Merit Goods

One of the most pervasive critiques of capitalism is its stubborn persistence in producing goods and services having little or no merit in the eyes of its critics.

Those determined to reverse global warming blame capitalism, its markets, its consumers and its governance, for creating and thriving on a hydro-carbon energy system.

Other critics bemoan “affluenza” and “consumerism” as almost an intentional capitalist conspiracy to undermine humanity’s moral nobility with cheapness of things and vulgar materialism.  Capitalism is said to be a system made by and for a “nouveau riche” sensibility, a deplorable middle class, middlebrow indulgence in trivial pursuits and enjoyments lacking any redemptive meaning in our cosmos.

Welfare economists have come up with a notion of “merit” goods which speaks to the value of what is either produced and sold through markets or provided by the state to the deserving as welfare goods and services.

I very much agree that the categories of merit goods and services and un-meritorious goods and services are sound and important for us to keep in mind.  Un-meritorious goods are not really needed in a good society or a wholesome culture.

But my problem with these two categories is my problem with any ethic or morality or with the legitimacy of any authority: “Who says?”

Should we listen to a pope or a tzar to learn what has merit and what must be shunned and excluded from our purchases?  What about following the opinions of bad people?  Or of stupid people who can’t see the consequences for the immediacy of their pleasurable satisfaction in consuming whatever it is they salivate for?

Or just look to good people and ape their consumption patterns?

Who is a good person anyway?  They don’t come from the womb having that label branded on their foreheads for all of us to see.

The free markets of capitalism can’t solve this justification conundrum.  Markets are value-neutral; they facilitate production of what people want.  If there are customers with ready money who know what they want, the history of our species suggests that someone will step forward to meet that demand, be it for guns, sex, drugs, pornography, stolen goods, ad infinitum.

Providing only merit goods is a great challenge to free societies.  We need to do a better job but there seems to be no way to easily and correctly cut the Gordian Knot of convoluted, intertwining, human desiring and free us from sin in demanding that which has no merit.

I recently saw an article for parents on what watching video games does to a child’s brain.  The article makes clear that video games, as intentionally designed by sellers, are not merit goods.

Video games cause the mind to release dopamine which is pleasurable.  The level of dopamine released – the pleasure experienced – rose with a progression of success at the game.  The more difficult the challenges, the better the scores, the better the players got vis-à-vis themselves and others, the more dopamine was released and the less homework got done.  Game designers excel intentionally in arranging for the release of lots of dopamine to keep the gamers at their consoles.

Requests, escalating into demands from parents to stop playing and eat dinner or do homework triggered anger in the child, confrontation with the parents, rejection of authority and a deterioration in the child’s emotional well-being and sociability.

Children give up playing with Legos when asked much more easily.

Then, I saw an article in our local paper here in St. Paul that Creative Kidstuff is going out of business.  There, we bought toys – old fashion toys – which require imagination and creative play – for our grandchildren.  The owner gave as a principal reason for giving up the business that now “children are more likely to play games on electronic devices.”  Can’t buy Legos there anymore but they can still be ordered on Amazon.

A 2017 study found that children and young adults who played video games four or more hours a day for six or seven days a week showed more symptoms of depression than those who put in less time in such self-entertainment.  Now, to me, becoming depressed as the result of using a consumer purchase is not a merit good for anyone.

So, should we outlaw video games?

Secondly, the American drug store chain Walgreens is testing tobacco-free stores under pressure from government health regulators but has no plans to give up selling cigarettes.  But the chain is trying to sell more smoking cessation products and has reduced the visibility of tobacco products to customers.

In a report on Juul, the maker of an alternative to cigarettes, it was said that: “Just two months after agreeing to no longer sell its flavored pods in stores, e-cigarette company Juul is planning to launch its first television ad campaign.  The ads, which are expected to air this summer, will feature testimonials from adults who have used Juul to help them stop smoking cigarettes,” Business Insider reports.  Juul removed its flavored pods from stores amid criticism that the pods specifically target teens.  It also deleted its Facebook and Instagram accounts promoting the flavored pods and has asked Twitter to “police” its posts so they’re not shown to underage users.  The television ads will reportedly cost Juul $10 million and will air on national cable channels after 10:00 pm.  According to executives, the ads are targeted at adults 35 and older and include testimonials from smokers between the ages of 37 and 54.

Thirdly, Big Data, soon to be put on steroids by artificial intelligence, brings to us many benefits, including social media, lower costs, more knowledge of what’s going on, quicker response times, etc.  But in the wrong hands, is it still a merit service?

Micro-targeting of customers by analysis of Big Data memory banks enables companies to enhance their return on advertising, politicians to adroitly stoke the emotions of their followers and autocrats to summon forth willing obedience from citizens.

Today, Facebook is trying to minimize the ability of its WhatsApp communications system in India to contaminate the forthcoming election with falsehoods and demagogic, divisive emotionalism.

Facebook founder and CEO Mark Zuckerberg has now called for government regulation of social media, dependent on Big Data for its ability to sell ads to companies.  He wants government to set rules for the restriction of free speech, the freedom of his suppliers to say whatever they want on his internet platforms, to prevent un-meritorious communications with harmful content, endangering election integrity, abusing privacy and misusing data portability.

The Wall Street Journal, in an editorial, wryly suggested: “Before he invites the protection of the political class, Mr. Zuckerberg should have Facebook fix Facebook.”

In other words, providing merit goods is part of corporate social responsibility.

Another commentator pointed out that once complex regulation is in force, only the big companies like Facebook will have the money to hire the lawyers and technicians to work in and around the rules and regulations and appeal process.  Small, innovative upstart companies will encounter barriers to entry as competitors of Facebook, to the great profit advantage of Mark Zuckerberg.

I note in this connection with a call for Facebook to be more socially responsible that Facebook paid App developers to secretly include Facebook software in their Apps so that users of the Apps unknowingly were sending very personal data to Facebook for the company to sell.  One App, Flo Period and Ovulation tracker with 25 million users, obtained the most intimate information on women’s menstruation cycles on behalf of Facebook.

With respect to free and fair elections, the problem is not the ads which partisans pay to display on Facebook but the very essence of Facebook – exacerbating “poisonous politics by creating filter bubbles of like-minded partisans, spreading hoaxes and inaccuracies, inducing anxiety and paranoia and rewarding clickbait and outrage.”  In other words, it is the Facebook service itself which lacks merit, in many respects.

When we start to think about what to do to promote merit goods and discourage un-meritorious goods, we are on the edge of important innovation.

Low Prices and…

I recently sent you some thoughts on low prices and the irreversible dynamics of capitalism and then came across some “case studies” of this fact-of-life in the news.

First, Amazon, an engorging presence in American life, recently bought a retail grocery chain of brick and mortar stores – Whole Foods. But there is great competition in selling groceries to American consumers, whose tastes are changing by the day. Whole Foods has a brand image of high cost. Amazon is working hard to change that image by lowering costs to attract more customers. To compete with the high-tech Amazon/low-tech Whole Foods amalgam, Walmart, for example, has been lowering its already low prices.

At Whole Foods internal meetings, it was reported that store managers predicted that lower prices could boost traffic to their stores but others voiced concern that lower prices will hurt their operating margins, pressuring them to find more ways to cut costs.

Another story reported that to save money, large American banks are cutting back on their local branch offices. But they are closing branches more in poor neighborhoods. These closings will make it harder for small businesses in poor neighborhoods to access credit to sustain and grow their operations. From 2014 to 2018, banks shut 1,915 more branches in lower-income neighborhoods than they opened.

Third, caviar prices are sinking thanks to an increase in production. China has become one of the largest producers of caviar through fish farming and is driving prices down. Farms have been able to produce large volumes of fish eggs for very low cost.

Prices for caviar have been cut in half since 2012. Sales rose. The U.S. imported $17.8 million of caviar in 2018, up from $7.6 million in 2014.

American farmers of such fish eggs can’t compete. Their labor costs are higher and American regulation limits the use of preservatives which extend the shelf life of caviar. American caviar farmers are trying to maintain sales and so their income, through differentiation of their products in price and taste, appealing more to high end consumers.

Fourth, the increasing selling of generic drugs is lowering profits for Walgreens Boots Alliance, Inc. and CVS Health Corporation. Walgreens has come off its worst quarter for earnings since 2014. Consumers – and health care providers – like lower prices. They are a boon for these stakeholders provided by volume purchasing on the part of insurers and government and by the lack of intellectual property protection for the drugs. But it will change the future for the stores and the makers of drugs.

It seems that prices really do matter to customers but low prices bring about winners and losers.

What is the Problem?

In the news today, Gordon Caplan, former Co-Chairman of the prestigious U.S. law firm Willkie Farr & Gallagher, pleaded guilty in federal court to cheating to get his daughter accepted for admission to a “prestigious” college. He paid $75,000 to have his daughter’s test score corrected and raised.

Then, it was reported that Boeing will cut production of its 737 Max aircraft by one fifth and constitute a special committee of the board to examine its development of new planes. This as a result of past design decisions which may have contributed to recent crashes of 737 MAX aircraft.

In both cases, remediation was necessary to offset harm that could have been prevented had better judgment been used by the decision-makers.

Systems did not cause these two shortfalls in judgment; lack of individual reflection did. The one who broke the law was a lawyer. Senior Boeing officers were well-trained and highly paid not to subject their company to long-term risk.

The failures in both cases ultimately were personal.

As Walt Kelley’s cartoon character Pogo said so many years ago now: “We have met the enemy and he is us.”

U.S. War on Poverty – Stalemate on Capital Inputs

Since 1980, the U.S. government has spent, in 2017 dollars, almost $500 billion on compensatory education to lift the achievement of disadvantaged children and another $250 billion on early childhood education for children from low income families. Individual states have spent more on these programs.

Despite all the public money invested in these programs, the achievement gap in educational outcomes has not narrowed. For all students, there has been no gain in overall performance at age 17. Students from the bottom 10% of socioeconomic distribution and the bottom quartile have the same relative lack of educational achievement compared to those in the top 10% and top quartile as before.

A World Bank report of December 2015 argued that “mind” and “society” influenced individual behavior and individual behavior influenced economic outcomes in life.

If special public educational programs in the U.S. have not resulted in constructive changes in mind, socialization and behavior, then what is to be done?

One is driven to conclude that culture in general – culture determined by free individuals living as they want to live – has its shortcomings. And those shortcomings may be values communicated to and character socialization for children.

Just transferring wealth to those who have less does not seem to bring about systemic change.

A new, deeper look at the foundations of social and human capital may be needed. As some business leaders in our network once told me, capitalism takes in and makes the most of whatever society puts out. If you want good values to prevail, don’t look first to markets but to families and religions.

Low Prices and the Damnation of Capitalism

I read recently of three instances where low prices attracted consumers. Interest rates on bonds in Europe are 3% lower than in the U.S., so American companies are borrowing money in Europe. BlackRock lowered the fees it charges big clients to close the gap with cheaper rivals and attract investors to its products. Residents of New York are moving to Florida where taxes are lower.

Thus, do low prices give capitalism a bad name? Companies relentlessly work to lower costs. They pay as little as possible for labor and supplies. They may gain customers by doing this or keep themselves in business but they divert income away from workers and suppliers. They don’t like to pay taxes which in turn buy public goods. Other companies connive and lower the quality of their goods in order to move further along the price/demand curve to lower prices but more demand.

Even with high-priced status and luxury goods, those at lower, more competitive prices may find more ready buyers. Look at the trade for knock-off, counterfeit purses and Rolex watches.

It is certainly true that some people will willingly, even eagerly, pay more for goods which have emotional significance – free trade coffee, support of socially responsible enterprises or for something having an intangible but beneficial impact on culture or communities.

Yet, one could easily predict that they would choose to pay a lower over a higher price if both alternatives would provide the same satisfaction.

For every micro-economic utility function there is more demand at lower cost. That’s just the way people are and rationally so, for spending less gains them access to more of life’s flow.

Even very rich people with low marginal utility of every additional dollar earned still are prone to buying the same good from another seller if the price is less.

As Benjamin Franklin pointed out “A penny saved is a penny earned.” And the more pennies we have in hand, the more we can get out of life.

The force field of competition keeps companies at the grindstone of lowering their costs and their prices unceasingly. Prices drop to commodity levels.

Not every capitalist likes working to make a profit under competitive pressure to lower prices. Many seek relief by obtaining market power – trademarks, patents, monopolies, cartels, etc. – which permit them to sell at a premium over cost.

So, who benefits from a system where lower prices for the same quality/utility are rewarded with more customer demand?

Customers for sure, particularly those with less wealth and lower incomes.

Society, maybe not so much. And therein lies the appeal of socialism.

The environment too, not so much. Environmentally sustainable products often cost more. Ending the hydro-carbon energy civilization would cost quite a lot just now. There is little mass enthusiasm to paying those costs out of our pockets but a great wailing and gnashing of teeth that we humans are so selfish and short-sighted.

The demand for lower prices gives rise to a fundamental critique of capitalism in that the system rests on individual greed. People, day-in-and-day-out, like to have more money and spend less. Why? Why can’t they care more for others and sacrifice their self-interest to let others benefit more? If customers would pay more, workers could earn more. If customers would pay more, quality would improve and risks to society and the environment would decrease and suppliers would willingly add more value to final goods.

If we look at money as power, then a law of thermodynamics might apply. Power is flow; it gets things done; it can even move mountains. Life is more giving, more fulfilled, more complete, more enjoyable, more accomplished, more diverse, the more there is flow.

It is natural for nature to want more flow. Higher prices restrict flow; lower prices augment flow.

More flow is distributive justice.

A system with the lowest costs for the same level of purchasing power has maximum flow. This is efficiency which is good for the social order.

There is rationality in running any system to lower its costs commensurate with quality.

Socialism – Really?

In something of a surprise, Americans are now debating, with some seriousness, Socialism as a public good to be generously funded through taxation.

The politics of this started in 2016 with an aging intellectual Jewish Socialist left over from the 1960’s born and raised in New York City’s robust and famous Jewish community – Bernie Sanders.

Bernie’s putting Socialism on the table of American politics in the 2016 Presidential campaign has attracted many young supporters. Bernie is running for president again this year.

Coming from a newer New York City ethnic community, U.S. Representative Alexandria Ocasio-Cortez has expanded Bernie’s dream of a New Eden for all into the Green New Deal which will save the world from climate change and bring social justice to all Americans, even those unwilling to work for a living.

From the hallowed halls of Harvard Law School, Professor Elizabeth Warren proposes seriously thought out legislation to replace much of capitalism with government fiat. She, too, is running for president.

Socialism can never succeed. It is a stupid idea, out of touch with human reality. So why all this foolishness from supposedly smart people?

I think Vladimir Lenin, no slouch Socialist himself in some ways, put his finger on the core problem of Socialist advocacy in his little book, “Left-Wing Communism: an Infantile Disorder, written in May 1920.

For the immature, Socialism is all at once 1) a superego-ideal, 2) a balm for their status anxieties and 3) a comfort for their Id-based drives for power and security. Socialism offers escape from reality through intentional human engineering of human relations. In the terms of psychoanalytical theorist Erik Erikson, Socialism provides delayed identity formation into adulthood.

Socialism ignores laws of nature, making impossible the achievement of its promises in the world in which we live and breathe and have our being. It is an anthropocentric fantasia.

Capitalism, on the other hand, both prospers under the laws of nature and suffers from them. It is the human condition, which Albert Camus and other French existentialists found to be absurd. Which is why if we want to improve Capitalism, we must work with the laws of nature and not run from them.

When I refer to the laws of nature, I am thinking of a materialism where patterns of life repeat themselves, permitting prediction of what others will most likely decide to do. Our species, Homo sapiens – each and every one of us, rich or poor, literate or illiterate, young or old – comes into this world through a natural process. We have evolved from nature and are subject to its physics, biology and chemistry.

And yet, the great mystery is that we also have a mind, a heart so to speak, a spirit, a consciousness.

To follow the spirit and ignore the material is just as foolish as to live only for the material and ignore the spirit.

The laws of nature, which I suggest created and shape Capitalism, are in human nature. To me, Capitalism can be analogized to fluid dynamics. There is a flow to life which seeks more flow and resists restrictions thrown in its way. The water in a downhill running creek will find a way around the rocks and the stones.

The private property and open markets of Capitalism are part of this natural flow, thrusting themselves up constantly from deep within the human experience.

Two great thinkers who have made this point are Frederick Hayek and Karl Popper. More recently, I refer you to the constructal law of thermodynamics proposed by Adrian Bejan of Duke University.

Flow is generally horizontal or downwards. As Mencius observed, water will not flow indifferently, up or down.

The core problem with Socialism is that it does not comply with thermodynamics. It is not designed for flow but rather for order – for what it calls “equality of outcomes.” It is top-down, hierarchical, directive and so is subject to stagnation, desiccation through evaporation, torpor and constriction of life force.

And given its hierarchy, even its promised equality is hard to thoroughly achieve.

Socialism does not have self-correcting checks and balances in its power dynamics. It depends on some people being right and correcting through regulation and discipline those who are wrong.

Roughly speaking, Capitalism is an open system working on frothy horizontal dynamics of change and innovation while Socialism is a closed system working on vertical dynamics of command and control. A solidly Socialist system has no circulation of its elites. Those on the top, stay on the top, as long as the top controls the “repressive apparatus of the state.”

The challenge for Capitalism is to sufficiently “capitalize” its inhabitants to permit them to take advantage of market opportunities. Where stakeholders are not attended too, where rent-extraction clogs up the workings of its markets and competition to restrict creative destruction, Capitalism takes on the top down exclusionary elitism of aristocracies – both traditional and Socialist.

Thus, the great experiments seeking to approach absolute Socialism – the Russia of Lenin and Stalin, the China of Mao, the Cambodia of Pol Pot – all stood upon a foundation of pervasive repression and death.

Even the first glimmers of living in an Edenic Socialist state under the Jacobins of the French Revolution were accompanied by repression and killing of undesirables. Revolutionary forces seeking a reign of virtue turned on their own – Danton, Robespierre, Saint-Just, Graccus Babeuf.

Anarchical Socialism – Bakunin, for example – never got off the ground.

Socialism has only been a success, of sorts, where it has compromised with Capitalism in welfare state economics. But even then, Socialism is limited in its achievements by the economic realities of taxability and private sector growth. Socialism needs a very big goose to lay all the golden eggs it wants to distribute. And under the laws of nature, presumably that big goose needs a big gander in order to meet its production goals.

The limitations inherent in Socialism also arise from human nature – greed, ignorance, self-promotion, faithless agents of the common good, inability to resist the temptations of power, factional loyalties, nepotism, narcissism, etc.

Just consider the present case of Venezuela.

Our challenge as a species is how best to live on this side of Eden in a very fallen world where ignorant armies clash by night.

Wealthy People Cheat!

Here in the U.S., there is a scandal: it has been revealed that wealthy people cheat. They paid money – lots of it – to arrange to get their kids into prestigious colleges and universities. The fixers paid bribes, falsified test scores and doctored photos to get the sons and daughters from wealthy families – many from Wall Street and Hollywood – into college on false pretenses.

This has enraged many ordinary families who play by the rules.

But it would not be news in so many countries where corruption, favoritism and use of social status and money knows no bounds. In some countries, even judges are swayed by more than the evidence of right and wrong. As Shakespeare’s King Lear noted: “Plate sin with gold, and the strong lance of justice hurtless breaks. Arm it in rags, a pigmy’s straw does pierce it.”

So what is the cause? Unjust social systems? Wealth itself? Racism and other identity politics sins? Classism? Fear of being left behind?

I would say the underlying cause is bad values.

In large institutions and social systems, organizational norms and practices are important but how they are used by individuals in any given case can make all the difference.

Self-interest is powerful but can be offset by traits of good character.

In the case of those American parents who cheated, it was their superficial values that made them sin. Many American parents today, the children of Baby Boomers, measure themselves by status symbols, not intrinsic goodness. Titles and money, connections and networking, the stuff of aristocratic one-upmanship, as applied to their children offset their insecurities.

The writer Peggy Noonan, who I believe has a keen eye for truth, calls these children “success robots” – morally vacuous, super-insecure, shaped by social media, extensions of their cell phones and computers. She reports that in one elite college, a very high number of students ask for and need psychological services. They are social capital basket cases being given entry to the American elite. They had been raised to be shallow and to see others just as commodities. Useless narcissism from one generation passed on to the next.

The challenge before America, then, is not a system of economics but a system of socialism – the socialization making for parental insecurity. It’s ironic that it exists so prevalently among the wealthy and the already socially powerful.

But again, where inculcation of good values is concerned, Lord Acton may have had the last word: “Power tends to corrupt. Absolute power corrupts absolutely.”

Capitalism and the Internet

Thirty years ago on March 12th, 1989, the idea was born which made the internet possible. A young British researcher working at the European Organization for Nuclear Research proposed a method for one computer to exchange information with another. Tim Berners-Lee suggested a “hypertext transfer protocol” – http for short. A protocol is a point of transfer and engagement. It overcomes isolation by providing for networking permitting geometric growth in aggregation of raw data, useful data, knowledge, insight and collective opinion.

The first remarkable conclusion to draw and treasure from what Berners-Lee did is to note that ideas make a difference. They can be foundational. They are the genius skill set over the centuries of Homo sapiens.

Less substantial than gossamer, ideas nevertheless have power for good – but also, let us not forget, for evil too – as we just witnessed in Christchurch, New Zealand.

Today, because of what Tim Berners-Lee thought of, there are some 2 billion websites in the world and how many uses of the internet every second and how many bits of data stored in servers?

Without Berners-Lee, there would be no smart phones, social media or Amazon.

The second conclusion I suggest we should always appreciate is that it was capitalism, not government, which brought the internet to humanity and changed its way of living forever into the future.

Since the dawn of the Industrial Revolution in northwestern Europe, it has been markets and private capital which have taken technologies, tested them, refined them and made them useful for customers. Money from customers happy to buy flowed to makers who grew new technologies to scale.

Thirdly, the internet revolution, like Guttenberg’s previous invention of moveable type – also starting with an idea, an insight, a brainstorm, a thought – has increased the importance and value of each individual person. The internet gives power to ideas by permitting them to expand anywhere others can access websites or engage in internet communications.

The internet has moved humanity beyond materialism as the principle source of wealth to intangible forces of mind and heart as the creators of wealth.

This means that we should invest in “human capital” more than ever before. People no longer need to contribute mostly labor to production. They can make themselves valuable to the system in many ways now. Marx’s proletariat has gone “mental.” Thus, the 19th century conception of social justice as a power struggle over cash – the “cash nexus” – which pitted the forces of capital against labor is no longer relevant. The zero-sum tug of war between capitalism and socialism has been dumped in the “dustbin of history.”

We need new “ideas” about how to achieve social justice in the internet age.

Technology, A Public Good?

On Wednesday, President Trump overruled administrative officials to ground all Boeing 737 Max 8 aircraft. Trump was reported in the Washington Post to consider himself something of an expert on commercial aircraft, saying modern planes are just too complicated to fly safely.

Apparent loss of pilot control on two Boeing 737 Max 8 airplanes in Indonesia and Ethiopia might justify Trump’s analysis of the cause of these two crashes.

Technology is the wonder of modern humanity, giving us modern civilization since the first days of the Industrial Revolution. Modern science – rational, logical and unyielding in its laws to human values – put technological progress into high gear. Homo sapiens became Homo faber. Homo faber went on to anthropocentralize our little part of the cosmos, remaking it after our own desiring.

Capitalism got its start with investing in practical uses of science and technology. Not only that, capitalism organized and funded the geometric advance of technology as the basis of human life.

But as in the fable of Dr. Frankenstein and the monster (written just 200 years ago), our skills with technology may outrun responsibility and prudence.

The Boeing 737 Max 8 is a commercial product, made by a commercial company to meet consumer demand. Negligence and liability laws have been imposed on free markets in order to promote prudence in the design, manufacture and use of technology.

Are they still enough to put proper restraints on the creation of super complex, computer-driven machines?