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Look With Two Is

A young handyman prices lumber, not gold, for a roof repair.

Capitalism is a system for organizing, directing, and motivating large groups of people who have never met. Remarkably, capitalism also gives people reasons to act as if they knew and cared about one another. As a result, the scope and success of commercial systems over the past century has produced prosperity, and reduced poverty worldwide, on a scale that is without precedent in human history. 

Yet self-appointed “experts” in politics and academics routinely pronounce the end of capitalism, and they advocate for largely imaginary alternatives. As I have written elsewhere, such unicorn alternative systems actually “exist” in the sense that if we close our eyes, we all see much the same thing. The problem is that the imaginary alternatives do not exist if we look, with two eyes, at the world we actually live in.

To open his presentation at Davos in 2020, Marc Benioff said “Capitalism as we have known it is dead.” He then shared his unicorn vision —  “stakeholder capitalism” — for an hour of new age psychobabble. No part of that claim is true, however: capitalism is expanding, not shrinking, and the corruption of “stakeholders” who have tried to impose DEI or ESG by force, and moralistic hectoring, is rapidly being forced to retreat back into its fortified academic redoubt.  

How can we “look with two eyes”? It takes two fundamental concepts: the first “I” is information; the second is incentives.

People have goals. Those goals require participating in social activities, that means that the group needs accurate information. In a liberal society, where the plans and purposes of individuals are privileged, the idiosyncratic “pursuit of my own happiness” requires plans and knowledge of the availability of resources. But no one possesses all the resources they need to “pursue happiness,” even in the case of something simple like having a dinner party. Consequently, those resources must be obtained from someone else.

As I have argued elsewhere, the kinds of information required are triangulation, transfer, and having trust. But this information is not readily available, in the absence of institutions. The two varieties of “liberal” institutions are commerce and politics. (There is also dictatorship, and theocracy, but of those I will say no more here.)

In a system of commerce, information is provided by prices, which are emergent phenomena indicating the relative scarcity of resources. That is, commerce generates information about the value of resources, information possessed by literally no individual or group in the absence of prices. Prices are an objective manifestation of subjective preferences, giving people an idea of how much other people — people you haven’t met, and don’t know — want to use the resource. Low prices say “no one else wants this, go ahead and use it!” High prices say, “Stop and think about this, because other folks also value this resource. Do you really need it?”

Politics, by contrast, generates information based on the expression of votes, or notions of what people want to be true. The question of the value of resources is then decided by what most people — if the rule is majoritarian — happen to want to be true about the resource.

Imagine that I have in mind two materials from which I might construct a roof: wood and gold. Wood doesn’t last all that long, and the seams between pieces of wood leak. Gold, on the other hand, can be pounded out quite thin and does not rust or rot. Gold is clearly the better roofing material.

In a commercial system, when I go to the hardware store to buy roofing materials, I see that I can put on a wood roof for about $1,000, but the cost of gold to make the roof is $1,000,000. What gives? The answer is that the commercial system is “telling” me that there are other, better uses for gold, and that I should take account of the needs of others. Now, do I know the other uses of gold, or the identities of the other people who have uses for gold? I do not, but then I don’t need that kind of specific knowledge. The price is enough.  I buy the wood, and make the roof. The people who need gold are able to obtain it, and overall the society is better off.

Compare that to a political system. Remember, each of us believes — and, honestly, we’re right!  — that gold is a better roofing material, simply on the merits. We vote, and gold “wins” by a vote of 95 percent over 5 percent who prefer wood. But then we all try to make our roofs out of gold, only to discover that there is not nearly enough available. We blame the greed of the people who are “hoarding” gold, and send out the police to find who is hiding all of this roofing material. They are enemies of the people, and must be found and punished!

Which brings us to the second “I,” incentives. In a commercial system, I have good reasons to consider the preferences of others. Suppose that instead of going to the home supply store I happen to have some gold in my garage. I start to hammer out the gold into thin sheets, to put on the roof. But I notice in an advertisement in the newspaper that my gold is worth $1,000,000. That’s much  more valuable than my entire house!

I change my plans, in response to the information, but also as a consequence of the incentive to be concerned about the plans of others.  That’s important, so I’ll say it again. I’m planning to use gold for my roof, but others are planning to use gold for other purposes. We can’t both carry out our plans. I am informed of their plans (through the price mechanism), and then because of incentives I happily abandon my plan so that others can carry out their plans, because from a social perspective their plans are more important.

When prices “tell” me to take account of the preferences of others, I am then motivated by the incentive provided by commercial institutions to obtain compensating resources in exchange. So, I immediately stop pounding out the gold, and sell it to someone who needs it more, to create an alloy for filling teeth, or to use in electric circuits, or something else — again, I don’t know and don’t need to.

Note that “who owns what” doesn’t matter, at least in determining how the gold is ultimately used (thanks, R.H. Coase!). If I don’t own the gold, I leave it in the hands of someone who needs it more; if I do own the gold I actively seek out someone who will buy it, expending effort to make sure that whoever needs the gold most gets it.

A political system is very different: resource allocation is decided by voting rather than pricing. But the incentives in voting are all perverse. Remember, almost everyone thinks that gold is a better roofing material than wood. And, to be fair, gold is a better roofing material, if you ignore all the other things gold can be used for! But if I don’t have gold, I have no way of obtaining it, because no one is going to vote to give me the gold; they all want it for themselves.

The incentive is equally perverse, though with a different outcome, in the case where I happen to own the gold already. I’ll hide it to make sure that no one else can take it, because in a political system I have zero incentive to make sure that the resource is redirected toward better social uses.  It is possible to use the threat of violence to force people to sacrifice their resources to the “greater good,” but that system is likely to result in hoarding and more secretive, rather than public-spirited, behavior.

The point, as I said at the outset, is not for anyone, on any political “side,” to argue about the merits of their ideal theory. The great society cannot be modeled using a contest over who can imagine the most attractive “unicorn.” What is necessary is to look at institutional arrangements as they actually play out, making the comparison by looking through two “I”s, information and incentives. 

Commercial society performs better than politics because commerce allows the operation of the price mechanism, which generates information politics cannot match using voting. But the other “I,” incentives, is ultimately even more important. It comes as a surprise to many people that  commercial institutions give people reasons to take the needs and wants of other people into account. Politics, by contrast, makes people selfish. It’s an inferior system for organizing anything other than elections.

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