Friday, June 13, 2008

Myths of modernity

Here are some of the things (most of which I used to believe to one degree or another) which I have learned to be modern folk wisdom, and myths.

Scale is always an advantage

How many times have you heard, "Capitalism is unstable towards monopoly"? Implicit in this claim is the belief that scale is always an advantage. So, when Megacorp A merges with Megacorp B, the resulting MegaMegaCorp will be even more powerful and consumers will suffer without government intervention either to prevent the merger in the first place, or regulate the behavior of the resulting MegaMegaCorp once it has formed.

While the economy of scale certainly has advantages and has been the foundation of most of our economic growth for the past two centuries, at sufficient scales, the internal efficiency of an organization begins to break down. It is this downward pressure induced by organizational inefficiency which eventually completely swamps the upward pressures of capital investment, replication, automation and hierarchical organization.

I work at Intel, one of the world's largest corporations, employing 88,000 people (two years ago, Intel had peaked at 102,000 employees). Despite being under the constraints of profitability, the inefficiency in Intel's organization is unimaginable to an outsider. The corporate bureaucracy is every bit as inefficient as a government bureaucracy, filled with redundant departments and positions, requiring excruciating paperwork and multiple approvals to authorize the most trivial of tasks and squandering innumerable hours in pointless meetings formed primarily by peer pressure to not appear indifferent.

There have been many giant corporations which have gone completely out of business or have gone into bankruptcy protection through no result of dishonesty or corruption. There any number of reasons this may occur but one of the constants that can be identified in all of them is the inevitable inefficiency of large scale organizations.

The free market (what people usually mean when they use the term "capitalism" although the two are not even remotely synonymous) is not unstable towards monopoly. In fact, in the long term, a true monopoly cannot exist without government sustenance and the free market is the best way to limit monopolies since smaller, more efficient organizations will naturally outcompete and limit the scale of monopolies. This conclusion cannot be reached until it is first understood that, at a certain point, scale becomes a diseconomy.

Government regulations hurt big business

Another folk myth is this idea that the way to get at the rich or the powerful businessmen is to pass popular laws, such as tax increases on the rich or raising the corporate tax rates or raising the minimum wage.

Experience has shown that our complex tax code is most beneficial to the very wealthy who are best positioned to afford the army of tax laywers required to safely navigate the complex tax bureaucracy and tax codes. Congress raises the taxes on X, Y and Z and it is those cannot afford the legal or tax consultancy resources to avoid the taxes on X, Y and Z who are punished, not the most wealthy or most powerful individuals.

In his book "In Restraint of Trade: The Business Campaign against Competition 1918-1938", Butler Shaffer discusses the unholy alliance between big business interests and the War Industries Board during the WWI years resulting in a post-war appetite for business regulations and price control measures. Since those most knowledgeable of the particularities of a particular industry are those already in it, it inevitably occurs that these men are appointed to the bureau positions tasked with regulating those industries. Here, established business interests find a best of all possible worlds - new competitors are prevented from entering the market without their explicit permission and the existing competitive environment can be controlled by those with the most political clout, which is inevitably those with the most disposable capital for currying political favor.

Those who have the most to lose from competition are those who are already the most wealthy or powerful.

Think about it.

On a related note, we hear a lot of rhetoric about "market stability" but who does market stability most benefit? It most benefits the established business interests which are so large, inflexible and inefficient that disruptive changes in the market or rapid shifts in technology or other innovations are threats with which they are ill suited to cope. The desire for "stability" is a desire to protect their business interests from unpredictable changes in the market. Small businesses thrive off the unpredictable local fluctuations in market and technological conditions which occur over space and time. Very large corporations require relative uniformity and predictability in order to survive.

But every bit of progress which we have seen since the inception of the Industrial Revolution without exception has been unpredicted. No one could have predicted five years out the invention of the electric lightbulb, the advent of radio, television, the photograph, the phonograph, the steam engine, the automobile, the airplane or any number of other inventions and technological changes which have revolutionized modern life. Predictability is the antithesis of progress.

Far from being expressions of discipline on big business, government regulations of commerce are almost invariably an expression of the interests of the biggest businesses! Consumer protection rhetoric is ubiquitous in this regard. In an earlier post, I mention Miltion Friedman's quote where he says, "When anyone complains about unfair competition, consumers beware, this is really a cry for special privilege always at the expense of the consumer." Large business interests will act to protect themselves from that which they cannot predict (new innovations, new competitors) and that which they cannot compete with (small, responsive businesses).

Good people are largely selfless

I debunk this notion in my inaugural post on this blog. The reality is that most of us are mostly self-interested most of the time, even when we would ordinarily think we are acting selflessly.

Profits induce selfishness

Here's another common modern myth. The idea is that by acting for-profit, an organization becomes more "greedy" or promotes greed in its ranks. This is completely backwards!

By refusing to compete, monopolistic organizations act outside the constraints of profitability. Unlike the Postal Service, FedEx and UPS must actually take into account the fiscal consequences of their decisions. At the end of the day, the Federal government will always be there to bail out the Postal Service. Political monopolies must always seek the aid and support of the government - either directly through revenue support, or indirectly through regulatory intervention in the market - to prevent the entry of competitors into the market who can operate under the stifling constraint of profitability in the face of competition.

In other words, the monopolist - who dons the sanctimonious robes of being "not for profit" or "working for the public good" or some other such nonsense - is in fact acting in the most self-interested manner imaginable by seizing control of the entire market through force (government regulation). Instead of letting this duplicitous drivel stand, we need to challenge the orthodoxy and think critically about why others do what they do, rather than assuming that people generally make decisions for the same reasons we imagine we would have if we were in their shoes.

Operating not-for-profit or as a government monopoly does not make an organization less self-interested. Rather, it removes the constraint of profitability from the actions and decisions of the organization, allowing it to bloat to ridiculous proportions, a pattern we see repeated again and again. Not-for-profit corporations and government monopolies have nothing more than a license to waste the public's resources.

Public property can be well cared for without central control

This is a common fallacy that is so obviously false it is difficult to understand how it even became a myth in the first place. All one has to do is use the restroom at a rest stop on one of the interstate highways to comprehend the problem of public goods. Milton Friedman says, "No one takes care of the property of others as well as he takes care of his own property." This statement is so manifestly true and the evidence behind it so overwhelmingly unanimous that only an insane person can even debate it.

The inevitable consequence of this fact is that the only way to care for public property to any meaningful degree is through central control. The concept of communal property which is well cared for despite not being owned by individual and in the absence of central control or direction is a concept with no instantiation in reality. We can appeal to the evidence to history to show how many times this ideal has failed to be instantiated by those who have tried, but there is no need to even do this unless someone first deigns to show that Friedman's summary of the nature of public property can in some cases be false. That is, unless it is the case that the property of others can sometimes be cared for as well as one's own property, then it is not even theoretically possible to have well stewarded public property. Appeals to the historical evidence are just icing on the cake.

At the end of the day, what is most surprising is how dismally our leading thinkers have failed to engage in even elementary critical analysis of the issues facing the modern economy. Some of this could be due to the influence of ideological and partisan dogmas such as communism. The myths of modernity need to be challenged, analyzed and - wherever they simply disagree with reality - abandoned. Don't just accept myths because that's what was taught to you.

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