What Am I Missing?

For the past 18 months or so I have been fascinated by the pundits, by news items like Occupy Wall Street, by the debate about the spread between rich and poor, by the decline of the middle class, by outsourcing and by the 1% idea. Frankly, none of it makes sense. I must be missing something. Please help me out.

I think that people seem to resent capitalism and the free enterprise system without understanding it. They want to blame it for results they do not like. I think they mean well, but are misinformed, even delusional about how the capitalist system works.

In my view, capitalism works just fine thank you and its outcomes are just that, outcomes. Some good, some not. The system is rigorously objective. The results are exactly what they should be, given the system. If you want a different answer, you need to change inputs or you need to change the system. Changing a system that matters and that you do not understand is the work of fools.

Let’s clarify my view and then you can compare your ideas and explain what I am missing.

First of all, capitalism is not a political philosophy or science. Goods are not in infinite supply. There must be a way to decide who gets them. Capitalism is just one of many methods of distributing economic goods.

Unlike political systems, it is neutral to the “value of the person” receiving the benefits. Neither does it care where the value came from. It makes no moral assessment whatever. It just runs its implicit program. Distribute the goods.

Capitalism’s “implicit program” is a barter system, but one that has more than one stage. In ancient times, by spending time and skill and risk I might catch more fish than I needed. I would then trade the excess for eggs or vegetables or meat. If I needed more I worked longer or smarter and collected more fish.

That rudimentary system has an obvious flaw. I have to be able to trade the extra fish. If I have perishable fish that you want and, just now, you do not have what I want to acquire, they are of no value. I wasted by extra time.

If you and I are to both be happy we need some other way to let you have the fish and let me have value for them. If we do not find a way then neither of us will get what we want and need.

The way to please both of us is money. A rather clever invention.

I trade my fish to you for money and some other day or in some other place or with some other person, I trade that money for the eggs I need. The fish and the eggs are real value, the money is not. It is merely a way for us to trade more easily.

Today a manufactured article or a service will likely replace the fish in this negotiation, but the point is the same.

Shortly after money was invented people began to focus on the money not on the trade. Bad mistake. These people tend not to realize that money is valueless unless it facilitates a trade. As soon as you focus on the money, you lose track of its purpose.

When you think about money, you need to notice that as far as the capitalist system is concerned, someone who has money and does not use it has no appreciable advantage over the person who has none. The money is not important, its motion and potential motion is important.

What then should happen when I have more money than I need? Motionless money.

This is where the discussion gets political.

Should the government take the money that is unused by one person and give it to someone who will use it? Minus the bureaucratic overhead, of course.

Not a bad question. The economy, which is really just a bunch of trades between people who want to carry out the trade, might be more vibrant then. If there were more trades, there would be a need for more goods and that would lead to more jobs, more purchases by the businesses that produce the products and that would be good. All would be sweetness and light. At least that is the argument.

The politically driven people have a mantra or buzzword for this idea. “Social justice,” whatever that means. By the way, I have asked what it means and have yet to get an answer delivered in normal voice. Loud and shrill soon follow the question. The expressed idea eventually is that poorer people should get more of what richer people have, just because. Not convincing.

While sharing is not an evil goal, it is not part of the implicit program of the capitalist system. It supposes value given for nothing in exchange. Running counter to the fundamental idea of the distribution system entails risk.

At the base of the capitalist system is the idea that people exchange values. That is all it is or does. The system requires that the money you possess be acquired by contributing some value to someone else and for that value they traded their money to you.

If a person is incapable of getting their own money, then society might want to find a way to help them. Is that a government role? Should we pay that extra overhead? Could we accidentally incentivize people to not contribute what they could? Hard questions unless you define boundaries. We have not done that. There is an implicit assumption that equality has value.

The politically driven idea of redistribution has at least two flaws:

  1. It does not pay attention to the fact that people who have a lot of money have by some way or other contributed a lot to the well-being of their fellows. Otherwise they would not have the money. Not many want to admit that Bill Gates owns a lot of value because he has contributed a lot of value. I know of not a single person who bought Windows without receiving a benefit at least equal to its cost. No one! There are a great many of them, so Bill gets a lot of money. That is fair. He traded value for value.
  2. The existence of the money that people wish to reallocate is an assumption, not a fact. Suppose richer people decide that trading their time, talent, and risk for money is not worth it to them because as soon as they earn it, too much is taken. There is no extra until there is an incentive to produce it.

Here is how it goes in real life. I had a client who was a multi-specialty and extremely talented physician. When he came here, he worked 50 weeks in the first year and, price adjusted, made about $800,000. He lived well, bought a home, a cottage and a very nice boat. (I am still envious of the boat.) Come April he owed taxes. Quite a lot of taxes. In those days, the top rate exceeded 60%.

In year 2 he worked more, paid off last year’s tax bill and made installments for the current year. Nothing extra due in April.

Year 3 is where it started to get interesting. He worked only 4 days a week and his income fell to about $700,000. He paid the taxes, saved some, paid off a little debt, and lived well.

In year 4, he worked 4 days a week for 40 weeks. Income down to $575,000. Again saved some, paid the taxes, lived well and planned year 5.

Year 5 was 4 days a week, 3 weeks a month, for 10 months. Just enough to get the money he needed to fulfill his wishes.

No one was a winner here. In year 1 he worked about 250 days. In year 5 and following about 120. Many people who could have benefited from his skill and training did without. He kept less cash and the government got less too.

His view was “I would rather spend time with my family or boating or traveling than doing risky, demanding work for 37 cents on the dollar.”

That is the meaning. Without incentives, you get less. As mentioned earlier, there are many ways to distribute society’s goods. Capitalism is the only one with incentives to produce built in. That matters.

We need to notice that people who contribute value do so on their own terms. They do it as long as the work pleases them or as long as they get the values that they wish to have in exchange.

When some authority says they cannot keep so much, they drive the person to ask themselves, “Given what is left for me after contributing to the system, should I invest the time, the stress, the risk to get more money or would I prefer free time, relaxation and less money?” Bearing in mind that unused money is useless, many will choose the time and relaxation.

Eventually there will be fewer resources for the distributors to transfer to someone else. Will the distributors be able to command the needed resources to appear? Dumb question!

What then? If you don’t know the answer, you need to find it.

These observations are neither new nor original, but we need to notice them and then decide how to proceed. As it is, capitalism and the free enterprise system are becoming less fashionable. Without an alternative, that can end badly. Take a look at “The Equal Division of Nothing

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Follow on Twitter @DonShaughnessy

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