1/14/12

Mitt Romney should be happy that he is being attacked for his performance at Bain Capital, because it offers the opportunity to have a dialogue about where America is going. If we really believe free market capitalism is superior to central planning we should appreciate the chance to engage our opponents in debate.

At the conference I just attended Synopsis said innovation is always good. Once we build a new chip that concentrates more functions on a smaller space we are never going back to the inferior product. This kind of linear progress is not possible in human society because there are limits imposed by human nature. That is why Francis Fukuyama said, after the collapse of the Soviet Union, that we had reached the end of history. Once we discovered representative democracy and capitalism we have hit the wall. While both ideas have flaws we will not find anything that is better. The reason is these ideas best suit the way we are.

Our opponents in the 2012 election favor central planning and collective action over individual action. They think people are incapable of free choice. Decisions should be made by experts on behalf of the people. The problem is it means the loss of individual initiative which is necessary for progress. If all societies were collectivist it might work for a while. But, as Ronald Reagan used to tell us, a free society will always outperform a slave society.

The first advantage of a free market is that it gives people a choice. If demand for potatoes goes up because people prefer them over carrots the price of potatoes will rise and farmers will plant more potatoes the next growing season. A central planner’s first instinct is to impose price controls on potatoes so that farmers will no longer exploit consumers.

Paul Krugman argues in the New York Times (America Isn’t a Corporation) that Mitt Romney’s experience in business means he would not be a good president because corporations believe in “ruthless cost-cutting” which benefits the bottom line at the cost of jobs. Krugman says that when Barack Obama bailed out the auto industry he did it to save jobs, not to save the business. That brings us to the second advantage the free market has over government. Government does not think in terms of the bottom line because it has the ability to tax. Business must be efficient or it will not survive. If the auto industry does not become efficient will taxpayers once again be required to put up the money for anther bailout?

When the focus is on job security it is easy to understand why collectivists have a negative view of innovation. Obama once said the ATM is responsible for much of the joblessness in America. When the ATM became available banks let most of their tellers go. Free market advocates have a more positive attitude toward innovation. It allows productivity to increase and the standard of living to rise, because only more output per worker can justify pay increases.

While collectivists accuse business of exploiting workers by not increasing wages fast enough they have no compunctions about forcing taxpayers to pay for inferior government services. Again, job security is the culprit. The mayor of New York City wants to fire 1500 teachers who are not performing well, but is up against teachers unions who think even bad teachers are entitled to safe jobs.

Krugman shows that he does not understand how business works when he says cost cutting is always good for the bottom line. He writes:

“From the point of view of the firm’s owners (though not its workers), the more costs that are cut, the better. Any dollars taken off the cost side of the balance sheet are added to the bottom line.”

What Krugman says is not correct because business is always worried about competition. A public school system can survive even if the teachers are incompetent because children are forced to attend the schools. If a corporation cuts costs for research a competitor is likely to come along with a better product. A company or industry that cannot compete will not be able to provide job security for its workers, and the owners will not earn any profits.

A columnist recently wrote that Mitt Romney is a bad capitalist because some of Bain’s businesses laid off workers, whereas Steve Jobs was a good capitalist because he produced jobs. That, of course, is ridiculous because when consumers shifted to the iPhone they stopped buying other products and some people lost their jobs.

Krugman says a corporation cannot be compared with government because corporations do not care about jobs but government does (or should). He writes:

“But the story is very different when government slashes spending..Look at Greece, Spain, and Ireland..In each case, unemployment soared, because cuts in government spending mainly hit domestic producers.”

Collectivists like to say “we are all in this together.” The problem is Greece does not have any money to spend and they cannot borrow. The solution is therefore for Germany to spend more, because that will pull in more imports from Greece. A central planner will argue that Germans must learn to like olives because that will save not only Greece but the entire eurozone.