Meridian publishers assured me
that they were not looking for an answer from Meridian. However,
the more I thought about it the more I felt like there were
some points I would like to comment on. In so doing let me
be clear these are my thoughts and do not necessarily represent
those of Meridian or its publishers.
I do not know where this particular
e-mail originated. However, I know people who could have written
it. I mean no disrespect when I say those I have known are
generally angry, unhappy, bitter and, in my view, terribly
confused about the way things really work in a democratic
capitalist society. Worse, not only do they fail to understand
how things work in the real world, but they also fail to see
how relatively well things work compared to the alternatives.
(The people I refer to would disagree with me.)
Although I believe the sentiments
expressed in this e-mail are extreme, I think most of us share
some of these questions from time to time and that makes them
worth commenting on. I believe it is well to remind ourselves
how well things really do work, even though things are far
from perfect. There are lots of problems and lots of inequities.
But if you think the current system of democracy and capitalism
that exists in most of the western world has problems you
should see the problems with the alternatives. Let me start
with the basics.
The Distribution of Scarce
Resources
Human beings must consume scarce
resources to live — food, water, shelter, and so on.
Beyond simply living, human beings consume scarce resources
for comfort and pleasure.
Economics is about the distribution
of scarce resources. Wherever there are two or more people,
there must be a method of deciding who gets what. Even in
a simple agrarian economy, one plot of ground is better than
another and one plow horse is stronger than another. Somehow
a decision must be made to allocate the scarce resources of
ground and plow horses. As the number of people in a society
increases, difficulty of distributing scarce resources expands
enormously.
Who decides which patients get
the best doctor? Who decides which students get the best teacher?
Who decides which person gets the best house with the best
view and finest landscaping? How about food, vacations, clothes,
cars, haircuts, computers, and other goods and services?
Here is a fact. Scarce resources
will always need to be distributed by some method.
Here is another fact. The distribution
will never be equal.
No Government vs. Total
Government — Both Extremes are Disastrous
Because humans are intelligent
social animals, they have always recognized that some form
of organization needs to be involved in distributing scarce
resources. We generally think of these organizations as governments.
There are two extremes: no government control or anarchy to
complete government control or communism.
Throughout history the world
has seen both extremes. Today, for example, Somalia is an
example of anarchy and North Korea is an example of communism.
As has been the case throughout history, neither one works.
Both extremes are disasters. They are not only disasters with
respect to the distribution of scarce resources — they
are disasters in virtually every aspect of human well being
from health to freedom.
When anarchy reigns, history
tells us that the strongest 2 or 3% will quickly own all the
resources and the rest will have none. We see a system of
warlords, or feudal royalty, or theocratic rule. There are
large areas of the world that do seem to want, or at least
tolerate, repressive theocratic governments. Some of these
religious zealots reject much of what the West considers modern
advancements. These governments are hostile to many of the
comforts and freedoms taken for granted in the West. I do
not hear many people in the West agitating for such a system.
Indeed we are at war with those embracing this philosophy
who would seemingly impose it upon us.
At the other extreme is a concept
where all the people come together, creating a government
that distributes the resources to everyone according to their
needs. The world has experience with systems similar to this.
It is called socialism and eventually communism. Despite the
West’s long struggle with communism, I continue to hear
voices in the West agitating for movement in the direction
of socialism and communism.
With due respect to the writer
of the above e-mail, the logical conclusion of his/her sentiments
is some form of communism. All the perceived evil corporations
with their power and materialism are taken over by some benevolent
government that somehow operates only in the public interest
for the good of all its people. This will not work! It is
always a disaster!
Despite Its Terrible
Failures, Many Still Want Communism
If you think that struggles with
communism ended with the cold war, think again. We are currently
witnessing an interesting drama unfolding in Venezuela. Hugo
Chavez was popularly re-elected in December. In January the
Venezuelan Congress voted to relinquish their authority and
give him dictatorial authority to rapidly nationalize major
elements of the country. According to the news the vote was
nearly unanimous and there was dancing in the streets following
the action.
The appeal is that some seem
to be getting more of the scarce resources in Venezuela than
others. There are rich and many poor. Chavez promises to get
even on behalf of those that are feeling left out.
As I write, the news is reporting
that Chavez is planning to nationalize the food chains. I
do not believe grocery stores were on his original list of
targets. The problem is that the government has imposed price
controls on food like milk and meat. (Note: imposing price
and other controls on independent businesses is just a form
of nationalization without compensation.) The prices for milk
and meat established by the government just happen to be lower
than the cost. Not surprisingly the grocers are not willing
to sell at a loss and shortages result.
As is typical in these types
of centralized planning fiascos, the government will not admit
that there needs to be a profit. They simply want low prices
for the people. So Chavez may nationalize the food stores
and try selling milk and meat at a price he feels is fair
to the people. When he discovers it actually is costing more
than he is selling it for, he will blame someone else. The
bottler, for example. Eventually, he will nationalize everybody
but the farmer. But the farmer will quit producing milk because
he is unwilling to sell at a loss and he will be nationalized
as well. Nationalized farmers have no incentive to be up at
4:00AM with their cows, and milk production will plummet.
The established government price of milk in the stores will
be very low. Unfortunately, there won’t be any to buy.
Complete Government Control,
a Proven Failure!
Please make special note that
not only will milk supplies decline so will all sorts of personal
freedoms. Start with all those business owners who saw their
property and farms confiscated. Think about those who want
to voice opposition but are thrown in prison for doing so.
Chavez has already announced that he will not renew the license
of a large TV station in Caracas because it has spoken out
in opposition too many times. It is impossible to have centralized
government control over the distribution of scarce resources
without also exercising centralized control over individual
freedom as well.
This is easy to predict because
Hugo Chavez is no smarter than any of the communist dictators
that have gone before him. It is rare in economics that we
can accurately measure the effects of one system against another.
But with communism we can. What we see is that there is not
one single solitary successful experiment with communism anywhere
in the world!
After World War II, politicians
drew an arbitrary line through Germany. The people were the
same on both sides — same language, same religion, same
ancestry, and so on. Within a few years West Germany was free
and prospering, while East Germany was enslaved and poor.
Only their system of democratic government and capitalism
was different.
After the Korean War, politicians
drew an arbitrary line through Korea; same people on both
sides. Today South Korea is free and prospering while North
Korea is enslaved and deeply impoverished.
Some might say China is a successful
example of communism because we are hearing much about their
current economic growth. However, just look at Hong Kong and
Taiwan compared to mainland China and you start to get a sense
how far behind China is. And the current gains are coming
only because the government has in recent years begun to embrace
some capitalist principles.
Communism fails for several simple
reasons. First, the creation and distribution of scarce resources
among a large population is way to complex for any government
and its bureaucracies to manage. Second, human incentive is
destroyed and incentive is the engine to solve all problems.
Third, all the power shifts to the government. Lord Acton
said, “Power tends to corrupt; absolute power corrupts
absolutely.”
I have spent much time on communism because communism is the
logical end of socialism. Not all socialists expect to wind
up as communists but with each attempt to correct some perceived
injustice through government control the socialist moves a
step closer to communism.
A Freely Elected Government
that Embraces Free Market Principles Including the Legal Creation
of Corporations is Best
I actually believe the day will
come that we will live in such a utopian society with a centralized
theocratic government, but it will only occur after we are
perfect and Christ heads the government. In the restoration
of all things the principles of United Order (which incidentally
was not communism) were revealed to the Prophet Joseph Smith.
United Order was subsequently withdrawn because the Latter-day
Saints were not yet able to live it. Latter-day Saints are
good people, but none of us are yet perfect people.
In the mean time we must live
with something else. Please note, I am not arguing for zero
government. As said earlier that is anarchy and that is also
a disaster.
What has proven superior is a
government by the people, for the people and of the people.
An elected government of laws with proper checks and balances
to avoid any element of the government or society from becoming
too powerful. A government that embraces free markets and
capitalism as the principle source for the distribution of
scarce resources. A logical result of embracing capitalism
is the legal creation of an entity called the corporation.
Free markets and capitalism have
at their very root the concept of personal self-interest:
everybody is trying to do the best for him/herself. In order
to produce any good or service four productive elements are
necessary: raw resources, financial capital, human labor,
and intellectual capital*. These are not listed in order of
importance. Indeed the order changes with each item being
produced.
Pulling these productive elements
together successfully presents many challenges. To meet this
challenge governments have legally defined the concept of
a corporation. A corporation exists on paper; it is not a
real being. But the law grants the corporation certain rights
as though it were a real being. Through the use of a corporation
those with the intellectual capital, the person with the idea,
can amass the other productive elements to produce goods and
services for society. Those goods and services will be distributed
through the market place.
People Control Corporations
— Not the Other Way Around
Here are some of the things this
system means. People get to vote every day on what they want.
They vote with their money and their labor. If they don’t
like the corporation’s product they don’t buy
it. If they don’t like the corporation’s employee
practices they don’t work for it. No feudal lord, no
communist dictator is telling them what they want.
Further — and this is very
important for the writer of the e-mail to understand —
no corporation is powerful enough to tell you what you want
either. I cannot tell you how many times I have heard in life
the idea that, “We only get the products the corporations
want us to get.” I am sorry to be so blunt, but people
that think this way are completely clueless.
If you think I’m clueless,
ask yourself how frequently you are asked to fill out some
survey about how you liked a particular product or service
and what you would like to see changed. Corporations are desperate
to figure out what you want. Sure, they spend billions advertising
a product so that you will know that it exists. Sure they
try to make the advertising appealing. Sure they are driven
by a profit motive. But in the end they cannot make you like
it or buy it.
If the consumer doesn’t
want it, no amount of advertising can make them buy it. If
you think I am wrong ask yourself why so many products fail.
Governments can force you to do things you don’t want,
but corporations cannot.
Corporations Must Strike
a Balance between Many Stakeholders
People run these legal entities.
Each corporation has many stakeholders; for example, the vendors,
the investors, the workers, the idea generators, the management,
the community, the customers and even the competitors. Each
of these stakeholders operates in his own interest, and that
provides important checks and balances.
It is a fact that the power can
shift among these stakeholders. Generally, however, it cannot
shift too far or for too long without destroying the corporation.
If labor gains all the power, costs may rise to a point that
consumers will not buy. If the intellectual capital gains
too much power, they may find they cannot attract the financial
capital.
The community can destroy the
corporation with excessive taxes or regulations. Competitors
are always trying to best the corporation. Success means finding
the right balance among the stakeholders and this does and
will continue to occur.
Often either outside observers
or stakeholders conclude things are not fair from their point
of view. That is when they frequently petition government
or some other powerful outside body to fix things. This can
lead to some powerful stakeholder like the government upsetting
the balance for the corporation. What typically follows is
the ultimate decline of the corporation, which winds up hurting
all the stakeholders. I believe firmly that history and long
observation proves no government can establish this delicate
balance better than the stakeholders operating within the
free market.
I find some serious flaws in
the logic of those that are constantly agitating for aggressive
government control of corporations:
