Capitalism is a Tool

Free market capitalism is awesome. But capitalism is a tool. Arguing about whether it is universally better than some other tool (socialism, communism, restricted capitalism, etc.) is as foolish as arguing about whether a hammer is a universally better than a screwdriver. The more relevant question is when it is appropriate (or in what form). Capitalism works fantastically well with a few conditions that create incentives that drive all parties to make decisions that benefit everyone:
1. Consumers have the ability to make a rational choice about what to consume.
2. Consumers have the freedom to choose between different products or services, creating competition that drives producers towards better value.
3. Demand drives producers to increase supply, benefiting consumers.
4. Consumers inability to afford a product/service does not represent an ethical violation.

When these conditions are present, capitalism generally contributes to a flourishing and just economies. For example with cars, consumers can easily research and test drive car to make a rational choice, they can choose between different makers and models, the demand pushes auto makers towards building more cars and increasing availability, and in general their is no basic inviolable human right to having a vehicle. This is a win-win situation, incentives benefit both producers and consumers in an relatively fair and accurate way that generally generates high and robust growth and production. Capitalism was integral in the industrial revolution were many growing sectors matched these conditions and showcased the benefits of capitalism in spectacular fashion.

However, if any of these conditions are missing, the effects can be negative. When a condition is missing, an otherwise free market may actually create perverse incentives rather than beneficial incentives. For example, when a monopoly occurs, consumers no longer have freedom, thus anti-competition laws are enforced. While many economic sectors fulfill these conditions, it is naive to assume that all do.

Education is sector where there is general consensus that it is ethically unacceptable to deny some children education due to economic circumstances (especially since such circumstances are usually beyond the control of the children). While a free market still exists with private education, allowing consumers to choose potentially superior services, this sector is supplemented with a public social structure because the ethical condition of capitalism is not fully realized. It is not appropriate to apply it as the only tool, thereby denying some children access to education.

Health care is a sector where consumers intrinsically fall short of rational and free choice. Some services are rendered in distress or emergency where there is little opportunity for research or alternatives. Other choices are made by specialists where the buyer isn’t involved (there isn’t a budget/value force towards low-price) or doesn’t understand the options enough to participate. Decisions also involved short-term vs long-term benefits where humans are notoriously poor at make rational decisions (we tend to choose short-term gains with little concern for long-term). Also insurance plays a buffering role further removing the consumer from direct value-based decisions. With these conditions for capitalism missing, perverse incentives are present, motivating increasing health care costs rather than reduction in costs. Predominantly privatized health care has struggled to produce good value (compared to government provided universal health care), not because capitalism doesn’t work, but because the conditions for capitalism simply do not exist (and it’s unlikely that they can be forced to exist) in health care. This is blatantly evident with the US health care system, one of the few developed countries still languishing with a privatized model. The US spends vastly more than any other country on health care, costs are rapidly increasing (since incentives are driving prices up instead of down), to the point where statisticians use it as an example of statistical outlier. In fact the US government spends more on our privatized health care (where the majority of expenditures are private), than do countries with universal health care (where the goverment covers the majority of costs), all while we have shorter life spans and higher mortality rates than most other developed countries. Finally, the health care also fails to meet the ethical condition. Denying basic health services due economic circumstances is a moral failure, even if the system was working efficiently.

Computers and the Internet are also creating situations where the demand-driven supply condition is started to evaporate in certain sectors. An example of this is the music industry. Duplication of music (and other products like software) has effectively reached zero-effort. This means that supply can be almost infinite as soon as music is recorded, as it can be distributed with no virtually effort from the producer. Consequently, perverse incentives are present, leading the music industry to create arbitrary constraints (DRM). With the absence of this condition for capitalism, the music industry is incentivized to create demand by reducing/constraining supply (a negative utility to society), rather than working to increase supply (benefitting society). The solution probably is not socialize the music industry, but we should acknowledge the suboptimal efficiency, and recognize that alternate post-capitalistic models may need to be exercised (and perhaps are already being used, many artists have opted for more of a gift economic approach ).

Of course there will be legitimate disagreements on the degree and type of different economic models needed in different sectors, but we should at a least start with the right question. We must start with a proper perspective of economic models as tools, not sacred institutions, that can be applied in differing degrees in different situations, rather than falling for simplistic overarching false dichotomies. Rather than leaning on our assumptions, the question of what tool to use should be driven by pragmatic look at works for the situation.


Gratefulness and Gas

A gallon of gas contains 130 million Joules of energy, equivalent to the energy of lifting a man from sea level to the top of Mt Everest about 15 times, or 31,000 Calories, and equivalent to about two weeks worth of food. Being able to purchase something with this much energy for less than $30 is incredible and something that we should be extremely grateful for, and we may not always enjoy.

The price of gas is based on simple global supply and demand. Gas comes from oil, which is a fungible resource readily interchangeable on the global market. Supply is dominated by OPEC. The US portion of the supply is very small, it currently produces around 8% of global oil, and holds only 1.5-2% of global reserves (there are some debates on extents of provable reserves, so it is possible we have up to a percentage point higher). On the otherhand, the US provides a significant part of the demand (25% of global demand), thus the US’s primary influence on prices is in demand. Economic recession decreases activity thus decreasing demand and prices, economic growth increases prices. If you don’t like prices, just like any other commodity, the recourse is it to not buy. If you are a buyer you are a participant in demand.

There are a few other contributions to gas prices that either small, regional, short-term. One is the gas tax. George H.W. Bush raised the federal gas tax to 18.4 cents per gallon in 1993, and it has remained at the level ever since. This tax represented about 14% of the price of gas under (the first) Bush. With current gas prices, this federal tax now only constitutes about 5% of the price of gas. The gas tax under the Obama administration is also at the lowest amount in constant dollars in over two decades. This is also one of the smartest taxes that we have since it not only improves roads, but incentivizes lower consumption better than any MPG mandates can (I would love to see it increased). Oil futures and trading affects price, but this too has minimal long-term impacts, and can help cope with supply fluctuations. Like other global products, inflation and exchange rates affect the current price, but the last few years have seen lower than average inflation and a general strengthening of the dollar against other currencies. Finally, there are different state and local taxes, and different regional requirements on the quality gas, and different transportation costs due to proximity to refineries and sources of production, and these are the primary drivers of the differences in gas prices in different locales, but this isn’t related to the overall country gas price trends. For each of these factors the federal government has little control or avoided any price increasing policy changes.

To grumble about prices and make it political is generally either ignorant (the principle way the US reduces prices is through economic recession), or manipulative. Drilling or pipelining more has a negligible affect on global supply. And the US is depleting it’s proven reserves at least 4-5 faster than most countries in the world, drilling faster now as way to avoid foreign dependence on oil just shifts even greatere dependence to our next generation. As one concerned for children’s future, I don’t want to dump them further them into the dead end of oil addiction.

Specifically the supposed benefits of the Keystone pipeline towards lowering prices are particularly vacuous, pipeline don’t produce oil, they just move it around, and as many have pointed out, it will move oil to the gulf for easier export, making it likely to actually slightly increase gas prices in the midwest. The real question in regards to Keystone is simply the ethics of increasing efficiency of tar sand based oil transportation versus the ecological impact.

In reality, increased gas prices are basically due to increased economic activity and recovery (the dominant supply factors are mostly out of our control), increased spring/summer driving, and supply concerns with possible conflict in Iran. The primary effect America has had is in economic recovery (and possibly we’ve played a part in some short-term supply concerns by threatening military action against Iran). You can’t eat your recovery and have your cheap oil too.

When it comes to amazing amount of convenient energy in we can buy in a gallon gas, gratefulness is a better attitude than complaining and reduced usage is a better response than political manipulation.

Kony 2012

A few thoughts from watching Kony 2012: This is an awesome and inspirational video and awesome cause worth fighting for. It is fantastic to see attention brought to tragic foreign issues that affect humanity beyond what just impacts our own self-interests. I know there have been criticisms of Invisible Children, but from what I have seen they have done a great job of responding to critiques and disclosing financial and operational information. They are definitely in it to end this injustice.

However, hopefully we don’t end with Kony. Kony and the LRA are just the tip of the iceberg of global injustices. What Invisible Children has courageously demonstrated is a willingness to learn and expose injustices that have been hidden, and speak out about them. We are not truly following in their footsteps if all we do is share or watch a viral video. And it is shallow pursuit of justice if we only react when there is a clear villian we can point our finger at. One of the criticisms of the film is that it oversimplifies the issue, but in reality this should be a criticism of us, and the fact that we often won’t respond to any issue that is more complicated than what a five year old can digest, even for injustices they have claimed far more lives than Kony. Simplification is just what IC had to do to connect with us (and obviously it worked).

Anyway, let’s follow Invisible Children’s lead. Let’s stop Kony. Our voices do indeed matter, and make a real difference. And let’s not stop there, let’s follow their lead in truly learning about other injustices and making our voices heard. And we can indeed reshape human history, both in Uganda and in the rest of the world.

“Where you live should not determine whether you live… At the end of my life I want to say that the world we left behind is one [my child] can be proud of… A place where children no matter where they live, have a childhood free from fear.” – Jason Russell (cofounder of IC)