Hey Folks, Capitalism is a Good Guy!

Here’s a very good read on the virtues of capitalism in today’s Wall Street Journal from Charles Murray. A snippet:

From the dawn of history until the 18th century, every society in the world was impoverished, with only the thinnest film of wealth on top. Then came capitalism and the Industrial Revolution. Everywhere that capitalism subsequently took hold, national wealth began to increase and poverty began to fall. Everywhere that capitalism didn’t take hold, people remained impoverished. Everywhere that capitalism has been rejected since then, poverty has increased.

What happened to turn the mood of the country so far from our historic celebration of economic success?

Murray goes on to answer that question. First, he blames it on collusive capitalism — which he breaks into two parts: crony capitalism and government collusion.

He also assigns blame to those with earned success who are unwilling to defend themselves because they have a liberal mindset and seem embarrassed by their good fortune.

I’ll add to those thoughts.

People often mistake collusive capitalism for capitalism. They cannot separate the crony and collusive parts from capitalism itself. I think it would be clearer if we take the word capitalism out of the description and simply call it cronyism and collusion.

As Milton Friedman pointed out in this video, all societies have greed. Greed is not unique in capitalism. It is human nature. If all we had was capitalism and greed, we’d be okay. Capitalism directs greed into productive pursuits that benefit others. That results in earned success. As Murray points out, that is embodied by Steve Jobs, Thomas Edison and even Mitt Romney.

But greed also leads to cronyism and collusion. That is toxic. Rather than earned success, that leads to bending the rules (i.e. reducing the our freedoms) to gain unfair advantages. Those are embodied by the fat-cat, cigar-smoking, well-connected folks that feed our images of capitalism gone awry. This means that it was illegal for me to willingly assemble bikes for a local bike shop owner when I was a kid. I was underage and made less than minimum wage. The third parties who passed those laws might say that bike shop owner was evil, or that I was taking away job opportunities for others. But for those involved — myself, the bike shop owner and my parents — the arrangement worked out well.

But the key insight is that real capitalism is the best check against those rent-seekers, it’s not the cause. Neither is greed by itself. Cronyism and collusion are the causes.

Capitalism is the conjured, tabloid and propagandized evil. The way our society treats it reminds me of the fictional propaganda war waged against Harry Potter in the final book of J.K. Rowling’s popular series. The evil folks were in charge and spun everything they could to make Harry Potter look like the bad guy. They even had the media on their side, as the magic community newspaper, The Daily Prophet, wrote regular and unbalanced screeds against the evils of Potter. With J.K. Rowling’s brilliance, she made those screeds remarkably similar to the reporting we see here in the muggle world.

Spend once shame on you, spend twice shame on us

 

I rarely disagree with Russ Roberts at Cafe Hayek. But I disagree with what he wrote in one of his recent posts:

Many people have excoriated President Obama for suggesting that entrepreneurs can’t claim credit for their success.

It appears that many of these critics have taken the President’s remarks out of context. (Full text here.) Never mind. Even out of context, the critics are wrong and the President is right.

Of course no one creates a business on their own. And yes, government played an important role as the President suggested–creating the schools that educated your workers (often poorly, but I’ll give him the benefit of the doubt), the roads that your product traveled on, the bridges your trucks crossed, etc.

First, I disagree that the critics have taken his comments out of context. The two sentences of the President’s in question are:

If you’ve got a business. you didn’t build that.  Somebody else made that happen.

Adding the full context of his remarks doesn’t change the meaning of these two sentences.

He repeats the same point twice in two sentences. To be in line with the rest of the speech, these two sentences would have looked more like:

If you’ve got a business, you didn’t make that happen all on your own. Others helped you make that happen.

Second, I disagree with Roberts that even with the straightforward meaning of these two sentences, that the President is right. He’s not.

I do believe that we tend oversimplify success and I agree there is usually more to the story than somebody who made it all happen on their own.

But to agree with these sentences, “even out of context”, I do not.

Russ Roberts has written books. Certainly, he couldn’t have done that without the help of a lot of people. The ideas presented in those books were not his own. Russ didn’t make the paper or ink or printing presses. He probably had a copy editor and colleagues who read the manuscript and offered suggestions. And, while writing the book he drove a car made by others, over government bridges and typed on computers built by others.

No disagreement there.

However, without Russ Roberts, those books would not have happened. He DID build that and nobody else made that happen for him. He took all the same inputs available to rest of us and shaped them into something that wasn’t there before and added some value in the process.

I do agree with the key point of Russ’s post, however. Government spending is out of control. This is a problem that needs to be addressed. I don’t like the idea of feeding this problem by taking more from the most productive members of society.

Thomas Sowell stated the obvious here:

Did the taxpayers, including business taxpayers, not pay for that road when it was built? Why should they have to pay for it twice?

Let’s quit busting the balls of successful business people. They pay their share for government and they create products that create value for the rest of us.

It’s inconsistent to bust their balls and complain about lack of jobs at the same time.

It’s time we start holding our government officials accountable. Successful business people are held accountable by their customers. If they make valuable things, customers buy and generate profits. If business folks spend more than the take in consistently, they fail and go out of business.

When government officials spend more than they take in, they whine about the wealthy not paying their fair share so they can take even more from them and spend even more.

Why do we listen to them? Why can’t we look objectively at their spending records and realize they have been woefully irresponsible?

 

Ron Johnson Termination Watch

How long will it be before the JC Penney board fires Ron Johnson?

I’d say it’s getting close.

First, without evidence to support his decision, last December he overhauled the company’s price strategy. Many people would agree that Johnson’s ‘everyday-low-prices’ change sounded reasonable, except for it would seem, customers.

In the first quarter of Penney’s new pricing strategy, sales tanked. As is typical with such leadership failures, rather than admitting a mistake and reversing course, Johnson entrenched himself with his strategy by saying it will take 3-years to see a difference. Good luck with that.

I’ve seen other leaders make the same claim. They usually weren’t around long enough to see if they were right.

As a true measure, if you believed Johnson made the right call, did you buy more stuff at Penney’s because of its new pricing strategy? Why or why not?

I have a characteristic that most CEOs don’t have. I can admit that I don’t know. Johnson’s strategy may have been a good one. But, if I were running the company, I wouldn’t make a wholesale change unless I had strong evidence that it would help.

JC Penney has enough stores that they could change the price strategy in a few and see if it helps or hurts profits. That’s called a randomized market test or field trial.

I believe shareholders pay managers to put their egos aside and use the resources they have to figure out how to make the best decisions for the company, decisions that please the customers and generate more revenue and earnings for shareholders.

Often, however, boards of directors are attracted to the cowboys who throw caution to the wind and make BOLD changes based on their gut instincts. It’s unfortunate that those board members rarely lose their jobs. So goes the woes of corporate governance.

Johnson now has a new idea. Seems right up his alley, coming from Apple. It’s tech related.That’s a typical move from a failed CEO. Move to your strength after you blow it on something else.

But, it’s a red herring. He hopes his cool new idea will take your mind off his previous rotten idea. He wants to use technology to get rid of cashiers. Kind of neat (unless you like your job as a cashier). But, will that cause you to want to spend more money there? I don’t see the case for it.

But, still, Johnson hasn’t learned the most important lesson. It doesn’t appear that he’s testing his change. The article says this will happen. There’s no talk about this change being explored in market testing. Maybe it’ll work, but we don’t know and if he rolls it out without testing it, he’s just creating more risk for shareholders.

Shareholders can’t afford cowboys.

I’m going to give away a valuable secret to success in retailing. It’s so painfully obvious, but also so elusive for so many ego-driven CEOs. Ready? Here it is. Sell what people want.

Often, cowboy CEOs don’t understand this secret. They try to remake the business into something that meets their own personal preferences not realizing that their preferences do not match that of their customers.

Thomas Sowell’s Random Thoughts

 

Long time readers know I’m a big fan of Thomas Sowell and even bigger fan of his Random Thoughts columns, one of which we were treated to this week.

Please go to the link and read the whole column. It was tough to winnow my favorites this time, but here they are:

Even squirrels know enough to store nuts, so that they will have something to eat when food gets scarce. But the welfare state has spawned a whole class of people who spend everything they get when times are good, and look to others to provide for their food and other basic needs when times turn bad.

Two reports came out in the same week. One was from the Pentagon, saying that, in just a few years, Iran will be able to produce not only a nuclear bomb but a missile capable of carrying it to the United States. The other report said that the American Olympic team has uniforms made in China. This latter report received far more attention, both in Congress and in the media.

People who lament gridlock in Washington, and express the pious hope that Democrats and Republicans would put aside their partisan conflicts, and cooperate to help the economy recover, implicitly assume that what the economy needs is more meddling by politicians, which is what brought on economic disaster in the first place. (Skeptics can [and should] read “The Housing Boom and Bust.”)

One of the arguments for Medicare is that the elderly don’t want to be a burden to their children. Apparently it is all right to be a burden to other people’s children, who are paying taxes.

Those who talk as if more people going to college is automatically a Good Thing seldom show much interest in what actually goes on at college — including far less time spent by students studying than in the past, and a proliferation of courses promoting a sense of grievance, entitlement or advanced navel-gazing and breast-beating.

Franklin D. Roosevelt famously said, “We have nothing to fear but fear itself.” Then he proceeded to generate fear among businesses for years on end, with both his anti-business rhetoric and his anti-business policies. Barack Obama is repeating the same approach and getting the same results — namely, an agonizingly slow economic recovery, as investors hang on to their money, instead of risking it in a hostile political environment.

 

What I learned in business school

Bryan Caplan asks a great question, What Did You Learn in Business School? He goes on his post to clarify that he’s looking for things that you learned that you actually use in your career. I believe he is doing research for a book. I can’t wait to read it.

We live with the mostly unchallenged general belief that all school is good and the more school the better. I think that belief is something that more of us should challenge.

To answer Bryan’s question about what I learned that I use in my career, very little. Much of what I do I learned on-the-job or by researching topics on my initiative.

I’ve been thinking about this question myself a lot lately. I’ve been working on a blog post with the same theme.

One of the first things I credited b-school with was teaching me how to read financial statements. But, then I remember that I took an accounting class one summer while I was attending engineering school. I was interested in finance and thought that would be a good way to dip my toe into it.

I took a community education course, taught by the finance manager of an auto dealership. It cost $40. We met twice a week in the classroom of a junior high school. I remember one classmate of mine was a floral designer at grocery store who was considering a career change.

Later, when I took the accounting course offered in my university MBA program, which was taught by a PhD who advised state treasurers, I remember being underwhelmed with how remarkably similar it was the $40 community education course that I took.

Next, I thought that maybe b-school taught me how to value business and business cases, something I do a fair amount of now. I think it laid some groundwork, but after b-school I read Robert Hagstrom’s book on Warren Buffett’s investment decisions, The Buffet Way, and was impressed with the simplicity and elegance of the valuation approach Hagstrom described. I thought it was better than what I learned in b-school, so I adopted it and have done better in that regard than many of my b-school peers who have not read the book and struggle to even express in words what exactly a stock price is.

What about economics? I think a broad base in the economic way of thinking is a good tool to have a business analyst or manager. I loved micro and came as close as I could to not passing macro in my MBA program. But, neither did much for me. By the way, that was the second time I had taken both. The first time was as an undergrad. Economics was an area of emphasis (whatever that means) I remember being impressed with the “multiplier” in macro as an undergrad and I scored better there.

But none of the economics courses did much for me. It wasn’t until I read Thomas Sowell’s book, Basic Economics, later that I gained a better understanding of the economic way of thinking. Since then I’ve become quite the pop economist, thanks to reading many more pop econ books, a few heavier econ books and years and years of economics blogs, along with learning exchanges in the comments sections of those blogs (sounds a lot like an online course).

As I posted here, I think it would be good if b-school were to transition into more of an applied experience. Go do something. Start a business. Do a project for a business. Buy a business, try to grow it and sell it. You’ll learn a lot more valuable stuff and you will probably end up adding more value to the economy than hanging the standard sheepskin on your wall.