Capitalism and Markets: The Good, the Bad, the Fair and the Unfair
There is too much rhetoric and not enough practical understanding out there
We need to understand that there is a “beneficial capitalism” that increases aggregate wealth and truly makes everyone better off, even if there are apparent disparities. This beneficial capitalism is always enabled by “fair markets”.
Bad capitalism, is where clever capitalists manage to pervert the fairness of markets simply so they can capture more wealth without any underlying basis of actually providing more or better goods or services.
I have a published essay on the concepts of “Consumer Surplus versus Economic Rent”, which are the opposite sides of the coin. Aggregate wealth is literally interchangeable with consumer surplus. Aggregate wealth is only “resources turned into goods and services”. Nothing else. Everything else is consumption or “transfers”. Aggregate wealth is increased by:
- using more of the same known resources to create more goods and services
- finding new ways to use resources (including hitherto unknown resources) to create goods and services
- finding more efficient ways to use resources to create goods and services
Now, it is obvious from history that nothing incentivizes these beneficial processes more than “competition”. Monopolies (virtually always a creation of government) have no interest in increasing aggregate wealth. They can make their profits simply by charging the maximum that their captive customers can stand to pay, for essentially unchanged and unimproved goods and services. This “over-charging” is a form of “economic rent”. Even without this perverse profit motive; for example in the case of communist economies with no price system, there is also no positive incentive to provide more, or improved, goods and services.
When there is competition, the only way to make a profit is on “volume” — that is, you manage to provide goods and services to customers who choose you instead of another provider. As Adam Smith said; “it is not to the benevolence of the butcher or the baker that we owe our dinner, but to their own self-interest”. The way to gaining and keeping customers, is by providing “consumer surplus”, and this is the reality in most markets in the developed world today, for most goods and services. The goods and services continue to get better, and cheaper in real terms for comparable products. The capitalists involved, increase their own wealth in the form of a share of the added wealth they created for everyone. The opposite of this, “economic rent”, is when a capitalist captures a share of the aggregate wealth that was created by others. It should be obvious which of these our attention should be focused on. Please see my long essay, “The Power and Necessity of Consumer Surplus”.
It is completely clear why, say, a monopolist granted political favors, eg to supply telecommunication in his country, will become obscenely rich; but it is not always clear why some particular cohort of capitalists, such as the finance sector, have managed to capture a larger and larger share of aggregate wealth without any fair basis in having provided or enabled any increases in that aggregate wealth. This is where things get really complex and hard to understand. I hold that opportunities to capture “economic rent” are like carrion to vultures. The finance sector is simply exploiting distortions that have been created in the big, “macro” economy. For some reason, people have been driven to “need finance” in greater amounts and volumes than before. On top of this, there are speculative opportunities in financial instruments and especially in market “short selling” under conditions of increased volatility.
Piketty’s famous data on increasing inequality in “sharing of capital” actually shows, even though he does not understand this himself, that almost all the problem correlates directly to the inflation and price volatility in urban land. The size of mortgages necessary to become a home owner, have risen. Cyclical volatility has increased and the 0.1% continue to amass wealth even when the “busts” come, by short-selling at the right time. These people are fiendishly clever. There is certainly connections between their wealth-amassing and the politics they support with donor funding — which politics and advocacy is responsible for creating the distortions. The reasons for urban land price volatility and the socio-economic effects, are the subjects of another long essay of mine.
One of the tragedies of public political argument about “capitalism” is that almost no-one understands how well-intentioned interventions by government can be responsible for the triumph of the worst forms of “capitalism”. One writer, Robert Conquest, has even gone as far as to argue that in time, every single bureaucracy created to “act in the public interest” on a particular issue, ends up controlled by “a cabal of enemies to that public interest”. In the most egregious example today, ubiquitous and popular government interventions in housing and urban development, are completely responsible for the current crises in housing affordability, social injustice in housing, and the explosion in wealth capture by powerful economic-rentier capitalists.
We hear many arguments against capitalism per se, based on various complaints about outcomes. But intelligent arguments, are the arguments made for a mixed system; capitalism granted scope to unleash its potential for humanity, with government intervention when justified, on an objective basis. Any favors of individual businesses is not capitalism per se, but “crony capitalism” or corruption. This is why regulation must be objective and “applied indiscriminately”.
But there are further widespread misunderstandings of what constitutes “market freedom”. We are constantly told “capitalism has failed” or “privatization has failed” or even that “free markets have failed”. Consider a government monopoly of the kind that has existed in many countries — for example, in telecommunications. Supposing the government “privatizes” that monopoly — sells it to willing capitalist buyers. But they retain regulations that perpetuate the monopoly, and the new capitalist owners simply keep price-gouging and offering poor service. This is not a “failure of market capitalism”, it is a market distortion for which government was and still is responsible.
The next potential level of “market freedom” is where the government “licenses” another applicant to “provide competition” to what would otherwise be a monopoly. Now even without collusion between these enterprises, the prices and service levels always remain sub-optimum compared to a market where there is no barrier to new suppliers. There was an economics literature decades ago regarding “monopolistic competition”, which actually held (with strong evidential basis) that even a multitude of “suppliers” who nevertheless held a “license to supply” that was not available to new entrants to the business, would end up providing sub-optimum value for money for consumers.
To be a truly effective “free market”, a market has to have freedom for new entrants to “supply”, and the resources available to these potential new suppliers must be super-abundant. Most resources in the world today are super-abundant. That is, the demand for those resources over a given time period, is only a fraction of what could be supplied in response to higher-price signals. It would be impossible for the global consumers of gasoline, for example, to suddenly in a single week, exceed the pumping capacity of OPEC. There is some power for OPEC to price-gouge but there is still massive global deposits of fossil fuels that can be developed as the prices trend higher. Plus, alternatives become ever more viable. There is in fact “freedom for new entrants to supply” and the resource is, for now, superabundant. Gasoline, believe it or not, still has “consumer surplus” in it, to such an extent that governments are able to take the greatest slice of the price people are prepared to pay, in taxes (especially notable in Europe).
The reason for real price escalation in housing, is that the superabundant resource of cheap rural land, has been denied to the market, by regulations (usually to restrict urban sprawl, but sometimes unintentionally, via local zoning powers). The beneficiaries of this trend happen to be rentier capitalists with interests in urban property and the financing of it, and the trading of related financial instruments. Piketty’s famous data on increasing inequality is explained almost entirely by the recent changes in urban land prices, and also explained to a large extent by the gains made by the 0.1% (not the 10% or even the 1%) in speculation in mortgage-backed securities and derivatives. This in turn stems from the urban planning fads that have made urban property markets volatile and “rent extractive”. The members of the 0.1% who lavishly fund the activism for this kind of urban planning probably understand very well what they are doing. See my long essay: “The History of Urban Land Rent and Cyclical Volatility”.
The correct government correction for the externalities of urban sprawl, would be simple taxes and fees on energy consumption and land consumption. These would modify human behaviour without creating opportunities for economic rentiers in property, and especially the 0.1%, to enrich themselves at the expense of everyone else. This would be an example of averting “bad capitalism” and retaining the benefits of “good capitalism”.