“Life Would Be So Much Better Without Capitalism!”

Thanks to Cafe Hayek for pointing me to this well done video from the Fund for American Studies:


All the good stuff we get from capitalism and don’t even notice is a them I like to explore often. The video does a nice job of illustrating it.We take for granted something as mundane as having 24-hour pharmacies nearby chock full of stuff to help many ailments that can be ours for a relatively small price. Have you considered that billions of people in the world now and before us would love to have.

In the video, an anti-capitalism protester who enjoys plentiful gadgets, food and overall decent standard of living (due to capitalism), is knocked out by a sign waver at the demonstration and gets to explore a world without capitalism while out cold, aided by a little dude with wings to help explain why everything is so dreadful there.

I love this line:

Anti-capitalist: My X-Box is gone?

Little winged guy: Yeh. In this world, that greedy Bill Gates works at a bowling ball factory in Akron.

Join the discussion.

Bill Gates: Treating symptoms rather than causes

While reading a November Forbes interview with Bill Gates about his philanthropic activities, I had a few thoughts I wish he would consider.

In the interview, Gates explains his charitable efforts in public health and elimination of disease:

The logic was crisp and Bill Gates-friendly. Health = resources ÷ people. And since resources, as Gates noted, are relatively fixed, the answer lay in population control. Thus, vaccines made no sense to him: Why save kids only to consign them to life in overcrowded countries where they risked starving to death or being killed in civil war?

Gates is wrong on two accounts here.  Population control is not the answer and resources are not “relatively fixed.”

The western world enjoys the best standards of living ever on this planet not through population control, but by an abundance of resources that were developed and allocated through innovation and trade.  We’ve discovered how to use resources more effectively to sustain larger populations with a grand standard of living.

The true equation is:  Health = Freedom, innovation and trade.  Seeking ways to improve this equation is THE answer.

More from the interview:

In society after society, he saw, when the mortality rate falls—specifically, below 10 deaths per 1,000 people—the birth rate follows, and population growth stabilizes. “It goes against common sense,” Gates says. Most parents don’t choose to have eight children because they want to have big families, it turns out, but because they know many of their children will die.

“If a mother and father know their child is going to live to adulthood, they start to naturally reduce their population size,” says Melinda.

This doesn’t go against common sense.   It is common sense.  Too bad it took that long for him to figure that out and more unfortunate that he states it as if it’s some unique finding of his.  This is well-known from anyone who have given any thought to their own ancestry.  There are reasons why two to three generations ago the birth rate in my family was much higher than it is today.  One of those reasons is that there was a greater likelihood of death, so parents had more kids to improve their chances of keeping the family going.

What’s especially frustrating here is that the Gates’ only see part of the picture.  Low mortality rate is a result (or output) of something bigger than the availability of vaccines, it’s not an input to it.

Low mortality rates are a result of a wealthy society that derives from freedom, innovation and trading.

It’s no accident that free societies grow wealthy enough where vaccines and other things that save lives, like nourishment, shelter, low crime rates, drug stores, paved roads to get to the drug stores, indoor plumbing, hand soap, sanitary conditions, disinfectants, antibiotics, bandages and clean water aren’t that difficult to come by.

In the U.S., vaccines are usually cheap and plentiful.  Even the poorest families here don’t need a billionaire to give them a vaccine.

Would Bill Gates rather have societies that are dependent on his benevolence for addressing a part of the problem, or societies that could become self-sufficient in that regard and not only would he save lives from disease, but also make available all the other advances that help make our lives better?

I don’t fault the guy for wanting to make a visible impact.  Giving a vaccine to a child that otherwise wouldn’t have had it is good.

But, I think it’s important to recognize that this doesn’t address the root cause of why a child in a third world country has such a difficult time getting medical treatment that is plentiful and basic to children in first world countries.

And, think about what happens when Bill Gates’ money runs out.  Either more philanthropy will have to take its place or the conditions will return, because the root cause has not been addressed.  He’s creating a dependency.

So, what is this root cause?  It’s concentration of political power.

At a young age, I crossed the border into Mexico at Laredo, Texas and was befuddled by the drastic difference in the standards of living on the north and south side of that river.

This was an eye-opening test-and-control.  The difference in the standard of living didn’t derive from the richness of the soil, or the availability of natural resources or differences in climate.  Folks on the north and south side of the Rio Grande have all of this in common.

The only difference between the two was how political power was distributed.  Period.

If Bill Gates wants to make a lasting impact for third world countries, he could do no better than to find ways to de-concentrate political power in those areas.

That is THE answer to improve public health.  It also happens to be the answer to improving education.

This is from the same interview:

It wasn’t dissimilar from the formula that he was developing behind a multibillion-dollar push into education reform. In that case, he based his giving on this formula: Success = teachers ÷ students. Smaller class sizes would result in more attention per student and smarter kids.

But much as Gates loves elegant solutions, his greatest achievements have resulted from perseverance and adaptability. It took three versions to get Windows right, and the Xbox originally lost billions. He’s not afraid to challenge assumptions when they don’t work. And in education he’s had a clear reversal: Class size, it turns out, is not the best determinant of student outcome. Teacher quality is. So after spending a fortune, Gates shifted course.

Here again, Gates stops short of the root cause.  Teacher quality is important.  But, it’s an output, rather than an input.

High teacher quality is an output of a system that decentralizes political power and allows the users of the system to choose the best teachers.

In third world countries, political power is concentrated in the hands of the dictators and warlords who run those countries.  Similarly, in public education, political power is concentrated in the hands of teacher unions, school boards and the so-called “education experts” whose often incorrect preferences for how things should work subjugate the preferences of the people who directly use the system — the parents.

In both health and education, he would do well to look for ways to decentralize the political power bases, instead of reinforcing them.

“…not a cent more”

George Will wrote an excellent piece refuting Elizabeth Warren’s collectivist logic.

Mark Perry posted about it on his blog Carpe Diem.

Responding to Mark Perry’s post and on this debate about how much the wealthy “owe to society“, mike k writes:

They owe exactly what everyone else owes and not a cent more.

The reason I like mike k’s statement is that it attacks the underlying assumption that a substantial portion of Bill Gates’ success is somehow due to ‘society’.

If this society assumption were true, then most of us would wind up to be as wealthy as Bill Gates, since we’re all in the same society.

But we don’t, so there must be explanations, other than society, that substantially account for his wealth.

Also missing from the assumption that the super wealthy ‘owe it to society’ is an accounting of what the wealthy has already contributed to society.

We ignore that his wealth resulted from what he has already contributed to society.

He earned his wealth by creating things that others in society found useful and valuable — enough so that they were willing to trade away some of their own hard-earned productivity to gain additional productivity and value from Gates’ products.

Creating products valued by the rest of us in society seems like enough payback to society already to me.

It’s only by ignoring the value that he has already added to society through his products that we arrive at the clumsy conclusion that Gates owes some part of his wealth to society (in the form of taxes — charity is also acceptable).

This notion of having the wealthy payback society twice (first when they create value and second when they receive the benefits of creating value) seems a lot like charging the guy who stopped to help you fix a flat tire on the side of a highway for using your tools and taking up your time while he fixed it.

Bill Gates is wrong on education

In the Wall Street Journal Opinion Weekend, Jason Riley asks Bill Gates, Was the $5 billion Worth It?

Bill Gates, through his charitable foundation, has sought ways to improve education for 10 years and has failed to produce results.

In this paragraph, Gates seems to rely on some data to back his position:

“We have heavy union states and heavy right-to-work states, and the educational achievement of K-12 students is not at all predicted by how strong the union rules are,” he says. “If I saw that [right-to-work states like] Texas and Florida were running a great K-12 system, but [heavy union states like] New York and Massachusetts have really messed this up, then I could draw a correlation and say it’s either got to be the union—or the weather.”

Immediately following, however, is this paragraph:

Mr. Gates’s foundation strongly supports a uniform core curriculum [i.e. one-size-fits-all] for schools. “It’s ludicrous to think that multiplication in Alabama and multiplication in New York are really different,” he says. He also sees common standards as a money-saver at a time when many states are facing budget shortfalls. “In terms of mathematics textbooks, why can’t you have the scale of a national market? Right now, we have a Texas textbook that’s different from a California textbook that’s different from a Massachusetts textbook. That’s very expensive.”

And later:

Nor does he see the need for competition among state standards. “This is like having a common electrical system. It just makes sense to me.”

So, with unions he relies on data to see if they have any effect on quality.  Yet he seems to want to whack out competition and innovation of curriculum without evidence to support that this would actually drive improvement in education quality.  It just makes sense to him.

I’ve seen quite a few decisions made by folks that just made sense.  They learned shortly thereafter why it didn’t make sense.

I was disappointed the article didn’t mention Gates’ involvement with the Khan Academy.  Ultimately, as with any other market that has evolved over the past few centuries to deliver amazing products, bottoms-up innovation and competition is what drove it.  Khan Academy is disruptive.

Top-down innovation rarely works and often causes massive failures.

The article made it appear like Gates kind of knows this, but he’s too timid to upset the existing rent-seeking constituencies in the education establishment.

We Should Expect Better for WSJ and Gates

Last weekend the Wall Street Journal ran the type of feature that I enjoy very much.  It was a debate-style format between Bill Gates and Matt Ridley, author of The Rational Optimist.

Gates’ portion of the debate can be found here.   Ridley’s here.

The debate covered several areas and focused on global warming and improvement in Africa.

I’m disappointed that so much of the debate relied on misunderstanding the opponent’s position.  It seems we could have much more productive discussions if we get better at recognizing when our view of the opponent’s position is flawed.

Quite frankly, I don’t believe the following portion of debate should have made it to print.

Gates writes this about Ridley:

In discussing Africa, Mr. Ridley relies on critics who say, essentially, “Aid doesn’t work, hasn’t worked and won’t work.”

Ridley responds:

Far from saying that aid “doesn’t work, hasn’t worked and won’t work,” I actually say this in my book: “Some of the most urgent needs of Africa can surely be met by increased aid from the rich world. Aid can save lives, reduce hunger, deliver a medicine, a mosquito net, a meal or a metalled road.”

I go on to say that “statistics, anecdotes and case histories all demonstrate that the one thing aid cannot reliably do is to start or accelerate economic growth.” Now here I admit that Mr. Gates does have a point. Unintentionally, I have given him and perhaps other readers the impression that, in my view, combating malaria or AIDS does not pay economic dividends. It does.

What I do take issue with is economic aid designed to stimulate economic growth. For example, a 2006 study by Simeon Djankov of the World Bank (now deputy prime minister of Bulgaria) and his colleagues concluded that “foreign aid has a negative impact on the democratic stance of developing countries and on economic growth by reducing investment and increasing government consumption.” Economic aid diverts resources into projects that fail, puts money into the pockets of corrupt government officials and crowds out the efforts of entrepreneurs. In one example, only 13% of educational aid to Uganda reached schools; the rest was siphoned off by rent-seeking officials.

Clever Buffett

I read in this Wall Street Journal article that Warren Buffett and Bill Gates are starting a campaign to persuade wealthy people to donate half their wealth to charity (charity bubble anyone?).

It reminded me of a long-standing disagreement I have with Warren Buffett.  Buffett’s business and investment acumen are undeniable.  But his political, economic and tax policy viewpoints are naive.  One of Buffett’s key investment tenets is to stick with what you know.  He should adhere to this tenet in matters of the economy and taxes.

Several years ago, Buffett came out in favor of the estate tax and said the tax system isn’t fair (or just) because he pays a higher rate than some of his employees.  From an ABC article in 2007:

Buffett says he pays 18 percent of his salary to the IRS while the rest of his staff pays nearly twice that — 33 percent, a lopsided equation that put Buffett in a Robin Hood frame of mind.

“Frankly, an economy where my receptionist pays a lot higher tax rate than, than I do does not strike me as a just economy,” he told lawmakers.

Strangely, in 2003 Buffett published a column in his newspaper, the Washington Post, making a similar case (see copy of his Washington Post article by clicking on more at the end of this entry) regarding cuts in dividend tax rates.  In the 2003 article, he wrote that his tax rate was the same as his receptionist’s, about 30%.

First, I’d be interested to know what changed between 2003 and 2007 to lower his tax rate from 30% to 18%.   Did the tax code change, did his income change and put him in another tax bracket or did the type of income or tax he used to calculate his tax rate change between his two analyses?

Second, in my next post, I’ll show that Buffett used hypocrisy in 2003 to arrive at the conclusion that he would pay a much lower tax rate than his receptionist if Berkshire Hathaway paid a dividend to its shareholders and the tax law that he was criticizing passed.  His hypocrisy is that he uses inconsistent approaches to view his wealth and tax rates.  I think the way he views his wealth is valid.  The way he views his tax is not valid, nor is it consistent with the way he views his wealth.

Click to read Buffett’s 2003 Washington Post article:

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