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.

Minnesota’s Contributions to Moral Capitalism Round Table – Tuesday, April 9th

Minnesota can take great credit for proposing the practice of moral capitalism for our global economy. The proposal is gaining traction not only in the U.S., which in the forthcoming presidential election campaign will debate capitalism vs. socialism, but seems to provide a political/economic/social formula of balance for well-being in societies around the world.

Please join us and Charles M. Denny and Bob MacGregor at 9:00 am on Tuesday, April 9th at the University Club of St. Paul as they recall the creation of the Caux Round Table for Moral Capitalism’s Principles for Business in the early 1990s.

They will discuss an important moment in Minnesota business history, one which reflects the Minnesota ethic of community and optimism about how we can always do better than we did yesterday.

Chuck was at that time CEO of ADC Telecommunications and Bob was Vice President of Dayton Hudson (now Target) and Executive Director of the Dayton Hudson Foundation.

Both are now retired, but still thoughtful and passionate about how business can best promote the well-being of societies around the world.

Registration and a light breakfast will begin at 8:30 am and the event at 9:00 am.

Cost to attend is $15 for Business and Public Policy Round Table members and $35 for non-members. Payment will be accepted at the door.

Space is limited.

To register, please contact Jed at jed@cauxroundtable.net or (651) 223-2863.

The University Club is located at 420 Summit Ave in St. Paul.

Parking will be available along Summit Ave.

The event will conclude at 11:00 am.

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?