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Some thoughts on socialism and capitalism

This post has been rattling around in my head for a while, and was finally prompted by a post left in sterno's journal.

Now, before we get started, let me make one thing abundantly clear. I am a capitalist. I am probably the biggest capitalist you will likely ever meet. For more than a decade, I have made money directly from the work that I do, without relying on an outside business for my full support. Even now, as a salaried employee, I am a minority partner in the company which employees me, and I have at least two other business ventures running at any given time, one of which typically pays my rent.

I am not a socialist, nor do I believe socialism is anything but a broken and inherently unworkable economic system which does little besides deprive those citizens who live under it from benefitting from their own labor.

However, I am also a fan of government oversight of business, and of environmental and social restrictions on the actions of business.

"But Franklin," you say, "how can that be? Isn't that a form of socialism? Isn't the whole point of capitalism the notion that market efficiencies work best when unencumbered by government intrusion?"

And the answer is "no," because without such oversight, businesses tend to adopt a weird sort of pancake socialism--an inverted socialist system where profit is concentrated, but the costs of doing business and the risks associated with business practices are socialized.

There are tangible risks associated with environmentally or socially negligent behavior. Take, for example, a hypothetical chemical business that produces acetic acid, and as a byproduct produces methylmercury. Methylmercury is difficult and expensive to contain and to get rid of safely, so let us assume that the business disposes of it by dumping it into a lake. (This is not entirely hypothetical; a company doing just that in the Japanese city of Minamata in 1956 caused the largest case of mass mercury poisoning on record.)

The business that pumps methyl mercury into a lake is increasing the risk of serious health consequences for the people living round that lake. Those risks come with a significant dollar value attached; in this hypothetical case, the dollar value may be the cost associated with medical treatment, the cost incurred by lost productivity, and the cost inflicted on the local fishing industry as the industry collapses.

These costs are not borne by the business that did the dumping. The business is not really a capitalistic enterprise; it keeps the profits from its various activities, sure, but it does not pay the costs associated with the risks incurred by its business methods. Those risks are socialized--spread across the population.

In a conventional socialist arrangement, the one everyone thinks of when they think "socialism," a worker works but does not keep the profits from his work. The profits--the results of his labor--are distributed across the population.

In the inverted socialism that comes along with lax regulation of environmental and social practices, a business keeps the profits from its work, but the costs associated with doing business are distributed across the population. This artificially increases the business' profit; the socialization of risk means that some of what would otherwise be the business' expense are paid by the community--even those who do not work for that business--and by other businesses impacted by the first business' practice. Profit is not distributed, but cost and risk are.

This socialization of risk amounts to a subsidy paid by the people surrounding the business which inflates the business' worth and increases its profits without increasing production or efficiency. Because the risks are subsidized and the costs associated with those risks are socialized, businesses which operate in a manner that socializes risk end up at a competitive advantage over businesses which shoulder the full costs of doing business.

It need not even be something as blatant as dumping toxic byproducts into the environment, and thereby socializing the risk and forcing others to assume the costs associated with that risk. This kind of "pancake socialism," or inverted socialization of risk, may happen even in the service sector. For example, when an independent mortgage writer writes a mortgage, he is paid a percentage of the value of that mortgage, and at that point he's done. The company who underwrites the mortgage, which may or may not own the mortgage throughout its entire life, shoulders the risk associated with the mortgage, but the guy who initially sold it has a different set of motivations. He is paid for every mortgage he writes, regardless of whether or not the underwriter profits from it or it goes into default. Therefore, his incentive rests only with writing the maximum number of mortgages possible, for the highest dollar value possible. He has very powerful incentive to issue risky mortgages, to artificially inflate the ability of the person buying the mortgage to pay, and to minimize the apparent costs associated with the mortgage. In fact, absent any kind of oversight, he may even have incentive to intentionally mislead his clients about the cost, and even to write mortgages which he knows damn well his clients can not afford. He does not bear the costs associated with the risk incurred by the mortgage underwriter.

The mortgage underwriter is in a similar position. It profits from writing mortgages; obviously, if the number of mortgages which go into default reaches a certain threshold, the underwriter will fail, but the more mortgages it underwrites in the short term, the more profit it generates, Particularly when it socializes its own risk by then turning around and selling those mortgages to others.

The total amount of money available to finance mortgages is finite. If a large number of mortgages go into default, this can diminish the pool of money available, which ends up dragging down much of the rest of the economy. A society which permits mortgage lenders to operate with little oversight is a socialist society; it encourages the socialization of risk by separating the risk from the profits. If the housing industry fails...well, the mortgage agents and the owners of mortgage issuing companies still made their millions; they're set. The costs of the failure are not born by those individuals; the costs are socialized, and end up being paid by everyone, regardless of whether or not they benefitted from the mortgages.

"Socialism" is something of a dirty word in American culture. The best way to defeat any policy is to label it "socialist." Yet we are a highly socialist society; it's just that we socialize risk, and we socialize cost, but we don't socialize profit. Businesses that work without oversight are socialized businesses; they expect everyone else to pay for their operational costs, while still concentrating profits internally.

This imposes significant barriers to entry into many industries; the socialization of risk benefits large businesses over small businesses. It makes up a hidden cost subsidy for businesses in areas where oversight is poor when they compete with businesses in areas where those businesses must pay the full cost of doing business, including the cost of waste management and risk management.

And you know what? As a capitalist, I think that's fucked up.


( 51 comments — Leave a comment )
(Deleted comment)
Mar. 1st, 2008 05:57 pm (UTC)
My take is that having the ability to incorporate is valuable. For example, I'm considering trying to start a side business as a photographer. With that comes a crap load of legal liability related to copyright, etc. By incorporating I can protect myself from the legal ramifications of that.

The challenge, as I see it, is limiting the scale of corporations. The bigger they are, the more prone they are to the abuses we so commonly associate with them.
(Deleted comment)
(no subject) - sterno - Mar. 2nd, 2008 01:20 am (UTC) - Expand
(no subject) - tacit - Mar. 2nd, 2008 07:03 pm (UTC) - Expand
Feb. 29th, 2008 11:59 pm (UTC)
Mar. 1st, 2008 12:00 am (UTC)
Seriously though, very well written. Interesting points. I'd not really considered that sort of business practice in those terms.
Mar. 1st, 2008 02:23 am (UTC)
So do I, but I get to call myself a 'democratic socialist' or 'progressive Third Way person' here in Oz.

The meaning of the second hasn't spread yet.

Mar. 2nd, 2008 07:04 pm (UTC)
Interesting. I hadn't heard that expression before, but it seems to make a lot of sense.
(no subject) - ruth_lawrence - Mar. 3rd, 2008 12:08 am (UTC) - Expand
Mar. 1st, 2008 03:00 am (UTC)
Well put. I've been thinking of just this topic for a few months now.

Have you read The Death of Environmentalism from the Breakthrough guys? They address this very issue. It's refreshing to see the concept spreading.
Mar. 2nd, 2008 07:05 pm (UTC)
I haven't! Fascinating reading. It draws a lot of conclusions I'd come to already, one of them being that environmentalists who are anti-capitalist and anti-business are doing themselves a profound disservice, and deeply, truly Don't Get It.
(Deleted comment)
Mar. 2nd, 2008 07:06 pm (UTC)
Well, I suppose I could make the journal about nothing but Net memes, discussions of television shows, and amusing pictures of cats....

Naah. :)
Mar. 1st, 2008 04:55 am (UTC)
Very good post. One of the best descriptions of how things actually work in American business I have seen. You should turn this into an article and get it published. Seriously!

I am a capitalist, too. A left leaning nutjob by Republican standards, but a capitalist.

I have noticed the socialism angle when it comes to business failures and bankruptcy. Businesses large and small can go through a process to have their debts wiped clean and almost entirely written off by their creditors (paid pennies on the dollar). They get to continue to operate and start all over again, usually with a relatively small amount of new capital investment by someone Very socialist when you think about it. Think about MCI Telecom or any of the airlines... much of the risks of these very large businesses were socialized (yes, indeed, the previous shareholder/investors did loose the most). Of course, individuals can do this as well -- but it is interesting now that it is now far harder for a person to discharge all of their past debts than it is for a corporation.

One the other issues is that corporations now pay so little income tax compared to what they did 50 years ago. They get to collect an increasingly disproportionate amount of benefits from government provided infrastructure and those socialized "off balance sheet" risks and costs as you pointed out.

Edited at 2008-03-01 04:57 am (UTC)
Mar. 1st, 2008 05:52 pm (UTC)
"A left leaning nutjob by Republican standards..."

Oh, so you're a normal person? :)

As for the bankruptcy thing, the biggest problem I see is basically unfolding right now. For the last 7-8 years, our financial system has been building itself up on a house of cards based on ill considered loans to buy real estate. Ultimately the people who made those decisions will not suffer for them. The banks will get bailed out because of the fear of economic collapse if they aren't. So there is no moral hazard to them for taking risky actions and we all pay for it in the end.

There will always be recessions, that's a normal and healthy part of the business cycle. But really bad recessions are caused by this kind foolish behavior indirectly encouraged by our governments refusal to properly regulate and mitigate the worst behaviors of the system.
(no subject) - tacit - Mar. 2nd, 2008 07:08 pm (UTC) - Expand
(no subject) - (Anonymous) - Mar. 3rd, 2008 05:10 pm (UTC) - Expand
(no subject) - tacit - Mar. 3rd, 2008 05:35 pm (UTC) - Expand
(no subject) - (Anonymous) - Mar. 3rd, 2008 06:38 pm (UTC) - Expand
(no subject) - tacit - Mar. 3rd, 2008 07:24 pm (UTC) - Expand
Mar. 1st, 2008 06:04 am (UTC)
Excellent article! When most people complain about US "corporate welfare," they're usually only considering the direct monetary benefits the US government grants corporations, in the forms of (for example) tax breaks and bailouts. Environmental and economic collateral damage from irresponsible business practices doesn't even register on their radar. Superfund and the S&L bailout of the 1980s are two spectacular examples.

I second the suggestion that you submit this for publication.
Mar. 2nd, 2008 07:09 pm (UTC)
I wouldn't even know how to go about finding a place to get published, to be quite honest.
Mar. 1st, 2008 08:24 am (UTC)
The Daily Show had a guy on a month or 2 back who'd done an extensive analysis of Adam Smith's book where the phrase "invisible hand of the free market" was coined.
He pointed out that very few people have actually read & understand the whole book, and that Smith is generally VERY cynical about businesses, especially large corporations, being GOOD.
The "invisible hand" idea basically came down to "if a company fucks up enough it will be forced back in to line." He also stated that Smith basically thought the market was needed to control business because government was even MORE corrupt.

It was verrrrrry interesting.
Mar. 1st, 2008 04:29 pm (UTC)
tit for tat
"socialism (is) a broken and inherently unworkable economic system which does little besides deprive those citizens who live under it from benefitting from their own labor"

capitalism is a morally bankrupt and inherently unfair and unsustainable economic system which does little beside deprive hard working citizens of the "excess value" of their work and concentrate it the hands of those who already have lots of capital, at the same time raping the planet in an orgy of greed and acquisitiveness, thereby fostering ever increasing levels of inequality, poverty, misery and war.

ok... so what now
Mar. 1st, 2008 05:47 pm (UTC)
Re: tit for tat
That's why you have government. Unchecked socialism doesn't work. Unchecked capitalism doesn't work. Broadly speaking, the best system is one where the wealth of the system is most broadly distributed.

It seems that the best systems are ones that are broadly speaking capitalist but that tax the system relatively heavily to redistribute wealth. People at the top can still make plenty of money, but people at the bottom have plenty of support to insure they don't become alienated from the system.
Re: tit for tat - nornagest - Mar. 2nd, 2008 04:54 am (UTC) - Expand
Re: tit for tat, part 1. - tacit - Mar. 2nd, 2008 07:26 pm (UTC) - Expand
Re: tit for tat, part 1. - polycanuck - Mar. 3rd, 2008 02:24 am (UTC) - Expand
Re: tit for tat, Part 2. - tacit - Mar. 2nd, 2008 07:37 pm (UTC) - Expand
Re: tit for tat, Part 2. - polycanuck - Mar. 3rd, 2008 02:34 am (UTC) - Expand
Re: tit for tat, Part 2. - tacit - Mar. 3rd, 2008 07:36 pm (UTC) - Expand
Re: tit for tat, Part 3. - polycanuck - Mar. 3rd, 2008 09:24 pm (UTC) - Expand
Re: tit for tat, Part 2. - polycanuck - Mar. 3rd, 2008 09:34 pm (UTC) - Expand
Re: tit for tat, Part 2. - tacit - Mar. 4th, 2008 11:32 pm (UTC) - Expand
Re: tit for tat, Part 2. - polycanuck - Mar. 5th, 2008 01:57 am (UTC) - Expand
Re: tit for tat, Part 2. - tacit - Mar. 5th, 2008 03:54 pm (UTC) - Expand
Re: tit for tat, Part 2. - polycanuck - Mar. 5th, 2008 06:03 pm (UTC) - Expand
Up and atom - polycanuck - Mar. 5th, 2008 02:04 am (UTC) - Expand
Re: tit for tat, Part 3. - tacit - Mar. 2nd, 2008 07:49 pm (UTC) - Expand
Re: tit for tat, Part 3. - polycanuck - Mar. 3rd, 2008 02:57 am (UTC) - Expand
Re: tit for tat, Part 3. - tacit - Mar. 3rd, 2008 07:43 pm (UTC) - Expand
Re: tit for tat, Part 3. - polycanuck - Mar. 3rd, 2008 10:02 pm (UTC) - Expand
Re: tit for tat, Part 3. - tacit - Mar. 4th, 2008 11:24 pm (UTC) - Expand
Re: tit for tat, Part 3. - polycanuck - Mar. 3rd, 2008 03:56 am (UTC) - Expand
Re: tit for tat, Part 3. - tacit - Mar. 3rd, 2008 07:51 pm (UTC) - Expand
Re: tit for tat, Part 3. - polycanuck - Mar. 3rd, 2008 09:14 pm (UTC) - Expand
Re: tit for tat, Part 3. - jtroutman - Mar. 3rd, 2008 09:01 pm (UTC) - Expand
Mar. 1st, 2008 05:43 pm (UTC)
My theory on it:

In a capitalist system, the primary motivation of a company is to maximize profitability. Any "good" that a company does is always in the service of higher profits. They provide health insurance because healthy employees are more productive. They fund local charities because it's good PR, etc. Companies that do good for any reason other than the bottom line are a rare and often transient exception, especially as they become larger and more disconnected from local communities, etc.

So given that premise, I believe the optimum way for government to achieve greater good for the public is through proper regulation of those corporations. That is, make it so that the profit motives of the corporations are in tune with the needs of the public. You make it so that profitability is best achieved when the company is paying good wages, providing good benefits, protecting the environment, etc.

This works best when companies are not penalized for failure to meet those goals (thus requiring investigation and prosecution by government). Ideally, the government should use various carrots that require companies to prove their success in meeting these goals. This puts the onus on the companies to demonstrate their success rather than creating a motivation to hide their failures.

Finally, I think that sometimes a private system does not work. A private capitalist system works when there is a guarantee of substantial competition in the market place. Where competition cannot be guranteed, the private market fails. For example, the health care system is broken because nobody competes for the most sick. This is in addition to the fact that medical care is a very complex field requiring years of knowledge that the average consumer cannot hope to understand and thus use to make informed decisions.

So while broadly speaking I'm all for capitalism and a well regulated market place, I think that a single payer government funded health care system makes sense. I also think that public utilities make sense. However if somebody could demonstrate a way that government could create a health care system that was private and yet covered all people and provided competition to keep prices low and quality high, I'd be all for it.
Mar. 2nd, 2008 07:57 pm (UTC)
In a capitalist system, the primary motivation of a company is to maximize profitability. Any "good" that a company does is always in the service of higher profits. They provide health insurance because healthy employees are more productive.

Actually, that's not entirely true. The current system of employer-funded health care is a relatively modern thing, and it's an artifact of Richard Nixon's wage and price freeze in 1971.

Back in the late 60s and early 70s, inflation was a very serious economic issue. Nixon hit on a particularly stupid "solution" to this problem--a mandatory freeze in prices and wages across the board.

Now, this particular idea was doomed to fail for a whole host of reasons, not the least of which is it's essentially impossible. A manufacturer of a complex, high-ticket item like a car has a zillion different ways to cut costs--remove features, use inferior materials--which effectively decrease the value of the car, and so increase its price even if the selling price remains unchanged. Makers of toilet paper and plastic spoons can't really do that. So a price freeze is inherently uneven; it affects commodity goods more than it affects other goods.

On top of that, a price freeze means that workers are no longer able to move to new, higher-paying jobs, and businesses can not compete for skilled workers by offering more money. So what businesses started doing is finding subtle, off-the-paycheck ways to compete for workers. One of these was offering to pay for their employees' health insurance.

The unfortunate legacy of Nixon's brain-dead approach to economic management still lingers with us. Multiple-payer health insurance linked to employment is wasteful, inefficient, and uneven, and it leaves a lot of people uninsured. This makes for an expensive, wasteful, and inefficient health care system in general; Americans spend more on health care than any other nation in the world, yet if you look at indexes of the quality of the health care we receive, such as infant mortality or longevity, we're the worst in the industrialized world. Linking health insurance to employment is just stupid.
Mar. 3rd, 2008 02:59 am (UTC)
Completely off-topic because I don't want to go hunting for the original conversation at the moment: Scalzi's list of Ten Things I've Done and You Most Probably Haven't gets a reply from Quinn Norton, who had implanted a magnet in her finger. Her suggestion to others: Don't.
And her article in Wired on the same topic, but at more length.

Aside from that, the Scalzi comment thread is a great read.
Mar. 4th, 2008 11:34 pm (UTC)
It is!

That's one of the problems of being an early adopter, of course. I love the idea of having this sense, and I can't express in mere words how badly I want it, but when you're dealing with what is essentially version 0.1 alpha 2 of a technology being pioneered by people with no formal medical training, there are likely to be...bumps along the way.

I would not get this particular body mod (and I haven't), but when the process matures a bit, you can be sure I'll be standing in line.
(no subject) - icedrake - Mar. 4th, 2008 11:41 pm (UTC) - Expand
Aug. 23rd, 2008 09:32 am (UTC)
“Wow,” it is really nice to read a post from someone that knows a subject well and is able to get their point across. I am really
looking forward to your next post.

Done a brilliant job and Best of luck for your upcoming one!
( 51 comments — Leave a comment )