Why capitalism has not failed, or an excellent post by Tim Ambler

Over at the Adam Smith Institute blog, Dr. Tim Ambler makes an excellent defense of capitalism and accurately blames the current crisis on the unholy alliance between large governments and businesses being forced to sleep with them to grow big. Some of the pertinent extracts are as follows:

One of yesterday’s headlines, “Davos elite confronts capitalism crisis”, reflects the widespread view that the financial crisis shows that capitalism has failed and “we need another economic model”.
The anti-capitalists see making money from other people’s needs as wicked. Business should be there to help people, they say. Of course, communism was seen as good because profiteering was illegal, but that was a main reason for its collapse: it removed the profit incentive.
The middle, Davos, ground is that making profits in moderation is acceptable provided it takes place within the “stakeholder” context. In other words, business should not be preoccupied by making money for its shareholders but should also take care of suppliers, customers, employees and society as a whole. A corporation should only be given a licence to trade if it meets these wider responsibilities. Profit is still basically reprehensible but is accepted as necessary to meet these social goals. The hysteria generated by NHS reform suggests this view is widespread.

As usual, though, and I quote:

The pious folk who believe this rubbish have forgotten, if they ever knew, that profits provide everyone’s income whether it be in employment in the private sector, or via taxes in the public sector, or through their investments. Cash flow needs to be positive and marketing provides the cash flow. It’s actually quite simple: make money and do not be distracted by corporate responsibility. Making money makes everything else possible. The alternative is that we continue to decline. 

Rubbish indeed. One such "pious" commentor on the site responds:

Companies should be regulated enough to make sure they also serve the people not just themselves, especially when companies grow large and become arrogant and reckless with other people's money and lives.     

Aren't the threat of losing productive employees and paying customers to a competing firm that provides better work conditions and a "socially responsible" product, if that is what society actually wants-- as opposed to a liberal's wet dream for what a company "should" produce-- regulations enough? And isn't the fact that such a scenario does not exist in a country like China merely argument for the case that Ambler makes-- that government does not lead to individuals being better off as compared to a truly free market?

The economics of textbooks, or one reason why healthcare in the US is so expensive

A friend of mine, Jelena, gave me the idea for this post. As graduate students and most American students are wont to do, I try my best to buy used books when I can to save precious currency for other, more valuable things. The advent of Ebay and Half.com is a blessing for us, reducing information asymmetry and transaction costs, thereby leading to lower prices (Case in point: my dynamics book. List price $100+, price I paid: $35, including shipping).

So, today, I met Jelena, an undergrad econ student, while walking to the library. She was carrying a plastic bag full of books for the semester ahead of her. After the usual New Year pleasantries, she happened to mention that her books for 3 classes cost her $500. Aiming to educate this helpless student, obviously new to the American way, I attempted to enlighten her on the benefits of online textbook purchases. She proceeded to tell me that she was well aware of this exotic means of transaction, but her government (read the taxpayers of Montenegro) was paying for her education and books, as a result of which she proceeded to buy brand new, amazingly expensive versions of the texts. (As an aside, what a sweet deal! For her, anyway.)

When people spend somebody else's money, they are less likely to account for the efficacy of their purchases. The same goes for consumers of healthcare (and government, but that's another topic). In the US, most insured do not face the full cost of their treatment, leading them to purchase the most exotic and expensive services, as well as an inefficiently higher amount of even basic services, driving up prices for the entire economy. This is just one piece of America's healthcare puzzle.

An eventual eventuality

My friends have heard me criticize the entire concept of the Eurozone and the Euro. Far from standing up to the might of the US Dollar, I argued that the Euro would prop up the bankrupt economic ideologies of countries like Spain and Greece, at the expense of the Deutschmark and Pound, which are backed by (comparatively) freer, competitive economies.

At the root of the problem is the reins of the monetary regime in the hand of one central unit, the ECB. A central bank is a good idea when its entire domain is governed via a similar ideology. As any idiot can tell you, that is far from the truth in Europe. We have socialist (and bankrupt) Greece, Italy and Spain, France and Britain trying to save their gasping capitalism, and Germany, which is pulling the entire Eurozone along like Atlas on his shoulders.

The bank's problems can be best summed up in view of the conundrum faced by it the previous quarter (Q1 FY11) with respect to Europe's economic performance. The region as a whole grew by 0.8% over the previous quarter. Germany, as expected, was the growth engine, with a 1.5% performance, helped by sturdy performances by the minor but robust economies of Lithuania and Estonia. On the other hand, the UK grew by 0.5%, with Spain following and Portugal shrinking by 0.7%.

So what was the bank to do? Should it have infused liquidity into the system to stimulate the southern countries, or should it have been concerned about an overheated Germany? It chose to do nothing, keeping rates unchanged at 1.5%. As a result, growth stalled in the subsequent quarter.

At that time, I had predicted the death of the Euro and dissolution of the Eurozone in the form it stands today. It seems, now, that the ECB can see the writing on the wall but chooses to cling on to hope, for some possible change, maybe? From The Telegraph:

Christine Lagarde, the IMF’s new chief, set off tremors at the Jackson Hole summit over the weekend with warnings that the global financial system is on very thin ice and vulnerable to the slightest shock.

“We are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed, so we must act now,” she said.

“Banks need urgent recapitalisation. If it is not addressed we could easily see the further spread of economic weakness to core countries, even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalisation,” she said.

 Others are not fooled. From the same article:

Tim Congdon from International Monetary Research said it is folly to force Europe’s banks to raise money too quickly or crystallize losses abruptly. This will cause a monetary implosion and a repeat of the 2008 disaster.
He said the ECB’s restrictive policies over the last 18 months and the lack of EMU fiscal union have doomed the euro. to certain break-up.

While it feels good to be proven right, the world cannot afford such economic turmoil at this delicate moment. However, if better sense prevails consequently, it may be a worthy price to pay. It is foolish, however, to expect wisdom from politicians, if history is to be believed.

Thoughts on the London riots

Subsidizing bad behavior will just encourage more of the same. Any economist worth his salt knows that. Why are governments so reluctant, on the other hand, to accept this premise?

The UK government has long been a nanny to its subjects. The United Kingdom, as a welfare state, was conceptualized in the William Beveridge Report, which, in 1942, identified five "Giant Evils" in society: squalor, ignorance, want, idleness and disease. Clement Attlee's government subsequently pledged to eradicate these "evils", and undertook policy measures to provide for the people of the United Kingdom "from the cradle to the grave."

Now, you do not need to be a rocket scientist to figure out that given free money, only the stupid, or irrational, will work. As a result of the liberal policy, the youth in London has grown up on the government's proverbial teat, which has destroyed any notion of self reliance and responsibility.

Shit, however, eventually, will hit the fan. The trouble with the government paying for stuff is that it does not produce anything and is, therefore, inherently inefficient with the resources that it does manage to appropriate from the productive segments of society. With a growing population, especially of immigrants, demanding access to entitlements and the consequently shrinking proportion of the economy actually producing wealth, the government had no choice but to scale back some of these "generosities".

The problem with making something a right, such as the right to free money or food even if you are an illiterate, worthless piece of crap, is that people generally fight for it if it is taken away. I fear the UK will sink into the socialist abyss sooner or later, no matter how Cameron handles the current problem. I guess we can add UK as yet another feather in the liberal cap.