Coyote Blog

Last week, there were several comments in Carnival of the Capitalists that people would like to see more articles highlighting the benefits of capitalism.  This got me thinking about a conversation I had years ago at the beach:

Hanging out at the beach one day with a distant family member, we got into a discussion about capitalism and socialism.  In particular, we were arguing about whether brute labor, as socialism teaches, is the source of all wealth (which, socialism further argues, is in turn stolen by the capitalist masters).  The young woman, as were most people her age, was taught mainly by the socialists who dominate college academia nowadays.  I was trying to find a way to connect with her, to get her to question her assumptions, but was struggling because she really had not been taught many of the fundamental building blocks of either philosophy or economics, but rather a mish-mash of politically correct points of view that seem to substitute nowadays for both.

One of the reasons I took up writing a blog is that I have never been as snappy or witty in real-time discussions as I would like to be, and I generally think of the perfect comeback or argument minutes or hours too late.  I have always done better with writing, where I have time to think.  However, on this day, I had inspiration from a half-remembered story I had heard before.  I am sure I stole the following argument from someone, but to this day I still can't remember from whom.

I picked up a handful of sand, and said "this is almost pure silicon, virtually identical to what powers a computer.  Take as much labor as you want, and build me a computer with it -- the only limitation is you can only have true manual laborers - no engineers or managers or other capitalist lackeys".

Yeah, I know what you're thinking - beach sand is not pure silicon - it is actually silicon dioxide, SiO2, but if she didn't take any economics she certainly didn't take any chemistry or geology.

She replied that my request was BS, that it took a lot of money to build an electronics plant, and her group of laborers didn't have any and bankers would never lend them any.

All too many defenders of capitalism would have stopped here, and said aha!  So you admit you need more than labor - you need capital too.  But Marx would not have disagreed - he would have said it was the separation of labor and capital that was bad - only when laborers owned the capital, rather than being slaves to the ruling class that now controls the capital, would the world reach nirvana.  So I offered her just that:

I told her - assume for our discussion that I have tons of money, and I will give you and your laborers as much as you need.  The only restriction I put on it is that you may only buy raw materials - steel, land, silicon - in their crudest forms.  It is up to you to assemble these raw materials, with your laborers, to build the factory and make me my computer.

She thought for a few seconds, and responded "but I can't - I don't know how.  I need someone to tell me how to do it"

And that is the heart of socialism's failure.  For the true source of wealth is not brute labor, or even what you might call brute capital, but the mind.  The mind creates new technologies, new products, new business models, new productivity enhancements, in short, everything that creates wealth.  Labor or capital without a mind behind it is useless.

From the year 1000 to the year 1700, the world's wealth, measured as GDP per capita, was virtually unchanged.  Since 1700, the GDP per capita in places like the US has risen, in real terms, over 40 fold.  This is a real increase in total wealth - it is not money stolen or looted or exploited.  Wealthy nations like the US didn't "take" the wealth from somewhere else - it never even existed before.  It was created by the minds of human beings.

How?  What changed?  Historians who really study this stuff would probably point to a jillion things, but in my mind two are important:

1. There was a philosophical and intellectual change where questioning established beliefs and social patterns went from being heresy and unthinkable to being acceptable, and even in vogue.  In other words, men, at first just the elite but soon everyone, were urged to use their mind rather than just relying on established beliefs
2. There were social and political changes that greatly increased the number of people capable of entrepreneurship.  Before this time, the vast vast majority of people were locked into social positions that allowed them no flexibility to act on a good idea, even if they had one.  By starting to create a large and free middle class, first in the Netherlands and England and then in the US, more people had the ability to use their mind to create new wealth.  Whereas before, perhaps 1% or less of any population really had the freedom to truly act on their ideas, after 1700 many more people began to have this freedom. 

So today's wealth, and everything that goes with it (from shorter work hours to longer life spans) is the result of more people using their minds more freely.

Look around the world - for any country, ask yourself if the average person in that country has the open intellectual climate that encourages people to think for themselves, and the open political and economic climate that allows people to act on the insights their minds provide and to keep the fruits of their effort.  Where you can answer yes to both, you will find wealth and growth.  Where you answer no to both, you will find poverty and misery. 

UPDATE

While it is not exactly a direct follow-on to this article, see my post Progressives are too Conservative to Like Capitalism for an analysis of some of capitalism's detractors.  For yet another way to explain capitalism, at least libertarian philosophy, here is a new-agy approach that is actually pretty good.  Finally, Spontaneous Order has an interesting post comparing religious creationism in the physical world with progressives' statism in the economic/social realms.

Update #2:  Here is my more recent statement covering similar ground, focusing on the mistaken assumption that economics are all zero-sum.

Roy Soifer recently suggested, as reported in Photon Courier, that the percentage of Harvard Business School graduates going to Wall Street jobs can be used as a reverse indicator of the market (i.e. lots of graduates going to Wall Street means the market is peaking and due for a fall).

As a graduate of that HBS in 1989, I have a few thoughts.  First, the vast majority of HBS graduates go into Wall Street, consulting, or the corporate world.  The relative popularity of these three destinations tends to vary over time.  To some extent this variation is due to what's "hot", and to some extent its due to simply to what jobs are available and what recruiters are showing up on campus. 

Second, though pride urges me to agree with this statement from Photon Courier, I really can't:

But one would hope that MBAs from a leading school--who have certainly studied business cycles--would reflect more on the principle of "buy low, sell high" before deciding among their various offers.

When I graduated from HBS, I don't remember having a clue what I wanted to do.  Its all fine and good to talk about trying to get in early on a growth sector, but that implies I am taking a job to maximize NPV of future incomes.  If that were the case, I would have gone to Wall Street, or remained a consultant.  But I also would have probably hated it.

A more interesting HBS graduate job indicator for me has been "how has the jobs people have evolved since they graduated".  When I graduated, everyone seemed to be investment bankers and consultants.  At our fifth year reunion, everyone was posturing as to how successful they had been, how far they had risen, etc.  Most people were still in the same type jobs, with only a few outliers who had switched careers already.  Our tenth reunion was totally different.  At our tenth, no one talked about their job - everyone talked about their kids.  The contrast was dramatic.  Many people were in different careers, including a number who were testing the dot-com waters. 

At the fifteenth reunion, everyone seemed much more relaxed.  Job performance stress at from the fifth and family starting stress at the tenth were mostly gone.  Many, many people (including me) had their own businesses, and few of these were ones anyone would have predicted;  I don't think anyone was a consultant anymore.  Here are a few examples just from our 90-person section of businesses graduates are running now:

• A camping business
• A children's media business
• A stereo equipment business
• A women's clothing business  (and don't miss this)
• A cooking and cookbook empire
• A succesful electronics startup

My observation - very few were the types of businesses that come recruiting at HBS.

My parting observation about career choices through life comes from Dan Simmons' great Hyperion series, where the prophet Aenea gives here famously concise advice to humanity:

Choose Again.

Certainly true with careers.

When was the last time you paid attention to the cost of any medical procedure (not your copay or share - but the actual cost)?  When was the last time you balanced whether to have an incremental medical procedure, such as an extra test, based on cost vs. benefits?  If you are like most Americans, the answer is "not lately" because our health care system does not give the end consumer any of the normal incentives to "shop" that they would when, say, buying a TV.

Marginal Revolution has a great post on laser eye surgery, probably one of the most popular medical procedures not covered by traditional insurance (I would normally guess "most" popular surgery, but having lived in Dallas and Scottsdale, I am all-too-aware of the popularity of breast implant surgery as well).  Guess what - it is one of the few medical procedures with high satisfaction and falling prices.

For several years, I worked for a major supplier to the commercial airline industry.  Eventually, I had to leave, because the entire industry just drove me nuts - some of the worst structural problems in any industry I have seen combined with an incredible unwillingness to do anything about them.  Marginal Revolution reminds me about the airline industry with this post.

Through the 1990s, the average weight of Americans increased by 10 pounds, according to the Centers for Disease Control and Prevention. The extra weight caused airlines to spend $275 million to burn 350 million more gallons of fuel in 2000 just to carry the additional weight of Americans, the federal agency estimated in a recent issue of the American Journal of Preventive Medicine (fee req'd).

As entertaining as this is, the industry is still totally unwilling to address the real problems in the industry.

Continue reading ‘Airline Industry and Inventory Pooling’ »

Yesterday, Florida apparently passed a new minimum wage $1.00 higher than the Federal minimum wage of $5.15 per hour.

This is actually an oddity - a red state with a higher minimum wage. Before the election, this Department of Labor map, showing the states with minimum wages higher than the Federal rate (shown in green) looked a lot like the presidential election map. With the exception of Alaska (which has price and wage levels so different from the lower 48 that it should have its own currency) all the states with higher than federal minimum wages are also strong Kerry states (e.g. Left Coast, New England and Illinois).

This is going to have huge implications for us. Camping is a low margin business, and most hosts are paid minimum wage. In fact, many of our hosts, who are retired, don't want to get paid at all, so they don't mess with their social security, but that of course is not possible. The total increase in wages will be higher than what we make in Florida, so we are going to be spending a lot of time evaluating price increases vs. cutting back on labor somehow.

UPDATE

I see from our logs we are getting a lot of hits on this post from search engines.  For those of you looking for more information on the implementation of this increase, we still have not seen any enabling regulation to go along with it.  Will it have the same exemptions as the Federal law?  Anyway, the go-live date is apparently 6 months from approval, which I presume equates to early April, 2005.

Good News via Robert Samuelson and Marginal Revolution.

While the number of people living under the poverty line have crept up, there is actually good news under the surface that has gone unreported (good news - unreported - your kidding me!)

Compared with 1990, there were actually 700,000 fewer non-Hispanic whites in poverty last year. Among blacks, the drop since 1990 is between 700,000 and 1 million, and the poverty rate -- though still appallingly high -- has declined from 32 percent to 24 percent. (The poverty rate measures the percentage of a group that is in poverty.) Meanwhile, the number of poor Hispanics is up by 3 million since 1990. The health insurance story is similar. Last year 13 million Hispanics lacked insurance. They're 60 percent of the rise since 1990.

To state the obvious: Not all Hispanics are immigrants, and not all immigrants are Hispanic. Still, there's no mystery here. If more poor and unskilled people enter the country -- and have children -- there will be more poverty. (The Census figures cover both legal and illegal immigrants; estimates of illegal immigrants range upward from 7 million.) About 33 percent of all immigrants (not just Hispanics) lack a high school education. The rate among native-born Americans is about 13 percent.

So, much of the increase in the people under the poverty line can be traced to immigration of low-skilled Hispanics trying to make a better life for themselves in this country. Of course, when these people first arrive, with no English, often lacking a high school education, and initially, no permanent job, they are going to be below the poverty line. Over time, many will find the American dream and move up (easy proof: if that were not so, why are so many trying so hard to immigrate here?) If we had been collecting the statistics carefully in the early 20th century, we would have seen a similar effect with the immigration of low-skilled Irish, Italian, German, etc. workers to this country. Surely, during this burst of immigration, it would have appeared that the poverty rates were going up, but not one would in retrospect argue anything but that everyone was getting steadily wealthier through this period.

Congratulations to Edward Prescott, our hometown hero from Arizona State, who shares this years Nobel Prize in Economics.

Why is it that the Nobel committee gives its highest economics prizes to people who consistently put more intellectual nails in the coffin of socialism, then go out of their way to give the "soft" prizes, such as literature and peace, consistently to communists, socialists, and enablers of totalitarianism?

UPDATE

Marginal Revolution has a good roundup on what exactly this economics prize was won for. I should have been more specific when I said "more intellectual nails in the coffin of socialism". The link explains it better, but one argument against free markets is that recessions are proof of market failure and a "better" system would not have them. Prescott and Kydland, among other things, show how:

Recession may be a purely optimal and in a sense desirable response to natural shocks. The idea is not so counter-intuitive as it may seem. Consider Robinson Crusoe on a desert island (I owe this analogy to Tyler). Every day Crusoe ventures out onto the shoals of his island to fish. One day a terrible storm arises and he sits the day out in his hut - Crusoe is unemployed. Another day he wanders out onto the shoals and finds an especially large school of fish so he works especially long hours that day - Crusoe is enjoying a boom economy. Now add into Crusoe's economy some investment goods, nets for example, that take "time to build." A shock on day one will now exert an influence on the following days even if the shock itself goes away - Crusoe begins making the nets when it rains but in order to finish them he continues the next day when it shines. Thus, Crusoe's fish GDP falls for several days in a row - first because of the shock and then because of his choice to build nets, an optimal response to the shock.

UPDATE #2

This is very timely. Our new Nobel Laureates did a lot of work on short term / long term economic paradoxes. For example, they work a lot with problems such as prescription drug regulation, where people can be made happy in the short term (lower prices) but really unhappy in the long term (via forgone research and therefore fewer new drugs). Interesting given that Kerry/Edwards are advocating just such a short term fix that would lead to long-term disaster. The press made a big deal out of how the Nobel Committee slapped Bush in the face with its Peace Prize to Jimmy Carter. Don't hold your breath waiting for anyone to point this one out.

I am not an economist, and would rather not stray too far off track, but the recent payroll numbers are raising interesting questions about the nature of business and employment in this country. Recent jobs growth numbers and unemployment numbers have been fine, with about the same unemployment numbers as we saw in November of 1996 when both parties agreed that the economy was pretty good.

However, as the total jobs growth numbers have lagged GDP growth, a number of people have scratched their heads to wonder why. One interesting fact is that when you survey households rather than employers, the jobs growth numbers look substantially better. Many are pointing to this household survey to say that the economy is changing - that more people are starting their own business or consulting and so are missed in the payroll numbers. This is a good theory, but its force is mitigated by the fact that the sample size, survey process, and error rates for the household survey are all much worse than the payroll survey.

Heritage Foundation argues that the household data is right and is better reflecting reality. Economic Policy Institute argues the opposite.

As a relatively new convert from the corporate world to small business, I can tell you that anecdotally, a good number of the people who left (voluntarily or not) the corporate world early in this decade have not gone back, and are, like me, now self-employed. I just had my 15th business school reunion and the proportion of small people self-employed or running small businesses is up a startling amount since the 10th reunion.