Sunday, February 3, 2013

Consumers of the World Unite!

Those from socialist-leaning cultures frequently complain about the wastefulness and lack of culture in the consumer-oriented US economy. It is almost as if their egalitarian vision of the future is of equally-refined individuals living in equal poverty.

Such a gray and uninspiring vision of the future perhaps explains the failure of leadership that ultimately strikes these cultures. For example, the old Soviet Union sought to take advantage of the economies of scale in manufacturing automobiles. There were only a few styles and one color: black. This was supposed to lead to an abundance of cars due to the reduction of costs on a national scale, but the real result was utter economic failure compared to the auto industries in the capitalist West.

Socialism generally fails to recognize that wealth and the economy are not fundamentally driven by economics, but by human psychology. Capitalism is more about leadership than economics. It is about how to inspire large numbers of people to work collectively and productively.

The capitalist Henry Ford, founder of Ford Motor Company and a consumerist, approached the auto industry differently. He priced his vehicles to sell in a free market, and the people inspired themselves and others to get the money to buy one. Note that he also used economies of scale, and the first Ford autos also had only one color: black. The real difference between Ford and the communists of the Soviet Union at roughly the same period of time was that he was trying to please the people, not command them.

In the Soviet Union, it was seen as a waste of resources to provide a car to someone who did not need it (in the socialist sense). Public transportation is less expensive than the auto, after all. Very few were excited about cars in the Soviet Union because the psychology was about scarcity and conserving collective resources rather than abundance and individual choice.

People everywhere are the same in their drive to be different and to distinguish themselves. In some ways it is the very purpose of socialist and communist systems to frustrate this drive. Capitalist economies eventually overwhelm communist and socialist economies because capitalism encourages this drive and puts it to economic use.

Socialist systems are still popular in part, however, because they answer several basic questions. People want to know how their children will be educated, what will happen if they or their children get sick, and how they will be taken care of when they are old. Capitalism and individualism are for the rich and for strong, healthy, and childless young people. We all cease to be individualists when we are sick enough or old enough, and when we have to raise children.

The US is bankrupting itself right now because of student loans, Social Security, and Medicare. Capitalism at first could ignore these issues because life was tough for everyone. Even the rich suffered from disease and accident in roughly the same ways as the poor, and education was not thought necessary. Things are different now. Now everyone knows differently and capitalism has not yet changed enough to meet these challenges.

The reason why capitalism has a problem with these issues is the idea that the money with which to buy education, health care, and retirement only goes to deserving individuals, where "deserving" is narrowly defined. The most narrow definition of "deserving" in this context is Rudyard Kipling's "If you don't work you die." Paraphrasing this in the early capitalist and communist social contexts: If you don't work, we will let you die – if we do not kill you ourselves.

These views are too simplistic, however, because there have always been those who did not have to work in order to live (and be educated, have health care, and retire). These include at least the children and spouses of the rich, and even the rich themselves after they have made their fortunes. In order to create a society that is always improving, providing the most and best it can for the most people, we try not to let anyone die any more because of lack of money. That is, we slowly are adapting capitalism to take care of everyone, but if we are to achieve this vision of the future, more will need to be done. That is why the US is taking the risk of bankrupting itself over these issues – we still believe that we can achieve an even better society.

The narrow communist focus on labor turned out to be insufficient. Under capitalist leadership, economies jumped ahead of their communist counterparts without the need for gulags and starvation tactics to get people to work. Capitalist economies have been able to provide more and more for those who are able to labor less and less. As it turns out, "From each according to his ability, to each according to his need," works better in the capitalist system than in the communist system.

Perhaps it is time to throw away another vestige of the communist system, and that is "Workers of the world, unite!" This is no longer necessary. We want to change this (for the time being, at least) to "Consumers of the world, unite!"

With its emphasis on labor and production, communist theory never devoted enough thought to the consumption side of economics and its relationship to productivity. That may be the primary reason why the people of China are still relatively poor. Satisfying individual needs at the minimum level while demanding maximum individual productivity will only inspire an individual so far, and the vision of a future utopia will inspire extra individual sacrifice only for a short time.

To put it another way, the problem with communism is that there are not enough buyers. Output means nothing if no one will buy it. The genius of capitalism and men like Henry Ford is to inspire consumption to match productivity in the free market. People will work hard for a bowl of rice and harder for a boring black vehicle to drive. People will work hardest to earn enough to buy that red sports car that they have their eye on. Perhaps it boils down to this: communism is boring and capitalism is exciting.

However, despite the superiority of capitalism over communism, we cannot depend on capitalism as it is today to lead us to a better future. The days and vision of Henry Ford are gone. The rich today do not necessarily support capitalism even though they are perceived as "capitalists," and they are trying harder and harder to squeeze ever more money out of the economy. They can do this now because they have enough money and political power to distort the markets in their own favor. Instead of creating and spreading wealth, they are concentrating it in their own hands. They are leading us to a system that will not be capitalist any more.

The rich are net producers (sellers) and therefore they always seek advantages over net consumers (buyers). Since the rich can withstand economic downturns far better than the poor, rich producers can use (or create) poor economic times to take advantage of poor consumers. Also, since there are relatively few producers compared to the number of consumers, the producers can use divide-and-conquer tactics against the consumers.

This suggests that today, successful defense against the concentration of wealth and production among the wealthy will require "collective bargaining" by unified consumers. An early example of this is Walmart, always demanding higher quantities and better quality from its suppliers for less money.

US consumers make up seventy percent of the US economy and about seventeen percent of the world economy. It is not our exports that drive the world economy, but our imports. All nations produce, but our real advantage is in our consumption. Yet we still do not get the best deals because we enter the market as individual buyers rather than as a collective of buyers. Companies like Walmart fill that gap to a certain extent, but it is not enough.

Furthermore, the financial system supports production, not consumption. Even capitalist economies for the most part see production as superior to consumption. Consumption is seen as a reward for production, not as an equal partner in the economy. It is equal, and the failure to recognize this has caused slow economic growth in many nations.

A primary problem is that a single currency cannot support both consumption and production. Monetary policy supports lending to increase production and (hopefully) income. Public borrowing purely to support consumption is problematic because it nearly always ends up collectively in bankruptcy. See Greece as an example. The reason has already been described. It is the mismatch between the power of rich producers compared to poor consumers in the markets.

At the very least, we need to divide economic activity into a rich market and a poor market, where the rich cannot participate in the poor market, but the poor consumers pool their economic power to participate collectively in the rich market. Production is now so efficient that we should be able to take care of everyone without taking on enormous debts. What really happens instead is that individuals take public money and then can find only bad deals in the markets, spending too much for too little. Only collective consumer power can demand good deals in the markets.

A simpler way to say all this is that capitalism makes good use of the human drive to be different and distinguish oneself, and therefore encourages increased buying to match the selling of increased production. This usually grows economies in good ways. However, when borrowing is in the same currency for both production and consumption, a growing economy dictates that these different kinds of borrowing compete with one another in the same credit markets. Borrowing for production competes with borrowing for consumption and vice versa, until everyone borrows too much and at too high a cost. Both production and consumption crash at the same time, within the same business cycle.

Breaking the connection using multiple currencies, and therefore multiple credit markets, seems a straightforward way to mitigate this problem and reduce economic volatility. If either production or consumption seems too "frothy," steps can be taken to settle the one market without directly disturbing the other. Just because we believe that production and consumption are equal in the markets does not mean we believe that they are the same and that they both should be regulated by a single set of policies.

Socialism for the socialists and capitalism for the capitalists.
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