Tuesday, August 16, 2011
Monday, August 15, 2011
Game Theory and Warren Buffett
Warren Buffett wrote in the New York Times today advocating for a higher tax burden on the mega-rich. Initially reactions seem to have divided along partisan lines--Democrats are praising Buffett for his courage, while Republicans are berating him for his cowardice. The Republican argument follows that if Buffett really thinks the mega-rich should be paying more in taxes, he would simply write a check for the difference in his current tax rate and what he believes is appropriate. This simple moral argument appears to have numerous supporters, as demonstrated by this slightly older piece by Gregg Easterbrook. There is a problem with Easterbrook's logic, however. He assumes that by voluntarily paying more in taxes, any rich person who advocates for higher taxes would appear more sincere and that this would lead to an appropriate increase in taxes being raised by law.
I'm personally at a loss as to why Easterbook thinks voluntarily payments by wealthy individuals would make a Congress more likely to raise taxes on the rich. Perhaps he believes that Congress will feel guilty and "do the right thing." This view of Congress is so painfully naive that I can't imagine this to be Easterbrook's argument. It resembles evil Disney villains who realize the error of their ways only in the humbling light of the sweetness and light that is the Disney hero. This is not an American Congress.
The fact of the matter is that Easterbrook is not truly considering how Congress operates. He is simply calling into question the sincerity of President Obama, Bill Gates, Warren Buffett, and any other wealthy person who might advocate for a tax increase on their own tax bracket in an attempt to discredit their position. Easterbrook hardly touches on the merits of such an increase (he seems to indicates it's a necessary along with other measures, but that point is certainly muddled among all the ad hominem attacks on these men), and he relies on incorrect notions of how individuals affect social decisions to come to his bizarre conclusion that unless Obama, Gates, Buffett, and other start voluntarily paying more in taxes, our deficit problem will get worse.
It is worth examining what effect, if any, the voluntary payment of excess taxes would have on society. Mathematically we have tools to do just that. The field of game theory provides the means to model the effect of individual behavior on the behavior of a group, and simple game theory models provide some insight on Easterbrook's erroneous conclusion.
In game theory, a matrix of possible outcomes based on each individual's decision is constructed and a weight is assigned to each outcome to allow for the maximization of "utility." Without going into too much detail about the nature of game theory, some simple examples can be used to approximate various scenarios of voluntary excess tax payments by individuals in society. For the first example, let's assume the total relevant population consists of Warren Buffet, whom we will simply call "Mr. A," and one other super-rich person who doesn't share his views, whom we will call "Mr. B." In this scenario, Mr. A would like for everyone to pay $500 more in taxes. These tax dollars will then be used for the benefit of the total population (n=2 in this scenario). The resulting matrix of outcomes looks like this:
B's choices
pay more don't pay more
A's choices
pay more -$500, -$500 -$500, -$0
+$500,+$500 +$250, +$250
Totals: $0 , $0 -$250, $250
don't pay -$0, -$500 - $0, -$0
more +$250, +$250 +$0, +$0
Totals: $250, -$250 $0, $0
The first line of each cell is the individual costs of their decision. -$500, -$500 indicates that Mr. A and Mr. B chose to pay $500 more in taxes in the top left cell. The second line of each cell is the benefit received in the form of government services due to the increase in voluntary taxes paid. +$500, +$500 indicates that each individual gains $500 in extra government services. The totals line indicates the combined cost in additional taxes as well as the individual increase in benefits. Mr. B's motivation is to maximize his personal total gain in the matrix. To calculate this, we must simply find the cell(s) with the largest total benefit for Mr. B, which is the second entry in each cell. Looking at our outcome matrix, we see that Mr. B maximizes his personal benefit in the top right cell. This means that Mr. B is hoping for Mr. A to voluntarily pay more, while he pays nothing extra.
Mr. A has chosen to pay additional taxes because he believes, similarly to Mr. Easterbrook, that by doing so, this will lead to Mr. B paying more in additional taxes. However, Mr. B considers the graph above and wants to maximize his personal gain, therefore he pays nothing extra. This results in a personal gain of $250 for him, the best he can hope for under any circumstance.
After paying extra taxes, Mr. A is now angry that Mr. B did not follow suit. Therefore, Mr. A now STOPS paying additional taxes the next year. Mr. B, always looking to maximize his personal benefit, goes back to the outcome matrix. He can still choice to pay more, but why would he? This results in a total loss of $250. His best move is to simply continue to pay no additional taxes. Now, however, he simply maintains the status quo and no one gains anything. As it turns out, Mr. A cannot persuade Mr. B to pay additional taxes by paying more taxes in this overly simplistic scenario.
Having gone through that tedious exercise, now let's expand the model. Let's include a "Congress" and a federal deficit of $1,000. Mr. A and Mr. B will continue to be the only taxpayers though. In this scenario, Congress must come up with an additional $1,000, but they are reluctant. Mr. A decides to pay an additional $500 in taxes hoping that this will persuade Congress to raise the rates on everyone. Because we have introduced a deficit, our matrix now has no additional government benefits, and the total benefit for each individual is now equal to the individual cost only, or the top line in each cell of our matrix. What happens now?
After Mr. A pays his additional $500, Mr. B must decide what maximizes his personal gain. It still appears that paying no additional taxes is his best bet. Here's where the analysis gets tricky. Congress now has a deficit of only $500. Congress must raise the base tax rate only enough to collect $500 total. Therefore, Congress raises taxes on both Mr. A and Mr. B by $250 each. Mr. A is now pissed! He wanted taxes to be raised by $500 each! Therefore, he stops making an additional voluntary payments after Congress raises taxes by the lesser amount. Only then does Congress have the need to raise taxes again to the full amount Mr. A thought was appropriate. Mr. A could have continued to pay an additional $500 to balance the federal budget, but then he's paying $750 more than the original base, while Mr. B is only paying $250. This is not what Mr. A wants.
In fact, the only way that Mr. A can have Congress raise the tax rate to the amount he wants is to not pay any additional taxes. Until Mr. A stops paying additional taxes, Congress will never have the incentive to completely raise the tax rate for everyone. The rational decision for Mr. A then becomes simple. His best decision to maximize personal benefit and eliminate the federal deficit in our model is to never pay voluntary additional taxes in the first place so that Congress must raise the tax rate by the full amount.
While this model is overly simplistic, the logic holds in larger, more complex scenarios like the one addressed in Mr. Buffett's article. By paying additional taxes voluntarily, Mr. Buffett and all the mega-rich who think like him would be creating a disincentive to Congress to fully accomplish their goal. Paying extra actually acts as a hindrance to their goal, and the rational conclusion is to never pay additional taxes voluntarily. With that being said, Mr. Easterbrook is simply wrong.
I'm personally at a loss as to why Easterbook thinks voluntarily payments by wealthy individuals would make a Congress more likely to raise taxes on the rich. Perhaps he believes that Congress will feel guilty and "do the right thing." This view of Congress is so painfully naive that I can't imagine this to be Easterbrook's argument. It resembles evil Disney villains who realize the error of their ways only in the humbling light of the sweetness and light that is the Disney hero. This is not an American Congress.
The fact of the matter is that Easterbrook is not truly considering how Congress operates. He is simply calling into question the sincerity of President Obama, Bill Gates, Warren Buffett, and any other wealthy person who might advocate for a tax increase on their own tax bracket in an attempt to discredit their position. Easterbrook hardly touches on the merits of such an increase (he seems to indicates it's a necessary along with other measures, but that point is certainly muddled among all the ad hominem attacks on these men), and he relies on incorrect notions of how individuals affect social decisions to come to his bizarre conclusion that unless Obama, Gates, Buffett, and other start voluntarily paying more in taxes, our deficit problem will get worse.
It is worth examining what effect, if any, the voluntary payment of excess taxes would have on society. Mathematically we have tools to do just that. The field of game theory provides the means to model the effect of individual behavior on the behavior of a group, and simple game theory models provide some insight on Easterbrook's erroneous conclusion.
In game theory, a matrix of possible outcomes based on each individual's decision is constructed and a weight is assigned to each outcome to allow for the maximization of "utility." Without going into too much detail about the nature of game theory, some simple examples can be used to approximate various scenarios of voluntary excess tax payments by individuals in society. For the first example, let's assume the total relevant population consists of Warren Buffet, whom we will simply call "Mr. A," and one other super-rich person who doesn't share his views, whom we will call "Mr. B." In this scenario, Mr. A would like for everyone to pay $500 more in taxes. These tax dollars will then be used for the benefit of the total population (n=2 in this scenario). The resulting matrix of outcomes looks like this:
B's choices
pay more don't pay more
A's choices
pay more -$500, -$500 -$500, -$0
+$500,+$500 +$250, +$250
Totals: $0 , $0 -$250, $250
don't pay -$0, -$500 - $0, -$0
more +$250, +$250 +$0, +$0
Totals: $250, -$250 $0, $0
The first line of each cell is the individual costs of their decision. -$500, -$500 indicates that Mr. A and Mr. B chose to pay $500 more in taxes in the top left cell. The second line of each cell is the benefit received in the form of government services due to the increase in voluntary taxes paid. +$500, +$500 indicates that each individual gains $500 in extra government services. The totals line indicates the combined cost in additional taxes as well as the individual increase in benefits. Mr. B's motivation is to maximize his personal total gain in the matrix. To calculate this, we must simply find the cell(s) with the largest total benefit for Mr. B, which is the second entry in each cell. Looking at our outcome matrix, we see that Mr. B maximizes his personal benefit in the top right cell. This means that Mr. B is hoping for Mr. A to voluntarily pay more, while he pays nothing extra.
Mr. A has chosen to pay additional taxes because he believes, similarly to Mr. Easterbrook, that by doing so, this will lead to Mr. B paying more in additional taxes. However, Mr. B considers the graph above and wants to maximize his personal gain, therefore he pays nothing extra. This results in a personal gain of $250 for him, the best he can hope for under any circumstance.
After paying extra taxes, Mr. A is now angry that Mr. B did not follow suit. Therefore, Mr. A now STOPS paying additional taxes the next year. Mr. B, always looking to maximize his personal benefit, goes back to the outcome matrix. He can still choice to pay more, but why would he? This results in a total loss of $250. His best move is to simply continue to pay no additional taxes. Now, however, he simply maintains the status quo and no one gains anything. As it turns out, Mr. A cannot persuade Mr. B to pay additional taxes by paying more taxes in this overly simplistic scenario.
Having gone through that tedious exercise, now let's expand the model. Let's include a "Congress" and a federal deficit of $1,000. Mr. A and Mr. B will continue to be the only taxpayers though. In this scenario, Congress must come up with an additional $1,000, but they are reluctant. Mr. A decides to pay an additional $500 in taxes hoping that this will persuade Congress to raise the rates on everyone. Because we have introduced a deficit, our matrix now has no additional government benefits, and the total benefit for each individual is now equal to the individual cost only, or the top line in each cell of our matrix. What happens now?
After Mr. A pays his additional $500, Mr. B must decide what maximizes his personal gain. It still appears that paying no additional taxes is his best bet. Here's where the analysis gets tricky. Congress now has a deficit of only $500. Congress must raise the base tax rate only enough to collect $500 total. Therefore, Congress raises taxes on both Mr. A and Mr. B by $250 each. Mr. A is now pissed! He wanted taxes to be raised by $500 each! Therefore, he stops making an additional voluntary payments after Congress raises taxes by the lesser amount. Only then does Congress have the need to raise taxes again to the full amount Mr. A thought was appropriate. Mr. A could have continued to pay an additional $500 to balance the federal budget, but then he's paying $750 more than the original base, while Mr. B is only paying $250. This is not what Mr. A wants.
In fact, the only way that Mr. A can have Congress raise the tax rate to the amount he wants is to not pay any additional taxes. Until Mr. A stops paying additional taxes, Congress will never have the incentive to completely raise the tax rate for everyone. The rational decision for Mr. A then becomes simple. His best decision to maximize personal benefit and eliminate the federal deficit in our model is to never pay voluntary additional taxes in the first place so that Congress must raise the tax rate by the full amount.
While this model is overly simplistic, the logic holds in larger, more complex scenarios like the one addressed in Mr. Buffett's article. By paying additional taxes voluntarily, Mr. Buffett and all the mega-rich who think like him would be creating a disincentive to Congress to fully accomplish their goal. Paying extra actually acts as a hindrance to their goal, and the rational conclusion is to never pay additional taxes voluntarily. With that being said, Mr. Easterbrook is simply wrong.
Sunday, August 14, 2011
Suggestions Welcome
Is there a specific issue in American economics or politics that you would like to read more about? Feel free to leave a comment with a question or suggestion for future posts. If it's something I don't know much about, I'm happy to learn more! And it may just be a topic that I have already planned to discuss, so let me know and I'll do my best to accommodate you.
Saturday, August 13, 2011
The Federal Reserve System
While most Americans are likely aware of the existence of the Federal Reserve System, few can accurately describe the structure and role of this immensely powerful organization. It is our central bank, acting as the "banks' bank." It determines our monetary policy. It even issues our currency that we carry in our wallet. The power that this organization wields leads many to believe that it is part of a master conspiracy, evil in design, and a detriment to our society. In reality, the Federal Reserve System is a complex entity composed of public and private interests and decentralized throughout the country. The specific structure and design of the Federal Reserve System is worth exploring, as it is uniquely American and exceedingly socially capitalistic.
The Federal Reserve System is not America's first central bank. In fact, it's not even the second. Agrarian interests and a national fear of centralized power brought to an end our first two central banking systems. The Federal Reserve Act of 1913 created the Federal Reserve System as we know it, and the tensions of American politics left clear fingerprints on the design. Because Americans have typically feared large, centralized institutions removed from much of the nation by thousands of miles, the Federal Reserve Act created twelve regional banks to decentralize the power of the central bank and to ensure a distribution of oversight across regional lines. Additionally, these banks were established as quasi-public institutions. Thus, ownership of the banks is shared between the federal government and the private commercial member banks in each district. By dividing the bank into twelve regional banks that are mutually owned by the government and private banks, power was divided between the public and private sector and further distributed throughout the country.
It would have been possible to stop with the regional distribution of the banks and the quasi-public ownership to ensure a reasonable distribution of power, but the Federal Reserve Act went further. A Board of Governors was established to oversee the activities of the banks. The Board is composed of seven members appointed by the President and confirmed by the Senate. However, once appointed, the Board of Governors has tremendous autonomy from the government as they are appointed to long fourteen year terms. The appointment by the President reflects the public need for input into the leadership of the bank. The fourteen year terms, however, insulate the Board from political pressure and allow for long-term decision making.
For each regional bank, another layer of hybrid oversight was established. The twelve regional banks each are headed by nine directors. Six of these directors are elected by the (private) member banks of the Federal Reserve System. The remaining three directors are appointed by the Board of Governors. Of these nine directors, there are three categories of directors: A, B, and C. The three A directors are professional bankers and are elected by the member banks. The three B directors, also elected by the member banks, are chosen from private industry, labor, agriculture, or consumer organizations. The three C directors are the appointees from the Board of Governors, and they are prohibited from being an officer, employee, or stockholder of any bank. The nine directors determine the president and officers of each bank. This complex mix of public and private election and appointment that mixes bankers, industrialists, and public advocates adds one more layer to the checks and balances of the entire Federal Reserve System.
Although the Federal Reserve System created twelve banks, there is still a need for a centralized component of the system that handles specific monetary policy decisions. Therefore, the Federal Reserve System also has the Federal Open Market Committee (FOMC). When you read about actions of the "Fed" in the news, it is likely that you are reading about the specific actions of the FOMC. The FOMC makes decisions that influence interest rates and the money supply, so their decisions receive much more attention than the actions of the individual regional banks. The FOMC includes the seven members of the Board of Governors, as well as five presidents of the regional banks. The president of the New York Federal Reserve Bank is always a voting member of the FOMC to reflect New York's unique position in the financial industry. The remaining four presidents are determined on a rotating basis among the remaining eleven regional banks. However, when the FOMC meets, all regional presidents attend. Only the current voting members have voting rights on decisions. This allows for input from all regional members, but restricts final decisions to a limited body.
Contemplate for a moment the complex consideration of various interests that went into the design of our central bank. Regional distribution provides decentralized control. The Board of Governors are appointed by the President, but still insulated from politics due to their long appointments. The directors of each regional bank are composed of bankers, leaders of industry, and public advocates to distribute power among the finance sector, non-finance sectors, and the general public. Finally, the FOMC represents both the public appointees of the Board of Governors as well as regional presidents appointed by the nine directors of each bank. The alchemical mix of capitalism and social protection expressed in this uniquely American institution is truly marvelous in design and execution.
The individuals that serve in the various roles of the Federal Reserve System are still fallible. Improvements to the structure of the system will likely occur over time. However, the values expressed in the design of our central bank are clear. Our preeminent capitalist institution shows a careful weighing of regional and social values. There is no clearer proof that we are, in fact, a social capitalist nation.
The Federal Reserve System is not America's first central bank. In fact, it's not even the second. Agrarian interests and a national fear of centralized power brought to an end our first two central banking systems. The Federal Reserve Act of 1913 created the Federal Reserve System as we know it, and the tensions of American politics left clear fingerprints on the design. Because Americans have typically feared large, centralized institutions removed from much of the nation by thousands of miles, the Federal Reserve Act created twelve regional banks to decentralize the power of the central bank and to ensure a distribution of oversight across regional lines. Additionally, these banks were established as quasi-public institutions. Thus, ownership of the banks is shared between the federal government and the private commercial member banks in each district. By dividing the bank into twelve regional banks that are mutually owned by the government and private banks, power was divided between the public and private sector and further distributed throughout the country.
It would have been possible to stop with the regional distribution of the banks and the quasi-public ownership to ensure a reasonable distribution of power, but the Federal Reserve Act went further. A Board of Governors was established to oversee the activities of the banks. The Board is composed of seven members appointed by the President and confirmed by the Senate. However, once appointed, the Board of Governors has tremendous autonomy from the government as they are appointed to long fourteen year terms. The appointment by the President reflects the public need for input into the leadership of the bank. The fourteen year terms, however, insulate the Board from political pressure and allow for long-term decision making.
For each regional bank, another layer of hybrid oversight was established. The twelve regional banks each are headed by nine directors. Six of these directors are elected by the (private) member banks of the Federal Reserve System. The remaining three directors are appointed by the Board of Governors. Of these nine directors, there are three categories of directors: A, B, and C. The three A directors are professional bankers and are elected by the member banks. The three B directors, also elected by the member banks, are chosen from private industry, labor, agriculture, or consumer organizations. The three C directors are the appointees from the Board of Governors, and they are prohibited from being an officer, employee, or stockholder of any bank. The nine directors determine the president and officers of each bank. This complex mix of public and private election and appointment that mixes bankers, industrialists, and public advocates adds one more layer to the checks and balances of the entire Federal Reserve System.
Although the Federal Reserve System created twelve banks, there is still a need for a centralized component of the system that handles specific monetary policy decisions. Therefore, the Federal Reserve System also has the Federal Open Market Committee (FOMC). When you read about actions of the "Fed" in the news, it is likely that you are reading about the specific actions of the FOMC. The FOMC makes decisions that influence interest rates and the money supply, so their decisions receive much more attention than the actions of the individual regional banks. The FOMC includes the seven members of the Board of Governors, as well as five presidents of the regional banks. The president of the New York Federal Reserve Bank is always a voting member of the FOMC to reflect New York's unique position in the financial industry. The remaining four presidents are determined on a rotating basis among the remaining eleven regional banks. However, when the FOMC meets, all regional presidents attend. Only the current voting members have voting rights on decisions. This allows for input from all regional members, but restricts final decisions to a limited body.
Contemplate for a moment the complex consideration of various interests that went into the design of our central bank. Regional distribution provides decentralized control. The Board of Governors are appointed by the President, but still insulated from politics due to their long appointments. The directors of each regional bank are composed of bankers, leaders of industry, and public advocates to distribute power among the finance sector, non-finance sectors, and the general public. Finally, the FOMC represents both the public appointees of the Board of Governors as well as regional presidents appointed by the nine directors of each bank. The alchemical mix of capitalism and social protection expressed in this uniquely American institution is truly marvelous in design and execution.
The individuals that serve in the various roles of the Federal Reserve System are still fallible. Improvements to the structure of the system will likely occur over time. However, the values expressed in the design of our central bank are clear. Our preeminent capitalist institution shows a careful weighing of regional and social values. There is no clearer proof that we are, in fact, a social capitalist nation.
Risky Business
One of the basic concepts of capitalism is that of risk. Investors must decide if they are willing to possibly lose their money in return for possibly making money. Increasing risk means that the potential profits are increased, but the probability of losing everything increases as well. The financial services industry makes billions every year performing risk management for their clients, and when performed correctly, this is a boon for society. This is one of capitalism's many virtues.
In a corporate setting, one of the many risk factors that must be weighed is leverage. Leverage is simply the amount of money a corporation borrows to conduct their ongoing operations. By borrowing money, a corporation is inherently increasing the risk for investors. Here's why:
Suppose you are an investor with $100,000. You have determined that you are going to use this money to begin a business called "Acme Industries." When this company begins operations, it has $100,000 to work with. This money is used to create metal anvils. After one year, the company makes a profit of $20,000. $20,000/$100,000=20%, a tidy return. What would have happened if the business did not do so well, though? Suppose that the business loses $20,000. -$20,000/$100,000=-20%, an unfortunate, but not catastrophic, loss. A mathematical analysis of these possible outcomes is how we measure risk.
Let's re-examine the same scenario, but now we are going to introduce leverage. Instead of simply using your $100,000 to start a business, you are now going to ask a bank loan for a loan. The bank lends you $90,000 so that you can start your business. You still invest $10,000 of your own money. $10,000 equity +$90,000 =$100,000. You happily march off to start Acme Industries.
What happens under our two scenarios now? Under our profitable scenario, the business earned a $20,000 profit. However, you now have only invested $10,000 to earn this money. $20,000/$10,000=200% return. This is awesome! But what about the negative scenario? The loss of $20,000 is now catastrophic. Because you only invested $10,000 to begin with, this money is now gone. Moreover, you now owe the bank $90,000, but the business only has $80,000 left to repay them! The bank will likely call the loan to recoup what money they can before you lose even more. The business closes, your employees are laid off, but at least you have your $90,000 that you never invested!
This example is similar to many that you might find in a basic finance textbook. However, there is a problem with the basic reward structure implied by this capitalist model. Note that the investor/owner is able to completely dictate the level of risk to meet his/her investment goals. However, the downside risk of his/her decisions is shared with his employees. The effects of leverage have definite ramifications on the future cash flows of the employees as they may lose their jobs if the business fails, yet they are not inherently rewarded for any increase in risk. This point will undoubtedly not be accepted by traditional capitalists, but it is an argument I am willing to have. While wages have remained stagnant for decades, investor wealth has soared. Leverage has played a large part in these wealth gains, and because there is an element of risk sharing, there should be an element of reward sharing as well.
In a corporate setting, one of the many risk factors that must be weighed is leverage. Leverage is simply the amount of money a corporation borrows to conduct their ongoing operations. By borrowing money, a corporation is inherently increasing the risk for investors. Here's why:
Suppose you are an investor with $100,000. You have determined that you are going to use this money to begin a business called "Acme Industries." When this company begins operations, it has $100,000 to work with. This money is used to create metal anvils. After one year, the company makes a profit of $20,000. $20,000/$100,000=20%, a tidy return. What would have happened if the business did not do so well, though? Suppose that the business loses $20,000. -$20,000/$100,000=-20%, an unfortunate, but not catastrophic, loss. A mathematical analysis of these possible outcomes is how we measure risk.
Let's re-examine the same scenario, but now we are going to introduce leverage. Instead of simply using your $100,000 to start a business, you are now going to ask a bank loan for a loan. The bank lends you $90,000 so that you can start your business. You still invest $10,000 of your own money. $10,000 equity +$90,000 =$100,000. You happily march off to start Acme Industries.
What happens under our two scenarios now? Under our profitable scenario, the business earned a $20,000 profit. However, you now have only invested $10,000 to earn this money. $20,000/$10,000=200% return. This is awesome! But what about the negative scenario? The loss of $20,000 is now catastrophic. Because you only invested $10,000 to begin with, this money is now gone. Moreover, you now owe the bank $90,000, but the business only has $80,000 left to repay them! The bank will likely call the loan to recoup what money they can before you lose even more. The business closes, your employees are laid off, but at least you have your $90,000 that you never invested!
This example is similar to many that you might find in a basic finance textbook. However, there is a problem with the basic reward structure implied by this capitalist model. Note that the investor/owner is able to completely dictate the level of risk to meet his/her investment goals. However, the downside risk of his/her decisions is shared with his employees. The effects of leverage have definite ramifications on the future cash flows of the employees as they may lose their jobs if the business fails, yet they are not inherently rewarded for any increase in risk. This point will undoubtedly not be accepted by traditional capitalists, but it is an argument I am willing to have. While wages have remained stagnant for decades, investor wealth has soared. Leverage has played a large part in these wealth gains, and because there is an element of risk sharing, there should be an element of reward sharing as well.
Friday, August 12, 2011
Social Capitalism: An American Tradition
"What Americans should by now be able to see is that neither the laissez-faire marketplace nor strong government has given them a satisfying or permanent resolution. The problem is not the marketplace and it is not government. The problem originates in the contest of clashing values between society and capitalism and, since this human society cannot surrender its deepest values, it must try to alter capitalism's. As we look deeper for the soul of capitalism, we find that, in the terms of ordinary human existence, American capitalism doesn't appear to have one." -William Greider, The Soul of Capitalism
Capitalism has many virtues. As an economic system, it has so far been unmatched in its ability to generate wealth. Moreover, the American form of capitalism has been the envy of the world for decades. Historically, industrial scions amassed great wealth while wages increased, cheaper goods became available, and general welfare increased. These advances in society were the bedrock principles of history's prominent capitalist idealogues. Ayn Rand stated:
"America's abundance was created not by public sacrifices to the common good, but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America's industrialization. They gave the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance -- and thus the whole country was moving forward and profiting, not suffering, every step of the way."
This ideology culminated in America with the Reagan Revolution of the 1980s. "Reaganomics" promised a host of benefits for all Americans by promoting economic initiatives aimed at the wealthiest among us. The increase in the wealth of the elite would "trickle down" to all society. This was the promise of the laissez-faire capitalists.
Thirty years after Reagan's election, we can now effectively say that the laissez-faire ideal has not worked according to the measures provided by Rand. Real wages have stagnated. Innovation has not been able to produce cheaper goods and services in many critical industries, most notably health care. The vast number of unemployed workers currently will attest to the lack of "better" jobs produced by the free market. For all that capitalism has given us, where did it go wrong?
The answer is evident in Rand's flawed logic. The laissez-faire capitalist, she argued, did not operate with any notion of altruism. However, her measures of capitalism's success are inherently altruistic. Rising wages, cheaper goods, and better jobs created a "whole country moving forward." The ideology called for no altruism in the naive thought that altruistic results would still occur. The inherent cognitive dissonance of Rand's ideal has infiltrated the American politic, and what is good for the wealthy has become good for everyone by virtue of the ideology, regardless of results. This is not inherently capitalistic; this is inherently selfish. The two are not the same.
Look back on American history and the things that have made us great, and you will see not just a capitalist society, but also a strong thread of altruistic tendencies and successes. The values of our nation have not been inherently selfish. Social Security and Medicare are prime examples that cut against the grain of laissez-faire capitalism and the ideals of Rand. These programs are widely popular and have had clear benefits to society. I do not posit that they are perfect programs, but they demonstrate strongly a moral fabric in our society that is not aligned with the selfish tenets of Rand. Moreover, these programs have been institutionalized while maintaining the basic framework of a capitalist society. This is the reality of our history. Though we have valued the capitalist model, we have done so because of the perceived benefits to society at large. This is our history. This is our heritage. By reclaiming our moral compass, we can restore and improve the system that has made our nation great.
Capitalism has many virtues. As an economic system, it has so far been unmatched in its ability to generate wealth. Moreover, the American form of capitalism has been the envy of the world for decades. Historically, industrial scions amassed great wealth while wages increased, cheaper goods became available, and general welfare increased. These advances in society were the bedrock principles of history's prominent capitalist idealogues. Ayn Rand stated:
"America's abundance was created not by public sacrifices to the common good, but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America's industrialization. They gave the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance -- and thus the whole country was moving forward and profiting, not suffering, every step of the way."
This ideology culminated in America with the Reagan Revolution of the 1980s. "Reaganomics" promised a host of benefits for all Americans by promoting economic initiatives aimed at the wealthiest among us. The increase in the wealth of the elite would "trickle down" to all society. This was the promise of the laissez-faire capitalists.
Thirty years after Reagan's election, we can now effectively say that the laissez-faire ideal has not worked according to the measures provided by Rand. Real wages have stagnated. Innovation has not been able to produce cheaper goods and services in many critical industries, most notably health care. The vast number of unemployed workers currently will attest to the lack of "better" jobs produced by the free market. For all that capitalism has given us, where did it go wrong?
The answer is evident in Rand's flawed logic. The laissez-faire capitalist, she argued, did not operate with any notion of altruism. However, her measures of capitalism's success are inherently altruistic. Rising wages, cheaper goods, and better jobs created a "whole country moving forward." The ideology called for no altruism in the naive thought that altruistic results would still occur. The inherent cognitive dissonance of Rand's ideal has infiltrated the American politic, and what is good for the wealthy has become good for everyone by virtue of the ideology, regardless of results. This is not inherently capitalistic; this is inherently selfish. The two are not the same.
Look back on American history and the things that have made us great, and you will see not just a capitalist society, but also a strong thread of altruistic tendencies and successes. The values of our nation have not been inherently selfish. Social Security and Medicare are prime examples that cut against the grain of laissez-faire capitalism and the ideals of Rand. These programs are widely popular and have had clear benefits to society. I do not posit that they are perfect programs, but they demonstrate strongly a moral fabric in our society that is not aligned with the selfish tenets of Rand. Moreover, these programs have been institutionalized while maintaining the basic framework of a capitalist society. This is the reality of our history. Though we have valued the capitalist model, we have done so because of the perceived benefits to society at large. This is our history. This is our heritage. By reclaiming our moral compass, we can restore and improve the system that has made our nation great.
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