01 February 2007

On Capitalism

Monday night, I watch an interesting documentary on PBS called Power of Choice: The Life and Ideas of Milton Friedman. The late Dr. Friedman was one greatest proponent of laissez-faire capitalism in the 20th century, and—thankfully—had the clout to be heard in Washington and around the world. I am convinced that much of economic boom of the past century is directly attributable to him.

Then, on Tuesday, I read a short article entitled “The Hard Rain That’s Falling on Capitalism” written by Ben Stein in the New York Times. I found this story through Reddit.com—a website which also lets you comment on the featured stories. I had been meaning to formulate my thoughts on capitalism for some time, and in responding to the mostly left-leaning critics, I finally got a start. However, newer stories are constantly making their way to the top on Reddit, and by the time I wrote these comments, most of the debate here had already subsided; therefore I will expand on my theories and observations here.

The criticism usually leveled at capitalism—and the US in particular—by the left and anti-globalists, is generally that this system only makes the rich richer (and by extension the poor get poorer.) Their proof tends to be pointing out specific cases of corporate corruption and other malfeasance, and instances of excessive compensation for top management. What they seem to suggest by this is that there was an idyllic time in the past characterized by more compassion and transparency in commerce.

With the exception of a few true, ideological communists, I think we all agree that the problem is not with capitalism as such, but corruption and the lack of transparency. This is especially egregious when big businesses use their influence extract subsidies from government or to induce the government to create barriers to new entrants (foreign or domestic) in their particular industry. Then there is the internal corruption, where management—usually through creative bookkeeping—steals from the corporation and, by extension, the shareholders and other stakeholders of the company. I admit this is a real problem, but I don’t believe it is an endemic or growing problem. I assume that this has always been going on; it was just not spoken about as much. I dare say the farther you look back in our history, the more corruption and back-room dealing you would discover—meaning the economic climate was less fair and transparent at any time in the past.

This is why, whenever a corporate scandal is uncovered, I gain—not lose—confidence in the business world. I believe the reason we hear more and more about these scandals is not because they are occurring with more frequency, but because the press is becoming more vigilant—uncovering and reporting more cases of malfeasance than ever before. The logical result would be fewer and fewer occurrences of malfeasance over time, since management knows they are being more closely watched. Pessimistically, it also means that future indiscretion will be more esoteric and harder to detect, but like with spam and viruses, it is a cat & mouse game between the good guys and the bad—alternately one-upping each other. If nothing else, this vigilance means the repertoire of deceptive practices available to unethical managers is constantly shrinking.

Let’s take the Enron debacle for example—could this happen again? Well, certainly not in the exact same way. More importantly though, the complicity of auditing firms in such scandals has been forever broken. Arthur Anderson is now defunct. Don’t you think that this has put the “fear of god” in the remaining big-3 accounting firms? This was a beautiful example of the free market at work—no government intervention was necessary; these firms now clearly understand their only really important asset is trust—specifically their reputation. If shareholders don’t trust an auditor, they will not approve them, and they will quickly lose all their clients—ending up bankrupt like Arthur Anderson. Certifying that the books of a client are accurate is no longer just a formality; it’s putting your reputation—and therefore your existence—on the line for these firms.

This trend toward greater transparency is self-perpetuating. It improves investor confidence, and investment naturally gravitates to its most efficient and profitable use.
The financial markets in London are a perfect example; previously characterized by widespread back-room dealing, they have recently been cleaned up, and are seeing a boom that is making them the premier international financial marketplace.

Therefore, my main assertion is that we are now seeing an emergence of truer, more open, equitable, and much more transparent capitalism—not just in the US, but also around the world (even China and left-leaning South American governments see the benefit of a free market.) Furthermore, this embrace of true (and global) capitalism is what is responsible for the exponential growth that we have seen in the world economy in the last 10-20 years. This boom is being felt not only in the industrialized world, but also throughout much of the third world—particularly Asia. The result is that infrastructure is being built and the economies of the countries are growing faster than under any other economic regime/philosophy. Even the supposedly “exploited” workers of the third world are earning more and are accumulating more valuable possessions than their forefathers could have imagined. I challenge you to find a more prosperous time in history.

In regards to the growing income gap between the rich and the poor, I can’t believe this is a result of poor getting poorer; the rich are simply getting richer at a faster rate—deservedly or not. And this group of super-rich is larger and more diverse than ever. Back in the day, there was only a handful of super-rich in the US; these families are household names today: Rockefellers, Vanderbilt, Carnegie, Morgan, Getty, et al. Today you have all kinds of innovators and entrepreneurs from unknown families (even from groups that were previously discriminated against) becoming fabulously wealthy.

For comparison, let’s go back to the idyllic “good old days” of yesteryear. A middle class working family lived in a tiny (by today’s standard) 2-bedroom saltbox house, had one car, never traveled by air, had no credit cards, no cable TV, no cell phones, no computers, no Internet access, etc.—all these things we now consider necessities and whose monthly payments now suck dry the wallets of middle class. The working class is not poorer today; they are just stricken with affluenza.

The ultimate argument for capitalism is its results; find me an economic system that not only created the greatest amount of raw, economic power this world has ever seen, but also given nearly all strata of society more purchasing power and therefore a more comfortable life. This last part is very important to remember when we begin discussing real wages of the working class, which have supposedly been flat or even declining in the US since the 1970’s. The homes, cars, appliances, and especially electronics we buy today are many times better (in terms of quality, efficiency, durability, etc.) than anything you could buy in the 70’s, and certainly not as manifoldly expensive. Technological advances can explain only part of this effect; I am convinced that we have—and continue to—see an incredible increase in the value of goods we purchase over the years due to efficiencies realized thanks in large part to more open and transparent global capitalism. This “Wal-Mart effect” in fact makes us richer, and it is not sufficiently reflected in the usual empirical statistics.

Any argument against capitalism, would by definition propose an alternate (or at least modified) economic system. And again by definition, any system besides a pure, laissez-faire capitalism would require some type of government or at least collective controls that would introduce distortions into the marketplace—either placing more or less value on a resource than it would naturally be entitled to. I am not advocating pure capitalism, I only want to make you think: what aspect of the economy is so important that we need to tinker with it (and be more likely to screw up rather than improve), and who (politicians, bureaucrats) can we trust with these decisions? We have seen that concentrated central planning—namely communism—has failed miserably; where would you set the limits? Many people hold up European (and especially Scandinavian) socialism as the perfect balance between capitalism and communism, and in a lot of ways it is hard to argue with: they have the lowest poverty rates, highest wages, and—amazingly enough—export more value per capita than low cost, export-oriented Asian countries. (This is because they produce higher-end products and operate more efficiently largely due to their excellent educational and vocational training systems.) However, I am convinced that this supposedly most advance economic system is not the answer for the developing world. Just as with your personal finances, you can’t spend your way into long-term prosperity.

Here is my 6-step program to economic prosperity for developing countries:
  1. Tackle corruption.
  2. Throw open the floodgates of laissez-faire capitalism to build wealth.
  3. Institute a low, flat tax rate.
  4. Invest tax revenues into infrastructure and education.
  5. Add regulations slowly.
  6. Add social programs as tax revenues allow.
I see doing this in any other order as “putting the horse before the cart.”

Well, that was longer than I expected it to be! Sorry for rambling on; I guess I should organize this a bit better, back it up with research, and write a more coherent article, but that’s not going to happen realistically!
Post a Comment