January 24, 2012
Adam Smith: Furtive Marxist?

George Scialabba reviews Nicholas Phillipson’s Adam Smith: An Enlightened Life.  In the process, he relates Smith’s observations about the relationship between workers and employers:

Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.


What are the common wages of labour, depends every where upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour. It is not difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it.


Such combinations, however, are frequently resisted by a contrary defensive combination of the workmen; who sometimes too, without any provocation of this kind, combine of their own accord to raise the price of labour. … But whether the workmen’s combinations be offensive or defensive, they are always abundantly heard of. … They are desperate, and act with the folly of desperate men, who must either starve, or frighten their masters into compliance with their demands. The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen.


What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves well fed, clothed, and lodged.


That a little more plenty than ordinary may render some workmen idle, cannot well be doubted; but that it should have that effect upon the greater part, or that men in general should work better when they are ill fed than when they are well fed, when they are disheartened than when they are in good spirits, when they are frequently sick than when they are in good health, seems not very probable.

There you have it.  Adam Smith: Das Kapitalist.

September 14, 2011
Henry Ford vs. The Shareholders: An Informative Exercise In Capitalism

In 1916, Henry Ford made a controversial decision that did not sit well with the other shareholders of the Ford Motor Company: he vowed to stop paying “special dividends” to shareholders (of which there were only eight at the time, including Mr. Ford’s 58% share), and instead pay only a regular dividend of $1.2 million, while investing the remaining profits back into the company in the form of lower prices and higher wages for his employees.

Here is an amalgam of two statements made by Mr. Ford explaining his decision, separated by the ellipsis*:

My ambition is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes.  To do this, we are putting the greatest share of our profits back into the business… . I do not believe that we should make such an awful profit on our cars.  A reasonable profit is right, but not too much.  So it has been my policy to force the price of the car down as fast as production would permit, and give the benefits to users and laborers.

Between 1911-1916, the company had paid a total of $41 million in “special dividends” distributed among it’s eight shareholders ($811,040,605 in 2010 dollars).  Ford’s intention was to end these payments and re-invest them into the company.  

The Dodge brothers, who co-owned a 10% share in the company, brought suit against Ford.  The Dodge brothers argued that Ford has breached his duty to run the corporation so as to maximize its profitability for shareholders, as governed both by Michigan statutes and by the Certificate of Incorporation and bylaws of the Ford Motor Company.

The trial court sided with the Dodge brothers, and ordered Ford to declare a dividend equal to 50% of the surplus cash of the company minus special dividends paid between the time at which the suit commenced and July 31, 1917.  This amounted to $19.3 million ($325,198,065 in 2010 dollars), to be distributed among the shareholders of the company.

The Michigan Supreme court, affirming this portion of the ruling, said the following:

[Mr. Ford’s] testimony creates the impression, also, that he thinks the Ford Motor Company has made too much money, has had too large profits, and that although large profits might be still earned, a sharing of them with the public, by reducing the price of the output of the company, ought to be undertaken.  We have no doubt that certain sentiments, philanthropic and altruistic, creditable to Mr. Ford, had large influence in determining the policy to be pursued by the Ford Motor Company…[but] A business corporation is organized and carried on primarily for the profit of the stockholders.  The powers of the directors are to be employed for that end.  The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the non-distribution of profits among stockholders in order to devote them to other purposes.  It is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholder and for the primary purpose of benefiting others.

In other words, corporations have a legal duty not to run their business for the benefit of their employees or even consumers.  They have a legal duty to maximize the profits of their shareholders.  All other duties are subordinate to profits.

This is something to keep in mind when analyzing the wild rhetoric of “angry Leftists” who seem to be irrationally pre-occupied with the immorality of the corporate business model.  You may question their partiality on the issue, but the law actually supports their view: corporate Boards have a legal duty to maximize profits, even if they do so at the expense of potential benefits to employees and consumers.  The example of what was done to Henry Ford by the Dodge Brothers demonstrates how this has played out at pivotal moments in our history, and how the law actually protects and encourages a profits-driven approach to Corporate Governance, at the expense of employees and consumers.

*all quotes taken from Eisenberg & Cox, “Corporations and Other Business Organizations,” Ch.4, 10th Ed., 2011.

UPDATE: I feel honor-bound to mention that modern law is not as draconian with respect to fiduciary duties to shareholders as it was in 1916.  For example: today many states have statutes which encourage corporations to engage in reasonable charitable giving.  However, these statutes do not allow charitable giving which significantly undermines the profitability or value of the company’s shares.  Thus, while some leeway is given by modern statutes, it still does not undermine the legal duties of corporate fiduciaries to maximize profits.  Shareholder profits still come first.  And it is doubtful that Henry Ford’s case would be resolved any differently today, since his decision had a massive impact on the profitability of the Ford Motor Co. for its shareholders, even though the benefits would have flown directly to consumers and his employees.

August 26, 2011
"People In Poverty Are Just Lazy"

I worked hard and got a good education, yet I am poor. I have no money and haven’t worked in years, and if it weren’t for my parents letting me stay with them I would be homeless. The notion that poor people are just lazy isn’t new. People have been asserting that Randian trope for years. [David] French adds a claim that religious attendance (if this were true, Nigeria should be an economic superpower) and moral depravity are also to blame.

The problem with this argument is that I believed it.

It may seem obvious to others that someone who completed an undergraduate double major in three years and graduated from a top ten law school can’t really be described as “lazy” but it took *years* of therapy before I could even contemplate the idea that it wasn’t my fault, I am not lazy or a bad person, but that I am suffering from depression. It is still sometimes difficult for me to accept that this isn’t my fault, but French seems to have no problem assigning that blame.

I wonder how this affects other people who are living in poverty. It seems like if you tell people that they are poor because they are lazy and immoral, the message that you’re sending is that there is no hope. Unless you believe that the poor have just decided that they would prefer to be lazy and depraved and they can wake up one day and simply choose to become virtuous hardworking citizens.

I started receiving food assistance last December after hearing about the program from a neighbor. My parents would be struggling financially even if they weren’t paying for my therapy and medication, so I figured it would help a lot if they didn’t have to feed me as well. I get $200 a month which can only be used to buy unprepared food. A few days after I started receiving this I happened to hear my state’s new House Speaker, Jase Bolger, talking about plans to limit the program I had just joined. He made it clear that he was doing this to *help* people on assistance:

“Michigan should help its citizens break the cycle of dependency, not create one for them,” Bolger said.

Really? $200 a month for food is going to create a cycle of dependency? People would go out and get a job but they just don’t want to give up that free six and a half dollars a day of food? The minimum wage in Michigan is $7.40/hr, and you think people are not working because you’re giving them less than that a day in food assistance? If there really are people with such an epic level of laziness I would suggest that the threat of starvation will not magically turn them into hardworking, moral citizens.

I like capitalism. I believe it is very effective and I value the freedom that it brings. But free markets are not bags of pixie dust that can be sprinkled on all of societies problems, and all of the failures of the market cannot be blamed on the moral failings of the less fortunate.

August 21, 2011
Catholic Theories Of Capitalism

John C. Médaille takes the left-Christianist line:

In the standard theory of economics, only freedom is considered in the belief that justice will take care of itself. But the Church responds by saying that freedom itself is dependent upon justice, and to ignore the latter is to destroy the former. Freedom cannot be reduced to a mere competition of unrestrained desires. This describes not freedom, but license, and licentiousness always doubles back on itself to destroy freedom. No, true freedom starts with justice. And our Easter freedom means moving away from not just personal injustice, but also from those “structures of sin” (as the Blessed John Paul called them) into the freedom of Christ.

This is not merely an otherworldly call; every religion, but particularly an incarnational religion, has meaning in terms of our concrete social, political, and economic systems. And as Christians, it is our task to make the gospel concrete within our social institutions. Indeed, that is the whole reason for renewing our baptismal vows.

Robert T. Miller’s riposte:

The magisterial doctrines of the Catholic Church entail very little about economics or even politics. They do not, for example, make any particular form of government morally obligatory, and thus the autocracy of the Roman Empire, the constitutional monarchy of Elizabethan England, and the democratic republicanism of the United States are all morally permissible. Similarly, Catholic doctrine does not make any form of economic organization morally obligatory; rather, a wide range of systems, including both capitalism and distributism, are morally permissible.

Now, I suppose the editors asked my opinion on this question because they expected me to argue that capitalism has some special moral standing in Catholic doctrine. Although I will not go that far, I will defend a more modest proposition, namely, that, for people like us in a society like ours, capitalism is the most reasonable choice among the various economic systems we might adopt.

August 16, 2011
Rescuing Capitalism From Itself

Nouriel Roubini worries about the state of the global marketplace:

So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.

Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China – and soon enough in other advanced economies and emerging markets – are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world’s middle classes are feeling the squeeze of falling incomes and opportunities.

To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.

How about a surplus-driven welfare State? Like Sweden?

In the last decade, from 1998 to present, the [Swedish] government has run a surplus every year, except for 2003 and 2004. The surplus for 2011 is expected to be 99 billion ($15b)kronor.[31] 

August 3, 2011
"Activists who romanticize the pristine life of the poor and the indigenous, and ignore a great deal of misery and stagnation, should keep in mind that the horrors of capitalism fade in comparison with the horrors of pre-capitalism."

(via ilyagerner)

I like this quote.  I’m not an anti-Capitalist, and I don’t think many Liberals actually are.  I think the average American Liberal merely tries to identify self-destructive impulses within free-market systems that increase individual utility at the cost of collective utility, and minimize the impact of those impulses through sound policy.  Seeking out these impulses does not change the fact that Capitalism is the least-worst option among economic schemes (at least those founded to-date), but is inherently cannibalistic (see the role of unregulated CDS’s in the 2008 Fiscal Crisis).  Things like The Uptick Rule and Federal Bank Insurance help prevent individual impulses from creating systemic havoc, and improve overall utility by preventing these self-destructive impulses from being perpetuated wholesale, to everyone’s detriment.

May 1, 2011
Economic Theory. Life Theory.


The economic theories we hold true today were ideas developed at the inception of modern capitalism. The failure to take modern science and environmental knowledge into account is a failure of human logic. While the foundations of our prevailing capitalist ideals are being highlighted, it us of the utmost concern to all humanity that our debilities be shored against the common understandings of humanity.

Our only collective concerns are the decisions made on behalf of the human race. We represent a parasitic presence incapable of moderation and sustainability in the absence of regulation. Beyond the borderlines of politics, regional respect and sovereignty, the impetus of our species must make the focus of our ontogenesis the respect and alimentation of our habitat.

Failure to respect the power and the void of morality associated with rampant pure capitalism will surely result in the undoing of the human race. To understand ourselves, we must be bereft of pride. The parasite on the face of our planet has a name; homo sapiens. In order for our path to be divergent with that of a parasite, we must sustain our host in order to create symbiosis.

Pure capitalism is based not upon balance, but infinite growth. Perdurable growth is unnatural and unsustainable. The sooner we make peace with our reality, the sooner we can move forward.

A Free Marketer would respond by mentioning that markets inherently regulate themselves through the business cycle: the fallacy of infinite growth is limited by the price mechanism, which reduces consumption of scarce resources as they become less available.  However, I think the obvious response to this is that the price mechanism is not capable of efficiently regulating goods for which there is inelastic demand, or where unpriced externalities exist, or where cultural mores undermine market mechanisms.  While the price of gas has been going up recently, consumption has not decreased in anything resembling proportion.  The environmental effects of coal (and their negative impact on human health) are completely unrepresented in the price of coal, but rather, are transferred to the healthcare industry.  And until we refuse to treat people at hospitals who can’t afford to pay for it, and let them die in the streets, the market will be incapable of controlling spiraling healthcare costs, because at a certain point of poverty, you can demand healthcare for zero dollars.  

In light of these conventions, markets do in fact require regulation to function efficiently.  That doesn’t mean regulations are always good, or that markets aren’t capable of functioning without regulation.  It just means that there is nothing magical about a free market.  Markets efficiently self-regulate the distribution of scarce resources most of the time, but sometimes they don’t.  And top-down intervention is required to alleviate those blind spots.

April 20, 2011
The Other Side Of Capitalism

From Sullivan:

Dave Weigel reviews Mike Daisey’s one-man show, “The Agony and the Ecstasy of Steve Jobs.” Half the performance “is a history of Apple computers and Daisey’s own appreciation of the company and its products.” The other half “is an increasingly dark, increasingly painful retelling of Daisey’s reporting in Shenzhen, China”: 

Working undercover, Daisey saw the nets that had been erected to catch suicidal workers who jumped off the building. He met workers whose spines had started to fuse together from 12-hour or 16-hour shifts. He met 12-year-olds who assembled iPhones and iPads. As he talks, the realization grabs you — your beloved little phone was put together by a serf, and you didn’t even care to find this out.

This is an unusually honest, un-cynical monologue. It is not propaganda; you don’t leave it pumping your fist and calling for the end of capitalism. You leave it with a better and more honest understanding of capitalism, one that has no comfortable place in politics.

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Filed under: politics capitalism china 
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