Minister supports murder

At Cheruti has a post about Union Labor Minister Oscar Fernandes’ statement on the lynching of LK Chaudhary, CEO of Graziano Trasmissioni. Chaudary was beaten to death by a group of dismissed employess inside the premises of his own company.

The minister said “This should serve as a warning for the managements. It is my appeal to the managements that the workers should be dealt with compassion.”

Disgusting. The minister should have been sacked. Instead he gets away with an “apology”.

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Sustainability of Capitalism – Applied Philosophy – 4

In view of the fact that the United States political/economic system has turned into a mostly illiberal and highly regulated democracy, the question “Is capitalism inherently unsustainable?” deserves attention.

Politically, capitalism is a form of social organization based on the recognition of individual rights. Economically, it is a system where owners of capital exercise their property rights to trade with each other voluntarily, thus establishing a free market. The freedom refers to the principle that no individual or group (including the state) may initiate the use of force against anyone else. The implementation of this principle requires a proper social organization – a legal system to resolve disputes and a police force to prevent the initiation of force and implement the decisions of the legal system.

Economically, capitalism (the free market aspect of it) is the only system that has ever worked in practice – economies have resisted collapse to the extent to which elements of free markets were present. This fact is partially recognized today in the sense that a free market is held to be valuable but fragile and in the sense that total state control of the economy has been thoroughly discredited. The success of free markets is not surprising. In a free market, every individual exercises his own judgement and takes responsibility for the consequences. Good judgement necessarily wins in such a system. As the economy grows in size and complexity, better and more specialized judgement is required for success, making it impossible for the state to control the economy effectively. Although it is certainly difficult to predict the results of a particular decision in the higly interdependent and complex economies of today, the complexity is its own defense as long as the market is free. In a complex economy, the effects of a bad decision are larger and more widespread and can be noticed earlier than would be possible in a simple economy. As long as people are free to make their own decisions, they can distance themselves from the bad decisions and minimize their risks. But when the economy is regulated, the effects of decisions are artificially suppressed by penalizing good decisions and rewarding bad ones. This is true irrespective of the kind of regulation imposed. Consider some examples. When the state puts a cap on the price of a particular commodity, thus reducing the profits of the producers, it makes production less attractive for newcomers, raises the barrier to entry, encourages monopolies, keeps supply short and removes the possibility of the price being lowered by competition. When the state bans insider trading or short selling of stocks, it prevents the spread of information that would otherwise happen. When the state lowers interest rates, it reduces the value of good investments and raises the value of bad investments. A regulated economy is more stable in the short run, but the stability is spurious. It is achieved by constantly changing the rules of the game to equalize results. Regulation is like a teacher’s policy of awarding similar grades to students irrespective of their performance, reducing the motivation of the brighter students and instilling a false confidence in the duller ones. The students from such a class fail when they encounter a world outside the teachers influence, the brighter ones because they never learned to work hard, the duller ones because they never learned to work well. When the damage done by regulation goes beyond the ability of the state to control, the results are catastrophic (as we see today). The short-term stability from regulation comes at the price of a certainty of a catastrophic collapse, something that is unlikely (though not impossible) in a free market. It is not free markets but regulation and the mixed economy that is completely unsustainable. Free markets are inherently stable in the long term, simply by virtue of the fact that good ideas work.

Politically, however, capitalism is unstable. The success of capitalism depends on a proper understanding of individual rights – most importantly property rights. This is impossible without a sound philosophical grounding – most importantly ethics – and difficult in any case. When the state enacts laws that violate someones rights, it turns from a protector of men into a looter. Unlike the action of the free market which corrects itself, violation of rights turns a difficult problem – how to objectively define and protect rights – into an impossible one – how to dispose of loot in a just manner. These difficulties exist even when a state recognizes its role as being limited to a protector of individual rights. They are enormously compounded when this recognition is absent. A state that actively oversteps its role is fundamentally corrupt and the corruption inevitably increases. Left to itself, such a state necessarily degenerates into an autocracy, constantly expanding its powers and violating rights, until its economy collapses and the state is forced to change its political principles. But a collapse does not necessarily mean that capitalism will be established (The example of Russia is a case in point). Establishing and even maintaining a system of proper well defined rights requires active, principled and continuous effort. As Thomas Jefferson put it “The price of freedom is eternal vigilance.”

However unstable the political aspect of capitalism may be, it is the only system that is proper to man – the only system that recognizes that man requires freedom to succeed, that the standard of truth is reality and not consensus, that the proper purpose of man’s life is his happiness, that the proper principle for interaction among men is trade, and that the standard for mutually beneficial trade is profit. Just as sustained effort is required to achieve any goal that man may set for himself, sustained effort is required to keep a society capitalist – effort to understand a proper code of ethics, to understand the principle of rights, to apply these principles to concrete situations, to establish and maintain objective laws based on these applications and most importantly to reverse or correct any mistakes that might be made along the way.

This post was written as a response to a comment that capitalism is unsustainable because of an innate desire for security in most men. The claim about the desire for security might well be true. However it is not these men who make the world or set its terms. The world is made by the men of vision who dare to think and plan beyond the short term – by the scientists who spend years on their research, by the businessmen who invest their money without expecting returns for several years, by the activists who can project a better future, and most importantly by the philosophers who devise theories and set the direction of the activities of men. Capitalism has declined not because of a desire for security, but because the principles underlying it have never been fully understood, and consequently the effort to sustain it has either been absent or misguided.

The end of Capitalism?

In the wake of the collapse of financial markets, a number of people are asking “Is this the end of capitalism?” But what is capitalism? Are the current political/economic systems really capitalist? Here is a dictionary definition of capitalism:

an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

While this definition makes no mention of any political system, it implies a political system that does not have the powers to engage in economic activity. Clearly such a political system does not exist today. The US economy, commonly regarded as capitalist runs on a fiat currency, the price of credit is decided by a central banking system, investments and production are controlled by antitrust laws and regulatory authorities, prices are controlled by tariffs and subsidies, distribution is controlled by federal grants and welfare schemes. This is not a capitalist system by any stretch of the imagination. That it is so regarded is only an indication of how little the concept is understood.

The collapse of the financial sector of the US economy is not a failure of capitalism but a failure of centralized control of credit. The crisis is commonly projected as a liquidity crisis. But the loss of liquidity is just an effect. The cause was the bad credit provided to unwise borrowers by setting artificially low interest rates. The responsibility for the crisis clearly belongs to the federal reserve. What we are witnessing now is not the end of capitalism. Capitalism ended about a century ago when the world switched to an elastic fiat currency. What we are witnessing is another demonstration that credit-based elastic unreal money necessarily leads to catastrophic failures.

Update: I have a more detailed post about Capitalism here

Specialization – Applied Philosophy – 3

In an essay titled “Why Nerds are Unpopular?”, Paul Graham writes that life in elementary school is warped and savage because it is isolated from reality and identifies specialization as the reason for the isolation.

“Teenage kids used to have a more active role in society. In pre-industrial times, they were all apprentices of one sort or another, whether in shops or on farms or even on warships. They weren’t left to create their own societies. They were junior members of adult societies.

Now adults have no immediate use for teenagers…
The cause of this problem is the same as the cause of so many present ills: specialization. As jobs become more specialized, we have to train longer for them…”
(Emphasis added)

Specialization and trade are the primary mechanisms of human progress. Todays industrial societies and the incredibly complex global economy would be impossible without specialization – without men who spend most of their lives working in a narrow field. Specialization has given us the sophisticated gadgets we use in our daily lives, the means to communicate with people across the globe, the opportunity to excel in our chosen careers. Specialization has given artists the time needed to create works of art and others the opportunity of enjoying them. Specialization has given sportsmen the time needed to perfect their skills and others the opportunity of being inspired by human perfection. In short, specialization has given us most of the things that we value in life.

Specialization has also caused innumerable problems. Specialization has made it very difficult for young people to make an informed choice of career or to change a choice of career once made. Specialization has made it difficult for people to adjust to economic changes. Specialization has created complex chains of dependencies among people. Specialization has made it difficult for people to understand fields other than their own. Specialization has made it difficult for anyone to understand the broader picture – the workings of the world. Specialization is atleast partly responsible for the large number of fallacious beliefs held by mostly reasonable people – particularly in economics and politics. Specialization is partly responsible for today’s rampant pragmatism – the lack of respect for abstract ideas and philosophy.

Perhaps the single biggest problem caused by specialization is the problem of knowing what to believe outside of one’s chosen field. Men have evolved a number of mechanisms to solve this problem – peer reviewed journals and techincal associations in science, the concepts of degrees and certifications in education, the concept of branding in advertising, independent rating agencies in industry, efforts like wikipedia, government regulatory bodies for everything, etc. While some mechanisms work better than others, it is clear that there can be no complete solution. The body of human knowledge is so vast and varied that it is impossible for anyone to establish trusted authorities in every field. The mixed success achieved in solving this problem is an important reason for the general lack of respect for abstract ideas and general principles. It also raises (well founded) questions about whether the entire system can sustain itself without directed effort. But the questions cannot be answered without abstract ideas and general principles, i.e without philosophy. Contrary to popular belief these are not merely questions of economics. They cannot be answered without an understanding of the nature of man, the function of his reason, the nature and structure of his knowledge and the reasons for his motives.

Specialization is a natural phenomenon. As long as men deal with each other, they have to trade. And as long as they trade, they will choose to spend their time on that which they are best equipped to do. In the absence of a catastophic disruption, a society will continue to grow in complexity. A system that constantly increases in complexity cannot be sustained without directed effort. Without that effort or with wrong efforts a catastrophic disruption is inevitable. Anyone who believes that the economy will continue to prosper irrespective of the social and political system is deeply mistaken. As the level of specialization continues to accelerate, the need for the right philosophy becomes ever more crucial.

Announcement – The Undercurrent

The Undercurrent (TU) is an independent, student-run Objectivist newsletter distributed twice a year to college campuses across America. TU is currently looking for distributors and donors for its fall edition, and will stop taking orders on or about September 22, 2008.
If you would like to distribute, please visit http://the-undercurrent.com/subscribe/ and buy your copies of TU today. If money is an issue, please contact Guy Barnett, our head of distribution, at guy@the-undercurrent.com. There is limited funding from donors for students who want to buy and distribute TU but cannot afford to do so. If you’re part of an Objectivist campus club, you may want to see if your college will fund distribution of TU as a club activity.

If you would like to donate, please visit http://the-undercurrent/donate/ and contribute directly using PayPal. If you have any questions about donating, please contact Guy Barnett, our head of distribution, at guy@the-undercurrent.com.

Spreading rational ideas on college campuses is critical to making this world a better place. Your assistance is necessary for the achievement of that goal.

Thank you for your support.

Property Rights and Philosophy – Applied Philosophy – 2

In an eminently readable article in The Objective Standard, Raymond Niles presents the history of the electric grid in America, the formation of state enforced monopolies and the unending stream of problems that has plagued the industry ever since. The thesis of his article is that the problems would not have arisen if the property rights of the utility companies had been recognized. From the article,

“In many cities, if not most, some form of bribery was required to persuade city officials to grant permission to build and operate an electric grid. Because electric utility systems could not be built without using the city streets, city officials were well positioned to coerce money and other terms from utilities. In Chicago, such extortion became an art form, perfected by members of the city council known as the “Grey Wolves.”

Having observed the city’s refusal to grant Yerkes a longer and more secure franchise, Samuel Insull stepped forward with a new idea; he proposed regulation of the electric utility industry at the state level. Instead of challenging the government’s control of the rights-of-way and the corruption it entailed, Insull accepted the government’s involvement and sought a seemingly superior and less arbitrary form of it.”

There are several aspects of this history that deserve analysis.

The motivation of the state officials:
It is notable that it wasn’t the state officials who wanted or proposed state regulation. They were merely exploiting an opportunity to extort money from others achievements – achievements which they could not have hoped to equal but were in a position to control. They either did not know or did not care that a system of extortion is unsustainable – that their victims could not continue to operate under extortion. They did not even have the vision to institutionalize their extortion into a system of regulation.

The motivation of the innovators:
The innovators like Insull were men who had the vision to build large profitable systems. They were driven by their desire to translate their vision into reality and were prepared to overcome any obstacles that others might put in their way. They had the foresight to realize that they could not survive under constant extortion and to seek a “seemingly superior and less arbitrary form of government involvement”.

The motivation of the regulators:
The regulators – the people who propose regulation or attempt to improve it or rid it of corruption – are usually motivated by a genuine but misguided desire to improve the workings of government. They do not necessarily want to expand the role of government, they don’t even see it as an issue. They don’t realize that a system of regulation is fundamentally corrupt – or if they do, they see no way out of it.

The growth of regulation:
The growth of regulation described in the article follows a familiar and tragic pattern. Innovators come up with a vision for a better future – a vision that if put into reality will give them large profits and improve the quality of life of all who deal with them. People in positions of political power see an opportunity to extort money by putting obstacles in their path. The innovators who rarely understand the political issues involved attempt shortcuts to get rid of the obstacles. The worthier innovators attempt to find long term solutions to the obstacles and legalize the process of extortion. Controls breed more controls with time.

This familiar pattern is not inevitable. It is important to realize that the people responsible for the growth of regulation are the innovators. Any significant change in the workings of a society – whether for better or worse – is initiated by its better men – the men of vision who can dream of something new and the men of action who can turn the dreams into reality.

Property rights form the backbone of any political system. Men cannot deal with each other effectively without holding clear, legally recognized title to the products of their efforts. Men cannot plan long range if their actions are controlled by the whims of regulatory boards. But a political system needs a foundation – an understanding of man’s means of dealing with reality, an understanding of the purpose of man’s life, an understanding of men’s interactions in a society and an understanding of the purpose of a political system. This foundation is philosophy. Without this foundation, any political system – whether it be democracy in India or theocracy in Iran or fascism in China – is headed in the same direction – towards chaos. As I mentioned in my previous post in this series, philosophy is difficult. But the first step in understanding and applying it is acknowleding that it is real – that it plays a pivotal role in the life of every man and that it can be discovered and understood.

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