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Capitalism   Leave a comment

The basic mythos of capitalism is that it is a form of morally acceptable elitism because it’s meritocratic.

The reality is that it is not particularly meritocratic, and as such the elitism it generates it’s not, in fact, particularly moral by any popular ethical standard.  Here’s why: capital means money that is not doing anything in particular at the moment.   The standard explanation is that the capitalist gives up his money into the creation of a factory or a new business, and he is paid more than he put into pay him for the service risking his capital.  The more the capitalist is willing to risk, the more he can get back.

The problem with that kind of thinking is that risk has both likelihood and magnitude, and both aspects matter.  Let’s say you have a disease and your doctor offers you two treatments. Treatment 1 has a 10% risk of failure.  Treatment 2 has 1% risk of failure.  If you only look at likelihood then obviously you take treatment 2.  But what about magnitude?  Let’s say that the magnitude of failure in treatment 1 is losing a finger, and the magnitude of failure in treatment 2 is death.  Now, which one do you want?  Comparisons of this type are not nearly as unusual as you might think, and are, in fact, why nuclear power vs other forms is a contentious issue.   The risk of catastrophic failure might only be 0.001%, but the magnitude (increased mortality over decades and/or centuries, mass relocation, hundreds of thousands of square kilometers of land unfit for human habitation, etc.) makes one pause.

The first reason that capital is not particularly meritocratic is that the capitalists magnitude of risk is virtually nonexistent.  Magnitude is an objective, not subjective measure.  Human want may be an endless well, but human physical and social needs are actually fairly small in number, well defined, and well understood.   More is only better up to a point, and we can clearly graph out a curve of more everything, more space, more money, more electricity, more food, more medicine, etc. for a whole society and we can see where the curve starts to flatten out. For sake of convenience, I will us the US number:  about 40,000 USD for the median family.  You can certainly have more, but that is the point where the curve of more increasing quality of life by objective measures starts to flatten out noticeably.

Until a capitalist is risking his ability to pull in $40K a year, he has virtually no risk whatsoever.  The difference between going from point A to point B in Bentley versus a Chevy exists only in the mind of the driver, as transport rather than status symbols, both cars do exactly the same thing.   If a capitalist has a nest egg capable of providing a family income of $40k a year, every need he and his family has can been afforded without ever working a day.  On average a large fund can payout 5% and still leave a lot behind to grow for next year.  A million dollars may not be what it used to be, but it still affords everything a person actually needs on interest alone.  So what if you have 10 million dollars?  You can “risk” 9 million dollars.  I say risk in irony/scare quotes because you aren’t actually risking anything thing.   In in the real, functional terms human need, the elite risk nothing.  Of course, the more elite you are, the more ridiculous it becomes.  Bill Gates was once valued at 50 Billion dollars.  Remember it takes about assets of a million year to have a risk free/work free lifestyle.  He could invest 99.99998% of income before he was under any functional risk whatsoever.   (Where as a Wal-Mart employee making $30,000 risks virtually everything to switch jobs.  Their home, their nutriton, their health care.  Everything.)

The second reason is that Bill Gates not withstanding, most people don’t become millionaires from their work.  They inherit it. Since ability to tolerate risk is the ability to generate new wealth, they acquire the ability to make more money not by work, but by being born into a rich family.  Acquiring the ability to advance in society by birth rather than hard work is only meritocratic if you believe in the divine right of kings.

The third reason is that outside economic textbooks, very little investing is actually done by individual investors.  The bulk of investing is done by institutions. Savings bonds might pay only few percent, but 10 million dollar blocks of treasury bills (the lowest risk investment on the planet earth) often pay around 10%…or 2%-4% than the 100 year average of the stock market, so the risk is actually very minimal to those who can afford the highest risk.

The forth reason is that hard work alone gets you nothing.  If hard work generated wealth, than pre-civil war slaves should have been the wealthiest Americans there ever were.  Another logical point would be if that hard work generated wealth, then the least hardworking should be the poorest…yet because of the first three reasons, the rich get richer even if they do nothing.  In fact, since spending is “doing something” the will get richer much faster if they do nothing.

The fifth reason expands on the fourth.  You have to work at what society rewards, not just work hard.  Like the slaves in the fourth example, brain surgeons don’t make 1/1000th the income of bank CEOs because there is a law that says they must, but because there is no law that says they mustn’t.  A further point on this is that fact that some of the things society needs most, teachers for instance, are some of the lowest paid employees on earth.

All this enforces a single point: capitalism, as practiced, isn’t about meritocracy; its about elitism.  There is actually a pretty simply mathematical explanation for this. Remember that because of his imaginary risk the capitalist must make a return on his money, called profit.  The cost breakdown of every product must look like this: material cost + labor cost + profit.   Let us say the material cost is basically the same worldwide.  While shipment costs and refinement costs can create minor variances in material cost, they don’t matter as much as you think.  The transport costs in any given market will be virtually identical, and refinement cost reductions are do to two major issues: intelectual property and scalability.  Intelectual property will be shared within 7 years for patents and 70 years for software, so those costs tend to stabilize.  If scalability is a large issue then rapidly 1-3 producers will own the entire market, the cost between them will be identical.  That means the only two costs we have to worry about are labor cost and profit, but the important point it leads us to is that product cost must always be greater than labor costs that went into it, the “+profit” aspect.    That means that, all other things being equal, people who make a product cannot afford it.  

It only appears capitalism works because economies of scale work, and the factories produce vastly more than the market that produced it can bear.  This why capitalist must open up new markets constantly, and is the explanation of both imperialism and consumerism but also issues like urban sprawl and planned obsolescence.

Posted April 18, 2012 by israelkwalker in Philosophy, Politics, Skepticism, Uncategorized

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