Who controls the capital?

As I wrote here, this isn’t a blog about Ronald Reagan.  It’s a blog inspired by a quote from Reagan.

But, chapter seven in F.A. Hayek’s The Fatal Conceit, entitled Our Poisoned Language, reminded me of my second favorite quote from Reagan (my first favorite is at the top of this page).

All systems are capitalist.  It’s just a matter of who owns and controls the capital – ancient king, dictator or private individual.

I try to avoid discussion about whether society is socialist, capitalist, communist, fascist or some other common label.  I find those discussions to be unproductive red herrings that avoid getting to the root of the matter.  Each word has textbook definitions and also has much baggage attached.  I find that most discussions about these terms equivocate between the text book definitions and the baggage and rarely apply exactly to any specific group of people.

In his quote, Reagan drops the textbook definition of capitalism and all its baggage to get to the heart of what truly differentiates large groups of people that form political economies — who owns and controls the capital.

In chapter seven of The Fatal Conceit, Hayek explains that the words we use to describe the actions of individuals interacting with each other, words like markets or society, give the impression that these groups of individuals are something they are not — a single unit with a centralized mind or central goal.  And this gives rise to some people using that image to convince others that this single unit should have their overall goals.

Steven Landsburg expressed this idea well in his book The Big Questions, which I quoted here, by explaining that folks  imagine that organizing an economy is like organizing a birthday party, which it is not.

Here’s Hayek’s words to explain the phenomenon (p. 113):

Thus the word ‘society’ has become a convenient label denoting almost any group of people, a group about whose structure or reason for coherence nothing need be known — a makeshift phrase people resort to when they do not quite know what they are talking about.  Apparently a people, a nation, a population, a company, an association, a group, a horde, a band, a tribe, the members of a race, of a religion, sport, entertainment, and inhabitants of any particular place, all are, or constitute societies.

To call by the same name such completely different formations as the companionship of individuals in constant personal contact and the structure formed by millions who are connected only by signals resulting from long and infinitely ramified chains of trade is not only factually misleading but also almost always to model this extended order on the intimate fellowship for which our emotions long.

The crucial difference overlooked in this confusion is that the small group can be led in its activities by agreed aims or the will of its members, while the extended order that is also a ‘society’ is formed into a concordant structure by its members’ observance of similar rules of conduct is the pursuit of different individual perspectives.

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Great Explanation of QE2

Here’s the best explanation I’ve seen on Quantitative Easing from Steven Landsburg.   I recommend reading the whole post, but if you are curious about what exactly QE is, here it is in a nutshell:

They’re creating 600 billion new dollars and using those dollars to pay down the government’s debt.

The rest of Landsburg’s post does a great job of explaining potential results of this action.

If I understand it correctly, the net effect will likely be the transfer of wealth from those who are holding to dollars to the folks who sold their bonds back to the government.

Thanks to Steven Landsburg for taking the time to explain this.

Restore Sanity? II

At about the 8:30 mark in John Stewart’s closing speech at his rally last Saturday, he starts a segment with:

We do impossible things, only made possible by the little, reasonable compromises we all make.

He then shows video of cars in traffic and describes the individuals in each car.  For example, “that car has a lady who’s in the NRA, loves Oprah.”  He describes several more individuals like that and then the video pans out to show the traffic merging into a couple lanes to get through a tunnel carved under a river, “carved, I’m sure, by people who had their differences.”

Back to the merging cars…

…and they do it concession by concession.  You go, I go.  You go, I go.  Sure, there’s some selfish jerk that comes along and cuts in, but that individual is rare and is scorned…

I found this segment interesting for a few reasons.

1.  It shows an example of a zero sum game.

I won’t pick on this point too much.  I know the idea was to show an easy visual of people cooperating.  But, I think the visual happens to represent how folks like Stewart view things — as a zero sum game.  There are only so many lanes in the tunnel and we just all have to share.

However, a broader visual with a time series would provide a truer example of how our getting along results not in a zero sum game, but a positive sum game where things can get better for everyone.

For example, a time series video may have shown how folks crossed the river before the tunnel was made and how the tunnel improved things by adding to the existing options of crossing the river.

Also, a broader picture might have included technology or new construction that saves people from ever entering the traffic jam, like a telecommuter working from home over a high speed internet connection or new apartments on the side of the river everyone wants to get to.

2. Stewart recognizes that people who disagree on some things generally get along for some reason, though I’m not sure he knows that reason.

Number 2 occurred to me when he made the remark about the workers coming together to carve a tunnel under a river, “even though they may have had their differences.”

This strikes at what I think is one of the most fundamental attributes of free markets and is overlooked or discounted by free market skeptics: the mutually beneficial, voluntary trade.  That mutually beneficial trade is the most effective way to align our “differences”  so that something good for everyone results.

For example, I buy my coffee from a dude who I may not agree with politically, because I want my coffee and he wants his paycheck.  To Stewart’s point, I compromised and he compromised.  I didn’t try to convert him to my way of thinking before I bought a cup and he didn’t qualify the sale of the coffee on my politics.  And we both came out ahead in the trade.

So, why do people with differences work together to carve a tunnel beneath a river?  Adam Smith explained it in this quote:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

The people working on the tunnel didn’t build the tunnel out of kindness.  Nor did they refrain from imposing their beliefs on their co-workers because they’re nice people.  They wanted a paycheck and they wanted to remain employed, so they supplied their labor and got along with their co-workers.  There’s nothing wrong with that and something good and useful resulted.

The problem is so few people understand the underpinnings of the human interactions that brought about many of the things that make our lives better.

3.  Stewart recognizes why people make concessions in traffic and why jerks on the road are rare:  accurate, clear and direct feedback.

One of my pet theories is that any problem can be traced to problem in the feedback loops.  There are few jerks on the road because we have several methods of providing clear and direct negative feedback.  One  feedback, as Stewart points out, is scorn (btw, Don Boudreaux mentions this in the video of his I posted recently on the law).  That might show up as honking horns, finger signals, yelling, shaking heads, risk of road rage or not receiving favorable treatment by other motorists at the next merge.

Even the most stubborn jerks have a difficult time not modifying their behavior with all of that clear and direct feedback, so jerkish flare-ups are usually squelched quickly.

The leap in the thinking that Stewart doesn’t seem to have made yet is why these concessions that are so clear and direct in traffic are not so apparent or strong in political discourse.  If he made that leap, he might better understand why the “24/7 politico conflictinator” exists.

Let’s go back to my feedback theory of everything.

Correct feedback on political ideology is unclear and indirect.  When I accidentally cut someone off in traffic I know right away by the accurate feedback I receive.  I learn and take care not to do it again.

Consider a political ideology that supports policy touted at helping poor people.  What feedback do I receive if the policy works or not?  It’s unclear and it may not be accurate.  It’s certainly not as clear as someone giving me the one-finger salute in traffic.

If I question the effectiveness of the program, I might receive clear feedback.  “You’re stupid and heartless if you think this great program hurts!” But, that may not be accurate feedback.  Notice, that’s a name-call and it doesn’t give me any information as to whether the program works or not.

Stewart himself is guilty of feeding this monster. He has the sanctimonious, authoritative, thou-shalt-not-question-my-superior-judgment, let’s-all-just-get-along (as long as it matches what I think) act down pat.  It puts food on his table.  It also prevents him from learning that he might be wrong.

If I question a policy’s effectiveness, I might also get  feedback from less biased sources.  A group of economists might tell me why it helps and another group may tell me why it hurts, and I’m left sorting out which group I think is right and why.  I think that’s better than being bullied into not questioning the policy, but it’s still not as clear and accurate as traffic signals.

4.  After listening to Stewart’s rally closing and also to Beck’s, I think there’s one big message missing from each: It’s okay to not know, to ask questions, to be wrong and to learn.

I’m reminded of Steven Landsburg’s advice, delight in losing arguments because you’ve learned something.

Somehow, somewhere in our society we’ve lost the idea that it’s possible that we could be wrong and that it’s okay to lose an argument.  I can empathize.  It took me a long time to get past that and sometimes it still gets in the way.

But our betters tell us to get out, vote and let our voices be heard.  They should know better.  Instead they should encourage us to get out and lose some arguments so that we’ll be better informed. And when you lose an argument, say thank you.

We’re not afraid to ask an electrician for help in wiring stuff up.  We know that if we do it ourselves and screw up, the consequences can be deadly.  So why are we afraid to let people know that we don’t know much when it comes to politics?

Is it because politics is a bit more like a religion than wiring skills?

Steven Landsburg on Trade Deficits

On page 205 of his book More Sex is Safer Sex, Steven Landsburg offers and excellent explanation on why we shouldn’t be concerned about trade deficits:

Here’s the final thing to keep in mind when you read about the nation’s overall trade deficit: the nation is nothing but the sum of individual households.  But there are limits to how much you ought to care about what goes on in other people’s households.  Even if you are convinced that the average American spends too much, or earns too little, or spends too little, or earns too much, it’s not entirely clear why it’s any of your business.  As long as you have your own household in order, fretting about your neighbor’s spending habits is a lot like fretting about the color of his living-room rug.  Maybe lime green was a big mistake, but it’s his mistake to live with.

“Delight in Losing Arguments”

In his book The Big Questions, Steven Landsburg offers valuable advice (p. 235):

Argue passionately for your beliefs; listen intently to your adversaries, and root for yourself to lose.  When you lose, you’ve learned something.

Rooting for yourself to lose runs counter to your instincts.  I consider it a sign of wisdom.

If you find yourself saying things like, “I know I’m right” or “I just know that’s the way it works because I feel it,” stop and ask yourself what’s so bad if it happens that you’re wrong?  Consider that you might be wrong.

When I did that, I started learning.

Yes. I’m human and not always wise.  I occasionally get caught up in being right.  But, it’s awfully disarming to a volatile discussion to say, “You know what.  I could be wrong.  Help me see what I’m missing.

Remember ALL part of Landsburg’s advice:

  1. Argue passionately.
  2. Listen intently (which we forget to do).
  3. Learn.

Even if you don’t learn that you are wrong, you may learn why it is that you are not agreeing and find a more productive way of reaching agreement.

Stagnant Wages! Really?

A commenter on Cafe Hayek this week lamented about stagnant wages.  While it’s unclear whether the comment was based on fact or the commenter’s gut feel, it did remind me of this passage from Steven Landsburg’s book More Sex is Safer Sex (p. 29).

In the 1930s, we had a Great Depression, when income levels fell back to where they’d been about twenty years earlier.  For a few years, people had to live the way their parents had always lived–and they considered it almost intolerable.  The underlying expectation–that the present is supposed to be better than the past–is a new phenomenon in history.  No eighteenth-century politician would have dreamed of asking “Are you better off than you were four years ago?” because it never would have occurred to anyone that they ought to be better off than they were four years ago.

Rising income is only part of the story.  Not only are we richer than ever before, we also work less and have better-quality products.  One hundred years ago, the average American workweek was over sixty hours, today it’s thirty-five.  One hundred years ago, only 6 percent of manufacturing workers took vacation; today it’s 90 percent.  One hundred years ago, men entered the full-time labor-force in the early teens; today labor-force participation by young teenagers is essentially zero.  One hundred years ago, only 26 percent of male workers retire by age 65; today over 80 percent of 65-year-old males have retired.  One hundred years ago, the average housekeeper spent twelve hours a day on laundry, cooking, cleaning, and sewing; today it’s about three hours.

If wages are stagnant for a little bit, so what?

Don’t get me wrong, I like standard of living improvements as much as the next guy, but I also recognize and am thankful for how good we have it.  Now that we’ve set the bar high for improvements because they have come so consistently during our lifetimes, we’re disappointed when those high expectations are not met.

Oh no! Stagnant wages!  That means we have to live approximately like we lived last year, which happens to be the best standard of living that humans have ever experienced?

Landsburg continues by giving us more specifics about the daily life a hundred years ago.

Here’s a typical laundry day for a housewife in 1900: First she ports the water to the stove, and heats it by burning wood or coal. Then she cleans the clothes by hand, rinses them, wrings them out (either by hand or with a mechanical wringer), then hangs them out to dry and moves on to the oppressive task of ironing, using heavy flatirons that are heated continuously on the stove. The whole process takes about eight-and-a-half hours and she walks over a mile in the process.  We know all of this because the United State government use to hire researchers to follow housewives and record every step they took.

Very well written.  For some reason, I imagine Louis CK’s voice as I read that.

Landsburg didn’t mention that this process wasn’t done very frequently since it was laborious, expensive and there was much other laborious work to get done.  The idea of wearing clothes once and washing would seem insane to those living around 1900.  So now, since it’s much easier and cheaper to wash clothes, we do it more often and that improves our lives by spreading fewer germs and being less smelly.  Such mundane, yet exponential, leaps in quality of our lives are nearly invisible to us.

Update: Another thought occurred to me.  I imagined the folks who recognized how laborious doing laundry was and invented ways to make it easier.  That’s innovation.  With less innovation our standard of living doesn’t advance as quickly.  I wonder if the commenter complaining about stagnant wages realizes that the cause of that, if true, could be stagnant innovation.

Here’s the new thing I learned today

On this blog, The Big Questions, Steven Landsburg explains how we incorrectly view taxes on capital gains and interest in today’s post, Getting it Right.

We normally view income from capital gains and interest the same as income from wages.  But, it’s not the same.  We forget that we already paid taxes on the capital when we initially earned it as income.

He explains it much better than I.  Read his post.