Is capitalism wrong in some fundamental way?
New Year’s Day found your editor up a tree. He was pruning pear trees. The trees had gotten some sort of blight. They’re half-dead…and probably should be cut down and burned.
Nevertheless, we went out into the cold – pruning shears in hand – and trimmed them.
Why? What was the point? Why invest time in a tree that won’t produce?
Perhaps it was a just habit.
This weekend, we will undertake another curious task. We bought a house down the road. The house was built in the 1950s. It is a wreck. The smart thing to do would be to tear it down, build a cheap new house and rent it out. The return on investment would be low. But at least it should be positive.
Instead, we are fixing up the house enough to rent it out…more or less as it is. Your editor is tearing off a decrepit porch and rebuilding it…as well as spackling the cracks on the inside and repainting.
If he were to calculate the value of his time, the enterprise would be unprofitable. But what the hell?
Is the house an investment? What else would it be? We’re not going to live there; we’re going to rent it out. Why then are we not carefully calculating our investment and demanding a return – on time and money – to make it worthwhile?
Perhaps we are not good capitalists? Or perhaps capitalism is flawed?
The latter is the conclusion of an academic paper from the Centre for Economic Policy Research.
The paper is titled: ‘Continued Existence of Cows Disproves the Central Tenets of Capitalism’. The research took place in rural India. The researchers studied the return on water buffaloes and cows. They discovered the animals were bad investments.
If you include the value of labour at the going rates, the cows lost 64% and the buffaloes 39%. If you put the value of labour at zero, the buffaloes then became profitable, at a rate of 13% a year. But even with free labour, cows were still unprofitable, losing 6% a year.
What does this mean? Does it really mean that capitalism is flawed? Or does it mean people are stupid? Or maybe just people in India are stupid?
The trouble with this kind of analysis is that it is too narrow and artificial. Who said people care only about making money? Who said they had to value their time at market rates? Who thought he could define capitalism so that it could be subject to analysis and judgment?
The critics presume capitalism follows certain rules. People are said to be ‘rational actors’. They are said to want to increase their wealth. They are said to always try to optimise their time and money.
If that were the definition of a real capitalist, we have never met one. Instead, the people we know function in a world of floating ambitions and ambiguous decision-making.
People have many different goals in life; making money is just one of them. Ultimately, people create for themselves their own stories. Then they play their roles. One wishes to make a lot of money. Another is more concerned with his family. Another finds the pursuit of money vulgar; it is something else he is after.
Not knowing what people want, it is impossible to know whether they pursue their goals rationally or irrationally. The typical person doesn’t know – at least, not consciously – what he wants.
He often does things that surprise and puzzle himself as well as the people around him. One day he makes rational, capitalist decisions. The next, he invests time and money in something that couldn’t possibly pay off.
Capitalism works because it permits people to do what they want – no matter how flawed or irrational it may seem to naïve researchers. It doesn’t always take people where they want to go; but capitalism generally helps them end up where they ought to be.
for The Daily Reckoning Australia