23 Things About Capitalism – Things 18 to 20


Today’s post is our seventh look at 23 Things They Don’t Tell You About Capitalism. We are up to things 18 through 20.

Thing 18 – What is good for GM is good for the US

General Motors is standing in for the corporate sector here, and in particular the largest firms.

I’m sure we can find some common ground on this one.

  • Even the most ardent free capitalist would agree that there have to be some limits on corporations.
  • Monopolies and externalities are the two that spring to mind, but let’s see if we can find some more.

That said, where possible, corporate dynamism needs to be encouraged.

  • Whatever Ha-Joon might think, the corporate sector at the very least exploits new technologies in order to make them available to the masses.
  • It also creates most of the jobs, unless you want to live under socialism, not to mention wealth and tax revenue.

Healthy competition is what drive things forward, and a state monopoly is unlikely to be any better than a private one.

  • So we should give business as much freedom as possible, up to the point where negative effects start to appear.
Thing 18b – Not everything, etc. etc.

Ha-Joon gives an example of something that we shouldn’t let companies do:

destroy the common pool of resources that all of them need, such as natural resources or the labour force

No problems with that.

  • It sounds like the externalities problem to me.

He also provides an example of something that we should force them to do:

making them do things that may be costly to them individually in the short run but raise their collective productivity in the long run ­such as the provision of worker training

I’m not so sure about this one.

  • If trained workers are more productive they should earn more, so it should be worth their while to fund their own training.

Alternatively, the state might provide free or subsidised training in areas where we know there is / will be a skills shortage.

  • The flip-side of this is that state should stop subsidising training that doesn’t increase productivity (eg. Art History degrees).

Either way, it’s not clear to me why companies should be forced to train workers.

They might decide to, where adequate training is not available elsewhere, or where there is a skills shortage, but should they be forced?

  • And if they do train their workers, that training should lead to a lock-in period where the newly-skilled workers can’t be poached by the opposition. ((This is something that needs to be adopted in the NHS, too ))

In addition to these points, Ha-Joon runs through quite a lot of twentieth-century history (communism, the Second World War) without shedding much light on the issue at hand.

He also has some fun with the fact that GM went bust after the 2008 financial crisis and needed a state-funded bailout – though it’s unlikely that letting GM go bust would have been better for the US.

  • We always need to look for the counterfactual.

GM clearly made mistakes in the run-up to the crisis, but the competition was foreign, and from a US perspective, bailing out a former national champion could look like the right thing to do.

  • Some of that competition was from Korea, so perhaps Ha-Joon has an axe to grind.

Ha-Joon also wants to highlight the “conflicts between different stakeholders” – “what is good for some stakeholders of a company … may not be good for others”.

I don’t accept the definition of workers in and suppliers to a company as its stakeholders.

  • They clearly have a relationship with the firm, but they have no ownership rights.

The only real stakeholders in a company are the shareholders, and the firm needs to be run for them.

  • Producing a return on capital is the way to make a capitalist economy grow.

Ha-Joon also has a bee in his bonnet about liquidity – the ability of shareholders to sell their stake whenever they please.

  • I think liquidity is key to capitalism, but that’s an argument for another Thing.
Thing 18c – Conclusions

Where you stand on this one depends on what you mean by the word good. ((It’s another one of those weasel words, like “fair” ))

If by “good for GM” you mean “maximum short-term profits” than Ha-Joon is right – that might not be good for the country.

  • But if you mean “consistent and stable long-term profits and growth”, then Ha-Joon is wrong.
See also:  23 Things About Capitalism - Things 9 to 11

It’s a question of using light regulation to align the interests of companies with those of the nation state.

This should be achievable with national corporations, but becomes more difficult with multi-nationals, who can play countries off against each other.

  • With countries at many varied stages of development, it’s hard to achieve the level of international cooperation required to reign in multi-nationals.

I’m going to give Ha_Joon half a point on this one.

  • He’s chosen a bit of a straw-man again, and we wouldn’t draw the line in the same place, but his basic point stands – there needs to be some regulation of the corporate sector, in line with the goals of the nation state.

That takes his score to 9 out of 18, still at 50%.

Thing 19 – Planned economies don’t work

The fall of communism has demonstrated the limits of centrally planned economies.
Decentralised decision-making (through the market mechanism) has been proved superior.

  • The less (central) planning there is, the better (unless we are at war).

I have a bad feeling about this one – few things seem more obvious to me than the failure of communism, and I don’t feel like wasting too much time or space on the issue.

According to Ha-Joon, the dream of Marxism is that:

Under central planning, the economy will produce only exactly what is needed. No resource will lie idle.

How’s that working out for you?

Just to recap what actually happens with communism:

  1. collective ownership of production means that bureaucrats with no financial stake in the future economic success of an enterprise make all the decisions
  2. the political commitment to equality means there are no incentives for business managers to innovate, since they won’t be rewarded
  3. the commitment to full employment means that non-performing workers can’t be sacked

Welcome to hell: not much to eat, exploding TVs and crappy state apartments.

Thing 19b – Capitalist economies are largely planned

Ha-Joon makes the obvious point that even in capitalist economies, a large part of the economy remains state planned and owned.

  • Indeed, many of the poorer regions of the UK have a larger state share of GDP that some of the communist countries did.

But that doesn’t make it a good thing.

Don’t get me wrong – I like planning.

  • I was a project manager for 20 years, and I’ve done enough planning to last me a lifetime.

But not all plans are created equal.

  • And a plan from Shell’s head office is likely to be better than one from Lambeth Council, or the Department of Education.

Ha-Joon points out that a lot of early-stage R&D (eg. the work done by universities and on behalf of the military – especially in the US) is government funded, and I agree that this bit is beneficial.

But he also wants to rope in the planning done by large corporations, but I’m not going to allow that.

  • Firms are transient arrangements, both in terms of their natural lifespans, and even more so in terms of the time workers spend in them (both by day and over years).
  • And the impact of a firm’s plans is not noticed by individuals.

That Shell is centrally planned does not greatly affect me, since I spent less than one year of my career there.

  • The same goes for the many corporations that made up the rest of my career.

Planning by my former employers no more affects my life than the TV companies planning a nightly schedule of programmes.

  • If the UK became a centrally-planned economy, the impact to my life would be immeasurably greater.

One of my current concerns is what the new May government is calling “industrial policy”.

  • My fears are largely based around this concepts failure during my childhood, but at the same time, I can’t really work out what they hope to achieve.
  • In the best case scenario, Britain might be picking “national champions” and “growth sectors” that allow the country to better compete in a post-Brexit landscape.

But it could just be a Trojan horse for government interference.

  • Everyone likes to feel that they are adding value, even when they are taking it away.
Thing 19c – Conclusions

Ha-Joon lays the blame for the failure of central planning at complexity’s door.

  • It’s relatively easy to plan for steel and potato production, less easy to plan for TVs that don’t explode.
  • To cope, the communists limited the variety of products, which didn’t go down well with the population (and didn’t fix the problem).

Interestingly, I see the massive quantity of competing consumer products – the vast majority of them failures – as one of the great drawbacks of capitalism.

  • Efficiency is my watchword, and there is clearly a great deal of waste here.
See also:  23 Things About Capitalism – Things 21 to 23

But once again, what is the counterfactual?

  • Communism proves that too much choice is better than not enough choice.

Ha-Joon may have a point about complexity.

  • There’s also the possibility that the internet, smartphones and in time the internet of things will mean that this complexity can be conquered.

But these new technologies can and already are being used to sharpen up market forces.

  • Uber and Airbnb are the two most obvious examples.

So don’t expect tech to drive a revival of central planning (unless like Ha-Joon, you mean to include the planning done by Google, Amazon, Facebook, Apple and Netflix).

I’m going to give Ha-Joon zero on this one – it wasn’t even worth discussing.

  • This takes his score to 9 out of 19, or 47%.
Thing 20 – Equality of opportunity is enough

More trouble ahead here, I think.

  • Equality of opportunity is absolutely enough, and moreover, anything “better” would be impossible to achieve.

Capitalism likes equality of opportunity.

  • It should mean increased efficiency, and firms that hire the best regardless of birth circumstance should prosper.
Thing 20b – We need equality of outcome

The alternative – equality of outcome – is not a close relative, but instead has more in common with the medieval pursuit of alchemy – the desire to transform base lead into shiny gold (though I suppose if we were all equal we would each be an uneasy amalgam of the two metals).

  • The pursuit of equality of outcome – first under communism, but more recently by left-wingers under capitalism – is one of the great follies of the modern age, and has wasted more time and money than the Space Race.

Even if it wasn’t a morally dubious idea that removed incentives – why shouldn’t the more talented and harder working do better? – equality of outcome is also impossible to achieve.

Under communism, in the army, even in prison, some people live better lives than others.

  • Whatever the system, some people will figure out how to work it.

It’s better to keep human competition above board and legal rather than driue it underground.

Thing 20c – Conclusions

We have a moral obligation not to discriminate against people for the circumstances of their birth, but not to compensate them for those circumstances, nor for anything that happened before their birth.

  • How would such a compensation scheme work?

Let’s use me as an example:

  1. I’m male, but now so old that I am discriminated against
  2. I’m white, but also a slum-class Irish Catholic by birth
  3. I didn’t have enough to eat as a kid, but I went to Cambridge
  4. I’m from the North, but now live in London
  5. I’m tallish, but my hair used to be ginger and I have terrible eyesight
  6. I’m very intelligent, but suffer from a number of autistic traits

Should I be compensated, or should I be compensating others?

  • Who is going to devise this scoring system?

You begin as the product of your circumstances, but over time, you make choices, and the consequences of your choices inform your future circumstances.

  • It’s possible to argue that disadvantaged five year olds need extra help.
  • By the time people reach adulthood, this argument holds much less water.

There’s a parallel here with the split between income and capital.

  • The income I make this year has much in common with that earned by the next man, and can reasonably be treated (ie. taxed) in the same way.

My capital – especially at my advanced age – is the result of many years’ accumulated income, and the spending and investing decisions that I made with it.

  • It’s unreasonable to assume that two people with the same net worth have followed the same path, and impossible to work out the relative moral standing of their wealth.

I’m going to give Ha-Joon zero again here.

  • This is another argument that only a left-winger could make.
  • He is clearly driven mostly by concerns for developing countries (he uses South Africa in a lot of his examples), but the read-across for Western economies is worrying.

Society needs incentives, and being told that you don’t qualify because your birth circumstances are too “good” is no better than being ruled out because they are not good enough.

  • That takes his score to 9 out of 20, or 45%.

It’s been a depressing day, with 2 of the 3 Things being largely ideological in nature, and the third not much better to be honest.

  • We have three more Things to go before we complete the book and sum up, and we’ll be back in a couple of weeks with those.

Until next time.

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.

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23 Things About Capitalism – Things 18 to 20

by Mike Rawson time to read: 8 min