Capitalists never liked capitalism

by Russ Roberts on May 19, 2011

in Competition

Capitalists tend not to like capitalism. Milton Friedman pointed this out long ago. Too much competition. Too much risk. Much better to have the government keep out competitors and subsidize losses. Floyd Norris at the New York Times has just discovered this in an article called “Capitalists Who Fear Free Markets” (HT: Catherine Rampell):

Capitalism is supposed to produce losses on bad investments.

But all too often it has not.

In Tokyo this week, corporate executives were outraged when a Japanese government official suggested that banks might have to take losses on loans to the company that produced a nuclear catastrophe.

Yukio Edano, the chief cabinet secretary, had the temerity to say “the public will not support” the injection of government money into Tokyo Electric Power, also known as Tepco, unless banks share in the pain. Tepco says it would like to pay compensation to victims, but needs government cash to do so.

The president of Japan’s largest bank, Mitsubishi UFJ Financial, was shocked by the very idea that a bank should lose money if it lent to a company that could not meet its obligations. Mr. Edano’s remarks “came out of the blue,” said the executive, Katsunori Nagayasu. “I felt there was something wrong about them.”

Consumers like capitalism, not business people.

 

Be Sociable, Share!

Comments

comments

87 comments    Share Share    Print    Email

{ 87 comments }

Bill May 19, 2011 at 7:20 pm

I live in Japan.

The govt here is absolutely out of control and they feel it’s their job to direct and guide all aspects of society.

The shock and dismay displayed by the Japanese “businessman” is not surprising at all to me.

Ken May 19, 2011 at 7:40 pm

Bill,

I don’t think it’s a surprise to anyone anywhere, particularly Russ. The US has plenty of examples, like GM and some large banks and insurance companies.

Many people who dislike capitalism actually dislike crony capitalism that Katsunori Nagayasu put on display. Unfortunately, I think many equate capitalism with crony capitalism.

Regards,
Ken

Bill May 19, 2011 at 8:33 pm

Ken,

Absolutely. I know the US isn’t much better at all. Perhaps my post had a little too much frustration laced into it. Recently the govt here has been driving me bananas.

Either way, both countries and their crony capitalism are absolutely corrupt.

Thanks for pointing that out, though.

Harold Cockerill May 20, 2011 at 5:58 pm

“Crony Capitalism” needs to be renamed. Real capitalism has to be about the free market and this ain’t it. “Corporate Socialism” is what it is and it should be labeled so.

Dave May 21, 2011 at 1:31 pm

That’s perhaps the best term I’ve heard for it. Awesome!

Clay May 19, 2011 at 7:58 pm

“…was shocked by the very idea that a bank should lose money if it lent to a company that could not meet its obligations…”
Sounds more like our government here in the States…

John V May 19, 2011 at 9:09 pm

*like*

Dan May 19, 2011 at 7:58 pm

I agree with Russ and Milton Friedman. Don’t know as much as most of you……. But, I know that a capitalist likes capitalism so long as he/she is making huge gains or winning. When competition takes a bite out of his/her fortunes then he/she will look for govt to GIVE them and advantage, rather than outcompete, if that person can.

Mark May 21, 2011 at 7:00 am

Yes it is often the same with survival of the fittest, its not as much fun when you weaken.

MIchael E. Marotta May 19, 2011 at 7:58 pm

Well in Japan disgrace has serious consequences. We prefer to wash the slate clean with generous bankruptcy laws. Perhaps mass seppuku at Goldman-Sachs would have been better, after all.

Harold Cockerill May 20, 2011 at 5:59 pm

Their enablers at the Fed should have been Act II.

hayseed May 19, 2011 at 8:44 pm

Hayek’s point was that our very survival depends on following rules whose origin we are unsure of, that we most often do not like, and at best can only partially understand.

Dr. T May 19, 2011 at 8:53 pm

“Capitalists tend not to like capitalism.”

That statement is too inclusive. I believe that mediocre capitalists (of which there are many) dislike capitalism and prefer rent-seeking. Successful capitalists love capitalism because that system spurs innovation and productivity. I found it interesting and challenging to help run a company (a medical lab) that continually had to improve to stay in business. Running a company that continually lobbies the government for favors for itself and for roadblocks for its competitors would be boring (and would make me feel slimy).

John V May 19, 2011 at 9:19 pm

Nope. I think when Don says that capitalists generally dislike capitalism…of a free market variety anyway….he means the whole concept involving ups and downs. Everyone loves making money and controlling their own capital. That’s the nice part that everybody loves. But that’s only part of it. The ones who are most negative towards it are the ones with the most to lose from the uncertainty of free markets. It’s tough to plan out in a sure-hearted and methodical way when the landscape isn’t smooth and predictable. Smooth and predictable are not what free markets are.

OTOH: New entrants and up-and-comers love it. They have nothing to lose and everything to gain. So the potential dangers don’t matter very much.

Look, I own a restaurant. I believe in free markets. But that doesn’t mean I don’t a little rankled on a personal level if I hear about a competitor moving in, or that the other place on the other side of town was busier than me the other night. Sure, it would selfishly wonderful if the town made it nearly impossible to open up a new place. MORE FOR ME. No dangers of increased competition. But I also know that that is wrong and I put the personal “it’s all about me” side of human nature in check.

John V May 19, 2011 at 9:20 pm

Sorry, I meant “Russ” not Don.

Dan May 19, 2011 at 9:49 pm

What many men are willing to do in tougher situations, may not be what you would do….. But many would….. Say, make a few claims of unhealthy situations at your competitor to scare off business or get govt to shut it down for a while.
Situation: co- worker is not making the grade on productivity and is asking for exceptions. That person gets it for a little while, but the productivity is falling further and further below the minimum standard. Now, other workers have to pick up slack. Their productivity for their specific job is falling and another person is having to assist. When confronted, the person goes on the offensive and tries to character assassinate closest works with accusations that cannot be overlooked in our litigious society. Eventually, the matter is solved with the unproductive co- worker being removed…. But not until much damage is done.

Dan May 19, 2011 at 9:33 pm

Good. But, the pressures and incentives to seek out an advantage is always present. In an industry with tight margins and little room for large gains, getting hear over year profit gains is easier when a ‘friend’ who writes legislation can change rules midstream to benefit you and your business. Say, magnesium mining. In the world market, it is tight competition. But, they appealed to a high power for an advantge……… And a tariff was imposed to make imported magnesium more expensive.
Question- if the Opportunity to find an advantage is available, why wouldn’t the business seek it out?
I believe that for every person who would say that they want honest competition in sports or games, there is one person who would say ‘if your not cheating, your not trying’.
From stealing other teams signs and relaying to batter what the next pitch is…… To catching a glimpse of the other coaches clipboard from the tv monitor……. To hacking in basketball……. To quickly snatching the puck back when it barely crossed the line of the goal in hockey.
A business will see who the clientele of their competitor is and undercut pricing …… Will not report a cash sale that is small enough to not be missed but enough to buy lunch.
The opportunity exists with govt to gain an advantage… The evolution to it’s current place may not have been deliberate conspiracy, but is in place due to govt having to much power to do so. And , the like it. They too, benefit by gaining an advantage over their adversaries in politics.
The leftists wish to add to the govt power believing the official can act benevolently and/or their actions will be found out. But, the media will not help. We have found this out most recently with Obama. MSM has under reported, if reporting at all, his history, and many of the actions taken place. Bush takes us into Iraq and he is a murdering dictator…….. Obama takes us into Libya, without even going thru channels that his predecessor did, and ‘mums’ the word.
In bed with a corporation like GE, MSM reports little….. Seemingly, in bed with Haliburton or accusingly in bed with Big Oil and MSM castigated on a daily basis.
So what is the option? Limited govt………. Take away the incentive for a business to spend millions and millions in influencing govt officials. They will still come ….. But less and less when the advantage thought to have gained is less and less, if any at all.

Frank33328 May 20, 2011 at 6:17 am

I think that which separates you is the last thing you said “and [seeking government favors] would make me feel slimy.” Oh how I wish that more of our fellow citizens felt that way.

Kurt May 19, 2011 at 9:07 pm

There was another interesting, but unclear, statement in a WSJ article (http://on.wsj.com/k2Aqxq) about how shareholders were expected to contribute in a restructuring as well. I don’t know if this means the 80 some-odd percent drubbing they have taken is not adequate, and the government of Japan is going to impose punitive benefits on them? This would be more disastrous than the Obama administrations neutering of bondholder’s rights in the GM fiasco.

John V May 19, 2011 at 9:08 pm

Very good article…especially for the NYT, whose many writers, like the Japanese execs mocked by Norris, are often guilty of the same nonsensical notion of what “capitalism” is or is supposed to be.

I especially liked this part:

“In “free-market-based capitalism” — or at least the version they used to teach when I went to business school — lenders and shareholders were supposed to monitor the risks taken by companies. They would benefit if the company prospered and suffer if it failed.

By not spending more money on safety, Tepco was taking a risk. That risk did not work out. The question now is who will pay the bill. If it is the investors, that would serve as a powerful incentive to the other nuclear plant operators to make changes. If it is the government, with investors protected, we are left with only the hope of better regulation to prevent a recurrence.”

Yes. I find the former alternative of forcing investors to plan for risk to be a much better way of dealing with these kinds of problems….and most others. Socializing risk while trying to patch up the resulting incentive structure with regulations is far more messy and less secure….as we have seen in this country in several sectors.

Dan May 19, 2011 at 9:41 pm

Under the same reasoning, no govt assistance in a failing business should come about. If the financial industries did not have Fannie and Freddie or the explicit (BACKDOOR) guarantee of assistance should the enough loans default to send the firm into a tailspin, thru NEVER would have leveraged themselves to the breaking point or even made those loans. No govt assistance or availability of advantage gaining, and they know they are entirely on hook for failures……. They are significantly less likely to take risks.

John V May 19, 2011 at 9:46 pm

Without the huge of government in the financial sector, banks would have made fewer loans and been more stringent on their own accord…without any telling them to. But unlike the government’s enforcing of “stricter lending standards”, banks would have been doing this on their own in ways that actually make sense on a case by case basis instead of the clumsy one-size-fits-all standards to meet regulatory requirements. I know many worthy people who have been denied loans because of tight standards that are out of the banks’ hands.

Dan May 19, 2011 at 10:23 pm

I once had a discussion where the person suggested that baks should not be able to deny a loan on someone who may come in dressed in overalls with no shirt underneath or any version where the person is not dressed appropriately. He wanted legislation to prevent judgment based on perception of someone.
Nonsense! Do you expect to get hired when you show up in just your underwear at an interview? You don’t have a right to a loan. Applying for a loan is akin to applying for a job in many respects.

Stephen A. Boyko May 20, 2011 at 9:24 am

@ John V

Einstein said that “insanity was expecting different results from repeatedly doing the same thing.” Yet, policymakers have chosen to do more of the same with OSFA governance trying to overcome conceptual shortcomings by raising the legacy capital market standards from legality to morality by equating failure with fraud. Throughout the policy spectrum many have advocated command-driven, governance based on a too-big-to-fail (TBTF) capital structure that enables regulatory scale to trump market forces. The TBTF financial sector strategy is a de facto subsidy because of the implicit government guarantee. But TBTF argues against itself as subsidies create excessive volume (market share) that feed industry giants and excessive complexity (over-engineered products) that beget uncertainty. The question remains as to how can you govern uncertainty with OSFA deterministic metrics a major theme of the book “We’re All Screwed! How toxic regulation will crush the free market.” (Also see: Parallel Paper Economy http://taffywilliams.blogspot.com/2011/05/parallel-paper-economy-by-sa-boyko-and.html

Seth May 19, 2011 at 9:20 pm

I also think Adam Smith made similar observations as Friedman’s, didn’t he?

Here’s one of my favorite quotes on capitalism:

“All systems are capitalist. It’s just a matter of who owns and controls the capital – ancient king, dictator or private individual.” – Ronald Reagan

Methinks1776 May 19, 2011 at 9:28 pm

um….point taken (you said “tend”), but I’m just here to stand up for those of us capitalists who really do like capitalism and we prefer the risks and the competition of markets to the tortured politics of state protection. We exist!! I swear.

Stone Glasgow May 20, 2011 at 1:42 pm

A successful capitalist who supports a system of free markets and unrestricted competition is doing so for the same reasons that a successful man in Sweden supports a system that redistributes 70% of his income. Both are doing so at their own expense because they believe it to be morally correct.

We think we can help the world be a better place by reducing government, even if we know that government can help us be richer. A socialist supports high taxes even if he knows that government can help him be richer (by lowering his taxes.)

vidyohs May 19, 2011 at 9:30 pm

For the simple reason that no blanket statement works for a wide variety of people, I have to disagree that capitalist dislike capitalism.

If we bore down to the nitty gritty, even the capitalist who beg for crony capitalism would still come down in favor of pure unadulterated capitalism rather than the other alternatives. IMHO.

Many capitalist prefer crony capitalism more for the obvious reasons.

John V May 19, 2011 at 9:42 pm

Yes. Capitalists in general will prefer unfettered capitalism to dirigisme. But I still think it bears repeating that the big guns will make a quiet fearful gulp at the thought of it. They have an army of lobbyists and lawyers in DC to fight for un-free market measures and defend the company against un-free market measures and suits from competitors….usually anti-trust whining.

vidyohs May 19, 2011 at 10:08 pm

Ahh serendipity reply.
John V, is your restaurant in or near Houston? Though my bride and I don’t eat out that much anymore, I”d certainly be proud to check you out if it is feasible. Hell, I wouldn’t even embarrass you by introducing myself.

On the other topic.

What bothers me about any discussion of capitalism on the media and these blogs is that every one focuses on the top of the tree where the biggest fruit is growing, and they ignore the rest of the tree and the smaller fruit that grows where less sun shines.

I am a capitalist and always have been, my friend across the road and down a bit is a capitalist salesman and always has been, the world is full of capitalist that earn modestly and deal modestly. They deal honestly and never make an effort to take criminal or political advantage of competitors.

I guess this puts me at odds with the great Milton Freidman, but I think he engaged in hyperbole in the quote above, in other words I think he is guilty of the same charge I just leveled at the unwashed majority.

The whole subject of capitalism, IMHO, has been allowed to develop to just talking about the upper reaches and the ignoring of all of what put the upper reaches where it is.

I am a street guy. Myself, I struggle with Hayek and Freidman…..Don is pretty good at putting things in words I can understand; but in general when I talk to my barber or the owner of the gas station where I shop, or maybe even the guy who runs the paint department at my local Home Depot, we talk capitalism at our level, we like capitalism, and we understand it isn’t going to happen for us if we don’t get out of bed and go to our business every single day to create the wealth we can.

John V May 19, 2011 at 11:04 pm

Vid,

No. My place is in PA. Long ways away. But I wouldn’t be embarrassed in any event. Would always like meet people I “know” in cyberspace.

Anyway, back to the point:

I agree with what you are saying. But what I am saying is simply the whole idea of “capitalists not liking capitalism” is based on simple human nature. Anyone, from the modest free marketeer to the crony big whig with K-Street boys and his Senators on his phone’s contact list, wants all the good without the bad. THAT, by definition, means capitalists “don’t like capitalism” in a manner of speaking. Wal-Mart doesn’t like it when they hear Target is moving into their area. The McDonald’s franchisee shrugs when he sees a Burger King going in across the street. Any salesman doesn’t like seeing another competing salesman walking into to meet his customer or potential customer. It’s human nature. That’s all it means to talk about this dislike of capitalism by capitalists. Everyone would prefer the gain without the pain.

That’s why vested interests like things like licensing and quotas. It’s anti-free market but it works for THEM.

If you ever follow the work of the Institute for Justice, you see this in action as they defend “the little guy” who has been slighted by some crony-based injustice. Their recent struggle against the Nashville government’s new laws against small independent taxi/limo services is worth reading about…and watching at reason.tv.

Very apt to all this was a recent post at MR. It’s actually quite funny.

http://marginalrevolution.com/marginalrevolution/2011/05/vance-isnt-sure-if-this-article-is-sarcastic-or-not.html

vidyohs May 20, 2011 at 6:24 am

John V,

I don’t think we are debating or arguing different positions as I know and understand thoroughly what you’re saying is as appropriate as what I have said, it is just as I said about my opinion…….it only rarely gets pointed out and entered into the talk because so many people react to the words capitalist and capitalism with their minds going straight to the top of the tree and ignoring all of what puts that top where it is. And, the rest of the tree is just as valid and constitutes a larger body of worth and value than the fruit at the top of the tree.

I merely want to point out that as long as the tree lives and functions, everything from the root-tips to the fruit at the top will be of benefit to itself and life around it.

I do brush up against the works of IJ but do not follow them regularly. I am familiar with what they do, and it is a good and necessary thing.

To close, IMHO, it is becoming more my thought that it is wrong to even link the words capitalist(ism) and crony(ism). Cronyism is such a distortion of the process that I am seeing it as a separate way of doing business that resembles capitalism but warps it so badly that it virtually eliminates all risk for those who are able to indulge. Take the risk out of investments and I would say that it is no longer an investment but is now simply the privileged purchase of larger wealth with the payment of a smaller price.

vidyohs May 20, 2011 at 7:13 am

@vidyohs
I do have a follow on thought that might piss our hosts off as it could be considered presumptuous coming from a street guy addressed to them.

I am going to attempt to put it down as best I can since I am not as well versed in formal economics as most of those who visit the Cafe, much less having the knowledge of our hosts.

I think our hosts, and like minded economist, miss great opportunity to do more service to capitalism by concentrating all their arguments and debates to address the fruit at the top of the tree, and not educating the vast public that constitutes the roots and the tree itself to the fact that they are just as much capitalists as Warren Buffet or anyone at Goldman Sachs and that it is a natural as breathing or sex, and something they simply can not avoid doing (or being) unless they throw themselves totally on the mercies of charity, public or private.

Our hosts and others could draw the distinction between cronyism and capitalism, promote that thought and teach it. Those of us, vast multitude of modest participants, who believe in capitalism and defend it with logic and reason will always be behind the curve as long as the real heavy hitters insist on ignoring us and only talking about the Cronies and their activities.

Why not explain capitalism at a level that will make my barber proud to be an unabashed capitalist and give him words, ideas, and guidance in understanding capitalism from its roots to its fruits. lMy barber knows instinctively what he wants to be and how he wants to participate in the economic activities of the nation, but he has no words, no education on how to defend or promote that because those who should be teaching him are constantly going on about the esoteric ideas of Macro economists and not talking about Adam Smith’s “invisible hand” and who that invisible hand is.

That invisible hand is you, me, and my barber, and we make capitalism what it is, Warren Buffet doesn’t, Goldman Sachs doesn’t. Oh those actors affect us but we make them, they don’t make us. Through education and educated choices the invisible hand could erase them right out of the picture.

Young impressionable school kids, college age kids, get warped because they never run into any real down to earth street level counters to the garbage that socialist teachers are shoveling on them daily.

Where is the education for the invisible hand to teach him to be proud of being such, to exert his strength by being good at it, and to win disciples at the street level to resist attempts to “kill capitalism”, attempts which can cripple but will never kill; but even so, crippling capitalism just makes it more ripe to distortion or criminal activity.

vidyohs May 20, 2011 at 7:27 am

@vidyohs
Okay, in case in my ignorance I was indeed being very presumptuous, I’ll ask, “Can anyone tell me where myself and my barber can find classes in economics at the level I have talking about, or find a good concise street level book that will help us and give us ammunition to use on our kids and their friends.?”

In the limited reading I have done prior to learning of the Cafe, and in none since, have I ever read or heard one single heavy hitting economist talk or hint at what the roots of capitalism are, and why that explains so much why life works for profit as a natural process, not a learned or contrived process.

On the other side of the rift between left and right, we see a whole body of people who believe that capitalism is a imposed process levied on the working class by irresistible manipulative masters. It would shock them to be told that what they hate is as much a part of their natural processes as breathing. But, if they never hear it, never have the understanding put in front of them, then certainly the rift has no chance of healing.

John V May 20, 2011 at 9:57 am

Vid,

Agreed….except one thing:

Cronyism to me is a form of capitalism. I understand capitalism as being a generic term with many forms.

There’s the free market variety, the crony/corporatist variety and everything in between.

The genuine free market variety is more readily seen, as you say, on the smaller scale….independent small business owners who just do it on their own. As companies get bigger and more influential the lure of using political pull becomes more common.

John Dewey May 20, 2011 at 10:37 am

John V: “As companies get bigger and more influential the lure of using political pull becomes more common.”

My observations of some very powerful entrepreneurs – FedEx’s Fred Smith and Southwest Airlines’ Herb Kelleher – leads me to see things a bit differently.

As companies get bigger and gain more exposure, their paths get blocked more and more by elected sloths who are hell-bent on extracting tribute from those companies. Powerful men in government force the powerful entrepreneurs into the unholy alliances.

John V May 20, 2011 at 10:53 am

“As companies get bigger and gain more exposure, their paths get blocked more and more by elected sloths who are hell-bent on extracting tribute from those companies. Powerful men in government force the powerful entrepreneurs into the unholy alliances.”

Yes. I realize this. My answer is a bit general. It’s actually one side of the same coin as to why I prefer free markets with minimal power and discretion to interfere by government. It keeps everyone clean…whether because they can’t play dirty or don’t have to have in defense against dirty play.

Government creates a self-feeding distraction to short-cuts to gain in a corrupt manner…because of human nature. For the businessman who would prefer to be involved, it becomes a necessary evil to “fight fire with fire”. Yes, I understand this. Without the recourse to (or threat of ) government (by labor or capitalist alike), businessmen would have no choice but to concentrate on business.

But, in using FedEx as an example, the larger point I was making in agreement with Russ is to ask yourself if FedEx’s owners and investors would prefer a world without UPS. The answer is yes. THAT is all I mean on the general point.

Methinks1776 May 20, 2011 at 10:54 am

John Dewey,

Well said! I agree with your assessment. This is exactly what happens – sometimes on a company basis, sometimes for the entire industry.

Once the industry is perverted by political intervention, everyone adjusts their business models to this new reality. They lose the ability to even imagine a truly free market environment and there’s little point in seeking to restore the market anyway since politicians will never stop seeking tribute, so the market will always be mangled. Your choice is to either seek political advantage or die. So, at some point, most of us find that competition becomes synonymous with some form of rent seeking.

John Dewey May 20, 2011 at 11:07 am

John V: “ask yourself if FedEx’s owners and investors would prefer a world without UPS. The answer is yes.”

I do not think you can lump together all the shareholders of FedEx in making that claim. From what I observed of Fred Smith and other leaders at FedEx, I would say that winning the competition on a daily and yearly basis – not the profits – was more important to them. Without a strong competitor, it just wouldn’t have been as much fun.

For what it is worth, I believe that Fred Smith viewed profits as not his goal but rather as the means to his goal.

John V May 20, 2011 at 11:15 am

Methinks (and John Dewey),

Again, I understand that side of the problem which amounts to “if you can’t beat’em, join’em”.

As I said way up thread on this tangent:

“They have an army of lobbyists and lawyers in DC to fight for un-free market measures and defend the company against un-free market measures and suits from competitors….usually anti-trust whining.”

Government power creates an avenue for cronyism while forcing others to participate in order to protect themselves.

John V May 20, 2011 at 11:21 am

John Dewey,

Pointing out shining exceptions that run counter to the rule, doesn’t change the rule. My comment that you responded to was:

“As companies get bigger and more influential the lure of using political pull becomes more common.”

As a rule, I think that’s true…regardless of nice exceptions.The little guys have neither the resources or the incentive to get involved at that level. But as power, market share and wealth grow to national or state level attention-getting status, involvement in influencing the legislating/litigating process becomes more common.

John Dewey May 20, 2011 at 11:26 am

John V: “I understand that side of the problem which amounts to “if you can’t beat’em, join’em”. “

Submitting to the will of a thug who has a gun to your head is not the same as joining them.

John Dewey May 20, 2011 at 11:30 am

John V: “Pointing out shining exceptions that run counter to the rule, doesn’t change the rule.”

It’s not a rule just because you say it is a rule.

Those so-called “shining examples” just happen to be the most familiar ones I know well enough to make that claim. But I’ve known other business leaders you may not be familiar with who also would much prefer to be rid of Leviathan.

John V May 20, 2011 at 11:40 am

John Dewey,

“Submitting to the will of a thug who has a gun to your head is not the same as joining them.”

You know what I mean…And I was referring more to competing businesses and not politicians with that statement. Let’s not get nit-picky here.

“But I’ve known other business leaders you may not be familiar with who also would much prefer to be rid of Leviathan.”

We all would. Not that’s actually a subtly different point. Preferring to be rid of Leviathan is not mutually exclusive from what I said about the tendency to involve oneself in policy machinations once he reaches a high level of business with more to lose. Most people can in fact hold both positions together.

My point is simply, again, one of human nature that distinguishes from the general principle one holds vs. specific personal preferences and accommodations one would gladly accept if they could have them.

Methinks1776 May 20, 2011 at 11:52 am

John V,

There are other reasons to seek rent from the government. As government regulation increases the cost of doing business, we seek rent from government in return for bearing these increased unnatural costs. A company can always close up shop to avoid regulation. This is neither the government’s nor the regulator’s goal as it would diminish the regulator’s power and the politician’s tribute. thus, they are usually forthcoming with rent.

Faced with increasing government-imposed costs, companies large and small find themselves in a position where they are unable to survive without rent seeking. Eventually, this happens in every industry.

Brian Saxton May 19, 2011 at 10:37 pm

I think my favorite expression of this thought is this editorial from the WSJ: http://online.wsj.com/article/SB122728924999048295.html

Chris_Y May 20, 2011 at 12:50 am

Dr. Robers interviewed Dr. Freidman here:

http://www.econtalk.org/archives/2006/09/friedman_on_cap_1.html

…In one of my favorite Econtalk podcasts, here’s the relevant quotes:

“Milton Friedman: But it’s always been true that business is not a friend of a free market. I have given a lecture from time to time under the title Suicidal Impulses of the Business Community… It’s in the self-interest of the business community to get government on its side. It’s in the self-interest of a particular business.[...]

But the real puzzle—puzzle isn’t quite the right word—the real problem here is where do you find the support for free markets? If free markets weren’t so damn efficient, they could never have survived because they have so many enemies and so few friends. People think of capitalism or free markets as something that obviously is supported by business. People think that if a business party is a party in politics, it will promote free market. But that’s wrong. It will be in the self-interest of individual businesses to promote a tariff here and a tariff there, to promote the use of ethanol—

Russ Roberts: Special regulations for its competitor that apply just by chance to its competitors but not to itself—

Milton Friedman: That’s right.

Russ Roberts: —or that they already comply with but their competitors don’t happen to comply with.”

Carrie Ann May 20, 2011 at 1:12 am

I’ve always thought of this as a function of “greed is good:” the same drivers of human behavior that lead to innovation and advancement also inherently lead to protection-seeking activities (and individuals participating in a free market should not be expected- or even desired- to avoid such compulsions). Whether consciously or not, the business person seeks to maximize his competitive advantage through the most efficient processes. If government is run appropriately, competitive advantage via tariffs, handouts, regulation, etc. becomes the most expensive and least efficient means to such an advantage and businesses who innovate thrive. However, innovation isn’t easy/cheap, and it seems most politicians are (and hence, so is the government as a whole). When the “cost of doing business” with the government via lobbying, bribes, etc. drops below that of innovating, one can only expect a prudent businessperson to pursue this route of securing an advantage. If anyone in public office were serious about “supporting innovation,” they would realize the government’s role in that is merely to maintain innovation as the most efficient means to successfully competing by keeping the cost of working through the government prohibitively high.

The problem inherent here, as I see it, is that a similar dynamic exists with politicians: they’re equally driven to self-protection. Unfortunately, “innovation” here is rarely rewarded (or perhaps it’s just rare?) and so the cost of securing their positions via handouts is far, far lower. Without a structural check to this (i.e. strict constitutional barriers), we end up with a double whammy of protection-seekers sitting at either side of the table, feeding each other at the expense of taxpayers, innovation, and capitalism as a whole.

Chucklehead May 20, 2011 at 1:38 am

Capitalism is being killed by its achievements.
When considered as a enterprise, investments in lobbying have returns on investment that make wall street jealous.
The health of the nation is inversely proportional to the DC area home values.
Regulation is more likely to be a lucrative legal shakedown racket whose costs consumers ultimately bear, than consumer protection.
Playing the statist game is feeding the crocodile, hoping he will eat you last–but eat you he will.

MIchael E. Marotta May 20, 2011 at 2:55 am

Comment 10 from John V: “….he means the whole concept involving ups and downs. Everyone loves making money … The ones who are most negative towards [capitalism] are the ones with the most to lose from the uncertainty of free markets.”

Thomas Caldecott Chubb founder of the insurance company is famous for saying,“If there were no losses, there would be no premiums.” Warren Buffettt said that he likes people who short Berkshire Hathaway. “”I love it when people short Berkshire Hathaway or companies we own. We get a fee for lending the stock and a guaranteed buyer has just been created.”

A man with two satellite dishes to Chicago told me that in the futures markets, you can buy on the news or buy on the rumor, but 90% of investors sell into their misery. Yet, of course, those markets were created by producers who protected themselves by taking positions opposite to their holdings. When the price goes up, they sell now; when it goes down, they buy — so they can sell later.

In a new anthology, The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times, in separate chapters, David Landes and Michael Hudson, identify the difference between creative and corrosive capitalism. The latter dominates in societies that deny the former. The editors generally point out that in any society, some people will take the best advantage of whatever modes are offered for personal advancement.
In Rome, making money was not honorable, so the wealthy left to their freemen and slaves the management of their businesses. Glory came from looting provinces.

In America today, we allow both the marketing of technology and rent farming. So, we get both. It is not just that both are legal, but that culturally, we do not distinguish between them. Instead of vilifying him for being an idiot, we should be praising Michael Moore for being a millionaire. He should get a hero’s medal for selling large volumes of what people want to buy voluntarily.

I am not sure how to commemorate the chic restaurants in Rep. Nancy Pelosi’s district that won exemptions to opt out of Obamacare. The avoidance of regulation should not be taken lightly.

Instead of praising clever children who memorize the President’s Cabinet, we should be teaching them that “LinkedIn started out in the living room of co-founder Reid Hoffman in the fall of 2002. The five original founders were Reid Hoffman, Allen Blue, Jean-Luc Vaillant, Eric Ly, and Konstantin Guericke.” (http://press.linkedin.com/history/)

John V May 20, 2011 at 10:34 am

Marotta,

“Instead of praising clever children who memorize the President’s Cabinet, we should be teaching them that “LinkedIn started out in the living room of co-founder Reid Hoffman in the fall of 2002. The five original founders were Reid Hoffman, Allen Blue, Jean-Luc Vaillant, Eric Ly, and Konstantin Guericke.” (http://press.linkedin.com/history/)”

ESPECIALLY good point there. History is taught as basically a story of government. Everything is oriented around it. The real movers of everyday history that affect us more closely in the way innovation and invention are generally unknowns.

Ampontan May 20, 2011 at 4:47 am

Alas, such is the price to be paid for believing something you read in the New York Times, particularly about Japan.

Here’s what really happened.

http://ampontan.wordpress.com/2011/05/14/bending-over/

John Dewey May 20, 2011 at 5:48 am

I agree with Methinks and Vidyohs that many capitalists really do like capitalism. Or, at least, I can say without hesitation that many American capitalists really do like free market capitalism. I’m not sure I understand well enough the cultural influences of other populations.

Is it possible that the view of economists is intentionally too focused? Suppose I said that most entrepreneurs desire to earn profits but only through fair play. Would most economists argue that the desire for wealth must have a greater influence on behavior than any morals which might guide the entrepreneur?

Ampontan May 20, 2011 at 6:26 am

Sorry for piggy-backing on my own post, but if you don’t take the New York Times’s word for an article about Barack Obama, George W. Bush, or Sarah Palin, why would you think they have become credible just because you turned the page to the international section?

Falsus in unum, falsus in omnium.

Isn’t it interesting how they get so concerned about free market principles when the objective is to promote a failed left-of-center government?

Paul Andrews May 20, 2011 at 6:27 am

Small-scale capitalism always wins out because it is the default. Individuals can never be completely controlled and will always innovate and seek to benefit themselves and their families and friends. This type of capitalism doesn’t need any “support” – of capitalists or anyone else. It’s just what happens normally and naturally.

Crony capitalism is self-defeating and eventually collapses in on itself. It produces enterprises that don’t know how to compete – these can be propped up for a while for not forever.

Paul Andrews May 20, 2011 at 6:28 am

Edit – “these can be propped up for a while *but* not forever”

Randy May 20, 2011 at 7:42 am

I’d say that it is our nature to seek advantage. As long as there is advantage to be gained by political behavior we will engage in political behavior.

So, is there a way to end the situation in which there is advantage to be gained by political behavior? Not likely. So, why not participate? Why not exploit the exploiters? Why not demand that they keep every last promise that they have ever made, even if it bankrupts them?

John Dewey May 20, 2011 at 8:09 am

I agree that a capitalist may be foolish to not take advantage of benefits offerred by elected officials. But that doesn’t mean all capitalists – or even most capitalists – prefer crony capitalism.

Not sure what you mean by:

“it is our nature to seek advantage”

Are you referring to genetic disposition? Do you mean that humans value the possessions of others more than they value their own sense of justice?

Where I think I disagree with Professor Roberts is in his too-encompassing argument that business people do not LIKE capitalism. I do not believe he can know what the millions of business people around the world like.

I have met many business leaders and entrepreneurs who are convinced they can compete and win on a level playing field. It is elected officials armed with government power who continue to shake down such capitalists.

Randy May 20, 2011 at 10:00 am

John Dewey,

I like the question referring to justice, but it could get real deep real fast. E.g., how can we refer to justice in an environment where the political organization has an established right to confiscate my property? What is justice if not my unestablished right to confiscate it back? And if by justice you mean that I should maintain a sense of propriety while my property is being confiscated, how is that of any value to me? Certainly it has value to the confiscators, but not to me.

John Dewey May 20, 2011 at 10:17 am

I meant that many business owners will try to behave as much according to their own sense of justice as they will based on their economic self-interest. And I am speaking about the true preferences of such persons, not the so-called “revealed preferences”, which I believe to be not preferences but rather acts of survival they are forced into by government mobsters.

Randy May 20, 2011 at 12:17 pm

I’m sure that many do find value in the idea that the system is just, necessary, that they play a valuable role in it, etc., but I don’t see reason to blame those who don’t. That is, I don’t see any objective standard which denies me the right to use political behavior in response to political behavior. They started it.

John V May 20, 2011 at 10:41 am

“I agree that a capitalist may be foolish to not take advantage of benefits offerred by elected officials. But that doesn’t mean all capitalists – or even most capitalists – prefer crony capitalism.”

Yes. But that’s like saying, in the abstract, that almost all people…left or right…say that government is wasteful and corrupt and spends too much money and that the politicians that run it are just as corrupt and that system is broken. BUT, come election time, these same people generally vote their congressmen back into office while not wanting any specific spending cuts that make a difference.

The point here is that supporting something in principle doesn’t mean that people will embrace that principle in a specific case that affects them when the moment arises.

The old evangelist’s line from Phil Collins rings true:

“Do I as say, don’t do as I do.”

John Dewey May 20, 2011 at 11:21 am

John V: “these same people generally vote their congressmen back into office while not wanting any specific spending cuts that make a difference.”

Sorry, but I could not disagree more. I think a majority of voters right now can identify specific spending cuts. They just do not all agree on what should be cut. And that is the dilemma facing those members of Congress who really do want to reduce government.

You may also believe that voters are not going to accept cuts which will hurt them economically. On this I also disagree. I think seniors, the wealthy, and many other interest groups are willing to accept a share of the “burden” of reduced government spending. The problem is disagreement over what share each group should be given.

John V May 20, 2011 at 11:31 am

John Dewey,

Never mind the world of Cafe Hayek posters, I’m simple talking nationally based on opinion polls that include a cross-section of everyone…and not simply the most ardent and engaged. They repeatedly show a contradiction between general opinion and real action on many issues.

But again, all this mulling over the little details distracts from the general premise of thread. It’s based on human nature.

Everyone prefer markets spoken generally. But if offered a specific rigged opportunity where the capitalist is guaranteed a healthy market share and annual growth of 9% with no fear of loss to competition, who wouldn’t take it?? (And don’t say you wouldn’t).

Saying “Capitalists tend to dislike capitalism” is another way of saying that a capitalist would prefer a safe, secure, lucrative and guaranteed opportunity if it were available. You get the gain without pain or fear thereof. It’s actually a very uncontroversial position. It’s human nature. But that doesn’t mean that capitalists prefer “dirigisme”.

John Dewey May 20, 2011 at 11:55 am

John V,

I wholeheartedly disagree with your view on what is “human nature”. I also disagree on your assessment of what motivates capitalists.

“(And don’t say you wouldn’t). “

I’ll say any damned thing I want to say.

Dan May 20, 2011 at 11:14 pm

To seek an advantage?

Whether by knowledge, physical attributes, advantageous associations, or furthering into political advantage, we seek advantages in competition.
I agree that we naturally seek out advantages in competition or at the very least will exploit most advantages offered.
Elimination of temptations of thenhighest order, govt advantages, would mean limiting govt itself.

Paul May 20, 2011 at 8:43 am

This posting, and the related comments show a typical misunderstanding of the words “Capitalism” and “Capitalist”. Capitalism is a philosophy As such it contains a clear set of ethics, a statement of metaphysics, and a defined epistemology. Most businessmen are not capitalists. Consider George Soros, Ted Turner. Jeffrey Immelt, Bill Gates, and Warren Buffett. By definition, a person who believes in Capitalism is a Capitalist. To say that someone is a Capitalist but doesn’t believe in Capitalism is logical nonsense. Words have meaning and if we want to win the battle of ideas we must use them precisely. Those people I listed are Fascists — by definition — they believe in the conjoining of business with the State. To call them Capitalists only demeans the cause of free markets and free people.

John Dewey May 20, 2011 at 10:25 am

Well, I think there are different definitions for the word “capitalist”. According to Merriam-Webster, there are two distinctly different definitions:

1. a person who has capital especially invested in a business
2. a person who favors capitalism

A person can certainly have capital invested in a business without favoring all of the aspects of free market capitalism which you believe in, Paul. You may not agree with Merriam-Webster on the first definition, of course. But I suspect it is that definition which Professor Roberts uses in his post above.

PrometheeFeu May 20, 2011 at 10:42 am

You know, there is a whole continuum between Milton Friedman and Adolph Hitler/Stalin/Mussolini and I would be ready to bet that Bill Gates and Warren Buffet are closer to Friedman than to Stalin. The truth is we will not get perfect capitalism ever. There will always be some extraneous government regulation and some to support it. But that does not mean those people are all fascists. The slippery slope argument is that those extraneous regulations can lead us towards the road to serfdom. It emphatically does not mean that those who are in favor of government accounting standards also want to abolish freedom of the press and murder all opposition. Calling Bill Gates a fascist won’t get us anywhere. If there is a fascist, it’s Steve Jobes! (That was a joke btw)

vidyohs May 20, 2011 at 5:57 pm

No Paul, capitalism is not a philosophy. It is a natural function of instinct. We do not think of breathing, defecating, urinating, as philosophies, why would we think such of profit taking when it is obvious that working to profit is a natural urge, particularly of human life.

Slappy McFee May 20, 2011 at 9:12 am

Russ –

I am wondering if this refutes the answer to question #1 on the pop quiz. Many commenters claimed that the non-DC landlords would benefit from the rent control. This post seems to back my assertion that it doesn’t benefit them as much as hoped because producers don’t like competition. It is the consumers that benefit the most from competition.

Dan May 20, 2011 at 11:25 pm

All of society benefits from the competition. The innovations (business practices, new products, etc.) benefit society greatly and the process of innovating is advanced more quickly by the competition. Competition conserves resources more than than it does not. Competition advances standards of living.

SweetLiberty May 20, 2011 at 9:35 am

I know the Constitution is written on toilet paper as far as the vast majority of politicians are concerned (and probably most US citizens as well who elect politicians to “fix” things, regardless of supposed limitations), but is everything that is considered crony capitalism justified by abusing the commerce clause – or are there other constitutional justifications politicians use as well to give subsidies, bailouts, levy tariffs, etc.? In other words, if there were a constitutional remedy to limit government’s economic meddling, wouldn’t it be based on either reworking or the complete elimination of the commerce clause – thus leaving congress without a leg to stand on?

indianajim May 20, 2011 at 10:04 am

“Capitalists tend not to like capitalism. ”

Yes, but the degree of preference matters. It is true that some “capitalists” “suck up the man” at every opportunity, but there are also those who stridently stare down the state and donate personal fortunes to advance efforts to educate people broadly about the characteristics and consequence of free market competition. It is an empirical matter as to whether the harm that has been (and over what time periods in particular) done by state-sycophant “capitalists” has been greater than the good that has been done by the T.J.Rogers’s of the world.

As your recent video puts it: “The Fight continues….”

John Dewey May 20, 2011 at 10:27 am

**** Like ****

Methinks1776 May 20, 2011 at 11:01 am

ditto

Sam Grove May 20, 2011 at 10:21 am

I received an email link to an article about someone noticing a link between religion (Christianity) and the success of America.

That and this post provoked the thought that the reason for American success is the pouring of human resources into a vast area unfettered by vested interests.

Unfortunately, we now have many vested interests.

PrometheeFeu May 20, 2011 at 10:35 am

The statement may be a bit overly inclusive. There are some successful companies which still believe themselves to be disruptive innovators and therefore want as much freedom as possible to enter new markets and therefore promote real capitalism.

Also, most consumers don’t think of capitalism when they get their groceries and the supermarket doesn’t run out. They think of capitalism when they see prices rising or companies cutting corners on safety and they really wish somebody would put a stop to that capitalistic nonsense of profits which bring out the worst in people. Most people are still waiting for Plato’s Philosopher King who will right the wrong and make everything available, cheap and safe.

Ken May 20, 2011 at 12:20 pm

I’m a consumer. I don’t like capitalism or capitalists.

John V May 20, 2011 at 6:03 pm

So go move to medieval village and make your own stuff. Clown.

Dan May 20, 2011 at 11:33 pm

Capitalism is in the US. If you don’t like it go where socialism/communism’s the prevailing wisdom. Bet you won’t.

Martin Brock May 20, 2011 at 2:32 pm

I don’t identify with “capitalism” for this reason. I advocate free association and market organization, not “capitalism”. Individual entitlement to proprietary use of means of production is necessary for a market in the titles, so I favor these property rights, but forcible propriety of any kind potentially threatens more liberty than it secures. One man’s “property” can be another man’s slavery.

Dave May 21, 2011 at 1:02 am

Dr. Roberts,
I love the Friedman quote (has there ever been a bad one?), and it reminds me of a debate I often have in my political circles. To anyone who proclaims himself or herself “pro-business”, I always reply that I’m NOT “pro-business”, but rather in favor of free, competitive, dynamic markets. It is amazing the number of people who don’t discern the difference.

Mark May 21, 2011 at 7:12 am

I dont like isms, there is allways capitol, regardless of politics and isms. Usually it is in the hands of the few.

Ben May 26, 2011 at 2:03 pm

See, if libertarians, Hayek supporters or Freidmanites were intelligent and self-critical they would recognize that these kinds of paradoxes prove their theories are seriously missing something. Instead, they insist that people and reality are missing their theories, and dogmatically insist on applying this crappy incomplete theory all over the world. If “unrestrained” capitalism always and everywhere creates massive wealth inequality, that wealth inequality is going to have a matching level of power inequality. The powerful elites created by capitalism will use political power to maintain their elite status, regardless of what Milton Friedman or the principles of “the market” ask them to do.

This is how capitalism always has been and always will be. The first corporations and “entrepreneurs” were completely in bed with monarchical power, eventually they replaced that monarchical power with representative democratic power, because it’s more efficient than capricious stuffy monarchs. Then they replaced representative democracy with oligarchy, because that’s more efficient as well (especially if it has a facade of democracy draped over it). Nothing in the true capitalist mode or mind gives a shit about any kind of principle, they want nothing but wealth, efficiency, and protection from loss. Only the stupidest most obnoxious academic theory-heads can embrace that greed and transform it into a set of holy principles, cooked up in some bullshit models of “economic equilibrium” that have NEVER existed in real life (despite many ultra-violent attempts to impose them on populations) and only by ignoring or pretending to be surprised by bankers or politicians violating those principles can those theory-heads hang on to their stupid dogmas. If economics is a science, then it’s about studying what happens, not studying and modeling what could happen and being constantly bewildered when it doesn’t.

God, i fucking hate libertarians.

Tony Fernandez June 2, 2011 at 5:58 pm

The problem is government, not libertarian theories. The problem is these “socialist solutions” that make a mess of things. If governments made the policy recommendations of libertarians, then we wouldn’t have the problems we have now. Don’t blame the theories, blame those who do not follow the advice of libertarians.

The powerful elites rigged the system to keep them as the elite. In a true free market economy, their wealth would be subject to the desires of consumers. When you rig the system so you always win, that is where the problem begins.

Tony Fernandez June 2, 2011 at 5:56 pm

Economists have known this for years. Big business loves big government because it protects them from new competition. Why others can’t understand this I can I only explain by maliciousness.

Previous post:

Next post: