The Chronicles of a Capitalist Lawyer: Capitalism

Showing posts with label Capitalism. Show all posts

I'm always interested with the claim that if all workers in the world cease to work, capitalism would crumble and there will be no more masters and servants afterward. I highly doubt that a labor strike in such supernatural level will ever occur considering the nature of men and their self interest. Nevertheless, this could be an interesting thought experiment.

So, for the argument's sake, let us just assume that all of the workers in this planet simultaneously stop their work. What would happen? If all productions stop, I assume that most businesses (especially those which use employee/employer system) will also stop save for businesses that are being run by individuals. My assumption that individual businesses will still conduct their business activities is based on two further assumptions: (i) they are their own masters, and therefore, there is no need for them to follow the workers, and (ii) they can run their businesses without significant dependance on other businesses or infrastructure support. In short, they would be most likely local businessmen who have the capacity to produce their own products by themselves.

Now, you can always stop working, but you can't stop living. You still need to obtain your basic needs right? If you can gather everything by yourself from the nature, that would be fine. But if not, what would happen? You'll depend on other people, and in this case, you will depend on the above individual businesses during your strikes while waiting for the crumble of capitalism.

In such case, the law of supply and demand will automatically work. With less supply and more demand, price will increase. Even worse, without any competitors, the local businesses will eventually have enough monopoly power to solely control the price of their goods and services. And trust me, that would be a very bad scenario.

Let me give you an example: previously a local farmer sells an apple for US$2. In reality, he's almost out of the business since he can't compete with the local supermarkets which are far more efficient than him and can sell their apples for US$1 each. But, with the great labor strike, the supermarkets cease to operate and the farmer becomes the only apple seller in the community. Imagine his power now to determine the price of his apple without any competitors. Why bother charging US$2 if you can get a higher price? After all, people can only get apples from you.

How about the workers? Without a job, the only thing that they can do is to use their savings, or they can try to become businessmen on their own, selling their own services/products to other parties. If they can do it, that would be nice, if not, they will need to rely on the new capitalists, i.e. the individual businessmen as I described above and the cycle will begin again. The irony is: in order to survive, they need to become new capitalists.

So in the end, at best, the strike will only produce new capitalists and a new cycle of capitalism. At worst, the workers lose their savings before the rich guys lose all of their money and therefore, the old capitalism prevails. In any case, it won't change the fact that servants and masters will always exist.

The problem lies with human nature, namely: the basic needs for surviving in this world. In the past, in order to survive, men must have a lot of skills. In such case, only the true elites can survive while others perished. But humans are not stupid, there is an easier way to survive, and that is by interacting and cooperating with others.

Unfortunately, by default, you can't get anything for free. Either you need to obtain your needs by self labor (producing everything by yourself) or you exchange something with others to obtain what you need from them. This process creates the market and within such process, the iron law of supply and demand will eventually lead some people to be on the top place while others will stay below depending on their skills and luck.

The above analysis is made on the assumption that order and authority remain to exist. But how about in worst case scenario when there is a revolution? Suppose the workers are out of their savings and they decide that they will take control of the resources from the businessmen. Will that change the analysis?

My answer is no. Once the workers gain control of the resources, similar issue will still exist. Even if you have all the money in the world, you can't do everything by yourself. Some will still be better at doing things than you and the process of exchange of products and services will start again. This will lead to another cycle of supply and demand, market, etc. And before you know it, capitalism will return swiftly. Of course, this is also assuming that those workers will distribute the resources evenly in the first place. If not, even from the very beginning, new masters will emerge without having to wait for another cycle of capitalism.

In the end, I don't think the slogan "All Workers Unite" will work to end capitalism. It will just produce another capitalism (but with different "capitalists"). It is still a nice slogan though, has a nice ring to it, and sounds powerful. Well, at least it is perfect for campaign and propaganda.

Around two weeks ago, I had an opportunity to attend a debate on Neoliberalism Thought at the University of Chicago between Gary Becker (Professor of Economics at the University of Chicago), Bernard Harcourt (Professor of Law and Chair of the Political Science Department at the University of Chicago) and François Ewald (former assistant to Michael Foucault and Professor of Insurance at Conservatoire National des Arts et Métiers, Paris). I think the quality of the debate is very good and it would be a pity if I don't share the ideas raised in such debate in this blog.

First of all, the debate spins on the idea of Homo Economicus or the Economic Rational Men by Gary Becker. Michael Foucault, a famous French philosopher and historians, believe that Gary Becker's idea on economics rationality provides the necessary theoretical foundation of Neoliberalism. This is interesting because usually Neoliberalism is more associated with political economic thoughts rather than pure theoretical economic thought.

I think even most of the time, when Indonesian people talk about Neoliberalism, they think about the idea of excessive free market, non governmental intervention, injustices by corporations and dictators, etc. Of course, I heavily doubt that this is the correct interpretation of Neoliberalism since pure Capitalism does not support any crony capitalism, dictatorism, business without liabilities, and so on. See my previous post on this issue here.

For now, let us return to Foucault ideas. He is a proponent of the idea that history is determined by the power relationship that controls men. Law and morality are things that are defined by those who have power and authority, and therefore they might be simply an illusion for the society. However, Foucault finds some consolations in Gary Becker's concept of Homo Economicus, which according to him is liberating.

Gary Becker, which is also a Nobel Laureate, is the proponent of idea that the science of economics can be used as a powerful tool to analyze almost all, if not all, of human behavior and activities. He introduces the use of economic analysis on crime, family and discrimination and is also considered as a part of Law and Economics development at the University of Chicago.

Within Becker's theory, human is viewed as a rational being that always wants to maximize his own interest. It does not mean that human has a perfect capacity of calculating the entire costs and benefits of his action. It simply means that when they are making their decision, they pay attention and respond to incentives, and thus, to certain extent, human behaviors are predictable.

A separate note though, even Becker agrees with Foucault that a perfect rational men is a fictional concept. What matters is that the theory is useful to understand the world in an insightful way by taking certain aspects of human behavior and make a simple model. After all, all theories are fictions, and a good theory of fiction is the one that works the best among many other fictions.

Then, why this kind of theory is liberating? According to Foucault, economists are seekers of truth, their analysis is not based on moral or legal issues, rather they focus on human behavior and incentives, and they also prioritize liberty (through free market concept). This is important for Foucault who sees the possibility of maintaining order without any coercion or doctrine as presupposed by laws and morality.

But the Neoliberalism view of Gary Becker is not totally free from any problem. Although it may be a liberating theory it can also be used to suppress the people and here we are moving to Gary Becker theory of Human Capital which is an essential part of Neoliberalism. Becker believes that human capital is very important, i.e. investing in people, making them to be a better and more productive person which will contribute to the welfare of the society.

The problem with that view, at least according to Harcourt and Foucault, is that once human is viewed as a part of capital, the government may favor certain group above other groups, discriminating and investing only in people who will produce the highest benefits and left the ones who are bad to suffer in the slumps. An example would be the case of mass incarcerations in the United States that target most of African Americans and poor people based on various criminal actions. Eugenics can also be a problem here since there was a time where the Government of US actually allow the sterilization of imbeciles and people with mental disorders.

Furthermore, viewing human as only a part of capital production could be degrading, i.e. human is viewed like a machine with the sole purpose of producing more capital and whose value is solely determined on how much capital will be produced and accumulated by him in the long run. I take this as the modern critics of Neoliberalism and Capitalism in general.

Becker's response was simple. His theory on human capital is established to liberate the people and while he agree that some aspects of economics theory on production and capital can be used to analyze issues on human capital, human capital is still a separate subject (and thus the reason why he makes a separate class on human capital in the University of Chicago).

From any point of view, human cannot be fully compared with machines. We can put machine in the warehouses and easily disassemble them whenever we want, we can't do that with human. Furthermore, the theory put a lot of stress in building human capital so that everyone may reap the benefit of social welfare. It includes investment in education, on the job training, health, etc.

The most interesting response from Becker is that his theory of human capital focuses on efficiency, but most of the time, things that are efficient, are also equitable. Through his theory, Becker want to show that human is the most important part of our capital. By investing in people, we hope that they can develop themselves and free to make their own life decisions without any interference. He also notes that there is an underinvestment in poor people and that is actually an inefficient thing to do, since better human capital always lead to better welfare maximization.

I completely agree with Becker's notion. This is indeed the main purpose of introducing the concept of human capital, preserving freedom and reducing paternalism, finding the most efficient way to allocate resources among the people. And I think this should be the main idea of Neoliberalism. It is just too bad that politicians and even some academics are using this concept in such a misleading way that they confuse the original concept of Neoliberalism that focuses on liberation and freedom of the people with crony capitalism, dictatorism, and the freedom to do anything without any legal liabilities which are not even parts of original concept of Neoliberalism.

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest" (Adam Smith - British Economist and Father of Capitalism) What is Capitalism?

In the simplest way, Capitalism can be described as the economic system which maintains the idea that owning and accumulating private wealth are the basic rights of every person, and those rights must be preserved and protected by the State on a first priority basis. In general, Capitalism believes that the preservation of the above rights and the freedom of people to enjoy such rights will enable the society, as a whole, to gain maximum prosperity. However, we must always remember that Capitalism is not a divine system established by God. It is an economic system created and developed by men through countless trials and errors.

There are many ways in implementing Capitalism in various parts of the world and even until today, we have not found yet a definitive and final form of Capitalism. To make it short, Capitalism is still evolving and I believe that the process itself is unlimited. In this article, I will explain some of the basic concepts of Capitalism. I'm not an economist, but my job as a corporate lawyer is directly related to the practice of Capitalism. Through my job, I realize that Capitalism makes sense and its principles are built on a solid basis. As I will further argue in this article, and despite the critics and the current global financial crisis, I still consider Capitalism as the best economic system that men ever have.

What Are the Basic Principles of Capitalism?

Capitalism is derived from three basic principles: 1. a common man will put his self interest as his first priority; 2. all men are interdependent; and 3. free competition is the most effective safeguard mechanism of Capitalism.

Could You Explain the First Principle of Capitalism?

Capitalism believes that a common man will put his personal interest as his first priority. It is not surprising that, using the above argument, many people claim that capitalists are evil individualists who only think about themselves and who will do anything to obtain what they want. But, those people are exaggerating, too exaggerating. I even dare to say that they are actually fooling themselves for not letting to believe their exact nature as men. Let us go through this simple test.

Say that you are an average man, having some decent work with a considerable good salary for living and you are not in a dire need. Then, you somehow get the opportunity to receive US$10 legally from someone. Now, answer these questions truthfully. Would you really want to reject that money and say to the generous man that the money should be given to other people in dire need? Then, try increase the number into US$100, US$1,000, US$10,000, and so on. And then keep asking the same question, would you reject that money?

How about if you are also in a dire need, will your answer remain the same? Or, try to imagine this: Having work really hard in your office, you soon realize that up to 30% (depends on the amount of your gross salary) of your salary is going to our beloved country for paying your income tax, which means in one year, there is a probability that you might spend more than 3 months doing charity work, working without any payment, acceptable or not? For the first question, I'll be honest, I'll take the money for sure (especially when the amount is significant). For the second question, I must be damned if I call that kind of legalized robbery as acceptable (though the new Indonesian Income Tax Law provides a lower tax rate and a higher limit of taxable income, for which I say Hooray!!!). I bet my X-BOX 360 that most people will also take the money and reject the high rate of tax (or even the tax itself).

This is natural, it's in our blood. You're not turning into a bloody parasitic dark lord for pursuing your self interest, you're basically trying to survive in this vast world. Capitalism happily embraces this fact and establishes it into its first principle. Interestingly however, some people pretend to forget their own nature on these issues and say crap things publicly about the need to promote social interests above individual interests while in reality these guys would absolutely chase their own interests before even thinking about the interests of the society. By this, I refer to the majority of the politicians.

How Come the Pursuit of Self-Interest Are Not Causing Misery?

You see, after acknowledging the basic nature of men, Capitalism puts the second basic principle: not a single man can pursue his self-interest without cooperating with others. Thus, every man is interdependent with another man. Whether they like it or not, they need to work together and reach mutual understanding in order to satisfy their needs. What a beautiful concept!

Have you ever imagined how you can get your nice nasi padang at the Sederhana Restaurant? Who supply the rice, the meat, the coconut milk and those other spices? Who cook the tasty food? Who serve the food? Who provide the place of the restaurant? The creation of Nasi Padang Sederhana actually involves a huge amount of actions, actors and factors, from the production of the rice to the distribution of the Sederhana franchise (including the recipes).

The most interesting part of the above scheme is the fact that none of the actors involved in such scheme are doing their part of actions due to their compassion for the greater good of the society. All of them are pursuing their own needs and interests! The farmers grow and sell the rice so that they can earn some cash to buy their needs, the waiters at the restaurant serve the guests nicely so that they can earn their salary (and maybe some tip) and buy their needs, and so on. And amazingly, no one actually have a global and full control over such process despite its complexity. If you think that there is a conspiracy back there which force all of the above actors to work together in order to provide a Nasi Padang, you must be crazy. So, in the end it is all interrelated.

Capitalism believes that the pursuit of self interest should not cause misery to each other, because through the existence and exchange of various self interests, men can actually satisfy their needs. The words of Adam Smith stated in the opening of this Article would be excellent to summarize this second principle. I must also add a note that this second principle is being greatly supported by the existence of money. With money, people has an easier mechanism to value goods or services that they want to produce or obtain. I will reserve the discussion about money on a separate article.

I Don't Buy This Idea, There is Something Missing, Isn't It?

True, as beautifully crafted as it may be, there is still a weak point in the second principle: not all men have equal power and status. Though all men are interdependent, the difference of power may disrupt the balance and thus opening a way for the emergence of the darkest part of human soul, the hunger for everything, even if it costs other people's life and needs. Without any safeguard mechanism, Capitalism will definitely crumble into dusts as a result of this problem (as once predicted by Karl Marx). Thus came the third principle of Capitalism: Free Competition. Too simplistic? Not at all.

Free competition is actually a brilliant way of ensuring that power is distributed efficiently among men. The concept is actually simple and can be explained by the following example: Some years ago, there were only two telecommunication providers in Indonesia using a dual-monopolistic system. To cut it short, these two companies have absolute control over the Indonesian telecommunication services. Result? Expensive telecommunication tariff and poor infrastructure. In 2004, it only cost me Rp80,000 per hour to make an international call from Seoul to Jakarta using a Seoul public telephone. That was very cheap at that time compared to the cost for doing international calls from Jakarta to Seoul.

But now, with the increasing number of telecommunication providers, we see the new era of cheap telecommunication services. Those telecommunication providers spend billions of Rupiah just for claiming in TVs and radios that they are the cheapest operator. Indeed, they don't have many choices. If they don't cut their prices, provide better services, and make the most entertaining advertisement, other operators will claim their customers and in the long run, losses will become the end result. Of course, how can they cut their prices if they can't increase their business efficiency? Like it or not, this competition game forces those operators to find new ways in increasing their business outputs. Efficiency, creativity, innovation, name it, and they will get it. Such are the results of competition, incredible!

In fact, the free market, the free competition, is actually doing better than the Anti Monopoly Supervisory Committee (KPPU) in the telecommunication sector. This is related to one case when KPPU brought the case of Temasek, a Singaporean State Owned Company, to Indonesian public attention for having control in two major Indonesian telecommunication companies. In that case, KPPU claimed that such control has caused monopoly and unfair competition and thus increasing the consumer cost for getting telecommunication services. So much hours and money are wasted to force Temasek to release its majority ownership in one of the operators and to cause those two operators to reduce their tariff. Yet, without having to wait for the final judgement, those two telecommunication operators have already reduced their tariffs for the sake of winning the competition. And this is the current trend, as I've once discussed it with an executive of a major telecommunication provider. Do we actually need a better example for understanding the power of free competition? I guess not.

Okay, Enough with Capitalism Principles, What About the Market?

Ah, good timing! As discussed in the second principle of Capitalism, all men are interdependent. But, how can they cooperate with each other? The answer is the market. The market is the most important facility of any economic system, even for the so called communism, since it provides a place for people to meet, trade and exchange their self-interests. Of course, I'm not referring to a traditional market in a remote village where you can find living stocks and fresh vegetables. I'm referring to the concept of market as an abstract place, a structure where goods and services are offered and traded, where supply meets demand, where buyers meet sellers.

There are countless numbers of markets in this world, telecommunication market, energy market, stock market, financial market, commodities market, you name it. But the basic is same, within the respective market, people may look out for what they want and try to obtain those things with certain price. The issue of price brings us to one of the most important aspects of the market under the system of Capitalism, one that has become a never ending subject of debate, the market equilibrium and the self-efficiency of the market.

Until today, no one has ever reached a perfect theory which can explain how the market can reach those conditions, where the prices of each goods and services reflect the actual supply and demand, and all market participants have obtained the necessary information in making their economic decision. It is almost impossible for me to explain those complicated issues within a single article without having the readers getting lost in understanding the concept. So, let me put this simply.

Under the basic principles of capitalism, the market will work best if there is a minimum intervention from forces outside the market, BUT, it does not mean that the market itself can always maintain its equilibrium and efficiency, some interventions would be need for certain cases, especially when the principle of fair competition has been breached due to unfair or illegal activities. The key issue here, is to find the best policy that can HELP the market to avoid its own weaknesses without having to sacrifice the freedom and the unlimited opportunities that market can produce through free enterprises.

I can't answer that yet, but am hoping through the times of my journey here, I would be able to provide certain solutions and insights on how we can create such best policy.

Why Promoting Capitalism?

Simply because Capitalism is applicable in every part of the world, even in the so called Communist Republic of China, and because it has survived for many times during the last 200 years. Economic crises come and go for many times, people have gone through some pessimistic and optimistic periods in doing their business. You know, during crisis, like in 1933, 1987, 1997, and 2008, people always claim about the end of capitalism. Of course this is a politically correct maneuver and it is easy to reach such conclusion. But, if you analyze it further, in the end it is a part of a grand business cycle. What goes up, will go down, and vice versa.

During the Asia financial crisis in 1997, most people blame us for our fragile economic fundamentals, and you know how the western countries see Asia at that time, a failure. But now, it is Asia who has the better economic fundamentals and can maintain such fundamentals despite the crisis in the US. Amazingly, most of Asia Countries and US use capitalism principles in making their economic policy. I believe that the basic nature of human is always the same, everyone want the same opportunity to do business and reap profits, and they want to do it without too much of restrictions and inefficiency, the way that capitalism has always preached about.

In general, the application of Capitalism principles has created an accumulation of wealth and development in many countries, and Indonesia, without a doubt, has also received benefits from capitalism. Of course, like I've said in the beginning of this article, Capitalism is not without any flaws, there will always be a problem, such as the problem of distribution of wealth, power disparity between market players, etc. But, we can't stop using a system or even try to replace it in entirety because of some flaws, that would be horrendous. It is our job to modify and fix the flaws in capitalism to ensure that it can work properly rather than spending times on building a new entire system which would be most likely not efficient. This is a never-ending process, and I expect to see many new developments in the future of capitalism.

To end this article, I would like to share a piece of wisdom from Milton Friedman, an American Nobel Laureate, "What kind of society isn't structured on greed? the problem of social organization is how to create an arrangement under which greed will do the least harm; capitalism is that kind of a system."