The Dollar And The Gun

You are in a conversation with an acquaintance. The conversation turns to politics. You make it clear you are for capitalism, laissez-faire capitalism. Eloquently, you explain the case for capitalism in terms of man’s rights, the banning of physical force and the limitation of government to the function of protecting individual freedom. It seems clear, simple, unanswerable.

But instead of seeing the “light-bulb look” on the face of your acquaintance, you see shock, bewilderment, antagonism. At the first opportunity, he rushes to object:

"But government has to protect helpless consumers from the power wielded by huge multinational corporations.”

Or: “Freedom is impossible under strict capitalism: people must have jobs in order to live, and they are therefore forced to accept the employer’s terms.”

Or: “In a complex industrial society such as ours, government planning must replace the anarchy of the marketplace.”

Does any of this sound familiar? It is a battle that is all but new. In fact it represents the fictional battle that ensues throughout one of the greatest pieces of literature ever written (my opinion). The literature I am speaking of is Atlas Shrugged by Ayn Rand. The book is controversial, however in my opinion I think that if you put your philosophical beliefs aside you will appreciate the mastery with which Rand has interwoven politics, business, philosophy, love, religion, etc all within an amazingly entertaining fictional tale.

I recently began following The Ayn Rand Center on Twitter which posts publications in line with Rand's philosophy. One that I read the other day was entitled "The Dollar and the Gun." It was written by Harry Binswanger as published in Why Businessmen Need Philosophy back in 1983. The work centers on many of the central premises of Atlas Shrugged, specifically the distinction between economic and political power.

"Political power” refers to the power of government. The special nature of that power is what differentiates government from all other social institutions. That which makes government government, its essential attribute, is its monopoly on the use of physical force. Only a government can make laws—i.e., rules of social conduct backed up by physical force. A “government” lacking the power to use force is not a government at all, but some sort of ugly pretense, like the United Nations.

A non-governmental organization can make rules, pass resolutions, etc., but these are not laws precisely because they cannot be enforced on those who choose not to deal with that organization. The penalty for breaking the rules of e.g., a fraternal organization is expulsion from the association. The penalty for breaking the law is fines, imprisonment, and ultimately, death. The symbol of political power is a gun.

A proper government points that gun only at those who violate individual rights, to answer the physical force they have initiated, but it is a gun nonetheless.

Economic power, on the other hand, is the ability to produce material values and offer them for sale. E.g., the power of Big Oil is the power to discover, drill and bring to market a large amount of oil. Economic power lies in assets—i.e., the factors of production, the inventory and the cash possessed by businesses. The symbol of economic power is the dollar.

A business can only make you an offer, thereby expanding the possibilities open to you. The alternative a business presents you with in a free market is: “Increase your well-being by trading with us, or go your own way.” The alternative a government, or any force-user, presents you with is: “Do as we order, or forfeit your liberty, property or life.”

As Ayn Rand wrote, “economic power is exercised by means of a positive, by offering men a reward, an incentive, a payment, a value; political power is exercised by means of a negative, by the threat of punishment, injury, imprisonment, destruction. The businessman’s tool is values; the bureaucrat’s tool is fear.” (Capitalism: The Unknown Ideal, p. 48)

Whether you agree wholeheartedly or are completely opposed to the above line of thinking, the argument should be had. As I was reading through a second time I came across the excerpt below.

In today’s depressed economy where “obscene profits” have turned into (lovely?) losses, the anti-business theme is being played in a new key: the target has shifted to foreign businesses. The equation of the dollar and the gun remains, however. To wit: “Senator Paul Tsongas (D-Massachusetts) believes that the hightechnology challenge from Japan is as serious to the United States’ long-term security as the defense threat posed by the Soviet Union.” (Infoworld, May 30, 1983)

The Soviet Union threatens us with nuclear annihilation. The Japanese “threaten” us with the opportunity to buy cheap, reliable computer parts.

One could point out that the law of comparative advantage, a cornerstone of economic science, dictates that one country’s superior productive ability can only benefit all those with whom it trades; that if Japanese firms can produce computer parts at lower cost than U.S. firms can, then our firms will necessarily have a comparative advantage in some other area of production; that any government intervention to protect some U.S. firms from foreign competition sacrifices other U.S. firms and the public at large to inefficiency, lowering our standard of living. But all this would be lost on the kind of mentality that equates imports with bombs.

Does that sound familiar? It should. Because we aren't far off from the same situation today. Just replace Japan's cheap products with China and add in cheap labor from India and it is one and the same. I really enjoyed the way in which the author employed a Socratic method-esque approach to debating common accusations against capitalism.

It is true that laws protecting rights are a precondition for the production of wealth, but a precondition of production is not production. In enforcing proper laws, the government does not produce anything—it merely protects the productive activities performed by private individuals. Guns cannot create wealth. When a policeman prevents a mugger from stealing your wallet, no value is created; you are left intact, but no better off.

The absence of a loss is not a gain. Ignoring that simple fact is involved in the attempt to portray the government’s gun as a positive, creative factor. For instance, tax relief is viewed as if it were government encouragement. In reality, tax breaks for schools, churches, homeowners, etc., are reduced penalties, not support. But socialist Michael Harrington writes:

The Internal Revenue Code is a perverse welfare system that hands out $77 billion a year, primarily to the rich. The special treatment accorded to capital gains results in an annual government benefit of $14 billion for high rollers on the stock exchange. (Saturday Review, November 1972)

Harrington equates being forced to surrender to the IRS one quarter of your earnings (the tax rate for capital gains), with being given a positive benefit by the government. After all, the IRS could have taken it all.

Just as the absence of a loss is not a gain, so the absence of a gain is not a loss. When government handouts are reduced, that is not “balancing the budget on the backs of the poor”—it is a reduction in the extent to which the poor are balanced on the backs of the rest of us.

And:

I will conclude with another scenario. Imagine that you survive a shipwreck and have to steer your lifeboat to one of two desert islands where you will have to remain for several years. On each island there is one inhabitant. The western island is the property of a retired multi-millionaire, who lives there in high luxury, with a mansion, two swimming pools and all the accoutrements of great wealth. The eastern island is inhabited by a propertyless beachcomber who lives in rags and eats whatever fruit and fish he can scrounge up. Let’s add that the millionaire is an egoist and strict capitalist, while the beachcomber is a saint of altruism who will gladly share his mud hut with you. Would you, or anyone, head east to escape being “exploited” by the millionaire’s economic power?

As I said earlier, you may not agree with the premise of the writing but I definitely recommend reading the article in its entirety here. I would love to hear comments as this is a polarizing topic amongst many.

Survival Of The Unfittest?

"Greed is good," is the phrase that most comes to mind when thinking of the infamous villain Gordon Gekko in the movie Wall Street. I am not naive or crass enough to believe that greed is good, however Gekko did say another phrase that is much more relevant in today's world. He spoke about survival of the unfittest, and in recent history our nation's breakout of bailouts is creating a culture that is bringing to life Gekko's nightmare. Or at least that is the way an article within the Economist describes the culture, and not just in the US.

But the dramatic changes in the pecking order mask a lack of more profound change in the system of finance itself. Lehman aside, no big firms have been allowed to fail (as they would have done, unaided). Thanks to state aid, the law for big firms today is what Gordon Gekko, the red-blooded villain of the film “Wall Street”, dubbed “survival of the unfittest".

Don't jump to conclusions too quickly. The article is not a total advocation of complete free markets within the banking industry. The article makes some great points on why some government regulation is necessary, but warns of the dangers of setting a precedent of state guarantees.

Removing the explicit side of the state’s commitment is relatively simple. Some guarantees are still plainly needed now, but a firm deadline of, say, five years for the final expiry of the governments’ various crisis-induced pledges should be set globally. With the world economy in better shape, this looks more realistic than it did six months ago. But even then the implicit assumption will linger that banks will always be bailed out. This is the core problem. There are two possible responses to it: regulate banks to try to make them safer, and attempt to limit the implicit guarantee. Both approaches are now needed.

No one should pretend that banking is an industry where pure natural selection takes place. But as guarantees, both explicit and implicit, are withdrawn, the hope is that self-discipline will be imposed on banks, not just swathes of new regulation. There are signs that riskier banks are already paying more to finance themselves. This differentiation must be promoted, so the weak and reckless are gradually forced to shrink and live within their means—and not off taxpayers’ largesse.

I really like the article because it talks about some of the consequences of providing an 'implicit state guarantee' to the banks. The described guarantee is a fancy way of saying that we are starting down the slippery slope. I have blogged about the unforeseen consequences that can arise out of government deities deciding who lives and who dies, and this article illustrates some that are being to take shape. A good read from a good source of information.

Meeting of the Minds - The Future of Capitalism

I watched a CNBC original called Meeting of the Minds The Future of Capitalism yesterday and it was very interesting. The show brought together some prominent business minds to talk about some of the issues surrounding our current environment.

What will capitalism look like going forward? What will prosperity mean? And ultimately, how will businesses navigate this uncharted landscape?

There were a few things that I found intriguing about the show. First and foremost, I always enjoy watching leaders interact with eachother. Who better to learn from than some of the finest business leaders our nation has to offer. I am always amazed at how much the topic of government is discussed when talking about business. I guess some of the questions were tailored to spark some discussion of the business/government dynamic, but I am sure it would have arisen regardless. The leaders, although all relatively similar with regard to their practicing of business, had political views that ran the gamit of the political spectrum. The short one hour program revealed quite a bit surrounding the leaders political views. Although their political views varied wildly from leader to leader, there was almost unanimous consensus that growth is the answer to get our nation out of the financial prediciment it is in today.

The leader that I found myself most drawn to was Jack Welch, former CEO of General Electric. I have listened to his audiobook before, but seeing him interact and share his views on this program solidified my belief that the guy is a real leader. Some people might not be able to look beyond his fiery personality, but many of the things he stands for resinate with me personally. In the program he used the word meritocracy. He spoke about how we need to not be ashamed to be business people. He said that the overwhelming majority of businesses and business people are inherently good. His answer for getting our nation out of the crisis was establishing and rewarding the winners while taking care of the losers. Not total cutthroat capitalism, yet a recognition that winners and the opportunity to succeed are what makes our country great. He really seems to celebrate personal responsibility and establishing systems that distinguish only based on merit; very noble ideals indeed. Check out some video footage of the show below. I highly recommend checking out the entire show.

A Point For Capitalism

With the economy the way it is, capitalism has taken a beating lately. Much to my amazement, people are starting to doubt that capitalism works. They seem to have forgotten that it is capitalism that has lifted the quality of life for so many across the globe. I came across this article on Andrew Sullivan's blog at The Atlantic that makes a push for capitalism.

With all the hits capitalism has taken lately its easy to forget that countries who reward innovation and the entrepreneurial spirit are rewarded with more entrepreneurs! It’s a perpetual cycle that increases the standard of living for all, not just those who are rewarded most heavily.

We all know the power of an Apple or a Google to create new business models and generate massive new wealth. But, long ago, the great economist Joseph Schumpeter argued that the formation of new entrepreneurs lies behind the great "gales of creative destruction" which set in place new firms and industries and revolutionize old ones.
The last couple of days, we've looked at how class effects economic growth and innovation. We now look at the relationship between class and entrepreneurship. In the graphs below, Charlotta Mellander compares countries' performance on the Global Entrepreneurship Index developed by economist Zoltan Acs to shares of the creative class and working class.
Again, the results speak for themselves. Entrepreneurial countries are creative class countries. Those with high percentages of the creative class have higher scores on the Global Entrepreneurship Index.

The opposite is true of countries with a large share of the working class. Their scores on the Global Entrepreneurship Index are considerably lower.



Interesting stuff that serves as a reminder that even in tough times we are standing on the shoulders of the achievements of many entrepreneurs who came before us. Your alarm clock, your toaster, that mass produced cereal you eat every morning are the fruits of the labors of entrepreneurs across the globe.

c

Paradoxical Madness

I have been seeing a lot of articles like this one in the last few days reporting on the anti-capitalist rallies in London. The protesters are forming their anti-capitalist rallies around the arrival of the G-20 conference. 

What I find comically hypocritical is how the protesters are going about organizing their efforts and tactics. The groups are using texting and twitter to organize and stay mobile. I just think that is classic. You have a bunch of people protesting capitalism, yet they are utilizing the fruits of innovation that have been made possible only through capitalism for their cause. These cutting edge advancements in communication and technology represent the cutting edge innovators that are only found in capitalist countries. When was the last time an African country funded an internet start up? I also think it is a little gutless to protest against capitalism when it is one of the main reasons that they have the right and ability to protest. Pre-capitalist England would have seen protesters like this jailed or even beheaded. Capitalism and democracy are not always necessarily rowing the ship in the same direction if you will, but they are both important foundations of most of the prosperous nations on this earth.

Maybe I am being a little to judgemental and general in my observations but I liken protesters such as these to the hippie counter culture movement of the 70's. It just seems like a lot of youth angst directing their pent up aggression towards the very system that has allowed them to enjoy one of the highest standards of living the world has ever seen. Even our nation's poor typically enjoy a higher standard of living than many non-capitalist countries. Take a look at North Korea with its epidemic hunger issues and I think it is a little harder to fault capitalism as the root of all evil. The gap is widening between the rich and the poor and I think that is something to be concerned about, and I am not discounting the struggles of our nation's poor. I am saying that everything is relative, and as bad as things are consistently portrayed by the media we live in an era of untold wealth and opportunity that has never been seen on this earth before.