Bleeding-Heart Capitalism, or How to Talk with a Socialist

About the Free Market Gene Epstein

Economics Editor, Barron’sGene.epstein@gmail.com

Romanian-American University April 10, 2014

19th Century Saying

• The man who is not a socialist at 20 is a scoundrel.• The man who remains a

socialist at 40 is a fool.

Key reason a bleeding-heart supports free-market capitalism (“gateway

drug?”)

• Free-market capitalism is essential to lifting the living standards of the broad masses of people.

Worker need and employer greed

• The Marxian…doctrine of the alleged arbitrary power of employers over wages appears plausible because there are two obvious facts that it relies on…worker need and employer greed.—George Reisman, Capitalism

Worker need

• “The average worker must work in order to live, and he must find work fairly quickly, because his savings cannot sustain him for long. And if necessary—if he had no alternative—he would be willing to work for as little as minimum subsistence.”- George Reisman, Capitalism

Employer greed

• “Self-interest makes employers, like any other buyers, prefer to pay less rather than more—to pay lower wages rather than higher wages.”--George Reisman, Capitalism

The parable of the car-seller…

• …who moves to the big city and who can’t afford to maintain his car. How does he get the market price from greedy buyers who want to pay him as little as possible?

Instead of buyer greed…

• Buyers and employers want to pay the lowest price or lowest wage, but that price or wage must be high enough to outbid any other buyer or employer.

Corrective Mechanism-1

• A “powerful” employer cannot depress labor prices below the value of workers’ [financial contribution] for long because other firms are attracted by the cheaper labor. The new firms hire these workers and thereby put upward pressure on the prices paid to labor until further profit from the initial exploitation of isolated labor disappears.-Morgan Reynolds, “Labor Unions,” Concise Encyclopedia of Economics

Corrective Mechanism-2

• “If employer clout depresses wage rates in one location, labor supply will decrease as mobile workers leave, again putting corrective, upward pressure on wage rates.”

--Morgan Reynolds, “Labor Unions,” Concise Encyclopedia of Economics

Corrective Mechanism-3

• “Even the historical image of corporate power dominating isolated ‘company mining towns’ is mostly fiction. Nineteenth-century Appalachian coal miners, for example, were highly mobile, and literally hundreds of companies competed in the same coal and labor markets in both company-owned and independent towns.”-Reynolds

Corrective Mechanism-4

• “Because labor is the most versatile and flexible input, it is much harder for owners of large fixed-capital investments to exploit labor than for labor unions to exploit business investors.”’-Reynolds

Labor Unions Foster Inequality• “The wage advantage enjoyed by union members

results from two factors. First, monopoly unions raise wages above competitive levels. Second, nonunion wages fall because workers priced out of jobs by high union wages move into the nonunion sector and bid down wages there. Thus, some of the gains to union members come at the expense of those who must shift to lower-paying or less desirable jobs or go unemployed.?-Reynolds

Tribute from Karl Marx-1

• “The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation. The cheap prices of its commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate.”-The Communist Manifesto

Tribute from Karl Marx-2

• “The bourgeoisie has subjected the country to the rule of the towns. It has created enormous cities, has greatly increased the urban population as compared with the rural, and has thus rescued a considerable part of the population from the idiocy of rural life.”-The Communist Manifesto

“Cheap prices of its commodities”

• --Rise in living standards comes from “cheap prices”

• --Virtually all the great fortunes in the U.S. were made by selling goods and services to the masses (Steve Jobs, Sam Walton, Henry Ford).

The consequence of rising productivity: layoffs and “creative

destruction”

• --Rising productivity on the farm drives workers from the farm to the factory.

• --Rising productivity in the factory drives workers from the factory to the office.

“Spoons, not shovels”

• Milton Friedman, visiting a work site in Asia where a new canal was being built, was surprised that the workers had shovels rather than modern tractors and earth movers. “You don’t understand,” explained a government bureaucrat. “This is a jobs program.” To which Friedman responded, “Then you should give these workers spoons, not shovels.”

Updated Saying

• The man who is not a socialist at 20 understands that socialism brings impoverishment and tyranny.

• He sees free market capitalism as the only system known to man that can bring prosperity and freedom.

Inequality Riddle

• Choice:• A. Top 1% increase their income by 50%,

bottom 99% increase their income by 30%.

• B. Top 1% suffer a decrease in income by 50%, bottom 99% suffer a decrease of 30%.

Public Choice theory

•“Politics without romance”

finally

• Free market capitalism is essential to liberty. (When the government controls the means of production, liberty is curtailed, even with the best of intentions.”)

• “Libertarian socialism” is a contradiction in terms.