Musings about capitalism - free markets

Many Americans (and others) are staunch advocates of free market capitalism without really understanding its economic dynamics. Free market capitalism has at least three dimensions important for ethics: free markets, government regulation, and including the cost of capital as a cost of production. This post explores free markets; the next two posts will explore government regulation and the cost of capital. A fourth post will then examine free market capitalism from the perspective of Christian ethics. For the sake of brevity, these posts use capitalism and free market capitalism interchangeably.

In my conversations with people on capitalism, current economic problems, and the Occupy Wall Street movement, I find that few people have a substantive knowledge of economics. Preparing these posts has caused me to pull together material that I last presented in a formal way when I taught a college economics course thirty years ago.

The material may seem unusual fodder for a blog premised on the idea that people do not live by bread alone and that emphasizes finding the path to the abundant life. How a person uses her/his money and financial assets best reveals her/his values. Money also makes economic exchanges much easier than bartering and provides a helpful standard of measure for costs and benefits. I feel fortunate to have a degree in business, a degree in economics, and to have taught both subjects in addition to my education and experience as priest, theologian, and ethicist.

I hope that you will find the first three posts lay a helpful and important foundation for the fourth post. One significant advantage of a blog is the opportunity to present in a more organized, extended fashion ideas that do not lend themselves to casual conversation. As always, comments and questions are welcome.

A few preliminary definitions are essentials. In a free market, multiple suppliers compete to sell to multiple buyers. None of the buyers or sellers controls the market. Information about prices and products is readily available to all. Barriers to entry (the cost of setting up a factory, e.g.) are sufficiently low that new sellers can enter the market in response to increased demand.

A market that does not satisfy all of those parameters has limited competition. With limited competition, either buyers or sellers exercise some degree of market control, creating market inefficiencies and ineffective allocation of capital and labor. For example, John D. Rockefeller’s attempt to monopolize oil production through Standard Oil in the late nineteenth century enabled his firms to earn outsize profits. This took money from consumers, who no longer had those funds to invest or to spend on other goods and services. Shareholders (owners) of Standard Oil and some of Rockefeller’s employees benefitted from the monopoly. Everybody else lost.

Pure free market capitalism, in many respects, is analogous to the survival of the fittest in nature, i.e., the fittest firms survive by earning the largest profits and no rules or authorities exist to protect the vulnerable or weak from a firm’s predatory behavior.

Mitt Romney called his work at Bain Capital creative destruction. Bain bought firms, shook up the newly purchased firms to make them more profitable, and then sold the restructured/more competitive firms to new owners. Many people lost their jobs as Bain made operations leaner and more focused on profitable lines of business (actual numbers are not available). The leaner, more profitable firms sometimes then expanded, creating new jobs.

Staples (the office supply company) is Bain’s highest profile example of this. With an influx of capital and management expertise, Staples went from being a small start-up to the major player in the office supply business. In the course of that rapid growth, numerous local independent office supply businesses went out of business, unable to compete with Stapes in terms of variety, price, and service. The fittest survived, generating large profits for owners and many new jobs at considerable cost to the hundreds of its former competitors who no longer exist.

Wal-Mart, the world’s largest business, has similarly affected the businesses that sixty years ago lined the main streets of most U.S. small towns and cities. People shop at Wal-Mart because they save money by doing so. Otherwise, Wal-Mart would not have become the retail juggernaut that it is, i.e., the fittest survived.

Fewer than 10% of American farms have sales over $250,000 but those large farms account for 85% of all farm production. Of the approximately 2.2 million U.S. farms, only 80,000 have 2000 or more acres; those 80,000 farms harvest 40% of the cropland. (2007 U.S. Government census data) Corporate farms are replacing family farms because they can produce more food at a lower cost, i.e., the survival of the fittest.

Competition is not the only force that drives market changes. Some change occurs because of technological advances, fluctuating consumer preferences, and demographic shifts. Firms that catered to consumers in much of the U.S. Midwest now struggle to survive or have gone out of business as people have depopulated a large swath of the Great Plains. Men (except the clergy, who now includes women) no longer wear celluloid collars on shirts. In my life, I have experienced a transition from slide rule to calculator, to mainframe computer, to PC, to handheld PDA. All of these changes have led to creative destruction, i.e., the bankruptcy of firms that failed to adapt and the success of other in the right place, with the right product, and the right technology.

The next post will discuss the role of government in regulating free markets, the third post will consider the cost of capital, and the final post will present a Christian ethical perspective on free market capitalism.

Observations on American politics

A correspondent sent me the following observations, as part of an ongoing conversation about the contest for the Republican presidential nomination. Although the flow weaves some, the remarks are worth reading:

The irony of Romney is that he’s very smart and obviously able. He was a good Massachusetts governor with heavy Democratic legislature and turned the Olympics around. His gaffes don’t bother me much; this news cycle would have hurt Eisenhower, Truman, and Kennedy. Making our presidential candidates run as if they were campaigning for city council is nuts.

The system is broken – I mean both Obama and Bush were/are poor presidents. Obama has, by his own admission, two friends! And he has no managerial skills; his White House is a mess with lots of political skills but little organizational abilities. From what from people covering him tell me: he is an incredible cold fish!

The second Bush’s experience was to delegate and then trust his appointees. …

The Senate is full of rich guys who made/inherited a lot of money and their political skills are all about being elected, not legislating.

Romney’s biggest issue is that he is a moderate. He may be a flip flopper, but for political purposes. Obama was elected by doing a terrific job of invoking hope and change – something we all want. But he is a poor governor. I am not a big Romney fan, but I believe him to be a tested pragmatic leader who will provide managerial skills to the federal government. If he were to do a good job, he will be a one-term president and, if elected, I hope he does a very good job. Flip-flopping? Of course, under the new Republican Party, social issues are the biggest marker.

Abortion, same sex marriage, etc., are social issues and bread and butter to the fringes of each party. Does anyone who has analyzed abortion really think we are going to outlaw it?

But we don’t govern on these social issues – we govern on the daily boring issues: the budget, regulatory responsibilities (we have way too many regulations, allowing too many companies to game them). Look at all the warnings we are given: if you read what it says about your toaster, you wouldn’t get near it! I believe that companies want the regulations so that they know exactly how to protect themselves.

My basic problem with Obama is that he has no relationships at all with Congress. His White House runs every department except Defense, CIA (Petreaus can do anything he wants, the WH is afraid of him), Justice, and State. You need to work Congress, building relationships and trust – Obama has zero relationships and trust.

People were outraged about torture, now we kill people whenever we want. As one reporter, who now covers the WH after spending years covering Israel, said, Israel decides on the rules of engagement and then states that every attack is legal if it meets those rules. We are mimicking Israel’s approach: rules made in secret, but adhered to. There is a lawyer next to the “pilot” of the drone; he has a chart that outlines the value of the target and the collateral damage that is acceptable, so as long as the attack is within the guidelines, that’s OK. …

To me, Romney is the best of mediocre lot. Unfortunately, I would probably accept Obama before any other candidate except Romney.

Well, there’s my rant! Hope it was readable, if not enjoyable!

A couple of points are especially worth emphasizing:

·         The political process is broken: candidates spend their time fundraising rather than transacting government business. When I was in high school, that was true for representatives with their two-year terms and not for senators with their six-year terms. Now it’s true for all members of Congress – except those who have declared they will not run for reelection. There is no easy answer to this problem, e.g., terms limits will not solve this problem; candidates who max out the limit too often focus on running for another office.

·         Social issues may be critical to winning an election but are tangential to governing a nation. Christians (including evangelicals!) have substantive issues (e.g., caring for the most vulnerable) that are central to governance. Those issues, not social issues (e.g., abortion, defining marriage) should determine for whom Christians vote.

·         Governing is not synonymous with managing or campaigning. Governing requires a unique form of leadership few have. One of Obama’s weaknesses is that his relative youth gave him insufficient time to develop the leadership that would have enabled him to translate his vision into effective governance.

Ten steps toward autocracy

Jonathan Turley, a public interest lawyer at George Washington University, published a column in the Washington Post (“10 reasons the U.S. is no longer the land of the free,” January 13, 2012) that enumerated ten steps the United States has taken toward becoming an autocracy (i.e., rule by one person). The president now has the legal authority to:

1.    Order the assassination of U.S. citizens;

2.    Detain foreigners and U.S. citizens indefinitely;

3.    Conduct warrantless searches;

4.    Decide whether a person is tried in a federal or military court, i.e., arbitrary justice;

5.    Rely on secret evidence in judicial proceedings;

6.    Prevent the prosecution of U.S. citizens for war crimes;

7.    Conduct secret judicial proceedings for those accused of terrorism;

8.    Give companies that assist in conducting warrantless searches immunity from judicial review;

9.    Authorize the continual monitoring of U.S. citizens;

10. Authorize extraordinary renditions;

These ten powers eviscerate the Bill of Rights’ guarantee of due process and move the United States dangerously close to tyranny.

Freedom entails vulnerability. I, for one, would rather die free than live under tyranny that allegedly protected me from terrorism, a threat from which no amount of surveillance, limits on freedom, and other authoritarian measures can assure. Such steps are always a bad bargain, offering the illusion of security in exchange for freedom and justice.

Unanswered prayer

In response to my earlier post, What is Prayer, a reader queried: “Might it be that petitionary prayer is one of the means by which God gives what we need? Jesus seems to acknowledge as much - ‘Ask, and you will receive’ and ‘You have not because you ask not’?” (Matthew 21:22; John 16:24)

Unanswered prayer poses real difficulties for believers and offers opportunities for non-believers to challenge the faithful.

For example, why do Christians ever die of famine, thirst, or easily treatable diseases? If Christians rightly understand the gospel’s record of Jesus’ teaching on prayer (we do not have because we do not ask) in a simple, straightforward manner, then hungry, thirsty, and sick Christians would never die from any of those causes; food, drink, and healthcare are all needed for life. Similarly, early Christians would not have died as martyrs (at least most of them); assuredly they prayed, as had Jesus, for it not to be their time to die.

One resolution of the apparent contradiction between the gospel’s promise of answered prayer and observing Christians dying because they lack what is needed is that God, for God's reasons, wills the death of those individuals. It is their time to die. I find this impossible to accept. God does not give life to watch humans suffer; dying from hunger, thirst, and treatable diseases are all horrible, easily avoided deaths.

Another resolution of the apparent contradiction is to recognize that God works in only certain ways in the world. Perhaps God in the act of creation surrendered some of God's omnipotence to empower God's creatures. The book of James seems open to this: “You ask and do not receive, because you ask wrongly, in order to spend what you get on pleasures.” (James 4:3) Perhaps God refrains from acting to preserve space for human autonomy. I find this latter option impossible to accept. Surely, a loving God who could act would do so in the face of massive human suffering.

Another possible resolution lies in living with an unanswered question, acknowledging that God's ways are not human ways and therefore unfathomable. I’m too intellectually curious and alive to find any satisfaction in this option, though I readily admit that my speculations and theological musings may not have moved in the correct direction.

Yet another possible resolution lies in contextualizing the gospel record of Jesus’ teaching that people do not have because they do not ask. Perhaps the teaching applies only to those things that people can expect God to provide and not to those things that people should provide. The reason that Christians (and others!) die of hunger, thirst, and easily treatable diseases is that God's people have failed to exercise proper care and responsibility for one another.

Encountering God in prayer is real. Unfortunately, humans have a tendency to conceptualize prayer as if God were a heavenly vending machine: deposit the right number of prayers, correctly phrased, with the appropriate ardor, and God will deliver what one asks. Life repeatedly demonstrates that prayer does not function in that manner.

There are no easy answers to the problem of unanswered prayer. But ignoring the problem, or denying that the problem exists, makes religion less credible and deprives the believer of an opportunity to plumb the depths of the mystery that is God.

Iran update

A flurry of recent media articles gives the clear impression that Iran is making apparently rapid progress toward acquiring nuclear weapons.

Meanwhile, other articles highlight steps that other nations are taking to prevent that. These steps include heightened economic sanctions (pushed by the U.S.), assassination of leading Iranian nuclear scientists (for which no nation has claimed responsibility but Israel seems the most likely candidate), belligerent rhetoric about the Straits of Hormuz (the U.S. and Iran), and expressions of concern (Russia).

None of these steps seems likely to be effective. The sanctions are pinching Iran economically, driving down the value of Iran’s currency against the dollar. This, in turn, is making life less affordable for many Iranians. In response, they are more fervently nationalist than before. Russia, one of Iran’s largest trading partners, has agreed to price that trade in a currency other than the dollar. This move will ease some of the economic pain that Iranians now feel.

These results illustrate why nations often perceive effective economic sanctions as an act of war that does not require direct military actions. Similarly, these results also illustrate why economic sanctions frequently fail and why ethicists question the morality of sanctions. In Saddam’s Iraq, for example, the sanctions affected the average Iranian but not the lifestyle or position of the ruling elite.

The assassination of nuclear scientists is unlikely to prove any more effective. Ethically, assassinations are at best a gray area. An assassination that ends great evil, and perhaps thereby avoids war, is arguably morally justifiable as the lesser evil. Assassinations that may slow but not derail evil are more problematic, e.g., Israeli assassinations of Hamas leaders, soon replaced by equally able and determined leaders who use the targeted killings in their propaganda.

Killing four scientists seems unlikely to bring the Iranian nuclear program to a halt, to make recruitment of new scientists impossibly difficult, or even to slow the program significantly. Instead, the killings seem certain to increase animosity and harden Iran’s resolve to develop nuclear weapons.

How can western nations constructively respond to the possibility of Iran developing nuclear weapons?

First, accept Iran as an important member of the global community. Iran’s threat to shut the Straits of Hormuz poses a greater danger for the west than for Iran. Making a relatively narrow channel too hazardous for commercial traffic is easier than keeping that waterway open and safe. Oil companies will probably not want to ship a quarter of the world’s oil through a channel in which even Iran sinks even a tenth of the transiting tankers. The economic disruption to world markets and economies from this move, coupled with the financial costs of a military response, surely would exceed the harm to Iran of any military attacks on that nation. The U.S. assuredly does not need to invade and conquer a third Muslim nation.

Second, give Iran as many and as strong reasons as possible to avoid war and to value international cooperation. Trade is the most important of these reasons; respect is a close second. The more prosperous and educated a people, the more that people values freedom and democracy. U.S. and western initiatives against Iran have generally backfired, promoting Iranian nationalism at the expense of democracy and isolationism at the expense of economic prosperity.

For half a century, a policy of Mutually Assured Destruction (MAD) produced a standoff between two nuclear superpowers with negative feelings (ideological opposition, fear, etc.) of at least the same magnitude as the animosity between Ian and Israel. Why should a similar policy of MAD fail between Iran and Israel?

MAD a high stakes option, far from ideal. However, MAD may be the best bet for stability in the Middle East. Preemptive strikes by Israel appear destined to fail. Iran has too many nuclear facilities that are too dispersed and too far from Israel for anything but multiple nuclear strikes to be effective. The U.S. waging war against Iran seems a prescription for another war, like Iraq and Afghanistan, in which quick victories give way to slow, agonizing no-win predicaments. Either Israel or the US acting would have huge adverse consequences for global prosperity and stability.

The Cold War ended when the USSR eventually collapsed. Iran’s theocracy seems destined for a similar collapse, unable to keep an increasingly prosperous people in shackles.

Why not allow Israel and Iran to have their own cold war? This may be the best of a set of poor choices. Thankfully, both Iran and Israel have much to lose in a nuclear war, both nations value survival, and so MAD is perhaps reasonably but unfortunately the best option for peace.

From a Christian perspective, peace is impossible unless people genuinely respect one another. Current US policies lack respect for Iranians and their legitimate national aspirations. But the ideas incorporated in tis blog do not reflect simply Christian ethics. Recent articles in Foreign Affairs provide much of the background: Hooman Majd, “Christmas is No Time for an Iranian Revolution;” Suzanne Maloney, “Obama’s Counterproductive New Iran Sanctions;” Cart Brown’s review of Ali Gheissari and Vali Nasr’s Democracy in Iran: History and the Quest for Liberty; and Jon Alterman’s review of Vali Nasr’s Free Markets, Free Muslims.

Leadership in Churches and other ecclesial organizations

Justin Menkes is a leading expert on leadership, especially at the CEO level. He has written significant books on the subject (Executive Intelligence and Better under Pressure). In an interview published in the Washington Post, he identified three key qualities for successful leaders in the federal civil service:

There are three attributes that I think best enable a leader to maximize the efforts of the 21^st century workforce: realistic optimism, subservience to purpose and finding order in chaos. (Tom Fox, “How to Be a Successful Federal Leader,” January 10, 2012)

Those qualities are true for leadership in the Church and other ecclesial institutions.

Realistic optimism connotes a positive outlook, one able to inspire others, but not the “pie in the sky” optimism that characterizes weak leaders. No congregation will thrive in the absence of realistic optimism. Ultimately, the Church’s real source of optimism is our confidence that God will prevail in establishing God's purposes.

Subservience to purpose connotes, in secular language, focusing on the mission. The Church has no tangible rewards to offer. Ministry necessarily entails consistently prioritizing service to God ahead of everything else. God calls the Church and all of its ministries and ministers (clergy and lay!) to serve, not to be served. Articulating the purpose gives an organization its vision and specific mission. The larger the organization, the larger the vision and mission need to be; the larger the vision and mission, the greater the chaos that will be present.

Finding order in chaos connotes an ability to perceive movement and purpose in the diverse, loosely connected if not disparate, constituencies and activities that collectively define a congregation or other ecclesial institution. Leaders with a high need for control unintentionally sabotage the effectiveness of the inherently chaotic religious organization that they lead. The adoption of social media and the attendant flattening of hierarchical, authoritarian structures compounds the amount of chaos in most congregations and ecclesial institutions.

The leader of a congregation or other ecclesial organization, powered by hope and directed by purpose, will then focus on inspiring others to join the effort. This may occur in the context of leading worship, teaching, counseling, conducting meetings, casual conversations, and a host of other activities. This variety of activities does not define the effective leader; instead, the activities provide opportunities for inspiring others.

Wisdom from the elderly

New York Times’ columnist Jane E. Brody recently summarized a few of the lessons from 30 Lessons for Living, a new book by Karl Pillemer, a professor of human development at Cornell’s College of Human Ecology. (“Advice From Life’s Graying Edge on Finishing With No Regrets,” New York Times, January 9, 2012)

These are the lessons that Brody identified as most important:

ON MARRIAGE A satisfying marriage that lasts a lifetime is more likely to result when partners are fundamentally similar and share the same basic values and goals. Although romantic love initially brings most couples together, what keeps them together is an abiding friendship, an ability to communicate, a willingness to give and take, and a commitment to the institution of marriage as well as to each other. … “Too many young people now are giving up too early, too soon.”

ON CAREERS Not one person in a thousand said that happiness accrued from working as hard as you can to make money to buy whatever you want. Rather, the near-universal view was summed up by an 83-year-old former athlete who worked for decades as an athletic coach and recruiter: “The most important thing is to be involved in a profession that you absolutely love, and that you look forward to going to work to every day.” …

ON PARENTING The demands of modern life often have a negative effect on family life, especially when economic pursuits limit the time parents spend with their children. Most important, the elders said, is to spend more time with your children, even if you must sacrifice to do so. Share in their activities, and do things with them that interest them. Time spent together enables parents to detect budding problems and instill important values. …

ON AGING “Embrace it. Don’t fight it. Growing older is both an attitude and a process,” an 80-year-old man said. The experts’ advice to the young: “Don’t waste your time worrying about getting old.” Most found that old age vastly exceeded their expectations. Even those with serious chronic illnesses enjoyed a sense of calm and contentment. A 92-year-old who can no longer do many of the things she once enjoyed said: “I think I’m happier now than I’ve ever been in my life. Things that were important to me are no longer important, or not as important.” …

ON REGRETS “Always be honest” was the elders’ advice to avoid late-in-life remorse. Take advantage of opportunities and embrace new challenges. And travel more when you’re young rather than wait until the children are grown or you are retired. As Dr. Pillemer summarized the elders’ view, “Travel is so rewarding that it should take precedence over other things younger people spend money on.” Create a bucket list now and start whittling it down.

ON HAPPINESS Almost to a person, the elders viewed happiness as a choice, not the result of how life treats you. A 75-year-old man said, “You are not responsible for all the things that happen to you, but you are completely in control of your attitude and your reactions to them.” An 84-year-old said, “Adopt a policy of being joyful.”