient.  The conservative expects and wants government to fail. 

Let capitalism do what capitalism does.  Capitalism and free choice rule the market place.  Let’s keep the battle going about the role of the free market and the role of government in the economy.  But let’s be honest and not exaggerate or lie about each entities role.  Agree that we let capitalism reign but with social controls.  Let the pendulum swing, but let’s learn as we go and the pendulum’s arc between swings towards more government or less government will be ever decreasing until one day, our society will strike the right balance and the pendulum will be still.

Shock Doctrine

In the “Shock Doctrine” by Naomi Klein, she talks about planning by free market capitalists to impose privatization when a nation is in either planned or unplanned shock.  In one section, Klein talks about the effect on competitive economic ideas of the fall of the Soviet Union.  “Without it (Soviet Union), capitalism was suddenly free to lapse into its most savage form, not just in Russia but around the world.  With the Soviet collapse, the free market now had a global monopoly, which meant all the ‘distortions’ that had been interfering with its perfect equilibrium were no longer required.”  Pp. 318

With the fall of the Soviet Union the gloves were off.  No more mister nice capitalism.  It could return to its proper form, the capitalism of Marx, Dickens, and Upton Sinclair.  Markets are King; whoa to the slow, the weak, the unlucky.  Whoa to those born in impossible circumstances, those who lost the conception lottery.

What I don’t get

I don’t get why no one is just saying, “we are Keynesians”.  What we need is an economic system where the Federal Reserve, the Treasury Department, the White House and Congress are required to follow some Keynesian rules:  no deficit budgets in good times, when the GNP is going up but allow, even mandate deficit budgets in recession.  By acting like there is some kind of “voodoo” system, we allowed the Bush administration to rake up record deficits during an economic expansion.  We did that during the Johnson administration in the 1960’s and what inevitably followed was a decade of stagflation.

Just say “we as a country get it”.  Pure laissez faire capitalism does not work.  We need social safety nets.  Unemployment insurance keeps mouths fed during recessions; plus, it gives a certain mobility of labor.  Sometimes workers find better jobs while on unemployment.  They have a little time to find a spot where there productivity is higher.  So many people are underemployed; if more people could find a more suitable job for their talents, total productivity in the country would go up.

A similar phenomenon would occur with single-payer health insurance.  People who hate their jobs or are under-employed often stay there because of insurance.  If they had freedom to move, our total national “utility” would go way up.  People would have freedom to move to more satisfying jobs and still have health coverage.

In Conclusion:

 In Keynesian theory, the government should run a surplus in good times and a deficit in bad times.  This smoothes out the business cycle.  In bad times, individuals don’t want to spend.   Indeed in the great recession in of 2008, every personal finance advice you heard on TV was, “reduce your spending”, “cut back on spending”, “don’t use your credit cards”, etc…  If everyone cuts back, the recession turns into a depression; the government must become the spender of last resort.  Paul Krugman’s advice, even into 2010, is for the government to keep deficit spending.

The problem is government should make this up in good times but rarely does.   The Bush administration turned a surplus budget into a deficit, even though unemployment was low.

There should be guidelines – tying the amount of deficit spending allowed to the unemployment rate.

There are a thousand degrees of a mixed economy between pure socialism and pure capitalism.  In a complex world, why would anyone believe that the perfect economic system is pure capitalism and not one of the thousand variations somewhere in between and why the perfect system wouldn’t be different between different cultures?  We need to be honest and narrow down and follow what the best “mixed” system is.

 

I started writing this because I wasn’t able to adequately explain my position

to friends in a 10 minute argument/conversation.  “The third way” just isn’t

that simple.

I have a degree in Economics and wrote my masters thesis on “The Post Industrial Economy”. 

I have continued to read and think about political economy all my life – as a hobby.

You may not agree but appreciate that I’ve spent a lot of time on economic thoughts.

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