4 Responses to Guest Post: The Church, Advertising and the Junk We Don't Need

  • I am interested in commenting on this more extensively, but I have too much to get done today. For now, consider what Benedict wrote in Caritas Veritate:

    “A link has often been noted between claims to a “right to excess”, and even to transgression and vice, within affluent societies, and the lack of food, drinkable water, basic instruction and elementary health care in areas of the underdeveloped world and on the outskirts of large metropolitan centres. The link consists in this: individual rights, when detached from a framework of duties which grants them their full meaning, can run wild, leading to an escalation of demands which is effectively unlimited and indiscriminate.”

    I would argue that advertising often does exacerbate this situation.

    I would also note that, like practically every other economic phenomenon, advertising can be used for good. Ethics in Advertising makes that point and so does Benedict.

  • Today is a crazy day for me between work and the new encylical… I have a feeling the libertarian blogs are going to freak.

    I’ve only read the opening, but so far I have a ton of questions about Caritas in Veritate…

  • Interesting topic—great post. Thank you!

  • I am reminded of when anti-smoking ads were on t.v. From what I remember (cloudy at best) was that these ads helped _reduce_ smoking in the general population. But when government outlawed cigarette ads on t.v. they had to pull the anti-smoking ads as well. Of course, they are teaching that smoking is unhealthy at schools now, but I remember how clever those ads on t.v. were.

    What if government could make those “public service” ads regarding saving, looking for quality rather than buying “by name”, and other “ethical” ads combating the advertisements of cheap/unwholesome goods? Or perhaps consumer groups (like Consumer Reports, Nadar’s consumer protection agency?) could start an “ad branch” and make advertisements with similar goals.

6 Responses to The Problem of Plenty

  • Darwin,

    You are hitting upon a problem that is a major theme of my own social thinking – the problems of abundance and technological advance. I’ll take this opportunity to plug my essay again.

    http://www.geocities.com/joeahargrave/consumerism.html

    “Surely, no one consciously thinks, “I have a good job and a house, so it doesn’t really matter if I tell off my cousin whose wife I can’t stand and stop visiting my grandmother who always lectures me about how I live my life,” but the fact of abundance makes the lessening of these ties more possible.”

    I wouldn’t be so surprised if there were people who DID think these things consciously, however.

    I believe there is a direct link between the consumerist revolution of the 1950s and the sexual revolution of the late 1960s.

    I plan on writing much more about this topic in general in the future. For now I think we have to keep in mind, as well, that the current and previous Popes have called on people living in wealthy nations to “moderate their lifestyles” for the sake of those living poor nations, and have condemned modern consumer culture, which frequently does little else but relentlessly appeal to our lower natures for profit.

  • I wouldn’t be so surprised if there were people who DID think these things consciously, however.

    Well, you may be right, though I’d think often it happens in a backwards sort of way. For instance, in Victorian novels (a form for which I have a certain weakness) one runs into many people who would gladly tell off Old Aunt So-and-so, if only it weren’t so essential to suck up to her because of the inheritance. At that point, I would imagine there’s already little virtue to the observances to community which are paid, since they’re done for the wrong reasons, and so it is but a short step from there to people who find themselves in an income-based rather than inheritance-based economy feeling much more free to ignore people they don’t life — whether it be in the family or the neighborhood.

    I’m not really sure how one gets around this. Christ often warns us of the dangers that wealth represents to the soul. I would think this is because wealth gives people more ability to sin without material repercussions — and people being what they are, temptation often leads to sin.

    Yet at the same time, not only does it seem an odd humanitarian approach (arguably antithetical to the common good) to wish everyone back into relative poverty, but it wouldn’t work anyway. Given the ability to be so astoundingly productive on a historic scale, the number of people who are seriously willing to say, “I could easily work at a job and make enough money to provide my family with a house, two cars, air conditioning, a TV, a computer, a few hundred books, and an annual vacation — but instead I think I’ll forgo that to share my parents’ two room house until they die and do subsistence farming with no electricity or vehicles because that will require me to exercise greater familial solidarity” is vanishingly small. The only people who seem to have any success with this are the most cloistered monastics and the most serious Amish.

    Which is, I think, why the Church is right to focus on the importance of each individual person acting morally within the situation he finds himself, rather than trying to describe some sort of ideal economic/social system.

    Though I must admit, I do have a certain admiration for the Amish in this regard, though I would not by any means choose to follow their example.

  • Darwin,

    I just don’t think it is fair to jump from the call of the Papacy for us to moderate our lifestyles to the conclusion that this means we must return to material poverty.

    I think we both agree that there is excessive consumption in America. Do we need 50 different fast food chains? Do we need Hummers? Do we need, for that matter, millions of pronographic websites? Of course not. But there is a “demand” for these things, and in an amoral market philosophy, that means someone also can and probably should produce and sell them.

    To moderate our lifestyles means to cut down the excesses and to share the surplus with those who don’t have one. I favor direct, social investment and distributist policies as opposed to mere wealth spreading. But even so, I do believe that there has to be a redistribution.

    It also means to take a firmer stand against amoral consumerism, against the ceaseless appeals made to our lower nature, to our violent, lustful, selfish desires. Just because something is marketable should not make it socially acceptable. Nothing bothers me more than those who peddle poison, especially to the children of overworked parents, under the protection of some misguided notion of “liberty”. That which is destructive of the higher self, and of society, is ultimately destructive of true liberty, freedom from sin and vice.

    Finally, the Church may not have an “ideal system” but it has been consistent in its support for the distribution of property and decision making power to more workers, the decentralization of vast sums of concentrated wealth, and now as we see, the financial system that has become detached from the production of real value and the satisfaction of real needs.

  • Joe,

    In these discussions of excessive consumerism, there is always the problem of ascribing moral agency to macro outcomes that are based on micro decisions. To use the fast food example: No, maybe no one needs 50 different fast food outlets, but say I stop at one once because I’m hungry and there’s nothing else around; am I part of the problem? Have I been “consuming excessively” even if it’s a one-time thing? Then multiply my personal decision by 500 every day, and you can see how these relatively simple decisions can be made without much of a moral dimension behind them. (I suspect Darwin might express this better, knowing that he works with data. Individual data points have ways of aggregating into distributions, and these distributions have little to do with moral agency. Things that are black and white to an individual become smooth curves when grouped with millions of other people…)

    What would shape the morality of every little choice I make about my consumption? Does this business make its products with child labor in China? Are they clearing rainforest for grazing land? Do they give to Planned Parenthood? There might be obvious cases to avoid, but to process all that information about each and every decision is daunting, to say the least. We certainly try to avoid cooperating with evil, but when the “evil” becomes so attenuated, how do we act? And even if none of these circumstances existed, what is morally objectionable about it? When does consumption become excessive? When I do it, it’s not, but when a million people do it, it is?

    I’m not an expert on Catholic teaching on this subject, but it seems that, when it comes to the individual (and that is where the moral agency matters, after all), one’s soul can be disposed toward consumption as an end or a means. I *think* I know the difference when I see it, but there’s an element of subjectivity there. I try to be charitable to the relatives who gave their daughter a Mercedes when she turned 16, but I’ve got this inkling that something’s a little disordered there… Want vs. need, how do we know? Maybe the answer isn’t “Live Amish,” but is it Amish Lite? How far down do we go???

  • To be clear: It’s not that I think we should return to material poverty. I don’t. It’s just that I think so long as we don’t return to material poverty, people will continue to have the option of falling into excessive consumption (and the various personal and social evils that permits) and people being what they are, as long as they have the option they often will.

    Now, there’s stuff like pornography which I’d like to see legally stamped out to the greatest extent possible (which in the world of the internet may still not be very much) but it strikes me that with some of these other things it’s hard to do anything at a wider level — what we really need is for people to change the way they think about life and material wants. (Realistically, that’s the only way to really get rid of porn either — but one can at least try to use the arm of the law there as well.)

    So for instance, I wouldn’t see it as a problem that there be fifty fast food chains. I’m all for variety. Heck, I’d enjoy it even more if we mostly had individual fast food places that weren’t chains. (And if Bangalore Express and Kabobs-To-Go would open up right down the street from where I work!) But the problem in regards to health and consumption is when people fall back on these places too often, spending too much of their money on it and eating too much cheap junk instead of “real food”.

    What bothers me is not necessarily the overall trend of huge numbers of fast food joints, so much as the fact that behind that overall trend often hide individual data points of people who feed their kids a double stack, a large fries and a 42oz drink three or four times a week. Not only is that bad for the kid’s health, but it in turn may mask a breakdown in family life where people aren’t taking (or having) the time to cook real food for each other.

  • J,

    I think we are victims of consumerism as much as we are perpetrators. Yes, its true – they will keep making it as long as we keep buying it. But at a certain point, you cut the addict off. And I include myself in all this.

    It is the producers and promoters of excessive consumer goods that are primarily to blame. But it is also our responsibility to develop alternatives – alternative lifestyles and communities where we regulate what goes in and out of them. Ave Maria town was a promising idea but I don’t think its launched escaped the gravitational pull of consumerism. Part of that is because of the stinking ACLU, which threatened legal action if the town banned pornography (as if it were a damned constitutional right). But part if it is also the shallowness of its ideological underpinnings and the extent to which it still looks like any other American suburb, which is to say, laden with excessive consumerism.

    Want versus Need: we MUST know. People in Canada and Europe live on less than we do, and people in other countries on even less than them. I think it would be just… wrong to deny that many Americans believe they have a right not to as much as they need, but as much as they can theoretically consume.

Will Health Care Reform Create (More) Health Care Shortages?

Wednesday, June 24, AD 2009

MSNBC recently did an interesting piece on the shortage of primary care practitioners, which has become particularly acute in rural and low-income areas. As a result, many older doctors feel that they cannot retire because there is no one to take their place:

There are not enough general care doctors to meet current needs, let alone the demands of some 46 million uninsured, who threaten to swamp the system.

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4 Responses to Will Health Care Reform Create (More) Health Care Shortages?

  • Will it reduce specialists. Yes. Will it reduce general practicioners. I suspect so also. It costs about 40 K a year for a medical school degree. Add to that cost of living and a med student comes out with a huge bill at the end of four years. Now add to that three to five years of residency at very low pay. If someone wants to specialize that may take another 2 – 4 years. That’s in a residency and fellowship that they may be working 80 – 100 hours per week. Many doctors are in the mid 30’s before they start to make that big paycheck. They now have to pay that back in the form of loans and interest on those loans. Cut their pay, it won’t make sense to do that work.

  • Does government run healthcare work?
    Do people in countries like Canada and Britian dislike their government run healthcare systems. Do they wish they were more like the US?

    In 2008 Harris conducted a poll of 10 industrialized countries to see what their people thought of their healthcare system

    Here are the results

    http://www.harrisinteractive.com/harris_poll/index.asp?PID=927

  • Just one other thought for tonight. The average orthopedist works 34 days to cover his malpractice insurance costs. A OB/GYN may work up to 70 days. Part of the high cost of practice.

  • To norris hal:
    Note that the Harris survey (for the USA) was an online poll of 1,000 persons; meaning it’s a very unscientific poll. This recent CNN poll (http://www.cnn.com/2009/POLITICS/03/19/health.care.poll/index.html) claims that 80% of Americans are satisfied with the quality of the healthcare they receive. So putting the two polls together we conclude that Americans are satisfied but want a more, bigger and better. That would seem a cultural trait more than a real argument for changing the system.

    Polls should always be taken with a lot of caution -remember the election eve poll fiascos- because their results can be easily manipulated to reflect the biases of the pollsters. There are more scientific ways to measure the quality of healthcare with indicators such as patient wait time for surgery or patient cancer survival rates by most scientific measures the US comes on top (see http://www.freemarketcure.com/whynotgovhc.php).

    The big problem with our system is cost not quality. The tried and true way to lower cost is by increasing competition (even President Obama has made this argument). In our current system the Big Insurance cartel negotiates with the Big Medicine/Pharma cartel and the Big Government cartel (Medicaid/Medicare). To lower cost all that is required is to return the power of choice to the consumer. Have you noticed how Cosmetic Surgery cost have gone down (a recent radio ad in this market announces free lipo with the purchase of breast enhancement). The reason is that Cosmetic surgery is outside the cartel since it’s “not covered”. Government makes everything more expensive (ever heard of NASA); competition reduces prices.

Capitalism — When People Sell Things I Don't Like

Monday, June 15, AD 2009

With the garden currently shooting up, I’ve found myself again disposed to read gardening and food related books. I finished reading The Omnivore’s Dilemma last week, and aside from a few gripes in regards to Michael Pollan’s understanding of economics, I enjoyed it quite a bit. On the last run by the library, I picked up a copy of Barbara Kingsolver’s Animal, Vegetable, Miracle: A Year of Food Life. The idea of moving out onto acreage and growing much of one’s own food is something that I find interesting. I enjoy gardening, I enjoy cooking gourmet food, and I think there’s a cultural and psychological value to remaining in touch with the way that humans have gained food for themselves in past centuries.

However, Kingsolver is far more passionate (and less balanced) in her jeremiads against “industrial food” than Pollan, and more prone to denunciations of what “capitalism” has done to our food culture. Indeed, so much so as to crystallize for me a trend among those who denounce “capitalism” and its impact on Western Culture. Kingsolver had just reached the crescendo of a complaint in regards to large seed companies peddling hybrids and genetically modified strains, when she turned to the subject of heirloom vegetable varieties, and her joy at paging through lengthy seed catalogs full of heirloom seeds.

…Heirloom seeds are of little interest to capitalism if they can’t be patented or owned. They have, however, earned a cult following among people who grow or buy and eat them. Gardeners collect them like family jewels, and Whole Foods Market can’t refrain from poetry in its advertisement of heirlooms….

So you see, when large agribusiness firms sell farmers seeds for field corn which are genetically modified to repel pests,
that’s capitalism. But when catalog and internet businesses build a thriving niche selling heirloom vegetable seeds, and Whole Foods ad men wax poetical over $7/lb tomatoes, that’s… Well, it certainly can’t be capitalism, can it? Not if it’s good.

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8 Responses to Capitalism — When People Sell Things I Don't Like

  • Love free market and capitalism! They are the best!

  • “In some circles, “capitalism” becomes such a scare-word that people forget what it means.”

    Unlike “socialism” in some other circles, right?

    🙂

  • Great post, Darwin!

    It is ironic that things like Whole Foods are made possible only because they are one choice among many at the “capitalist” buffet table.

  • Actually, Joe, I’d agree with you that “socialism” as used in contemporary American discourse has become fairly meaningless. It’s used to mean any sort of centralization at all.

    Complicating this is the fact that many of the European groups calling themselves “socialist” these days are in fact groups endorsing technocratic oligarchy with a large social safety net.

    While on the other side, “capitalism” and even “free markets” are sometimes mis-used to endorse anything that large companies would like — even government protections of large corporations’ market shares.

  • This reminds me back during the election when the differences between the McCain and Obama tax plans were described as being a choice between socialism and unfettered capitalism, whereas in reality it was about whether the top marginal rate for the federal income tax would be 36% or 39.5%.

  • I’m currently reading Joseph Heath’s The Rebel Sell: How the Counter Culture Became Consumer Culture. Heath documents how much so-called anti-consumerism movements are defined in terms of branded goods, both negatively (‘I would never shop at Wal-Mart’) but also positively (e.g. Adbusters selling their own brand of sneakers). Heath’s view is that consumer trends are driven mainly by competitive status seeking, and that the anti-consumerist pose is simply one more strategy for gaining status and distinction through one’s consumer choices.

  • “but whose of us who are in any sense in the cultural minority should hesitate to rail against capitalism, when it is free markets which allow those of us with niche-y tastes to see our needs met as well as those of the mainstream culture.”

    If one would endorse or reject capitalism, socialism, or anything else culturally relevant based on how it allows for our tastes to be met, then, I think the reasoning that would follow would verge on relativistic. The point of having a rigorous discussion on the merits and demerits of the imperfect options we have come up with thus far is that there is a standard of justice that is worth striving for continually, I think.

  • I would tend to view most political and economic structures as relative rather than absolute goods. Thus, for instance, I see great virtue to representative democracy, but if I lived in a stable and well ruled monarchy I would be against any agitation to overthrow it for a democracy of unknown quality.

    In light of this, I think one should consider the likely results of replacing freedom with a more controlled system. Given that few people consider it worth while to spend extra money for food which is produced “organically” or “sustainably”, I think those who espouse that kind of food would do well not to seek to do away with free markets — since it is free markets which allow them to get what they want. If they somehow got their wish and saw free markets abolished while remaining a small minority, they would see not the imposition of their preferences, but in all likelihood those of the majority.

    In similar form, it is perhaps not coincidental that the Church developed a greater understanding of the advantages of religious freedom when in the space of a few decades the old Catholic monarchies of Europe were replaced by secular regimes hostile to the Church.

Your Wealth Makes Me Wealthy

Friday, June 12, AD 2009

One of the concepts in economics that people seem to have difficulty grasping at an intuitive level is how other people’s income affects one’s own income. Many people instinctively ascribe to the “lump theory” of money, in which one may imagine all wealth to consist of a set amount of money, like a dragon’s hoard. If you capture more of it, that means that someone, somehow, has ended up with less.

In certain circumstances, this theory might describe things pretty well, but in most times and places wealth grows and shrinks with productivity. Basically, if I am able to produce more goods and services of value to othe people in the same amount of time, then my income grows.

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5 Responses to Your Wealth Makes Me Wealthy

  • I agree. A man who won’t mow his own lawn isn’t much of a man. Even when I had 1 acre to mow, I did it on my own. With a regular, not a riding mower mind you. Couldn’t afford one.

  • I mow my lawn at home and absolutely hate doing it, although one of my sons mows half of it for me. I have my office lawn mowed and would never think of doing it myself. I would pay to have it done at home, except that I am cheaper than I am lazy (at least when it comes to yard work.)!

  • Excellent point. A related point is that rising wages in one field will make that field relatively more attractive, which means that wages in other fields will have to go up in order for employers to be able to retain workers.

  • My lawn mowing days are over, I hope forever, but I did it for many years and took pride in it, as did my son after me.

    My son, Michael, is matriculating at the University of Illinois this fall to pursue his MBA. Since graduating from DePaul in 2004 (Economics) he has worked for a credit union downtown while living in greater Lincoln Park. He secured that job, which has served him very well, by starting there doing part-time clerical work during the summers he was at DePaul. The part-time work opportunity came by way of a recommendation and tip from the CFO of an Atlanta credit union for whom Michael performed part-time mail room work while in high school. That summer job was the product of the CFO being a neighbor who so admired the outstanding job Michael did on our front lawn (the CFO is an avid golfer and can appreciate such things), that he offered Michael the job under the theory that “any kid who takes that kind of pride in mowing and caring for his family’s lawn is someone I want working for me.” Now that kid is off to Champaign. Taking pride in one’s work does not always pay off, even though we all agree it should I suppose; but sometimes it does.

  • Chesterton had some reflections on wealth [Illus London News U.S. 12 July 1924]:
    “It is a curious paradox that competition had really the same ethics as communism… The individualist of this school did not, indeed, think of it as other people’s money. Neither did he think of it as his own money. He thought of it simply as money, as a mass of worldly wealth vaguely wandering about, a floating treasure that was in its nature unattached… It was property without a proprietor…
    This sort of individualism had no sense of property…

3 Responses to The Stimulus Bill and Jobs

  • For a country with the current living standards of the USA the stimulus programme is misguided. During the Depression working men and women were desperate for any kind of work to keep hunger at bay, some of them even left for the Soviet Union in their search for a living wage. (Their fate was a terrible one.) It made sense in those days to finance road building and similar projects. On the one hand the roads and dams would pay for themselves by stimulating demand for cars and electrical products, on the other the expectations of the workers were quite low. This is the reason why countries well within the boundaries of technical posibilities such as India and China can get substantial returns on their infrastructure investments. But such is not the case for the mature economies already operating at the frontiers of production curves. For such economies it is better to cut business taxes and provide a direct subsidy to companies to retain their workers till the business climate improves. Given his luck, I expect Obama to get a boost from a purely secular turn of the business cycle which he’ll claim is due to his spending binge.

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Picturesque and Primative

Tuesday, May 19, AD 2009

From last weekend’s Wall Street Journal, an article on the not-yet-crowded heritage treasures in the world:

As dawn breaks on top of a mountain near the China-Vietnam border, hundreds of water-filled rice terraces reveal themselves, clinging to the mountainside in geometric patterns in every direction. The rising sun, reflecting off the water, turns some of the terraces bright shades of orange and gold. Then solitary figures appear, black against the rising sun — peasants with their water buffaloes hitched to wooden plows.

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5 Responses to Picturesque and Primative

  • I recall riding on a chartered bus tour of the Ring of Kerry 15 years ago … before Ireland’s “Celtic Tiger” really took off. The Irish bus driver, who was local to the area, stopped the bus at one particularly beautiful vista and told us that this was to be the site of a new factory.

    Several of the people on the bus gasped at the prospect. The bus driver turned around in his seat, looked at his passengers, and said of the landscape we were viewing:

    “It’s lovely. It’s green. It makes for a nice postcard. But you can’t eat it.”

    He turned back around in his seat and drove us away.

  • That is a breathtaking picture.

    I’d like to visit it when the Communist government in China is removed.

  • Tito:

    I strongly doubt that the Communist government in China will ever be removed, especially given the remarkably considerable power that they now wield and will (unfortunately) inevitably transform their nation into The New World Power.

    Besides, don’t you know these guys hold our currency hostage?

  • I strongly doubt that the Communist government in China will ever be removed, especially given the remarkably considerable power that they now wield and will (unfortunately) inevitably transform their nation into The New World Power.

    The communist government may be around for quite a while, due to their willingness to moderate enough to let their people develop while still holding on as what is these days effectively an oligarchic dictatorship. However, I’d very much doubt that China will ever to a hegemonic power. If the US is to pass that mantle on soon, I would imagine it would do so to India, which is another Anglosphere nation with all the global cultural benefits that entails. I’d bet more on the US remaining the world hegemonic power for a quite a while longer, though.

    Besides, don’t you know these guys hold our currency hostage?

    To an extent. But then, we hold their whole economy hostage, to a great extent. One can’t be an export based economy without having somewhere to export to.

  • I agree with Darwin. China will never become a world power due to their limited opportunities for growth. Combined with their inability to raise the standard of living outside of the coastal regions, we will see huge upheavals in the social structure of China which is already being felt. Throw in the disproportionate amount of males due to their one-child policy, we have a highly turbulent present and future awaiting communist China. Communist authorities will be spending an inordinate amount of time trying to quell their underclass in addition to crushing Islamist movements out in western China as well as Tibetan aspirations for freedom.

    It won’t be a cakewalk for the totalitarian authorities in Beijing. On top of all that mess they want to upgrade their military capabilities to match the United States and pursue the boondoggle of space travel.

    I won’t be surprised to see communist China collapse within my lifetime a la the old Soviet Union. China is not a homogeneous nation. They have competing ethnic groups (besides the Muslims and Tibetans), they still have Mongolians, Koreans, Cantonese, and various assortment of other peoples that don’t like being second fiddle to the dominate Hans.

The Culture of Death and Consumerism

Monday, May 18, AD 2009

Contributor Joe Hargrave posted a link to an interesting new essay of his today on the topic of the Culture of Death and its connections to consumerism. It’s an interesting essay, and I encourage people to read it. I do not pretend to similar length or erudition in this piece, but in formulating some thought about Joe’s essay I realized that it would be very long for a comment, so I’m writing it up as a post here instead.

There are a lot of things I found interesting and wanted to discuss (or dispute) in your essay — perhaps in part because I get the impression that our areas of historical knowledge are somewhat non-overlapping (I know most about 3000 BC to 400 AD, you seem to be most expert on the last two centuries), and the person who imagines himself an expert in anything invariably has all sorts of quibbles with what the “outsider” writes. However, I’m going to try to stick to what I think is my most central critique.

Joe finds at the root of the culture of death the materialistic and individualistic phenomenon of modern consumerism, and about consumerism he says the following, beginning with a quote from Pope John Paul II:

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7 Responses to The Culture of Death and Consumerism

  • Darwin,

    Thanks for taking an interest in my article. I appreciate the time you took to respond to it. Here I will address some statements regarding my positions.

    You write,

    Joe seems to see the evil of consumerism as being that of reducing the human person to its exchangeable value.

    It would be more correct to say that I see that as one of the evils. The very passage you quoted before making this observation shows what I think is perhaps more crucial; consumerism consistently appeals to our ‘lower nature’, to what is base and selfish within us, whether in the form of commercials, entertainment, eating, public events, etc. Our lower natures are easy to ensnare and enslave to addiction, ensuring repeat business. Our higher natures take years of patient guidance to cultivate properly.

    After describing some rather mundane pettiness in modern society, you go on to to say,

    Yet this is not, I think, merely a product of a cash economy or a capitalist society. Rather, it is a sinful tendency which is much deeper in our fallen natures.

    My response is that I would not try to isolate one cause, but to show which cause exerts the most influence at a given time. Our sinful, fallen nature is a constant throughout history. On this you and I will agree. The question is, how will it express itself? Humans have always had selfish tendencies, but in previous forms of society, and in non-Western forms of society, these tendencies have consequences that people want to avoid. Part of the problem of consumerism is that it not only removes consequences for selfishness, but encourages it. That makes a pretty big difference, I’d say.

    The next point I would address is this:

    For instance, modern capitalist society is much less violent, on a daily basis, than many previous societies. Not that wrath itself is necessarily less, but that wrath is less often expressed in physical violence.

    I suppose, in times of relative peace, this is generally true within such societies – though I don’t recall any previous society where school children took a sword to school one day and started slaughtering classmates in a fit of existential angst.

    That said, modern capitalist society is most certainly sustained through violence – in other parts of the world. We’ve been down this road before; cheap third world labor is brutally exploited to make modern capitalist society a reality. Workers are denied their rights to organize, to political protest, to form unions and parties that will advance their interests. Repression means cheap labor which the West has not only taken advantage of but sought to preserve through policy.

    The sanitized world many of us inhabit is an illusion propped up by blood and dirt and violence of every sort. So I do reject this notion of a more peaceful society.

    This is perhaps the more important point to address:

    I don’t necessarily see that people working for a collectively owned firm would be less inclined to treat others as objects than those working for a publicly traded corporation — just as I don’t necessarily see that those who belong to a credit union would be less likely to use their money to buy porn than those who use for-profit banks.

    I don’t think cooperative economics is going to necessarily cause people to stop looking at others as objects. That is more of an end goal to be reached after generations of living and thinking differently. What I do believe, however, is that we have to start somewhere. What cooperative enterprises do is take the individual, isolated atoms and links them together, at first only materially. For it to succeed, everyone must be concerned with everyone else’s performance and well-being. One person’s problem quickly becomes everyone’s problem.

    Over time, these enterprises must cooperate with one another as the people within each one cooperate amongst themselves. And then, these enterprises cooperate with all of the other institutions in the community. A material sub-structure of cooperation is created, and our daily habits have undergone a transformation. A corresponding transformation of thinking and perceiving develops. Combined with a Catholic moral philosophy, ever-present in the life of the community, a new respect for others is developed.

    My main point is that consumerism is as much a complex of unconscious social programming as it is conscious reflection and activity. Our daily routines take on an ideological life of their own and influence the way we think about everything. Our Christian values can serve as a strong buffer against evil influences but values can only go so far. A rearrangement of the daily routine is also required so that our physical brains are in sync with what the mind and heart want.

    I probably should have said all that in the essay. If I decide to include it, I will credit you for it!

  • Original sin.

  • Joe,

    Thank you for your thoughtful and irenic response to my response. As I was writing, and as usual finding myself to run long, I was hoping that I wouldn’t come off as brash or aggressive. I hope I didn’t — but if I did I’m thankful that you took it in your stride.

    Hoping to continue in this vein:

    consumerism consistently appeals to our ‘lower nature’, to what is base and selfish within us, whether in the form of commercials, entertainment, eating, public events, etc. Our lower natures are easy to ensnare and enslave to addiction, ensuring repeat business.

    I agree that in the modern world the satisfaction of our baser instincts becomes a major temptation — specifically that emphasis on consuming which provides the illusion which we can satisfy our deeper human needs by owning or consuming some material thing.

    However, I’m not clear that this is the result of a capitalist economy so much as the natural reaction of our fallen nature to a wealthy society. Throughout history, we see those in a given society who are wealthy acting in much this way. The lure of consumption seems to be a constant in any society with enough material wealth to consume, regardless of its economic system. In this sense, I’m not sure that anything other than becoming significantly more poor would “solve” the problem, and then only via lack of opportunity.

    By this I don’t mean to ignore those teachings which have to do with moral behavior in the business realm, but rather to argue that this doesn’t represent a “move to his economic model and this will fix everying” prescription but rather an attempt by our popes in the last 140 years to provide us with a moving target idea of how to treat our brothers and sisters with the human dignity they deserve in whatever economic conditions we happen to find ourselves in at this time.

    Humans have always had selfish tendencies, but in previous forms of society, and in non-Western forms of society, these tendencies have consequences that people want to avoid. Part of the problem of consumerism is that it not only removes consequences for selfishness, but encourages it. That makes a pretty big difference, I’d say.

    Here I would disagree with you on two points:

    1) I don’t think it’s accurate to characterize previous and non-Western societies as having provided greater negative consequences to prevent selfishness than our modern society — except to the extent that these societies were poorer and lacked welfare and charitable institutions such that one had a greater incentive not to offend those in one’s community enough that they wouldn’t help you in need. However, even just looking at the Bible (parable of Dives and Lazarus, parable of the talents, parable of the treasure in the field, etc.) it seems to me pretty clear that people exercised selfishness to the maximum that they believed they could get away with.

    2) The characterization of our modern economy as encouraging selfishness strikes me as taking a somewhat self-defining view of what free exchange is. One can say that the principle of free exchange means that everyone will be best off if everyone has the maximum of selfishness, but one can just as well (and I would actually argue more accurately) describe the principle of free exchange as meaning that one many not expect to take any benefit from another person without providing that person with a benefit of equal value. In that it’s called “mutually beneficial” exchange, one might as well characterize it as consisting of making sure you always give as much as you get, as making sure that you get as much as you give.

    That said, modern capitalist society is most certainly sustained through violence – in other parts of the world. We’ve been down this road before; cheap third world labor is brutally exploited to make modern capitalist society a reality. Workers are denied their rights to organize, to political protest, to form unions and parties that will advance their interests. Repression means cheap labor which the West has not only taken advantage of but sought to preserve through policy.

    To the extent that this is true (I tend to think that you over-emphasize this element a bit, taking the worst excesses of developing world abuse and extrapolating them as if this was the universal experience of the deloping world), is that necessarily different from other societies. Within the medieval European world that I know a fair amount about, there was a long history of incredibly bloody peasant revolts. And even during “normal” times, the social order was maintained through what we would see as very repressive laws.

    For all that developing world industrial workers are kept from unionizing, feudal serfs could be flogged or worse simply for the offense of trying to leave their land and seek a better living somewhere else. (And never mind the slaves who formed the analogous workforce in much of the ancient world.) And for all that pay is often low in the developing world, serfs often lived on landed estates where not only was the amount of food left for them after the lord to his share small, but if they dared to “steal” the wild fish and game that could be caught on the land, the punishment was anywhere from flogging to hanging.

    Indeed, it seems to me that the primary exit from this kind of societal violence and repression is when a society becomes sufficiently developed that there is plenty of material wealth to go around.

    What cooperative enterprises do is take the individual, isolated atoms and links them together, at first only materially. For it to succeed, everyone must be concerned with everyone else’s performance and well-being. One person’s problem quickly becomes everyone’s problem.

    Over time, these enterprises must cooperate with one another as the people within each one cooperate amongst themselves. And then, these enterprises cooperate with all of the other institutions in the community. A material sub-structure of cooperation is created, and our daily habits have undergone a transformation.

    I know this is something we’ve bumped up against a number of times in the past, but I remain skeptical of this development path because my experience of the business world is that it already requires this kind of cooperation — and while I would certainly say it is possible to follow a path towards holiness in the modern capitalist economy, it doesn’t do the work of guiding us there for us. But I certainly cannot succeed in the absence of my coworkers and those who work for me doing so. Nor can a company succeed without helping those other companies it works with to prosper. It’s good, and pleasant, and that interconnectedness is one of the things that I enjoy about the business world, but I certainly don’t see it as necessarily guiding people towards a personal transformation away from consumerism.

    It strikes me as harder and easier than that — more work for us personally as we seek holiness and right-orderedness, yet less work in that these things do not require a re-ordering of economic institutions from the ground up.

    Not that I object to the employee owned enterprises that you admire (though I do suspect that they must end up running more top down than you imagine on a daily basis — or else they would have to be based on very non-complex business models) it’s just that I don’t necessarily see them as solving the problem that we’re discussing.

  • Darwin,

    Thanks again for responding.

    You write,

    However, I’m not clear that this is the result of a capitalist economy so much as the natural reaction of our fallen nature to a wealthy society.

    I think we should dispose of the phrase ‘capitalist economy’. I don’t think I once used the word ‘capitalism’ in my entire essay, or in my response to you. To me the major conflict in economics is between democracy and oligarchy. Democratic, cooperative firms based upon private property and marketplace competition would by most definitions be called ‘capitalist’.

    Next,

    this doesn’t represent a “move to his economic model and this will fix everying” prescription but rather an attempt by our popes in the last 140 years to provide us with a moving target idea of how to treat our brothers and sisters with the human dignity they deserve in whatever economic conditions we happen to find ourselves in at this time.

    I must say, neither of these are correct. No one is suggesting that ‘everything will be fixed’ – it is not a fair representation of what I believe.

    More importantly, however, the Popes have passed clear moral judgments on both economic liberalism and communism, and more recently on consumerism. Catholic social teaching is not, and cannot be made into, a guide for individuals to cope with unjust social structures. It is a guide for Catholics who do, or seek to, play a role in shaping society in various ways. I truly mean no offense, but I honestly cannot see how one can read a social encyclical or the Compendium and interpret them in the way that you do. Pius XI did not say, ‘when you find yourself in a society gone mad with individualism do a b and c, and when you find yourself in a communist dictatorship, do x, y, z” – he sharply condemned both ideologies, declared that they were unacceptable for Catholics, that they were in error, immoral, out of control.

    Regarding the dispute over past and present societies, it is clear to me that consumerism is a new breed of selfishness. Without disputing the basic idea that people have always been selfish, the point here is that they are now expected and encouraged to be. We are not expected to marry, bear children, participate in civic life, or any number of things that were expected of a person before. These things are now simply one among many choices at the great buffet of life. And now we see with fertility treatments, genetic manipulation, and transhumanism, attempts to reduce every aspect of the reproductive process itself to a consumer act. A nearly 70 year old woman even 100 years ago could not indulge a selfish desire to bear a child, but today she can – it is suicidal madness and a gross injustice if a being can even be born to a woman so old, but they will try because the technology is here.

    As you say people will push the limits, and the deal is that the limits have been pushed, further and further. Technology has made it possible remove natural restrictions on selfishness.

    We will agree to disagree I suppose on the amount of violence it takes to sustain the ‘American way of life’. 1.5 million dead babies a year through abortion is violence enough.

    As for the work situation, I don’t know exactly what kind of work you do, but I do know that the typical American business is not a ‘community of solidarity’ in any meaningful sense of the term. Workers are often interchangible parts in a money-making machine. Unless you are particularly skilled, you are expendable. 80% of Americans work for a wage.

    It should be clear that what I am talking about goes far beyond what passes for cooperation in America today. The culture of death finds a powerful impetus in social atomization – in the belief that one is essentially to be left alone to deal with one’s problems. In yet another contrast with the pre-modern world, this is something new. With the breakdown of family even that refuge is gone. JP II recognizes all of this in Evangelium Vitae – it is not only a tragedy but a moral indictment of this entire civilization.

    We do not see ourselves as our brother’s and sister’s keepers. We see them most of the time as competition. Maybe this has, again, always been true – but never before has it been a cherished and widely accepted dogma, promoted by official propaganda.

    So what the cooperative does is link our fates and fortunes together in a way that necessitates closer cooperation, the Christian ideal of civic friendship. It is not a quick solution to all problems, it is only intended to be the first step in breaking the cycle of consumerism, atomization, demoralization, and mass murder.

  • Joe,

    I must say, neither of these are correct. No one is suggesting that ‘everything will be fixed’ – it is not a fair representation of what I believe.

    More importantly, however, the Popes have passed clear moral judgments on both economic liberalism and communism, and more recently on consumerism. Catholic social teaching is not, and cannot be made into, a guide for individuals to cope with unjust social structures. It is a guide for Catholics who do, or seek to, play a role in shaping society in various ways. I truly mean no offense, but I honestly cannot see how one can read a social encyclical or the Compendium and interpret them in the way that you do.

    Well, I’ll be honest: I’ve never read Quadragesimo Anno. I read Rerum Novarum some years back, and I’ve read a number of John Paul II’s encyclicals as well as Benedict XVI’s two thus far, but that’s about it.

    I have read a number of sections of the Compendium of Social Doctrine, and to be honest (braces for possible condemnations from all sides) it really annoys me as a document. I can see what is being attempted, but when one dives into the footnotes it quickly becomes clear that a lot of observations and comments being made by the pope (mostly John Paul II, of course, his output having been so high) in various addresses, greetings and travels. However, these are served up in a format that strikes me as purposefully similar to the Catechism, thus often giving the impression that observations or judgements regarding a particular time and place (and not necessarily beyond question or with long track records in Christian doctrine) are given the impression of being absolute doctrines of the Church. This strikes me as symptomatic of a particular modern form of political ultramontanism which will pick out a papal statement on a given topic, however passing or predicated on assumptions which may or may not be correct, and pass that statement off as “the Church’s teaching on X”.

    Thus, I’ve been told at various points that, “The Church teaches that global warming is one of the greatest threats in our modern age.” Or “The Church teaches that greed is the primary cause of the financial crisis.”

    But I digress…

    How’s this for a good faith offer: I’ll commit to reading and systematically blogging through Quadragesimo Anno this summer — though because of existing writing commitments it may not be till around July — and blogging through it as I go. If you’d be interested and have time, we could even do it as a series of co-written posts. If nothing else, I’m sure that I’ll learn something.

    We will agree to disagree I suppose on the amount of violence it takes to sustain the ‘American way of life’. 1.5 million dead babies a year through abortion is violence enough.

    As a toss out thought: I would very much question whether a complete elimination of abortion (and the resulting million plus extra births each year) would actually decrease the US standard of living at all. Indeed, in the long run it might well increase it.

    As for the work situation, I don’t know exactly what kind of work you do, but I do know that the typical American business is not a ‘community of solidarity’ in any meaningful sense of the term. Workers are often interchangible parts in a money-making machine. Unless you are particularly skilled, you are expendable. 80% of Americans work for a wage.

    I certainly wouldn’t consider the massive corporation I work for right now as being a “community of solidarity”, but then, I’m not sure that any organization of much more than a dozen people can have tight solidarity — and by the time you’re in the hundreds it seems quite impossible. And I do work for a wage, though not an hourly one. (Like many skilled US workers, I’m classified as “exempt” which means that so long as I get my allotted work done my employer is not legally able to fuss to much about whether I do it in 45 of 55 hours, and pays me the same regardless.)

    I would, however, describe my team as having a strong sense of solidarity. The one I’ve been on for the last two years consists of ten people. We work together on a daily basis, help each other as needed, know each other personally, and cover for each other when we’re out. Our manager is very open with us in all decision making, and has an open policy that he doesn’t keep track of vacation and sick time so long as we give him a couple days notice and don’t abuse the privilage. (So for instance, two members of the team who have had significant health problems over the last year were both simply covered for rather than having to go on disability.)

    I would see this as being pretty much how things ought to work. And although I recognize that most people are not so lucky in their current situations as I, in many ways I don’t think it’s at all unattainable in our existing economy.

    I do, however, want to see small enterprise grow much larger. Currently there are 20 million small businesses in the US that have no payroll — which means they are one or two person enterprises where all the income goes straight to the owners. They accounted for $970 Billion in sales in 2006, an average of 46k per company. There are another 5 million companies with twenty employees or less, employing 21 million Americans. There’s certainly been a major growth in this small business over the last few decades, but seeing more would of course be better.

  • Ok, quick reply:

    1) On the Church’s social teaching – having read most if not all of the encyclicals that the Compendium references, I think it is a faithful representation of a consistent line of thought, developed in each new historical era by the popes. What some guy tells you is one thing; what the teaching actually says is another. Usually, I don’t reference the Compendium, or if I do, only once – the rest of the time, I go to the source.

    2) Your proposal: I like it – I would only suggest that we then read Mater et Magistra and Laborem Exercens. It can be an ongoing study, however long it takes.

    3) It doesn’t matter. That abortion is an essential requisite for the social mobility of women is an article of faith among feminists and most leftists in America, not to mention the millions of women who get the abortions and the men who also participate. You know you can’t even win the statistic wars when it comes to currently existing phenomenon – forget about it when it comes to projections into the future.

    On the rest: I’ll save it for Laborem Exercens.

  • Even quicker:

    On the Church’s social teaching – having read most if not all of the encyclicals that the Compendium references, I think it is a faithful representation of a consistent line of thought, developed in each new historical era by the popes.

    I’m sure it is accurate on the encyclicals. My beef with it (and maybe this was the particular sections which I read, which as I recall involved living wage, unemployment benefits, welfare and environmental restrictions) was that the footnotes for the concrete policies which I had criticisms of all sourced minor talks and addresses, not encyclicals. I didn’t like that these fairly minor venues were being used to back up very definite policy prescriptions as if they were required by Catholic doctrine. I’d certainly agree they’re compatible with Catholic doctrine, but I don’t think they’re the only policy prescriptions which Catholics can support.

Capitalism, A Beneficial Exchange

Thursday, April 30, AD 2009

Blogger Sam Rocha wrote a post the other day titled, “A Brief Defense of ‘Capitalism'”. However, Rocha’s attempt is, I think, somewhat hampered by the fact that he by his own description does not think much of capitalism.

For the most part we (by “we” I mean those of us on the left, yes I will own up to being something of a leftist, whatever that means) like to say that all capitalism, and its governing libertarian sentiment, desires is for there to be no limit at how much one can take for one’s self. It is a creed of the indulgent and the rich. Greed, selfishness, isolationism, sterile individualism and other nasty things, are what we enjoy making capitalism out to be.

With such an opener, what might wonder what it is that Rocha then finds to praise in capitalism. What he find is, I think, not at all unique to capitalism narrowly defined, but it is something which those of us in the West are much attached to:

If we can cut-out the name calling, I think we can find a powerful meaning within capitalist sentiment. Namely, the much-abused, taboo, and rejected idea of the individual, the person-singular. I think that if we take notions of private property and negative freedom (“freedom from”) inherent in capitalist sentiment, and ponder what they mean, we will find that we all value such things privately….

Here is my defense: Capitalism, as it is believed in benevolently, reminds us of our radical existence as images of God with a potency to as we wish within the vast sea of possibility. What we need next is the ability to control ourselves with the prudence, grace, and love of our Creator in this stormy sea of freedom. But we should never be too quick to accept external-control over our bodies, minds, and hearts. We need to be free. And perfect freedom is not the raw, brute force of libertarianism, to be sure. At the same time, it also is that imposing force.

I don’t find what Rocha finds to praise unappealing, but at the same time I think that there is something more to be found in capitalism as described by Adam Smith and others which even many of those who frequently condemn capitalism would find it in themselves to admire if they could look past their preconceptions and see Smith-ian capitalism for what it is.

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30 Responses to Capitalism, A Beneficial Exchange

  • Thanks for reading my brief article. I also appreciate your critical remarks, and, for the most part, I agree with them. Aside from a couple glitches (like keeping my quotation in separated text), I think you put too much emphasis into what it is I am arguing for. It is not so much capitalism, socialism, distributism, or what have you. There are much more qualified people doing that. My goal is simply to point out what seem to be intuitive ways in which the words we use measure the belief people have in them. It is not very technical, but, to me, it is important to add to the discourse on these subjects. After all, such things really play out on the ground, I think.

  • Sam,

    My apologies on the formatting. I believe that it’s fixed now. (Some sort of trouble in transferring from Blogger to WordPress, I believe.)

    For what it’s worth, I wasn’t so much trying to impute a specific communitarian system to you as to point out that the distinction between capitalism and the other “isms” is that it’s based on mutually beneficial exchange rather than on the states implicit right to use violence. (Thus, I always have a mental twitch when people walk about “the inherent violence of capitalism”.) I picked a communitarian counter-example simply because it was readily available and frequently used as an alternative to capitalism.

    So I hope like it didn’t seem that I was coming down like a ton of bricks on your post. I just thought it provided a well articulated example of an assumption that I’d been wanting to write a post arguing against for some time.

  • No apologies in order here, plus, you helped me realized that I missed a “do” in there. This is fine to me, I just want to be sure that the purposes we have are a bit crossed. I call my self all these absurdities like “leftist,” “democratic socialist,” and so on. But the truth of the matter is that they do not stick for me, not at the level of conscience. What does stick are things I think can find in common belief that creates the devotion we seem to have for this or that ideology. I guess the most direct point of the essay is the first line: “Language seems to poison our ability to be rational.”

    Thanks again for the engagement, it sure beats the alternative.

  • I think the first part of Sam’s quote reflects what I see among many of my classmates in my social justice class. There are a few hardened capitalists also among us who, through their lives, prove that such a narrow perception is false.

  • At the risk of sounding like an unreconstructed Marxist, I just have to point out that Marxism is simply not utopian.

    Frederic Engels wrote an introduction to Marxist theory called “Socialism: Utopian and Scientific.” The whole point was to distinguish his and Marx’s ‘scientific’ socialism from the ‘utopian’ socialism of the past.

    Meanwhile Marx himself criticizes a whole series of utopian policy proposals that are ironically and mistakenly attributed to him by people who have never read his work in ‘The Critique of the Gotha Program.’ Engels does the same in ‘Anti-Duhring’.

    Please don’t misunderstand – I’m not advocating a Marxist program (I’m a distributist, which Marx would have found reactionary and utopian), but there’s a right way to criticize Marx and a wrong way. The wrong way is to dismiss him as a utopian, since there isn’t a shred of evidence to suggest that he was by any reasonable understanding of that word.

  • A look at how JP II in Centesimus Annus looked at how to understand capitalism:

    “42. Returning now to the initial question: can it perhaps be said that, after the failure of Communism, capitalism is the victorious social system, and that capitalism should be the goal of the countries now making efforts to rebuild their economy and society? Is this the model which ought to be proposed to the countries of the Third World which are searching for the path to true economic and civil progress?

    The answer is obviously complex. If by “capitalism” is meant an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative, even though it would perhaps be more appropriate to speak of a “business economy”, “market economy” or simply “free economy”. But if by “capitalism” is meant a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom in its totality, and which sees it as a particular aspect of that freedom, the core of which is ethical and religious, then the reply is certainly negative.

    The Marxist solution has failed, but the realities of marginalization and exploitation remain in the world, especially the Third World, as does the reality of human alienation, especially in the more advanced countries. Against these phenomena the Church strongly raises her voice. Vast multitudes are still living in conditions of great material and moral poverty. The collapse of the Communist system in so many countries certainly removes an obstacle to facing these problems in an appropriate and realistic way, but it is not enough to bring about their solution. Indeed, there is a risk that a radical capitalistic ideology could spread which refuses even to consider these problems, in the a priori belief that any attempt to solve them is doomed to failure, and which blindly entrusts their solution to the free development of market forces.

    43. The Church has no models to present; models that are real and truly effective can only arise within the framework of different historical situations, through the efforts of all those who responsibly confront concrete problems in all their social, economic, political and cultural aspects, as these interact with one another.84 For such a task the Church offers her social teaching as an indispensable and ideal orientation, a teaching which, as already mentioned, recognizes the positive value of the market and of enterprise, but which at the same time points out that these need to be oriented towards the common good. This teaching also recognizes the legitimacy of workers’ efforts to obtain full respect for their dignity and to gain broader areas of participation in the life of industrial enterprises so that, while cooperating with others and under the direction of others, they can in a certain sense “work for themselves”85 through the exercise of their intelligence and freedom.”

  • Joe,

    I guess I would tend to find the whole concept of the dictatorship of the proletariat and the changes that would have on society as a whole somewhat utopian in the sense of a society which if fundamentally differ (in part due to a change in human nature) even if it’s not seen as utopian in the sense of “perfect”. However, you clearly know a lot more about Marx and Engels than I do, since you studied them seriously and I read the Manifesto in a big hurry because we covered it in one class of Steubenville’s great books program. I suppose honestly I should reread Marx too one of these days as well as Smtih — though I have the bias of liking Smith more.

    Philip,

    In response to JP2’s quote which you provide (which I agree with in essentials) I guess I’d say that the original insight of Smith is not actually a “model” in the sense that JP2 is discussing. It’s simply a description of how trade occurs when unimpeded by some other force.

    In this sense, I’d say that the pope is right to say that the Church is still looking for models at present. Socialism does not seem to be the answer to our problems, because it does not take human nature into account. And capitalism (I would argue) was never meant to be a moral answer in the first place. Unlike distributism or socialism, capitalism does not include a moral component. It is simply a basic understanding that in order for exchange to take place it must be mutually beneficial.

    As a Catholic and a capitalist, I would tend to see this as meaning that capitalism as an economic system works well in coordination with a strict moral system such at Catholicism, which tells us as individual agents of action what consists of moral action. But the two are separate systems, and at the moment I remain skeptical as to whether there is an economic system which provides a blueprint for right behavior.

  • Darwin,

    Regarding Marx,

    Here’s the thing: a lot of liberals in the 19th century too believed in a never-ending progression towards a ‘better’ society and a ‘better’ humanity. Is a naive faith in human progress ‘utopian’? Perhaps. But usually I associate the word with people who want to pre-design blueprints for the perfect society, something Marx consciously avoided.

    Regarding capitalism,

    This is what I have a problem with.

    “Unlike distributism or socialism, capitalism does not include a moral component. It is simply a basic understanding that in order for exchange to take place it must be mutually beneficial.”

    Is this really what capitalism ‘simply’ is? There has to be more to it than that. Unequal bargaining power is a fact of life for billions of people who come into contact with Western countries and their corporations on the labor market.

    Didn’t Adam Smith himself admit that the wealthy, the employers, are always in a more powerful bargaining position than most workers, than the poor?

    If so, does this have moral implications? For the Church it does – it has always defended trade unionism.

    Unbalanced exchanges do take place, even if both parties benefit. The Marxian argument and the socialist argument in general has been that the worker does not merely confront one boss, but an entire system where the vast majority of employers exploit their labor. For them the choice is between different rates of exploitation, not between exploitation or something else.

    That said, nothing prevents workers from forming cooperatives where they are not exploited – nothing but inertia, and perhaps ignorance.

    On a final note, looked at in certain ways, neither capitalism nor socialism have moral components – in other ways, they both do. Surely capitalists prefer voluntarism to coercion, as much as socialists prefer that the workers win the inevitable class war instead of the capitalists.

    But both also have simply descriptive elements – capitalists note that mutually beneficial exchanges produce such and such results, while socialists note that class struggles result in this or that. Both camps base their positions on what they believe to be an objective analysis of reality, and claim that their moral position follows from this analysis.

    Not all, though. Austrians seem to start from moral axioms instead of empirical data. Many non-Marxian types of socialist start from similar axiomatic principles.

  • Joe,

    To say that capitalism does not have a moral component is not to say it is without moral consequences. The difference Darwin is highlighting (not to speak for him) is that capitalism is merely descriptive of the terms of exchange; the normative necessarily follows. Whereas socialism always presupposes the normative (i.e., power relationships) and then goes on to describe the terms of exchange.

    This is a very fundamental difference. It’s not to say that capitalism is morally neutral — how could it be? But one does not have to *begin* by thinking about power to work within the confines of capitalism. Not true with socialism. Socialism makes an idol out of power relationships, I think. John 19:11 and all that.

    As you said, nothing prevents workers in a free economy from forming cooperatives. Or being entrepreneurs. Or ascetics, for that matter. The power that business lords over us can be somewhat illusory in that sense, just as the power of big business can be fleeting (How are those Big 3 American auto manufacturers doing these days?)

    This isn’t capitalism apologetics. I’m not dismissing the reality of exploitation. As you said, bargaining power is often unequal. Bargaining power can become concetrated in different institutions — big business, big government, and even big labor unions. Things other than size skew power as well. However, there are ways of working politically and technically around these problems without resorting to the socialist “it’s all about power” rallying cry.

    Maybe “capitalism” is too loaded a word. There’s no purely capitalist society, anyway. I always refer to the U.S. as a mixed economy. I prefer to start from the first fundamental welfare theorem and, if something’s not right, ask, What’s going wrong here? Where’s the market failure, and what policies might correct it? Economic freedom is somewhat analogous to social freedom; you start from the premise of liberty, but liberty guided by the duty to do what is morally right. This is where it’s helpful to have the Catholic lens.

  • j,

    I just have a problem with the notion that ‘description’ is all capitalism consists of.

    Of course you are right about the distinction between component and consequences.

    Capitalism is a thing people do. Classical liberal economics, on the other hand, is the thing I would call ‘descriptive’.

    So I draw a distinction between those two. Adam Smith’s writings are like Karl Marx’s writings – they’re largely descriptive, and only occasionally normative.

    “Whereas socialism always presupposes the normative (i.e., power relationships) and then goes on to describe the terms of exchange.”

    By my understanding of the word ‘normative’ – and I will concede that it may be totally wrong – power relationships are not necessarily normative. They are and can be objectively analyzed and described without any normative statements. For Marx, a class is generally a group of people who have a specific relationship with the productive forces of society. Like Adam Smith, he is simply describing what people do (and he was an avid reader of Smith, calling him the ‘Luther of political economy’). Why would that necessarily fall under a normative analysis?

    “But one does not have to *begin* by thinking about power to work within the confines of capitalism. Not true with socialism.”

    Who does? If I made it sound as if that is where socialists “begin”, it was a mistake. Marx says nothing about power relations at the beginning of his analysis of capitalism. He begins with the commodity, the ‘cell’ of capitalist society as he calls it.

    Of course, not all socialists are Marxists. But then, not all economic liberals are devotees of Adam Smith.

    “here are ways of working politically and technically around these problems without resorting to the socialist “it’s all about power” rallying cry”

    Of course! I agree, and it’s why I’m not a socialist (anymore). In the end I believe only Christian charity can transform the world.

  • Darwin,

    Thanks. I’ll have to admit I have not thought heavily on the subject of capitalism, socialism or other such things much in my day. I have become more interested since my social justice class started. I have read many of the social encyclicals in the past but never in a rigorous way. The challanges of some of my fellow students has prompted seeking a deeper understanding of capitalism in relation to Catholic social teaching.

    The reason I posted however was more to challange Joe, Sam and others who take a prejudiced (?) view that all capitalism is exploitative. Again, several of my classmates are dedicated, orthodox Catholics who are also small businessmen. Their experience is far from that that Sam describes and thus his impression can be noted as not universally descriptive of capitalism.

    I remember the teacher saying that the course would challenge everyone. One of my small business owner classmates commented that the way the course was taught it was meant to only challange some. I post the quote I do to challange all, but in particular those who hold an extremely biased perspective of capitalism.

  • “One of my small business owner classmates commented that the way the course was taught it was meant to only challange some.”

    Very few professors in academia have ever operated so much as a lemonade stand. Concepts such as “making payroll”, “solvency”, “self-employment tax”, etc., might as well as be written in Sanskrit as far as they are concerned.

  • Philip,

    Agreed. My personal experience of working for a small business and briefly running one (and now working for a very large business) bears very little resemblance to class warfare dynamics and a great deal of resemblance to Smith’s descriptions of mutually beneficial exchange. Experience is not everything, but all the business owners I’ve known have at other times in their lives been workers, while very few economic justice theorists have been business owners, and some have not even been workers.

    Joe,

    Agreed that the 19th century had a massively inflated idea of progress — one I don’t think corresponds well with human reality. I guess I’d taken Marxist dialectic as assuming something even more transformative and inevitable (the idea of reaching a classless society, for instance, strikes me as intensely utopian) but that may merely be my reaction.

    I’d love to dig into the unequal exchange question, but family vacation duties call. Perhaps later.

  • Have a good family vacation Darwin.

  • Joe,

    Socialism theory starts with an analysis of the factors of production, but it seems to me that from there it proceeds rather hastily to the conclusion that these factor relationships are exploitative. Smith and Marx might be descriptive in many ways, but to my knowledge Smith didn’t have a “manifesto” attached to his name.

    And this goes to the point that both Phillip and Darwin make about the advocates of socialism and their personal experience with economic exchange. Except in the case of some radical libertarians (who view all state regulation of economic activity as an immoral imposition on personal autonomy), one generally doesn’t start from the normative side of market exchange. Economic freedom might not be morally neutral in its outcomes, but then again neither is social freedom — and I doubt even orthodox Catholics here want a kind of theocracy to make the laws conform to the Magisterium. Instead, we look for laws that at a minimum do not violate justice and the common good. We don’t try to “root out” immorality, as many left-secularists fear we would do with the law.

  • Yes, well, when was Smith a young radical?

    I think it’s wrong to judge Marx by the Manifesto. Capital is what Marx wanted to be remembered for, but it consists of thick volumes that aren’t easy to read. Some versions of the Manifesto, on the other hand, fit into your pocket.

    Also, while I think capitalism is exploitative, I also think people voluntarily submit to it, at least in the West (the third world is a different story). As long as no capitalist ideologues try to stop me and others from spreading the word about cooperatives and economic democracy, we’re cool!

    “Except in the case of some radical libertarians”

    Well, we just call those anarchists anyway, right?

  • Now wait a minute: My description of capitalism at the front end was to point out the error and ridiculous nature of run-of-the-mill, capitalist-hating critics. I may identify myself as a leftist, only because I seem to have to or people’s heads explode, but I am not capitalism hater. In theory it seem worth keeping around a long time like all the others, the question is whether I like it here and now…

    But if I understand you most recent point on this column correctly, then, you misread my article.

  • Yes I can see that now. I apologize for that. Though I will add many on the “left” do hold the view stated in your first paragraph.

  • Sure they do, but I would much prefer you to quote “them” instead. I clearly am saying nothing of the sort and am getting sold as if I was here. I hope you add an update or something. Apology certainly accepted, but with some reservation until the misreading is corrected for the viewing audience.

    I work pretty hard not to settle into one of the categories and only graze them from time to time because, as I said before, no one likes a non-descript. If you want a glance of my politics, then, read this post I wrote on the matter: http://vox-nova.com/2009/04/21/i-guess-i-should-reveal-my-politics/

  • Wait are you the author? I’m so confused…

  • I guess our definitions of exploitation are different, then. I don’t think people submit voluntarily to severely unjust relationships very often or for very long. If by “exploit” you merely mean take advantage of or use to one’s own ends, well then I’ve seen just as many workers exploit their employers.

    If one believes that merely being a worker and not an owner is exploitation, then I doubt there’s much that can be done to rectify that. The division and specialization of labor is pretty extensive in an industrialized world; we all have to act as “units of labor” in some sense, unless we’re entrepreneurs. I’d love to know more about distributism and economic democracy to understand how it would work. I remember when America West Airlines came on the scene years ago; they made a big deal out of being an “employee owned airline,” but basically it was just an ESOP. If I’m an airline pilot, unless I can afford my own Boeing 737, I’m always going to be a worker (and thus exploited?) by the employer. Owning shares of the airplane/company doesn’t seem to change much. Who’s the residual claimant on those assets? I need more concrete examples of distributism, I suppose.

  • One more thing I’ll add, Joe: I think the analytics of classical economics support more economic democracy than less. Market concentration leads to inefficient outcomes, transparency and information is better than imperfect/asymmetric information, etc. So I think within the framework of economic theory, there’s definitely support for distributist ideas. Hey, that’s good news! 🙂

  • J,

    “I don’t think people submit voluntarily to severely unjust relationships very often or for very long.”

    Well when you throw ‘severely’ and ‘very long’ in there, not quite as much. But when every employer is an exploiter, then there is no escape from exploitation, only from greater degrees of it. That is what many people in poor countries face. They do submit, because the will to live overrides everything.

    “If by “exploit” you merely mean take advantage of or use to one’s own ends…”

    Ah – ‘take advantage of’ is an interesting way of putting it.

    All businesses must be profitable. The difference between economic oligarchy and economic democracy, if you like, is who controls the profits.

    I believe people are exploited when they accept the terms of wage labor; they give up all claim and control to the product of their labor in exchange for a wage. They do so because they do not and cannot practically access the means of production as individuals. In other words, because they can’t or won’t for whatever reasons be a) self-employed or b) in a cooperative. It isn’t entirely their fault, many things stand in the way. But not enough things to make it impossible, or to justify violent revolution.

    We don’t have to agree with everything Marx said to agree with this idea: a conductor doesn’t need to own the instruments that the symphony plays with in order to make great music.

  • As for examples of distributism, I made a post here not long ago, “Will the Real Utopians Please Stand Up?” Try to find it. Worker cooperatives are real. There is no speculation as to ‘how they would work’, there is how they actually do work, and succeed, in real life. To be a distributist is to be for the expansion of these principles, not their implementation from nothing.

  • Joe,

    I did see that post, but I didn’t have time to comment on it or read through the links. I’ll go back and look, because I’m very curious about real world examples.

    “The difference between economic oligarchy and economic democracy…is who controls the profits.”

    Controls as in who gets a share of them, or has a say/vote in how they’re disposed? How is that different from an equity stake in a public company? Is there some enforced leveling of the equity shares? What this seems to imply is a flat organization or a non-hierarchical structure.

  • Sorry Sam. I am not the author of the post. I was merely refering to my comments. I will let Darwin answer for his.

  • J,

    The best example is the Mondragon in Spain. Of course like any company they face difficulties. There’s nothing utopian about distributism, but I don’t see why there should be. Alternatives don’t have to be perfect, only better in some way.

    “What this seems to imply is a flat organization or a non-hierarchical structure.”

    Not quite. In some cases, however, the worker/owners hire the managers and, ironically, ‘exploit’ them. The problem with exploitation, though, has never really been the exploitation itself, but its results – people working harder for less than they would otherwise obtain if they weren’t exploited.

    There are differences between cooperatives and public companies. But the main difference, I think, is the social aspect more so than the economic. It’s like the difference between a bunch of us talking on the Internet, and a bunch of us actually getting together to make something positive happen. The former isn’t a bad thing, but the latter, I think, acts as a realistic material foundation for the kind of social change I want to see in the world.

    The Compendium says that businesses ought to strive to be ‘communities of solidarity’, for instance. When we meet with one another as true partners, we have more of an incentive to solve common problems.

  • Sam,

    No, I’m the author of the post. I’m just a bit reclusive at the moment since I’m traveling. 🙂

    I’m sorry if it seemed I was attempting to paint you as a non-thinking leftist. I haven’t read much of your stuff yet, but I would certainly take it from what I’ve read so far that you are determinedly unclassifiable.

    My purpose in jumping off from your article was basically that I thought you’d written a pretty clear presentation of, “As left-leaners, we are often tempted to describe capitalism as negatively thus, however capitalism actually has a redeeming quality which we all accept as follows.” Good so far as it went, but my contention is that the former (which I took you to find at least somewhat attractive, in the sense that I might, in an unrigorous moment, comment that the government is much like the mafia in that it possesses sufficient potential for violence that it can extract protection money from all of us whether we like it or not) is a mischaracterization of what capitalism is which obscures an element (the necessity of providing someone else with something they recognize as beneficial in order to get anything from them) which actually does tend towards relationship in a way that many of a communitarian leaning should find attractive.

    So no, I hope I did not come off as characterizing your views on capitalism as being limitted to the first (it sounds like we both agree rather foolish) summary, but I did think that in underlining the good elements of capitalism you’d missed something which I think you actually ought to like _more_ than the individualism implicit to capitalism: that one may not expect to get things from someone without building a mutually beneficial relationship.

  • Joe,

    I guess I don’t see the ownership divider as being such a hard and clear line. For instance, I’ve used credit unions and banks over the course of the last decade, depending on availability, but to be honest I’ve felt no more community feeling being a part owner of a credit union than simply putting my money in the bank.

    If my ownership in a worker’s cooperative was little more immediate than my ownership in the credit unions I’ve belonged to, I don’t think I’d feel nearly the sense of responsibility I felt when I was running my small web design business. The sense of ownership there can be very, very strong. For instance, my business partner and I would routinely change our ownership distributions (pay) in order to match how profitable we were at the time, and there were points when we met significant costs out of our own personal money in order to keep the business moving along. At various times we had several programmings working for us for wages (part time, in this case) and we would never that even thought of asking them to take a pay hit when a client was late paying us or chip in to cover expenses. They hadn’t asked for that kind of responsibility for the business, and if we’d asked them to come in as partners and take the same risks, they probably would have walked away instead. They were much happier knowing they’d make the same number of dollars per hour no matter how the company was doing. (I know I’m not making this sentiment up, because the people we employed were and are still personal friends, and said as much.)

    At a business model level, I like the idea of getting workers into an ownership mentality via employee stock programs (the company I now work for both grants stock to people it sees as having particular potential, and has a subsidized stock buying program where the company will help subsidize your purchases of stock if you set aside money for it via your paycheck) and through bonuses based on company profits. However, I’d tend to see a lot of the question of whether a company makes a lot of money being reliant on the decisions made by a comparatively small number of people near the top (and I’m not sure one can successfully change that much via democratic processes) and so I’d see it as appropriate for those people to get hit with most of the risk while most workers have the comparative assurance of “wage slavery”.

  • Darwin,

    There is nothing assuring about ‘wage slavery’, especially during a recession.

    Per your personal experience, not everyone is going to run their own service business. I’m thinking in broad, general terms – we’re always going to need many types of labor and many of those types, I think, are best organized cooperatively. Notice that I did include self-employment along with cooperatives most of the time when discussing this with J.

    I’m not inflexible but most agriculture, manufacturing, and many services must be done in by many people functioning collectively. There is a division of labor over which no one has any control, determined by our level of technological development.

    And so it is not a question of why kind of work is to be done, or at what level, but rather, who will own and control the surplus, the profit. Cooperatives mean that everyone who plays a role in creating profits earns some of them, and everyone has a say in the decisions that affect their lives.

    Some people may indeed prefer the ‘freedom’ of wage labor – less responsibility, less risk, less incentive and less reward – and that’s fine by me. But I think a mature society would see that sort of work carried out by children, with the majority of adults moving into the responsible role of owner and partner.

    “I’d tend to see a lot of the question of whether a company makes a lot of money being reliant on the decisions made by a comparatively small number of people near the top”

    Is it not true at this point that much of business management is a science? Why is it that a democratic assembly could not have the same access to the same objective information that forms the basis of executives decisions today? Economic oligarchy only seems to have one function – to ensure that the profits flow as narrowly upward as possible.

No Guarantees

Friday, April 24, AD 2009

I was struck by this Megan McArdle post, of which I will go ahead a quote a large chunk:

Guess what, honey? You’re not entitled. You can do everything right, and the universe doesn’t owe you anything. Neither do your fellow taxpayers. If there is any way to save the banking system without paying you $2 million a year, I will do it, not because I hate you and want to rob you, but because I don’t want to pay more than I have to. You may have come across this concept in business school. At Chicago, we called it “a market”.

The real problem with investment bankers goes deeper, and is the problem of the entire upper middle class: we have come to believe that complying with the rules produces excellent results as by some natural law. In school, if you do your work, teacher gives you an A. It comes to seem like a sort of a natural law: if you have a good education and work hard, the universe is supposed to reward you. After school, the upper middle class gravitates towards careers with very well defined advancement hierarchies: medicine, law, finance, consulting, where this subtle belief is constantly reinforced.

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2 Responses to No Guarantees

  • DarwinCatholic,

    Although I very much appreciate this entry, I’m not entirely sure that people are actually generally of the opinion that if you work hard, you shall reap its rewards. If the populace happens to believe such a notion, they are either naive or given to nonsense.

    In fact, the lessons featured herein are one most Harvard Business School grads themselves already know (or eventually do).

    Devotedly engaging in arduous labors in view of some high aspiration does not automatically guarantee that such efforts will result ultimately in some seemingly felt much deserved success.

    That’s almost as crazy as believing that if one is kind to others, others will be kind in return.

  • e.,

    People rarely phrase the objection in precisely those terms, but such an assumption is fairly common if my little corner of professional grad school is any indication. People take out very large amounts of debt to finance grad school with the (traditionally reasonable) expectation that they will be able to pay these debts off with a high-salary, high-status job upon graduation.

    When that doesn’t work out, they, like Ms. McArdle (and many of my classmates currently) are disappointed, and feel like the world is unfair. I think it’s a question of expectations. In general it’s much harder to lose something you expected to have (and thought you had), than just not to have it at all. These people are told constantly they are the best, and that they will be successful if they do the work. When that doesn’t happen they are disappointed, particularly those who have little life experience outside of the educational system, where there is a rough correlation between effort and success. Sure, they know intellectually that ‘life isn’t always fair,’ but it’s harder to experience it than to grasp it intellectually.

Unreasonable Compensation

Thursday, April 23, AD 2009

With people focused on the economic downturn, many have found it a good time to give a little extra thought to whether other people are making more than they ought to. The president has spoken out several times against “excessive compensation” of executives, and a number of people have floated the idea of adjusting the top marginal income tax rate to effectively cap total compensation at ten million dollars a year. MZ tackled the question somewhat humorously here.

Beyond question, $10 million is a lot of money. Most of us will never see anything like that much money, and so it seems entirely reasonable to demand: Why should anyone be paid so much? What’s so special about CEOs and actors and baseball players that they deserve tens of millions of dollars? Aren’t they running off with the money that we should be getting instead?

I certainly wouldn’t claim that executives are not often paid more than they are worth. A board of directors is still a group of people with emotional commitments (including wanting to assure themselves that they made the right pick in choosing the current CEO) and they will certainly not always do what is in their own best interest. Though we may be comforted that in a free economy the incentives are in place to automatically punish them for not doing so.

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22 Responses to Unreasonable Compensation

  • supply and demand, it’s just that simple.

  • Concerns over executive compensations always seem overblown to me; a way for politicians to express faux moral outrage over what is almost entirely a matter of symbolism. In its worst form it exploits a crude populist instinct based on the haunting fear (and resentment) that someone, somewhere might be overpaid. Notice, even if confiscatory taxes were imposed on income over $10 million, the tax would generate very little revenue because the contracts would just be restructured. I suppose there may be some symbolic value in preventing people from being paid large salaries, but it seems to be a very minimal and cheap sort of value.

  • Indeed it is a distraction away from the far more vast and destructive sums being either created or spent by the government.

    While there is something to the argument that top executive are over paid, its really an irrelevant question. They should be paid whatever the market is willing to pay them. If the agreement on compensation is consensual then morally there isn’t much to argue against. If its a stupid move of the part of the employer, that will be revealed in due course as the company’s fortunes decline.

  • One of the odd things about executive compensation is that the people who actually have to pay the compensation tend to be the ones who are least concerned about it.

    As for whether it can be justifiable to pay someone $48,000 for an hour’s work, I think that the Wilt Chamberlain example shows pretty clearly that it can.

  • I’ll point out that to some of the workers on the lower end, $105 extra a year is a big deal (probably an extra week’s groceries).

  • There is a problem with executive compensation. Not that it’s too high, but that it’s unresponsive to the needs of the stakeholders – principally the shareholders of the company. This occurs because of imbalances in corporate governance. I think there are reasonable adjustments that the SEC could make to level the playing field so that shareholders can better control the selection of directors and ensure their interests are better served. This would result in a better correlation between compensation and benefits to the company.

  • I am opposed to high executive pay not because I think it needs to be re-distributed in a futile attempt at equality (real equality will be established through Distributist principles), but because that much money in the hands of a single individual easily translates into disproportionate political and social power.

    The disproportionate wealth stems from ownership, not work. More evenly balanced ownership, i.e. on the cooperative model, will address the problem. We will see that, after all, it is possible to compete and succeed without paying someone 34 million dollars to make all the big decisions. What a waste of resources.

  • I also want to add, whenever I’ve looked up CEO compensation, I see a break down that shows, like I said, that almost all the compensation comes from ownership: stock options, etc.

    The actual salary, for instance, of the CEO of Wal-Mart a few years ago was only 1.1 million, but he took home over 20 million in compensation.

    So, I don’t care about 1 million. I don’t think that gives a person a disproportionate political presence, though, if he is a Christian, he doesn’t need that much money and should give a lot of it away. But that’s his decision.

    I do care about the 20 million. Because it places too much power in the hands of one person.

  • My understanding is that it became a lot less advantageous for companies to give executives stock after the Sarbanes/Oxley round of accounting rules revisions.

    It looks like in this case, the CEO for 1.4M in salary, 5.3M in bonus, 7.9M in stock options and 18.6M in “non equity incentive plan compensation”. So about 1/4 stock, if I’m reading that right.

    It’s really interesting to me (in the sense that it highlights our differences) that you find the stock issues more troubling than the salary. I tend to be very much in favor of paying executives mostly in stock rather than in cash (especially if it’s restricted stock they can’t sell for a certain number of years) in that I think it incents them to look longer term.

    Now for instance, at the company I work for I own about 500 shares total, and my bonus is based on how profitable we are (so it was a lot smaller this year 🙁 ). By comparison, the CEO owns a much, much larger percentage of the company. But I generally consider that positive because I hope it means he’s incented to make good long term decisions for the company. The same actions that will make his billion dollar stake in the company be worth 1.5 billion would make my $5,000 stake worth $7,500, and assure me a safe job and good bonuses in the meantime.

    Which basically makes me realize that while I support a democratic (or more properly: representative democracy) ideal when it comes to political structures, I’m basically a monarchist or oligarch when it comes to the corporate world — though I want to see the castes be porous in a meritocratic kind of way.

  • “I do care about the 20 million.”

    Yeah, right.

    Is that only when his stock options are worth that much?

    Would you actually express the same disgust and resentment when his shares are significantly worth less?

    I can’t believe that folks here have the gall to think they can dictate such seemingly draconian terms on companies across America without actually paying any heed whatsoever on the kind of negative repercussions that might likely occur as a result.

    A talented individual such as a Steve Jobs might as well earn a mere dollar/year for his salary, but God forbid that he should happen to be compensated in stock options which value for the most part ultimately depends on his management of the company.

    Should his skillful management of the company be appropriately reflected in the value of those stock options, crucify the bastard!

    Should the value of said stocks fall below a buck, all the better!

  • “while I support a democratic (or more properly: representative democracy) ideal when it comes to political structures, I’m basically a monarchist or oligarch when it comes to the corporate world”

    And so here’s where we’ll have our disagreements 🙂

    I don’t see how a political democracy can be supported by an economic oligarchy indefinitely. We may call it a political democracy but if real power is distributed differently, it’s just a name.

    What is it people really want in life? I think we agree that no one needs millions of dollars to live a dignified and comfortable life; I should hope we would also agree that any man who says ‘only 30 million can make me happy’ doesn’t have a natural right to it.

    I see no reason why a man can’t be happy with a salary that provides a dignified, comfortable life. I don’t see why progress or economic decision making has to be conditioned on such large compensation. I have a very hard time respecting a person who insists on that much money. What would happen if they didn’t get it? Would they die? What would happen if they just lived at a middle class level, maybe a little higher? It would prevent them from wanting to do a good job?

    I guess I don’t understand how that works. I have many flaws and faults, many sins of which I am guilty, but the need for that much money is something I can say I’ve never had. In fact, give me a computer with an internet connection and I’ll live in a tool shed or a van if I have to 🙂

  • “Would you actually express the same disgust and resentment when his shares are significantly worth less?”

    Disgust and resentment? You’re projecting your own feelings on to me, E.

    I’m for the stock being more evenly distributed to all of the people whose labor create the wealth that the CEO has been hired to manage. Production is a partnership.

  • e,

    Don’t be unhinged. No one said what you’re suggesting.

    Joe did say that he finds it easier to approve of cash compensation than stock compensation — which I find myself at variance to — but no one is talking about crucifying anyone.

    (BTW, I don’t think Steve Jobs even gets stock options. He still owned a major chunk of Apple from when he founded it and figured increasing the value of that was enough. As someone who bought Apple stock in 1996, I agree.)

  • There is a lot to chew on here. I think we are in agreement that the compensation is mostly tied to the performance of the firm rather than the actual work product. My greater concern is not necessarily the gross dollar amounts as much as they act as a first dividend and our lax bankruptcy laws induce companies to undercapitalize thereby resulting in the socialization of risk and the privitization of profit. Similarily companies that carry too much cash on the books place themselves at risk for leveraged buy outs. LBOs wouldn’t be near as advantageous without the bankruptcy protection. Why own company stock if your bonus is equivalent of the dividend of x% of the float? Why worry about the long term health of the company, if you can be paid first and now for risk you aren’t really assuming?

  • The biggest problem I have with large executive bonuses at failing companies is the fact that the top people who are driving companies into the ground are being rewarded while the people at the bottom who are doing the front-line work, no matter how well they do it, get screwed.

    Take the Chicago Tribune, which is handing out $18 million in bonuses to its top executives while firing about 50 reporters, editors, and photographers. The people who actually make the paper worth reading (or used to, before Sam Zell got ahold of it) get nothing while the people who come up with one harebrained marketing idea after another get rewarded, on the grounds that they are sooo talented that the Trib Company simply must provide them with incentive to stay.

    An insistence on high levels of profit for the benefit of stockholders and executives is a big part of what is destroying the newspaper industry, to which I devoted 20 years of my life. It led to Gatehouse Media — a mega-corporation owned by some mysterious hedge fund in New York — buying up nearly every significant newspaper in downstate Illinois, running up massive amounts of debt, then having to slash and burn the staff at nearly every newspaper it owned.

    Now there’s nothing wrong with making a profit, of course; there’s nothing wrong with making big profits if they are the result of genuine innovation and high demand for your product. If Steve Jobs makes gazillions of bucks because Apple computers are great products and everyone wants one (including me, I love them), I don’t have a problem with that. It’s the idea that you can increase profits SOLELY by making risky investments and cutting costs (which usually translate into massive layoffs) that I have a problem with.

  • Elaine,

    While it’s a spectrum rather than a duality, it strikes me you basically have high growth business models and sustaining business models. A sustaining business model has the capacity to keep employing everyone well, and if it has investors to provide them with a small return each year. But the business itself is not going to be worth much more in five or ten years than it is now. A great many small family businesses fall in this category. On the other hend, you have high growth business models where you expect the worth of the business in five or ten years to be anywhere from 2-100x what it is now. These are the sorts of businesses which can return a lot to people via stock, etc.

    It strikes me that a number of the problems we have with “corporate raiding” have to do with people who take what is fundamentally a sustaining business model and try to turn it into a high growth business model for a while in order to turn a quick profit. It’s bad for the business, and indeed basically everyone involved except those who cash out early and run.

  • It’s bad for the business, and indeed basically everyone involved except those who cash out early and run.

    The difficulty, though, is that ‘corporate raiding’ is one of the most effective checks we have on agency costs like empire-building (AOL-Timewarner anyone?) and excessive perquisite consumption. Moreover, such ‘raids’ generally benefit shareholders, while the people doing the raiding are assuming much of the risk. LBO’s provide management with a very strong incentive to eliminate inefficiency and produce stable cash returns. I’ll admit that bankruptcy perhaps eliminates too much of the downside risk (as M.Z. suggested), and that some features of these deals are problematic, but here as elsewhere the benefits need to be considered in addition to the drawbacks. And I think LBO’s play an important role in reducing agency costs.

  • “I’ll point out that to some of the workers on the lower end, $105 extra a year is a big deal (probably an extra week’s groceries).”

    Michael–
    Indeed. But if I read the post correctly, hiring the cheaper guy could end up in revenue loss for workers.

    When you’re one of the guys on the factory floor who gets laid off because the company’s not being run well, it’s a big deal, all right.

  • Joe,

    I guess I’d need to think a little more deeply on the topic, but a few thoughts:

    – I’d see democracy as more necessary for a state than for a company because with a state (especially a large, modern state) the potential dangers involved in failure or overthrow much outweigh the greater efficiency one might find in a monarchy or oligarchy. Businesses on the other hand, present fewer problems when they fail. And leaving a badly run company is generally far, far easier than leaving a badly run country.

    – This is kind of an assumption of the above: It seems to me that individual decision making is almost invariably more efficient than collective decision making. Our form of government (representative democracy) recognizes this, in that rather than having everyone vote on everything, we elect people who then make decisions either individually or collectively. While a company of any size is large enough that one person can’t know enough to make all decisions, I do strongly support business models in which each person is the decions maker in regards to his set of responsibilities, with managers making decisions where necessary rather than doing everything by consensus. It’s not as simple as straight top-down management, but like with a well-run army the executives should give the next level of management a clear set of orders and objectives, those managers formulate order and objectives to accomplish those, and so on down the line. Each person down to the individual worker is a creative part of the whole, but each takes direction from above. Given my experiences in various companies I don’t find the idea of true bottom up management very attractive. I guess I should read up on how this works out in reality in organizations like Mondragon.

    – That said, I do strongly believe in profit sharing and employee ownership stakes. I don’t necessarily see why we should require everyone owning the company equally (if the CEO and CFO were the joint founders of the company twenty years before, it makes total sense to me that they’d own far more of it than the 1000th worker hired who’s only been on staff a year) but I do think that everyone should have a real stake in the company they work for. At the same time, my experience is that often the upper levels of management not only make decisions that have wide ranging effects, but they frankly put in more time than most workers would want do. As I’ve started to have to deal with VPs and Directors more, I find myself getting called into meetings that start as early as 7am or run as late as 7pm, and all the executives I know are answering emails and making phone calls in the evenings and through the weekend. 70+ hour weeks seem standard for them — and I’ve got to say that one of the things I’m enjoying about not being in business for myself anymore is not feeling like I need to put in 80 hour weeks.

  • John Henry,

    Agreed. LBOs are certainly not always a bad thing. Sometimes they turn a failing company into a successful one again. (And as you point out, the leveragers are the ones taking on the risk — since they are “leveraged” as in borrowing the money to fund buying the company on the assumption they can make it work.)

    But at times there do seem to be examples of people taking overweight old companies and trying to turn them into growth monsters when they’re simply in industries where there’s not that much room for growth. (Obviously, the people who try to do this must disagree about whether there’s room for growth.)

    I’d tend to put the fad of buying up regional newspapers around the country over the last ten years in that category. It doesn’t seem to me that there’s much growth potential in regional newspapers these days — at best you can keep them at a sustaining level. Though there are very interesting exceptions. The WSJ has turned itself into a broader national newspaper over the last five years and as a result is growing quite nicely.

  • The problem with this issue (like with many others) is it is multi-faceted and people choose to only address the area that fits the point they want to make or demagogue. Class warfare plays well with the masses so politicians make hay about CEO XYZ getting $$$$$$$ in compensation. It is an easy target to shoot at just like complaining about overpaid ballplayers. Truth is salaries at the top have skyrocketed over the last couple decades. However, that truth doesn’t automatically equal all being overpaid or mean that government intervention is necessary or proper to fix the perceived problem. We often hear that a company needed to pay X amount in order to attract top talent. Problem with that argument is it isn’t always top talent (or top results) being rewarded.

    This situation is similar to the problem caused by “free” health care. Whenever the end user is not responsible for the cost of something you can be sure the cost will escalate unchecked. In this case because of the dilution of the strength of the individual stock holder no one is able to speak up about the corporate waste or mismanagement of assets. If a company is owned by one or a few people they tend to be more careful about out of control spending including spending on management. However, a massive corporation has billions of share holders who have little or no say in the level of compensation, perquisites, or golden parachutes offered to management. I am strongly opposed to government interference, but I see it coming because most boards of directors are too cozy with management and are failing to provide proper oversight.

  • Well said. While some may think $10M or $40M is a lot of money for a CEO there are workers in Africa or China that think making $10 per hour is a lot of money. The goal should not to be to drag down those doing well but to lift up those that are not. You’re free to quit your company if you think the CEO makes too much money. You’re also free to better yourself with FREE books at the library so you can move up the ladder. Besides, the free market will reward and/or punish companies that do stupid things with their money much better than two corrupt politicians being wined and dined by some lobbyist that “help” them decide who gets paid what and who gets taxed and how much.

EconTalk

Tuesday, April 21, AD 2009

For something over a year now, I’ve been enjoying the EconTalk podcast, something which Blackadder of Vox Nova turned me on to. EconTalk is a weekly, one hour podcast put out by the Library of Economics and Liberty. It’s hosted by Dr. Russ Roberts, a professor of economics at George Mason University and regular National Public Radio commentator on economics, and the format is usually one of Prof. Roberts interviewing an economist about his/her recent book, or about an topic of current interest. And generally it succeeds in pursuing that fascinating middle ground of being accessible to the general listener while not shying away from discussing highly technical/academic topics.

I was inspired to post on them at this point because this week’s podcast was of a different format than usual, consisting of an extended interview of Prof. Roberts by a journalist on the difference between wealth and income, and what it means to say that we have “become much less wealthy” over the course of the recession of the last 6-9 months. Roberts also discusses the inexact nature of economics as a science and how the uncertainties of interpreting data play into policy debates.

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9 Responses to EconTalk

Krugman's Foundation

Tuesday, April 21, AD 2009

This Newsweek article about Nobel Prize-winning economist and NY Times columnist Paul Krugman contained an interesting biographical detail:

Krugman says he found himself in the science fiction of Isaac Asimov, especially the “Foundation” series—”It was nerds saving civilization, quants who had a theory of society, people writing equations on a blackboard, saying, ‘See, unless you follow this formula, the empire will fail and be followed by a thousand years of barbarism’.”

His Yale was “not George Bush’s Yale,” he says—no boola-boola, no frats or secret societies, rather “drinking coffee in the Economics Department lounge.” Social science, he says, offered the promise of what he dreamed of in science fiction—”the beauty of pushing a button to solve problems. Sometimes there really are simple solutions: you really can have a grand idea.”

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6 Responses to Krugman's Foundation

  • I remember finding this aspect of the Foundation series ridiculous as well (in fact, it was one of the main reasons I didn’t read beyond the first book).

    It’s probably not a coincidence that the first Foundation stories were written just as the Socialist Calculation Debate was winding down. A lot of economists back then really did believe that they could do something kind of like what Seldon did, if only they had enough computing power.

  • I read the Foundation series, the original trilogy, in High School back in the seventies. I enjoyed the broad sweep of History in the books, but I found prediction of History via math preposterous in the extreme. Purportedly Asimov was inspired by Gibbon’s Decline and Fall, a book I have devoured footnotes, the best part, and all. Gibbon is the best bad historian of all time in my opionion. His style is a take it or leave it affair: I take it and love it. His erudition for his time was immense. His history however was his biases against religion and “barbarism” writ into a fairly mechanistic formula that does injustice to the actual facts.

  • I also read the Foundation trilogy and the two that followed after a long hiatus and I enjoyed them all (thought the original 3 were the best).

    Reading about the Mule and how Hari Seldon mathematically calculated the demise of the Galactic Empire with the fall of Trantor mesmerized me as a high school student.

    As far as Gibbon, I just started reading the Rise and Fall recently and it’s good so far. Though I’m biased towards Warren Carroll (just finished reading the Last Crusade… magnificent)!

  • Tito, if you like The Last Crusade, you should try reading Jose Maria Gironella’s trilogy on the Spanish Civil War: Cypresses Believe in God; One Million Dead and Peace After War. Gironella fought on the side of the Nationalist’s in the Spanish Civil War, but his novels are remarkably even-handed and give a view from the inside of the war on the ground level among ordinary people. His books are suffused with a strong love of Catholicism and of Spain.

  • Donald,

    Thanks! I am simply enthralled with the Spanish Civil War and I’m wary of getting anti-Christian leftist authored history books.

    You have just made my next book purchasing decision on Amazon!

  • Pingback: Paul Krugman — economic crank | Taking Hayek Seriously

On The Question of Inequality

Friday, April 17, AD 2009

There’s been some discussion of inequality in posts and comments here recently. I have ambitions to write a series of the particular challenges I believe our country is facing in regards to inequality in a modern high-skill-based economy, but given recent discussion I’d like to open with something fairly open-ended.

John Henry pointed out that the Catechism of the Catholic Church addresses the question of equality to some extent in its section on Human Solidarity:

1935 The equality of men rests essentially on their dignity as persons and the rights that flow from it:

Every form of social or cultural discrimination in fundamental personal rights on the grounds of sex, race, color, social conditions, language, or religion must be curbed and eradicated as incompatible with God’s design.40

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15 Responses to On The Question of Inequality

  • You are missing a core aspect of Church teaching, best enunciated in paragraph 303 of the Compendium:

    “The economic well-being of a country is not measured exclusively by the quantity of goods it produces but also by taking into account the manner in which they are produced and the level of equity in the distribution of income, which should allow everyone access to what is necessary for their personal development and perfection. An equitable distribution of income is to be sought on the basis of criteria not merely of commutative justice but also of social justice that is, considering, beyond the objective value of the work rendered, the human dignity of the subjects who perform it. Authentic economic well-being is pursued also by means of suitable social policies for the redistribution of income which, taking general conditions into account, look at merit as well as at the need of each citizen.”

  • This presupposes the notion that the sheer competency of church teaching extends to matters such as these (i.e., with respect to even economy).

    To my mind, I would think that the competency of the Church lies strictly within the realm of Faith & Morals and does not actually extend to even matters of economic system.

  • Well, no, of course it extends to the economic system. Even the most cursory review of the OT shows that economic injustice is something God cares about (as in a matter of sins crying to Heaven for vengeance).

    So, MM is right to cite that section and the Church is certainly right to give a rip about whether the economic system is just.

    Or should She have just shut up about communism?

  • Of course, the tricky part is whether a particular economic system fails to measure up to the concerns laid out in section 303, and whether or not “mere” numberical inequity is implicated by that.

    But, let’s just say I’m more than a little receptive to concerns about the “objective value of work rendered” when we consider a financial system that seems to have rewarded greater and greater levels of chicanery and obfuscation over the past generation.

  • “We see similar injustices in the world today on a much larger scale, especially as we have entered a period in which (contrary to the entire history of the world up to this point) nearly all hunger is the result of politics rather than lack of resources.”

    Not only politics, but reckless greed.

    http://www.foodfirst.org/en/node/2402

    “There is now wide agreement that speculation in food was the major cause of the skyrocketing food prices that led to the 2008 global food crisis.

    Though commodities prices are down, some investors are already betting on a rebound by the third or forth quarter. Despite low prices now, all the ingredients of 2008’s toxic, speculative bubble are still with us today.”

    Speculation is condemned as a sin in more than one of the social encyclicals, too. This is my problem: when, in the name of “freedom” people are allowed to do things such as this, that have a combined and cumulative effect that threatens the very lives of others.

  • I agree with MM that economic well being can’t be measured simply by the amount of goods it produces. A country where almost all the wealth is concentrated in the hands of a few is not necessarily better off than a country where there is less wealth overall but it is more evenly distributed. I don’t think, though, that this contradicts anything in Darwin’s post.

  • There is now wide agreement that speculation in food was the major cause of the skyrocketing food prices that led to the 2008 global food crisis.

    Wide agreement among whom? Certainly not among economists.

  • Thoughtful post Darwin – you’ve done lots of great work lately!

    To MM’s quote from the compendium I would reply (hastily): An equitable distribution of income implies that income will not be equal. Justice obliges us to give to unequals unequally, and we are certainly created very unequally. (How bland life would be if we weren’t!)

    As to redistribution according to need – sure – but what does the Church teach that we really need?

  • Dale Price,

    Apologies, but where exactly does it state either in Scripture or in Tradition that the Church teaching even on matters of economic systems is actually infallible?

    To my mind, if the Church’s competency extends even to this, that even (what should rightfully be considered) her opinion concerning what type of economic system entire nations should subscribe to is actually indeed infallible, then I take it only marvelous Utopia awaits us all if only the World were wise enough to yield to the Church’s financial expertise (although her own balance sheets would have me skeptical even in that regard, but at any rate…) and have her impose upon the rest of the world’s populace the kind of economic system that She would have us all follow.

  • Wow, e, I scanned my previous post for phrases touting the Church’s economic thought as the immanentization of the economic eschaton, but came up empty. Perhaps my lack of rest, occasioned by a hit and run on our minivan, a bout of explosive nausea, and a barfing toddler who managed to call 911 and summon the police to our humble abode this morning have all managed to cloud my reading skills, but I still don’t see it. I’m inclined to call “straw-man,” but I’m really pooped at the moment.

    As a rule, I don’t look for the Infalli-label in Church teaching. By that logic, I could contracept.
    Playing the “But is it infallible?” card grates, to put it mildly. Supporters of women’s ordination do it all the time.

    Look, either the Church is a teacher, or she is not. She may not be the clearest teacher at times, to be sure.

    But treating her like an oracle on, say, theft, but like the crazy aunt who needs to be shuffled back up to the attic posthaste when she starts talking about paying a worker a just wage strikes me as a staggering exercise in special pleading, if not quite completely schizoid.

    Bluntly, you seem to be ignoring that there is a moral dimension of economic life. Again, by your logic, the Church’s warnings about communism could be just as airily dismissed.

    It at least behooves you to consider the body of informed teaching that has issued forth under the Popes since Leo XIII. Which, as it turns out, is quite open to free enterprise and hostile to statist collectivism. It is the furthest thing from imposed–snarf. If it is, it’s about as well “imposed” as Humanae Vitae, with similar consequences for our moral lives.

  • Dale,

    She have just shut up about communism?

    Communism/socialism is incompatible with church teaching because it explicitly rejects the true dignity of man, capitalism does not in it’s essence oppose the Church but must be bounded by limits to protect the common good. This is apples and oranges.

    I don’t look for the Infalli-label in Church teaching. By that logic, I could contracept.

    you’re in serious error on this. The Church infallibly teaches that every act of contraception is intrinsically evil.

    Supporters of women’s ordination do it all the time.

    And they are in serious error here as well, this teaching is clearly enunciated as infallible.

    You don’t further your argument with wildly inaccurate analogies.

    I do have concerns about the translation and interpretation of this article of the “Compendium of the Social Doctrine” (there are many compendiums, let’s not lend this one any more weight than the Church grants it). I’d like to know what is the original authoritative source for this paragraph.

    Regarding the food crisis… the politics which leads to it are more to do with African dictators and Islamic-fascism than with price speculation.

    Interesting to note that the US vessel captured by Islamic-fascist pirates last week was carrying food aid to the starving of Africa, and so was the vessel attacked subsequently.

  • MM,

    I’m not clear that the section you quote from the Compendium of Social Teaching says anything beyond the sections of the Catechism that I already quoted, nor does it depart from my point. From the section you quoted:

    the level of equity in the distribution of income, which should allow everyone access to what is necessary for their personal development and perfection.

    From this it seems pretty clear that sufficient equality that all members of society has access to what is necessary for their personal development and perfection, but it is not at all clear to me that it is an element of such personal development and perfection that one have the satisfaction of knowing that no one has significantly more than you do.

    Again, the point that I’m trying to be clear on is: inequality becomes a serious moral problem when it means that some in society lack either basic human dignity or the basic needs of life while others enjoy excess. However, it is not at all clear to me that it is an injustice for others to have a thousands times more wealth than I, so long as I have the basic necessities for life and human dignity.

  • Dale,

    “It is the furthest thing from imposed-snarf.”

    I don’t think you quite caught the gist of that comment.

    What I was trying to express is that if you should happen to believe that the kind of economic system that the Church conceives as ideal is actually infallible and, in all actuality, an efficacious remedy to the plight that has historically plagued mankind, then presumably a nation following such an economic system conceived ideal by the Church would ultimately result in only positive success & properity for all.

    However, given the reality of the world, I highly doubt that.

  • Darwin,

    I do agree with your main point; I have no desire myself to be extremely wealthy and I don’t look at anyone else’s extreme wealth as an offense against me.

    But there is a) the problem of inequality on a global scale, which I do believe deprives many of the necessities of a dignified life (simply existing as an organic life form is not necessarily an existence worthy of a human being), and b) the problem of political inequality – those with great wealth can and often do manipulate the political system to their advantage.

    A rough equality, falling at least in a range of highs and lows, would seem to be necessary either way.

  • Joe stated: “the problem of political inequality – those with great wealth can and often do manipulate the political system to their advantage.”

    Gee, I wonder why is that? That is, if what you would so happily desire is the kind of monstrously bloated leviathan state, then this is exactly what you’ll get as this oligarchy is but an unavoidable inevitable consequence!

    The Rich Pay for the Federal Government

Fraud, Folly or Probability

Monday, March 23, AD 2009

As the government continues to pump money into AIG, the foundering insurance giant which found itself at the center of the real estate and financial crashes, I’ve seen increasing numbers of commentators demand to know why no one is calling for the jailing of AIG executives on charges of fraud. How, the argument goes, was their selling of financial insurance products any different from the sort of fraud Maddoff carried out? They sold insurance policies they couldn’t cover! They took money and gave nothing in return!

I think this tends to underline that people don’t actually understand insurance and how it works very well. This is doubly concerning in that insurance has become increasingly central to people’s ideas of economic security in the last few decades. Indeed, we’ve reached a point where lacking health insurance is itself considered a health problem, regardless of whether this actually results in someone failing to receive needed treatement.

What is insurance? Basically, insurance is a way of extending your savings for unlikely but high cost eventualities.

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10 Responses to Fraud, Folly or Probability

  • I think where the fraud comes in is when billions of government dollars are pumped into private businesses. The opportunity for corruption on an epic scale between politicians and business men and women is probably unparalleled in our nation’s history. In short, I think the fraud is probably underway now.

  • Yes. Justly, AIG should have been declared insolvent and its assets sold off to it’s more cautious competitors who were more careful in their choices. Keeping them afloat helps avoid some (potentially very bad) short term pain, but sends a bad moral hazard message in the long term.

  • Agreed. Bankruptcy is a meat cleaver solution, but it is very good at taking assets from failing businesses and transfering them by sale to businesses that can use them more productively.

  • Insurance isn’t what made AIG insolvent. Derivatives made AIG insolvent. Derivatives can be like insurance, but are not insurance. One of the differences is that bankruptcy doesn’t provide shelter from derivatives.

    Why AIG was bailed out was more akin to the following. Say your brother offers your mother an investment and gives assurances of its soundness. Your mother gives him 20% of her savings, not alturistically but because she believes the investment is sound and good for her. Your brother manages to lose 80% of your money. Certainly you can tell your mother that she needs to take responsibility. You can tell her that she needs to forgive her son and your brother. You may even offer a pittance to help her get by. This is what is happening at a more global scale. If AIG were to go down, a number of very large European banks would go down with it. Much of the aid given to AIG has gone to those banks. Needless to say Europe isn’t much interested in hearing, “Oh that’s the free market, sorry.” They aren’t interested in having their economy tank because U.S. regulators couldn’t manage their banking system. The US isn’t exactly in a position to ruthlessly default. A signficant number of dollars in our stock exchange is held overseas. (The largest investors in Citibank are in the Middle East.) Recalcitrance on bailing out AIG would have resulted in a stock market crash. If I remember right, there were 1.5 TRILLION DOLLARS in sell orders ready to execute just prior to the announcement that the government was taking over AIG.

  • Insurance isn’t what made AIG insolvent. Derivatives made AIG insolvent. Derivatives can be like insurance, but are not insurance. One of the differences is that bankruptcy doesn’t provide shelter from derivatives.

    Definitely, CDSs are not insurance, though the point that interested me was that their pricing depends on a probability of default, which is something which the issuer is responsible for forecasting. And they are effectively used as insurance, in some cases, by investors.

    I guess I’m a little confused as to the point that bankruptcy would not provide shelter from the derivatives to AIG. You may well know more about this detail than I, but I know I’ve heard several economists write or say that the government should have let AIG go down, and I would assume that had they gone down they would have been unable to pay out on CDSs they had issued for any further companies that defaulted. So sheltered or not, the CDSs would have gone away if AIG broke.

    Needless to say Europe isn’t much interested in hearing, “Oh that’s the free market, sorry.” They aren’t interested in having their economy tank because U.S. regulators couldn’t manage their banking system. The US isn’t exactly in a position to ruthlessly default.

    I’m a bit confused by this. Your suggestion is essentially that the poor, simplistic European banks bought a number of investements which turned out, because people’s statistical forecasting models did not take into account extraordinary events, to be unsustainable, and that therefore it is now our duty to use government funds to make those investments good anyway (privatized gains and socialized losses across borders?) because the Europeans would otherwise be shocked and angered that we failed to regulate to keep their banks from buying investments that would pull them under?

    If the problem is that American financial institutions are under-regulated compared to European ones, then shouldn’t the virtuously regulating Europeans refuse to get involved with American investments lest they be burned?

    Really, though, this all comes back to the forecasting question, which was what actually interested me in this discussion. Rare but cataclysmic events are inherently very hard to forecast, and I really see no reason to believe that regulators would be any better at doing so than the financial products division of AIG. Government regulators’ decision biases would be different, but not necessarily in better ways, just different ways.

  • If AIG were to go down, a number of very large European banks would go down with it. Much of the aid given to AIG has gone to those banks.

    This is certainly true, and in fact the value of this indirect bailout of European banks, in real dollars, is likely to exceed the amount given in the Marshall plan. What isn’t clear is why bailing out insolvent European banks should be the responsibility of the American government, rather than of governments in Europe.

  • The European banks bought mortgage securities and hedged by buying default swaps from AIG. Perhaps I should have introduced another brother into the scenario to better analogize the situation. The point of the analogy was not however a criticism of regulation but to note that the process is not atomized. Like the mother’s investment with her son, the son and mother have mutual interests that extend beyond the investment transaction. There was a reason Clinton was in China two weeks ago. The US economic life is not autonomous but a part of our foreign policy. We have troop commitments in Afghanistan and Iraq and myriad of lesser interests, not to mention maintaining our petrodollar status, that would be significantly effected if we just pretended that AIG’s issues were in a box seperate from US issues. The most significant issue is that no one else sees the seperate box.

    As to Blackadder’s question, the Euros have already stuffed a lot of money into their banks. Britain has nationalized I think 3 of them now. In some respects the question is like asking the starving man why he doesn’t buy a bowl of soup.

  • M.Z.,

    If only Obama could articulate this to the American public then most of the confusion and ridicule would subside. President Obama doesn’t want to fall into the same pitfall of failing to explain his policies like President Bush did.

    One more thing, how about a pic to go along with your WordPress ID?

  • As to Blackadder’s question, the Euros have already stuffed a lot of money into their banks. Britain has nationalized I think 3 of them now. In some respects the question is like asking the starving man why he doesn’t buy a bowl of soup.

    The UK has given large amounts in bailouts. The rest of Europe hasn’t. If the idea is that European governments are simply incapable of giving more, then this would seem to be rather damning for their financial system as compared to our own.

  • The linked article doesn’t carry as much water as you want it to carry. France, Germany, Belgium, and the Dutch has all participated in bailing out banks. Yes, the European banking system has many problems. Eastern Europe, Spain, and Ireland have real estate bubbles that may be worse than our own. Ditto Brittain. If we are however measuring which financial system can handle a default by AIG, the answer is apparently none, or at least we are afraid to find out.

Capitalism is 3rd World's Safety Net

Monday, March 16, AD 2009

While Americans weather layoffs and watch their 401ks dwindle, the developing nations in which many of our products originate are being hit even harder by the global downturn. Many of these developing nations have virtually no social safety net, and job loss can be crippling. However, as jobs manufacturing good to be sold to the West dry up, many are turning to the “informal economy” the open air markets, street vendors, and in-home manufacturers which make up more than half the economy in countries ranging from India and Mexico to much of sub-Saharan Africa.

The informal economy consists of cash and in-kind transactions and its practitioners do not pay taxes, hold licenses, or obey regulations. Pay is simply however much money is made, and there are no benefits. Because informal businessmen pay no taxes and work on a cash only basis (they seldom capitalize through loans, nor do they put savings into banks) economists have generally seen them as a drag on the economy. But as export-based jobs dry up, it provides a fallback safety net for many workers:

pilaporn_jaksuratUntil late December, Pilaporn Jaksurat, 33, was working full-time on a cotton spinning machine in a textile mill in Bangkok. She made about $7 a day and her benefits included bonuses of $30 a month for good attendance and a severance package worth about $800.

Then she was laid off when her factory, which sells fabric to clothing manufacturers in Europe, said it had to cut costs to cope with the global economic crisis.

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2 Responses to Capitalism is 3rd World's Safety Net

  • I thought the free market was an uncharitable monster. And I thought that the underground economy was only for drugs and guns.

    Why do you have to go and use reality to smash stereotypes, you capitalist freedom-loving monster.

  • Wilhelm Röpke had a lot of insight into this.