Saturday, January 21, 2017

What concerns a "conscious capitalist"

I'm reading The morality of capitalism as part of supervising an internship a couple of students are doing. It's a provocative read. My reaction to the introductory chapter is here.

The second chapter is an interview with John Mackey, the founder and CEO of the grocery chain Whole Foods.

Mackey's an interesting guy, an advocate of food causes associated with liberals and progressives (organic farming, healthy eating) and an opponent of economic positions associated with progressives (government involvement with health insurance to make it available to more people).

His calling card is something he calls "conscious capitalism," the idea that companies should make profits, but that they should also be about something more than making profits. In the interview, Mackey lists seven core values; creating wealth through profits and growth is number three. Other items on the list include being a good citizen in the communities where they do business, and trying to do their business with environmental integrity.

The interviewer asks, Why not pursue those other things without pursuing profit? Mackey makes the interesting and reasonable reply that that would limit the reach and efficacy of the organization:
[I]f you’re only making enough money to cover your costs, then your impact’s going to be very limited. Whole Foods has a much greater impact today than we had thirty, or twenty, or fifteen, or ten years ago. Because we’ve been highly profitable, because we’ve been able to grow and to realize our purposes more and more, we’ve been able to reach and help millions of people instead of just a few thousand people. So I think profit is essential in order to better fulfill your purpose. (p. 20)
He wraps up this line of thought with a slight overstatement that nonetheless makes an important point:
Also, creating profits provides the capital that our world needs to innovate and progress—no profits, then no progress. They are completely interdependent.
The overstatement lies in the fact that there are ways besides profits for assembling the financial capital to fund innovation and investment.

Strictly speaking, what's needed is "social surplus" - production above and beyond what we need/want to get through our day-to-day lives. If it takes everybody's labor just to grow enough food for us to eat, then we have zero social surplus and no ability build more and better tools. If we can feed ourselves using only half of our time, then we can use the other half in various ways. One option is leisure, but we could also choose innovation and investment.

As long as the social surplus exists, it can marshaled toward investment and innovation in various ways. The Soviet Union had lots of investment and some material progress - a very unimpressive ratio of progress to investment, because their planned economy was bad at choosing useful investments and bad at fostering and adopting innovation, but both things did happen.

And even in a market system, profits are not the only source of [financial] capital. If you pay decent wages, people will save some of their earnings, and then banks and other financial institutions can gather those up into large pools of capital that can fund investments, large and small.

But even if you pay workers enough that they can save and in that way fund investments, there's still an important role for profits, because profits are what provide the return on investment that gives people the incentive to save, and relative profits give information about which investments to choose.

There's an important conversation - one which Mackey perhaps doesn't want to have - about whether profits at some level exceed any useful role in the economy, but profits in principle definitely are an important element of functioning capitalism, whether that be the laissez-faire type that Mackey prefers or a social-democratic model.

Another reasonable concern of Mackey's is what he calls "crony capitalism," where you get ahead not by your hard work and the social usefulness of your ideas, but by your coziness with the government and your resulting ability to get special deals from it.

Palmer: You’ve distinguished free-market capitalism from other systems in which people also make profits and have businesses, but which are oft en characterized as “crony capitalism.” What’s the difference between your moral vision and what exists in a lot of countries around the world?
Mackey: You’ve got to have the rule of law. People have to have rules that apply equally to everyone, and those have to be enforced by a justice system that has that goal in the forefront of their consciousness. We need an equal application of the law to everyone as the primary goal—no special privileges to some and not to others. So what’s happening in a lot of societies, and what I think is happening more and more in America, is you’ve got special favors given to the people who have political connections. (p. 22)
I would agree with him that this is a bad thing, but it would be good to know how far he takes that definition. A recurring subtext of the book is the inappropriateness, the harmfulness of government social programs, and Mackey himself is an advocate of a completely free market in health insurance. I wouldn't be surprised if he saw social programs as an instance of "special privileges" - that's certainly the tenor of much libertarian complaint that progressive taxation is a way of "punishing success."

But note that there's no contradiction between his moral vision and, say, universal health insurance provided by government. A law in support of that wouldn't say, "You, John Mackey, have to cover 63% of the health-insurance costs of Bill Smith." It would say, "Here are the tax rates that apply to various levels of income; here are the insurance benefits available to all legal residents." The effect at a given time might be that John Mackey was paying 63% of Bill Smith's health-insurance cost, but the law would indeed apply equally to everyone: if John Mackey were somehow to fall into near-poverty, while Bill Smith struck it rich, whether through hard work, dumb luck, or morally dubious activity, the roles would be reversed without the law needing to be changed.

The interviewer then asks whether there's cronyism in the U.S. economy, and Mackey has two favorites as of the time of the interview (the interview itself isn't dated, but the book came out in 2011). The first concerns the Affordable Care Act:
[W]e now have well over a thousand waivers that have already been granted by the Obama Administration for their rules and regulations that were passed under Obamacare. That’s a form of crony capitalism. The rules are not being applied equally to everyone. And that means that the power to give a waiver also means the power to deny one. And you can deny it to those who aren’t making the proper donations to the political party in power or who you just, for whatever reason, you don’t favor. You have an arbitrary law that you can selectively apply to some and not to others. (pp. 23-24)
That's an interesting point in theory, but he ignores the intended role of the waivers. They exist to allow people in different states to come up with better ways of satisfying the law's purpose, so that it can be less onerous and still work to make health insurance more widely available.

It's obviously important to remember that laws can have unintended consequences, and provisions that were written in pursuit of reasonable ends can be abused to harmful effect. Similarly, the waivers from Obamacare are vulnerable to abuse in the way he describes, but he presents no evidence that they actually were abused in that way. Does he dismiss a priori the possibility of government that is reasonably competent and honest?

His second example is even more telling:
I see crony capitalism right now in all of these subsidies that are going into “green technology,” for example. They’re subsidizing some businesses and, ultimately, since the government doesn’t have any money on its own, it’s taking it from taxpayers and redistributing it to people who are politically favored. I see what’s happening with General Electric now, in terms of the kind of taxes they’re paying, with all the special exemptions and deductions that get written into the tax laws. And since they’re so heavily into these alternative energy technologies, or some of them, they’re getting to a point where they do not have to pay taxes on most of their income, just because they’re politically connected. So it offends me. I think it’s a very bad thing.
It's a complicated question whether green technology is oversubsidized. Currently, subsidies to less-polluting energy sources are substantial (though that may not remain true under the new administration), but cumulative subsidies to the fossil fuel industry dwarf what green technology has received. And if you include the uncompensated health and environmental harm from fossil-fuel combustion, you might estimate implicit global fossil-fuel subsidies to be as high as $5 trillion. That's quite a bit more than governments are spending to try to get green tech off the ground.

And it looks like General Electric has done well by green energy subsidies. If they got them through political connections, that's not good. But the outcome itself is understandable in innocent terms: the government was trying to subsidize green energy, and GE is a major player in wind turbines, subsequently moving into the solar-panel industry. If the subsidies simply went to the companies that could get the work done, or goaded companies into expanding their clean-energy portfolios, then they were working exactly as intended, without necessarily involving political machinations.

Mackey implies that GE's negative tax rate was the result of the green subsidies. According to a table here, GE paid negative taxes in 2008 (before Obama was president) and essentially zero taxes in 2009 (Obama's first year in office, when his policies were only partly enacted). They did better in 2010 than in 2009 or 2008, and presumably green-energy subsidies contributed to that. But the problem of zero or negative taxation predates Obama's green-tech subsidies, yet Mackey forces reality through his lens and implies that the new subsidies are the root of the problem.

More tellingly, think about an area of government subsidization and cronyism he doesn't talk about: food and agriculture.

In the U.S. we are privileged to subsidize agriculture through:
I went and dug up the links for the sake of documentation and getting the numbers right, but I constructed the list just off the top of my head. Not one of those items makes it onto Mackey's radar.1

Remember, this is a guy whose company is about providing healthy food, produced in an environmentally friendly way. And his favorite example of crony capitalism is nothing to do with food, and is instead concerned with trying to create an industry that will supply us with the energy we need while not killing us all.

For a "conscious capitalist," his awareness seems to linger in surprising places.

He does have a point on the failings of communism, but then, like Tom G. Palmer in the book's introductory essay, he tries to move from a reasonable observation to a black-and-white conclusion it simply won't support. He says:
Even communism, which purported to produce a society of equal ownership of wealth, was highly stratified and had elites who had special privileges. So I don’t see that inequality should be blamed on capitalism. Capitalism enables people to escape from poverty and become more prosperous and wealthy and that is very good. That’s the issue that we should focus on.
The big gap in the world is between those countries that have adopted free-market capitalism, and became rich, and those that haven’t, and stayed poor. (pp. 22-23)
His description of stratification in the Soviet Union is spot-on and important to remember. Just because someone proclaims their devotion to an ideal of equality, doesn't mean they actually live it. (If you want to read about the mechanics of that in communist countries, a good place to start is The new class, by Milovan Djilas.) And so it does logically follow that you can have inequality without capitalism.

But it still could be true that capitalism could also cause inequality, a possibility which Mackey seems to want to avoid. And then the last line is simply not true. In the interview as a whole, he seems to agree with the overall usage in the book, by which "free-market capitalism" is a condition of minimal government involvement in the economy. By that standard, the economies of western and northern Europe are not free-market capitalist, and yet they are very much with us on the prosperous side of the "big gap," not on the poor side.

A more accurate interpretation of the facts in the world is that there's some sort of threshold level of market involvement (and limitation on government). If you fall below that threshold, it's highly unlikely you'll be rich. If you make it over the threshold, your odds aren't bad. But the threshold isn't where Mackey wants it to be. In the context of this book, he's arguing against social democracy, and there are lots of countries with social-democratic systems that simply aren't remotely poor.

As a last example for now, Mackey says:
I mean, where would our government be without a strong business sector that creates jobs and income and wealth that they can then tax? Not that I’m always thrilled with that, mind you. (pp. 25-26)
True enough, but we could just as well ask where the business sector would be without a competent government that provides infrastructure, guarantees education regardless of financial means, and supports the existence of property rights.

Mackey has the standard American view of the true economy as synonymous with business, and the government as a succubus, rather than as complementary, co-evolved structures. He looks at business from a microeconomic perspective and sees businesses "creating value." He hasn't worked out the nature of value-creation in macroeconomic terms. When you get around to doing that, it's much harder to preserve a view of businesses doing all the work of creating value and governments doing nothing but confiscating what businesses create.

I was originally going to extend this post, but there was a single paragraph in Mackey's interview which ended up requiring an entire post of its own to unpack, so that's next.
1. I originally had an additional item on the list I drew up, which was sub-market grazing fees on federal land. The story I thought I knew was that the government let ranchers graze cattle on federal lands for fees that were far below the amount they'd have to pay a private land-owner for the right to run their cattle. Wanting to get the story right, I looked around and found articles making essentially that point. But I also saw articles painting a much more complicated picture. According to these sources, you only get to run your cattle on federal land at low prices if you own lands that have grazing rights attached to them. The cheap grazing fees may have been a gift to a landowner a century ago, but now the right to that cheap grazing has gotten "capitalized" into the price of the private land, so any subsequent buyer of that land paid a price that was fair given the right to run cattle on adjacent federal land at low cost. There is still an issue of subsidizing cattle-raising, but it's a more complicated story than I thought, and I didn't want to oversimplify.

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