Monday, October 28, 2019

Why Put Capitalism on Trial?

This past Friday, the STA Money Hour economists talked about Capitalism on Trial. Usually their radio show is about managing your investments and retirement, so this seemed different and caught my attention.

Luke Patterson was doing most of the talking; along with him was Max Gaines. Patterson started this segment by pointing out that we have nearly 16 million new eligible young voters, who were not old enough to have voted in 2016, the last presidential election. What is on the mind of these new voters?

Not the stock market, not tax cuts, and not deregulation, but rather things like climate change, and income inequality, and forgiving of student loan debt, and more free stuff.
If even half of these voters show up to vote, that could be a problem for Donald Trump. And the alternative—all of them: Warren, Sanders, Biden, even Buttigieg—are extreme (what he calls left, and what is southern statist tyranny on the Spherical Model) and open about their socialist plans.

The economic sphere is the center of the discussion this election. As he puts it,

Profiteering, capitalism, free markets are absolutely on trial—I think fundamental this election. The way of life in the United States I think is also on trial—what we want, and how we want to do things.
So, Patterson goes ahead and makes the case for capitalism. He sets up the defense with this information about what capitalism has done for the United States:

There are now 46.8 million millionaires around the world. That’s up 1.1 million from mid-2018. That’s according to a report released this week by the Credit Research Institute. Thanks again to the value of both financial, like stocks, and non-financial, like real estate assets. The report reveals that there are a lot more millionaires—again totaling 46.8 million millionaires around the world.
From the Credit Suisse Research Institute
Global Wealth Report 2019, p. 11
You’ve got the United States that’s a big part of that. About 25% of the global market capitalization, and the United States is the millionaire capital of the world, according to this report. This year the United States extended its unbroken spell of wealth gains, which they say began after the global financial crisis of 2008. The country now accounts for 40% of dollar millionaires worldwide and 40% of those in the top 1% of global wealth distribution.
The United States, and its system, makes a lot of millionaires. A lot of wealthier people.
This is just the beginning point. The opposition might even say this is a bad thing—creating more inequality, because they don’t understand wealth creation and they think someone gaining wealth means they’re taking it from someone poorer. So there’s more education to do to defend capitalism. Here’s more from the radio broadcast on how US wealth creators compare to other countries:

Luke: And on a per capita basis, there is no country even close. Not even China. Not even close to the United States. They are so distant in second, they’re not even second.
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What’s more, the biggest gain in the number of millionaires this year comes from—I’ll give you two guesses, Max. Is it Denmark, Switzerland, someplace in Western Europe, China? Gaining the most millionaires this year, with all those people, with a 6% annual GDP growth? Is it China that is creating the most millionaires? Who do you think it is? Western Europe? China? Gaining the most millionaires this year? With all those people, with a 6% annual GDP growth? Is it China that is creating the most millionaires? Who do you think it is?
Max: You’re putting me on the spot.
Luke: I think you know the answer. Give it to us.
Max: I’m not going to say Denmark.
Luke: No. No, you won’t. But it’s the economic system that’s being, I think, promoted by many on the left, as sort of the system to aspire to, the Western European style system.
He’s tells us the answer eventually. But first he’s making clear how the opposition is characterizing capitalism:
Again, capitalism, profit taking, and corporations, and billionaires especially are evil, and our system broken, and so it should be eliminated and rebuilt under a socialist system. That’s what they’re advocating for.
They don’t even apologize for it anymore. It’s not something that they’re saying, well, you know, it just needs to be tweaked around the edges, improve the capitalist system, or make better the things that need improving. They’re not saying any of those things. They’re saying, Listen, this thing is broken. It’s rotten from the inside. It has to be eliminated and criminalized, called out for being evil—to rise up, squash it, and rebuild under a socialist system.
Here’s the essential information, and the answer to his quiz question:
But, as it stands, according to this data, the biggest gain in the number of millionaires this year comes from none other than the United States, which added 675,000 new millionaires in the past year. 675,000 of the 1.1 million.
Hear me on this. This exceeded the extra newcomers in the next nine countries combined.
So, the United States created, this year, 675,000 new millionaires. This exceeded the next nine countries combined: Japan, China, Germany, The Netherlands, Brazil, India, Spain, Canada, Switzerland.
Let’s let that set for a moment. And repeat it. The number of millionaires created in the US this past year exceeds the number of millionaires created in the next nine countries combined. That’s not a small difference.
But, so what if capitalism creates millionaires? Shouldn’t they just feel guilty for that? Don’t we need fewer billionaires and millionaires? Unfortunately, the opposition believes that.
As Patterson says,
So capitalism is on trial. You’ve got Elizabeth Warren. She proposed the Accountable Capitalism Act (nice word), which obliges large corporations to obtain a federal charter requiring directors to consider the interests of all stakeholders—not only shareholders and customers, but also groups representing societies, such as their employees, local communities, civil society, including non-representative anti-business NGOs.
The Chief Justice of the Supreme Court of Delaware—where, by the way, more than two-thirds of the Fortune 500 corporations have their legal home—has written a book arguing that corporations should be run for the benefit of their workers. The Financial Times also launched a new agenda: “Capitalism: Time for a Reset. Business must make a profit, but should serve a purpose too.”
People are buying into this nice-sounding irrationality. He adds,
In a recent letter by the Business Roundtable, 181 corporate CEOs disavow the profit motive. The corporate directors, accountability shareholders, the CEOs champion a new view now widely held by them. It says that profit could only be justified for virtuous conduct, that profit should merely be a byproduct of making certain contributions to society. It’s a proposition that the Business Roundtable already implicitly accepts.
So there’s the central debate question: shouldn’t making contributions to society be a higher value than making a profit? Patterson makes this assertion:

In fact, the profit that a business earns is a pretty good approximation of its contribution to society. One might think of it in terms of a simple equation: revenue (what people pay in a competitive market) minus cost (the value of resources used to provide a product or service) equals profit—which is a first order indicator of a business’s contribution to society.
Here's the equation more visually:
revenue – cost = profit

Profit isn’t bad. As Patterson says, “profit is one of the most powerful signaling devices in the free market.”

Back in 2013 I was taking an online Hillsdale College class on economics, and also reading Poverty of Nations. So I wrote a number of economics pieces, for example, herehere, and here. Professor Gary Wolfram, the Economics 101 teacher at Hillsdale, had pointed out that the decentralized free market system makes it possible for the market to prepare and provide what he wants to buy his wife for her birthday even before he has thought about it. It’s amazing. The wide variety of choices, at costs we’re willing to pay (exchange for the fruits of our labor) are far beyond what is available practically anywhere else in the world. He also said—and I’ve heard others point this out as well—capitalism is based on providing goods or services to people—to serve others. The only way to make a valuable exchange is to think about what will make the customer so pleased that they are willing to exchange their own profits (the fruits of their labors) for whatever it is you’re offering them.

Back to the defense of capitalism. Here’s Luke Patterson again:

In their search for profit, businesses create the dynamic for economic growth and prosperity, rising living standards. Is this not a contribution to society of the most dramatic kind imaginable? The contribution to society, the profits making people wealthier, bringing more people out of poverty? Is that not a contribution to society?
He later goes into some detail about estimates of costs surrounding Medicare-for-all, which is just one of the promises of “free stuff” that Elizabeth Warren fails to show how she will pay for. She says she’ll never take from the middle class. But studies show there isn’t enough wealth in the upper class to take from to pay for this giveaway, which takes profits, and even prices, out of the equation.

Here’s what we can know for sure: the free market creates wealth. It doesn’t just move money from some people and place it in the hands of others; it creates actual wealth—new surplus resulting from work. The free market has indeed lifted more people out of poverty than any other system.

It’s not just luck. It’s not just “Well, things are going OK for now, but that can’t continue.” It’s not just, “Sure, socialism has failed every time it’s been tried, but it just wasn’t ever done right.”

I know, for certain, that I am a better expert on what kind of healthcare I am willing to pay for, what foods I’m willing to buy, what kind of transportation will meet my personal needs—or anything else we make payment exchanges for—than some bureaucrat in a faraway office.

Prosperity requires the freedom to make those exchange decisions for ourselves. The person who earns the wealth should be the one to decide how, when, and whether to spend it, save it, or invest it. Any path that allows anyone else to make that decision leads to poverty.

So, when we’re talking economics with young people, we need to make sure that, if they insist that they care about the poor (which they think might include them), we let them know the way to lift the poor is more free market, combined with careful philanthropy—not more government control.

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