Tag: Adam Smith

The search for purpose: Nature and Nurture – Genes and culture

Every healthy boy and girl searches for the meaning and purpose of their lives. We ask why we are here and what we should do with our lives.  Where do we want to go and be in the future? How do we think we can best get there?  What should we strive for or should we strive at all?  The search for meaning can be agonizing but it is part of human nature to ask, “Who am I?”.

But we do not search in a vacuum.  That we search at all can be attributed to our genetic inheritance. Over the millennia our ancestors who pondered this question and chose and worked toward goals of mutual help and cooperation, prospered and multiplied relative to those who didn’t.  While personal and family survival and wellbeing come first, working together with others enhanced the wellbeing of both. In a fascinating presentation at the Cato Institution, Nicholas Christakis, Sterling Professor of Social and Natural Science, Yale University, discussed his new book “Blueprint: evolutionary origins of a good society”  He argued that the evolutionary survival of the fittest also favored (selected) those disposed to love, friendship, cooperation, and teaching. Homo sapiens with those qualities formed more successful and durable groups.

This happy genetic predisposition, however, was just the start, the foundation from which the search for the meaning of our lives was launched. The rest of the answer is the product of the values taught to us by, or absorbed from, our parents, family, and community and its religious and other institutions, and filtered by our reason, which is another capacity favored by evolution. The cultural values from which we learn what our peers value and respect in us can contribute to successful and prosperous societies (and their economies) or not. Children growing up in poor neighborhoods dominated by gangs are more likely to see success in terms of the demands of their gang. The esteem of their gang peers will be earned by very different behavior than in neighborhoods in which honesty and respect for the law are valued.  Gang culture does not contribute to safer, more prosperous neighborhoods or societies.

Cultures that reward cooperation, honesty, and trust enjoy more successful economies as well. Financial wealth is only one source of esteem, however, and after being well feed and well clothed, the respect of our communities probably tops the list of aspirations for our lives. The cultural values in which we map out our goals profoundly influence the choices we make.  Adam Smith’s “invisible hand” guiding our actions for our self-enrichment serves us individually and the society we live in best when functioning in a culture of mutual respect, honesty, and cooperation.  In free market, capitalist economies, individual workers and entrepreneurs profit by satisfying the wants of others. Thus, competitive capitalism encourages a culture of serving others and such a culture encourages successful economies.  These are win – win societies.

“The overwhelming weight of evidence supports the conviction that when human beings, created in the image of God as free, rational, social, and moral animals, are allowed to creatively serve each other’s needs and responsibly plan their own lives, they flourish. And when a nation’s citizens flourish, the nation as a whole flourishes as well.”  “Dylan Pahman: Why-economic-nationalism-fails-conservatism”

So where should today’s Generation Z and Millennials look to find meaning and purpose for their lives? Most of us want to “do good” for our community, country and the world as well as for ourselves and our families. Will today’s youth see this marriage of public and personal good in the world of personal freedom and responsibility described by Adam Smith, or in the world of greater central government assistance (control) advocated by Bernie Sanders?

Sanders says he is a socialist, but I doubt that he means government ownership and direction of the means of production, which is the traditional meaning of socialism.  Rather he seems to mean government provision of important goods in our lives (heath care, education, jobs, etc.)  But the provider also determines what and how to provide.  Are the key decisions in our lives to be made by each of us within the legal and cooperative framework of norms and support provided by our culture and government of limited scope, or to be determined centrally for our benefit by a larger more dominant government and its employees? Government employees no doubt feel good when they help others, but capitalism provides a financial reward for doing so as well. Human greed is more likely to be tempered by the requirements of success in free markets than in government bureaucracies.

Though the average family, and especially the poor, have never before had such wealth broadly defined, today’s world suffers many shortcomings. The social safety net of a properly limited government is not always effective or well designed.  Each person in our newest generation in seeking the esteem of its family and community will ask how best to fix these shortcomings and to address and reduce the barriers to their’s and their neighbor’s fulfillment of their potential for a rich and fulfilling life. Will they turn to the “socialism” of Bernie Sanders or the individual/family-based free market model of Adam Smith?

So called “socialism” is enjoying a resurgence of popularity among American youth today. Even before Trump’s election a majority of 18-29 year old’s viewed socialism favorably. “Why-so-many-millennials-are-socialists”  Why is this, given the strong theoretical and empirical case against it?  For one they were not alive to see its greatest failures (though we now have Venezuela and North Korea).  They seem to think of countries like Sweden as socialist. While the free market capitalist country of Sweden has a larger government than the U.S., it ranks only a bit below the U.S. on the Frasier Institute Index of Economic Freedom (8.07 versus 7.83 in 2015).  For example, Sweden adopted a nationwide universal voucher program (school choice) in 1992, well ahead of the U.S.  https://www.fraserinstitute.org/studies/economic-freedom

Like every generation before it, today’s youth wants to “do good.” They want to contribute to making the world better than it already is. Those of us who highly value our personal freedom as the basis of how we live and who have studied the weaknesses of government provided and guided economic resources [e.g., https://wcoats.blog/2020/01/25/crony-capitalism/] must take up the challenge of explaining the superiority of a family based social structure and honest, law abiding, mutual respecting, cooperative culture. While free market capitalism has produced incredible riches for almost everyone, its primary virtue, and potential appeal to Generation Z, is its promotion of caring for and serving our fellow man.

Crony Capitalism

The standard of living of the median income family in the United States has risen to heights that could not have been imagined just a hundred years ago ($73,891 in 2017). All other industrial countries have had similar experiences.  “As measured in 2011 U.S. dollars, the global income per person per day in the first year of the Common Era stood at $2. That’s also where it stood when William the Conqueror set sail in 1066 to claim the crown of England…. In 1800, the average income was $2.80. In the 18 centuries that separated the emperorship of Caesar Augustus and the presidency of Thomas Jefferson, per capita income rose by less than 40 percent….

“Then industrialization changed everything. Between 1800 and 1900, GDP per person per day doubled. In other words, income grew over twice as much in one century as it had over the preceding 18 combined. By 2016, the number…in the United States… stood at $145…. In other words, global and American standards of living rose twelve-fold and 24-fold respectively over the course of the last two centuries….  These and other fascinating data are presented by Marian Tupy in: https://humanprogress.org/article.php?p=1906

How was this miracle possible? It resulted from each worker on average becoming dramatically more productive and being able to trade his or her products for the other goods and services he or she wanted. But what was the source of such an amazing increase in productivity?  Workers developed and or were provided with tools and equipment (capital) that made it possible.  These machines, cooperative production structures and worker skills (so called “human capital”) were developed because “capitalists” creating and investing in them had protected property rights in them and shared in the profits from their use. In short, it was because people had an incentive to invent and learn that was lacking in feudal or earlier social structures.  Bill Gates, for example, became a billionaire from selling us the computer products and services that Microsoft invented and produced. We happily paid Microsoft these billions for its tools that greatly enhanced our own productivity in both production, household management, and play. In the win-win world of private property and trade, we gained from Microsoft as much or more than Bill Gates did.

Interestingly, there is more to this story. As industrialization took hold, and the incomes of the lower and middle classes rose, income inequality declined. The monopolies of feudal Lords were eroded.  More recently “global inequality is declining as developing countries catch up with the developed world. Between 1990 and 2017, argues Branko Milanovic from City University of New York, the global Gini coefficient, which measures income inequality among all of the world’s inhabitants, decreased from 0.7 to 0.63” i.e., became more equal (zero equals perfect equality). [Tupy]

In the U.S. after years of gradual decline, the Gini coefficient rose from 0.35 in 1979 to 0.49 in 2018, slightly less than China’s (0.47). What is going on? Though still more equal than the world on average, why is income distribution widening modestly over the last forty years in the U.S.?

A widely held explanation is that industries have become more concentrated and have exploited their quasi monopolistic market power to extract noncompetitive, i.e. monopoly, rents. Two hundred forty-four years ago, Adam Smith wrote that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” [Wealth of Nations Book I, Chapter X.] What prevents such conspiracies from succeeding is the competition from other firms seeking to exploit these attractive prices. When faced with competition, a person or firm can only profit by satisfying customers better than the competition.

But why have American firms, and those of many other industrial countries, become more concentrated and protected from competition?  Largely via state capture. As he reluctantly increased U.S. military spending as the “Cold War” heated up, President Dwight D. Eisenhower worried that it would be hard to avoid a mutually self-serving relationship between the government paying the bills and the defense industry supplying the goods. In his famous Farewell Address on January 16, 1961, Eisenhower warned that: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes.”

When government becomes involved or increases its involvement with private firms, the door (and the revolving door) is opened for firms to exploit the relationship to their advantage. It is not just the military-industrial complex (or the military-industrial-congressional complex as Eisenhower stated it in the first draft of his Farewell Address) that enjoys government favor and protection. President Trump’s tariffs on imported steel and aluminum are not for the benefit of American’s generally but are protectionist favors to America’s uncompetitive steel and aluminum firms. Protectionism is just another word for corruption.

Some products and industries need to be regulated to protect consumers and insure honesty and transparency. But larger firms increasingly accept, if not welcome, overly burdensome regulations because they are better able to devote resources to complying with them and thus absorbing their cost than are smaller firms. Such regulations protect them from competition from new, smaller firms. Professional licensing has increasingly been used to protect professionals from hairdressers to real estate agents to lawyers from competitors thus enjoying higher fees than would result in a more competitive market for their services.

The quasi monopoly rents firms are able to extract as the result of government protection against competition grow with the size of government involvement with the economy. The increase in income inequality (a reflection of shrinking competition) of recent decades (the increase in America’s Gini coefficient) have followed the large increases in the size of government, whether measured by expenditures, employment, or regulations.  https://wcoats.blog/2008/09/06/how-to-measure-the-size-of-government/

“• In 1900 the federal government consumed less than 5 percent of total output.

  • In 1950 the federal government consumed roughly 15 percent of total output.
  • In 1992 the federal government consumed almost 25 percent of total output.”

https://fee.org/articles/the-growth-of-government-in-america/

Bernie Sanders, a self-proclaimed Socialist, and Elizabeth Warren, a self-proclaimed defender of capitalism (I am not joking), argue that to fix industrial concentration, to prevent or unwind monopolies, the government needs to be bigger and more active in the economy. This is backward in terms of logic and experience. I don’t question that overwhelmingly most public servants work for the government out of the desire to serve the public. However, the interface between government and the private sector creates opportunities and incentives (resisted by most I am sure) for corruption. By corruption I mean the exploitation of government regulations and contracts to reduce market competition for (i.e. to protect) established firms.

Political lobbying by firms and trade organizations can provide useful industry input to congressional legislation or executive rule making but it is generally the prospective of established firms rather than of potential competitors or the general public. “Since the 1970s, there has been explosive growth in the lobbying industry, particularly in Washington DC.  By 2011, one estimate of overall lobbying spending nationally was $30+ billion dollars. An estimate of lobbying expenses in the federal arena was $3.5 billion in 2010, while it had been only $1.4 billion in 1998.” “Lobbying_in_the_United_States – A_growing_billion_dollar_business”

In 2010 the Supreme Court ruled in a 5-4 decision in Citizens United v. Federal Election Commission, “that the free speech clause of the First Amendment prohibits the government from restricting independent expenditures for political communications by corporations, including nonprofit corporations, unions and other associations.” “Citizens_United_v._FEC – Super_PACs”  This opened the door to direct corporate and union “donations” to political candidates and parties, providing a powerful tool in achieving government cooperation with what these groups consider their special interest.

The competitiveness, and whatever the lack of it contributes to income inequality, of American businesses will not be served by expanding the government’s role in the economy, quite the opposite. Competition is rarely stifled by natural market phenomena. Rather it is much more often blocked or restrained by government regulations that favor the established, dominant firms, who are able to gain the government’s favor. The political forces of expanding government regulation and interference in the economy promote every increasing state capture by dominant firms.  Crony capitalism will be the death of the real thing if it is not continuously resisted. As we should all well know, the price of liberty is eternal vigilance.