Thursday, April 2, 2015

Why Do We Need Free Enterprise?

Several months ago French economist Thomas Piketty was all the rage.

Seeming to follow Jean-Jacques Rousseau, Piketty argued that free market capitalism was producing too much income and wealth inequality. He offered a set of policy prescriptions designed to reduce it.

Piketty also influenced French politics. When Socialist president Francois Hollande took power in 2012 he enacted a program that seemed to derive directly from Piketty.

How did that work out?

By the evidence of subsequent French elections, not very well.

The New York Times reported the results of a series of elections that took place in France last Sunday:

In the aftermath of balloting on Sunday, conservatives in France were well positioned to build momentum before the presidential election in 2017, political analysts said Monday.

The elections for thousands of local council members in 98 ofFrance’s departments amounted to a rebuke of the Socialists, who were ousted by conservatives from control of 28 departments — some they had dominated for more than 30 years.

The steady advances by conservative forces appear to have set adrift France’s political left, leaving it fractured and uncertain about how to regain popular support in the midst of an economic malaise that has failed to improve substantially over more than four years.

The French problem with inequality, and especially with high unemployment has actually been around for quite some time. So-called conservative parties are hardly bastions of free enterprise. Among the consequences, hundreds of thousands of France’s best and brightest are now living and working in London.

Apparently, policies that aim at redistributing wealth tend to stifle economic growth, thus wealth production.

Some believe that inequality is a symptom of capitalism's corruption. They believe that the profit motive, whatever its value, tends to produce greed and that in a capitalist system the very rich will take as much as possible for themselves even if they starve everyone else.

To solve this problem, they propose tighter government control over the economy, first, by increased taxation; second, by increased government regulation. In some places they also want the government to own the means of production.

In their radical forms, these efforts to overcome inequality have tended to produce misery.  Whether in Communist or Socialist countries, the results are consistent.

But, when government control is loosened the same countries show exceptionally strong economic growth. Accompanied, it is fair to say, by an unequal distribution of wealth.

Free enterprise does not solve all of the problems of inequality but it does solve the problem that excessive government control creates: that is, extreme poverty.

Edward Lazear asserts the value of free market reforms by examining the results obtained by nations that introduced them:

Consider some facts: In 2013, the World Bank reported that the number of people world-wide living on less than $1.25 a day had decreased dramatically since the early 1980s. In 1981 half those in the developing world had income below this threshold. By 2011 only 17% lived on less than $1.25 a day. In China 84% fell below the level in 1981, a proportion that shrunk to 6% by 2011. In India the figure fell to 24% in 2011 from 66% in 1979.

The fact that inequality within India and China has grown is of minor consequence. What’s important is that the average citizen of these countries, once among the poorest in the world, has seen income rise substantially. Though China and India are the most striking examples because of their size, smaller developing countries have experienced similar changes. In 1993, Vietnam had 64% of its then nearly 70 million people in poverty. But by 2008, after implementing market-based reforms, and with a population of 85 million, the percentage of Vietnamese in poverty had fallen to 17%, according to the World Bank.

But, Lazear asks, why should we believe that these same policy prescriptions will work for developed economies:

Still, these countries are very different from rich, developed countries and it might be argued that their lessons are not relevant for wealthier countries. Perhaps not, but there is no compelling evidence that the poorest citizens of rich countries fare better when there is more government control of the economy.

Does this mean that we should ignore inequality? Not at all. Equality of opportunity is a basic goal of every fair society, as is help for those who fall on hard times. But the bulk of those who have moved out of poverty in the recent past have done so because their governments have turned away from state control and toward markets, not the reverse.

No one doubts that capitalism is flawed. The same applies to all human institutions and to all policies. And yet, one should appreciate that capitalism has markedly improved the living standards of billions of people.

Economic policy is not designed to engineer the ideal state dream by philosophers and economists. If we say that capitalism is flawed, we must also add that those who condemn it are comparing it to something that does not and probably can never exist.

Idealists reproach capitalism for failing to produce the society that they want. 

We do better to judge whether it can produce and distribute goods and services to the general population. In that case, we would arrive at a different conclusion?

As for the idea of inequality, it is probably built into all human social groups. Some are older; some are younger. Some are richer; some are poorer. Some are stronger; some are weaker. Some have more talent; some have less talent. Some work harder; some choose to work less. 

And yet, inequality motivates. If some did not do better than others, no one would have anything to strive for.

It is surely possible to have too much of a good thing, and current conditions seem to have produced a cavernous divide between the rich and the middle class in America.

But, has this divide been produced by capitalism or by government meddling in the economy?

Lest we overlook the obvious, many people who could have made a good living in an old manufacturing economy are being left behind by a high tech industry that requires job skills that they do not possess.

4 comments:

Ares Olympus said...

I find these big questions intractable, while idealists are on both sides, between corporate power and government power.

So terms like "free enterprise" seem more like emotional code words to prevent thinking rather than encourage it.

I'm not sure how to best identify the most important bottlenecks in our economic success, but its easy to see that debt as a tight noose that feels liberating for a long time, especially when you compare yourself to everyone else, and see your debt is smaller, or see your debt is smaller than your asset values.

But its all like a game of musical chairs. When the music is playing no amount of debt is bad, and when it stops, everyone has to sell assets at the same time, and you find out who ends up short, and suddenly there are unlimited chains of debt defaults, and bankruptsies, of both good and bad businesses, all just caught by an unexpected slow down.

And so now we have a central bank willing to create unlimited amounts of money to keep everything going, while no real problems are fixed, like if we allowed a crash to sort through the defaults. So we're stuck, and there's no way out except complete failure, when the federal reserve finds itself on the wrong side of history, because the market suddenly requires a 50 trillion dollar bailout that can't be paid.

I've accepted the ideal that our fiat money system, where money is borrowed into existence, and all that debt has to have interest paid on it, and when economic growth fails to provide enough "new wealth", i.e. easy one-time resources to exploit, it crashes.

I tend to think 2008 was the end of any sort of "real economy", and so when we talk of "free enterprise" all that really means is enabling people with the right connections to have unlimited access to cheap debt to speculate up bubbles for quick wealth.

So that's not 100% of the economy, but that's the last place for "easy wealth", and the rest of us benefit by that economic "trickle down", but only as long as we can keep growing hidden debts that will never be repaid, and keep pretending the future will always be bigger than the present.

So government regulation can't save us from that. And large corporations with unlimited access to credit and debt can't save us from that.

And so we really can't have any idea at all what "success" looks like until we have a crash that the federal reserve can't paper over.

I know its easy to wrongly believe we have problems that no one has had before, but its true this time.

Everyone has to keep playing the game, and money keeps flowing, and governments can try to offset some of the excesses, and keep the poor comfortable enough to not revolt. And that would seem all that we can do.

What makes me feel wrongful certainty is to look at the idea of retirement, the idea that 25% of the population with enough money to save something, are putting it all into abstract markets, believing someday they can retire. But all that money doesn't exist until you sell, and so most of it will never exist, either because of asset devaluation or inflation or both.

So what's an enterprising person supposed to do these days?

My only answer is you'd better invest in something that has value to your community beyond your dividends.

Anything else is greed and lies, and your own participation in that.

Ares Olympus said...

Here's a 2 year old editorial by David Stockman, starting out with observations of the S&P stock rises, awesomely sitting on top of a THIRD bull market, but this one has lasted since a January 2009 bull market.
http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html?pagewanted=all

You can see its current plateau just below 2100 after a low of 800. So people with money to bet had their wealth increase by 162% in 6 years, a 17% return per year.
http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive

Someone owns that "wealth". Does anyone believe it's going to keep going up another 162% in the next 6 years? No?

What does "Free enterprise" mean in an economy where the 1% owns 50% of the stocks?

A smart cousin has an engineer husband who claims he's putting $500k of his own inheritence into a business to create solar power systems via a lens system. He has one partner, and looking for investors, starting at $25k. He said people who invest should consider it 'throw away' money they may never see again. I was impressed by his honesty. But I guess when you are putting your own money in, you don't have to lie.

But I was less impressed about his business plan. Basically his goal was to be "independently wealthy" so he could spend the rest of his life inventing things without asking anyone for anything. So his his business plan was to put everything into this one shot, and prove the technology was viable, and some rich company like Google would be impressed and buy up his patents for $10 million or whatever.

And if that plan fails, he promised my cousin he'd get a real job and be sensible after that.

So that's my tiny window into the land of big money. Some people are willing to take $500k of savings from his now dead parents and transform it into $10 million. And maybe 10% of these dreamers will win the lottery.

Is that how our ancestors use to think? I suppose many did. That's why they came to America, to have new opportunity.

My ancestors came in 1850 and saw the free land as their gateway to wealth. My grandfather owned 80 acre farm in the 1920's, and rented another 80 acres and passed through the great depression debt free. Farming is never going to make you rich, but it will protect you from caring whether our financialized world crashes down.

They say the problem with depressions is people stop being willing to take risks, so having a Federal Reserve that will backstop the economy no matter what must be a great boon to the risk-takers, the honest ones like my cousin's husband, and the dishonest husters alike.

It seems like a good time to be a billionaire, where you can buy up all the best inventions and throw easy money at dozens of them, knowing all but one will fail, and that one will make you your next billion. It seens like a good life for people who are good at that.

Its hard to imagine what the world will become when this easy credit dries up, and even the billionaires are too scared to invest, knowing the market bottom is still 5 years away.

And in a "conservative" world, at some point the 90% failure rate will rise to 99%, and then the big money holders will lock down their profits in tried and true businesses.

Perhaps after stocks drop 90% in the next crash, Buffet and his friends will buy up everything from those who have to sell, and the middle classes $500k retirement stocks will be sold for $50k, and then the real golden age of the new robber barrons will shoot for the whole game, and our plutocrats will be benevolent, and let us keep our democracy in name.

But really, I'd rather be my grandfather with the debt free farm, and when Buffet wants to buy my neighbors farm, maybe I'll buy it up for 10% of its precrash price.

Its going to be interesting, but so far I've not decided to become a farmer. But I will be looking at self-directed IRAs this year.
https://en.wikipedia.org/wiki/Self-directed_IRA

Ignatius Acton Chesterton OCD said...

Free market economics is important to our society because otherwise we wouldn't have Monica Lewinsky taking over Rosie O'Donnell's place on "The View." If this kind freedom were not afforded to television producers, people wouldn't get the important voices they need and want to hear, because the socialist bureaucrats would have us listening to Rosie all day. This is what Piketty and other sophisticates do not understand. Monica Lewinsky has EARNED that seat on "The View." Her credentials for fame, celebrity and opinion are unmatched. I am happy for her, and for the American daytime television audience. The future has never looked so bright.

Dennis said...

Yes
Think Cell Phone and how a society that has a small amount of free enterprise took the risks early on to develop the means to create the possibilities that now reside with just this item. Just the ability to access knowledge alone opens up increased possibilities.
Yes there are things that we wish did not happen, but there are so many advances that have made better the life of all who would use its ever growing possibilities. Even those who are in poverty have access.
people, for the most part in this country, make their own beds, but don't want to sleep in them. As a young poor guy I stood in line loading watermelons on rail cars for $5.00 an hour. I worked construction during the summers, sold boiled peanuts and also spent many hours developing my abilities while others partied, vacationed and generally wasted time doing nothing to improve themselves. I joined the military to get the GI Bill and learned there was nothing I could not accomplish if I just worked hard. In that military was a significant number of minorities who were doing the same thing. People are the masters of their own destiny in a country that has free enterprise and true capitalism. Other systems lean on governments to control what is expected in that society.
The reason more people are falling by the wayside is the growing government involvement in almost every aspect of our lives. When a government, or for that matter do gooders, take away the desire to challenge or be challenged by life it/they take away a person's ability to believe in themselves. No one is happy with being dependent.
The sad part here is that given the chance to face the exigencies of life a significant number of people can succeed on their own.
We DO NOT have a free market system and if we keep allowing government to grow we will be slaves to the state. This, in many ways covers some of why we are losing our way. http://thefederalist.com/2015/03/31/gay-marriage-isnt-about-justice-its-about-selma-envy/