FOUR ASSUMPTIONS OF CAPITALISM

In one of my college classes that focused on the interaction between business, society and government, we discussed a set of principles that was referred to as “the 5 assumptions of capitalism”. Here's a link to the powerpoint document from the class just to prove I'm not making this up (it's the 16^th slide).

www.suu.edu/faculty/johnsonr/4200/CLASS2.PPT 

Capitalism is touted as the most efficient economic system.  Theoretically, when one or more of these 5 elements are missing or are interfered with, the economic system reaches a lower level of efficiency, and becomes something less than pure, unadulterated capitalism. I'll be addressing only four of the assumptions – I've been out of school for several years, and I don't recall much about the fifth assumption, which was referred to as “Institutions Functioning as Designed”.

On face value, these are common sense assumptions, but when you consider them carefully, I think they raise some interesting questions as to whether common practices, policies, and ways of thinking that we tend to accept as part of a free market concept are in fact taking us further away from capitalism. 

Also, the explanations of these four assumptions are my own words according to my own understanding, so please take the following with a grain of salt, and feel free to tell me where I've erred.

Assumption #1- The rational consumer. The inherent assumption here is that consumers will act in their own best interest, will not pay more than they need to for a product or service, will prioritize necessities above frivolous or unnecessary purchases, etc.

Assumption #2 - Full and accurate information. Buyers and sellers will both have access to basic, important information relevant to the transaction at hand. This is closely related to the first assumption, because how can a consumer make rational decisions if they are unaware of important information pertaining to the product or service they are considering?

Assumption #3 - Costs and benefits are fully contained within the transaction. Whenever the costs of a transaction are borne by someone other than the buyer and the seller, and whenever the benefits of a transaction are enjoyed by those who are not party to the transaction or the intended recipients of the benefits of the transaction, then the transaction results in a less efficient allocation of resources. In its most simplistic form, this assumption states that theft will decrease the efficiency of capitalism.

Assumption #4 – Income is distributed fairly. The income any person receives is a direct result of the value of they have created. Thus the wealth any one of us accumulates (or fails to accumulate) should be basically a reflection of our own choices, the career path we choose to pursue, the level of effort we put forth, the risks we are willing to take, etc.

Now that I've briefly explained these four assumptions of capitalism, I'll cite a few examples of how our society fails to meet these basic requirements, resulting in a less than optimum economic system than would be attainable under true capitalism.

Marketing/Advertising/Sales

In theory, advertising fulfills an important function – making full and accurate information available to potential buyers. In practice, advertising tends to focus heavily on the positive aspects of a product or service, while downplaying or even failing to address the negative aspects. 

A prime example would be the pharmaceutical commercials that spend the first 30 seconds telling you how the new drug will cure your depression or restore your balding hair, and showing you images of happy, beautiful people. And then they cram ten different disclaimers in the last ten seconds about how possible side effects include sudden onset of schizophrenia, nasal spasms, and PTRF (Premature Termination of Respiratory Functions). 

This is actually a good example of how government intervention can play an essential role in maintaining capitalist ideals. Without government regulation, would advertisements even include any of those disclaimers?  Would there be any chance that consumers of such prescription drugs would be making rational decisions based on accurate information?

Looking at other examples, it's apparent that the purpose of advertising is often not to present the all the facts, but to only present some of the facts from a skewed perspective. 

A commercial can tout a small car as having the government's highest crash test rating, but omit the fact that there are five comparable small cars built by other companies, all five of which also have the highest crash test rating, are less expensive, get better mileage and have better warranties.

Celebrity endorsements, humor and special effects are used to make commercials more appealing. Companies spend hundreds of millions of dollars each year on these strategies, but these strategies don’t add any value to the products and services being touted, nor do they lead to better informed consumers. And these strategies work. Sometimes they are alarmingly effective, leading to very irrational purchasing behavior, like people living in abject poverty who buy $120 shoes endorsed by the all-star basketball players.

Inheritance Taxes

If I were asked to define “royalty” in the most simple, basic terms, I'd say it is “people who come into a position of extreme wealth and power by virtue of the fact that they were born to extremely wealthy and powerful parents.”

Is there anything less American than the notion of a monarchy? If we allocate wealth to people based on lineage, rather than what they themselves have done to earn it, is that compatible with capitalism? Yet, that is what we allow to happen on a regular basis. 

I'll refer to a study that was conducted in 1997 that analyzed how the 400 wealthiest individuals and 50 wealthiest families on the Forbes 400 list made their fortunes. The study concluded:

·         42% were “born on home plate”, meaning their inheritances alone would have put them on the Forbes 400 list.

·         6% were “born on third base”, meaning they inherited substantial wealth in excess of $50 million or a large and prosperous company, and grew their initial fortune into membership in the Forbes 400.

·         7% were “born on second base”, meaning they inherited a medium-sized business or wealth of more than $1million, or received substantial start-up capital for a business from a family member.

·         14% were “born on first base”, meaning they came from an upper class background, and received substantial inheritance or start-up capital from family worth less than $1 million. (Due to the conservative nature of the rankings, it is probable that some of the people in this category should have actually been assigned to 2^nd or 3^rd base).

·         31% were “born in the batter's box”, meaning their parents did not have great wealth or own a business with more than a few employees.

The conclusion of the study is, “The data, then, do not support the assumption that the United States is a true meritocracy where the most able rise to their rightful positions. Nor do they defend the contention that the United States is structured so that authentic equality of opportunity prevails. Inheritances undermine the achievement-reward equation.”

http://www.faireconomy.org/press_room/1997/born_on_third_base_sources_of_wealth_of_1997_forbes_400

I'll leave it at that for now, but I'd like to know what you guys think. Do you agree or disagree with the “four assumptions of capitalism” as I've presented them here? Are any of my conclusions somehow flawed? If you agree with assumption #3, then wouldn't you at least agree that “cap-and-trade” proposals are based upon solid capitalist principles? Do those four principles bring to mind any other flaws in the way we do things?

Response to the response to the response to the response

Australia could very well have a dictator sometime within the next couple hundred years, but if that happens, I believe it will be because Australia failed to address the warning signs listed in my prior post.   Gun control laws would be a side note, not a major reason for the downfall of their freedom.

Drawing a straight line between a country’s freedom and its guns is a one-dimensional approach.  It is true that we have a high level of freedom here in the U.S., and it is also true that a lot of people own firearms in our nation.  In fact, in a comparison of the rate of private gun ownership in 179 countries across the globe, the United States ranked #1 (A). 

However, in that same study, Yemen’s rate of private gun ownership ranked #2 (B), Saudi Arabia ranked #7 (C), and Iraq ranked #8 (D).  Are these countries less likely to have a dictator at some point in the next couple hundred years than Australia?

I’d also like to clarify what I meant when I wrote, “a gun that is incapable of inflicting bodily damage or death has lost all of its intrinsic value.”

This statement was not meant to suggest that guns don’t provide any benefit beyond inflicting death, or that gun owners are violent people overtaken by their own unrelenting blood-lust.

The “intrinsic” value of an item is the fundamental benefit that the object provides because it is what it is – it’s the function for which it was designed.  I argued that any comparison of a gun to a refrigerator, a baseball bat, or an automobile is misleading – those items can be used (or misused) as weapons, but the intrinsic value of those items is unrelated to their lethality.

An object can have value in addition to and beyond its intrinsic value.  For example, my guitar is an Epiphone Dot Archtop, which sells for $400.  However, its value to me is much greater because it was a gift, and I have used it for a long time and am now very attached to it.  In spite of its relatively low dollar value, I intend to keep my guitar until the day I die.

An object can have value in spite of the fact that it has lost most or all of its intrinsic value.  For example, the intrinsic value of a book is in its ability to be read, but some books that are several hundred years old are worth over $100,000, and you wouldn’t want to flip through those books for fear of damaging them.  They are valued as rare artifacts, not as books.

A gun can also be valued as a gift, a family inheritance, an antique, or a rare artifact.  Like a frisbee, or a fishing rod, a gun can also because it’s fun to use with family and friends, and gives us an excuse to enjoy the outdoors.  But the intrinsic value of a firearm is that it enables its user to injure or kill with ease.  This is the basic characteristic that separates a gun from a guitar, or a rare book.  This is the reason a person opts to spend $450 on a Glock instead of $2 on a frisbee, or $35 on a fishing rod.

(A)   http://www.gunpolicy.org/firearms/region/united-states

(B)   http://www.gunpolicy.org/firearms/region/yemen

(C)   http://www.gunpolicy.org/firearms/region/saudi-arabia

(D)   http://www.gunpolicy.org/firearms/region/iraq

Response to the response to the response

In regards to "government being the problem, not the solution".

I was using a sweeping generalization because that is how I felt when the president stated a problem and then stated how the government is here to solve it for you. I feel that in order to be a leader you have to use ideas and the idea that Reagan stated in that quote is what I am behind.

The ideal expressed by saying that "government is the problem not the solution" does excite certain people, but 235 years ago "We hold these truths to be self evident that all men are created equal" excited a lot of people too, I think some other people when they read or heard it may have thought "These words show that even now, the most successful politicians are adept at riling up their base supporters by using ambiguous, sweeping generalizations which fail to address any particular issue with even the slightest bit of intelligence, insight or nuance."

If you step back and realize that when president Reagan took office and throughout his presidency congress was controlled by the opposite party except for 2 years when republicans controlled the senate it may offer some insight into the growth of government that you are blaming on Reagan. In fact the tax hikes that you cite were finally agreed to contingent on promises of spending decreases. If you are referring to a growth in the military to effect "peace through strength" that ended the cold war, that is growth in government that ended the cold war. Chris Edwards makes the point I am trying to make better than I can.

When the budget is looked at as a share of the economy, Reagan's legacy looks a bit better from a small-government perspective. Federal revenues as a share of gross domestic product fell from 19.6 percent in 1981 to 18.3 percent by 1989. Spending fell from 22.2 percent to 21.2 percent. Thus, Ronald Reagan shrank the federal government by about 5 percent — a less radical change than supporters or detractors often claim. (1)

In summary, whether or not the gipper lived up to the ideal stated in the quote has been and will continue to be a subject of debate. All politicians and anyone who has ideas find their idealism attenuated by the practical realities of their circumstances. The political realities of what happened after the quote was said doesn't in my opinion dilute the impact. I feel that this also applies to the Reagan quote I chose on gun control.

I feel like your cost benefit analysis makes some great points and I agree with them but I like to be concise and get to the bottom line. I feel that the point of the 2nd amendment intends to give us the right to bear arms so that our personal security from criminals as well as tyrants is

possible to be retained as a personal responsibility. When you cite Australia as a gun free country that has not given rise to a tyrant, they have only been gun free since 1996. I say wait a couple hundred years and let's see.

Another point about your cost benefit analysis that I wanted to address is that you unequivocally state that guns have no intrinsic value except to kill people. I think that comes from a view of a person who just doesn't like guns. The same way I don't like sports. It would be like me saying that we should ban the NBA because a lot of NBA players commit crimes and are a menace to society. I enjoy shooting guns personally and with my family and friends in a way that is difficult to quantify just like I imagine it is difficult for a basketball fan to quantify his enjoyment of watching NBA games. I do not feel that the NBA should be banned because I don't like it or because there is some negative consequences to having an NBA.

1 http://www.cato.org/pub_display.php?pub_id=4181

RESPONSE TO RONALDUS’ RESPONSE TO MY POST ON GUN CONTROL

I’ll begin with a quick aside about the whole, “government is not the solution to our problem; government is the problem” thing. 

This quote shows that even 30 years ago, the most successful politicians were adept at riling up their base supporters by using ambiguous, sweeping generalizations which fail to address any particular issue with even the slightest bit of intelligence, insight or nuance.  I’m sure this quote is often cited by people who strongly feel that smaller is better when it comes to government (except when it comes to military spending same-sex marriage, abortion, constructing a fence along the Mexican border, preemptive strikes, building a permanent Moon colony, etc).  I also wonder whether the government-is-not-the-solution crowd realize that two bills Reagan passed in 1982 and 1984 together constituted the biggest tax increase ever enacted during peacetime (1), and that the federal government grew by 2.8% in real terms under President Reagan (2).  

Anyways, on to gun control. 

In my original post, I argued that the drawbacks of making firearms easily accessible to the general population outweighed the benefits.  My argument was presented as a cost-benefit analysis, in which I reasoned that although guns do save lives in some instances, society ultimately pays a much higher price in terms of lives lost, gun-related injuries, decreased security, and over $2 billion in annual medical costs.    I was pleasantly surprised to find that Ronaldus’ response didn’t contest any of these conclusions; I had been worried that I had overlooked some critical flaw in my original argument. 

Instead, Ronaldus simply posted a quote by Ronald Reagan, in which the Gipper contended that a society that gives up its right to bear arms is giving up its means of “protection from what has always been the chief source of despotism — government.”

Reagan said, “if we give it the power to confiscate our arms we also give up the ultimate means to combat that corrupt power. In doing so we can only assure that we will eventually be totally subject to it. When dictators come to power, the first thing they do is take away the people's weapons. It makes it so much easier for the secret police to operate, it makes it so much easier to force the will of the ruler upon the ruled.”

My initial thought was that it was interesting that this quote was taken from an article published in 1975, five and a half years before Reagan and three others were shot and wounded in an assassination attempt.  Although gun control laws did not change significantly during his administration, Reagan did later support the two most significant and controversial gun control measures in the last 30 years: 1993’s Brady Bill and 1994’s Assault Weapons Ban (3).

Seriously though, if we’re going to identify factors that lead to evil dictatorships, we need to begin with mustaches.  Gaddafi, Stalin, Castro, Saddam Hussein, Hitler, Assad, and Ming the Merciless were all mustached men, so mustaches must play a crucial role in any dictator’s rise to power. 

But wait!  Gandhi had a mustache too.  Damn.  There goes that theory.

Similarly, strict gun control laws may have been enforced in some countries where dictators took control, but we would be mistaken to conclude that those gun control laws were a key factor that enabled the rise of the dictators.

What about the U.K., Japan, Australia, and scores of other countries where there are strict gun control laws in place?  If gun control is such an important determining factor in regards to a nation’s liberty, why are these countries still enjoying freedom?

Is it possible that Reagan’s comments were overly-simplistic, and that while some dictators have used gun control to their advantage, other dictators have also used lack or gun control to their advantage as well?  If gun control is such an essential component of a dictatorship, then how do we explain African warlords and dictators (such as Charles Taylor), who have been able to gain control of nations or parts of nations in spite of rampant firearm proliferation and absolutely no effective gun control measures?

Based on my own limited knowledge and understanding, I’d say that the following elements play a crucial role in the rise of dictatorships:

1.     A persuasive, intelligent, and driven leader.

2.     The ability to capitalize on the widespread fear and/or anger of a society, usually through the demonization of a minority group within the country itself or another foreign country.

3.     Legal/constitutional controls designed to prevent the consolidation of political and military power are ineffective or absent.

4.     The rising dictator has the ability to gain a high level of financial backing.

5.     Effective use of propaganda to promote a sense of hyper-patriotism and a cult of personality.

6.     The demonization of a minority group within the country and/or another foreign country

7.     Powerful (and often violent) suppression of political opposition, to create an environment where nobody dares voice their dissent.

8.     State control of the media.

9.     The dictator is physically isolated from the general population, and surrounded by his cronies and yes-men whose success, lifestyles and safety are absolutely dependent upon the dictatorship maintaining control.

This is not an all-inclusive list, but these are the warning signs I would be worried about.  The infusion of astronomical amounts of money into politics, the demonization of those who follow a “different” religion or lifestyle, saber-rattling, inflammatory rhetoric intentionally rousing people to anger, the overriding of constitutionally established separation of powers, the increasing use of  labels and name-calling in place of thoughtful debate, placing a higher priority on a candidate’s personality than his/her credentials, treating politicians as celebrities, these are the red flags that have me concerned about both sides in American politics. 

Sorry I’m not as concise as Ronaldus.

(1)   http://money.cnn.com/2010/09/08/news/economy/reagan_years_taxes/index.htm

(2)   http://economix.blogs.nytimes.com/2009/05/06/big-government-republicans/

(3)   http://civilliberty.about.com/od/guncontrol/a/Gun-Rights-Ronald-Reagan.htm

Answer to Aarons post on gun control and my personal reaction to the state of the union address.

The most concise way I can respond to Aaron:

"There are those in America today who have come to depend absolutely on government for their security. And when government fails they seek to rectify that failure in the form of granting government more power. So, as government has failed to control crime and violence with the means given it by the Constitution, they seek to give it more power at the expense of the Constitution. But in doing so, in their willingness to give up their arms in the name of safety, they are really giving up their protection from what has always been the chief source of despotism — government. Lord Acton said power corrupts. Surely then, if this is true, the more power we give the government the more corrupt it will become. And if we give it the power to confiscate our arms we also give up the ultimate means to combat that corrupt power. In doing so we can only assure that we will eventually be totally subject to it. When dictators come to power, the first thing they do is take away the people's weapons. It makes it so much easier for the secret police to operate, it makes it so much easier to force the will of the ruler upon the ruled" Ronald Reagan from a column published in Guns and Ammo (1 September 1975)

All I could think during the State of the Union, maybe I am being to simplistic:

"In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden" Ronald Reagan from his first inaugural address.

Both Quotes are from,

http://en.wikiquote.org/wiki/Ronald_Reagan

Quality of life considerations

In light of a recent discussion I had with Merril concerning the cancellation of some oil and gas drilling leases in Utah, I’m posting this op-ed that I sent to the Spectrum a few months ago.  I don’t know if any of you already saw it in the paper.  I’ve also included three links to articles concerning the cancellation.  The Washington Post is probably the most balanced.  The individual identifying himself as left wing nut job is the least, but is included due to his providing a picture of one of the areas which had been leased for drilling.  Enjoy!

My father came to Southern Utah 28 years ago after finishing his residency to become an orthopedic surgeon.  He had not intended to move here, but after spending a weekend enjoying hiking and skiing in Southern Utah's spectacular surroundings he was convinced.  He brought a skill the community needed and ran a small business that employed several people for the next 25 years until he retired.  

I work as a computer programmer for a California based company that has its software development shop in St. George, because this is where the developers want to live.  Our business is not constrained by geography. We could work from anywhere, but we choose Utah and the beauty of the area plays heavily into why we make that choice.

There's been a lot of discussion about the impact extraction activities would have on jobs. Sometimes someone will point out that Utah benefits from tourist and outdoor industry jobs as well, but that will often be countered by the argument that the extractive industries create better, higher paying jobs than those that benefit from our spectacular scenery. I feel that jobs like mine or those my father created are all too often ignored in this equation.

In the growing knowledge economy there are more and more jobs that will not be constrained by location.  Entrepreneurs and skilled workers will be able to choose where they want to work and they will often make those choices based on standard of living considerations such as air and water quality and opportunities for outdoor recreation.  To trade away such standard of living considerations for the jobs and money that will be brought by extractive industries strikes me as a devil's bargain.

In our stunning natural surroundings we, in Utah, have a goose that has been laying a Golden Egg for us every day for years, but I fear that like the foolish farmer in the fairy tale we're convincing ourselves that by cutting the goose open we'll discover untold wealth. I strongly suspect that if we pursue reckless extractive activities such as Oil Shale development, we will find ourselves consigned to the same disappointment that the farmer experienced after having killed his goose.


http://www.washingtonpost.com/wp-dyn/content/article/2009/02/04/AR2009020401785_2.html/


http://www.msnbc.msn.com/id/29017638/ns/us_news-environment/t/bush-era-energy-drilling-leases-utah-canceled/


http://leftwingnutjob.blogspot.com/2009/02/77-drilling-leases-canceled-in-utah.html

An interesting question

I have some good responses for Aaron's gun essay but haven't taken the time to post them, but I wanted to throw this out there before it is forgotten. Chris Wallace asked Tom Donalin http://dailycaller.com/2011/05/09/chris-wallace-shooting-bin-laden-in-the-head-is-ok-but-not-waterboarding-ksm/

WALLACE: I’m not asking you why it was OK to shoot Usama bin Laden. I fully understand the threat. And I’m not second-guessing the SEALs.

DONILON: Right.

WALLACE: What I am second guessing is, if that’s OK, why can’t you do waterboarding? What can’t you do enhanced interrogation of Khalid Sheikh Mohammed, who was just as bad an operator as Usama bin Laden?

DONILON: Because, well, our judgment is that it’s not consistent with our values, not consistent and not necessary in terms of getting the kind of intelligence that we need.

WALLACE: But shooting bin Laden in the head is consistent with our values?

DONILON: We are at war with Usama bin Laden.

WALLACE: We’re at war with Khalid Sheikh Mohammed.

In the light of our prior debate on waterboarding and current debate on gun control, I have two questions, #1 what do you think about the SEALS shooting Osama? FYI: I have no problem with it. #2 if that’s OK, why can’t you do waterboarding? What can’t you do enhanced interrogation of Khalid Sheikh Mohammed, who was just as bad an operator as Usama bin Laden?(stolen from Chris Wallace)