Why Capitalism?

January 11, 2018
I recently had a conversation with my sister in law where she argued against capitalism. She said that she had given up on it as an economic system and cited cooperative business models as an alternative. I argued the merits of the capitalism and expressed doubt that any such society existed. She later sent me a list of links to testimonials and “Ted talks” about cooperatives. She included comments of dismay over the gigantic salaries given to CEO’s.  Since I spent much of my day researching the data and claims, Jeff suggested that I share my response to her on my blog. So here it is.
If you want to check my data claims, just google the questions and the data is readily available. But I caution you to read to the end of every post. Some have details about how the data used was collected or what incomes were counted only at the very end of the studies and in some cases it gives an entirely different picture if you consider that the methods were aimed to achieve a specific result.
Here is my response with some editing for clarity.
I watched several of the videos and did some research on the Italian system. I also did some fact checking for some of the claims.
Here is what I found.
The Ted talk with Jim Brown begins with him making a statement that the USA is a leader in world poverty. This is WILDLY untrue. The worldwide standard of poverty is earning less than $3.10 American-spending-power-adjusted dollars per day. There are dozens of countries around the world where their poverty numbers using the $3.10 number are over (some well over) 50%. That is the global standard for poverty.
In the USA, poverty levels are calculated on income reported to the Federal Govt. The figures do not include government funds such as food stamps or subsidized housing or medicare that poor people receive in addition to their wages.  Yet the “poverty level” in American-spending-power dollars is more than 10 times higher here than the 3.10 used worldwide. Any single person making less than $1000 a month is considered impoverished. We had 4 kids before we had an income high enough to disqualify us for free lunches for poor families. But we owned our own home, had two cars, and had all the food and clothes we needed.
So our standard of living is so high that we consider a person poor here, when they would be wealthy by the standards used in most countries around the world. Freedom and the companion capitalism has produced that standard unprecedented in world history. So it is completely disingenuous to make a statement like he makes. We define poverty completely differently than most of the world. Even those living exclusively on govt. welfare programs are wealthy by global poverty standards.
Co’ops can work well within a capitalist system in small niches. In all the reading and watching that I did, I saw evidence of NOT ONE coop business that was a social system in itself. The coops were each a hybrid form that needed capitalism as a foundation. It’s a business model that can be successful as long as there are outside customers to buy the product and a donor to start the business in the first place.
Jim Brown used the Freedom Quilt guild as an example of a successful coop but they best demonstrate why it doesn’t work long term. The market for quilts eventually diminished.  Also members retired or moved on. In a free system, that will eventually happen with every sort of non-food producing coop.   Coops are specialized. When the market changes, they can’t readily adjust. IF in the happy circumstance that they can’t meet demand, they hire people to work for them like any other corporation. There is not an unlimited supply of quilters and if prices are too high, it kills the market. The Freedom group moved to mass production model with hired wage earners.  The biggest downside to the coop business model is their inflexibility. Without a saavy president or CEO anticipating market changes and creating new avenues for marketing or products, recruiting new members etc,  the coop stagnates and then dies away. The Quilters Freedom coop went through all of these stages and eventually dwindled away. That county in Alabama is STILL one of the poorest in the nation. So the coop was a temporary fix for a larger problem.
 The laundries and solar companies  (she sent me links to testimonials about a laundry business and a solar panel company) are worker owned, but they are HIRED initially and then can spend part of their wages to invest in the company. And before any of that can operate, an investor must build the facility. There always has to be a donor. There have to be leaders also to organize and devise rules of operation. So though they are slated as “worker owned” without leaders or CEO’s, that’s not actually true. The philanthropist that starts the laundry or the solar business may not be making more than the average worker, but he works for his mansions on high. Of course this requires an entirely altruistic wealthy individual and so we’re back to the pure-hearted donor making his money from an outside source.
As I looked at all the models,  each coop has the same potentially limiting factors. The laundry provides a little more prosperity and opportunity to it’s worker/owners for a while, but the local hospital could close. The market demand is stable so there is no growth potential for the business or for the individuals.  The market for clean linens could be swept away in the grunge revolution. Or eventually (hopefully) the next generation will want to do something more fulfilling than laundry, get an education and find better employment. The market for laundry workers will age out, just as it did with the quilters. The market for solar will eventually be saturated or someone will invent a superior product that will make that business obsolete. (Do you know that solar generators have a life expectancy almost precisely equal to the time it takes for them to pay for themselves in costs saved?)
You may remember that I worked at a factory job. I silkscreened football jerseys in Licking MO. My factory coworkers were poorly educated, and told me they spent of lot of income on booze and smokes. Pay started at about 15% above minimum. The factory was their world and it was striking how little interest they had in leaving their sphere. I never perceived a feeling of resentment toward the college educated employees who started at triple their wage. They worked in an adjacent building but  it simply wasn’t in the silk screeners’ path. When I explained to some of my coworkers that I was getting married and going back to school and would probably not live in MO again after my marriage, they wondered at it and explained it to themselves that I wasn’t from there, so I had different ideas. They had no thought of doing anything different from what they were doing and were apparently content. It wasn’t that they could leave, it was that they had no interest in leaving.
The perception about how much CEO’s earn relative to employees is VASTLY exaggerated in most cases. Companies paying CEO’s huge incomes proportionately to business results are a tiny fraction of business that make up the American economy. There are over 7000 companies listed on the NASDAQ and NYSE. Only one third of American workers work for a business that is publicly traded, and the statistics used on the anti-CEO websites are a reflection of about 5% of publicly traded companies. (The largest 200) So those extreme examples used in the propaganda represent less than 2 percent of total  American businesses.  There is a strong relationship to the size of a company and the size of the executive’s paychecks. So the reporting is done on the exceptions to a great degree.  The idea that overpaying CEO’s is a systematic practice throughout AMerica is not supported by data. They use only the portion of companies most likely to have that condition and present it as the normal. They generalize  falsely just as they do with poverty numbers and give a grievously false impression of the true condition.  There again, of course CEO’s pay is also the result of supply and demand. If the cost of an effective leader starts at a dollar but there’s only one in 10,000 who can do the job properly, businesses would be dumb not to offer to hire a competent leader at a much higher cost rather than an incompetent just because he or she is cheaper.
Many many American companies have profit sharing programs. At Farmers Insurance, where Jeff worked his whole career, employees are given a percentage of their wage based on meeting company goals and performance. Everyone wins when the CEO leads well, the investors invest well, the claims workers do their jobs well, the salesmen do their job well, etc, etc. Every company has some elements of Coop theory if they want to thrive. Capitalism allows them to be rewarded for working together well.
There is a catch phrase that people often accept which is blatantly false. “In a free (capitalistic) economy, the rich get richer and the poor get poorer.” This is contradicted by the statistics. As the standards of living rise for the rich, they rise for the poor. When the rich are richer, the poor have more opportunity.When the rich are getting richer, unemployment is reduced. Our economy is thriving now and we have almost reached a statistical zero unemployment rate. (That disregards those who do not seek to be employed) When the economy is thriving, charitable contributions soar. But when the economy is downturning, charitable giving does not follow that same pattern and remains proportionately high.
I recently did a study on the relationship between charitable giving and political leanings. People may call themselves “Liberal” but they are anything but that when it comes to charitable giving. The more blue any given state is the lower the percentage of personal income donated to charitable organizations of any variety. Utah led the nation in charitable giving, not only to the church but also to other charitable organizations as percentage of income.
Note what has happened with this recent corporate tax cut. Companies all over the country are announcing employee bonuses, hiring new employees and raising wages. New businesses are starting. When businesses thrive, opportunity abounds. When a controlling entity of governance skims off the cream, the leftovers are weaker and watered down. If you examine national economies around the world, the median standard of living is directly proportionate to the level of freedom the people enjoy.
In China, we learned that the current chairman traveled around the world and recognized that capitalistic countries lived better. He decided to allow a higher level free enterprise in one section of China, (the area nearest Hong Kong). That region quickly blossomed into the most prosperous in the country. So they allowed more free enterprise elsewhere and got the same result. Our guide concluded that it was “a very good thing for China. People are happier and they can do things they never could do before.”
To my knowledge, the purest attempt to live by the principles of an economic coop system were with the Mormons in Kirtland around the 1840s.  They started with donors. In one instance that demonstrates the whole, a thriving farm was donated to the Church for the cooperative use and labor of the members. Within a few years, (I think it was only 4 years!) the farm was in serious disrepair. There were several families living there in squalor and nobody was doing the hard labor of farming. There was nothing wrong with the farm. There was nothing wrong with the principle. But the recipients were not ready to make the sacrifices necessary for the benefit of a community without gaining more than subsistence for their work. There was nobody with knowledge and experience of farming directing the operation either.  Human nature is self centered. Only a perfectly righteous and pride-free society will ever or has ever succeeded with a purely cooperative form of society.
Current coop systems are much more similar to conditions of slaves. They work for their subsistence but they are strictly limited to the sphere of the coop, where they can never penetrate the iron limits of the business model. Even skilled American slaves were generally allowed to keep half their earnings. In a true coop system without any free enterprise, a worker has no incentive to work an extra hour or do something extra well because he/she has to divide the benefit with 50 other people. Skilled slaves, on the other hand, worked twice as hard, but they got to keep at least part of the resulting prosperity.  A coop is far better than idleness. It’s main success is that it can provide a more stable home life for youth so that they can receive an education and partake in the vast opportunities this nation offers.
I have been interested in the Kiva micro loans which enable donors to give small loans, often to coops around the globe.  The coops generally work to provide subsistence. The nature of the coop prevents them from thriving much beyond that sphere because of the limiting factors mentioned above, limited market, limited flexibility and the diminishing work force. MOST of those applying for KIVA loans write that they want to earn more so that they can send their children to school. They demonstrate the power of free enterprise allowing upward rising. Those who don’t belong to coops apparently rise much faster, even if they have a similar starting point regardless of the industry.
One last point. You cited the flat wage growth over time for lower income earners. I looked carefully through the most current charts and noticed a huge flaw in that interpretation of the data. Mean income is measured for certain ranges. Data shows that the income for the poorest segment of society has risen somewhat over the last 60 years. Each level measured, (poor, lower middle, middle, upper middle, wealthy and top 5% has seen a steady increase, but with the wealthiest much wealthier than 60 years ago. So it might suggest that the poor are downtrodden and the wealthy are hogging prosperity. But what those charts don’t show is the fact that each of those segments of the population is fluid. During that 60 year period, I have moved in and out of the very lowest almost to the highest. So it utterly fails to depict the truth that I used to be poor and now I’m rich and that is true of my generation.   What I wonder is, why is the poorest class better off at all? Probably because their now-wealthy parents are sharing with their adult children. Our children don’t have to eat beans and rice for very long. Doesn’t the upward trend on each level of income prove that capitalism raises the entire society, even those who contribute the least? Today’s poor are not as poor as we were and the entire nation trends upward in economic security. This is not true in any other model other than when saints live collectively in righteousness.
Off topic, sorta. California is raising their minimum wage. The budget office estimates that this will cause the net loss of 450,000 jobs over five years as they phase it in. Who will be most injured by this effect? The lowest income earners. This is reverse capitalism and its effects are devastating to prosperity. The upper earners will move to a more business friendly state, (as they are already doing.)
Capitalism isn’t perfect. There are predators and there is corruption in the human race and capitalism has no protection inherent in it. Yet for raising the standard of living for an entire society, no other system can touch it statistically. No other system can even come close.  In my observation, this prosperity also reaches the poorest peoples in the world. Poverty, world wide is getting better by inflation adjusted numbers and much of that is because wealthy people share. Our nation shares it’s prosperity both directly and by buying the products made around the world.
Pew research indicates that Americans’ wealth increases with age and genuine progress has been made against poverty. Here’s a link to some interesting data

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