Saturday, October 18, 2014

Why Capitalism, Not Socialism? Because Milton Friedman

Honestly, I have been a proponent of the free markets sans government intervention after I was enlightened by the simple logic of Austrian economics. After watching this issue being debated by David Hannan a few months ago, I have been won over by the capitalism camp and I have come to agree with his very simple statement: (10.08 - 10.18)
"Don't make the mistake of judging socialism as a textbook theory, but judging capitalism by its necessarily imperfect outcomes."
I have been doing some personal education recently to give myself further reasoning to substantiate my position, reading many articles from both camps (even the communist camps) and I really have to admit, as much as socialism is a lovely idea, it just isn't logical or practical at all.

However, I will concede that socialist policies within a country can be useful, but rarely in the purely economic sense. Their benefits, even though economic in nature, usually provides for other less tangible benefits, such as social stability and harmony.

Amongst my research, I very pleasantly stumbled upon a series of lectures given by Milton Friedman. This guy blew my mind.

If anyone can argue against the points he brings up without bringing in hippie logic into the equation, I would be very impressed. I find his arguments very logical and rock-solid.

Responsibility To The Poor

Q: "Have you ever been on welfare or poor?"
A: "Of course, more so than the people in this room....

That is irrelevant. Is there one of you who is going to say that you don't want a doctor to treat you for cancer unless he himself has had cancer?"

Equal Pay For Equal Work

I have to admit, when I was still a student, I thought that this was a no-brainer policy that should be legislated. It only seemed fair. However, after I became more mature, entered the work force and understood economics, business and simple logic better, I now understand why this should not be the case.

In this video, he used the examples of women and minority races. In the Singapore context, we can think of it as foreign workers and even older workers or low-educated workers. In an equal pay for equal work regime, all these discriminated people would never get a job, ever. In fact, it encourages discrimination and also discourages labour productivity. In a free market society, a cost is introduced for discrimination. I doubt how many people would ever understand this concept. A free market protects the marginalized people by giving them the option to compete on cost. A regulated and enforced society of rules takes away their only weapon to fight with.

With all this said, I want to end with this picture which I find as a very simple, straightforward and refreshing reminder about why capitalism and why not socialism:

Oh, and also here is some monetarist humour for all you nerds out there with reference to point #4!

I hope you all have a great weekend!


  1. Hi GMGH,

    I am back and going to argue from another point of view again. Hope you won't tire of me. =p

    Firstly, I haven't watched the video of Milton Friedman and not sure if my points below is entirely relevant to your point.

    But well, here's my views:

    Capitalism, if unchecked, can rear its ugly head and the outcome can be as bad as a socialist society.

    Somehow, capitalism has allowed the finance sector to dominate the economy. Finance, in its most basic form, isn't a productive activity. There's a reason why in medieval times, merchants (dabbling in finance/moneylending) were often despised by society.

    And it really irks me that in recent times, the governments had bailed out banks without attaching enough conditions. If banking is that crucial to the economy, it needs to be regulated and governed like utility bills instead of allowing a 'heads, banks win; tails, tax payers lose" outcome.

    For the 5 Truths, it's surprising that 2 to 5 applies to the banking sector.

    When bankers bank big bucks just for allocating capital, engineers and farmers have to work that much harder.

    Many governments have recently taken from the middle class to save the rich. (Bailouts)

    Allocating capital (division) does not multiply wealth.

    When everybody is just clamouring to be bankers that allocate capital, instead of becoming engineers and farmers, I think that's the end of productivity and the beginning of the end.

    Yup, that's the end of my short rant and hope to hear from you soon for further engagement!

    1. Hi Mr 15HWW,

      I won't tire of you, you bring in great perspectives :)

      It is so coincidental, last night I was just talking to my friend about what a huge beast that the financial industries in many economies have become! I agree with you that the finance sector should not be as large as it is today, it is a definite glut on the economy. It have a necessary function to facilitate transactions and provide credit facilities, but it should not be this large of a proportion that it is today. They are not producers, they are facilitators.

      If everyone is clamouring to be bankers, our system of rewards must broken. I think that it is broken. The price of financial services should be based on the service being provided (fee-based), not the net worth of the client. Sadly today, everyone wants to be in the finance industry so that they can get the "big fish" accounts and get their cut from their AUM. I think the future of the finance industry will be fee based, because this just doesn't make sense.

      This issue about the bailout of the banking sector isn't a failure of capitalism, but it is the failure of governments and it exposes the cost of their intervention. Over-leveraged, over-exposed and ill-capitalized banks SHOULD fail and go bankrupt, giving back deep haircuts to their depositors and leaving the shareholders with next to nothing. Boom and bust cycles help to weed out unproductive and poorly managed capital. The governments should not have bailed out the banks, even banks should go bankrupt if they are not run right! The free markets would have advocated that these banks have failed.

      Although many people look at the US as a shining example of a capitalist society, I don't think it is so given that in the recent decade that they have quickly shifted much deeper towards socialism. Taxes on everything, surging use of EBT cards, Obamacare and Obamaphones, these are just some of the things of the top of my head that I can think of. President Obama has made many socialist pushes, it is quite hard to label his view as a capitalist or a free market proponent.

      While capitalism does have its set of problems, I would argue that these problems are less in quantity and magnitude of those found it other systems. I find it hard to find any other system (I can't find any examples) comparable to the progress that capitalism can bring and deliver.

      I look forward to your thoughts!

    2. Hi GMGH,

      Thanks for entertaining my rant. I guess you are right that the problems of the banking sector is more of government's fault than capitalism.

      And I agree wholeheartedly that capitalism has served most of us well since it helps to enlarge the economic pie better than socialism. But should it be lauded then?

      To ensure that I don't go out of point, have appended the definition of capitalism below:

      "Capitalism is an economic system in which trade, industry, and the means of production are largely or entirely privately owned and operated for profit."

      At least for me, I feel that economic systems exist mainly to benefit the society. Advocates of capitalism probably felt that as individuals gain wealth, the increase will filter through even to the lowest echelons of society and everybody will be better off, leading to peace, harmony and prosperity.

      But the problem with capitalism is that when it's unfettered, it might just destroy those very societal goals that it's supposed to help achieve. And there's some link here to the rise of the banking sector.

      Economic growth is generally divided between capital and wages and in recent decades/years, capital has taken on a larger and larger proportion as a result of capitalism. With increasing technology, capital can help to substitute for labour and since there's a large labour supply (increasing world population), capitalism logically results in this outcome.

      This also probably helps to explain why US stock markets can grow by an annualised 10% even when the US economy grows by ~5% a year. A capital owner gains more from economic growth compared to the wage worker and over time, this creates massive inequality.

      It probably also doesn't help that capital owners and high wage earners have formed strong lobby groups to reduce the amount taxes that pay and reduce the amount of redistribution to maintain a stronger and "healthier" society.

      The last time we had such massive inequality was about a hundred years ago and the two world wars happened as the masses felt that that was the only way the field could be levelled. This probably helps to explain why someone like Warren Buffett advocates higher taxes (against the principle of capitalism) for people like him.

      Shall end here and look forward to your reply again. Maybe we can catch up over a drink or a meal one day. Maybe you can email me if you are keen since I don't know your email?

    3. Hi Mr 15HWW,

      No worries, your rant brings up good points!

      Personally, I think the benefit of capitalism is that any man can elevate himself out of his circumstances if he is able to effectively allocate his own capital (human or financial), such as being employed in a skillful and good job, or making savvy investments (to now become a capital owner too!). I would argue that the poor don't want handouts or the trickle down effect, but rather they want to have options that allows them to be are able to change their circumstances. They don't care if the richest person is 1000 times richer than them, or only 100 times richer than them because it still doesn't change their own situation.

      Capital owners should get more than workers. Capital owners are defer their consumption and take risks, while wage workers do not. Businesses can have negative profit periods, while workers would still get paid. Perhaps a way to compare is like the returns of a shareholder to that of a bondholder. Returns for shareholders have lots of upside, but they also have downside risks. Whereas bondholders have steady returns and are not able to participate on the upside, however their bond could defaults (company busts). But even then, "bondholders" in this example are workers, who can just find work in another company.

      As we progress into a globally interconnected economy, tax policy will become an issue between countries. Low income tax attracts wealthy entrepreneurs who bring capital for investments and creates employment, or even niche skills to provide to employers willing to pay for it. Low corporate tax rates encourages companies to set-up shop and employ locals and use the local infrastructure. With high income taxes imposed on the wealthy, they simply just grab all their assets, pack up and move away. This has happened in France (lots of migration to Belgium or Switzerland) and it is happening in America (citizenship renunciation is at an all-time high, going exponential). Tax inversions have also became a real issue after the Burger King and Pfizer news earlier this year.

      The Singaporean model of taxes is actually working out very well (28%+ of tax revenue comes from consumption, vehicles and gaming). If you consume more and your consumption is extravagant, you should be taxed more. Buffet draws a modest income, but his wealth comes in through his investments, which are all given special tax treatments in the US. Raising the income tax wouldn't make much of a difference to him. If the US changes their capital gains and dividends tax laws, I think that would make him speak out against it.

      Many people have been enamored by Piketty's recent book about inequality. Although his ultra high income tax suggestion would no doubt reduce inequality, it would also hinder economic growth. The result would be that everyone is now poorer, but the inequality is not as severe. The correct amount of tax ought to be as low as possible to keep the government and public resources running. It should tend lower, not higher. Governments should be lean, not excessive!

    4. (sorry too long, need a part 2!)

      Why is the degree of inequality an issue? Inequality will always exist because the attributes and skills of humans are intrinsically different at birth already, without even factoring in parentage and nurture factors. How about this scenario: If even the poorest person has a condo and BMW, should we be bothered that the richest person has 1000X more assets than him? Should we tax the rich so that can give to the "poor"?

      I don't think that inequality should even be an issue. The issue should be how many people need assistance, and how can we best help them. We should focus on helping the poor to effectively manage their only 2 capitals they have, which is human and financial capital. We should give them training and opportunities for them to be able to make an independent living, and they should be educated on how to manage their financial capital gained from work (avoid vices, be thrifty and prudent). The first problem is more tricky, because not everyone has the skills to be more productive than their consumption, in which case subsidies have to be given out to prop them up. However, the second problem is clearly out of our control. If people spend all their money on gambling, smoking and alcohol and need assistance, should they be given taxpayer's money to subsidize their deviant lifestyles? I personally vote no. I rather gamble, smoke and drink alcohol myself than to pay taxes to subsidize someone else doing it for me!

      Haha, a drink sounds good, but maybe year-end when I am not so busy. I will drop you an email then :)

  2. Hi GMGH,

    It's nice to banter with you because it's constructive!

    First of all, let's talk about what I agree with you on.

    I do think Singapore's model of taxation is pretty good since we tax heavily on luxurious items (COE comes to mind). So even if I can afford a car, I might opt not to have one and save more of my income. That option is probably not available to a European. I am still pretty much pro-choice.

    Capitalism has allowed capitalists more choices but it does appear that wage-earners' choices are increasingly compromised. As capital gets a higher share of growth, wage-earners suffer and it does become harder for them as a group to accumulate capital, and over time, with wages losing its shine, results in massive inequality between the two groups.

    I can also agree with you that inequality wouldn't be an issue if the bottom strata enjoys a "good" standard of life. And I understand "good" is subjective. However it's hard to dispute that there are hardworking people in the bottom 5% that are struggling to maintain a basic living standard in many countries. This also helps explain why I might be a proponent of minimum wage in some specific situations (our last debate).

    And since capital is getting a higher proportion of the fruits of economic progress, there is increasingly less risk for a capital owner? Sometimes, I wonder if the world is not divided into countries, would workers get a better deal? i.e. no undercutting among countries for businesses to set up shop. Companies would have to suck thumb since they have to be based somewhere physically and most want to expand. Understand this is an unrealistic utopia or even a dystopia (depending on your stand).

    Anyway, even Buffett is favorable regarding a hike in dividend tax. He mentioned before that even when the marginal dividend tax rate was 90% in the 50s, it didn't stop him from earning a good salary or the ultra-rich from investing in favourable businesses. According to him increasing taxes is unlikely to affect the vibrancy of the economy and low taxes are effectively a tool to wage "class wars".

    Capitalism tends to work really well when the make-up of the society is pretty equal (100-150 years ago in US and 50 years ago in Singapore). People of better qualities would just do well and rise to the upper strata. But after a few generations, wealth perpetuates, inequality rises and social mobility can be adversely affected. Now, people like you and me are unlikely to catch up with someone who receives a huge inheritance.

    Logically, we shouldn't be bothered if that inheritance guy gains $1 million if we can get a hundred bucks more from economic growth. However, human beings are rarely rational. The ultimatum game often cited in behavioural econs show that altruistic factors are real in reality. Even chimpanzees would reject a "reward" if the scheme is deemed unfair.

    And I do think that the world we live in today is increasingly becoming more "unfair" with unfettered capitalism, which could lead to disastrous consequences. Ultimately, the "rich" are pushing the boundaries and I am afraid it could snap one day.

    Maybe it's time to draft a blog post and construct a more coherent argument on this issue . =p

    1. Hi Mr 15HWW,

      Actually I am a bit confused now, haha. I do not know if you are for or against capitalism!

      If not capitalism, then what system? Cuba and North Korea hasn't been very good examples of socialism. (Some argue) North Korea managed to morph into a monarchy/dictatorship because of the socialist system! That was similarly observed in WW2 Germany with Hitler as well. (tackling Godwin's law head-on, haha). I'm not saying that socialism is a phase into fascism (though it seems eerily to suggest so), but rather that there are no examples of socialism working better than capitalism. Compare these countries to other countries in terms of inequality, absolute poverty, quality of life, social mobility, etc? They do not hold up so well. China might be tempting to be called upon to represent the socialist side, but they are ideologically communists, while their economy practices state capitalism!

      If capitalism, then what are the problems and how should we tackle them?

      Inequality isn't a capitalist problem, it is a human problem. Greed and jealously do not need to be taught, they are within our nature. The rich and powerful create systems and organizations to keep themselves in power, which is the iron law of oligarchy. This happens in all economic models, even in fascism and the communist party. Human inequality will always exist due to genetic differences, innate ability and even characteristics such as perseverance and curiosity. I think we have to learn how to make an exception of our society and break this iron law to prevent the elites from being controlling powers. There have been structures that have managed to do this before, but not in a governmental sense, yet.

      Second point on equality, perhaps my definition of equality might be different from yours.

      I support egalitarianism, but under the school of thought of equality of opportunities. I do not support equality of outcomes (smells like communism to me). Given the same opportunities, a hardworking person will succeed and be rich, and a lazy person will fail and be poor. Fair enough? However, proponents of equality of outcomes suggest that the hardworking person subsidize his lazy counterpart so that they are both equally well off. Now, I can't see how that is fair in any sense. The lazy person had a choice, but did not seize it. This is different from being a prisoner of circumstance (handicapped).

      If someone is lazy and skill-less (did not care about school, unable to get a job) and stupid (misallocates his capital by spending money frivolously), should he be a problem that our society has to take care of? When I talk to my friends that support socialist ideas, they are not able to tell me when someone DESERVES to be poor. So I suppose my question to you is, when does someone deserve to be poor? If he spends every single cent he gets on liquor and cigarettes, should society even provide him with shelter, food and water? At what point do we say, hey, I'm not giving him my money so that he can smoke and drink all day in the house I bought for him. Or do we never give up on him, since it is the inhumane thing to do to see someone repeatedly try to harm themselves, even at the expense of ourselves?

      This is an extreme example, but seriously, when does someone deserve to be poor? Personally, I have 3 criteria. (1) Lack of (marketable) skills, (2) Misallocation of capital, (3) Choice. In my future utopian/dystopian world, there are poor people. However, all people have equal access to the same quality of education, employment opportunities and even respect.

      Phew, I'm done. I hope I don't come off as heartless. I'm not saying that all poor people deserve their current circumstances, that is a douchey thing to say!

      Please write a post Mr 15HWW! You are very popular, I would like to see what other people have to say on this topic!!

  3. None of your five points have any relevance in the real world. They're pure abstractions. Nobody (except on Fox News) is talking about impoverishing wealthy people. The VAST majority of people who receive supplementary payments (some estimates are as much as 95%) from the government work as hard as they can to become independent.

    Unless you believe Mitt Romney, or Bill O Reilly. That is, if your highest value is truthiness, rather than honesty and integrity.

    1. Hi Don,

      Perhaps your real world is different from mine.

      If the mass majority of people are getting supplementary payments from the government, there is clearly something wrong. Obviously this money comes from deficit spending. As a non-American, I do not care much about US politics (like the other 95% of the world who are not Americans), but it doesn't take a genius to figure out if you spend more money than you take in, that is going to be a problem.

      I do not support a specific person or their ideas. I am only saying that I believe that the economic system of capitalism is better than socialism.


Observe the house rules.