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?

Is Good Character Important?

The great debate among ethicists is between Kantians – Deontology – and Utilitarians – interest.

Pure morality as an abstract form of thought true at all times and all places is juxtaposed against materialism and self-seeking in this world so fallen from a religious and idealistic perspective.

Business ethics and corporate social responsibility have been stuck in the quagmire of irresolvable irreconcilability between ethics and profit-seeking. How could they ever be integrated?

If one backs away from this confrontation of the intangible and the tangible, there is the approach of praxis – what works? Can a case be made that ethics “works” which does not slide all the way down into self-delusion and expedient rationalization of why what I want is the “right” thing to do?

Looking at what will work raises a perspective of science – say, laws of motion or chemistry which lead from here to there on a predictable basis.

Individual character – the ethos which drives our preferences and decision-making – might work as such a natural law. If I know your character, I can reasonably accurately predict your behaviors.

If you work for me and I know your character, I will have a sound basis for trusting or not trusting you to do what the firm wants and needs and not to get us all in trouble through your indiscretions and malfeasance.

Heraclitus said that character is fate or destiny. In the Greek, his point is more active: character is our daimon – our driving spirit, setting our course in life.

If we focus on character and if all people are helped to have good character, then the output of our social endeavors will be constructive.

The way to moral capitalism, therefore, might be through character education.

Oh, that’s just what Mencius, Aristotle, Cicero, Marcus Aurelius and Adam Smith recommended for living the good life.

PG&E Says Its Equipment Was Probable ‘Ignition Point’ of Camp Fire (Wall Street Journal)

PG&E Says Its Equipment Was Probable ‘Ignition Point’ of Camp Fire (Wall Street Journal)

Culture costs company big money. Pacific Gas and Electric (PG&E) says probably its equipment sparked the deadliest wildfire in California history.

The company is taking a $11.5 billion charge against earnings as a result. The company has warned it may not survive as a going concern. Credit agencies have stripped the company of its investment-grade rating.

But for five years the PG&E delayed a safety overhaul of the century-old high voltage line that is a prime suspect in the huge Camp fire which killed 85 people and destroyed the town of Paradise last November.

The delay reflected decisions consistent with company leadership priorities. In other words, delay flowed from core company values. Those values, part of the company’s social capital, were financially speaking a source of risk and so a detriment to, and so a reduction of, its comprehensive asset valuation. The company’s culture was a balance sheet liability (an equity loss) for its owners.

Such a loss to its present value should have been measured and recorded somewhere to provoke remedial management response.

The PG&E case reminds us of the BP accident at the Macondo well in the Gulf of Mexico, a failure of company culture which cost the company and its owners billions.

EBay Breakup Inches Closer to Realm of Possibility (Wall Street Journal)

EBay Breakup Inches Closer to Realm of Possibility (Wall Street Journal)

Is a company worth more than the sum of its parts? A classic part of financialism is buying a company to break it up and sell the parts for a total sum more than what the company is valued at. This was the raider tactic in the 1970’s and 1980’s and a private equity play ever since.

Now it is being proposed for eBay by Elliot Management and Starboard Value LP.

How should the value of the company as a whole and its various parts be determined?