Rants 2 – On Economics

by vpundir | November 22nd, 2008

If my previous email (Rants 1) hasn’t offended, or at least alienated, everyone, then this one should do the trick.

(Because of the slight ambiguity in terminology, I want to specify that by using the term “capitalism” I refer to the whole concept of “free-market economy”)

Allow me to begin by saying that I started off as an Ayn Rand capitalist, and I am not ashamed to admit that. There is something enticing about “being in control of your own destiny”.

It is just so ridiculously clear, sensible and logical that if everyone takes care of himself/herself, then the whole society is taken care of. On the other hand, when there are community resources and community accountabilities (as opposed to individual ones), irresponsible waste is inevitable. That makes perfect intuitive sense.

But capitalism kills the capitalist ideal just the way communism kills the communist ideal. The corporation, that towering achievement of modern capitalism, can be credited with much of the success of capitalism. At the same time, by separating ownership from management, and further by turning the focus of management from long-term goals to quarter-to-quarter thinking, the corporation fosters an environment where the capitalist ideal can die a silent death.

And while the Republicans are correctly blaming President William J Clinton’s administration for a large part of the current crisis, what they forget to mention is that irrespective of the party in power, it was the policy of laissez faire that brought the stack of cards down. (Except for Republicans like Gov Palin, of course, who seem to have no qualms about saying, “Government, get out of my way” and “we need more regulation and oversight” in the same breath.)

Alan Greenspan recently talked about a “flaw” that he discovered in his philosophy. If one looks past the jargon, he essentially said that he did not account for human nature, and that left to their own devices people and corporations can act unethically. (Not to mention the presence of perverse incentives that foster quarter-to-quarter thinking)

Coming from a pillar of modern capitalism, this statement was certainly shocking. In his seminal work, “An Inquiry into the Nature and Causes of the Wealth of Nations”, Adam Smith certainly doesn’t make that assumption. In fact, he believes that human nature is selfishness and greed and that if we are all selfish and greedy together then things will balance out in the larger picture. Hold this thought as we will return to it in a moment.

—- From this point, your head may start shaking involuntarily, your ears may experience spontaneous combustion, and your brain may lose all focus , but I implore you to look past the labels and keep an open mind as you read on —-

It’s truly a seductive concept that a society will only function if everyone knows that if they are smarter and work harder then they’ll have a bigger paycheck, a bigger car, and a bigger house. That monetary reward proportionate to ability and effort is the primary motivation of human enterprise is an indoctrination (and therefore a bit of a self-fulfilling prophecy), and not a truism.

Otherwise, why would people write blogs, why would they participate in the Olympics, why would people create free open-source software, why would they sacrifice their today for the well-being of their children and grandchildren, and indeed, why would people go from door to door, campaigning for their favorite politician? In fact, why would any voluntary work exist at all?

Researchers from Herzberg to Adams have found that “more money” is not the only, and not even the primary, motivator for most people.

Socialism has been demonized for long in the American society, and even those that believe in some or most principles of it steer clear of the label itself. The power of branding, if you will. I’d like to submit, however, that as a concept it is not as monstrous as it is made out to be (with apologies to all who might have suffered unspeakable atrocities under communist regimes).

Think about it – capitalism is not a new concept; it has been around forever. There was a reason that socialism came into being. That reason was exploitation of the masses and extreme discrepancies in the standards of living of the rich and the poor under the capitalist formula. It is sort of okay when everyone is poor, everyone is in the same boat, and there is no other world that the people have seen. It is also okay when based on their work, people earn different levels of money, status or respect. However when these differences become so stark as to be extreme, it gives rise to a sense of “unfairness” and “envy”, and an unstable society.

Most importantly, irrespective of how smart or able we are, we stand on the shoulders of others – past and present, and it is quite arrogant, not just selfish, on our parts to claim the credit and rewards for ourselves.

Even *if* we were to agree that “every man for himself” makes perfect sense and is the fair thing to do, we would have trouble explaining the laws of inheritance. Why, if everyone gains as per their ability, should a rich person’s children end up owning massive wealth?

It is nobody’s case that socialism is a better system and we should move to it. My point is that the old models like capitalism and socialism do not reflect the ground realities on this century, and we need a paradigm-shift in our economic thinking.

Capitalism served us just fine when the markets were smaller & local, and the players were smaller. But in today’s world with unfathomable amounts of capital forming formidable barriers to entry for new players, virtually every market turning into a network-effects economy, patents & copyrights, government influence and lobbying, and complicated capital and labor flows, the invisible hand is not as potent anymore.

(Sidenote – it is quite interesting that the free-market advocates are not vociferously demanding the opening up of US-Mexico border a la intra-EU borders to allow for free flow of labor)

The fact is that whether one worships analytical techniques like Game Theory, or touchy feely leadership of Stephen Covey, it is quite clear that when individuals work towards a common goal everyone benefits more (and the pie is bigger), as opposed to the common capitalist belief that if individuals work for themselves, individuals benefit in an economically-efficient solution. And this particular brand of philosophy is not a part of either of the conventional economic models. We need something radical, something pathbreaking, something that can create win-win situations and an “envy-free” society.

Am I offering solutions? Unfortunately not. Not yet anyway. In any case, this issue is probably for minds sharper than mine. But in the meantime, it may be a good idea to use a hybrid of systems – instead of getting ideologically married to one system or the other, we could cherry-pick the items we like from all available systems, and work with that.


I followed with interest the thread on taxation. The tiered income tax structure seems to be a major source of heartburn as it appears to punish people for being successful.

Let’s see what taxes are used to pay for: infrastructure, security, social services etc. Let’s take the example of a road provided by the government. How do we divide that cost? We could ask everyone to pitch in equally. But the guy who doesn’t use a vehicle probably doesn’t use the road much either, causing less wear and tear than, say, a biker, and hence should probably be asked to pay less than the biker. Similarly, a biker should probably pay less than a Mini driver, who should pay less than a Taurus driver, who should pay less than a gas tanker driver. To figure out each person’s exact share, one could go to the highest granular level of looking at an individual’s use (frequency, duration, vehicle weight, tire conditions, loads etc) of each road over the lifetime of such roads. Or we could simplify this into a tiered structure: $x for walkers, $y for cars, $z for heavy vehicles…something like that.

Now let’s change the perspective further. Let’s say income tax is the cost of working or doing business in the country. Pricing theory would suggest that pricing should be value-based, not cost-based. What is the value of the usage of a road for a guy selling bananas out of his cycle-based mobile vending-shack compared to an oil company transporting gasoline? So is a flat tax really such a good idea?

Besides, it’s not quite a level playing-field anyway. While it may initially seem that the taxes are higher at higher income levels (which they theoretically are, based on the government’s own tax structure), the fact remains that the rich actually pay a smaller tax percent than most other people. One word (okay, three): capital-gains tax. Most high-income individuals have substantial chunks of their incomes coming from capital gains through investment or speculation, and that is taxed at a lower rate than “normal” income tax, creating the paradox. Not exactly fair, wouldn’t you say?

I also do not fully buy the story of an inverse linear relation between productivity and taxes – that when taxes increase, productivity decreases proportionally. Are we to believe that at zero taxation a nation would have its highest productivity and at 100% tax it would have its lowest productivity? My sense is that (and I do not yet have proof to offer for this) a plot of these two factors would look like a reverse-S curve with a curved starting tip – for the first very few points, as tax goes up, productivity will go up – counter-intuitive, in keeping with Adams’s experiment and based on non-monetary motivations. Then productivity will decline extremely slowly for increases in income tax. This will pick up speed, somewhat like an exponential curve, creating the first bend/elbow in the curve depicting the sharp decline in productivity. Not too long thereafter productivity will actually start going up for increase in tax levels – simply a function of the fact that people will HAVE TO work harder to make ends meet or maintain a lifestyle, as the case may be. Each additional percent tax would bring the productivity up a little bit less than the previous one – culminating with slope 0 at 100% tax. Just pulling numbers out of my hat, I’d say the sweet-spot lies between 20 and 30% and the steep slope between 35 and 55%, and beyond 65% people are forced to increase productivity. But again, I’m just theorizing about this, and I do not have proof for this one.

Consumption tax has gained some currency in recent discussions, but it’s no panacea either, though it does have the distinct advantage of disbanding of the IRS. In terms of answers, though, consumption tax doesn’t provide much. In fact, most of the questions remain exactly the same as in case of income tax: Should there be a flat tax? Should goods consuming rarer community resources be taxed at higher rates? Should luxury goods be taxed at higher rates than food or other essentials?

The notion that ideology can be divorced from taxation is unrealistic, to say the least.

Budgets and Deficits

As you are well aware, the national debt is now $10.6 Trillion. To put this in context, the US GDP is $13.8 Trillion. In other words, looking at it simplistically, national debt is 77% of the GDP.

Deficit financing is the kiss of death for a nation’s economy. UNLESS of course, the deficit financing is being used to build infrastructure. That’s classical economics. At the micro level, if a company leverages its capital or borrows a lot of money, it will go down in flames if instead of building capabilities it chooses to spend the entire amount on CXO salaries and “sales summits”. At the macro level, for a nation, the only good use of deficit financing is infrastructure development.

Now let’s look at a few proposals from this (completely economic) prism.

Firstly, let’s look at war. As I will argue in the Foreign Policy rants, there are no good wars, though there can be some necessary wars. Harry Truman famously said, “War profiteering is treason.” But ignoring any moralistic musings, if we view war as a purely economic enterprise, it can be argued that war does create immense opportunities for many companies – technology, logistics, fuel, etc, apart from the more obvious weaponry and ordnance ones. And since these call for big undertakings demanding big investments, these companies earn good profits, creating more jobs and pumping up the economy via the trickle-down effect.

Closer inspection would reveal this to be a myth, particularly if the war is being financed through deficits (loans). The aforementioned corporations are usually loathe to share their profits with the rest of the economy. Also, development and building or “rebuilding” takes place in the theater of war, not in America, and so American infrastructure doesn’t achieve the long-term gains either.

We can go in with an assumption that America is so important in the world that the rest of the world cannot let her economy flounder, and it may well be true (just like the US government rushed to the support of financial institutions, which it thought it couldn’t allow to fail). But consider this: even if America’s creditors were to rush to “help”, what would the cost of such assistance be? In return for its “help” the US government has practically bought ownership to several huge financial organizations. If Saudi Arabia, China and Japan were to decide to help the US, what would they end up owning?

On the other hand, consider healthcare and education. While usually not discussed as such, these are, in fact, infrastructure investments. And while deficit financing should be avoided, if there ever was a good reason to pursue deficit financing, it’s infrastructure development. A healthier, better-educated, more competent work-force is likely to provide a very encouraging business-environment.

There has been some concern that government intervention in healthcare will mess it up completely just like government intervention in almost anything does. I believe that fear is unfounded, or at least overstated. While government involvement does bring along its own set of challenges, infrastructure projects often need government support, at least initially, as the private sector is either unable or unwilling to undertake them.

In the case of healthcare, for example, while bad policy can further entangle the mess, a deliberate, rational, and intelligent government intervention could be very helpful. It is no secret that the US ranks poorly on most parameters of healthcare (from infant mortality to morbid obesity) in spite of spending the highest amount of money per head on healthcare.

One of the reasons is the unyielding focus on clinical care and the absolute disregard for preventive care. This is particularly embarrassing because not only does preventive care lead to a healthier nation, but it also costs only a fraction of clinical care – estimates have placed preventive care costs at between a tenth and a thirtieth of clinical care costs. But the current healthcare system has a vested interest in not opting for preventive care.

This is similar to the case of the electric car, where the oil companies saw it as a threat and bought out patents to the batteries, starving development and manufacturing, choking the electric car to an untimely death.

That everyone will act in his/her enlightened self-interest is, on occasion, too much to ask for. It is well-documented that there’s a multifold increase in the number of people quitting when a government bans smoking in public places. The car companies didn’t introduce seatbelts, airbags or catalytic converters until mandated by the law. And of course, there is the whole range of companies from Big tobacco to Enron et al that suggest that self-regulation doesn’t work too well either.

So whether it is universal healthcare or socialized medicine, let’s not get hung up on labels. Whatever anyone may say about communist societies, it is undeniable that most communist nations have done exceedingly well in the areas of healthcare, education, and gender equality.

Doesn’t mean that we should become communists. Just that let’s allow for the possibility that even the communists might have done something right. Let’s not leave a good solution on the table just because it came from someone we despise. The Nazis walked on their feet…doesn’t mean that we have to do handstands and walk on our hands. If there’s a good thing out there, let’s pick it up and get on with it. Let’s see what good ideas are out there and how they can be adapted to the current society, not to create a Frankenstein, but to achieve the best of both worlds.

Civil Law

Traffic fines in Finland are based on the offender’s income, unlike most countries. In fact, as some of you might remember, in 2002, a Nokia director was fined over $100,000 for driving his Harley at 45mph in a 30mph zone in Helsinki.

Now that may seem hardly fair, and actually quite harsh. Till you consider the purpose of law, that is. Is the objective of law to punish offenders or is it to reduce future offences? It is widely accepted that the former is used as a tool to reach the latter objective, which serves as the philosophy behind law.

That being the case, a $100 fine can certainly discourage someone earning $30,000 a year, but will it deter someone who rakes in $3 million a year? While a flat $100 fine for everyone sounds fair to begin with, doesn’t it sound like the rich have the law in their pocket?

(Sidenote: Question to self – If equal income is socialism, why doesn’t equal fine reek of socialism?)

Instead of equality, if we are looking for equitability and deterrence, then wouldn’t it make more sense to impose fines based on the hardship imposed on the individual by such a fine? Of course, there are many ways an income-based fine regime can be implemented. For instance, one way is to fine everybody X days’ worth of their yearly income for each Y mph exceeded beyond speed limit. For instance, one may have to part with 2 days’ worth of income for every 5mph beyond speed limit – so if one were to be caught doing 68mph in a 50mph zone, they could say goodbye to 8 days’ income.

But even in that case I could be argued that the rich get off relatively easily, for to a rich person a week’s salary, however big, may mean just an annoying inconvenience, for a poor person, it could mean inability to purchase necessities – not quite an equal amount of hardship then, is it? And thus we could move on to a sterner penalty for the richer folk – either on an exponential sort of curve or on a step curve. And my guess is that one could argue on without conclusion till the cows come home which specific pattern is the most equitable.

Well, it seems that we aren’t looking for equitability after all; we are looking for stability in the society. In other words, we are looking for something that is considered fair by a large majority of people, if not by all the people. We are looking for an envy-free solution.

In that context, practically even the flat $100 solution works remarkably well AS LONG AS the über-rich “behave themselves”. If Mr. Richie Rich decides to flaunt his wealth and flout traffic rules speeding throughout the day and paying 20 traffic tickets because the cost is just too low for him, then that would breed unrest and “envy”.

Economics and patriotism (and bailouts)

American companies are going down. Ford and GM are crown jewels of American enterprise. One should be patriotic and support these all-American companies by opting for cars sold by them. That’s the party line anyway.

But what were these companies doing when America needed them? Turns out, that instead of helping America in her times of need (e.g. – WWII), these companies indulged in blatant opportunism and what can only be described as treachery. It wasn’t the Coca-Cola sort of opportunism either. In case of Coke, The Coca-Cola Company and its German subsidiary each supported its nation’s war effort and defense forces.

In America, Robert Woodruff made a point of supporting US troops. So metal cans were introduced to meet their needs. In 1941, when the US entered the war, Woodruff decreed, “See that every man in uniform gets a bottle of Coca Cola for 5 cents wherever he is and whatever the cost to the company”.

Coca Cola (GmbH) under Max Keith, of course, sponsored the 1936 Olympics. When the export of Coca-Cola syrup to Germany was banned after US entered the war, Coke GmbH created a new soda called Fanta, and kept raking in the cash.

It is understandable (though not condonable) that businesses may be concerned only with profits and may not have loyalty to any particular countries (besides, a bottle of Coke never killed anybody). Of course, that by itself should be enough to hold them accountable for their losses just like they enjoy their gains by themselves.

But in the case of Ford and GM, there’s more. It is a well-known fact that Ford and GM factories in Germany retooled to produce war machinery for the Nazis, while at the same time Alfred Sloan and Henry Ford fought the US government tooth and nail not to retool to help the American army. And after the German plants were bombed by US military, these organizations claimed compensation from the US government.

(Similarly, during the Vietnam war, when an army strike to clear the VC caused damage to a rubber plantation, the owner Goodyear sued the US government)

And now the US government is supposed to bail them out?

Buy American (cars)? No thanks! Even in terms of economics, it is far more patriotic to buy a Toyota manufactured in Texas than a Ford from Mexico.

Freedom of Speech, etc.

This doesn’t really have much to do with economics or economic systems. But media freedom is, correctly or incorrectly, usually a property understood to be closely associated with capitalist economies, and so I decided to slip this one in.

In this respect, the propaganda-press societies and free-press societies are not as different as they may seem at first glance. What’s the difference between having a single government-owned TV channel airing propaganda, and 200 privately-owned news channels parroting government-speak (or sometimes election campaign-speak), using not only exactly the same talking points, but often even the same words and phrases? The latter is actually the more powerful form of control due to the illusion of choice and freedom.

Of course, I am thankful for the Internet and fringe channels which still provide alternative avenues for independent inquiry by curious minds. But in the real world, doesn’t a large majority get its world-view from the medium of their choice? In a sort of circular relationship, most of us go to news sources which we believe would reinforce or validate our preconceived notions, and then allow these sources to cement those notions. Ask a random person in the street a question about any of the major issues, and there’s a good chance that (s)he will repeat, word for word, the commentary of the so-called analysts from his/her favorite channel.

Fox News has often been made the punching bag for media-bias, but the truth is that there is a reason it came into existence and became popular in the first instance. While it is fashionable to say that “reality has a liberal bias” or “mainstream media doesn’t have a liberal bias; it has a ratings bias”, it cannot, in good conscience, be denied that a majority of mainstream-media professionals have liberal leanings and that probably had an influence on the editorializing, at least till the time Fox News came into existence. There was an underserved market, and Murdoch was astute enough to identify and fulfill that need, making the channel so popular. I would have thanked God for Fox News to show us the other side of the picture.

The problem with Fox News is not that it has a conservative bias, or that it claims not to have a bias in spite of that, but that it lacks credibility – one cannot be sure that they will adhere to any levels of journalistic integrity. Spin, in terms of perspective on facts is fine, but the problem arises when someone starts misrepresenting facts or outright lying. Fox’s big hitters are Bull O’Reilly (2 Peabody awards etc), Sean Hannity (Harlem school vouchers etc etc), and Ann Coulter (NYT & Daytona etc etc etc etc). Now NYT has had its share of liars, but at that organization, that sort of thing gets you fired.

(Not that MSNBC is far superior in putting a sportscaster pretending to be a journalist in its “chief analyst” chair)

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