Capitalism Under Fire III

Dave Davis Commentary, Policy, Uncategorized , , , ,

I probably should’ve started here. Any discussion of capitalism assumes people understand the role of capital. This may be a false assumption. Ask your friends or others to define or describe capital. You might get a blank stare, or something like, “Oh, that’s stocks and bonds.” Can you define or describe it?

Apparently, this lack of awareness is widespread. I asked AI whether many Americans could describe economic capital. The answer is that very few can. On the other hand, surveys show that at least 17% can define socialism, and many more have some idea of it. This knowledge includes Karl Marx’s concepts like his convoluted labor theory of value:

However, capital, unlike Marx, isn’t hard to understand. The easiest way to understand capital is to think of it as foregone consumption. Eons ago, our hunter-gatherer forebears would forage for grains and fruit over distance. At some point, they brought some back closer to the cave. Maybe some dropped on the ground, and new plants grew. Someone noticed and, rather than eating everything on later forays, planted some of the seeds instead. When the crop ripened, the planter saved some of the harvest for the next crop, again foregoing consumption; in agriculture, we called the saved amount seed corn. In economics, we call it capital.

If you want similar crops in the future, you save a similar amount of seed, but to grow more, you need more seed, more capital. Growing the tribe’s economy requires ever-expanding seedcorn-capital.

Of course, risk is ever-present. Rats may eat your saved seeds. A flood may wash away the crop. Drought or locusts may loom. Thieves and hostile governments, both foreign and domestic, are ever present. So capital is also a bet on the future. It stands to reason that the most successful farmers can take the biggest risks. Through their knowledge and resources, they have the best chance of overcoming the risks.

Properly assessing the risk-reward ratio is often key to moving forward. The old saying, “nothing ventured, nothing gained,” is true for people and societies. Refusing to take a chance guarantees you won’t make progress.

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Capitalism Under Fire II

Dave Davis Commentary, Policy, Uncategorized , , , ,

No monopoly lasts without government sanction. That’s just a fact. If you can think of one, I’d like to know. In competitive free markets, dominance is fleeting; look at American Online, Sears, IBM, or Microsoft.

You might ask, what about the Gilded Age Robber Barons? Didn’t Standard Oil and U.S. Steel use their dominance to gouge the public? Even then, both competed in the world market and faced plenty of competition. Instead, out of fear of competitors and to reach lower price points that expanded their markets, they lowered their product prices during the period.

Given the thousands of years of government favoritism, patronage, monopolies, and corruption, pointing to Capitalism’s so-called moral deficiencies is laughable. If Government didn’t control so much of the economy, we wouldn’t need the vast army of lobbyists encamped in Washington. All seek some favor or try to prevent others from using Government favor against them. We now mimic a Royal Court, attracting those seeking benefits:

The recent Skydance-Warner Bros merger illustrates how far down the road to corruption we’ve come. The Government, with its power over “monopolies ” and “restraint of trade ” at various levels, seems to have extracted large sums from the Ellisons and their company, Skydance, to ensure completion of a merger they had already committed large sums to.

No one in their right mind thinks the merger could create a media monopoly or meaningfully restrain trade. At 27%, its largest share of any media sub-market, Motion Pictures is hardly a monopoly—just a large entity in a vast market. Still, the Ellisons contributed 45 million dollars to the Trump ’24 election campaign, and more to other Trump-favored endeavors.

Then many states jumped in through their attorneys general, forcing Skydance to commit huge sums for favored constituencies. Doesn’t this sound more like doing business in a banana republic than in the U.S.?

Adam Smith was, in fact, a moral philosopher; he saw greater virtue in businesses serving their customers rather than their rulers. A business that loses its customers’ confidence will go out of business, but if the Government protects it from competition, serving the public matters little. The invisible hand sorts the trustworthy from the rest.

If you order from Amazon today, you expect it to arrive on time at the agreed-upon price. Even as big as it is, it works hard to keep your trust, knowing that if it doesn’t, someone else will. Do you feel the same when you deal with the Government? How about the IRS or the motor vehicle department?

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Capitalism Under Fire I

Dave Davis Commentary, Policy, Uncategorized , , , ,

It is widely reported that Socialism is more popular than ever in the U.S. and is gaining on Capitalism as our preferred economic system. This shift is most prominent among young people, many of whom claim that Capitalism just hasn’t delivered for them. Because of Capitalism’s failures, we are in the middle of an affordability crisis.

While this may make some sense on the surface, a closer look is warranted. Affordability is just another way of saying prices are too high and rising. In other words, Inflation. Economist Milton Friedman famously stated that “inflation is always and everywhere a monetary phenomenon,” arguing it results from the money supply growing faster than economic output—too much money chasing too few goods.

Capitalism means the least government interference in the economy. Private enterprise has no control over the money supply. Only the Government, through the Federal Reserve (FED), has that power. The FED is a 1913 progressive creation with a poor record on Inflation:

Except for wars, sustained rising prices were virtually unknown before the FED. In fact, during the Gilded Age, a period with little government interference but amazing growth, prices consistently fell, increasing real wages. Inflation, then, is a government phenomenon. Blaming Capitalism is misplaced. Looking to the Government for solutions flies in he face of experience.

This situation led me to look more closely at the other prevalent criticisms of Capitalism. The first thing you find is this: Adam Smith and his followers, moving away from the government-controlled mercantilist and feudal systems then in existence, never used the term Capitalism. Instead, they used free markets or free enterprise. Smith himself called it a “system of natural liberty.” French socialist Louis Blanc used the word capitalisme around 1850 to mean “the appropriation of capital by some to the exclusion of others.” He obviously meant it as a pejorative.

Maybe this explains why the media and academia use Capitalism rather than free market or free enterprise when referring to an economic system relying on markets to direct investment and set prices?

The Gallup poll shows Socialism’s favorability rising to 43% vs. Capitalism at 53%, while Free Enterprise in the same poll sits at 77%. Yet Capitalism and Free Enterprise are considered synonyms in every dictionary, meaning essentially the same.

Curious, I asked AI what the major failures of Capitalism were touted. They centered on five general n deficiencies. Unequal distribution of Wealth, market failures, prioritizing demand over morality, environmental degradation, and labor exploitation make for quite an indictment.  

Since we aren’t gods and aren’t perfect, a reasonable inquiry into this bill of particulars should ask: compared to what? Has any other system done a better job in these areas?

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Doomed

Dave Davis Commentary, Policy, Uncategorized , , , ,

In our neighborhood, or on our way to grade school, we couldn’t miss the stars in so many windows. We were told the blue ones showed a family member serving in the war. The gold ones meant they had lost a family member. Even at our young age, we were no strangers to crisis and loss.

Even after WWII ended, the sense of crisis and fear didn’t end. The Russians had the atomic bomb, and the Cold War was on. We all had seen pictures and movies of mushroom clouds. Our school, like the rest, brought it home with “Duck and Cover” drills. It seemed we were likely doomed:

Fortunately, the Cuban Missile Crisis showed the Russians, like us, had no interest in mutual destruction. The bombs never dropped, but the memories stayed.

At summer camp, spraying areas and the cabins with DDT was a normal ritual. Mosquitoes were nasty and spread all sorts of bad things. The good news then was we had almost eradicated Malaria, one of the world’s major killers. Then came Rachael Carson’s book, “The Silent Spring,” which told us in no uncertain terms that DDT was deadly to birds and probably to humans. Exposed repeatedly, we were doomed.

Later, our fears proved overblown. DDT wasn’t going to kill us after all. The chemical that had Malaria, which cost millions of lives worldwide yearly, on the run wasn’t so bad after all. Unfortunately, millions DDT might’ve saved were lost when most of the world, including us, took Carson’s overblown warnings to heart and banned DDT. Children were at the forefront of the deaths.

It wasn’t long before we faced the distinct possibility that, because there were too many of us, we would face famine. Even those who survived would face shortages of everything. A “Population Bomb” awaited us because Stanford Biologist Paul Ehrlich showed in his 1968 book that the Earth couldn’t sustain the massive population growth since the Industrial Revolution. Ehrlich became a fixture on TV, and the fear spread worldwide. We were doomed.

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Impending Crises Get Worse

Dave Davis Commentary, Policy, The Middle East, Uncategorized , , , ,

A little over a month ago, I pointed out two crises that aren’t getting the kind of scrutiny one might expect in an election year. Just because we’re talking far less about them than we are about hating Trump or socialism doesn’t mean our debt crisis and a losing war aren’t churning just below the surface. Like all impending crises, they can’t be ignored forever.

The Federal Reserve Board (FED) finally took minimal action, acknowledging the government’s longer-term bonds were yielding more than at any time in the last thirteen years. More than in 2022, when inflation was above 9%.-in fact, higher than at any time in the last 13 years. The Fed raised short-term rates by a whopping quarter point. While this is the first rise in years and shows a change of direction, it is the least it could do:

By reducing the amount of credit available, the Fed makes buying even more painful. In some cases, some consumers and businesses can’t borrow at all. Rather than increasing supply to arrest or lower rising prices, raising interest rates reduces demand. Less demand means less economic activity, slower growth, or, worse, a recession.

The quarter-point rise alone won’t change much. The rise in 10-year and 30-year government bond yields had already pushed up rates on mortgages and auto loans. The FED is just playing catch-up.

Still, President Trump has blasted the raise. He rightly sees it will only raise prices, and that further rises might slow the economy. No politician wants that, and Trump has always demanded lower rates no matter the conditions. He sent his trade advisor, Peter Navarro, to argue that rates should be down to one percent.

The problem is that the President tells us this is the best economy ever, but we will still run a two-trillion-plus-dollar deficit. If we run big deficits in good times, our $40 trillion deficit will keep growing rapidly. This situation means more and more Government debt on the market. With the looming shortfalls in Social Security and Medicare, the market can only see expanding supply, putting downward pressure on bond prices. Lower prices mean higher rates—plain old supply and demand.

These deficits come at a time when the Artificial Intelligence Revolution (AI) is consuming large amounts of capital, adding to pressure on the capital markets. AI will likely lower the cost of goods and services in the future, but right now, it uses gobs of capital.

In any case, the FED’s ability to affect the bond market is limited by its still-huge underwater portfolio of longer-term bonds accumulated through its previous actions. At the same time, interest payments continue to grow, adding to the deficit.

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