Good narratives and bad

This is part 2 of my response to the interview with Whole Foods CEO John Mackey in the collection The morality of capitalism; part 1 is here.

 

Earlier I discussed the introductory essay by the book's editor, Tom G. Palmer. Like Palmer, Mackey calls simplified history to his aid, and simply can't get the story he wants to tell to line up sufficiently with reality.

I saw what happened when Ronald Reagan got elected. America was in decline in the 1970s—there’s no doubt about it; look at where our inflation was, where interest rates were, where GDP was heading, the frequency of recessions, we were suffering from “stagflation” that revealed the deep flaws of Keynesian philosophy, and then we had a leader who came in and cut taxes and freed up a lot of industries through deregulation and America experienced a renaissance, a rebirth, and that pretty much carried us for the past twenty-five years or more. We had basically an upward spiral of growth and progress. Unfortunately, more recently we’ve gone backwards again, at least a couple of steps backwards. First, under . . . well, I could blame every one of these presidents and politicians, and Reagan wasn’t perfect by any means either, but most recently Bush really accelerated that retreat and now Obama’s taking it to extraordinary lengths far beyond what any other president has ever done before. (p. 24)

There's a lot here to unpack. Mackey's story is that when Reagan took office in 1981, things were bad, and the policies Reagan implemented made things better, and the whole story shows that Keynesianism is deeply flawed.

Let's look at the numbers.

First, Mackey is right about the frequency of recessions: starting in late 1982, we had a long expansion under Reagan, a very long expansion under Clinton, and a reasonably long expansion under Bush II. Also, the recessions in between those expansions were short and "shallow": they didn't last very long, and GDP didn't fall by very much.



Year-over-year percent change in real GDP.
Shaded bars show recessions.
Click for larger image.

And he's right that inflation came down in the early 1980s.

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.

Setting the stage

Two students of mine are doing an internship at Atlas Network, where they've been encouraged to read The morality of capitalism: what your professors won't tell you, [link fixed, 1/23/17] a collection of essays by various authors. In order to be able to discuss the book with them, I've been making my way through it, and found myself jotting notes at such a rate that it seemed there was a short essay lurking in the margins of each chapter.

The title has some ambiguity: Will the argument be that capitalism is moral and your professors are unfairly blackening its name? Or that the morality of capitalism is bad, and your professors have been painting too rosy a picture?

Let me not keep you in suspense: the book's contributions are dedicated to showing that capitalism is good, despite what college may have tried to teach you to the contrary.

The introductory chapter by the editor, Tom G. Palmer, sets the stage by laying out pieces of the argument for how capitalism is moral. But based on the five essays I've read so far, it also prepares us for what's to come in other ways. The essay makes some valid points touching on facts that may be overlooked by critics of how markets work, things that are worth keeping in mind in your view of reality. But then it weakens itself with a black-and-white view of "capitalism" vs. anything that deviates from it, overly broad generalizations drawn from excessively simplified historical narratives, logical leaps, and use of words with strong emotive power while avoiding any specification of what is meant by them.

As an example of a point that may be ignored by critics of capitalism, consider the potential openness to people, regardless of their background: