Building Blocks - Part 3

As noted previously, Joseph Stiglitz (left-wing economist and Nobel Prize winner) and other progressives delight in pointing out the shortcomings of the American economic and political system. And, in all honesty, they actually have quite a lot of things to point out. The American system is not perfect. No system designed and implemented by humans can be. And there is nothing wrong (and arguably laudable) about pointing out a system’s defects and suggesting remedies and reforms to improve the system’s operation. Unfortunately, because the progressive left, mired in wrong-headed Marxian economic thinking, does not understand what drives the free market economy their recommendations for reform do not address the real problems that affect our political/economic system.

Their list of complaints is long, very long. Inequality is one of their principal bugaboos. In his book, The Price of Inequality (2012), Stiglitz states, “our growing inequality –especially the amounts seized by the upper one percent – is a distinctly American ‘achievement’.” The use of the word “seize” is notable. Seize means to take possession of forcibly (although it has other less apt meanings as well). Stiglitz expounds the Marxist concept that surplus is “seized” through exploitation or other non-legitimate methods. I wonder if Mr. Stiglitz believes that Steve Jobs “seized” his fortune? Or Bill Gates? Or Jeff Bezos? Or the many other inventors and entrepreneurs that make the gadgets and supply the services that make up our modern day life.

It is indeed true that some surplus can be generated by nefarious means. But this unjustifiable and often illegal surplus does not represent all surplus and I believe that it represents a relatively small percentage of the total surplus generated by the free market economic system. The social contract defines the rules by which surplus can be legitimately created and the citizens constitute a government to enforce those rules. Illegal surplus is the surplus generated by violating those rules.

There are three main ways that people and organizations create non-legitimate surplus; monopoly, fraud/theft and capture.

Monopoly is where a person or company controls all of or an overwhelming majority of a product or service. A monopoly gives its owner the ability to control the price of the product or service and to reap excess profit (surplus) because of the lack of competition. Monopoly is illegal in the United States and the government has the power to block or break up attempts at monopoly. There are, of course some exceptions such as copyright laws to protect intellectual property rights and patent protection for newly invented products.

Fraud is where a person or organization attempts to gain excess profits by adulterating the product or service in order to reduce costs compared to the competition's costs. The adulterated products not only are a fraud that deceives consumers but also a danger to the public (such as the case of lead in toys for small children). The theft of intellectual capital allows the thief to avoid the research and development costs needed to create great products (significant because knowledge represents the most important part of our accumulated surplus). Fraudulent actions and thievery to create illegal surplus are subject to criminal as well as civil penalties.

Capture is different than the other abuses to create unjustifiable surplus. Rather than trying to illegally increase prices (monopoly) or reduce costs (fraud/theft), capture is where a person or organization (sometimes an entire industry) try to change the laws such that their efforts to maximize profits does not violate the law (even though they violate the spirit of the social contract).

While the government actively seeks to prevent fraud and monopoly government often colludes with attempts of capture (because it is government that is being captured and the people in the government who benefit). This is the most insidious method of trying to obtain unjustifiable surplus because it becomes engrained into the system and is difficult to root out. At the extreme, citizens will claim, “the system is rigged against us” (because it is).

Many people accuse Wall Street and big corporations of trying to capture government for their own benefit (a 77,000 page tax code is proof of that). But other interests can also attempt to capture government. Unions often use monopolistic practices to try and control the price of labor. America spends more per pupil than any other country on the planet but high priced teachers do not result in better academic results. Unions also try to capture government in order to rewrite the labor laws in their favor.

It is a natural human impulse to try and orient the environment in which you live in your own favor. We have been doing that ever since our prehistoric ancestors wandered the savannahs of Africa. But as long as you play by the rules (and don’t try to tilt the field to your advantage by rewriting the rules) that’s okay. That’s the beauty of the economic freedom available in the American free market economic system. We don’t care about a person’s motives as long as they play by the rules.

People being what they are, the social contract envisioned by Enlightenment philosophers will always be subjected to constant attempts of capture and of people trying to tilt the playing field in their favor. But if people “being what they are” is what makes life in the free market social contract occasionally hard for some; people “being what they are” is what makes socialism so abhorrent. The free market social contract has a tendency toward chaos and needs constant reform to stay on track. Socialism tends toward static order and resists (usually with force) any attempt at change.

The discontent that is running amuck in the United States is evidence that the Enlightenment social contract envisioned by the Founders is not functioning very well. This need is echoed by the progressive left as they shout for more equality but it also reverberates from Trump supporters in their calls to “drain the swamp.” We need reform that addresses the causes of our current problems and not resort to the favorite political choices of paper over the problem, mandate the desired outcome and kick the can down the road.