I think that's a myth. Not the part about socialism -- I agree that people are selfish and greedy and will not work hard for the public good. But I reject the claim that capitalism is founded on a flawless model of human behavior; indeed, I think that the personality model underlying capitalism is only effective when applied to individual efforts: one person manufacturing one product. As soon as capitalism is extended to apply to groups of people, interpersonal dynamics begin to intrude into the process; and when we talk about very large corporations with very indirect and abstract economic functions, all of Adam Smith's clear and simple explanations are thrown by the wayside.
Indeed, I claim that the effectiveness of capitalism is inversely proportional to the size of the economic units operating in a capitalistic system. This is easily demonstrated by the same logic that demonstrates the failure of socialism. We all agree that socialism fails because the hard-working people who produce are not fairly rewarded for their efforts. There's no mechanism for engaging their greed and selfishness towards public benefit. The invisible hand is tied behind the invisible back.
It is true that the single proprietor enjoys a direct relationship between the effort they invest and the reward they enjoy. More effort always means more reward. But this does not apply in the corporate environment. If I am one employee among a thousand, then my efforts are averaged with the other employees. If I work twice as hard and am twice as productive, the company as a whole only enjoys a net gain of 0.2% in overall productivity. It's still socialism -- only now I labor for the benefit of the corporation instead of society as a whole.
Ah, counters the capitalist, that's not quite right: the corporation will recognize my contribution and promote me or give me bonuses. I will be fairly rewarded for my contribution.
Yeah, sure. The advocate of capitalism knows little of the real corporate world. Advancement and reward in the corporate world are poorly correlated with productivity. Political acumen is always more important than productivity. Kissing up to the boss still works better than just doing your job well. And aggressive greediness is rewarded more than patience.
Socialism doesn't work because humans are selfish and greedy. And big-organization capitalism doesn't work because humans are scheming social manipulators.
The current brouhaha with AIG illustrates this problem with textbook clarity. The managers at AIG intend to take $450 million dollars of the taxpayers' money and hand it out as bonuses to the same people who bankrupted AIG. They intend to reward AIG managers for their spectacular failure. This is not capitalism -- this is corporate-level socialism. It violates the fundamental principles of capitalism. The irony is that conservatives who scream "socialism" about the policies of the Obama Administration are pointing their fingers at the wrong targets. The real socialists are the people at AIG.
I have profound respect for Christianity as a philosophy; it's Christians that I can't stand. In the same way, I agree that capitalism is the best overall economic system -- it's capitalists that I can't stand. If we can just get rid of all the damn capitalists, maybe we can restore capitalism.
23 comments:
"I reject the claim that capitalism is founded on a flawless model of human behavior." You and Alan Greenspan, who was finally forced to concede same before a Congressional committee.
"Advancement and reward in the corporate world are poorly correlated with productivity. Political acumen is always more important than productivity. Kissing up to the boss still works better than just doing your job well. And aggressive greediness is rewarded more than patience."
I spent my entire working life (over 45 years) in the private sector. Your description is basically 100% accurate, especially re the importance of politics and A-kissing. Good people sometimes did get ahead, but it was almost more happenstance than anything else.
Rather than "one person manufacturing one product" capitalism works when effort is measurable. I have never been a salesperson but I'm told that they often get paid fairly because their effort can be easily measured.
Even if a worker's results can be measured the Marginal Theory of Value implies we don't have to pay him fairly -- just more than he could get elsewhere.
I don't know how to fix either one of these things. It would be nice to discover a new organizational form that works better than the corporation. The Dutch East India Company was founded about 1600 -- the corporate form predates calculus and computer science. Perhaps a form exists where we all rotate positions like a volleyball team watched by some algorithm that allows the strivers to gradually get more money and/or authority. I fear that any new form though will be plagued by the measurement problem so I'm not hopeful.
Re capitalism and its opposite number, socialism, this from Winston Churchill:
"The inherent vice of capitalism is the unequal sharing of blessings; the inherent vice of socialism is the equal sharing of miseries."
It seems to me you are not arguing that capitalism doesn't work. Rather, you are arguing that a particular business model — the large corporation — doesn't work.
In your critique of socialism, you pointed out that people will not work as hard for others as for themselves. This is true, but there is another important reason why socialism cannot work as an economic system.
Economics deals with the problem of how best to utilize scarce resources with alternative uses. Under capitalism, resources are allocated by prices that fluctuate freely in accordance with supply and demand. Profits and losses ensure that resources are used efficiently to satisfy the wants of the masses. Wasteful enterprises fail and the resources they commanded are freed up for more efficient employment.
Socialism has no such means of economic calculation. Without market prices, the central economic planners have no way of knowing what goods to produce, when, by what means, and in what quantities relative to other goods. Literally, socialism cannot economize, and thus cannot even be properly called an economic system.
So why does a company following a lousy business model survive in a supposedly capitalistic economy? Shouldn't it suffer losses and go out of business, and the resources it is squandering be freed up for more productive uses? Yes, unless it is propped up by artificial means.
When AIG is bailed out by the taxpayers, that is not capitalism. Under capitalism, risk is not socialized. Losses are not socialized. In order for capitalism to function properly, losses and business failures are as important as profits.
When big corporations lobby for, and Congress passes, regulations that erect barriers to entry into the market, that is not capitalism either. It is a form of protectionism. It shields the established players from competition, and props up their inefficient business models. Same for the tax code that favors big corporations.
In summary, it isn't fair to blame capitalism for the problems that result when government prevents its functioning. No genuine advocate of the free market favors bailouts or regulation of the kind described above.
As for Greenspan, no genuine advocate of the free market would take a job as the U.S. government's most senior central economic planner, fixing interest rates rather than allowing them to be set by the market and thus to reflect actual economic conditions.
It was largely Greenspan's artificial credit expansion that inflated the housing bubble and caused the present economic crisis. It is positively Orwellian to call him a free market guy. Still, I would imagine such a misperception is very useful to the ruling class. "If he says capitalism don't work, then who can argue otherwise?"
So, what kind of business models would be better than the corporation, Dither?
Dither, I think you're taking an unjustifiably extreme position. I disagree with your rejection of socialism as an economic system, for two reasons: first, you claim that it isn't an economic system because it cannot calculate the most efficient allocation of resources -- but that's not the definition of an economic system. An economic system is a scheme for allocating the wealth of a group of people. Socialism does that. In any case, this is a silly argument: socialism is real, it's out there, and shows up in varying degrees in every economy in the world.
Similarly, your black-and-white claim that socialism cannot work goes too far. Socialism is not as efficient as capitalism -- but it still has means for allocating resources based on measurement of economic flows. Indeed, in one very special case -- war -- socialism is clearly superior to capitalism. The Soviet Union's economic response to the German invasion was an astounding feat of economic planning, and it would have been impossible to pull off in a capitalistic system. Even the USA, in effect, nationalized most industrial production in support of its war effort. Ironically enough, Nazi Germany was the most capitalistic of the warring nations -- a piano-making company in Berlin was not pressed into wartime service until January of 1945. And the Nazis were crushed by an avalanche of production.
But you have not grappled with my most important claim: that human social manipulation intrudes into the optimization of economic performance of large corporations. You sweep away this problem by declaring that economically unproductive companies will be swept away by the fires of competition -- but you do not address the fact that such human behaviors are universal. EVERY company will suffer from the same human foibles, so the competitive element doesn't come into play.
This is not to argue that capitalism is inferior to socialism -- I believe the contrary. But I do perceive capitalism to be an ideal system. The frailties of human personality insure that capitalism will ALWAYS suffer from flaws (so long as it is operated by human beings). Just as socialism trips on the ugly realities of human selfishness, so too does capitalism trip on the ugly reality if human social manipulation.
I've been trying to think of a way that corporations could be reduced in size so that social factors would play a smaller role. We are already seeing some movement in this direction as industries fragment into large collections of vendors and consumers. I suspect that the best thing we could do for capitalism is to accelerate this process.
Eurohippie:
I don't know, and I wouldn't pretend to know. I don't even know that the corporation is not a good business model. It is probably a good model in some cases, and not in others. Ultimately, the consumers decide in choosing to patronize a particular business or not.
My point is that wasteful and incompetently-run businesses (those that are not efficiently satisfying consumer demands) are propped up by government, not capitalism.
Chris,
It wasn't my intention to make a big deal about whether or not socialism is an economic system. Clearly, it is an attempt at one. But in order for me, as an individual, to actually economize in using resources, I need information. Specifically, I need to know how much of those resources are available, and how valuable the existing supply is to other people, for purposes other than my own, at any given moment. Market prices convey this information.
Socialism is, as you put it, "a scheme for allocating the wealth of a group of people." But its planners lack the information necessary to actually economize. They come up with formulas and plans, but these are nothing but guesses that must result in too much of some things being produced, and not enough of other things -- in short, the squandering of resources, and a continual decline in the people's standard of living.
As for war, it is true that militaries are socialistic institutions, and that war production is inherently socialistic. But I must disagree that a socialistic economy is better prepared for war production than a capitalistic economy. At the outset, the productive capacity of the latter will be much greater than that of the former.
The Soviets had a geographical advantage over the German invaders, a large population out of which to draw a slave army, and military aid from the United States. But who would argue that the Soviets would have been worse off if their economy had been in better shape before the war began?
"But you have not grappled with my most important claim: that human social manipulation intrudes into the optimization of economic performance of large corporations."
I did address this point. If large corporations are inefficient, relative to other business models, because of office politics or whatever, then those other business models -- which are less affected by such problems -- will gain market share.
Unless, of course, the wasteful corporations are bailed out by the government, which necessarily takes money and resources away from the more efficient people. That's what happened in the case of AIG, and countless other examples.
"I suspect that the best thing we could do for capitalism is to accelerate this process."
The best thing government could do for capitalism, and for civilization generally, is to get out of the way. Stop protecting the established players, and stop forcing the competent to subsidize the incompetent, weakening the whole economy as a result.
"Under capitalism, resources are allocated by prices that fluctuate freely in accordance with supply and demand. Profits and losses ensure that resources are used efficiently to satisfy the wants of the masses. Wasteful enterprises fail and the resources they commanded are freed up for more efficient employment."
In your dreams.
That's quite a convincing argument, Gerald. You changed my mind!
Dither's arguments may explain why it's hard to get a job as a plumber or optometrist but can't be the whole story.
Why do corporations, with their extra layers of middle management, succeed when small efficient companies do not?
1. Many small companies are doing well but are franchise operators - so we perceive them as corporate but they are actually small.
2. Corporations can be a lot more heartless because the decision makers are insulated from the grunts. For example, my wife once worked at a chain restaurant. Most days only 60% of employees worked but there was a policy that "everyone works on Christmas". Few could make that decision while looking the workers in the eye.
3. Humans are only suited to thinking about a few hundred entities. It's hard to track the quality of tens of thousands of mom & pop operations. Often we crave comfort and repetition and crave "a Wendys hamburger" rather than something better and cheaper.
4. For Dither's vision to succeed there have to be entrepreneurial risk-takers willing to attempt to undercut incumbents. Society seems to have an over-supply of middle-manager-aspirants and an under-supply of entrepreneurs.
"That's quite a convincing argument, Gerald. You changed my mind!"
As convincing as yours, I'd say.
Argh, this discussion looks like another promising one, and I'm still swamped!
Hopefully I'll be free in 36 hours or so to throw in my weight on this one.
OK, first and most important: let's maintain civility here. It is destructive to the discussion to take cheap shots at the other guy. I want to see substantive arguments, not sniping.
Dither, you write:
If large corporations are inefficient, relative to other business models, because of office politics or whatever, then those other business models -- which are less affected by such problems -- will gain market share.
But we both acknowledge that there are no "other business models". We have single proprietorships, partnerships, and corporations. It would be great if we could dispense with corporations, but we cannot. Hence, the flaws intrinsic to corporations are necessarily intrinsic to capitalism.
Chris,
Those are all legal structures under which business is conducted, but there are many different business models possible under any of those legal structures.
I agree that when a corporation grows very large, it is likely to become bloated and inefficient. There is a natural corrective to this: the losses that start appearing on the balance sheet. At this point, the corporation could either downsize and streamline its efforts, or be broken up and its parts sold.
No business will ever be run "perfectly," without any waste whatsoever. It is probably not even possible to define perfection in this context. These are human efforts. Humans are self-interested and flawed whether they are in business or government or the non-profit sector. The standard for comparison is not perfection. As it stands, free market capitalism (when it is allowed to function) is better at economizing and producing goods for the masses than is any known alternative.
I would also argue that it is morally superior to the alternatives, because it is based on peaceful, voluntary exchange. Government economic planning necessarily involves pointing guns (implicitly and, if necessary, explicitly) at innocent people to make them do what you think they should do, regardless of whether or not they feel it to be in their best interests.
People who look for government solutions to every problem are really saying, "Violence solves everything."
(I know you don't like moral arguments, but I do think they are relevant, and not entirely unrelated to utilitarian or pragmatic arguments. It is my opinion that what is moral is also pragmatic.)
Re: sniping. For my part, I won't respond to those types of comments anymore. They don't merit a response.
Dither, I agree that capitalism in general works better than socialism, but my key point here is that even pure capitalist suffers from human foibles. There is no absolutist argument that capitalism is in some fundamental theoretical fashion superior to socialism -- it just happens to work better with real human beings.
As for your argument regarding the use of violence in socialism, the government uses violence to enforce contracts. Watch some family getting thrown out of their house sometime. This problem runs deep, because the interplay of capitalism and politics usually grants lots of political power to the wealthy, who then use the government to violently enforce their will upon the populace. Consider, for example, the use of violence against union members a hundred years ago. I see no moral difference between this kind of violence and a socialist government's use of violence against its populace.
Chris,
I assume you are referring to strike-breakers. But in such cases, the labor union members are the initiators of violence. They are trespassing on private property, intimidating and even beating non-union workers, and sometimes vandalizing the property. They are violating the right of the property owner and the non-union workers to enter into contracts.
I make a distinction between aggression and defense. Shooting a serial killer who invades your home is violence, but it is defensive. He is the aggressor.
There is an ethical and utilitarian argument for the idea of property, which can be constructed logically from the ground up. If you reject property, then my distinction between aggression and defense will seem arbitrary to you. But I don't think anyone here rejects the idea of property. Nobody here wants the fruits of his labor up for grabs by everyone else. Nobody leaves his door unlocked with a sign inviting strangers to "come right in and help yourselves."
I do agree that wealthy people can and do use the government to initiate force against others. So do non-wealthy people, and even labor unions today. This is a problem of politics, and a reason why it should be the aim of everyone who values peace and liberty to restrain the power of government.
Chris you are letting Dither pull you off the subject. You said "If I work twice as hard and am twice as productive, the company as a whole only enjoys a net gain of 0.2% in overall productivity. It's still socialism ..." I believe you are right -- large companies have a safety net for the inefficient that's like socialism.
Dither can prove mathematically that capitalism is more efficient than socialism. Therefore he can prove that organizations that remove the inefficient can always beat lazy cliqueish ones. So why isn't it happening?
I recently read Clay Shirkey's book Here Comes Everybody. One reason corporations seems to win is the Coase theorem which seems to prove there are a lot of transaction costs with negotiating. It would be a big pain to have to negotiate with your boss and team members!
Without logical negotiation we need something else to allocate control and resources and start behaving like primates.
Gerald has been pointing out that we can ask or force companies to adopt practices that are better than running them like primitive tribal bands and probably achieve more efficient results. The results might not be as good as Dither's pure capitalism but Dither hasn't been accounting for transaction costs.
Ed wrote:
"Why do corporations, with their extra layers of middle management, succeed when small efficient companies do not?"
I have to disagree with you that small, efficient companies don't succeed. If they are efficient, then by definition they are succeeding, because they are able to pass along their cost savings to their customers and still turn a profit. If they can't do that, they aren't efficient.*
You might look at a large corporation and see a lot of waste, and there might, in fact, actually be some dead weight. Even still, the large corporation might be more efficient than a smaller operation for a number of reasons. It might benefit from economies of scale, for instance.
It's not enough to say, "My boss is a moron who promoted my airhead coworker because she's hot. Therefore, corporations don't work." That kind of thing happens even in small, mom-and-pop operations, as well as in government. No bureaucrat, imperfect himself, is going to expunge human imperfections from business. Government is the most bloated, inefficient institution in existence, despite the efforts of all those geniuses who want to tell the private sector how to run a business.
Even with their flaws, many large corporations do provide goods and services very efficiently. Many goods (like computers, for instance) have become better and cheaper, even despite inflation. That's real efficiency.
*Assuming they are not placed at a disadvantage relative to their competitors by the law. See here, for example.
Just wanted to let you guys know I won't be posting for the indefinite future. Calling it quits! I'm going to be very busy with something else and won't be able to give our discussion the attention it deserves.
Chris, Gerald, Alex, Ed and company: All the best to you. I know we've disagreed about almost everything, and misunderstandings were common. I guess that's what happens when people with very different backgrounds and viewpoints try to communicate through blog postings. The written word seems inadequate, especially in such short form.
Anyway, thanks for a vigorous debate!
Oh no! Dirty ricklefricks! Sideways imprecations and frontways importunations!
We'll miss you. I really appreciate having my own opinions put to the flame, and I'll admit that some of them got rather scorched. I very much hope that someday you'll pass back through these parts.
It's a shame to see you go, Dither, but understandable, seeing how I've been posting so rarely for the last few months; arguments require a lot of time.
Best of luck. If it seems that nobody has budged, I'd just like to throw it out there that I don't know how much I believe in Keynesian economics these days.
-Alex
This is why we have depressions and recessions... sadly. Businesses which are less efficient are weeded out, and more efficient businesses die off. Unfortunately right most businesses are run incompetently.
Some of the most successful businesses during the industrial revolution utilized competition within the company the best.
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