Tag Archive for markets

Capitalism: ‘Its Own Worst Enemy’ (And Yours, Too, But Who Cares?)

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We’ve got a live one!

A pair of corporate CEOs have decided capitalism is ailing. They start their Project Syndicate commentary off in a super original way that isn’t cliche’ed in the field at all, riffing off Churchill’s famous quote about democracy being the worst system “except for all the rest”. The writers opine that capitalism is the worst type of economy, except for all the others they’ve no doubt researched exhaustively.

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Paul Polman of Unilever and Lynn Forester de Rothschild of E.L. Rothschild are joining the ranks of liberal capitalists concerned that capitalism, after saving all the poor people from the very poverty it consigned them to, might at long last harm something that really matters: capitalism itself.

Capitalism has guided the world economy to unprecedented prosperity. Yet it has also proved dysfunctional in important ways. It often encourages shortsightedness, contributes to wide disparities between the rich and the poor, and tolerates the reckless treatment of environmental capital.

If these costs cannot be controlled, support for capitalism may disappear – and with it, humanity’s best hope for economic growth and prosperity.

Let’s break this down. First of all, Polman and de Rothschild think two of the most upsetting problems with capitalism are “shortsightedness” and its contribution to “wide disparities between rich and poor”.

The dominant economic system on Earth is apparently just one reason some people are rich and some are poor. The other reasons must be those invisible reallocation pixies that come in the night to transfer wealth to the haves, like reverse Robin Hoods.

Financial disparity is a problem in many ways that are getting lots of deserved attention lately, but I’d have to say the abject poverty that capitalism keeps much of the world in by depriving it of a sensible system for allocating basic goods and services to those most in need (instead sending them to those most able to pay), is a much bigger problem than the wealth gap. That is, a gap between super-rich and comfortable would be one thing; however, the actual canyon we’re saddled with is from a super rich elite to a massive underclass of billions who lack consistent access to basic necessities.

(Polman and de Rothschild do at the end of their article take a stand against extreme poverty in and of itself, but throughout the piece they maintain that capitalism is the savior from, not the cause of, such poverty.)

It’s not entirely obvious what is meant by “shortsightedness”, but in context of the piece, it seems to refer back to the main thesis: that capitalism will engender its own demise. They advise businesses to “look beyond profit and loss to maintain public support for a market economy”. Be less profit-driven in order to make sure the system that drives your profits remains intact.

Capitalism is of course also shortsighted in that the profit motive leads firms to eat their future lunch by eschewing long-term product and market planning to suit short-term returns. This seems to be another of the writers’ concerns, but it’s not inherent to capitalism, as Polman’s Unilever claims to demonstrate. (The other problems – inequality and environmental destruction – are indeed inherent to capitalism.)

And, yes, the writers really did cite “reckless treatment of environmental capital” – not devastation and unsustainability, and not the environment per se, but mere mistreatment of that portion of the natural world that is useful to capitalists – as the final of the three things capitalism does wrong.

Problems with markets and capitalism not cited by Polman and de Rothschild, most of them externalities not accounted for in the prices we pay for products and labor:

  • climate change
  • class antagonism
  • inhumane working conditions
  • alienated labor
  • animal exploitation
  • undermining democracy
  • absurd privatizations (schools, prisons, etc)
  • fiat currencies (and black markets)
  • debt
  • un(der)employment
  • intellectual property
  • limitless growth on a finite planet
  • crass consumerism
  • commodification of life

I’m probably missing some.

Anyway, what do Polman and de Rothschild say is the risk of not minding the problems that matter to them?

If these costs cannot be controlled, support for capitalism may disappear – and with it, humanity’s best hope for economic growth and prosperity. It is therefore time to consider new models for capitalism that are emerging around the world – specifically, conscious capitalism, moral capitalism, and inclusive capitalism.

Again, I would love to see the array of noncapitalist alternatives Polman and de Rothschild have familiarized themselves with in order to support their claim that (modified) capitalism is our best hope. It surely is a very dismal hope as it stands, but sure enough, these glass-half-fullers hold out that capitalist elites can save us from the certain disaster that would result from us shedding the yokes of concentrated capital, exploitative markets, and dehumanizing hierarchy.

These preferred “models” all

share the assumption that companies must be mindful of their role in society and work to ensure that the benefits of growth are broadly shared and do not impose unacceptable environmental and social costs.

Polman and de Rothschild don’t go into specifics, but these are basically mindset protocols, not actual economic structures or institutions; they’re not systemic models, just enterprise models. That is, business leaders are supposed to just do the right thing out of the goodness of their heart, with faith that in the long run, their bottom line will reflect the sensibility of prudent past decisions. Nothing to structurally incentivize or enforce changes, aside from a belief that doing the right thing will pay off.

Addressing the failures of modern capitalism will require strong leadership and extensive cooperation between businesses, governments, and NGOs. To begin creating a path forward, we are convening key global leaders in London on May 27 for a conference on inclusive capitalism. Top executives from institutions representing more than $30 trillion in investable assets – one-third of the world’s total – will be in attendance. Their aim will be to establish tangible steps that firms can take to begin changing the way business is done – and rebuilding public confidence in capitalism.

So after noting that the effort will have to involve governments and NGOs, though not necessarily any grassroots representation of civil society or apparently even organized labor, the authors brag that their conference will involve a staggeringly disproportionate representation of wealth. Advocates of “inclusive capitalism” will have the ears of elites representing a massive amount of capital, and presumably those representatives will have the ears of the government and civil-society do-gooders, as well. What could possibly go wrong?

The list of speakers at the conference includes representatives of such humanitarian institutions as the IMF, GlaxoSmithKline, UBS, and Dow Chemical, plus elites like Bill Clinton, Larry Summers, and fellow Titanic deck-chair rearranger, Jeremy Grantham. Apparently just one person from organized labor will be given a microphone, along with nobody from an environmental group or a consumer advocacy organization. The only identifiable progressive on the roster is Chrystia Freeland. But somehow, this meeting is expected to yield progress, without even having key stakeholders represented.

In any case, the argument here is that microeconomic adjustments by concerned CEOs and boards at major corporations, usually fighting the wishes of greedy shareholders every step of the way, will save capitalism from the litany of contradictions and abuses that threaten humanity, the environment, and yes capitalism itself. This notion is quite simply absurd.

But don’t take my word for it – read the Project Syndicate piece, and this one by de Rothschild, and this one on “moral capitalism”, and this one on “conscious capitalism”. Then decide for yourself if they (a) address the full host of problems with capitalism; (b) take the problems they do address seriously enough for the right reasons; and (c) even remotely meet a burden of proof required of a solution to be considered realistic.

Banner reads: "Capitalism isn't working - another world is possible"

 

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Robots Will Waste You

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I couldn’t really run a blog called Future Economy if I didn’t love talking about robots. Well, over the last several days, my RSS feed was like Shark Week for radical econ geeks.

Humans as Wasted Capital

First up, Frances Coppola with an interesting commentary on “The Wastefulness of Automation”. If it’s just dawning on you that the perpetual automation game is rigged against working people, you can go through some of the phases of grief with Coppola (though, to her credit, I think she doesn’t make it past “bargaining” here).

It starts out on an odd note for someone as highly schooled in economics as Coppola:

But what if capitalists DON’T want a large labour supply? What if automation means that what capitalists really want is a very small, highly skilled workforce to control the robots that do all the work? What if paying people enough to live on simply is not cost-effective compared to the running costs of robots?

First thing’s first. A large labor supply means lots of people willing and able to work. The more of them available, the cheaper they’ll sell their hours. Of course capitalists want a large labor supply — they get to pick and choose from that supply which ones can come off the 95% unemployment list.

But Coppola struck on the core conundrum — the contradiction hopefully keeping the worst-conceivable future off the table. Do capitalists want a large, active workforce?

If only a small number of people can afford to buy the products produced by all these robots, then unless there is a vibrant export market for those products – which requires the majority of people in other countries to be doing rather better than merely surviving on a basic subsistence income – producers have a real problem.

Okay, well, phew — capitalists will always need us workers. Problem averted, right?

Coppola notes the current trend of automation happening in middle-skilled office jobs, where labor is costly enough that automation is most attractive, while automating the lowest-skilled jobs is of lesser priority to the cost-cutting capitalist happy to pay slave wages for picking and skinning, maybe even lifting and sorting.

But we can’t lose sight of the reason “white collar” jobs pay more; it is because the people in the market for those jobs have comparative bargaining power. It is not because the jobs themselves are more valuable, or have a marginal advantage to the purchase of labor, compared to lower-paying jobs. They’re just more costly due to irrational market forces.

Therefore, such jobs are worth spending more to eliminate.

If the future is that the majority of people will do unskilled, insecure jobs for very low wages, then this amounts to a shocking waste of human capital. And if the more distant future is that even these jobs will eventually be automated, and working for a living will become the privilege of a few, then it is an even bigger waste.

Well, no. Under capitalism, human resources are only “wasted” if they could otherwise be put to better use. There has to be an opportunity cost to their disuse. In the dread scenario Coppola lays out, it’s not clear all this excess potential could do anything the capitalists would value. And since capitalists in the scenario have nearly all the demand power (not just an insanely disproportionate share, as now), who else would capitalism dictate has the prerogative to be valued? Who would a skilled worker be to argue that her talents and passion are being “wasted”?

In these conditions, a “waste of human capital” would be someone who could outwork a robot for wages amounting to less than the cost of the droid’s inputs but who, by some accident, doesn’t get put on the assembly line working shoulder-to-shoulder with X9-5R112. What a shame, the capitalist would think if he ever learned of the case. But someone who can make great art or engineer a way to feed the poor is of no value in this scenario if they can’t do it in a way that makes money for capitalists.

That skilled worker withering away in a tomato patch is only a “problem” if you’re unfortunate enough to possess morals that suggest human suffering is somehow wrong, per se. It is demonstrably not something markets can be bothered by.

Crucially, this isn’t some “Egads! There’s a flaw!” aberration of capitalism. This is one of the market’s more elegant features, if you set aside the hardship blah blah blah. It’s what you get when you put your faith in a system that values people precisely for their ability to (1) invest capital, (2) consume products, or (3) produce valuable goods and services at market rate. What else would you expect?

If you have no money and can’t compete with robots, according to capitalism you’re not a “waste of human capital”; you’re a waste of carbon and water. Coppola can’t seem to get over this shocking notion that capitalism has this built-in anti-sanity attribute:

A labour market that is skewed towards unskilled jobs when the workforce is more highly skilled and educated is malfunctioning. People who are in the wrong jobs are less productive than they should be: therefore, when most of the workforce is in the wrong job, we inevitably have an economy that is less productive than it should be.

No. What you’re actually seeing is that markets don’t care about your skills. And they’re not supposed to. That’s not their job! You either outwork a robot while matching its obedience and loyalty, all while asking for less… or you can go rot in a gutter. At best, you can go do something that’s not yet cost-effective to automate. Oh, and don’t forget, the capitalist gets to keep the robot’s wages; you’ll probably get all selfish and only give your wages back to him in exchange for some kind of commodity or service.

Now, the quote above about the labor market “malfunctioning” if it is “skewed towards unskilled jobs when the workforce is more highly skilled and educated” is true about an economy if and only if you believe an economy’s mandate is to take care of human needs. But it is not true of a market, which has the mandate of moving products to sources of demand. You ask for an invisible hand, you don’t get to whine or call it a “malfunction” when it predictably turns into a fist and squashes you and everyone you love the way it’s been abusing so many for so long.

Robots don’t eliminate jobs; markets do.

Cartoon by Carol Simpson - Robots gather for employee empowerment seminar

Coppola’s revelations continue:

Looking ahead, the only way in which such extensive outright subsidy of wages can be sustained in the longer term is through heavy taxation of profits and wealth – which rather undermines the purpose of forcing down labour costs, from capitalists’ point of view.

Exactly. The capitalists’ only choice would be to pay people just to buy stuff. As neat as that might be for a dystopian novel setting, there’s a flaw in the concept: it would be way more sensible for them to pay robots to buy stuff. Why bother with consumer markets when you can program demand? (Everywhere you look, those damn robots…)

Anyway, we know this isn’t a practical scenario. So Coppola tries to bring us back to reality:

It seems to me that providing people with a reasonable income while they find or create for themselves the right job (not just any job), or to enable them to do creative and/or socially useful things that are currently unpaid, or to study and develop new skills, might be a good investment for the future, improving the productivity of human capital which over the longer term benefits the economy.

This is certainly the right general attitude to have about the future. But then you have to stop using the term “human capital”. As long as humans are capital, their “productivity” will be measured by the value of their output in the market. Only sounds about two-thirds insane… until you remember: robots. And then continuing to advocate markets sounds three-thirds insane.

You also have to rethink what it means to serve an economy. If the mandate of the economy is to produce goods and services for anything with demand power, there’s no way that “benefiting the economy” means “benefiting society”.

How They’ll Do it to Us

Martin Ford of EconoFuture blog is on a similar tip, but he’s been thinking hard about this issue for a very long time, and is probably the leading harbinger of the very real possibility that hyper-automation will create structural unemployment, with predictable shock waves throughout economies. Ford’s latest contribution is a primer on just how contemporary automation may encroach more permanently on the workforce.

Of course, people have cried wolf about technological developments throughout the modern era, yet from prior periods of egg-cracking disruption, omelets have usually emerged. So what’s different now?

Well, what if innovations started targeting more and more costly lines of work, as Ms. Coppola noted above? What if they started doing creative work? What if they start innovating, even upgrading themselves? Would that be fundamentally different from the steam engine? (Yes. Yes it would.)

Ford notes that the trend of automation is to replace routine functions carried out by workers. We see this everywhere. Workers welcome it when it means making their job a little easier — sometimes to their own peril down the line. Now innovators are seeking to automate more complex forms of routines.

Our definition of what constitutes a “routine” job is by no means static. At one time, the jobs at risk from automation were largely confined to the assembly line. … Machine learning … is in essence a way to use statistical analysis of historical data to transform seemingly non-routine tasks into routine operations that can be computerized. As progress continues, it seems certain that more and more jobs and tasks will move from the “non-routine” column to the “routine” column, and as a result, an ever-increasing share of work will become susceptible to automation.

So what are the implications for you and me?

Rather than simply acquiring new skills and moving to another routine job, workers will have to instead migrate to an occupation that is genuinely non-routine and therefore protected from automation—and they may have to do this rapidly and repeatedly in order to remain ahead of the advancing frontier.

Okay, but my job can’t be automated, you say… Well,

Lawyers and paralegals have been displaced by e-discovery software that can rapidly determine which electronic documents are relevant to court cases. More routine forms of journalism—such as basic sports and business writing—have been successfully automated.

If you’re starting to wonder if anybody is safe from the rise of the robots…

Not Brain Surgery, Right?

I imagine if I were a brain surgeon, I’d have trouble believing I could be replaced by a machine, even as I bragged about the jaw-dropping technological innovations being made in my field.

So I’m going to excuse the limits of Dr. Garnette Sutherland’s inability to see the writing on the wall as he regales us with stories of new and near-future technologies that are revolutionizing neurosurgery.

My favorite line is this:

What robots lack is the human brain’s executive capacity. Given that comprehending – and reacting appropriately to – the immense number of variables that can arise during surgery would require enormous computing power, surgical robots aim to integrate human experience and decision-making ability with mechanized accuracy.

Yeah, good luck with that, Doc. Neurosurgery will be a prime target for automation. Of course computers have an executive capacity; try playing one in Backgammon, Chess, or Texas Hold’em. If in the middle of a surgery, a not-yet-programmed decision needs to get made, the on-call surgeon will be able to cover several robot surgeries at once. Maybe several hundred. From across the Internet.

And talk about high-cost routines! Before the good doctor knows it, robots will be explaining how the human brain utterly lacks the capacity to aggregate the compound experiences of multiple units (in real time, no less!), and how its error rate is N times that of robots, and how it can only perform one surgery at a time, and how it needs to sleep and play golf, and go to conferences, and… you get the point.

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Capitalism Makes Us Sick

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I often enjoy reading Harvard economist Kenneth Rogoff’s commentaries. He strikes me as someone who kind of “gets it” about capitalism but who is unable, for whatever reason, to draw the logical conclusions. The final paragraphs of his column entries that point to some serious flaw in capitalist economic arrangements are almost always anticlimactic disappointments.

His latest piece, a brief exposé of how capitalist forces contribute to bad diets and poor health titled “Coronary Capitalism”, serves as a great example of his unsatisfying lessons. The piece starts off digging into an important economic matter. After noting that decreased life expectancy is bad for economic growth, he explains that making people fat and sick is probably a net boon to the economy, all aspects considered. Here’s the nut:

Highly processed corn-based food products, with lots of chemical additives, are well known to be a major driver of weight gain, but, from a conventional growth-accounting perspective, they are great stuff. Big agriculture gets paid for growing the corn (often subsidized by the government), and the food processors get paid for adding tons of chemicals to create a habit-forming – and thus irresistible – product. Along the way, scientists get paid for finding just the right mix of salt, sugar, and chemicals to make the latest instant food maximally addictive; advertisers get paid for peddling it; and, in the end, the health-care industry makes a fortune treating the disease that inevitably results.

Coronary capitalism is fantastic for the stock market, which includes companies in all of these industries. Highly processed food is also good for jobs, including high-end employment in research, advertising, and health care.

So, who could complain? Certainly not politicians, who get re-elected when jobs are plentiful and stock prices are up – and get donations from all of the industries that participate in the production of processed food. Indeed, in the US, politicians who dared to talk about the health, environmental, or sustainability implications of processed food would in many cases find themselves starved of campaign funds.

Okay, all of this rings true. But doesn’t it sound like the problem is pretty deep? Doesn’t the problem even seem inherent to capitalism?

Not for an economist steeped in the religion of markets — “free” or otherwise. For these cats, the market — regulated or not — has to form the basis of any solution to an economic problem… even when the market causes the problem in the first place. Rogoff is so conventional in his mindset, he seems to think market forces are actually an excuse for problems, rather than ever being able to draw the conclusion that markets are the problem. Look at the way he almost gives food pricing a pass:

True, market forces have spurred innovation, which has continually driven down the price of processed food, even as the price of plain old fruits and vegetables has gone up. That is a fair point, but it overlooks the huge market failure here.

[emphasis added]

Let’s explore the first sentence, which is so strangely structured as to imply that lowering food prices through subsidies, monocropping, and over-processing is a positive in any way — like, cheap food = good, so it counts for something. But let’s give Rogoff the benefit of the doubt. I think it’s fair to define “innovation” as developments that make something more economically efficient or profitable but not necessarily “better”. Still, I’d bet most people think of innovation as inherently “good”. It would make sense to take pause here and consider that in capitalism, innovation is something that helps capitalists. It may incidentally help workers, but usually it does not. And it doesn’t necessarily help consumers at all; it might even harm them. So finding cheaper ways to get junk food out to people is an innovation — one that is killing us.

But Rogoff acknowledges the “market failure” — so why am I picking on him for allegedly not recognizing that markets are the failure? Am I just nit-picking? Rogoff goes on:

… [P]roducers have few incentives to internalize the costs of the environmental damage that they cause. Likewise, consumers have little incentive to internalize the health-care costs of their food choices.

As far as I can discern, producers have no incentives to internalize the costs of environmental damage of their economic activity. I would love to see Rogoff’s list of the few incentives he thinks they do have. But where is this division coming from, concerning who has what incentives to internalize “externality” costs? This divide between producer and consumer is very real in our society, but how unimaginitive does an economist have to be — or how logically manipulative — to divvy up who bears what costs of bad economic behavior? Rogoff seems to be suggesting, by implication, that producers should have to internalize environmental costs and consumers should have to internalize health care costs of bad agricultural, food-processing, and dietary practices. Consumers somehow aren’t responsible for the production of their food, and producers aren’t responsible for the consumption of their goods (even though previously he notes that advertising is a significant force in the equation). This is the best analysis a conventionally “progressive” orientation on economics produces: bizarre, irrational surface conclusions drawn about a system that is fundamentally flawed at its core.

So what are Rogoff’s disappointing, vague, intangible suggestions for addressing the latest problem he has rightfully (if not rightly) exposed? Well, you can bet he will suggest reforming the “pathological regulatory-political-economic dynamic that characterizes” the food industry, for starters. It isn’t the market, you see; it’s our failure to regulate that pesky rascal. Indeed, Rogoff insists,

We need to develop new and much better institutions to protect society’s long-run interests.

That’s the only sentence we get on the matter, so we’re left to presume he’s talking about regulating bodies of some sort, to rein in the market, or manipulate it so that it works the way centuries-old magic-imbued dogmas suggest it should… you know, intervene to make markets do what they’re supposed to do precisely as long as we don’t intervene.

But even this cop-out directive comes with a familiar warning.

Of course, the balance between consumer sovereignty and paternalism is always delicate. But we could certainly begin to strike a healthier balance than the one we have by giving the public far better information across a range of platforms, so that people could begin to make more informed consumption choices and political decisions.

And that’s it. It’s all he offers. I don’t know Rogoff so I won’t presume to know what goes on in his mind, but it wouldn’t surprise me if the constraints of a neoclassical economics education, a current gig at Harvard, and a couple of stints at the IMF, have limited Rogoff’s imagination so that he can’t fathom there might be another way to manage production, consumption, and allocation in a modern society. Standard forms of centrally planning are too “paternal” to consider; I’d agree with that. And I’d even suggest that having a thoroughly undemocratic government like the United States republic intervene to coerce policy in a major sector of the economy would be rashly paternalistic, with mixed and confusing impact.

So what does that leave us with? Oh, if only there was a way to plan production, consumption, and allocation in a democratic manner, averting the paternalism problem altogether. Information for consumers is indeed a good start. But short of people actually organizing in their dual capacities as consumers and producers, let’s not pretend we can change much just by making smarter purchases. The idea of using the blunt instrument that is “voting with our dollars” to affect the agricultural and manufacturing policies of the handful of conglomerates that dominate our food supply is just plain ridiculous. Change will require collective action to tear down existing institutions and replace them with a foundation of alternatives.

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Naomi Klein Takes on Climate Change, Capitalism

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Author and journalist Naomi Klein has done it again. She has written a sensible, perhaps seminal, and truly accessible treatise on what climate change and resource scarcity really mean for the coming decades. I do not fully agree with her conclusions, mainly because she shies away from condemning all markets to the dustbin of history (where she rightly notes the “free market” belongs). But I don’t want to gripe with the piece until after you’ve read it; I think it’s that important. Naomi has clearly spent the last several months much as I have, studying the implications of climate science and resource limits on the future of our economies, but I bow readily to her presentation.

So please, take the time to read “Capitalism vs. the Climate” in The Nation magazine right now.

Pretty impressive, right? Okay, now on to my misgivings, first reiterating that I am overwhelmingly fond of Naomi’s take. I’m just going to address my main concern, then briefly praise Naomi for a daring step in the right direction on another matter.

I am in favor of economic planning. And while Naomi didn’t provide a real framework for how she’d like to see it happen, she did note that participatory engagement in local-level planning would be on her preferred agenda.

In the cities and towns that have taken this responsibility seriously, the process has opened rare spaces for participatory democracy, with neighbors packing consultation meetings at city halls to share ideas about how to reorganize their communities to lower emissions and build in resilience for tough times ahead.

There’s nothing wrong with the above statement; it lays out the basics of what needs to happen society-wide, worldwide, and is already happening in places that overuse resources today (North America, Europe, etc), and places that will suffer the earliest and the most severely from climate change (Asia, Africa, etc).

Local-level planning will definitely be inadequate. It’s clear that Naomi fully understands this, as she advocates for big steps such as agricultural planning and reining in corporations, which no community could ever really do on its own.

But she doesn’t state that over-arching planning (at state, regional, national, and international levels) will have to address differences in capacity, privilege, and other factors that will make it harder or less necessary for some localities to “transition” the way others will have to. That is, communities privileged in terms of geography or wealth will benefit from the marginal advantages of slower and less-thorough transition periods. To the extent planning is based around markets, discrepancies of these kinds will be stark. I wouldn’t actually expect this to be covered in a short piece like Naomi’s, but it’s an implication that deserves to be noted.

Far worse, Naomi’s framework seems to accept that existing governments somehow have the capacity to engage in sensible planning. It’s not clear to me that any polity can responsibly engage in economic planning. Politics is truly a different sphere, dealing with matters of morality and justice; it starts to fail even just with regard to managing production and consumption of public goods. Intervening in the private sector is not the forte of institutions designed and overseen by politicians, especially as they are in turn funded by the industries they’re charged with regulating.

Naomi spends a lot of time in her article noting that market fundamentalists are right about the implications of climate science on the manifestations of their political economic ideology. It is a threat (hence their denial of the science). But so-called libertarians are also at least partly right about government’s inadequacy when it comes to intervening in economies; polities, politicians, and political bureaucrats make ham-fisted planners, at best. When society truly accepts climate change as a catastrophic reality, those arguing that Earth’s collection of profoundly inept governments and literally ridiculous bodies like the United Nations or the World Trade Organization can address matters by meddling with market economies will sound like clowns. Indeed, that’s how it sounds to me today.

Libertarians remain wrong about how profoundly awful markets are. If the contest were only between unregulated markets and regulated markets, the latter should win, but we should also all resign ourselves to a planet ablaze with suffering. Fortunately, those aren’t our only two options, and the alternatives are not limited to central planning, either.

What is needed is a direct-democratically planned economy managed by the population writ large as workers and consumers with more indicative data at their fingertips than simply market prices. It should be essentially autonomous of government, and it should allow for the systematic pricing of externalities, including those affecting ecology, public health, labor, and oppressed communities.

You can imagine then how massive this problem is in my view. First, the kind of transformation needed has to happen at all levels, as Naomi acknowledges. Second, it does not make a wit of sense to leave markets intact, as there is no way to responsibly plan (or do anything that concerns the environment) with markets at work. Third, the planning process cannot sensibly be carried out by government institutions; a separate technocracy is required free of the perverse interests of government, and more sensibly structured to facilitate the kind of ideal, consumer- and worker-influenced economic forces I think many people (very wrongly) romanticize the free market as being able to foster.

As a final note, kudos to Naomi Klein for being willing to grapple with the unnecessarily touchy issues of resource depletion, peak oil, and the cult of economic growth. Many conventionally trained progressive economists (which does not include the likes of Naomi or me) seem not to grasp the very real threat of these impending crises. In my experience, even some of the most radical economists exhibit a rather bizarre faith in capitalism’s ability to innovate its way through nearly any crisis, not to mention an almost mystic belief that the earth’s resources are essentially infinite. As I’ve noted before, there’s not overwhelming sense in concluding peak oil is going to collapse our economy in a precipitous fashion, but denying it will have a severe impact is indicative of a blind spot I simply cannot fathom. Mainstreaming acceptance that these factors will have a tremendous influence on any future economy is a terrific contribution.

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Small is Beautiful… Can Big Be, Too?

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Recently I’ve noticed economic observers engaging in something of a backlash against the idea that small businesses are the key to economic prosperity. And as much as I hate nearly every feature of large corporations, I have to agree that the fetishization of small business is blind to the very important matters of stability and productivity.

In one important contribution to this emerging counter-trend, Jared Bernstein of the progressive Center on Budget and Policy Priorities wrote an op-ed that appeared in the New York Times under the title “Small Isn’t Always Beautiful”. Bernstein is primarily concerned with job growth, and while he seems to tacitly admit he’s ignoring the rest of the big vs. small picture, that picture is by no means black and white.

Think Progress’s Matt Yglesias picked up on the Bernstein piece, praising purported evolutionary characteristics of the growth of firms. This prompted Karl Smith at Modeled Behavior to wax positively apoplectic about this “market selection” process that weeds out the little guys and yields benevolent giants.

Perhaps most readably, The New Yorker financial writer James Surowiecki made a series of astute, essentially undeniable points about large vs. small businesses vis a vis economic growth, under the title “Big is Beautiful”. He followed up these statements (which I’ll get to in a minute) with a conclusion that only makes sense in a world where all economic writing in the American liberal press has to somehow uphold the absurd notion that capitalism is not utter lunacy. In the end, Surowiecki conspicuously does not uphold the title assertion about big being beautiful, but rather just exposes one of capitalism’s many critical contradictions: that big and small are often both bad and good simultaneously.

Let’s look at some of Suroweicki’s unassailable truths, all building the case that large companies are good for the economy because “greater productivity is the main driver of long-term economic growth and higher living standards”:

small businesses are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs, since, while starting a business is easy, keeping it going is hard.

True enough (though I think semantically it should say small businesses create and destroy the most jobs, not most jobs).

In part, this is because big businesses are able to enjoy economies of scale and scope. Big businesses are also better able to make investments in productivity-enhancing technologies and systems;

Another truism. And these are big matters. Productivity and employment stability are huge factors in any economy.

But let’s look at some of the more qualitative assessments of the large-small break.

A recent study by the economists Erik Hurst and Benjamin Pugsley shows that only a tiny fraction of small-business owners have any interest in becoming big-business owners, or even in bringing a new idea to market. Most are people who simply want to run a small company, do work they enjoy, and have some control over their own financial lives.

Now that’s curious: most small-business owners (thus almost certainly most business owners) are in it not for empire or wealth so much as for self-management and fulfillment.

Some of the [political] support [for small businesses] derives from real virtues that small companies offer—diversity of choice, connection to local communities.

Surowiecki doesn’t take this further, but it’s also true that large businesses have an incredibly difficult time meeting the challenges of diversity and community. He’s tacitly arguing for the loss of these things.

The conclusion?

Small may be beautiful. It’s just not all that prosperous.

Think about that. The more qualitatively appreciable way of doing business doesn’t provide as many stable jobs or as much growth as the approach that is inferior in qualitative terms. Shouldn’t such a glaring contradiction be considered a fundamental flaw of capitalism, rather than treated as a natural law of economics that we all just have to accept? In order for it to be a law, it would have to extend across systems and not be particular to just some, like market capitalism.

Let’s examine scale by looking at some of the relevant factors that inhibit small businesses from being more productive in raw economistic terms. It’s not too complicated; mainly, we’re talking about the ability to pool resources, carry out common tasks in-house vs. using vendors, and the advantages mass-oriented branding and reach.

  • wholesaling & resources — This is the most common element we think of when the term “economies of scale” is raised. The more you buy, the less you pay per unit, thus the higher the margin. Each item you stock in your corner grocery cost you more from the wholesaler than it did the giant chain that has a retailer competing with you across the street. If you custom-build motorcycles, you’re going to pay way more per tire than a big manufacturer does when it puts in an order for 100,000 at a time.
  • distribution — Whether you own your own trucks like many groceries, department stores, and other chains, or you simply have a huge contract with a major trucking company (and other shippers), you’re paying less per unit to ship the goods you sell if you’ve got a massive network and are shipping huge quantities around the clock.
  • R&D — Research and development is resource intensive, and in most industries it doesn’t make a lot of sense for the “little guy” to buck up against concentrated capital. Consider even that many (if not most) terrific inventions and innovations that arise from independent minds (rather than big R&D departments) get licensed and gobbled up by major operators, and also that rolling out innovations can often be costlier than developing them, and it’s easy to see why this area is dominated by big guns, with wonderfully notable exceptions.
  • labor — Payroll processing, benefit packages, human resources overhead, and numerous other costs of employing workers are cheaper per-unit for large companies with thousands of employees than for small businesses.
  • marketing — In a capitalist economy, massive advantage is accrued by firms that can leverage advanced or large-scale marketing campaigns. National companies can afford to create higher-end ads for multiple markets, and they can do ad buys in bulk.
  • market access — That larger companies can reach more potential customers is obvious, but consider that it also more likely includes overseas markets, and we see another fundamental advantage to scale.
  • capital and credit access — As a rule, big companies can more easily raise fundamentally more operating funds.
  • administrative overhead — Sure McDonald’s spends more on accountants than Joe’s Burger Joint, but probably not as a share of gross revenues. Big businesses concentrate and compartmentalize management and secretarial functions in ways that small operations simply cannot.
  • environmental impact — (This isn’t a productivity factor, for the most part, but I’m including it so we can assess and understand the fuller advantages of scale.) Environmental impact is a mixed matter, but generally speaking fewer facilities doing more concentrated production means less pollution, duplication, waste, and greenhouse gas emissions. However, it can also mean concentrated pollution that is fundamentally worse than distributed pollution (such as with factory farm waste). It can also mean more alienation between decision makers and the habitats they affect, which encourages careless policies. And it can lead to increased shipping activity. But overall, like it or not, fewer facilities would be more environmentally friendly than more facilities, assuming the same production output.

All these advantages would seem to uphold Surowiecki’s conclusion that big businesses are the true backbone of growth, and that the more of them we have, the better off everybody is.

Setting the rest of their relative “ugliness” aside for now, let’s first note that an economy heavily reliant on big businesses isn’t without growth- or jobs-related liabilities, not to mention the political threat of conglomerated capital. As unlikely as the corner store may be to innovate or offer a great benefits package, it’s also unlikely to offshore jobs or move overseas at the drop of a dime. And while small businesses can associate to apply generalized pressure on policymakers, rarely can they muster the same kind of concentrated, specialized political influence as giants in fields such as manufacturing, agribusiness, telecom, finance, and so forth (especially compared to the power these sectors wield when they associate). Nor are small businesses so phenomenally distanced from the rest of the population — including their own workers and consumers — as giant corporations inherently wind up, enabling the notorious “faceless corporation” to engage in anti-social policies without having to face the consequences so immediately or directly.

Nevertheless, while he conspicuously fails to paint a complete picture of big vs. small for us to evaluate the merits of each, and by extension consider his thesis that “big is beautiful”, Surowiecki is correct on the matter of productivity advantages of scale and scope, and it’s a very important point that many who romanticize small business tend to want to downplay.

But all this contradiction exposes is how inadequate capitalism is. This isn’t some side feature of the system that naysayers like me can take potshots at. It’s a core attribute: the keys to productivity inherently detract from the quality of economic interactions. As scale increases, workers are alienated from their bosses and the products they make; consumers are alienated from the decision-makers of the businesses they patronize; marketing departments and firms add a whole layer to this mediation.

One of the key ways to grow an economy is to concentrate production processes in order to create greater marginal advantages of scale. This also tends to concentrate capital and to alienate capitalists from consumers, not just within firms (think of the quality of interactions at Barnes and Noble compared to your local independent bookseller), but also in the economy as a whole as more and more small businesses give way to big competitors, leaving fewer producer-consumer interfaces available.

A sane economic system would harness the opportunities of scale without losing the advantages of more intimate enterprises. But how could this be done? What is keeping firms from doing this in a market capitalist system?

The key problem is propriety. In order to achieve scale in a competitive market system, a company has to grow itself. Want a spiffy ad campaign? You have to be national. Want to do your own shipping? Get vertical.* To take advantage of scale in a market economy, a business has to grow its power base. In doing so, it sacrifices the community connections and personal capacities that make it a quality employer and producer. This is a simplistic generalization, but it’s basically stipulated by reasonable critics of the “small is beautiful” mentality.

The key, then, is to break the bonds of competition so that all producers of all sizes can take advantage of scale. In a participatory economy, scale would be built into every enterprise, no matter the size. While each firm would have to demonstrate its ability to work generally as efficiently with resources as the others in its industry, it would have the freedom to customize and personalize everything from its workplace to its products, within socially agreed norms that maintain the integrity of its output.

Let’s see how a participatory economy fairs on the main productive aspects of scale mentioned earlier.

  • wholesaling — In a “parecon”, all resources are equally accessible by all producers. Without markets, all allocation is merely a logistical matter, with no one looking to take a cut out of being the “middle man” doing the simplest or fewest transactions for the highest relative return.
  • distribution — All firms have equal access to distribution networks with priority managed through participatory planning that seeks equity (fairness) rather than profit in distribution. There is no obvious advantage to a firm being large, except that it might influence location of transportation “hubs”. Locating near such a hub would achieve this advantage for a small producer.
  • R&D — The elimination of patents and intellectual property means the advantages of all inventions and innovations are immediately available to all producers. The advantage of this to the entire economy cannot be overstated.
  • labor — In a parecon, aside from relatively minimal overhead of tracking personnel, the marginal advantages of scale offered to large employers in modern capitalism are all but eliminated. No more bulk health insurance packages or payroll management to tip the scales in favor of big players.
  • marketing — Participatory socialism entirely eliminates the need for marketing, trusting consumers to know what they want and facilitating the acquisition of it without hawking wares through an artificial desire-creation machine that itself constitutes a net drain on the economy, requiring work and spawning waste where there need be none.
  • market access — The entire participatory economy benefits from giving all producers bilateral access to consumers (who are after all participatory planners), but more importantly, a lack of such access on a large scale would not make or break a firm. Parecon facilitates appropriately scaled consumer-producer interactions, and it does so fundamentally better than any capitalist marketing department or firm could ever dream.
  • capital and credit access — All firms have access to the counterparts of these features in a participatory economy, with industry and consumer councils considering all proposals for expansion on their merits. Size would not be a condition for acquiring increased capacity.
  • administrative overhead — This is perhaps the one area where participatory socialism might at first appear weaker than capitalism. No doubt, generally more “man hours” will be spent on managerial tasks inside a given firm or industry, though many administrative tasks would either be eliminated or would lend themselves to concentration with the achievement of scale. In any case, the upside of this distributed (collective) management is the huge advantage of widespread personal empowerment as a byproduct of economic activity. This is that self-management factor Surowiecki noted as an incentive for small business owners to stay small. There’s no concentration of managerial power or overhead at the top… and this is good. Most of us want a nice, comfortable, fair share of management, not a king’s ransom of power.
  • environmental impact — On this matter, there’s really no contest. In a participatory economy, there are in theory essentially no externalities; the environmental effects of production and consumption are built into “prices”. This would likely encourage scaling of at least some aspects of many production operations, all else being equal, but it would only be one factor, and it wouldn’t necessarily effect key elements of an enterprise, such as community interface or worker self-management.

In short, a participatory economy permits firms of various sizes to productively coexist, respecting the needs of each operation and the population it serves (both workers and consumers), be it local, regional, international, and so forth, all while increasing access to most of the advantages currently only associated with large-scale firms. By eliminating the incentive to make those advantages proprietary, society can assure that they don’t get hoarded. If society decides the efficiency enhancements of concentrated administrative activity and softened environmental impact militate toward increased scale, such would be the trend. But if consumers and workers decided smaller is indeed overwhelmingly desirable in terms of workplaces, public interfaces, product outlets, etc, few if any advantages of scale would be lost on smaller firms.

An economic system that offers the advantages of economies of scale and the advantages of small, personalized enterprises would seem to be fundamentally superior than one that poses a trade off. Too bad the very idea of a rational economy is outside the realm of acceptable discourse, where a system rife with contradictions has been pre-ordained.

 

* There are notable exceptions in businesses that pool resources to achieve some advantages of scale, including owner cooperatives and associations. Better known is the franchise model. But these exceptions have weaknesses that prove the rule. To the extent they achieve scale through association, they lose the distinct characteristics that customers and employees appreciate.

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The Promise of Capitalist Globalization, Predictably Unfulfilled

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I swear it’s just coincidence that right after coming down so hard on Nouriel Roubini, I’m going to praise a piece appearing in his EconoMonitor blog, this one by investment executive Walter Molano.

In “The Summer of Discontent“, Molano cuts straight to the nitty gritty, squarely placing blame for the past year’s various grassroots grumblings (China labor tension, Arab Spring, London riots) on the shoulders of market capitalism — namely, its failed promise. And he doesn’t try to sugar coat it or tack on a hackneyed stupefaction proclaiming capitalism will make it all right.

Molano basically illustrates how the global game of musical chairs that was played for the last twenty years as new markets opened up and capital flooded in has, in the end, left much of the world standing, disgruntled. It’s a short piece (with dreadful paragraphing), but let me share some highlights:

The growth spurt driven by globalization expanded the economic pie, as billions of new consumers were incorporated into the marketplace. Rising commodity prices and expanding trade flows delivered huge windfalls to the developed and developing world. However, as the rapid rise of global integration began to plateau, and the effects of the downturn in the U.S. and Europe took hold, the vast aspirations of disparate societies dimmed. Not only is the American dream looking like an empty promise and the European socialist model a distant memory, the hopes for a better way of life by billions of people across the developing world is also in doubt.

It’s hard to argue with this, adding to the account that everyday people in the “developed and developing world” did not accrue benefits equitably from the windfalls, which Molano fully understands. An investment analyst has captured the spirit of the street, and he’s going to tie it into useful, plain-English macroeconomic analysis. Observe…

The mad scramble for productive and physical assets throughout the former communist states, such as Russia, China and Vietnam, created a cadre of super-rich individuals. However, the re-allocation process is over and most of the boundless opportunities are gone. Now, these populations are stratifying into the traditional class segmentations associated with modern capitalist societies, fostering disappointment and frustration for some.

Molano then actually presents a Marxist framework within which to understand the impact these changes on class in countries his colleagues typically refer to as “emerging markets” (Molano spares us this dreadful term). I actually found this to be the weakest aspect of the piece, as Molano is trying to wedge modern concepts into an arcane (if historically useful) model. Nevertheless, it’s interesting.

But Molano’s commentary isn’t done getting better (i.e., franker). I’m going to make you read his piece for the details, though.

I can’t help sharing his conclusion with you just in case you don’t take the hint and read the original:

The blurry images of the violence in London, Hama and Hangzhou are the precursors of similar events that will take place in other parts of the world, such as Istanbul, Jakarta and Bogota, when they realize that the dream of greater prosperity was dashed by the basic principles of market economics.

I’m not familiar with Molano’s prior work, so I don’t know what the rest of his take on capitalism is. His job title suggests he’s okay with taking advantage of it, but unlike many of his contemporaries examining the current hyper-crisis of capitalism, he seems to have some genuine understanding of if not sympathy for the people economics impacts most: workers (and the unemployed). His lens is still familiar to those of us who read economists and analysts speaking to an elite audience of investors, but he focuses it in a way Roubini and Jeremy Grantham don’t seem willing or able to. Not revolutionary, but kind of refreshing. Why can’t this become a trend?

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The Political Economy of Famine

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It’s that time again, when market apologists rush to wax insightful by noting that politics, not weather, causes famine. With the current uber-crisis in crisis-bound Somalia making small-print headlines, the marketiers will start tripping over themselves to seem smarter than people who superficially believe climate-based bad luck is the cause of hunger in Eastern Africa. They’ll do this by ignoring economics and focusing on government actions. And they’ll be partly right, of course, which is all that’s required to get a good pat on the back from anyone desperate not to acknowledge that “the market” has failed the destitute at least as much as their own and world political leaders have.

Case in point, a recent commentary by Richard Dowden called “Famine in Somalia: It’s the Politics… Stupid“. (One can’t help but think Dowden’s title is overstepping in its heavy-of-hand attempt to distract the reader from that other, less-palatable culprit.) Check out how insightful this sounds:

Drought can cause food shortages and price rises. But drought does not automatically mean famine. Famine is cause by politics – when war or governments prevent people moving or trading.

Nothing wrong with that statement, except failure to note the elephant in the room. Hmmm, what else could cause famine? Maybe extreme poverty, high food and general commodity prices globally, combined with the world’s reliance on markets to move goods even where movement and trade are not blocked by political forces. If political openness and local security do not guarantee a population the very basics for sustaining life, what is the failing force then? Dowden doesn’t answer this. Few ever do. Markets are treated as a fact of life, a given, not unlike the weather. So thoughtful observers hunt for causes that aren’t inevitabilities, as if we humans do not determine our economic models much the way we determine our politics (i.e., we let power elites decide).

Affluence and wealth are like magnets in terms of allocating necessities — regions and classes with greater demand power will see their excess wants prioritized over the bare basics needed in impoverished regions or by the destitute class. It isn’t really famine but the core impacts of famine we need to be concerned with; if we do, we see that famine is more a class phenomenon than a regional one. Politics somehow haven’t kept the wealthiest in famine-stricken regions from getting food. If you have the purchasing power, famine’s effects on you are very different than if you lack it. That being the case, how can we not note that the rules of the global market are the driving force of famine’s worst impacts?

Furthermore, where we see politics having the greatest impact on food insecurity in developing nations, it’s often if not usually due to economic policy that favors free markets. Where markets are freed up and stabilizing regulations or safety nets are removed, we see spikes in local food scarcity and human despair. Liberalized markets often even lead to countries exporting food during acute and chronic domestic shortages; international demand has that much perverse power! These policies are typically at the political behest of international bodies that operate under market ideologies for the benefit of international private interests.

This all applies to Somalia, which has spent 20 years in chaos following IMF intervention.

Non-fundamentalist market apologists will say this is all still the fault of government. If only governments would behave appropriately to control market forces, we wouldn’t see such perverse outcomes. It’s always the fault of politicians, and politicians are seemingly never able to curb markets appropriately in the developing world. What a coincidence. It can’t be the positive feedback loop of concentrated wealth has on politics, can it? This is inherent to market capitalist societies at all levels, which makes it the fault of capitalism, whether you like to admit it or not.

But it’s more in vogue to blame local governments, and of course Somalia’s excuse for a polity is an easy target here, what with the UN/AU-backed provisional government all but dead and the Al-Shabaab sideshow ineffectively running most of the South.

Why am I blogging about this on FuturEconomy? Because these same forces are at play here in North America. Austerity measures and deregulation are the watchword of Washington, and wealth disparities are a fact of life. Don’t think famine can’t happen here; it can, and it will, as long as we rely on an economic model that allocates necessities on a priority basis to those who don’t need them.

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The Genius of the Market

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It's pretty amazing that our society has reached a point where [the effort necessary to manufacture a plastic spoon] is considered easier than just washing a spoon when we're done with it.

Not to mention the externalities (air pollution, ground water pollution, ocean pollution, greenhouse gas emissions, etc.).

Or, consider the opportunity costs. What could we be making instead? Perhaps a product that does not have a superior substitute that is already in abundance if not massive surplus (you know, metal silverware).

Or, what would be the net leisure impact of not making disposable plasticware and freeing up all those work hours and resources? I know, you say you don’t work in the disposable utensils industry, so how would there be a net gain for you? And if you did work at a plastic spoon factory, you wouldn’t want the kind of leisure time associated with being laid off. And what about waste reduction — don’t I care about sanitation workers losing their jobs if we dispose of less shit?

And therein lies a key problem with capitalism: instead of socializing the opportunities of decreased consumption, it turns them into liabilities and institutionalizes excess and waste.

Graphic by Max Temkin. Print available here. Via Geoffrey Grabowsky Google+.

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How Outsiders Will View Our Demise

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I made this movie to express my frustration with where we’re headed. It’s not particularly informative, but I hope it’s a funny way to make people think about how untenable our economic system is.

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