Economics: A Hard to Understand Dismal Science but Definitely

Date: April 23, 2010

by Roger Tan, SIAS Research

Recently, I saw a contribution in SIAS Research’s forum that ended with “Live and die by your own hands. That’s real capitalism. So let’s not get twisted, Roger.” Curious of the comments (since my name was mentioned), I decided to read the full forum contribution by this forum participant MK.

The forum was about an article that was posted some time back by another forum participant HL on “socialism versus capitalism” using an anecdote of a conversation between Donald Trump and his daughter Ivanka (I don’t know if it is a true story). Just two weeks ago, I had read that anecdote and found it very educational. I then left a comment in the forum which may explain why my name was mentioned.

I took some time to figure out what MK meant by “twisted” and I thought I should not leave the comment hanging. However, when issued a challenge like this, I always like to fall back to my old “Oaktree Research” style of analyzing the issue as this method is more intellectual and less emotional in nature.

Without further ado, let me start the analysis and explanation process…

The Anecdote

Let me start with an abridged version of the content that was posted in the forum. The story of Donald and Ivanka Trump started off with Ivanka trying to convince her father that people like him who are hoarding a large amount of wealth should face higher tax. The money collected can then be redistributed to others who “need to earn more than minimum wage and better food”. To which Donald answered “Welcome to socialism!”

Donald apparently then asked Ivanka how was her studies to which Ivanka gave her account of how she worked hard to score 4.0 GPA. Donald then asked her about her friend Audrey which Ivanka then explained to her father how popular and party going she was in school but because of that was only able to score 2.0 GPA.

Donald then suggested that she should consider giving away 1 point of her GPA to Audrey and then all will be fair. The suggestion was met with angry protest from Ivanka who claimed she worked hard for her GPA and there is no reason for her to give that away to someone who didn’t work hard. To which Donald then answered “Welcome to Capitalism!”

To me, this anecdote contained three important points. Firstly, man is self‐interested by nature. Secondly, because of the self interested nature of man, economic structure or system will tend to shift towards capitalism rather than socialism. Lastly, to reduce the “pain” experienced by one caused by empathy, he is willing to sacrifice some of his wealth to the person causing such disutility to reduce it.

What was MK Trying to Say?

MK then posted the following: “That’s pretty twisted. Wall Street epitomizes capitalism. The Wall Street implosion that originated in New York and ended in faraway shores of Iceland and Japan is more than Risks and Greed.

Wall Street is paid to take risks. But it speaks of a societal amorality when people who understand risks and get paid to take risks do so using other people’s money (eg, depositors, public coffers) as opposed to their own money. Since they are so good at taking risks, surely they should lump those risks and keep in on their books instead of slicing and dicing it and then passing it on to others.

Live and die by your own hands. That’s real capitalism. So let’s not get twisted, Roger.”

The problem with forums is that the ideas posted on such a platform can sometimes be extremely abstract. There seems to be three points that MK was trying to make in this short posting. These are my conjectures:

1. The anecdote twisted the notion that capitalism is not evil when in fact it is.
2. Capitalism has no compassion.
3. Wall Street should own the investing risk instead of transferring such risk to investors.

These conjectures may not totally reflect MK’s true thoughts but with so little information, I can only speculate.

Capitalism and Socialism – Smurfs and Gargomel?

Capitalism and socialism are actually economic structures or system ideals based on different assumptions and arguments. In a nutshell, capitalism is where factors of production (land, labour, and capital) are owned by individuals and production of goods and services are coordinated by organizations. The decision of what and how much to produce and also the price of acquiring the factors of production to produce such goods and services are determined by markets. The determination of price and the transaction of goods and services within these markets are aided by “fiat” money.

Capitalists believe that all economic participants are self‐interested and are motivated by acquiring the highest possible utility (or satisfaction) through the earning of highest possible returns – be it wage, rent or profit. The interaction of these participants as buyers and sellers in the market will theoretically result in an optimal allocation of resources and also wealth.

Socialists, on the other hand, argue that individuals should be empowered to produce output (and therefore utility from consumption) directly and not be “burdened by private property relations in the means of production and the need to generate profit” (taken from Wikipedia on socialism).

Some socialists argue that factors of production should be owned by workers and not individuals or corporations and wealth should be distributed according to amount of labour inputs and not by simple ownership. Others socialists suggest that resources should be owned by the “state” and distribution of resources and wealth should be decided by a central agency. They believe that “all men are equal and no one is more equal than others”.

These two economic systems mark the two poles of the range of economic systems in the world. if objectively studied, one will be able to better understand the economic system one is living in and how resources and wealth are distributed in their economy.

Both of these systems have their own pros and cons, but it should not be seen as good versus evil. Though capitalistic nations have cases of wealth being concentrated in the hands of a few, socialistic nations have also cases where “some men are more equal than others”.

How can the anecdote be “twisted” if the objective of the anecdote is not a discussion of good versus evil between the systems? Being a capitalist does not mean you cannot do good deeds and being a socialist does not mean you cannot perform evil deeds.

Can There be Compassion in Capitalism?

Compassion exists in both capitalism and socialism because any economic system is ultimately made up of humans. Some have argued that because capitalism is based on self-interest, people will have no compassion.

There are two flaws in this argument. Firstly, the suggestion of self-interest in people is based on observation from human behaviour – it did not prescribe the behaviour. Secondly self-interest does not mean selfishness.

Self-interest simply means that the benefit (positive utility or satisfaction) of any action must be more than the cost (disutility or dissatisfaction) to motivate one to undertake it. Benefits do not need to be immediate but future benefits must be at least plausible.

In a situation where a person is forced to choose between negative outcomes – such as feel the pain of seeing a starving old person against the pain of giving some money to that person to feed himself for the day – the dominant choice would naturally be the one that produces the least unhappiness.

We have seen many people who live in capitalist nations donate funds to the needy in charity shows and also volunteering their time to help the less fortunate but we have almost never seen people in socialist nations do the same. Not because the latter do not want to but they cannot afford to.

The anecdote did not suggest people become more selfish but explained why nations will naturally tend towards capitalism. In the anecdote, we did not see Donald asking Ivanka to stop feeling the pain of the poor; he was only educating her on why the world is what it is.

What Does Wall Street Have to Do with It?

MK’s final point on Wall Street epitomizing capitalism is really a deviation from the anecdote. Wall Street is a market where the demand for funds or capital and the supplier of funds “meet” and transact. The suppliers of funds are made up of not only institutions but also individuals with excess funds or savings.

The role of the bankers and the many financial intermediaries in Wall Street is to help these suppliers find opportunities to invest their funds to those who need these funds – be it institutions or individuals. In return for this service, the intermediaries make a fee or commission from either or both parties. The role of the intermediaries is not to own the investment and therefore the risk; it is the suppliers or investors who will own the risk.

There is no actual transfer of risk from the intermediaries to the investor, it is the investors who decide whether to undertake the risk – and the rewards – presented to them. The fees to the intermediaries are also a result of the investors’ willingness to pay. All these are features of a free market.

So MK is right, “live and die by your own hands”. That is life not just capitalism. Capitalism is really beyond Wall Street and one should extend this knowledge base before using Wall Street to explain capitalism – let alone using it to epitomize capitalism.

Judge with Knowledge Not Emotions.

As a lecturer in the past, I have always emphasized to my students that they must learn, un‐learn and re‐learn knowledge to increase their knowledge width and depth. The deeper the knowledge base, the more one can rely on logic rather than emotions to make judgment. I hope this article has at least encouraged you to learn more about economics objectively.


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