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.

Have you ever changed your mind?

I like this video clip (HT: Carpe Diem) of a discussion between economist Milton Friedman and talk show host Phil Donahue from Donahue’s old TV show for several reasons.

First, it reminds me of conversations between my brother (Donahue) and I (Milton Friedman). I’m not claiming to be close to Milton Friedman in his ability to articulate his positions, but I fall on the same side of the argument as he does. While Donahue sounds a lot like my brother.

I could think my brother and I have had this very conversation. It seems I’ve said to my brother exactly what Friedman says at 1:16. “Is there some society you know that doesn’t run on greed?” 

Humans will be humans, after all. Pick an organization of humans. No matter how they are organized, they are still run by humans. Businesses, churches, charities, neighborhood associations, trade associations, libraries, schools, police departments, the Department of Education — they are all run by humans that, as we find out over and over, are no more or less virtuous, infallible, self-interested and corruptible than the rest of us.

Second, I like that Donahue would have Milton Friedman on his show. This is a conversation that doesn’t often happen often in our society. When it is attempted, it goes down hill faster than a game of tag with 1st graders. Emotions take over and the discussion becomes wrought with straw men, ad hominem and other types of fallacies until one side gets frustrated and quits.

That’s one reason I started this blog, to try to carry out discussions without the fallacy and emotion.

Third, I can vaguely remember seeing the Friedman segments as a kid and not having a clue what he was saying (I was very young then), but I’m glad I understand it now.

Fourth, the video also demonstrates how difficult it is for people to change their minds. Milton Friedman was the best of the best at articulating the rationale for liberty in an understandable and non-threatening voice.

Yet, I don’t believe even this master changed Donahue’s mind about anything. Friedman seemed to sway a few people in the audience, but I’m guessing that Donahue held steadfast to his belief that there is just something inherently wrong about capitalism and freedom, even though the standard of living is best for everyone where there is some measure of capitalism and worst for everyone where there is not.

I could be wrong. If Donahue reads this, I’d love for him to answer these questions. If anyone out there knows Donahue, please forward him this link. Phil: Did Milton Friedman ever change your mind about anything? If so, what and why?

How about you? Have you changed your mind about anything? I have. But, I’m not sure if I’m just abnormal. I use to be on Donahue’s side of this conversation and transitioned to Friedman’s as I come to realize many of the exact things that Friedman says here.

How about you, after watching this video? If you already agree with Friedman, never mind. Send the video to someone you know who will disagree with him. Have them watch the video. Have them pause the video and write down every time they disagree with Friedman or when Friedman says something that makes them reconsider their position. I would love to see the comebacks.

Toughen up

1. Milton Friedman’s comment, “Capitalism is a profit and loss system. Profit encourages risk-taking. Loss encourages prudence.”

2. Nassim Taleb, author of the Black Swan and Fooled by Randomness, released the prologue of his new book on Anti-Fragility online. In it, he expounds on Friedman’s point:

Which brings us to the largest fragilizer of society, and greatest generator of crises, absence of “skin in the game.” Some become antifragile at expense to others by getting the upside (or gains) from volatility, variations and disorder and exposing others to the downside risks of losses or harm from them.

In the housing crisis, losses were spread to other parties — investors in mortgages and ultimately to taxpayers — while the upside was retained by the bankers. This caused the bankers to exercise less prudence. How many lottery tickets would you buy if someone else was paying? Likely many more than you would buy on your own.

Then Taleb makes an even more important point:

And such antifragility-at-the-cost-of-fragility-of-others is hidden — given the blindness to antifragility by the Soviet-Harvard intellectual circles, this asymmetry is rarely identified and never taught.

Very few people see this. They even blame the problems on capitalism, never realizing that  spreading losses across taxpayers is not capitalism.

3. A blog post from the Wall Street Journal: Half of U.S. Lives in Household Getting [Federal Government] Benefits.  And, we’re not talking about benefits like driving on Federally-funded roads or sending a child to a public school that receives some Federal funds. No. We’re talking about getting a direct benefit from the government.

I’m guessing that Friedman and Taleb would suggest that this doesn’t end well.

Friedman might say that we are removing losses and therefore, removing prudence. Taleb might say that we are letting people gamble without having “skin in the game”.

Ultimately, this leads to folks taking risks they wouldn’t take if they had to pay the loss. This is dangerous itself. But, it also leads to something else that is even more dangerous. The loss of resilience, hardiness, grit and adaptability.

The 0.000179%…

…is the federal government.  Or, the 535 members of Congress + 1 President.

If my calculations are correct, those few currently “control” about the same amount of income as the 3 million, or so, in the much ballyhooed Top 1%.  Thanks to commenter, Xerographica, for pointing that out.

I wonder why those who fret about 3 million people earning that much money, by and large by producing value, don’t seem at all bothered by the 536 controlling just as much, through taxing and spending.

Because we vote for our elected representatives? Because they’re not spending the money directly on themselves?

These are reasons we should care even more about the 0.000179%, not less.

I believe many people will intuitively defend Congress having so much spending power by saying, but they are held accountable by our votes, we get to choose them.

How has that worked out for us?   Not well.  Public choice economics tells us why our intuition about elections is wrong.  Thomas Sowell explained it well in his book, Applied Economics.   I wrote about it in my post, How to Get People to Respond to Other People’s Desires.   This is Sowell’s key paragraph:

Politics and the markets are both ways of getting people to respond to other people’s desires.  Consumers deciding which goods to spend their money on have often been analogized to voters deciding which candidates to elect to public office.  However the two processes are profoundly different.  Not only do individuals invest very different amounts of time and thought in making economic vs. political decisions, those are inherently different in themselves.  Voters decide whether to vote for one candidate or another but they decide how much of what kinds of food, clothing, shelter, etc. to purchase.  In short, political decisions tend to be categorical, while economic decisions tend to be incremental.

I can also imagine some people defending the immense spending power that has been concentrated into the Federal government vs. the Top 1% by saying, well, they’re not spending the money on themselves.

Milton Friedman explained why this should make us more concerned in his Four Ways to Spend Money.  Government spending falls under Type IV spending — spending other people’s money on other people.  Friedman explained that with Type IV spending you have little incentive to spend it wisely since you don’t pay the consequences if you’re wrong or receive the benefits if you’re right.

Though, sometimes politicians do get benefits.  I get the pleasure of driving over a bridge each weekday named after a still living Senator from my state, for no other reason than he played politics with the rest of the 534 folks in Washington to get enough of them to agree to spend our money on that bridge.

Someone listened for once

I was impressed by the New York Times column, Some of Sarah Palin’s Ideas Cross the Political Divide by Anand Giriharadas.

After taking some requisite lefty swipes at Palin, Anand tentatively praises her for the substantive part of her speech:

She made three interlocking points. First, that the United States is now governed by a “permanent political class,” drawn from both parties, that is increasingly cut off from the concerns of regular people. Second, that these Republicans and Democrats have allied with big business to mutual advantage to create what she called “corporate crony capitalism.” Third, that the real political divide in the United States may no longer be between friends and foes of Big Government, but between friends and foes of vast, remote, unaccountable institutions (both public and private).

In supporting her first point, about the permanent political class, she attacked both parties’ tendency to talk of spending cuts while spending more and more; to stoke public anxiety about a credit downgrade, but take a vacation anyway; to arrive in Washington of modest means and then somehow ride the gravy train to fabulous wealth. She observed that 7 of the 10 wealthiest counties in the United States happen to be suburbs of the nation’s capital.

Her second point, about money in politics, helped to explain the first. The permanent class stays in power because it positions itself between two deep troughs: the money spent by the government and the money spent by big companies to secure decisions from government that help them make more money.

“Do you want to know why nothing ever really gets done?” she said, referring to politicians. “It’s because there’s nothing in it for them. They’ve got a lot of mouths to feed — a lot of corporate lobbyists and a lot of special interests that are counting on them to keep the good times and the money rolling along.”

It took nearly three years, but someone on the left appears to have finally discovered the main driver of the tea party/libertarian movement (though I’m not certain that Anand realizes that yet).   Anand got past the fallacious name calling and inaccurate characterizations and liked what he heard.

And it’s something that Milton Friedman told us about long ago.  At the 2:40 mark of this video, as a matter of fact, he tells us how special interests get the political power to use government to bend the rules in their favor:

What he says about government regulation:

There are always…two groups of sponsors.  There are the well-meaning sponsors and there are the special interests who use the well-meaning sponsors as front men.  Who, almost always, when you have bad programs, have an unholy coalition with the do-gooders on the one hand and the special interests on the other.

There’s an old saying in poker.  If you don’t know who the patsy is, then you are the patsy.  If Anand keeps poking along at these thoughts, he (or she?) might discover that the well-meaning folks on the left and right, have been played as the patsies for the special interests seeking control over government influence.

Keynesian stimulus in one sentence

Image via Wikipedia

We’re not sure why you’re not spending your money, but we don’t like it, so we’re going to spend it for you.

No?  What am I missing?

Unfortunately, when this happens it moves spending from Types 1 through 3 spending, per Milton Friedman, to Type 4 spending.

In Type 1, you spend your money on yourself.  That’s the most carefully spent money.

Type 2 is you spending your money on someone else (e.g. gifts you give).  Type 3 is you spending someone else’s money on you (e.g. you on business travel).  Type 2 and 3 spending isn’t quite as carefully spent as Type 1, but they’re still much better than Type 4.

Type 4 is spending someone elses’ money on someone else (e.g. government spending).  The result of Type 4 spending creates value in the same way receiving a gift of 100 cans of green beans for your pantry creates value, even though you don’t much care for green beans. To be clear it doesn’t.  That destroys value — even if you donate them to a charity (but I won’t get into that now because I might be wrong about that).

And that’s why stimulus doesn’t stimulate.  It ignores why people aren’t spending money (because they’re being careful for some reason) and overrides that with spending that’s not likely to create net value because it’s not carefully spent.

UPDATE: Be sure to read W.E. Heasley’s excellent elaboration on this post at his blog, The Last Embassy, where he also coins Type 5 spending.

Everything’s Amazing

Here’s an excellent TED video, which is a new take on a classic: How to Build a Toaster.  (Credit: Don Bourdreaux of Cafe Hayek)

Plot:  How to build a toaster from scratch if a modern person found himself on a planet inhabited by primitives.

Subplot:  The benefits of trade and specialization.

Some of the comments on the TED site ding Thwaites for taking for granted the other tools he used while making his toaster.  I also find it suspicious to assume that a 240 volt electric source would be readily available on a primitive planet or that he would have much to toast.

But the video is still eye-opening for its subplot exposes how much we take for granted the special, distributed, evolved and advanced knowledge and coordinated effort that goes into making something as seemingly simple and unremarkable as a cheap toaster and making it available at a local store to pick up at our convenience.

Here’s the first remake of the classic in the video world:

And here’s the original classic: I, Pencil by Leonard Reed

Unholy Coalition

At the 2:40 mark of this video, Milton Friedman says this about government programs:

There are always…two groups of sponsors.  There are the well-meaning sponsors and there are the special interests who use the well-meaning sponsors as front men.  Who, almost always, when you have bad programs, have an unholy coalition with the do-gooders on the one hand and the special interests on the other.

The do-gooders focus on the intentions of government programs and either do not pay attention to results or are quick to explain away bad results as a problem that can be fixed if we just spend more money or find the right people.  It never seems to occur to these people that perhaps the incentives are poor and the system is broken.  Maybe we should change those incentives before doing anything else.

The special interests are the folks who get a paycheck from public education — or benefit in other ways (like tenure with bad results)– be they teachers, administrators, consultants, business owners who have the custodial contracts — just about anyone feeding off the public school district funding.

As commenter Lane Meyer pointed out when he replied to this post, the special interests who benefit from economic rents created by the public school system have incentives to keep getting those rents, which provide political barriers to changing the system for the better.

We expect those in the private sector to practice full disclosure.  If a business commentator mentions a stock he owns, we expect him to mention that so we can take his comments with a grain of salt.  I find it amazing that we don’t have the same expectations in the public sector.

When the do-gooders and the special interests combine into their “unholy coalitions” we get a political force that’s tough to beat.  And we may get a lot of creative, consultant-inspired rhetoric to the question, why should any student have to settle for a neighborhood school that’s awful?

 

Responsibility to the Poor

Here’s a nice video of Milton Friedman explaining where the true responsibility lies.  Not the government.  People.

The student asserts that it might be the responsibility of the government to help out the poor.  Right about 50 seconds in Friedman responds:

First of all, the government doesn’t have any responsibility.  People have responsibility.  This building doesn’t have responsibility.  You and I have responsibility.  People have responsibility.

Make no mistake about it.

Great Stossel Show

If you’re like me and don’t have the Fox Business News channel in your line-up, you’re missing good television.  Luckily, there’s this thing called Youtube where you can also view his show.  His latest show was on Milton and Rose Friedman’s book and video series, Free to Choose. The book came out in 1980.

Here’s the first segment of the show.

You can watch it and the rest of the segments by clicking here.  The Friedmans’ book is also an excellent read.  I read it last year as a check out from my library (I love my library).

I have a few thoughts on the show.

First, Stossel runs video footage of Friedman accepting his Nobel Prize where it appears there is one loud heckler.  It amazes me that the message of freedom can stir such a strong anti-response from people.  This reminds me of graffiti I saw scrawled on an old sheet metal building near by home decades ago that read, “Die Kapitalists Pigs.”  I was too young to know much about politics.  Though it did strike me as odd that my elementary school teachers only ever spoke of one candidate for President in ’76 – Jimmy Carter.  But, I often wondered when I saw that graffiti what was at the root of such message.

Second, the young lady in the 5th segment does a superb job at going toe-to-toe with the Friedman opponent, Ben Barber.

Third, Stossel and his guests do an excellent job at responding to the opponents points.  The one critique I have, though, is that he