Is Capitalism Sustainable? with Professor Michael Munger

thanks thanks very much I should explain that outburst he blessedly did not say the most embarrassing thing about me which is in 2008 I ran for governor of the state of North Carolina as a third party candidate as a libertarian and I discovered that generally the only way I could get applause was to lead them myself so it's a pleasure to be here some 10 years ago I started thinking a lot about the problem of how often it is that I I teach at Duke I've been teaching at Duke now for almost 25 years and a lot of the students that I encounter as first years are from elite high schools and I asked them in the first couple of classes when they're when they're freshmen well can someone summarize the argument for markets can someone give me the reason that some people advocate for capitalism now that doesn't mean that those arguments are correct well what I want to be able to do is to start with the argument for capitalism so I worry that we have not done a very good job in making sure that people know the argument for capitalism and one of the things that I admire about the Center for study of the government and the individual at a university is that it makes possible events like this where we can have a discussion about those arguments on their merits they're presented by someone who advocates for them and we're going to hear some alternatives and questions but second I myself have begun to worry that capitalism is actually not sustainable in a democracy and a lot of people on the right I noticed tend to make rather extreme assumptions about how capitalism ought to work and their defense of capitalism relies on those things actually being true when they're demonstrably not and that means that a lot of the criticisms that the left has taken for granted for a long time that have been ignored by those of us that are for markets need to be taken more seriously so that's what I'm going to try to advocate for in this talk is first explain why it is that I think the argument for Kitt's is one that people should take seriously and then second why is it that the argument that capitalism becomes a distorted perverted version of itself called cronyism why it is that cronyism is actually a likely consequence now in 1944 Friedrich Hayek published a book called the road to serfdom in which he said there is a tendency in central planning to metastasize outside of its original boundaries and the result can be a cascade of regulations to fix the distortions that are caused by the initial set of attempts to plan if you use central planning on pricing you end up having to regulate other things where the distortions are introduced I think a modern-day Hayek might write a book called the road to cronyism where capitalism in a democracy tends towards cronyism and so the question that I have for defenders of capitalism is when you see cronyism can you show me an example of a country that's a democracy where cronyism is not now rampant where many of the problems that we observe have to do with people in power who were able to manipulate the market system to their benefit and if that's true then capitalism in the form that we teach it in microeconomics class that is its pure form may not be sustainable so there's the summary of the talk that I'm going to give this is a question that's gone on for a long time and political theory and the worry about virtue so the question is is our markets consistent with virtue so Cicero in of duty' wrote about Quintus Kavala son of Publius he asked to have the price of an estate that he was buying named once for all the seller had complied with his request he said he thought it worth more and added a hundred thousand sister seized so I spent about 10 minutes on Zillow this afternoon looking at Colorado state of Colorado Springs forgive me that's a terrible thing to say Colorado Springs real estate and was looking at three-bedroom condos and it's pretty hard to find one less than $300,000 so suppose I go to someone and they have a condo and I say look I want to buy it how much do you want and they say well 260 I said no no that's not enough three hundred said no one ever I mean after all the the seller gets to say so this is what's interesting what Cicero observed is no one would say this was not the act of a good man that is a good person might say no no it's worth more but men in general would not regard it as the act of a wise man any more than if he'd sold the estate for less than it would bring and then here's the surprising part this then is the mischievous doctrine regarding some men is good and others as wise so the question that this poses is is there just an irreducible conflict in a capitalist system between being good and being wise that's true then we have a problem so I'm gonna argue that there need not be but that there often is in a crony system so I have a theorem I'm catechized as an economist though I have long been apostate but if exchanges are you voluntary now you voluntary is a word that I've written about in philosophy journals means truly voluntary so there's a often there's a problem with exchanges where differences in bargaining strength or wealth maybe make it not voluntary so the set of conditions but if exchanges are truly voluntary then by definition both parties to the exchange are made better off and if profits are the excess of revenues over cost in a market without artificial constraints that is markets are the result of me making voluntary contracts with all my input suppliers all of whom are better off by having made that transaction and then my revenues are the result of selling my products in a vault in a series of voluntary exchanges now if that's true and I have some money left over then profits are a sign that I have created a lot of value in the economy and that if that's true then entrepreneurship is always virtuous it is the habit of the alert seeking of exchange opportunities embedded in a character of forbearance of rent seeking opportunities now rent seeking is something that Public Choice theorists often talk about rent seeking is the pursuit of artificial games and you might think of it this way most businesses when they're first starting out are probably investing in more engineers more workers to produce things and more marketing people to get the information to the public at some point though it is likely that you can increase your profits by starting to hire lawyers and lobbyists but lawyers and lobbyists are just getting subsidies favorable tax policy and restrictions on competition and entry so the point is capitalism works well as long as profits are the result of the pursuit of entrepreneurship as long as you're hiring engineers and lobbyists there's an argument for capitalism the question is is that sustainable don't all businesses at some point don't all the firm's that we see if people talk about the fact Microsoft didn't used to have any lobbyists now they have an entire building on K Street at some point you can make more profits by selling to the government for subsidies than you can by selling voluntarily to consumers for prices and so that's the perversion is when capitalism becomes cronyism but this is the argument for markets so the problem is sustainability now suppose I'm an owner or manager of a corporation and I say we could make a lot of money by investing in lobbying and getting favorable treatment favorable tax policies that we don't have to pay taxes like other corporations do there's all sorts of policy we can use our money to buy better policy from the government but I think that's wrong and I'm not going to do it is that sustainable well there's a market for managers that company can hire another manager that's perfectly happy to and what would be their reason for doing that well why would you say you refuse to do this it's legal you just say it's immoral we will find someone who lacks your qualms we will find someone who is wise but not good and there's a market for managers you can find someone who does that suppose though that stockholders say no we also think that it's immoral we think that you should leave money on the table legal money on the table in that case there's the mergers and acquisitions market I a corporate takeover artists recognize that your stock price is undervalued I can go to a bank and borrow against the increment to your stock price that I expect there's going to be a capital increase as a result of investing and I'm using investing in quotes investing in favorable treatment from the government so when I do that I can pay a premium over your current stock price your capital in a sense is underemployed and then I will spend money on lobbyists and I'll be able to pay back the loan I used to acquire your company so there's two parts of the logic of the competition of capitalism that work against it the market for managers and mergers and acquisition meaning that capital is probably at some point going to be devoted to the higher profit use the problem is the higher profit use is likely to be cronyism so I hesitate to use this because you're going to recognize the provenance of it it's as if capitalism contains certain contradictions that mean that over time it is self destroying just as Karl Marx said Karl Marx said that it contained those kinds of contradictions and my claim is that pro-market people need to take that argument more seriously rather than dismissing it because what do we usually say oh that's not capitalism that's kearney ISM okay and that's what all capitalist systems become so we have to take it seriously so depressed share prices stock lawsuits the market for managers increase accounting profits all those things are the result of this kind of competition so you may remember from Star Wars when grand moff tarkin got the bad news guy comes in we've analyzed their attack sir and there's a danger should I have your ship standing by and governor Tarkin is dismissive evacuate in our moment of triumph I think you overestimate their chances now if I were governor Tarkin I would say why the hell is there a hole in our ship that goes straight to the central reactor y'all didn't notice this before you had to analyze their attack to realize that a hole that goes straight to the central reactor is a problem but he didn't say that he said no we're in good shape and of course he died so my friends on the left when I say look socialism doesn't work and you can tell then it's whele Venezuela is empty shelves so socialism or even an attempt to have something like price gouging laws in North North Carolina we have price gouging laws so after a hurricane you can't raise the price of necessities so there's an old North Carolina joke about this so after a hurricane a lot of people need ice and water so you some guy goes into a store and they have cases of bottled water but it's $30 for a case of bottled water and the guys outraged $30 that's incredible you shouldn't be charging that much the guy down the road has water for $7 and the owner says we'll all right go buy it from him well they're out and the owner says I tell you what I'll make you a deal as soon as I'm out I'll charge $7 so the point is that price is a way that the market system allocates resources in the face of scarcity and it's indispensable we can't do without it so the thing about socialism is prices are really low but the shelves are empty because there is no way of signaling we need more of this stuff so I think Venezuela is socialism on the other hand a lot of my friends on the right if someone says so this was on medium in my opinion the most important problem of capitalism that you didn't mention is lobbying and immediately the person said oh that's not capitalism it's cronyism or corporatism it's the opposite it has nothing to do with capitalism so someone said Betsy DeVos is gonna have one company that's gonna handle all student loans come on that's not capitalism that's crony capitalism so the point is always that's not capitalism that's cronyism but what if cronyism is an essential feature of any democratic system that tries to be capitalist and all I do here is list three of the fundamental assumptions of the public choice approach public choice approach says you cannot rely on good people or virtue to solve the problems you have to have good rules you can't rely on good people you have to have good rules and the claim is that a market system is good rules well if voters are mostly passive and rationally uninformed they don't necessarily know that much about the alternatives presented if individual politicians benefit from cronyism and individual corporate CEOs benefit from cronyism the only hope would be for one of those to act morally one of those then to display virtues saying I refuse to participate in this legal profitable but immoral system so that's virtue and that means that that's the one thing that public choice is not supposed to invoke now it's interesting and I actually think we might take the problem of virtue a little more seriously one of the criticisms of liberalism is that it has tended to say everyone can act in any way that they want and the system will somehow take care of it Adam Smith famously said people of the same trade seldom eat together even for merriment and diversion but the conversation ends in a conspiracy against the public alright so if all you do is quote this part it looks like that's pretty yes but what Adam Smith said then is the law can't hinder people of the same trade so I wanted to give the entire quote in context the reason this is important is Adam Smith is saying you know the government has to be careful not to give capitalists an opportunity to collude to try to raise price people by their nature are likely to be competitive but if they meet in groups they're likely to try to cooperate the reason I quote this at some length is that Adam Smith is assuming good people are running in politics now that's one of the things that the public choice now that could be I hope it's true but if it's not it means that someone could read this as a how-to manual so if I wanted to create a setting where businesses collude and collaborate all I need to do is have a bunch of trade associations and requirements that they get together on insurance and statutory requirements on standards that means that the state has both the interest and the capacity to nudge capitalism in the direction of cronyism it's in the interests of democratically elected leaders to nudge the system towards towards cronyism so a public spirited government official won't require meetings or trade associations but you can't defend capitalism by assuming a benevolent dictator a democratic state will always want to make such assemblies necessary which brings us to Grand Moff Greenspan so now the commander comes in we've analyzed their attack sir and assuming altruistic CEOs is silly while making no benevolent government violates basic public choice theory should we admit that capitalism is unsustainable this is the actual quote from Greenspan it's called Alan Greenspan's maiya Copa in 2008 after the financial meltdown those of us who look to the self-interest of lending institution to protect shareholders equity myself especially are in a state of shock to disbelief I still do not fully understand why it happened and obviously to the extent I figure out where it happened and why I will change my views well he thought that the threat of bankruptcy and the loss of financial reputation would be sufficient to discipline the large financial firms on Wall Street turned out it wasn't because many of you know the problem if I owe you a million dollars and I go bankrupt I'm in trouble if I owe you a hundred million dollars and I go bankrupt you're in trouble so if I owe you enough now your interests are to bail me out so the assumption that we could rely on that system to discipline people meant that we were ignoring the incentives for profit the profit maximizing thing to do was to leverage yourself to such an extent that you were able to be pretty sure that you would be bailed out so if that's true Alan Greenspan is taking this back how are we to think about the way to discipline large corporations well capitalism is a social system based on the recognition of individual rights corporatism is a social system where the government intervenes aggressively into the economy typically with political instruments that benefit large corporations and enterprises to the detriment of small businesses so the question is is capitalism to the extent that it even exists is it sustainable so I had have a very good friend who was the CEO of BB&T a large bank in North Carolina South Carolina so John Ellison was the CEO of BB&T and in 2008 and 2009 he received quite a few visits from people at the Treasury Department saying that well we all understand that the financial industry was so screwed up that everyone is going to need to receive tarp funds so tarp is toxic X Asset Relief Program but BB&T had divested itself of all the mortgage-backed securities by the end of 2006 so he had thought this is a terrible idea and let's not hold any of this toxic paper so he said no good it's okay and the guy the Treasury Department said I don't think you understand it's a nice little Bank you got here be a shame if something was to happen to you no like accidents they happen an audit a fire who knows why this happens we can protect you so John finally accepted tarp funds so even someone and now I'm going to claim and I have a bias I said he's my friend but my claim is that you have a corporate CEO that's saying look this is wrong we're not going to accept these interest-free loans but the state had interests in ensuring that he had to so my point is not to cast blame maybe you think the problem is Herod in capitalism maybe you think the problem is an overreaching State the point is either way capitalism is not sustainable in a democracy the point is not blame the point is how to fix the problem so two examples that are commonly used were Solyndra now as far as I know Solyndra actually never produced and sold any solar panels they did have an amazing climbing wall in the employee cafeteria and they spent nearly a billion dollars in subsidies so they're a very successful company a lot of people at Solyndra got rich but this didn't actually make any green energy but they sold stuff to the government in the form of subsidies and then daraprim and some of the other things that Martin shkreli was famous for Martin shkreli bought up some companies and then dramatically raised the price of the pills that they sold how was he able to do that they weren't under patent these were generic pills what happened was that the Obama administration had said we have insufficient regular regulatory control over generic drugs so we're going to do two things first in order to produce generic drugs you have to have a license from the FDA which takes nearly two years to acquire and second you have to contact the other producers of the drug and get them to agree that there's insufficient production capacity well what Martin shkreli did was he bought these up and then opposed the petitions to delay anybody else from being able to produce generic drugs so that's not kab my first reaction is that's not capitalism well maybe not but it's smart as hell he didn't go to jail for doing that he went to jail pursuing a bunch of other stupid stuff there's nothing illegal about what Martin shkreli did in the system it was the way to make profits now people at the FDA said well we never thought that would happen well maybe but then you're idiots because what you've done is create a legal way for someone to charge a much higher price for a generic drug the point of which was that it's no longer under patent so my thesis was businesses maximize accounting profits revenues minus expenditures if those revenues are voluntary transactions and those expenditures were voluntary transactions with input suppliers then those profits are actually virtuous but they don't have to be politicians seek to maximize power including but certainly not limited to re-election probabilities and voters are poorly organized and poorly informed again rationally because there's a collective action problem so if I spend a lot of time some of you may have had this experience I spend a lot of time acquiring information and I reach the conclusion that that person is not the best person to lead the country damn it it happens anyway you have relatively limited control over what happens particularly in presidential elections in some sense your vote doesn't matter at all no electoral college race has been determined by a single vote Florida in 2000 was still determined by 500 now we should vote it's an important thing to contribute to but should you acquire enough information about whom you're voting for or should you rely on party or friends if that's true it means that it's very hard to run on a pro market as I found out it's very hard to run on a pro market platform so those three assumptions are pretty standard Public Choice tenets but taken together they mean capitalism is unsustainable and it converts to cronyism so I've said this a couple of times but let me give a better definition profits are the excess of revenue from selling a product after costs are subtracted if the exchange is voluntary each person buying the product must think that she or he is better off entrepreneurs then seek profits and therefore they try to create value and generally when people talk in favor of markets that's as far as they go that's what they're talking about they're talking about entrepreneurship fair enough the good action and the wise action are the same under those circumstances rent-seeking though is a competition for an artificial price or benefit that's created either by taking money from taxpayers or trying to give it away or a restriction of competition that allows an artificial increase in prices so political entrepreneurs seek rents and no value was created but it may very well be more profitable to seek grants than it is profits and the question is how can we avoid that problem so when we look at honest profit in a simple economics class we're gonna say that its revenues which is price times output minus what we pay for a capital minus what we pay for labor so if you look at any of those you say well all of those are going to be determined in a market setting and again in microeconomics class you go through this all of these are determined into my inner market setting we draw the conditions that show that this is producing the maximal utility and welfare for the society on the other hand the price the regulation of production conditions the regulation of my ability to purchase capital and labor the interest rate and the wage rate are all things that can be manipulated by the state which means that on all these different margins all of these different things and these are boring as helll so you have a lobbyist and some of you all may be lobbyists I we need lobbyists we can't do without them I love y'all y'all are grave but still when you think of a lobbyist got $1,200 Italian shoes really nice suit when they shake hands they do it with both hands and they're making a little more eye contact and you're really looking for do you look good if you lost weight you know you and Alison I am surely we need to get up to Vail again that was really fun how are the kids doing at Yale I understood that one of them got one of their term papers done by my assistant I hope that worked out oh by the way that thing we were talking about that little tiny provision in the mm line of the regulation that seems to be a general change in economic regulation but actually will benefit my company you takin care of that good good all right let's talk about that yeah that veil think some more very difficult to prevent that from happening and I want to claim some of you may disagree and I'd be interested to hear about that I want to claim that the defense that's not capitalism he's not good enough because that's still where capitalism goes and in fact it is where a rational capitalist will go in the sense that pursuing profits that way gives me more profits so a rational economic actor will recognize that the marginal profitability of rent-seeking exceeds the returns to the pursuit of the honest profit now that I realize I'm making this argument in a fairly technical form but it's actually important to recognize that it fits in a very congenial way it articulates in a very congenial way with the logic that we use teach in microeconomics class even if entrepreneurs forbear a rational politician will recognize that power and electability can be improved by forcing a rent-seeking society on entrepreneurs so there's a marginality condition if you invest in engineers and inventors and you invest in lobbyists and rent-seeking specialists until the last dollar devoted to each produces an equal increment the only way capitalism can survive is if the last dollar devoted to honest profit is still more profitable than the first dollar devoted to rent-seeking because we're on the road to cronyism so it's a pretty standard graph if we have marginal profitability on the vertical axis on the horizontal axis and investment spending so we have if this is the way the marginal investment curve works then capitalism can survive forever this is the first dollar reward to lobbying and I think it's plausible to say that there's a kind of life cycle in industries so what happens is that a new industry at first is competitive and they can make substantial profits by investing in new plant and equipment new products better ways to make things and invent new products but at some point the first dollar to lobbying is more profitable than the last dollar they spent on capitalism and they rationally turn in a crony Asst director so if that's true one answer that some people give is we need to make it so the state can't do that and in fact it might be possible to have restrictions on benefits that the state can offer limit the tax benefits that the state can offer but think about what you're saying what you're asking is current members of the House and Senate who benefit from this system to say all right I will do the right thing instead of what's good for me it's possible that some of them will do it but it's unlikely that a majority will so we embalmer in a famous paper in 1990 and the journal political economy said the total supply of entrepreneurs varies among society the productive contribution of the Society's entrepreneurial activities varies much more because of their allocation between productive activities such as innovation and largely unproductive activities such as rent-seeking organized crime this allocation is heavily influenced by the relative payoffs society offers to such activities this implies that policy can influence the allocation of entrepreneurship more effectively than it can influence its supply now a lot of people when they look at developing nations say that there's not enough entrepreneurship in developing nations that's not true everybody in developing nations is an entrepreneur they're always working on new hustles new ways to make things it's just that almost all of the ways that are available to them or some form of red seeking because there's insufficient protection of property rights there's not a monetary or financial system that allows them to define and borrow against their profits there are ownership of these things in fact is tenuous it's not even clear they really have full ownership so there's plenty of entrepreneurships in developing societies but we can suffer from the same sort of debilitating disease if we allow a turn towards cronyism so a hopeful note one possibility is that the US economy is large and dynamic enough that we will continue to have new industries in the sharing economy maybe new industries that use smart contracts blockchain things that are beyond the the normal way of doing business that mean that there will be intense entrepreneurial activity so so long as we can continue having new productive industries that come up that replace the loss of dynamism in the existing industries we still have a shot but it's very tempting to regulate those two and so we're seeing an arms race between the ability of entrepreneurs to think of new ways of new industries so my most recent book was on the sharing economy my next book will be on blockchain and smart contract applications if you ever bought a house there's a bunch of people in the room and you're tempted to say who the hell are you well I'm the lawyer that represents something in something in something so there's like eight or ten different groups that have to sign off if it were possible for us to execute contracts without that level of requirements then we might be able to regain enough dynamism in some parts of the economy that we can at least balance those out but I am worried that two things as I said at the outset first we're tending towards cronyism in at a level that I don't think most people recognize there's a sclerosis in many of our large industries a lack of dynamism even though they're still profitable because it is possible to use cronyism to get profits from taxpayers the second thing is I don't think that argument which has long been made by the left is taken seriously enough by defenders of markets so I want to urge people who consider themselves to be defenders of markets to actually work directly on that challenge and to admit that a lot of the people on the Left we have long dismissed have made an important criticism that we need to take seriously thank you for listening

Channel: Institute for Humane Studies

Views: 3,092

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Keywords: Is capitalism sustainable?, michael munger, mike munger, capitalism, economics, public choice, socialism

Id: _tRlt8BwB7w

Length: 35min 22sec (2122 seconds)

Published: Thu Feb 20 2020