Thursday, July 16, 2009

Episode 69: Capitalism: The Double-Edged Sword

A comment in my last post about my opinion on capitalism drew a bit of fire in the commentary. And rightly so… it was a bold statement that I didn’t have time to support in that post. Allow me to do so here.

At the onset, I’d like you, loyal reader, to know that I am very much of the capitalist mind. I think our version of capitalism is what makes our country so powerful. If you have a great idea, you are greatly rewarded for your contributions to society by amassing more wealth than some countries are worth. For example, Bill Gates and Steve Jobs took the idea of a computer in this massive warehouse to a device that could fit in your office (now they fit inside a cell phone!) Larry Page and Sergey Brin revolutionized how we navigate through the internet when they made Google (my FAVORITE company). Russell Simmons and Rick Rubin created Def Jam Records in an NYU dorm room. Not to be outdone, Mark Zuckerberg created Facebook in his dorm and turned what was originally an interactive student directory into the #1 social networking site. This is capitalism at its best – find a missing part of our life, dream up a great idea to fill the void, and if the stars align, get paid a hell of a lot to make an impact on the country and the world.

Let’s scale back a bit. Let’s say I’m an awesome cook who could whip up the best tacos in town. After doing a market analysis, I see there is a Taco Bell, Miguel’s Tacos, and El Dorado Restaurant. So when I open up The Law’s Taco Shack, I may do some things like undercut the competition’s prices and offer a taco that tastes so good that it becomes a local brand. Brand recognition is one of the most important assets a business could have, as in this scenario I crush the competition, even putting Miguel out of business.

Let us scale back even more to the personal level. In our free market system, When I get a pay check, I have obligations to make like bills, and loan payments, but other than that, I’m free to spend my money how I please. If I want to save or invest it, I can. If I want to soup up my car and buy aftermarket parts, there is very little a government body can do to stop me. As long as my car passes the emissions test, I’m free to make my roadster as fuel inefficient as I want. Our system allows me maximum selection to buy any of life’s creature comforts like 57” Plasma Screen TVs, leather couches, or a post-modern table that is ugly as hell for $4000 if I want to. There is no government body that could stop me from spending my money as I please so long as my obligations are met.

I like – no, love our system. All the examples above is capitalism at its finest, even Miguel losing his shop to my business. My idea is better than his which in turn made his business lose its solvency. But our version of capitalism even helps Miguel from going to the economic crapper just because his idea no longer appeals to the people. When a business fails, there are numerous ways to get rid of your debt with little impact to the business owner (as long as it is not a sole proprietorship – then it gets a little tricky) and Miguel can quit, or he can come up with a new recipe and try again. Our system of private enterprise employs 80% of our workforce, and is in most cases very honest and legitimate companies. These small, medium, and some big business are completely exempt from my criticism of capitalism. The aforementioned people are the heart of our economic engine and deserve our support and thanks.

With that said, let’s continue forward to my comment from episode 68 that drew much criticism:
“The problem with amassing personal wealth is capitalism. It is the nature of capitalism that for one person to amass wealth, someone also has to lose wealth. Also, many people become addicted to making money, and do so with little to no consideration for others.”

In this quote, I’m referring to big business, namely in the financial, banking, credit, and pharmaceutical sectors. See the problem with big business is they start out with a great and noble idea to help Americans live their lives a little better than it was the day before. As they climb up the ladder, something changes. It becomes less about helping the people they originally wanted to help, and more about increasing their portfolios. Then these established companies hire people who never cared for the “little people;” they got in the investment banking business from the start to make money.

Look at the financial crisis. There were many factors that contributed to the collapse, but arguably the biggest factor (or at the very least the factor that cause the pot to boil over) was the gamble made in the subprime lending market. It was the greed by a few in the upper echelon of the biggest of big business that didn’t care about the American dream, they cared about making more money for themselves. Those business people would rationale their actions by saying they helped to give more people a shot at the American Dream. If it requires so much workarounds and trickery and number manipulation to get these people into those houses, that should’ve been a clue those were risky mortgages to make. Conservative minds may ask “who’s more foolish, the fool or person who follows the fool?” Both. But if we left the system alone, the one that looked at your financial history and determined based on your earnings if you qualify for a loan, we wouldn’t be in the mess we’re in.

How about the pharmaceutical industry? We are a nation of magical pill poppers. We create diseases to cure so we can sell more medicine. We break the backs of middle class and lower echelon with skyrocketing costs of treatment. We had a government that blocked access to cheaper generic drugs from Canada to appease the big Pharma companies. Conservative minded people may talk about long lines at the hospital under a “socialized” health system, but what’s the difference between that and people not being able to afford medicine? Either way, the middle class is hurt. Case in point, a passerby reader of this blog told me a story on my Facebook page that her friend (who has insurance) needs a surgery which the insurance requires he pays $1000 AND 20% of the costs. Using my own surgery to estimate the cost, he’d have to pay $10,000 out of pocket, plus medicine and other fees. The big business system could care less about the fact that this expense absolutely crushes these young professionals is college educated, working, and has insurance.

That is what my statement means. As capitalism pays in dividends for the individual, someone has to lose. The insurance company could afford to cover more of the cost of treatment, but that means less profit which is bad for its portfolio. So they will do anything in their power *not* to pay for your coverage. The banks could loan money to people who have money to pay it back, but fewer loans means less profit. Add to that the complicated terminology (like credit default swaps), in addition to wrecking the life of one trying to aspire toward a better life for their family, these bankers passed the liability to someone else. Credit card companies could issued limits based on ones credit score, but that would mean less credit equals less interest, so they surprise you with credit line increases. Now yes, we don’t have to spend it, but when you have been laid off and do not qualify for unemployment (another program that causes rifts in conservative ideology) you need to live, and Mr. Gold Card becomes your best friend. To add insult to injury, they even lowered credit lines on some people and charged them penalties after the recession began to worsen! Combine that with super high interest rates and now a bad situation becomes worse for Joe Six –Pack. Not for the credit card Fat Cat CEO however. In the end big business is about making more money, and nothing else. That includes companies I applauded earlier, like Microsoft. They once had a great idea to help Americans compute better, but now they outsource almost all of their manufacturing and customer services overseas which deprives Americans of jobs. Yes, high government taxes drive away big business, but with a $23 Billion profit, I’m sure they could afford to employ more American workers. Apple does… (which hurts for me to say since I’m a windows guy!)

So to amend my statement, I should say “The problem with amassing personal wealth is capitalism. It is the nature of capitalism that for one person to amass wealth, someone also has to lose wealth *** and that person is almost the middle class American.*** And this post is not meant to give a pass to the government, as they do a lot of funky counterproductive stuff as well. If I opened that can of worms, this post would easily be 6-7 pages long. I will instead stop at two and a quarter pages and devote that topic for a post another day.
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10 comments: on "Episode 69: Capitalism: The Double-Edged Sword"

Mark Meloy said...

In all honesty, I am unsure of the point here. Is capitalism good? Not the way it is set up now. I agree everyone should be rewarded for their hard work, but of course, as one amasses wealth, someone, somewhere has to pay the price, unless, of course, we just keep printing cash (oh wait, we do that.) The issue is people are not paid for hard work, they earn money on the interest of the money they already have, or more likely, their daddy gave them. Additionally, the amount paid is not proportional to the work/service performed. Baseball players work hard, but so do car mechanics, but a simple comparison of salaries would not show that. I have no issue with capitalism, as long as those dis- proportionally compensated are taxed at a much higher rate, thus taking some steps to even out our capitalist society, remembering that it was the capitalist system we have in place that enabled such wealth to be amassed in the first place.

conservative generation said...


I don't agree. No surprise ;) I most definitely agree that there are companies out there that are no one's friend, but in all cases you do not see capitalism as the cause, but the opposite, a lack of capitalism. Capitalism is based on competition. If you have the lack of competition you get situations where a single company has too much power. I've argued this before, but we have a CEO problem and not a corporation problem. The shareholders do not have enough power. By the way, corporations exist by government. They are a legal entity.

The idea that one has to loose for another to win actually describes government, not capitalism. Government's must take money and give it to someone else. As a result their is economic loss in taking and economic loss in giving. Government is like filling a bucket of water with a hole in the bottom.

Capitalism on the other hand does not bleed economic gain like government, but creates new economic gain.

In fact, what you are talking about is making things fair, but that is always in the eye of the beholder. For me there only one kind of fairness that is actually possible and that is capitalism. Everyone gets to keep what they earn.

The Law said...

I definitely see where you're coming from here. But I'll see your arugment and raise you:

Capitalism is based on competition. If you have the lack of competition you get situations where a single company has too much power.

This may be true for say Microsoft and Intel, but is this really true for private health insurance companies or banks?

Health Insurance comapnies are a dime a dozen. The lowest tiered ones basically blows (but you get what you pay for afterall). There is competition here and it is for as good as service possible for as cheap as possible. I have no problem with this.

Then you have middle tiered comapanies that do a good job *and* give you relatively little hassle. These companies compete for service. I have no problem with this as well.

Now in many cases of low and mid tier companies, they are privately owned stock, so you or I couldn't buy them. So moving on to the big boys, this is where the problem is. It is the upper echelon compaines that are fighting for profits. The higher up the corporate chain you go, the less it becomes about the cause or the people, and the more it becomes about the money. So the AIGs and the Met-Lifes will screw you over in order to increase their portfolio. It doesn't matter whether you are sick or need cheaper medicine. They don't want cheap generic drugs from Canada because they lose money on the contracts for more expensive brand name medicine! And they have some of the most powerful lobbies in Washington who are not fighting for you, their fighting to increase their portfolio. And these are the types of companies we buy into.

Look at the banks... there are people with 760 credit scores who *still* can't get a loan. You can't buy stock from Local Bank NY who treat you well and do their best to protect your money and get you loans at affordable rates. The big boys that we can invest in raise your interest, make getting a loan as easy as navigating a minefield (with a good credit score mind you), and as we've seen with the subprime lending, can give two craps whether you're making a safe loan or betting against the table.

So yes you are right, capitalism doesn't bleed economic gain, no... it is the people in the system who do that. And it is our blind (or maybe not so blind) faith in the system that empowers them to take advantage of middle class Americans. When the fat cats win, everyone wins. When the fat cats lose, they still win, and the rest of America could go scratch. It's not right.

Mark Meloy said...

Capitalism on the other hand does not bleed economic gain like government, but creates new economic gain.

I could not agree more. the issue is not can capitalism create economic gain, but where this gain goes. It is not going to the average American, but rather to the large stakeholders, typically those that, quite frankly, are already rich and getting richer. The days of the ethically superior business owner are long gone, those owners that new their employees well, and would operate the company that in the best interest of the area and those that depended on it. Republicans still argue as if this is the case in business, and nothing could be further from the truth. Decisions about lives are made by strangers in a boardroom staring at flow charts, employees reduced to a statistic, thrown about so that another faceless investor can show gains. Business has a right to operate for profit, but in balance with making decisions based on what is in the best interest of the common good, and when this fails to happen, which is quite often, government must regulate it. The economic gains provided by successful corporations are substantial, but mostly unseen by most of the public.

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Anonymous said...

I think this is a very simplistic look at the, to steal a turn of phrase from our mutual acquaintance Adam Smith, Wealth of Nations. In your mind there 'has' too be winners and there 'has' too be losers. While this couldn't be any more from the truth. The assertion that wealth on the one hand and poverty on the other are ever increasing is made without any conscious connection with an economic theory. You fall into the inconstancies one encounters when they try to treat the economy as a pie, like it's something you can cut up and hand out at the nearest bake sale to your supporters. When instead it's constantly expanding more, more, more in ways you can never divide equally. That because your judgment is clouded by the ideas that the sum of wealth in any society is a given quantity, so that if one possesses more one must posses less.

I find it inadequate, as well, to consider the free market as some form of warfare that you capture resources and hoard them all for yourself. That your main goal is to collect gold bullion and put it inside your castle/corporate office like some sort of emperor. The world of business couldn't disagree more, Big Pharma doesn't sit on its wealth like a king upon his throne. That's what the government does with our taxes, our Social Security and our 'Safety Nets XYZ,' and don't we see how that works out? You set out practices you abhor, based through the narrow prism that there 'must' be some sort of inherent division created by capitalism between those who have won, those who have lost. Yet there is no such requirement within the capitalist system; indeed there is only system that honestly tries to create what you hate, and to give you a hint, it is not commerce.

What I'm trying to say is that unless you've discovered some fundamental truth that a history worth of economists has missed. This 23 billion dollar profit you speak of, to use a example from your post, comes from (I believe, but I've always been a bit sketchy about what Microsoft does at its shareholder's meetings, something having to do with not moving past 35 but once in the last decade) everything but exploiting its consumers. It makes money, certainly, from the selling of goods but that's such a one dimensional view of the whole problem. Where does this money come from, does it magically appear out of the ground because Bill Gates made one prototype in his garage? Hell no!

Capital investment?

Yes, sir!

You have completely missed the whole point and theory of investment your economic falls apart because you initially forget about how you get your business started. Very nice you have a great, cheap, recipe but where do you get that initial financial capital to construct 'everything' and the financial liquidity to get running? Fortunes do not magically self-perpetuate themselves. Fortunes cannot grow; someone has to increase them and for this successful activity an entrepreneur is needed. So that the capital reproduces itself, bears fruit and increases only so long as a successful investment endures. This money does not just sit around starving the middle class, it goes right back into funding their businesses so that they may “create” wealth and that they may be paid and that they may accept the glorious benefits of (for example) Vanderbilt University.

Succinctly, there is no evidence to suggest – beyond emotional arguments – that higher amounts of freely created wealth somehow constitute greater amounts of poverty.

The Law said...

First, hello and welcome Random Babblings from a young American.

You raise an interesting argument, but I think you put a few too many words in my mouth here.

I most defintely do not think of capitalism in such a narrow, finite view that necessitates winners and losers. My argument is the higher up the coporporate ladder you go, the less it becomes about the goods and services you provide to the people, and more about making profits, using people as a vehicle to do so.

I'm reading David Kessler's book "The End of Over-Eating" which suggests that the food industry pumps our food full of fat sugar and salt because they know we have a psychological and emotional attachment to that taste that keeps us coming back for more. The same reason my sprite is full of salt... it never really makes you feel less thristy. Of course you can say "well don't eat the food" but havign worked with advertisers, I can tell you they don't give two craps about yoru health, its about the tag line that gets you buying sugary foods. Who wins? The corporate fat cats. Who loses? the Obese Americans. They don't make healthy food appealing because **it costs too much to produce!!!!**

I never once mention poverty in my post. The poverty class is not a consideration in this post because they are likely not investing in stocks and bonds for big business.

That because your judgment is clouded by the ideas that the sum of wealth in any society is a given quantity, so that if one possesses more one must posses less.

I also do not believe this is true. Wealth in my opinion is determined by living your life without financial burdens. If you make $26,000 a year, and have $18,000 of expenses in a year so that you have $6000 of disposible income per year, I'd say you're doing well. I do not believe the capitalist system steals money from the individual. If anything, taxes do that.

That your main goal is to collect gold bullion and put it inside your castle/corporate office like some sort of emperor

I never made that asseration. In my comment, I noted small companies compete for price/value, middle level companies compete for the best customer service. the upper echelon compete for profits. I never mentioned what they do with their profits, and frankly that argument for the purpose of my argument is irrelvant anyway.

Let me be clear, the capitalist system doesn't create winners and losers, its the people in the system that go bend and break the rules who create these problems. It is easy to point the finger at government, and they deserve a fair share of blame. But it is also a mistake to believe that the capitalist system at the highest levels - the companies we invest in - are working for us because at a certain point, they aren't.

Hence the double edge sword, we invest in companies that increase the wealth of the nation, but the companies do so at the expense of the very people who invest into the system.

My argument is, the higher up the corporate ladder a comapny is, the more often they lose touch with the people. Winners and losers are not always determined financially or economically, but also by social staus, psychology, morallity, emotionally, physically, etc. And they fat cats at the top don't care who they hurt so long as they mantin a high profit margin. Not all companies are like this, but many of them are, and the are allowed to be unfair and unchecked. So while we invest in these companies that ultimately increase their worth, they also use us as vehicles to bring in larger profits. so to close, while we can say the government blows, the upper levels of the free market is not much better, and we should be as diligent with calling them out on bad business practice as we are with the government.

Grog said...

One of the great things about this blog is that we can have discussions about the fundamental nature of government. Plus I get to show off my knowledge of the federalist/antifederalist debate (forced upon me in lieu of the bible) period which I believe to be very salient to the current political situation.

"But the great security against a gradual concentration of the several powers in the same department, consists in giving to those who administer each department the necessary constitutional means and personal motives to resist encroachments of the others. The provision for defense must in this, as in all other cases, be made commensurate to the danger of attack. Ambition must be made to counteract ambition. The interest of the man must be connected with the constitutional rights of the place. It may be a reflection on human nature, that such devices should be necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions."

James Madison
Federalist Paper # 51

The Law said...

Thanks Grog... I think it's easy to lose sight of what the role of government is, and it's hard to debate the issues without talking about the boundaries.

It is amazing how the founding fathers in some ways had a crystal ball and forsaw possible consequencess of our version of democracy. Or, maybe some things never change...

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