The Politically Incorrect Guide to Capitalism
1. When the government interferes with prices, it cripples the ability of free people to make intelligent economic decisions.
This is a claim at the heart of free market capitalism insofar as it suggests the invisible hand is the most rational way to encourage economic activity. Every individual person, when left to their own devices, will presumably make the most intelligent economic decisions according to their situation and desires. Whether someone is selling or buying something, the price of the relevant goods and services will reflect the costs associated with them and the extent of consumer demand. In other words, the people within each industry or business will freely set the prices of goods and services themselves.
No merchant or business will sell something for a loss outside of some marketing scheme, and nobody knows the costs of a good or service better than the merchant or business selling it. The government is too far removed from each individual supply chain, unique set of business expenses, or circumstances of local demand to make pricing decisions better than those intimately involved in each respective industry. The government’s interference with prices simply undermines the ability of the free people and free markets to set their own prices based on what they believe to be appropriate or economical.
2. Corporate greed is not absent in the marketplace, but businesses can only charge what the market is willing to pay and generally must reflect the costs and supply/demand circumstances associated with their product. And if you believe their prices aren’t fair, you can choose to start a competing company and charge whatever price you believe is fair.
The point being made here is not that corporate greed isn’t real or that it isn’t a problem when it comes to pricing, but corporations can only charge what the consumer is willing to tolerate. If Walmart raised its prices on bananas to $100, people wouldn’t just start paying $100 for bananas. Walmart might be able to get away with a few dollar increase to add to its profit margin, but there is a price limit the market will put on every good and service.
Supply and demand are the be-all-end-all for everything in markets and if a product starts to become too expensive, whether that’s due to corporate greed or anything else, demand will fall until eventually there is no demand at all. Corporations can and do charge more than they have to and regularly get away with it, but that’s only if the consumer lets them by continuing to buy whatever it is they’re selling.
The last point on starting a competing business to combat excessively high prices is a bit tongue in cheek, though it is often a defense staunch capitalists throw out. While technically true, starting a competing business to fight every instance of corporate greed or egregious mispricing is wildly unrealistic.
That said, the more charitable point to pull from this is that if there is an instance of excessive greed or mispricing, someone in the market with the means, the know-how, and the desire will step in to compete. This goes back to the invisible hand idea in that the market will generally solve pricing problems over time simply by creating an opportunity and profit incentive for some entrepreneur to step in. It may not be you, but someone in the market will see an opportunity to sell something better or at a better price and, consequently, steal a fed-up consumer base to reap the winnings of a market.
3. Rent control discourages renovations and can lead to shortages as the risk or expenses of renting are no longer practical/economical for owners and developers. And because housing isn’t granted to the highest bidder, rent control breeds slumlords who establish arbitrary standards for those to whom they rent, which the low cost allows for because of the artificially high demand those low prices create.
Rent control is just another form of price control, meaning it’s a way to stifle natural market prices. Although rent-controlled homes or apartments can seem beneficial to those they house, they usually eliminate any profit incentive to maintain or improve the property. If you are the owner of a rent-controlled property, the money you earn is probably just enough to support your expenses, so there is little to no budget for repairing toilets, patching walls, or fixing anything on or about the property. Having no money or incentive to improve a property naturally leads to a steady decline in quality over time until the rent control is lifted or either the tenant or landlord abandons ship.
Another big problem with rent-controlled properties is that it paves the way for slumlords. When prices are capped and the primary concern of landlords is no longer who will pay the most or always pay on time, landlords begin to find more arbitrary reasons to rent out a property to someone. This could lead to discrimination based on race, age, attractiveness, or any other metric the landlord wants to use to filter out applicants.
Normally, people wouldn’t put up with an evil, racist, sexist, or what have you landlord, but the low prices of rent-controlled properties create so much demand that landlords can get away with a lot more than they otherwise could. So when landlords can’t rent the property to the highest or most credible bidder, it goes to whichever person they like most or to whoever will meet any strict conditions they lay out.
4. While wage discrepancies can seem absurd on their face, they are the result of marginal utility. A teacher may be more valuable than a professional baseball player, but replacing that teacher is far easier than finding someone with the abilities of a professional athlete. Additionally, that player helps bring in millions of dollars through tickets and viewership and has a right to the fruits of his labor—otherwise, that money disproportionately flows to the owners of the team or other people in the industry.
This is one of the points that really underscores the name of the book “The Politically Incorrect Guide to Capitalism.” Nobody wants to hear about how much more a professional baseball player makes than a school teacher, but their wages are a product of supply and demand. There’s no doubt that we value teachers and everything they do to improve the education of our children, but there are hundreds of thousands of people willing and able to become teachers. Yet, there are only a small handful of individuals who have the ability to play a professional sport, become a world-renowned actor, or sell a top-10 album.
One could argue that the demand for teachers or other noble professions of that kind is higher than the demand for professional athletes and other elite professions—though I’m sure many sports fanatics would argue otherwise—but the supply of individuals capable of meeting the existing demand for those elite professions is so much smaller than the supply for professions like teachers that the wages for those individuals are sky high.
Just consider how much money sports teams, blockbuster movies, and similar enterprises make relative to the people contributing to their value. If the individual athletes, actors, etc., weren’t getting paid as much as they do, all that money would be contributing to someone else’s even more disgustingly absurd salary. For these reasons, the marginal utility, not the overall utility, of any profession is extremely relevant when considering the price of wages.
5. Much of the public credits the reform of child labor laws to unions or governments, but it’s actually a product of the free market. When a nation becomes wealthy enough, they choose not to send their children to work to earn for the family as they no longer need the extra money. Conversely, if they do need the money, child labor laws will force children into illegal professions to earn the money they and their families need.
This point touches on what is generally referred to as a selection bias, which leads us to believe something is the cause of what we see rather than the other way around. In this case, we see less child labor and assume it’s because of the child labor laws in place when the real reason it has declined over the years is that families have less of a need to send their children to work.
Child labor isn’t something parents prefer, it’s something they reluctantly endure to survive. When times are tough and an economy is struggling, any additional income is crucial to putting food on the table. A law outlawing child labor isn’t going to give a child or family the money they need to survive, that law would just be creating additional barriers for that child to find work, which often pushes children toward more under-the-radar, dangerous, and unregulated jobs.
The solution to child labor, then, isn’t banning the outcome with laws, it’s treating the underlying cause by fostering a robust economy that provides enough wealth to families so their children have no need to work. If families have enough money to live without asking their children to work, child labor disappears, and that’s what we’ve seen as economies improve.
A free market driven by incentives to create value will slowly build wealth over time and improve economic conditions so undesirables like child labor aren’t seen as a necessity to survive. This doesn’t mean there will never be child labor in a free market or even that the free market solves the problem quickly, but a law treating a symptom of a bad economy (child labor) rather than addressing the underlying cause of the bad economy will definitely not solve the problem, it will only temporarily mask it or push it to the periphery of the economy like the black market.
6. If a profession was really being underpaid relative to the value it generates, a new employer could enter the market and pay the workers slightly more to steal their labor and still turn a profit. This would take place until the wages were at or around their fair value leaving no need for a minimum wage.
This gets back to one of the previous points about solving injustices in the market by creating a competing business or, at the very least, injustices being solved because of the incentive structure of a free market.
While it is technically true that this can and does happen, businesses aren’t usually excited to enter an industry in a race to the bottom as they compete with incumbents for who can make the least amount of money by paying workers higher wages. Such a scenario sounds great for workers, but it doesn’t seem like something we can or should rely on when it comes to reaching fair wage values.
That said, an arbitrary minimum wage doesn’t really help either because it doesn’t take into account any of the unique circumstances or costs of each business. A minimum wage is another form of price control, meaning it often prevents a natural market price from developing. If the minimum wage is too high, it will actually drive up unemployment because employers can’t afford to pay as many workers that high wage. In that sense, then, minimum wages can actually be counterproductive.
If a government, federal or otherwise, really wanted to keep wages high, it would find promoting competition and increasing productivity much more effective than a minimum wage. If governments made it easier for competitors to enter an industry and capitalize on wage discrepancies rather than stifle them with regulation, the free market forces pushing wages higher could be much more reliable. And if businesses or governments focused on ways to increase productivity, there would be more money generated by a business to pay workers. After all, a business can only pay what it can afford to pay, so the more it makes, the more it can increase wages.
7. Discrimination in markets is perfectly reasonable. Employers discriminate based on talent and profitability all the time for the betterment of the market. Discriminating based on more arbitrary grounds like race or gender will only limit your addressable market or pool of qualified employees, which either hurts you and your business or hurts the customer by delivering a lower quality good or service.
The word discrimination has a lot of baggage these days, but we live in a society where we have to discriminate based on something to create the necessary hierarchies for running the economy. If you discriminate based on arbitrary qualities like race or nationality, your business will probably suffer because those qualities have nothing to do with the duties of the job. All you would be doing is limiting the number of people who can get the job, meaning you’re probably eliminating a lot of qualified candidates.
That said, no employer wants to hire just anyone to be their babysitter or surgeon, they want the most qualified and trustworthy person to handle such a delicate task. This is why discrimination is fine, it just has to be based on merit or relevant characteristics.
Absent any characteristics like intelligence, kindness, or punctuality to discriminate over, there would be no such thing as more or less qualified candidates. Everyone would be the same and nobody would deserve a job over another, so discrimination is a necessary quality of a well-functioning economy.
8. Affirmative action can be somewhat counterproductive insofar as it forces people into positions for which they can be unqualified simply because of their identity. It tries to help minorities and instead sets them up for failure.
Nearly by definition, affirmative action means affording someone a job, role, or position they wouldn’t have gotten otherwise. Presumably, the reason someone wouldn’t have gotten that benefit is that they weren’t as qualified as other candidates. They were lifted to the top of the pack because of some arbitrary quality like race or gender.
Many people will argue this is the right thing to do to balance out demographics, but it’s not all that different from refusing to hire someone based on their race or gender. For one, you’re choosing a less qualified candidate solely based on a characteristic unrelated to the duties of the position. If that position is a job, both the business and customers will suffer from a worse employee. If that position is a student at a prestigious college, it’s very likely the student will suffer because they are being forced into classes or other circumstances they aren’t equipped to tackle, which could lead to a dropout from school altogether.
The second problem is affirmative action attempts to solve social injustices by discriminating against qualified candidates based on their identity. You could be the most qualified person for a position, but, because of your race or nationality, you weren’t hired.
There’s nothing wrong with trying to hire or accept a more diverse crowd, but hiring or accepting based on someone’s identity at the expense of relevant qualities is recipe for disaster and why a meritocracy is the fairest approach. All things held equal, choosing a more diverse candidate can absolutely make sense, but identity shouldn’t be the principal reason someone earns a position.
9. If recycling an item costs more than the value gained from recycling it, the market won’t make an effort to recycle it. So when governments encourage recycling through arbitrary rewards like five cents per can, they can be causing more harm than good by costing the economy more energy and money than the recycling generates.
The purpose of recycling is to reduce the amount of energy and materials we use, so there are obvious advantages to encouraging it. But if the government says they’ll pay you five cents to recycle a bottle that contributes three cents of value to the economy, they are using more time, energy, and money than is being saved through the actual recycling.
We want to recycle because it’s helping, not because the government is willing to lose taxpayer money to pay people to recycle. Recycling is almost synonymous with saving money because it’s the process of reusing rather than recreating, but if the recycling costs more than the creating, we should really start to question its utility.
10. By enforcing tariffs on a country’s imports, you limit the number of goods people buy from that country, but you also limit the number of goods that country can buy from you because that country now has less of your currency.
This is a very important point because it highlights the self-destructive nature of trade wars. Throwing tariffs on foreign goods may seem smart at first because of its first-order consequences of increasing domestic demand for certain domestic products, but it also decreases the demand from abroad.
When a country trades with another country, they usually keep the money they get from that trade as part of their FX reserves, which they use to buy goods and financial assets from that same country. So if you reduce the amount of your currency another country earns through trade because of tariffs, you are also reducing a portion of the foreign demand your country benefits from.
11. Trade deficits have to balance. If the US buys $1T of goods from Japan and Japan only buys $850B of goods from the US, that difference has to go somewhere. Usually, that money returns in the form of investments and asset purchases, but it can also sit as US dollars as FX reserves.
Trade is frequently viewed as some amorphous phenomenon that’s too complicated to understand, but it ultimately boils down to basic math: how much a country sells to and buys from foreigners. If a country like Japan sells more than it buys from the US, Japan simply receives more value in dollars than value it sells in yen because the US is buying more yen (more goods) from them. If the two countries bought an equivalent value of goods and services from each other, their trade would be perfectly balanced, but that is rarely the case.
Any difference in value between two countries’ trading translates into one of those countries holding more of the other’s currency. When that happens, the country with that extra foreign currency will look to use that money for something other than trade. Generally, excess foreign currency is used to purchase that country’s respective government bonds to earn interest while maintaining them as reserves for any future trade or liquidity.
However, FX reserves are also used to buy assets denominated in that foreign currency, which can be anything from real estate to stocks. This is especially common for foreigners with trading surpluses with the US (which is basically every country) because of how liquid and developed its financial markets are.
Nevertheless, the main point to focus on is trade imbalances between countries usually lead to one buying interest-bearing financial assets from the other because any difference in trade has to balance.
12. Interest rates are essentially a measure of patience for payment and borrowing. In the construction of a large project like a factory that takes years to pay back its costs, early-stage workers will want payment right away rather than years later when the factory finally starts to make money. This is only possible through capital investment and the desire to earn interest by investors.
This is a fundamentally important yet overlooked quality of most developed economies. The idea of waiting to get paid for building a business, factory, or anything else that is capital intensive may seem strange because immediate payment has been so normalized, but immediate payment for long-term projects is only possible when some investor or group of investors are fronting the expenses.
Constructing a business, buying equipment, and paying workers is costly, but a company (or asset in the case of a house) has no way of paying for itself until after it has been created. Leading up to that point, investors have to fund any operational or building expenses under the assumption they will get that money and more back once the investment is complete and generating some sort of cash flow.
Generally speaking, the longer investors have to wait to get a return on their investment, the higher the interest rate is to compensate them for their patience.
If the financial system was such that investors didn’t feel comfortable investing in longer-term projects or there was no opportunity to earn significant interest for taking those kinds of risks, the economy would be vastly different than what we see today.
The desire and ability to earn interest on long-term business ventures is why they are possible in the first place. Without any system or incentive in place to encourage such low-time preference and capital-intensive investments, there likely wouldn’t be any long-term capital-intensive investments.
13. Middlemen provide a valuable service in the economy. They absorb some of the burdens and take care of the logistics associated with selecting, transporting, loan defaults, etc., rather than forcing suppliers to organize more than they care to or can. They charge a small markup, but they afford consumers certain luxuries for that markup.
With such extensive and complicated supply chains today, organizing everything around creating a good, distributing a good, and selling a good all throughout the country or world is not always practical or even possible.
It takes a village to make supply chains run as smoothly as they do, and middlemen play a crucial role in relieving many of the logistical challenges, expenses, and liabilities that would be otherwise left solely to producers.
With the help of middlemen and distributors, producers and suppliers can focus more energy on their core business and avoid stretching themselves too thin. Middlemen may lead to slightly higher prices to compensate themselves for their services, but those services are essential to a healthy and efficient economy in the modern era.
14. Speculation actually serves an important role and, contrary to common belief, is not devoid of utility. Speculators help balance out prices by attempting to buy low and sell high. Even futures speculators who buy contracts just to make money will encourage holders of commodities to stockpile more as a hedge to spot prices rising, which encourages production.
Speculation and even investment more broadly get a bad rep for serving little purpose in the economy, but that is far from the truth. Investing is essential to funding and growing businesses that generate wealth in an economy and speculation is paramount to increasing liquidity in markets.
Without speculators, farmers of commodities or any business that is commodity price sensitive wouldn’t have as much opportunity to hedge their risk. If someone was worried their crop next season could suffer from a drought or their business could be severely hurt by a massive spike in energy prices, buying and selling futures contracts of the relevant commodities could be business saving.
Absent speculators, however, there is less of a chance futures markets will have the liquidity and demand necessary to supply all the hedging farmers or companies need.
Speculators can also motivate farmers to produce more whenever they choose to hedge their commodity exposure because if supply falls and prices rise, farmers miss out on those gains they hedged. This means those farmers will try to produce more to keep supply high and prices low whenever they do hedge their risk with futures contracts.
All farmers and commodities aside, speculation creates much of the liquidity in capital markets that companies rely on. It may not be the most admirable or important feature of an economy, but it certainly isn’t without purpose.
The last bit of information I’ll leave you with is the twelve key takeaways the author themself outlines at the end of the book:
Summary:
1. Admit that government solutions are a problem.
2. Have faith that humans can interact peacefully and that economic blessings are available to all.
3. Surrender to the fact that certain social ills cannot be eradicated by force or political will.
4. Advocate self-sufficiency and voluntary means rather than looking to politicians every time you don’t like something.
5. Survey the past record of governments when it comes to economic planning or other economic improvements.
6. Learn to look for the hidden cost of government intervention rather than the superficial benefits.
7. Understand the role of market prices and why tampering with them interferes with the job they have to perform.
8. Study history. Examine whether governments that violated private property rights stayed out of their citizens’ other affairs.
9. Before condemning any market outcome as unjust, first understand why it occurs.
10. Study other spontaneous social institutions such as language and science where nobody is in charge and yet the outcome is quite orderly.
11. When politicians propose a new program, remember how much they said it would cost at that outset and compare that number to the actual amount spent in the end.
12. Go through the news and discover how government meddling causes or exacerbates the conflict in virtually every story.