LVTFan's Blog

George Bernard Shaw: 1885 speech on private property and privilege

Interesting comments on a number of things, including doctors, slaves, soldiers, income inequality, sobriety, thrift, poverty,  

Some excerpts:

Bad as we are, I believe that if we all understood how we are living, and what we are doing daily, we should make a revolution before the end of the week. But as we do not know; and as many of us, forseeing unpleasant revelations, do not want to know; I can only assure you that I am in perfect concord with standard economists when I state that competition is the force that makes our industrial system self-acting. It produces the effects which I have described without the conscious contrivance or interference of either master on the one hand, or slave on the other. It may be described as a seesaw, or lever of the first order, having the fulcrum between the power and the weight.

and

The so-called right of private property is a convention that every man should enjoy the product of his own labour, either to consume it or exchange it for the equivalent product of his fellow labourer. But the landlord and capitalist enjoy the product of the labour of others, which they consume to the value of many millions sterling every year without even a pretence of producing an equivalent. They daily violate the right to which they appeal when the socialist attacks them. Nor is their inconsistency so obvious as might be expected. If you violate a workman's right daily for centuries, and daily respect the landlord's right, the workman's right will at last be forgotten, whilst the landlord's right will appear more sacred as successive years add to its antiquity. In this way the most illogical distinctions come to be accepted as natural and inevitable. One man enters a farmhouse secretly, helps himself to a share of the farm produce, and leaves without giving the farmer an equivalent. We call him a burglar, and send him to penal servitude. Another man does precisely the same thing openly, has the impudence even to send a note to say when he is coming, and repeats his foray twice a year, breaking forcibly into the premises if his demand is not complied with. We call him a landlord, respect him, and, if his freebooting extends over a large district, make him deputy-lieutenant of the country or send him to Parliament, to make laws to license his predatory habits.

 

MR. G. BERNARD SHAW ON SOCIALISM.

Shiller: Too Many Graduating Seniors Go Into Finance

One might be led to ask, how many is enough, and how we might go about encouraging our best and brightest into careers that serve others instead of rent-seeking.  Two generations ago, many became doctors, engineers and teachers.  

• What changes in public policy will reduce the returns now funneled so generously to the rent-seekers, leaving more for the folks who labor in the productive sectors of the economy?  
• Why do we pay so little attention to rent-seeking?  
• Why is rent-seeking taught to our MBAs, but the impacts of rent-seeking not taught to our liberal arts, social sciences, political science, public policy students?   
• D'ya think that the rent-seekers might really really like it this way??

Shiller: Too Many Graduating Seniors Go Into Finance

http://www.moneynews.com/Economy/Shiller-financial-field-speculative/2013/09/25/id/527558

Too many of the our brightest people may be choosing careers in finance, undertaking economically and socially useless — and even harmful — activities, Robert Shiller, a Yale University economics professor, writes in an article for Project Syndicate.

A survey of elite U.S. universities showed that 25 percent of Harvard graduating seniors, 24 percent of Yale graduating seniors and 46 percent of Princeton graduating seniors were going into financial services in 2006, notes Shiller, co-creator of the Case-Shiller home price index. 

While those proportions have fallen more recently, he explains that might only be a temporary effect of the financial crisis.

And more are going into speculative fields like investment banking rather than traditional finance such as lending, he says, citing a study by Thomas Philippon of the Stern School of Business, New York University and Ariell Reshef of the University of Virginia. 

We need some traders and speculators, Shiller concedes, as they provide some useful service — sorting through information about businesses and trying to judge their real worth.

"But these people's activities also impose costs on the rest of us," he explains. Much of their speculation and deal making is "pure rent-seeking." 

"In other words, it is wasteful activity that achieves nothing more than enabling the collection of rents on items that might otherwise be free."

Those working in speculative finance fields are like a feudal lord installing a chain across a river to charge fees on passing boats, he argues. Making no improvements to the river, the lord does nothing productive and helps no one but himself. Few people will use the river if enough lords put chains across it to collect fees. 

Those working in speculative fields, he says, "skim the best business deals, creating a 'negative externality' on those who are not party to them."

For example, they can reject bad assets, such as subprime mortgage securities, offloading them to less knowledgeable investors. 

The repeal of the Glass-Steagall Act, which blocked commercial banks from investment banking, allowed bankers to act more and more like those feudal lords collecting fees.

"In fact, the main advantages of the original Glass-Steagall Act," he says, "may have been more sociological than technical, changing the business culture and environment in subtle ways. By keeping the deal-making business separate, banks may have focused more on their traditional core business."

A paper by economists at Columbia University and Princeton published on the Social Science Research Network website showed that over-the-counter (OTC) traders allowed informed dealers to extract excessive rents and to undermine organized exchanges by "cream-skimming" the best deals. 

"The informational rents in OTC markets in turn attract too much talent to the financial industry, which would be more efficiently deployed as real-sector entrepreneurs," the paper asserts.

Plus, OTC dealers' rents tend to increase "as there are more informed dealers, because the greater cream-skimming by dealers worsens the terms entrepreneurs can get for their assets on the organized exchange, and therefore their bargaining power on OTC markets."

Louis F. Post on Laissez faire (1909)

I'm skimming Louis Post's book "Social Service" (1909) and came across a couple of elegant paragraphs about Laissez faire.

Doesn't unrestricted competition mean to let everybody alone? That depends upon what you mean by letting alone. It does not mean to let everybody or anybody alone to interfere with production, with rendering service, with industry. Such interferences, whether by government or by highwaymen, are precisely what ought to be stopped in the interest of unrestricted competition. Unrestricted competition does mean that everybody should be let alone in production, in trade, in service, in usefulness to his fellows, in making the world better and richer, and in securing a fair distribution of service among those who render service.

Truly enough, "laissez faire" is the word — "let alone," that is the watchword of competition. But it isn't all of it. As the old democratic economists of France put it — those preceptors of Adam Smith — it was "laissez faire, laissez aller." Now, how would you translate that, Doctor? Don't you think that George's free translation of "a fair field and no favor" will do? Or we might make it "a square deal and no odds," or best of all, maybe, "equal rights and no privileges."

There is no competition in the policy of "let alone," unless you abolish privileges. But with equal rights and no privileges, can you imagine anything fairer or squarer or juster in industry, in trade, in social service, than the policy of "let alone"? This doesn't mean a "struggle for existence and survival of the fittest" in the sense of survival of the strong at the expense of the weak, nor even of survival of the more productive at the expense of the less productive. It means fair distribution in proportion to production. It means that he who renders the most and the best service in his specialty shall get the most and the best service from other specializers, while those who render the least and the poorest shall nevertheless get the equivalent of what they do render. And it leaves the decision to those who in equal freedom make the deal for the service.

Competition is the natural regulator of the law of the line of least resistance. Without such regulation that law might stimulate the strongest — not the strongest in rendering service, but the strongest in extorting service — to get service without giving an equivalent service of his own. There is your savage "tooth and claw" condition, Doctor. But under free competition this would be impossible, for free competition restrains the individual desires of each by the opposition of the individual desires of others. In other words, competition tends to produce an equilibrium of the self-serving impulse at the most useful level of social service.

It is a word of confusing connotations, this word "competition," as are all living words; and it may not be the best word for conveying my idea. But I can't manufacture words, Doctor. All I can do is to make unto myself a definition, and always to use my word in that sense; and all I can ask you to do is to adopt my definitions when you try to understand my discourse.

Though competition may not be quite synonymous with natural co-operation, it is closely related to it, and in such a manner as to justify me, I think, in characterizing it as the life principle of natural co-operation.

Monopoly, on the other hand, whether its purpose be malevolent or benevolent, is the death principle of natural co-operation.

So it seems to me that you will grasp the significance of competition best by contrasting it with monopoly.

To sum it all up, there are only two ways of regulating co-operative service, that social service which springs from individual desires for selfservice. One way is by monopoly; the other is by free competition. Monopoly is pathological, and socially destructive; competition is natural, and socially creative.

Ed Dodson's excellent library resides on the website The School of Cooperative Individualism

Louis F. Post was editor of Henry George's weekly newspaper, The Standard, for a year or so, and went on to edit The Public for a number of years, and then became an Assistant Secretary of Labor in Woodrow Wilson's administration.

When Historians are Paid $25,000 a Month

He is ignores history is doomed to repeat it.

So those who understand the past ought to be well paid to share their understanding with society.

One of the current presidential candidates claims to understand his claims to a fabulously high income in this light.

His payment came from an entity which thought his intellectual offerings, or something he had to offer, worth the price.

The question is, who is paying the larger price for this?  And why should it be this way?

 

And we need to be thinking about what those who teach history -- and other subjects -- to our children and young scholars ought to be paid.  What do we value? 

• Financial engineering, or physical engineering of various kinds? 
• Medicine or Corporate Finance? 
• Understanding history, or the fine points of real estate speculation?
• Enriching oneself, or acting in ways that create a more prosperous and stable economy for all of us?

 What fields should attract our best and our brightest?  And what should the rewards be?

I heard a snippet on the radio this morning -- something about waking up in the morning trying to figure out how to provide for one's family.  It wasn't about providing trust funds for one's family, but about providing the basics. 

Shouldn't our society's best minds be encouraged to examine our history in search of better ways to structure things so that life is not such a struggle for the ordinary human being?

(And maybe a critical mass would discover that Henry George had some useful and relevant observations and recommendations toward that goal.

Don’t Tax the Rich. Tax Inequality Itself. - NYTimes.com

Don’t Tax the Rich. Tax Inequality Itself. - NYTimes.com.

THE progressive reformer and eminent jurist Louis D. Brandeis once said, “We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.”

What we call the Brandeis Ratio — the ratio of the average income of the nation’s richest 1 percent to the median household income — has skyrocketed since Ronald Reagan took office. In 1980 the average 1-percenter made 12.5 times the median income, but in 2006 (the latest year for which data is available) the average income of our richest 1 percent was a whopping 36 times greater than that of the median household.

Brandeis understood that at some point the concentration of economic power could undermine the democratic requisite of dispersed political power. This concern looms large in today’s America, where billionaires are allowed to spend unlimited amounts of money on their own campaigns or expressly advocating the election of others.

We believe that we have reached the Brandeis tipping point. It would be bad for our democracy if 1-percenters started making 40 or 50 times as much as the median American.

Enough is enough. Congress should reform our tax law to put the brakes on further inequality. Specifically, we propose an automatic extra tax on the income of the top 1 percent of earners — a tax that would limit the after-tax incomes of this club to 36 times the median household income.

Importantly, our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down.

The authors go on to mention that they're both 1%-ers (presumably 1%-ers by income, not by wealth, though they use terms interchangeably in a way that seems very odd for people with any training in economics. Further, I am surprised they are as innumerate as their "solution" would suggest.

Their proposal is that each year the IRS would do some calculations based on "the average 1%er:"

Here’s how the tax would work. Once a year, the Internal Revenue Service would calculate the Brandeis ratio of the previous year. If the average 1-percenter made more than 36 times the income of the median American household, then the I.R.S. would create a new tax bracket for the highest 1 percent of income and calculate a marginal income tax rate for that bracket sufficient to reduce the after-tax Brandeis ratio to 36.

This new tax, if triggered, would apply only to income in excess of the poorest 1-percenter — currently about $330,000 per year. Our Brandeis tax is conservative in that it doesn’t attempt to reverse the gains of the wealthy in the last 30 years. It is not a “claw back” tax. It merely assures that things don’t get worse.

What this doesn't account for is the wide range of incomes within the top 1%.  Should the folks in the bottom half of the top 1% be penalized indiscriminately for what the folks in the top half are "earning?"  Why?  Whose activity are we attempting to penalize?   When a Bill Gates, or big deal football player,* or a so-called "small businessman" selling his company to a roll-up receives a huge windfall, should the $250,000 per year doctor be taxed?   Why should the latter be in the same bracket with the windfall folks?    And the fellow selling his company gets taxed at the 15% "capital" gains rate, well below what working people get hit with.

*Why is the football player on this list?  Well, in part because I see that I am paying $100 per year to the NFL via my cable TV bill.  I am thus taxed to provide him his windfall.  My tax doesn't go through any government entity, but is in my cable bill.

I don't think Justice Brandeis would think Ayres and Edlin have proposed a good solution to the problem.  They're nibbling at the leaves, not hacking at the root.

The article sent me off to read some of Brandeis's work, including "Other People's Money, and How the Bankers Use It," (published as a series of 10 articles in Harpers Weekly in 1913 and as a book in 1914). Here is the table of contents for the book:

I Our Financial Oligarchy 1
II How the Combiners Combine 28
III Interlocking Directorates 51
IV Serve One Master Only! 69
V What Publicity Can Do 92
VI Where the Banker is Superfluous 109
VII Big Men and Little Business 135
VIII A Curse of Bigness 162
IX The Failure of Banker-management  189
X The Inefficiency of the Oligarchs  201

The letters to the editor published today don't speak to the issue either.  For instance,

Ian Ayres and Aaron S. Edlin write, “It would be bad for our democracy if 1 percenters started making 40 or 50 times as much as the median American.”

Are Bill and Melinda Gates a great threat to democracy? Jeff Bezos? Oprah Winfrey? Mayor Michael R. Bloomberg? I fail to see how those who have amassed great fortunes in America threaten American democracy.

They do not plot coups or finance fascist militias. They do, however, give lots of money to wonderful charitable and educational organizations.

He's chosen some people who have built up monopolies, and have helped to drive other businesses into the ground, and in at least one case, used a great fortune to influence elections; and it might be worth mentioning what people like the Koch Brothers have done, and others will do, now that "corporations are people" and have free speech rights.  Bloomberg managed to derail the term limits laws in his city.

Wouldn't we be better off examining privilege, and eliminating it, than indiscriminately taxing productive activity?   Forcing the internalization of externalities.  Playing around with income tax brackets doesn't fix the problem, and it deflects us from going to the source of the problem.

Shouldn't our incentives be set up to encourage our best and brightest to devote themselves to serving others instead of enriching themselves at the expense of others?

High Salaries: Are they earned?

Questions about the sources and rightness of high salaries, particularly in sectors of the economy in monopoly positions or able to skim wealth from the productive economy, are not new.  Here's an editorial from the October 14, 1905, issue of "The Public:"

The envious policy holder

It is perhaps quite natural for policy holders in the Mutual Life to be indignant upon learning that their president gets a salary of $150,000 a year; that his son's salary is $30,000; and that his son-in-law's commissions have amounted to $932,823 since 1893 -- about $75,000 a year.  But let these policy-holding creatures beware.  There is good professorial and priestly authority for saying that indignation like theirs springs from envy, and is the mark of a covetous mind.  Is not the laborer worthy of his hire?

Professorial and priestly authority ... hmmm ... Have you seen the documentary film "Inside Job" yet? (It comes out on DVD in a couple of weeks, I have in mind.)   Have you read Mason Gaffney and Fred Harrison's 1990 book, "The Corruption of Economics"?    Does the phrase "rich people's useful idiots" ring a bell?

A check of an inflation calculator shows that the $150,000 salary referenced for 1904 (paid to the president of a mutual life insurance company!) equates to $4.2 million in 2011.   This onger article comes from the following issue of The Public, the October 21, 1905, issue.  $100,000 then equates to $2.8 million in 2011.    The FIRE sector -- Finance, Insurance, Real Estate -- has been skimming the cream for a long, long time.

MAXIMUM SALARIES.

We have become accustomed of late years to the contemplation of enormous salaries.

The payment of such salaries is sauctioned upon the pretext of the equivalent value of the recipient's services. If a protest against the payment of a hundred thousand dollars a year to the president of a mutual insurance company is offered, the answer is made that the rare qualifications demanded in the manager of such in enormous and complex business not only justify but necessitate the payment of such a salary. "The office demands the highest ability, and a hundred thousand dollars is none too much for that."

Defenders of the high salary sometimes make comparisons between a particular salary in question and certain other salaries of equal value, or salaries somewhat less but attaching to positions of less responsibility, under the impression that such citations establish the equity of their cause. And what is of vastly greater and more portentous significance—the general public, though perhaps doubting, yet not knowing how to answer, suffers the case to go by default.

Yet to the clear thinking man who has a comprehensive knowledge of fundamental economic law, the question presents no difficulties, and the verdict will be promptly and emphatically adverse.

-----

In the common field of wage labor, so called, the arbitrament of competition, though it does not indicate the absolute value of theservice rendered, nevertheless does determine, with some approach to equity, the relative values.

True, competition is not free even here; some wages are artificially advanced. But the discrepancy is insignificant in comparison with the difference between, say, the $8,000 salary of a judge and the $150,000 salary of the president of an insurance company. Some carpenters may receive 30 percent higher wages than some other carpenters of equal capacity; but some salaried men receive 1800 percent more than others of equal capacity!

Yet the claim that such enormous salaries are necessary in order to secure the services required, is equivalent to asserting that the salaries are competitive A very little reflection should expose the absurdity of that claim.

President Alexander, of the Equitable Assurance Society, received a salary of $100,000. With whom was he in competition? Did he ever have a chance to get such a salary in any other connection? Will he ever have another chance?

Mr. Paul Morton has succeeded Mr. Alexander, as being fitter for the place, at a reduction of $20,000 in salary. But if the salary were competitive, Mr. Morton being conceded to be much the better man for the place, would have received an advance, instead of a cut.

Of course, in this particular case, the real reason of Mr. Morton's voluntary acceptance of the reduced salary was that the United States public was in no mood to be trifled with at the moment. Mr. Morton, and everybody else, knew perfectly well that a considerable part of the $100,000 salary was graft, pure and simple, and as the ostensible purpose of his selection for president of the company was the elimination of its scandalous excess of graft, he wisely began where the permanent graft was greatest—in the president's salary.

But the salary still is $80,000. Is it an equitable salary? Or (to get away from this particular case, which I have cited only as a means of illustration), are the notoriously large salaries justified by the services rendered by their recipients?

No. And that they are not is easily demonstrated.

----

If any individual is entitled to higher pay than another, it is because he renders greater service to society than that other. The interposition of the employer between the workman, for instance, and the public does not alter the case. The most efficient group, including employer and employes, will outstrip the less efficient in the competition—that is, in service to the public—and will, as a group, receive cominensurately a greater reward.

The law holds, either as to the individual or the group of individuals. The question of reward does not depend upon the amount of an individual's product, but on the amount that he imparts. He must get his reward by exchanging his product for the product of others; and therefore in order to get more than his competitors he must impart more.

That would be the case if the principle of competition were universally free to act. And the moment that you exempt an individual from the law of competition you thereby concede his inability to command an increased reward without such exemption. Else why exempt him? By exempting him you help him to an increased income; an increase which he could not get without such help, and which, therefore, he does not earn, but receives by special privilege.

Since, then, naturally—that is, under purely competitive conditions—increased reward comes only from increased service to society, it follows that under such conditions an exceptionally high salary would indicate a general rise in the level of social conditions; and that a large number of very high and frequently advancing salaries would indicate a very much improved and frequently rising general standard of living, reaching down to the lowest level of wage-earners.

I repeat that the rapidly rising standard of living would embrace the common laborer. This is the most important fact of the whole problem. The laborer's wage is the criterion of general service value. All advance in income starts from the wage-level of Common Labor. All advance in service-value, therefore, starts from the service-value of Common Labor. The test of alleged exceptionally high service-value, is, therefore, the condition of the Common Laborer.

It follows that if the exceptionally large incomes now prevailing (whether these incomes are in the form of $100,000 salaries or of $1,000,000 profits), are earned, then the condition of Common Laborers generally has risen by leaps and bounds within the last few years.

But statistics prove that in the United States the cost of living has increased beyond any advance in wages. The conclusion is inevitable, therefore, that large incomes exceed the recipients' earnings.

How much do these incomes exceed earnings? No one can tell. The fact of paramount importance for our consideration in this connection is that the great incomes are indisputably beyond the effective influence of those natural laws which tend toward social equity.

The individual laborer's wages are modified by the wages that his fellow consents to work for. The wages of the mechanic bear a manifest competitive relation to the wages of common labor. The profits of the green-grocer, the draper, the teacher, etc., all are competitively related to the wage rate of common labor. Only through exceptional service to those below, can those above maintain their positions in the competitive field.

But there is no comparison whatever between the common-laborer wage and the hundred-thousand-dollar salary. There is no natural relation between them. The wages of the common laborer are the just compensation for valuable service rendered—minus the laborer's enforced contribution to the incomes outside the influence of competition. The great incomes are, at best, in small part compensation for valuable service rendered—plus the maximum of graft that special privilege is able to extort from the occupants of the competitive field; and. at the worst, they are, in their entirety, graft, pure and simple.

---

What should be the maximum salary, or the individual income of whatsoever name?

It should be just what a man can get, under conditions of universal freedom of competition, in a world where natural opportunities are free to all men. Abolish all special privilege, and the man of high abilities would earn his greater compensation as the just reward of benefits imparted to the whole body of society.

Under such conditions all society, including the humblest servitor, would rise in affluence in proportion to the increase in productivity. Which is to say that if our productivity should increase as fast in the next 40 years as it has in the last 40, the poorest class would be ten times as affluent as now, plus its hitherto withheld equity in the current product of today.

Today, the difference between the extremes of income measures the difference between the opportunities of individuals. Abolish all forms of special privilege, and the difference between the extremes of income would measure the difference in the social service of the individual recipients, and the maximum income would be the just reward of the largest contributor to the sum of human welfare.

EDWARD HOWELL PUTNAM.

In India, Many Potholes and Not Enough Engineers - NYTimes.com

In India, Many Potholes and Not Enough Engineers - NYTimes.com.

Despite this nation’s rise as a technology titan with some of the best engineering minds in the world, its full economic potential is stifled by potholed roads, collapsing bridges, rickety railroads and a power grid so unreliable that many modern office buildings run their own diesel generators to make sure the lights and computers stay on.

It is not for want of money. The Indian government aims to spend $500 billion on infrastructure by 2012 and twice that amount in the following five years.

The problem is a dearth of engineers — or at least of civil engineers with the skill and expertise to make sure those ambitious projects are done on time and to specification.

Civil engineering was once an elite occupation in India, not only during the British colonial era of carving roads and laying train tracks, but long after independence as part of the civil service. These days, though, India’s best and brightest know there is more money and prestige in writing software for foreign customers than in building roads for their nation.

Our best and brightest ...

Think about it.  $500 billion in spending on infrastructure between now and 2012.   Those projects are likely to create $1 trillion to $6 trillion in increased land value!

Another $1 trillion in investment in infrastructure between 2013 and 2017.    That will create $2 trillion to $12 trillion in increased land value.

So here's the question.  How should India finance that $1.5 trillion in investment?

• Should they tax the wages of their workers?
• Should they tax the purchases of their workers?
• Or should they collect some portion of that increase in land value year in and year out?

What might America learn by considering what India's options are?