Monday, March 10, 2014

Answering Readers' Comments

After having written several blog posts about the superiority of laissez-faire capitalism, I have seen quite a few comments that ranged from thoughtful responses to shrill insults. I have decided to focus on the comments that were aimed at my arguments than at my person. The following are the most common comments that I have received and my answers to them.


1. The free market, when left alone, does not solve every single problem.

I suppose that it is possible that I have been living under a rock but I have never heard of anyone, at least no one intelligent, on my side of the argument who has ever subscribed to such a caricature of an idea. The free market is merely the function of the free exchanges of goods and services entered into by individuals. How can the free exchange of goods and services “solve” anything other than the immediate needs of the sellers and the buyers to sell or buy the goods? Furthermore, I don’t understand where people get the idea that I think that the market “always knows exactly what to do and when to do it.” If I truly believed that, then I would need to come up with an answer as to how I would account for businesses that go bankrupt.

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2. Capitalism is immoral because the market economy is controlled by humans who are susceptible to greed, corruption, and exploitation.

People who think like this don’t ever seem to consider that government officials and bureaucrats, whom they want to regulate those greedy, corrupt, and exploitative corporations, might be susceptible to the same kind of greed, corruption, and exploitation. When I raise such an objection, they are quick to counter that such people can later be voted out of office, which, though charming, does not really hold much water considering incumbency rates that reach up to 90%. Furthermore, they do not ever seem to think that it is much easier to “vote out” businesses that they do not like simply by refusing to buy their products. As crazy as this may sound, unlike the government, businesses, not even the Almighty Samsung Electronics or the Great Exxon Mobil can force people to buy their products.


3. If free market principles were allowed to rule, what that means is everything would be based on maximizing profits.


And even if they did, this is bad because...?

I simply do not understand why there are so many people in the world who seem to think that profit is synonymous with evil. What is profit? Merriam-Webster defines profit as “the excess of returns over expenditure in a transaction or series of transactions; especially: the excess of the selling price of goods over their cost.”

With all due respect to Merriam-Webster, however, profit is more than that. It is also society’s way of ratifying a business’ past production decisions. To explain, when a business makes a profit (assuming that it makes a profit honestly without having to be bailed out by taxpayers), it is an indication that it is able to make products that consumers want to buy aka something that people think is beneficial enough for them to fork over their hard-earned money.

If a business does not provide goods or services that people feel is worth paying for, the business won’t be in business for very long.

Furthermore, if these people do think that profits are evil, then barring the profit motive, how exactly should resources be allocated? We can either allow consumer preferences to guide production, or let the personal preferences of a monopolist (i.e., government) dictate what should be produced and how. But of course, the question is never posed this way.


4. Maximizing profits would mean that the quality of goods sold would suffer because greedy businesses would do everything to cut corners to make an extra buck.

As I mentioned earlier, no business can force people to buy their goods and services and businesses don’t always attempt to maximize profits. Furthermore, if a business owner were stupid enough to cut corners at every turn to maximize profits, consumers will eventually catch on and will seek alternatives. Goodbye, profits.

Incidentally, does that mean that when businesses are not motivated by profit, i.e. the desire to sell products that consumers want, the quality of goods sold would then improve? Would businesses then start to produce high quality products solely for the benefit of the Proletariat or the Fatherland? I suppose they would. If they were threatened with death but that arrangement will most likely not last for very long.

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5. Profit maximization means that only the rich will be able to afford to buy things like healthcare insurance or a good education, while the poor will have to stay poor.

Do I have to mention again that businesses don’t always attempt to maximize profits?

About halfway through the movie Elysium, I had to force myself to stop rolling my eyes lest they stay that way forever. At the end of the movie (SPOILER ALERT), Matt Damon and his band of merry revolutionaries raid the excess medical beds found on Elysium and then give universal health care to all the suffering masses.

Of course, non-economists who watched this movie did not seem to wonder why these excess beds were being stocked on Elysium when they clearly weren’t being used. It stands to reason that people are more likely to make a profit by making goods widely available to anyone who can afford to pay for them. Initially, prices would be high, just as the first cars or the first mobile phones were ridiculously expensive. However, over time, as more people consume products, the more it becomes mass produced. This means that in the long-run, per/unit cost falls.

But why try to make sense when people can instead make a dumb movie with a straw-man argument about universal healthcare with cyborg-like humans and robots shooting lasers and missiles at each other?

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6. The free market has to be regulated.

The people who make such an argument seem to have either never heard of or simply wish to ignore the vast amounts of literature on regulatory capture. Somehow, all regulation seems to be solely for the public good!


7. Deregulation was what got the world into its current-day economic mess.

Firstly, deregulation is a myth. For one thing, when financial institutions like Goldman Sachs are allowed to make riskier bets while the government still insures their deposits, that’s not deregulation.

Furthermore, people who make these arguments are prone to believe that the world has undergone a revival of laissez-faire economics since the Reagan-Thatcher years. I would like to know what they’re smoking because that seems to be really powerful stuff.

All of that aside, however, can any of those people actually empirically prove that we are indeed living in an era of deregulation? Have the number of regulations increased or decreased? Do governments spend more or less money on regulations? Are there more or less regulators or bureaucrats? What about the number of legislation on the books? What about the number of administrative agencies today versus thirty years ago?


8. Capitalists are all about competition until the government steps in to provide competition.

This fails to take into consideration that in the free market, despite the size of certain businesses, a large business does not, in fact, have the ability to dictate every single transaction the way it wants. If that were indeed possible, Wal-Mart shouldn’t have to pay for anything. However, that is simply not the case. That is because, though some are indeed bigger than others, it does not change the fact that all businesses are “players.”

However, once the government engages in the business side of any given industry, not only would it be the biggest “player” in the business, it would also be the “umpire.” This fact alone should make any sensible person averse to government engaging in business.

Secondly, businesses and the government are motivated by very different things. A business is typically motivated by profit maximization or market share maximization, etc. The governments actions, on the other hand, is motivated by politics.

The government has no rational basis to determine what to produce, or in what quantities. It gets its money not by providing a good that people voluntarily choose to purchase, but by seizing the funds from its subject population. Since it therefore lacks a profit-and-loss feedback mechanism, every single production decision it makes is absolutely arbitrary, and necessarily wastes resources. Case in point, Medicare, Medicaid, Social Security, the Post Office, etc. etc. etc.

Furthermore, private businesses compete for consumers dollars and bear financial risks and absorb financial losses (again, this is assuming that businesses are not bailed out by the government). The government, however, is subsidized by the taxpayers, and the taxpayers would assume the risks and the liabilities for whatever mistakes or losses that the government incurs.

And these were my favorite ones. Perhaps some day I will come up with another list.

If your argument is not here and you’d like to see it addressed, feel free to write it in the comment section.

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7 comments:

  1. Hi John,

    I'm no economist and i don't pretend to be. I love the idea of a capitalist society where everyone prospers and government is a separate entity, devoid of profit motives. But when I look at the way capitalism has developed, and specifically in America in which you are referring to in regards to the companies mentioned, i am a little (highly) skeptical as to the current system's success in regards the methods used by the businesses and government there.

    I'll pick a quote from the latter part of your post and see if you can help me with your point of view some more, maybe i'm missing something.

    "However, once the government engages in the business side of any given industry, not only would it be the biggest player in the business, it would also be the umpire."

    As far as I can see, they are the umpire, because they do engage with business. They receive millions of dollars from lobbying by companies like Walmart for their reelection campaigns (and also direct campaigns) and the dealings of those meetings don't usually come to light. The fact that Walmart make some of their employees contribute to particular campaigns is more than suspect.

    But when you say that the government is about political gain as opposed to profit, it begs looking at who actually sits in those chairs of power, and when you see that the crossover of Wall Street and Goldman Sachs alumni are abundant, it's clear that the members of the government and their financial associates stand to gain a lot of profit from the decisions made by that government, bank bailouts for instance, which not just keep the companies above water, but allow massive bonuses to be dished out. Look at how much the government spends of defense who are some of the biggest spenders of campaign trails and lobbying - the companies that make defense contracts.

    From my way of seeing, the government has no need to step in as competition (as the comment you replied to in #8) said, but nor are the government and large businesses pursuing entirely separate interests. They are all so closely tied by both parties' individuals influences over each other that it's very hard to separate the two. In fact, when the money raised by the political parties comes from big business and individual citizens, whose own leanings are so heavily influenced by the media outlets owned by the aforementioned businesses, the idea of a separate and unbiased government operating for the good of it's average citizen seems an illusory concept.

    If you wonder why companies seeking only to maximize a profit can be detrimental then how about those same companies using said profits to influence governments defense spending, so the companies can in turn make more defense contracts, so they can join forces in the military along with companies like Halliburton (Hello Dick Cheney) and sail toward the next poor country with untapped natural resources in the name of spreading that free market freedom.

    So my point is, i'm sure capitalism was founded on some kind of principle where everyone might prosper somehow, but America is capitalism on steroids and has reached the point where the idea of a fair and caring government is long gone and corporate interests (or that of their financial investors) are the true dictators of the so-called democracy via capitalist means.

    Thoughts on that perspective?

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    1. Hello. Before I say anything else, I would like to thank you for your comment. It was very thoughtfully written. So here's my reply.

      First of all, it is a fallacy to assume that everyone would prosper in a laissez-faire capitalist economy. The only things that such an economic system guarantees is the freedom to engage in trade with one another without being molested by external factors; with the government’s role being limited to enforcing contractual agreements as well as to provide law enforcement and national defense.

      Whether or not individuals sink or swim is entirely dependent on their own merits.

      Secondly, you will notice that I repeatedly refer to the model that I champion and defend as “laissez-faire capitalism.” This is a very important distinction to make because the American economic model that you are challenging is not the model that I am championing. For all intents and purposes, the American economic model, as well as the vast majority of economic models that the countries of the world practice, is “crony capitalism.”

      You will also note that I am pro-laissez-faire capitalism (or pro-free trade) but I am in no way pro-Big Business. That is also an important distinction to make. The former is defending an economic model of a particular order, whereas the latter is corporatism.

      You have raised points about businesses lobbying the government for favorable (aka unfair) treatment. Of course I am deeply concerned (to use an understatement) about this issue, just as anyone else ought to be. But you see, that is one of the reasons that I am opposed to having a government that can regulate the free market as much as present day governments do. That is because when there is more government, industrialists take it over and the two together form a coalition that is against the interests of consumers.

      Businesses are superb institutions provided that they engage in trade without resorting to anything else outside of their limited power to lower production costs while increasing revenues.

      Similarly, in regards to your point about the collusion between the Treasury Department and financial institutions like Goldman Sachs, you have highlighted the point that I made previously about regulatory capture. To quote PJ O’Rourke, one of my favorite humorists, “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”

      So you see, when you say that “America is capitalism on steroids,” you are right in the respect that the American economic model is the pinnacle of crony capitalism. However, it is not the laissez-faire model that I champion. And the only way to save capitalism from the capitalists, the crony kind, is to limit the government.

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    1. I do not particularly like to resort to rhetoric about revolutions for three main reasons. Firstly, I prefer non-violent means unless compelled to resort to violence to defend oneself. Secondly, I am not an anarchist. And finally, history seems to suggest that revolutions are seldom peaceful and they seldom lead to the positive changes that the revolutionaries initially promise.

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  3. Hi John...I really can't find anything to argue about with this post. Oh no...could that mean you've convinced me? Maybe so since I'm really not educated in economics at all just struggling to understand a little better than the average joe. How's the weather in Seoul any hints of spring yet? I'm on the U.S. east coast where the weather has been more interesting than most other daily news stories. We had "thunder snow" twice in less than 3 weeks and one day it's 70, twelve hours later it's snowing. Of course any hint of the white stuff farther south than Maryland will create a vehicular apocalypse in every metropolitan area. It's all fascinating to watch as I work from home on my laptop. Yeah modern technology, and the free market of course.

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    1. You're on the East Coast? Aren't the cherry blossoms blooming soonish?

      The weather in Korea is fine. It's getting warmer but we could use a bit more rain.

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  4. No it's a bit too early and we're having an exceptionally long winter this year. It's snowed multiple times and most years we don't even get snow here anymore at all. We've had more than enough wet for my taste lately. It won't be long now before everything starts to bud. I just hope we don't get a cold snap afterward and it bruises the buds before they can bloom. When I look at pictures of SK in the spring and summer it looks a lot like it does here, the azaleas, rhododendron and flowering trees. We've been sick in my house for a few days now too. I brought home a nasty bug from work that has a high fever and lots of head congestion. I'm up right now at 3 a.m. because my son came down with it around 2:00 and woke me up with the chills. I felt so bad Sunday I couldn't even drive myself to the doctor, had to get my daughter to take me. You know I'm ready for winter to be over. Be well buddy. Looking forward to your next post.

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