The Ethics of Capitalism

The title is that of Chapter 30 in Henry Hazlitt’s The Foundations of Morality (1964; free download here).

Hazlitt says the basic institutions of capitalism are: (1) private property, (2) free markets, (3) competition, (4) division and combination of labor, and (5) social cooperation. They are not separate institutions but mutually dependent (303).

He mentions force and fraud elsewhere. I don’t know why he didn’t include prevention and retribution against them here.

He quotes economist P. H. Wicksteed at length (318-20) because he considers Wicksteed’s the most powerful statement he ever encountered of the thesis that the free market system is "ethically indifferent" or ethically neutral. The thesis, nevertheless, seems to him seriously questionable (320).

The habit of voluntary economic cooperation tends to make a mutualistic attitude habitual. And a system that provides us better than any other with our material needs and wants can never be dismissed as ethically negligible or ethically irrelevant (322).

Hazlitt cites Adam Smith and Ludwig von Mises regarding productivity, the following from Mises. "The division of labor extends by the realization that the more labor is divided the more productive it is. The fundamental facts that brought about cooperation, society, and civilization and transformed the animal man into a human being are the facts that work performed under the division of labor is more productive than isolated work and that man's reason is capable of recognizing this truth" (308).

He writes about mutualism in Chapter 13.

A society in which everybody act on purely egoistic motives, or one in which everybody acts on purely altruistic motives (if either is really imaginable) would not be workable. A society in which each works exclusively for his own interest, narrowly conceived, would be a society of constant collisions and conflicts. A society in which each works exclusively for the good of others would be an absurdity. The most successful society seems to be one in which each worked primarily for his own good while always considering the good of others whenever he suspected any incompatibility between the two.

“In fact, egoism and altruism are neither mutually exclusive nor do they exhaust the possible motives of human conduct. There is a twilight zone between them. Or rather, there is an attitude and motivation that is not quite either (especially if we define them as necessarily excluding each other), but deserves a name by itself.

I would like to suggest two possible names that we might give this attitude. One is an arbitrary coinage—egaltruism, which we may define to mean consideration both of self and others in any action or rule of action. A less artificially contrived word, however, is mutualism” (102).

The Is-Ought Problem

David Hume published A Treatise of Human Nature in 1739. He later wrote that the book fell dead-born from the press, but it has become one of the most famous books in philosophy. Therein he posed the is-ought problem -- how can an "ought" statement be derived from an "is" statement? It has become one of the central questions of ethical theory.

While much has been written about it, I have not investigated it much. Anyway, having thought about it off and on for many years, I eventually decided that an "ought" statement cannot be deduced from an "is" statement, but an "ought" statement can be based on an "is" statement.

Reading some of Henry Hazlitt’s The Foundations of Morality (1964; free download here), I found that Hazlitt decided similarly.

“For ethics is a "normative" science. It is not a science of description, but of prescription. It is not a science of what is or was, but of what ought to be.”

“True, it would have no claim to scientific validity, or even any claim to be a useful field of inquiry, unless it were based in some convincing way on what was or what is” (11).

“And others have even gone on to assert that there is no way of getting from an is to an ought. If the latter statement were true, there would be no possibility of framing a rational theory of ethics. Unless our oughts are to be purely arbitrary, purely dogmatic, they must somehow grow out of what is" (11-12).

“Actions or rules of action are not "right" or "wrong" in the sense in which a proposition in physics or mathematics is right or wrong, but expedient or inexpedient, advisable or inadvisable, helpful or harmful. In brief, in ethics the appropriate criterion is not "truth" but wisdom” (52).

Two Worlds at Once

The above is a shortened title of an essay by Steven Horwitz that I think is well worth reading. The longer title is ‘Two Worlds at Once: Rand, Hayek, and the Ethics of the Micro- and Macro-cosmos’. It was published inThe Journal of Ayn Rand Studies, Vol. 6, No. 2 (Spring 2005): 375–404. It also appears on the author’s webpage here. 

Here is the abstract:

Although both Rand and Hayek supported capitalism, their ethical systems were distinctly different. This paper explores these differences and how they apply to the institution of the family. It concludes that Rand's ethical system matches very well with what Hayek sees as necessary in the "Great Society" of the macro-cosmos, but that our understanding of the institution of the family seems better suited to a more altruistic ethical code. The challenge for a Hayekian ethics that pays attention to institutional contexts is how to ensure that the complex process of making those distinctions is learned as children pass into adulthood. [end]

Horwitz does not use “altruistic” to mean what Rand meant by it. The following is Horwitz’s definition.

“For the purposes of this analysis, I will define an act as altruistic if it is intended to benefit another and any benefits that might accrue to the actor are not the reason for undertaking the act. Contrast this to acts of exchange, which may well benefit another, and can even be intended to benefit another, but are normally assumed to have as their motivating cause that they benefit oneself first and foremost” (382).

A Brief History of Logic

The Preface of George Englebretsen’s book Something To Reckon With: The Logic of Terms gives a brief history of logic. Major topics are Aristotle’s categorical (term) logic and criticisms of it, mathematical logic introduced by Gottlob Frege, Fred Sommers’ new term logic, and the skirmishes between advocates of term and mathematical logic. Of course, the aim of mathematical logic is to explain the logic of mathematical reasoning, whereas term logic, especially that of Fred Sommers, is to explain the logic of natural (everyday) language.

Fred Sommers wrote the Forward of Englebretsen’s book. I had thought that a contradictory statement said something about its utterer, and still do, but Sommers gives a different perspective.  “Note that a contradictory sentence such as ‘some man is not a man’ transcribes as a sentence of the form ‘+X+(-X)’, which literally says nothing.”  The notation he used is his.

I read the book a few years ago and plan to reread it. The way statements expressed in Sommers’ logical syntax combine arithmetically is very cool. 

Interest as Cost of Immediacy

Interest is often justified as a reward for deferred consumption or waiting. That is clearly based on the perspective of the recipient of interest, the lender. On the “flip-side of the coin”, what is the perspective of the borrower and payer of interest?  Isn’t it the cost of not waiting or immediacy? Doing a Google search, I found a few sites that used the phrase “cost of not waiting”, but it seems rarely used by economists.  Doing a Google search for both “cost of not waiting” and “wages,” I got only two hits. One was a website of the American Economic Association. However, the “cost of waiting” therein wasn’t about wages. A search for both “cost of immediacy” and “wages” gave a few more hits. Again the connections were coincidental; the “cost of immediacy” was about the speed of execution of investment trades.

Eugene Böhm-Bawerk constructs an example to justify income to an entrepreneur-capitalist and criticize the labor theory of value in his Positive Theory of Capital (Chapter XII). He imagines building an engine over a 5-year period, employing 5 workers. Worker #1 works the first year, #2 the second year, and so on.  They are equally skilled and work the same number of hours. He values the finished engine at $5,500. Assuming the entire value comes from labor, one might say that each worker merits $1,100. Böhm-Bawerk says that can’t be correct, because the different workers wait different times between completing their individual labors and the end of the 5 years. How about $1200 for worker #1, $1150 for worker #2, $1100 for worker #3, $1050 for worker #4, and $1000 for worker #5? That seems okay, unless each worker demands payment upon finishing his work. Enter the capitalist, who pays each worker $1000 upon completion of his work, and retains $500 at the end. The $500 is the capitalist’s interest, the factor cost of capital. Böhm-Bawerk does not describe $200 as worker #1’s “cost of immediacy”, $150 as worker #2’s “cost of immediacy”, and so forth. However, the phrase surely fits.

For an entrepreneur who borrows to enable a project, the fit is not as good because it is not inevitable that the project will eventually be done by waiting. On the other hand, for borrowing to buy consumer goods or a home to live in, “cost of immediacy” is very apt.

It also fits the interest and/or fees for the borrower (not the lender) of a payday loan. This is not to liken the lender to an employer. The borrower is not an employee of the lender, but a customer. The lender is not paying a wage to the borrower.

The “cost of immediacy” is an example of “time preference”, an often used concept in economic theory. For example, a person prefers X now versus X later or X+ later, or vice-versa, where X+ is a greater quantity of X. It is typically used regarding consumption goods or capital or to explain interest, as on the Wikipedia page. For example a capitalist or a future retiree prefers $150 in 5 years versus $100 now.  Besides Böhm-Bawerk’s example, it seems rarely used concerning a worker receiving wages. 

A different sort of cost of immediacy is to pay X+ versus X, both immediate, to obtain something sooner. Some examples are:

- Paying more to deliver or receive something faster than alternative methods. FedEx was built on that desire.
- Paying a higher airfare due to booking shortly before travel. This is very common in business.
- Paying for a taxi versus waiting for a cheaper, later shuttle at an airport.

- Buying the latest high-tech phone or other thing when its price is very likely to be much lower later.

Another cost of immediacy appeared in today's news. The title should suffice. Visa, Wal-Mart Move to Speed Checkout for Customers With Chip-Enabled [Credit and Debit] Cards

Federal government debt

Time magazine’s 4/25/2016 cover story is about the U.S. federal government debt. The author James Grant says the debt is $13.9 trillion, whereas the famous National Debt Clock says it is $19 trillion. The difference is what the government owes itself, especially what the General Fund owes the Social Security Administration.

Sometimes the higher number is called "gross debt", e.g. here, and the lower number called "net debt". That doesn't mean the difference is not a debt. It's a different kind of debt that could be called "unfunded obligations.” See the above link again. However, the federal government's unfunded obligations are way more than $5 trillion. To the extent the present value of future Social Security and Medicare benefits exceed the present value of future taxes and premiums dedicated to these programs (plus $5 trillion), that is also an "unfunded obligation." That amount was estimated at $45 trillion in 2009.

Another perspective is that the lower number is debt that has been monetized, and the difference is debt that hasn't yet been monetized. When it comes time that cash is needed to pay benefits promised by Social Security and Medicare, then the debt will become monetized.

Social Security is sometimes defended by appealing to the Social Security Trust Fund. The Trust Fund is projected to be depleted about 2034. However, that does not imply that Social Security and Medicare won’t be more of a financial burden before then. They will be a greater burden as soon cash outflows exceed cash inflows, which is projected to begin around 2024. A cash-flow deficit will be used to reduce the Trust Fund balance (until it is depleted). On the other hand, the U.S Treasury will need to cover that deficit by selling more Treasury securities. In other words, non-monetized debt will be converted to monetized debt.

That gives another reason to call the Trust Fund bogus, the other being that the rest of the federal government has already spent the money Social Security and Medicare (mostly the former) loaned to the General Fund in exchange for non-marketable Treasury securities. 

Addenda: Only a few hours after posting, I see unfunded liabilities addressed here by the Mercatus Center at George Mason University. The article cites two other estimates. The first says the amount is $87 trillion. The authors add federal employees' future retirement benefits to $63 trillion for Social Security and Medicare.

The $63 trillion estimate as of 2012 versus the $45 trillion estimate as of 2009 on the Wikipedia page seems huge. On the other hand, it might be largely due to different interest rates used to calculate the present values. The 30-year Treasury rate was much lower 12/31/2012 (3.08%) than 12/31/2009 (4.60%). 

The second is $222 trillion calculated by Kotlikoff. The Mercatus link only goes to Kotlikoff's home page. His Testimony to the Senate Budget Committee showing the $222 trillion ($210 trillion later) is here. I don't know what to make of such a high number now and suspect error.

More Like a Business

The entrepreneur-builder EB in my April 2 post manages construction of a house and sells it in 8 weeks. I now suppose he borrows more money – $70,000 rather than $30,000 -- so he can pay each worker when his work is complete, and this will cost EB another $1,000 of interest.  I also make it more realistic by supposing he repeats the process. He starts a new project every 4th week, each with the same weekly cash flows.  In only the 5th week his cash flows will start a 4-week repeating cycle. 

The cash flow for one project is obscured in EB’s combined weekly results. Still, a pattern is there and EB nets a profit of $23,000 each 4-week period after the initial 4 weeks.   This agrees with intuition since one house is finished every 4th week after the initial 4 weeks.  A skeptical reader can check my numbers fairly easily in a spreadsheet. 

Looking at the combined results and ignoring their root, one might be fooled into believing that EB exploits the workers. He nets $23,000 each 4-week period like clockwork, apparently without difficulties. Also, his banker collects $2,000 of interest every 4th week starting the 8th week.

Now suppose EB decides to save part of that $23,000 netted every 4 weeks, say, $10,000. After 32 (= 8 + 6 x 4) weeks EB has saved $70,000, so he no longer needs to borrow from the bank. He can commence making $25,000 each 4-week period, not having to pay $2,000 of interest. He becomes self-financing.

This is a rather complicated story but still simpler than real life. Regardless, it essentially describes how many successful businesses operate.  The business uses its own retained earnings to finance growth and future operations.  

Let’s now assume EB can’t work the entire year due to weather, and he wants a little vacation. Suppose he can manage building 10 houses per year rather than 13.  10 x $25,000 = $250,000, which sounds like a nice income. But hold on. With 2 projects going at once – he is done with the 1st when he starts his 3rd – and probably some advance and afterwards work for others, he could probably use an office manager.  That person could order supplies, help schedule workers, pay expenses, handle sales transactions, do bookkeeping, and so forth. Deduct $40,000.

There is also the taxman, who wants about $55,000 for income taxes, Social Security and Medicare. I can imagine Obama saying to EB, “You didn’t build that!”