23 things they don't tell you about Capitalism

This is a summary of the book '23 things they do not tell you about capitalism'

I recently read the book what they do not tell you about capitalism and found it fascinating. I think everyone should read the book. Having said that, if you are not the kind to take the time to read the book, read this summary!

There is nothing called a free market. In free-markets monopolies would not be constrained. Environmental laws won’t exist and child labour would be allowed. The govt always takes a position. So long as the position is agreed upon by the participants they are willing to call it free. Often the position of the government helps the participants thrive, but they are always passing of regulated markets as free.

We talk about shareholder value maximisation. But in the tussle between shareholders and stakeholders, the former can move out at a whim the latter cannot. An employee cannot leave a company on any given day or on a whim. But a shareholder can liquidate their position in the company. Therefore they do not care about the long term viability of the company and only the short term viability. This leads to higher dividends, share buybacks etc which could be retained to invest in the long term or to survive a bad day. Companies have therefore stopped investing in the long term.

You can understand why there is a chip shortage now!

It is not that the western worker is 50 times more productive than a Chinese worker. It’s just that he is offered protectionism through curtailed immigration. 

A washing machine caused a greater economic upheaval than the internet. It brought 75% more women into the workforce and therefore reduced preference for the male child. We tend to underestimate the effect of things that we take for granted.

Economics assumes everyone is selfish and the only way to get high output is by harnessing selfishness. If you only see the worst in people. That is all you get. There are other instincts that people have that can be harnessed to bring out the best in them. 

Economists sought out only price stability and thereby focused on inflation but this has brought with it job instability. Price stability is only one piece in the economic stability puzzle. Higher inflation leads to price rise and hence to wage rise. A low inflation environment is only good for business owners and money managers. Like a frog boiling in the water, the worker class watches its wages lose value without knowledge of it in a low inflation environment. Low-interest rates and low inflation imply that the only favourable opportunities lie in financial products and not in making investments in people. Free market policies have increased job insecurity. High inflation makes financial assets less interesting. 

Almost all rich countries are rich because they did not pursue a free market policy to get there. Especially not US and British. America had a protectionist policy till 1890 and Britain till 1860. Just like you send a child to school instead of asking them to compete in the labour market different economies need different policies. 

While many companies claim to be multi-national almost all of them tend to be controlled in one nation and hence incapable of respecting the needs of the other nations they operate in. If the choice is between producing microchips, wood chips or potato chips, FDI is unlikely to produce microchips in a foreign country. 

The US has a higher standard of living only because the cost of services are low due to immigrants. Also, the higher standards of living are accessible to only a few. 

Making the rich people richer, will not make the rest of us richer. The highest per capita growth registered during the golden age of capitalism in the 1950s was at a time when taxes were high in the western world. Since the 80s downward pressure on taxes increased and so did the income inequality. 

To keep executive pay high, executives (managers who run companies - also called CEOs) dole out huge dividends to keep the shareholders from questioning their pay and put downward pressure on the workers and hurt their compensation. Further, if the CEO fails, there are no consequences or punishments. They are usually given a fat severance. 

Self-interest will protect people only when they know what is going on. Most people including fund managers have no idea what is going on. Our ability to accurately calculate risk is horrifically poor. 

Education has no relationship with the performance of the economy. Most things taught in school and college are not even useful in the real world. Everything is learnt on the job. In fact, capitalism uses mechanisation to de-skill the workers so that they are replaceable. Education is merely an act of robbery.

The absence of regulation will destroy a business. Often regulation is what keeps industries alive. Businesses will destroy common pools of resources if left unregulated. Developing countries end up destroying their economies by deregulating so that the Americans find it easier to open business. 

Equality of opportunity is only real when one can take advantage of that equality. What is the point of providing equality to every kid to enter a university when they do not have the capability to take advantage of it perhaps because they cannot afford it or do not have the books to prepare for it. Do they really have access to equal opportunity? 

The welfare state for workers is the same as the bankruptcy law for businesses. It makes people bolder and allows them to take up work in sunrise industries rather than stick conservatively to established industries. 

Financial markets are too optimised for their own good. If you were to set up a factory and create value it is going to be a decades-long process and real value creation takes time. Financial assets are too liquid and too easy to move around hence people seek short term returns even at the cost of hurting the entire system like they did in 2008. Long term investments are destroyed. 

Almost no economic success was produced by economists.