Capitalism, the game we play; Democracy, the referee

“My job is to try to make it so that every year every team has an equal chance to win the Super Bowl.  The job of every team is quite the opposite.”
 An approximation of a quote attributed to Paul Tagliabue, then commissioner of the NFL

To summarize up to this point:

Economies arise out of the division of labor. The division of labor creates a much more productive economy. It also presents us with make/buy choices.  The more it divides, the more specialized we become, and the more we end up selecting buy over make choices.

Government arises among groups of people with the purpose of protecting property, broadly defined.  Initially, it was intended to protect one’s property from individuals out side one’s own group.  However, with the division of labor threats to property can arise within one’s own group and so rules are set up in the group to protect property in the course of economic transactions. As labor divides and people become more specialized more regulation is required.

As a framework for the relationship of the economy and the government we participate in, I would propose that the economy is the game we play and government makes and enforces the rules.  So what kind of game do we want to play and why do we want to play that particular game?

What should distinguish a democracy from any other form of government is that the object in making and enforcing the rules is, as much as possible, to make the game fair. By fair I mean that that there is equality of opportunity. Fair is certainly in the eye of the beholder and how far we should go to create equality of opportunity varies across the political spectrum but the principle is the same for all of us who accept democracy as the form of government we wish to live under. There are a lot of reasons for this.

To begin with it speaks to our most foundational beliefs. It is why we hold sacred the words that this nation was dedicated to this proposition seven score and 14 years ago.

Democracy by definition is participatory. When people don’t feel the game is fair they are far less likely to participate and more likely to act outside the “rules.” Locke would say they are completely justified to overthrow the state entirely  and then we no longer have a game.

When the game isn’t fair it weakens democracy but it also weakens capitalism.


Capitalism depends on its inherent creative destruction to be self-correcting.  But that creative destruction can be thwarted when one team gets to stay on top. When one team stays on top, we lose the innovation of the rest of the market and the team at the top loses its competitive edge because there is no opposition with which to compete – an opposition which Walter Lippman would define as indispensible.

Moreover, de Tocqueville concerns us with the possibility of creating an aristocracy of the manufacturing class. “ . . . there are every day more men of great opulence and education who devote their wealth and knowledge to manufactures and who seek, by opening large establishments and by a strict division of labor, to meet the fresh demands which are made on all sides. Thus, in proportion as the mass of the nation turns to democracy, that particular class which is engaged in manufactures becomes more aristocratic.”

He ominously notes that, “The territorial aristocracy of former ages was either bound by law, or thought itself bound by usage, to come to the relief of its serving-men and to relieve their distress. But the manufacturing aristocracy of our age first impoverishes and debases the men who serve it and then abandons them to be supported by the charity of the public.”
He finishes by warning, “I am of the opinion, on the whole, that the manufacturing aristocracy which is growing up under our eyes is one of the harshest that ever existed in the world . . .  the friends of democracy should keep their eyes anxiously fixed in this direction; for if ever a permanent inequality of conditions and aristocracy again penetrates into the world, it may be predicted that this is the gate by which they will enter.” 
When an aristocracy is created and we systematically exclude classes of people we diminish the talent pool from which we can derive new and better products and ideas.  Just imagine how impoverished our country would be today if we persisted in the white male dominated culture that was the norm little more than 60 years ago.


Everybody wants to beat the competition, drive the other team from the field, win the Super Bowl every year. It is not in our hearts as capitalists (and we all have that germ of capitalism in our hearts) to want otherwise. But it is toxic to the system, the losers and the winners, if the same team wins year after year.  Just like the NFL needs a commissioner, capitalism needs government to save it from itself, to maintain a level playing field, to optimize the process we call capitalism.

And no form of government is more suited to do this than democracy because equality of opportunity is precisely the object of democracy’s game. And while the relationship between capitalism and democracy isn’t perfect it is at least “more perfect”, and that, at least in this country, was our stated purpose from the outset.

Next time I will start to take a look at why that relationship is less than perfect.

Capitalism meets Democracy (or at least government) in the 21st century

Since you are reading this on a computer it is safe to say that, as ruggedly independent as you think you may be, you overwhelmingly make buy choices over make choices. As a result you trade your property (time and money) for what for you, you hope, is someone else’s property (time or material goods) that is of at least equal value to you. Since you don’t (nor do any of us) have the means to assess, enforce, (freedom to) the quality of these transactions you are protected by a blizzard of standards and regulations (freedom from) that allow us all to conduct these transactions with piece of mind.

You go out most days and earn your daily bread.  When you actually buy the bread you can be sure that it is the pound of bread you expect it to be because we have a Bureau of Weights and Measures that has long since set a standard we all agree to and accept without question. We can be certain it is the advertised grain and not sawdust because we have an FDA inspection system that oversees both food and medicine so that we can consume these with almost perfect confidence.

When you buy a prescription, that drug has survived a gauntlet of regulatory hurdles, so that your doctor can help you make an informed decision as to the safety and effectiveness of that drug for your condition.  Furthermore, you can be certain that you are getting the amount of the drug that is printed on the label.

Contrast this with the recent experience with the unregulated herbal supplement industry.  In 2015 the New York attorney general reported that several large retail chains were selling health supplements that did not contain any of the supplement (Echinacea, for example) that was supposed to be in it.[1] [2] Whether they work or not an individual is getting cheated out of their property if they are not getting what is labeled on the bottle.

The regulatory environment we live in is far more ubiquitous than this and even effects (intrudes) in our life without transactions. The government has something to say about the air we breath, the water we drink, and the food we eat and it does all these things to our benefit. For those who say government doesn’t do anything for me try breathing the unregulated air of Beijing, or drink the unregulated water of a Mumbai slum, or eat the unregulated food from a Mogadishu street vendor.

In summary up to this point, as labor divides we overwhelmingly make buy choices and surrender to the salutary servitude of the fruits of others’ labor. As we depend more on the goods and services of others, we surrender to the salutary servitude of a massive regulatory system that ensures without us thinking about it (freedom from) that the most basic interactions we have with the world and with the market are fair. I would say that this is a most fundamental characteristic of civilization.

All that said, I can understand where the ultra-libertarian feels that the statement, “The government has something to say about the air we breath.” is positively Orwellian. And as much as the ultra-liberal may cheer the regulatory framework that engulfs us it may be a fundamental part of the discontent we all feel toward the civilization we have been born into. In a future post, I may look more closely at this particular source of discontent. For now I only hope to give a way of looking at the world we live in that may be helpful for you to see where you stand in it.

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[1] https://www.washingtonpost.com/news/morning-mix/wp/2015/02/03/gnc-target-wal-mart-walgreens-accused-of-selling-fake-herbals/?utm_term=.2cd5debed77c

[2] http://insider.foxnews.com/2015/02/03/new-york-ag-walmart-target-gnc-walgreens-supplements-are-phony-contaminated *

Capitalism meets Democracy (or at least government)

Locke envisions governments being formed to protect property.  His examples suggest that these groups form for protection against the people on the other side of the forest or river; but in this day and age what do we mean - Canada?

Yes all nations have standing armies to collectively protect themselves from real or perceived threats from other nations. However, on a day-to-day basis threats to our property are much nearer to home. There is, of course, the threat of common crimes such as assault and robbery for which we trade freedom to (personal retribution) for freedom from (involving the police and the judicial system). However, threats to property which are much more ubiquitous arise from the division of labor. Let us go back to Adam Smith’s bow and arrow maker to see how this might originate.

Let us say that the bow and arrow maker agrees to provide a certain number of arrows to the hunter in return for a specific quantity of venison. Let us then imagine that the meat that the hunter provides is mostly gristle or rancid, or simply less than promised. Or we can imagine on the other hand that the arrows weren’t straight or the heads weren’t sharp, or the feathers fell off.  In either case one or the other lost value of their property in the exchange. Initially, they might resolve the dispute between themselves. However, and especially if the dispute were settled through violence, this throws the individual back to the state where the “enjoyment of it (his freedom) is very uncertain, and constantly exposed to the invasion of others” who happen to be the ones with whom he is most closely associated. In addition to being bad for those involved this defeats the purpose of the group which is to allow the individual to enjoy his freedom from both the threat of violence and the capriciousness of the solution (Might makes right regardless of facts.) Furthermore, since this threatens group cohesiveness it is bad for the integrity of the group and makes it more vulnerable to threats from outside.

One can imagine then that very early on the group recognized a higher authority –tribal elders or a chief – to arbitrate such disagreements and render a decision that the group accepted as an acceptable resolution of the dispute.  Whether such individuals or tribunals rendered fair judgments most, some, or none of the time is irrelevant. These primitive institutions did their job if they minimized intragroup violence and their pronouncements were accepted by the group as binding.

This is my speculation on government’s first step into (interference in) the market place. I acknowledge that neither Smith, Locke, nor I have any appreciable factual knowledge of the governance of pre-historic man. That said throughout history we have evidence of markets that function as Smith said, governments that function with the purpose that Locke said, and the interaction between markets and government that function as I have speculated and that is what we have today. We choose buy (vs. make) and trade our property (time and money) for what we expect is of equal value to us. We depend on government to give us piece of mind (freedom from) that that trade lives up to our expectations.

In my next entry I will bring these ideas into the 21^st century to see how markets, government, and their interaction affect us today.

John Locke: Trading Freedom to for Freedom from

John Locke is as good a place as any to start a discussion of democracy. In his first Treatise on Government he refutes the divine right of kings and in the second he lays out the rationale for democratic governments.  He was a powerful influence on Jefferson who had his portrait in his study along with Francis Bacon, Sir Isaac Newton, and Galileo.

In the Second Treatise on Government, he makes the case that man in his natural state is free and equal to every other man. Locke states “ men are naturally in . . . a state of perfect freedom to order their actions and dispose of their possessions and persons as they see fit . . .”[1] that is in the state of nature they have perfect Freedom To.

Locke then asks, “If man in the state of nature be so free . . . absolute lord of his own person and possessions . . . why will he part with his freedom?”[2]

His answer is “. . . that though in the state of nature he hath such rights, yet the enjoyment of it is very uncertain, and constantly exposed to the invasion of others. For all being kings, as much as he, every man his equal, and the greater part no strict observers of equity and justice, the enjoyment of property he has in this state is very unsafe, very unsecure.”[3]

So men form political unions, “for the mutual preservation of their lives, liberties, and estates, which I call by the general name, property.”[4]

Since he has entered this contract as an equal he has an equal say in the matters of governing and since he entered it voluntarily if he is not getting the protection for his property that the contract promises he can opt out at any time. Thus the process is democratic.

However, I want to clarify what exactly he gives up and what exactly he gets with this arrangement.

The function of government is to preserve property; but Locke has a pretty broad definition of what he calls property.  In addition to the physical chattels we customarily call property he adds life and liberty (time). It is the expenditure of his property in all these forms that he gives up to enjoy the security of the group. If he defends his tribe against the tribe across the river he gives over his time, his physical resources (weapons perhaps), and possibly his life. He trades his Freedom To use, however he sees fit, this property, in all its forms, and gives it over to the collective for Freedom From the threat of the enemy host which he is not able to deal with on his own.

So Locke presents to us another continuum for us to consider, and consider we have.

Dostoevsky’s Grand Inquisitor is a parable on the subject. Roosevelt’s four freedoms split down the middle, two freedom to’s (Speech and Religion) and two freedom from’s (Want and Fear). In high school a classmate who was a member of the John Birch Society said there is no such thing as Freedom From.

This in fact, I would maintain, is the fundamental continuum upon which liberals and libertarians/conservatives disagree. It is the central political argument of our age.

So I am going to leave it for now and give you a chance to consider how you think and perhaps more importantly feel about it.

In the next post I will look at the freedom to/freedom from continuum in the context of context of the make/buy continuum.

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[1] John Locke Second Treatise on Government Chapter II - Of the State of Nature

[2] John Locke Second Treatise on Government Chapter IX - Of the Ends of Political Society and Government

[3] Ibid.

[4] Ibid.

The division of labor; THE fundamental principle of capitalism

Adam Smith in the Wealth of Nations starts the book with defining and promulgating the importance of the division of labor. I would maintain it is more than that; it is a sine qua non of any economic system.  If there is no division of labor then everyone is wholly self-sufficient and therefore there is no meaningful exchange of goods or services and no economy exist.

He gives the following example of how in a primitive society the division of labor might arise.

“In a tribe of hunters or shepherds a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison, than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be

his chief business, and he becomes a sort of armourer. Another excels in making the frames and covers of their little huts or moveable houses. He is accustomed to be of use in this way to his neighbours, who reward him in the same manner with cattle and with venison, till at last he finds it his interest to dedicate himself entirely to this employment, and to become a sort of house-carpenter. In the same manner a third becomes a smith or a brazier; a fourth a tanner or dresser of hides or skins, the principal part of the clothing of savages. And thus the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.”[1]

The result of this division of labor is that everyone becomes a producer/consumer and as a result is left with a make/buy choice. In the primitive society, do I make my arrows, build my hut, tan my hides or do I trade my cattle, venison, corn for someone else’s skill set? In modern society do I grow my food, build my house, repair my car or do I contract with the grocer, builder, or mechanic to do those things for me?

Make/buy then is a continuum around which we all make choices and to some degree speaks to a core belief we have about ourselves. The more independent among us is inclined to have a garden, fix the faucet or check under the hood before calling the mechanic. Others from a lack of talent (me) or inclination can’t wait to hand the problem off to someone more capable than us. I have a great deal of respect and even envy for those who “look under the hood” before they pick up the phone. Being a core belief it shades the way we look at not just the specific problem but the world as well.

However, no matter how independent we think we are, certainly everyone who is reading this earns the vast majority of their capital pursuing a singular task (doctoring, lawyering, architecting etc.) and trading that capital for virtually everything we need to survive.  And that capital we buy is the work of tens if not hundreds of thousands of people. In the opening chapter of The Wealth of Nations Smith uses the example of pin makers, and notes that ten can collectively make 48,000 pins in a day compared to the not more than 20 one untrained person might make.  However, that is still ten people who just make the pin. (And it doesn’t include the people who make the wire from which the pin is made.) If ten people make a pin, how many make a rug, or a book, or a chair, or a computer?

Thus, as with dogma where we believes a million things on the faith of other people, we buy most everything produced by a million other people, because it materially “allows (us) to make a good use of freedom.” Thus from the dawn of economic history, as with dogma, we willingly submit ourselves to a “salutary servitude” because we buy the goods and services of others way more than we produce for ourselves.

The fact that almost all of our choices are buy in the make/buy paradigm perhaps has implications for our happiness but it also has implications for how we view how we govern ourselves.

As a final aside Smith says the division arises out of man’s propensity to barter and trade.  This may be a part of it and the “modern shop till you drop” mentality is a testament to this idea. However, at the inception as he describes it I think it is a quest for efficiency. (My perspective of efficiency as a paramount core belief, of course, shades this opinion.) The arrow maker feels he can get more out of his time from doing something he is good at. This is what motivates him, not the “art of the deal”.

In summary, the division of labor gives rise to economic activity.  The division of labor gives rise to the make/buy continuum.  Where we see ourselves on this continuum is a reflection of certain core beliefs we have. The fact that overwhelmingly we buy rather than make is another form of salutary servitude that we accept to operate in the world.  How we perceive these choices has implications for how we make decisions about how we govern ourselves and perhaps implications for our happiness.

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[1] Adam Smith The Wealth of Nations Book I chapter 2 Of the Principle which gives Occasion to the Division of Labour

Capitalism and Democracy I

Someone* said institution that are not self-correcting will not survive.** Basically this is a statement of social evolution. Institutions that can adapt to change survive. However, it is not a statement of survival of the fittest; rather it is a statement of survival of the flexible.

On the face of it capitalism and democracy are self-correcting institutions. 

Capitalism is inherently self-correcting. It is first and foremost a competition.  People with ideas invest or attract capital to create products that compete in the marketplace.  Consumers are free to choose the products they like the best. As in any competition there are losers as well as winners. Money moves from bad or obsolete ideas to ones that work or at least what people want through this process of creative destruction. As a result wealth is transferred to those with winning ideas for enriching the lives of the consuming public with inexpensive and efficient products.  In addition to increasing the material well-being of both the individual and the general public, capitalism gives people the opportunity to maximize their creative talents.  The human spirit is nurtured by the vision of people like Bill Gates, Michael Jordan, and the Beatles who followed their dreams, amassed fortunes, and captivated us with their vision, creativity, and talent. 

Democracy is self-correcting by both by design and purpose.

The structure of government, three co-equal branches with a system of checks and balances, was specifically designed by the founding fathers to be self-correcting. The fact that virtually every country that has a right to call itself a democracy follows this model is a testament to the effectiveness of this design.

Democracy, the system for distributing political power, aspires to distribute that power equally.  The rule of law, one man one vote, and equal justice under the law affirm that the very purpose of Democracy is to put no one person’s interest above another regardless of difference in talent, intelligence, race, or gender. No secular idea has enriched mankind more than the knowledge that we all stand equal before the law.

This reinforces the self-correcting nature of Democracy in two ways.

First, it allows for a marketplace of ideas so that ideas can compete and ultimately the best can rise to the top. 

Second, it gives the citizen a sense of buy-in so they are part of the process and will work to make the process work.

To say that these systems are successful because they can continually evolve is to imply that there is something organic in their nature.  If that is the case then while on the face of it capitalism and democracy are self-correcting it is possible that any given democracy or capitalistic system can age, ossify, and ultimately be replaced by a more nimble and flexible one.

In summary then self-correcting institutions survive.  Capitalism and democracy are self-correcting institutions and therefore are likely to survive. However, any given system can age and ossify and ultimately be replaced.

While capitalism and democracy are both self-correcting systems they do make strange bedfellows. Democracy is the source of our egalitarian principles, which says we are all equal, while capitalism is the mainstay of our meritocracy which implies we are all different and should be differentially rewarded according to our variable talents.  In the next few entries I would like to look at first capitalism then democracy and then create a framework in which they both fit.

*20 or so years ago I read a book review of a biography in the Economist that attributed this idea to the subject of the biography.  I have never been able to retrieve the name of the person who said this. If any of you know who it is I would love to hear from you.

**This is the ultimate “THEY said it” statement and therefore clearly dogmatic. (I readily acknowledge I don’t know who “They” are.) I offer it as a way to look at the systems I mention and see if it fits for you. This also suggests another continuum; should institutions be flexible or steadfast or more negatively relativistic or rigid. Your underlying emotional predisposition toward this continuum will influence how willing you are to accept the premise.

Core Beliefs: what we feel is true; the second framework

“In anything at all, perfection is finally attained not when there is no longer anything to add but when there is no longer anything to take away.”[1]            Antoine De Saint-Exupery

“You get out what you put in minus the friction”

The first principle of engineering and a more perfect expression of the former

“Go.”

The sentence an engineer wrote when asked to write a sentence on a mental status exam. A practical application of the first principle of engineering

In the book, The Righteous Mind, (which I highly recommend), the author Jonathan Haidt convincingly makes the case that moral judgments arise from innate instinctive reflexes; they are not derived from reason.  That is we respond spontaneously and emotionally when we see a baby harmed, or the flag desecrated, or a criminal get away with their crime.

He goes on to say that these innate moral intuitions or appetites seem to fall into six categories, care/harm, fairness/cheating, freedom/subjugation, community/anarchy, authority/insubordination, and sanctity/degradation.  Different groups tend to value these moral appetites differently. Haidt points out that, universally, liberals put far more weight on the appetites of care and fairness whereas conservatives give more balanced weight to all six appetites.

He sights data to make the case that this differentiation begins genetically and then is influenced by our cultural surroundings. Once we have developed these moral intuitions they tend to color how we see the world and that is the point I want to make.  Our view of the world is continuously colored by emotional undercurrents and intuitions that incline us to favor one set of facts over another. 

However, I would contend that these intuitions are more diverse than Haidt’s six moral appetites. The following is an example from my own life. I continue to be amazed at what an influence my father has been on me.  He was first and foremost an engineer (and the author of the sentence in the introduction). I don’t have the discipline to be an engineer but “you get out what you put in minus the friction” is in my marrow. Whether this was passed on to me from my father by genetics or example, it is clearly the intuitive response I have that colors my emotional response to any situation or problem. Mediation is better than litigation not because it is morally superior by any of Haidt’s moral intuitions but because it is more efficient (less friction).

Having identified this predisposition or coloring of the landscape I have at times been able to, if not see a situation from another point of view, at least acknowledge that the other point of view is legitimate.  For example, flowers, especially cut flowers, (as I have written in another venue) are completely non-utilitarian and often expensive.  However, since all the women and particularly the most important woman in my life don’t share that view I have been able to put aside my predisposition for a variety of reasons (for instance survival).

Much, no most of our view of the world is based on dogma (It’s true because THEY said it). And what we choose to accept of the many facts that are presented to us is colored by emotional undercurrents that run through us.  If one can step back and try to identify those emotional undercurrents one need not change the way they see the world but might have a better understanding of why they see it the way they do. A mutual acknowledgment of these undercurrents between people of different viewpoints could go a long way to improving understanding.

My next series of entries will be about capitalism and democracy.

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[1] Wind, Sand, and Stars, Chapter 3 The Tool p.42, Antoine De Saint-Exupery