Sunday, October 04, 2009

The Evils of Capitalism

I swear, I do some of my best work on forums having nothing to do with my best subject. Over on the Off Topic forum of the El Goonish Shive forums (EGS is a webcomic), somebody comes in posting about "Net Neutrality." Someone else posts something about capitalism and the free market being essentially the same thing, and his absolute trust in free markets, as opposed to the other guy's distrust of markets. And this is what falls out of my brain. I'm calling it:

The Evils of Capitalism

And this is where you get it wrong, and lead folks like blort down the wrong road. The Free Market is nothing more than the notion than the notion that society allocates resources best when it does so via an unregulated market. This is true, so far as it goes. But Capitalism is more specific to the current era, and carries with it baggage accumulated thanks to a property regime that, in my opinion, is wrong in places, and results in concentrations of wealth that must, ultimately, turn into concentrations of power via government. Capitalism is its own worst enemy (and Adam Smith himself predicted this very phenomenon): under Capitalism, a John D. Rockefeller can make a fortune providing a plethora of petroleum products for the consumer at prices lower than ever before seen, thus creating opportunities for more innovation and more fortunes, overall a good thing. But then the big money can then turn around and use that fortune to cement his own and his people's position, by acquiring rent collecting opportunities--ramming legislation through that limits potential competitors more than himself is but one of the tools.

Markets are very efficient at property allocation. The question the market cannot answer (except, perhaps, under a condition of total anarchy, and even then the market only provides the evidence; we still must use our own brains to figure out the answers) is "What do we properly regard as property?" For when this is answered incorrectly, the market will show us, with brutal efficiency, why we are wrong... but we ourselves may be so enmeshed in the system we either fail to notice, or even deny the evidence. A perfect historical example is chattel slavery. American slavery was a very different thing from Mediterranean slavery (argument lifted directly from Stanley M. Elkins Slavery).

Mediterranean slavery was a heavily regulated institution, but both church and state watching over the institution with a close eye. It was as humane as slavery could be (which isn't very, but I'm just saying), and there were many opportunities for a slave to be freed. The pressure was toward gradual elimination of slavery, and, like so many other places, when it was finally abolished, the abolition occurred bloodlessly.

Slavery under Capitalism

Contrast the American experience. Under pure Capitalism, a thing is either property, or not property. Further, in the absence of a power system preventing a thing from becoming property (whether it be a substantial religious/philosophical influence, or access to friends and relatives), some people WILL reduce just about anything to property, and gaining by doing so, influence others to do so as well. Thus it was that, while white indentured servants had to be freed at the end of their term, lest word get back to England and Europe the fate waiting for future indentured servants in the Colonies, African servants had no similar defensive power structure, and as such could safely be, and therefore were, reduced to property. And once they were property, the law made few restrictions as to how this "property" might be "used".

But People are Not Property. Reduce them to such, and you reduce both them, and yourself, from personhood. For the slave must carefully avoid thinking, lest he notice his condition and despair, thus robbing the slave (and the public) of the creative potential of a human mind. The slave master, on the other hand, must devote his energies to suppressing rebellion, causing a similar impact on his potential as it does on that of the slave. Additionally, the master must singe, and ultimately burn out, his conscience, in the process of doing so; the more his conscience complains, the more likely he is to invent even more untrue ideologies (ie. racism), distorting his thinking further, and reducing his wealth producing capabilities even more.

Make no mistake: the market, left unrestricted, punishes both master and slave (and I'm not sure which gets it worse, since at least the slave has the benefit of a market value protecting him from excessive levels of cruelty!) for this violation of correct principle... by imprisoning them within this horrible system. For while the generation of slaveholders that first cemented the slave's condition in law doubtless saw benefits, the market quickly devours those benefits by pushing them into asset prices (the purchase price of a slave is higher than that of an indentured servant). Nobody after that point gets to be a free rider; he must pay a price for his slaves at least equal to the benefit the former owner could have gotten from the slave. But why would someone willingly buy into such a system, if it isn't even all that helpful in the long run?

Making Money or Taking Money?

My answer is that the vast majority of people understand accounting far better than they understand economics; or, to put it blort's way, people are greedy. For under capitalism, people follow the money, wherever it may lead. More profits is inherently better, and believed to be so, without reservation, by the layman economist because he imagines the only way to increase profits is to improve productive efficiency. And this is true... IF we're using the definition of "profit" used by economists, which is revenues minus ALL wages, rents, and interest... even the opportunity cost of this operation to the entrepreneur, himself. But most people don't; they instinctively use the accountant's definition. For the accountant, profit is what's left over from revenues once expenses have been paid. Profit equals revenues minus what you have to pay others for.

The difference is crucial, for under the accountant's definition, there are TWO ways to increase profits. Efficiency can be improved, leading to more revenues relative to the factors used; or, more factors can be brought under the ownership of the business owner, thus dropping the opportunity cost of these assets from the balance sheet. For example, if a man rents a storefront, he can increase his profits by making his store better (increasing revenues without increasing the resources used), or taking ownership of the storefront (thus dropping the opportunity cost of the storefront from the balance sheet). If he pays another for his labor (whether weekly, monthly, or for a five-year contract, in the case of indentured servitude), he can increase his profits by increasing the revenues of his operation through greater efficiency, or he can utilize the labor of someone he doesn't have to pay, thus dropping the opportunity cost of labor off the balance sheet.

It is very important to point out that from the economist's perspective, there IS NO PROFIT in either of those second options, the one that involves taking ownership of an asset he previously had to pay someone else for. There is, at best, a revenue neutral transferring of revenues from one person to another... but often, the effect is a net loss. The opportunity cost of a slave is the productive potential of a free man... but that does not matter to the slave master, since his revenues are up as a result of reducing a man to slavery. And if he DID buy his way into the system, while he has realized but small net gains to himself (having to pay the previous master the opportunity cost of giving up a slave), the abolition of slavery wipes his asset book clean. He goes from being a rich man to a poor man overnight... and therefore, though the slaveholders are every bit as held down by the system as the slave himself (witness the explosive economic growth in places were slavery was illegal, relative to that of the slave states), he dare not permit the institution to be abolished, because he is psychologically attached to the asset value of his slaves. It makes him "feel" rich, even though he isn't.

Political consequences of Rent Seeking

What does this have to do with Capitalism as a whole? The fact that while markets are the best way to allocate goods, it is also very efficient at entrenching evils (until such a society is overtaken from without by another society that has not entrenched that evil). People become wealthy by performing valuable services... but then can use that wealth to turn access to their profession into property. A big company may successfully petition the government to grant them a privileged position (generally protection from competitors) in exchange for a share of the loot. A particularly high paying profession may convince the government to erect barriers to entry (through state required licenses, etc.) in exchange for a share of the loot. A large developer might get preferential treatment with regard to the acquisition of land (to the point where municipal governments will deliberately create blighted areas for the purpose of seizing it to sell to a developer), in exchange for a share of the loot. Economist have a term for this sort of behavior: rent seeking. It's the effort to take control of something for purpose of requiring others to pay a toll to access it, whether customer or competitor... a thing they did not create.

And our economy is FULL of these kinds of things. Look at the health care debate, for example. A lot of people are convinced that the current costs are the result of the free market. Strictly speaking, this is true, but that is only because the market monetizes the rent seeking behavior of pretty much every participant in the health care system. Over the past century or so, enormous barriers have been erected against entry into pretty much every aspect of the health care system. There's doctor licensing (which requires far more in the way of expense than is actually necessary to acquire the necessary skill to perform basic services), centralized drug regulation (which big pharma can deal with much more easily than small pharma), tort law (which fails to recognize the inherent risk involved in medical care and medical procedures), preferential regulatory treatment of patented medicines over organic (and therefore unpatentable) alternatives, the insanely expensive nature of the legal system itself (which is, itself, caused by the cartelization of the legal profession), intense "fairness" regulation of health insurance and medical care which has the effect of shifting costs from those who incur them to others, employer health care requirements that have the effect of creating mini-monopolies over the employees of smaller firms, and mini-oligopolies over the employers of larger firms... the list goes far farther than I can even begin to go. At every point of contact, the money spent into the medical system is diverted from actual medical care, to the costs of maintaining, extending, and enjoying all the privileges granted by government... in exchange for a share of the loot.

Rent Seeking in the Communications Industry (Or, the Nexus of All Rent Seeking)

There is rent seeking in the communications industry, as well. Presently, rent seeking behaviors are likely low (in the Internet industry, at any rate), due to the fact that there are still plenty of real capital investments to be made. But when the field ultimately matures, the money that presently goes into laying new lines, sending up satellites, building towers, and such will go more and more into rent seeking behavior: efforts to control the communication system. And government will not merely support it in exchange for a share of the loot: large budget mass democracy creates a market for centralized control of media, the value of which is exactly proportional to the size of the government's budget. Centralized control over the media is the very engine of rent seeking, for everything the government does must pass muster with the electorate. The ability to saturate a market with a particular message, or to deny access to a particular message, has a value that can be measured in dollars, a value that is reaped by those larger companies that have the ability to edge out smaller competitors.

So with regard to Net Neutrality, we're between a rock and a hard place. On the one side, we've got the rent seekers, who will, if able, consolidate control over the medium of communication. On the other side, we've got government types saying they will protect us from the evil corporations (and rent seeking IS evil)... but it's every bit as likely that those very politicians are the tool of the rent seekers. In addition, the politicians AGAINST Net Neutrality might ALSO be the tools of the rent seekers. There are numerous examples throughout American history where BOTH sides of the debate were dominated largely by what we today call "Astroturf". It's entirely possible Net Neutrality is yet another example of that. That's why both sides of that debate scare me.

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