Questionário

Thursday 30 April 2015

Capitalist or consumer sovereignty

As it is in the nature of humans to protect acquired advantages by all possible means, we cannot expect leading capitalists to always uphold free competition and other fundamental principles of capitalism.

On the contrary, consumers do not face a similar conflict of interest. If they already have a good product or service they still look out to replace it with another even better. This has led some to view capitalism primarily as a system of consumer sovereignty, usually defined as “the power of consumers to determine what goods and services are produced”.

For instance, Mises argued that capitalists and entrepreneurs “are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain's orders. The captain is the consumer. (Bureaucracy, "Profit Management," p. 226 )

On the contrary, the opponents of capitalism see it as a threat to consumer sovereignty by claiming that for-profit firms will manipulate dispersed and unorganized consumers in order to maximize their profits. These critics substitute or supplement the old Marxist class struggle between labor and capital with a new divide between corporations and consumers.

The relative power of consumers and businesses is an empirical matter, but there is no doubt that one is limited by the other and vice versa. Nevertheless, as we move towards a system of market capitalism we know that we are getting closer to the libertarian ideal of consumer sovereignty. On the contrary, if we move towards managerial or state capitalism consumer sovereignty becomes more and more remote.

Two other important issues concern the role of capitalism in innovation and health safety in relation to new products and processes. In some areas, like fundamental research, it is obvious that consumers' demand cannot be at the helm. Here, the other two sectors – voluntary and state – are better placed to establish mundane or far-fetched objectives, even when they are contracted to the private sector (e.g. space science).

Regardless of whether such programs are promoted by special interest groups (namely the suppliers and producers of such items) or by public interest, there is a need for some sort of arrangement between consumers and capitalists.

So, overall, capitalism is better described as a system of shared consumer sovereignty. A system where the long term self-interests of capitalists work as an incentive to invest in businesses with strong consumer awareness.

The relative preference of consumers for material and spiritual wants can be influenced by the business, voluntary or the state sector, but in no circumstances should any of the three sectors have the power to unduly coerce individual consumer decisions. That is why the freedom of contract and the rule of law are two important principles to protect the capitalist system as a system of shared consumer sovereignty.

Tuesday 28 April 2015

Wage devaluation: Why Brussels insists on this mistake

The Brussels consensus keeps insisting that to solve the external adjustment problems in the peripheral countries they need a major wage devaluation. They ignore both theory and experience showing that wage and currency devaluations are substantially different and that even the later has limited success in balance of payments adjustment. Moreover, they also ignore the macroeconomic debate and experience on money illusion concerning the differences between real and nominal wage declines.

They persist in their recommendation despite a failure of the current adjustment programmes to show the benefits of such policy. And, unfortunately, some of the countries are eager to accept them unquestionably. For instance, some supporters of the Irish Fine Gael – Labour coalition are calling for a €2 an hour cut (25%) in the minimum wage fixed since 2007 and which is paid to less than 5% of the labour force. Slovenia, has in place measures aimed at cutting the public sector wage bill. Likewise, in Portugal both the government and the main opposition party are disputing the next general election with a proposal to cut the taxes on wages (the so-called TSU).

Regardless of whether nominal wage costs are reduced through cuts in the minimum wage, public servants pay cuts or labour tax reductions, the relevant assessment is how wage cuts impact on take home pay and employer total labour costs, as well as in the government budget.

The following charts drawn from OECD data illustrate some of the misconceptions about nominal wages.



The chart above depicts the evolution of manufacturing hourly wages in Germany and the peripheral countries. It shows that, as expected, they have risen in all countries, except in Portugal.

Now, with rising wages, the so-called labour unit costs (the measure often used to assess competitiveness) will also rise unless productivity gains outpace such rise. The following chart shows that, except in Germany for the period before the 2008 crisis, none of the countries achieved the necessary rise in productivity.



The case of Portugal is especially noteworthy. Since it did not experience a rise in hourly wages, the rise in unit labour costs means that it had a serious decline in productivity. However, the link between hourly wages and unit labour costs does not work only through productivity. Two other factors – employment and nominal wages - also play an important role. Let me illustrate it through a numerical example for Germany and Portugal.

Imagine that the high wage sectors employ 30% and 40% in Portugal and Germany, respectively. Moreover, assume that wages and productivity are 50% higher in the high wage sectors and two times higher in Germany than in Portugal, so that both countries would have the same unit labour costs. What would happen under three different scenarios?

First, imagine that nothing changed in Portugal but in Germany wages continued to rise at 1% and 2% in the low and high wage sectors, respectively. In this case the unit labour costs would rise 1.5% in Germany but remained constant in Portugal.

Next consider the case where additionally 10% of the labour force in the Portuguese low wage sector migrates to Germany increasing the low wage labour market there by 3% without affecting the sector’s average wage and productivity. In this case unit labour costs would remain constant in Portugal and rise slightly less in Germany (1.49% against the 1.50% of the first scenario).

Finally, ponder the case where nominal wages and productivity are cut by 5% in the Portuguese high wage sector. In this case the result would be exactly the same as in scenario two. Only if productivity had not declined as much as wages would we have a reduction in unit labour costs. For instance, if productivity had declined by just half of the nominal wage cut the unit labour costs would be reduced by 1.05% continuing to assume that the labour force in the low wage sector had been reduced or just 0.99% if there was no change in its labour force.

This relationship between employment, wages and productivity depends on how much workers take home out of their salary and whether retained earnings are used to pay taxes or fund pensions. The following chart highlights once more the striking difference between Portugal and Germany in the aftermath of the 2008 crisis.



It can be observed that, on average, the Portuguese took home almost less than 10 percentage points while the Germans took home more than before (1 percentage point). Such a drastic reduction had a dramatic effect on nominal contracts (in particular mortgage loans) and on private consumption. If continued, this could degenerate in a vicious circle of reduced productivity, higher unemployment, higher public debt, higher taxes, lower take home pay and lower productivity, without achieving any significant reductions in relative unit labour costs.

Now, contrast this policy with a policy without nominal wage cuts. Using the numerical example given above and assuming that productivity declined by merely half a percentage, then the rise of unit labour costs would be barely noticeable (0.2%) and the negative impact on unemployment and fiscal consolidation would be much smaller.

In conclusion, the small gains in relative labour unit costs achieved through wage devaluation are too small to justify the large costs in terms of employment and fiscal consolidation.

Friday 24 April 2015

Catholics against Soares dos Santos

Left-wing politicians are not alone in disliking capitalism for liberating the poor from their franchise on gloom and doom. Some religious leaders also dislike capitalism because they fear that it alienates the poor from their charities.

The charities’ attitude against capitalism is often based on an apparently solid ground. Namely, on the immorality of wealth and the charge that profit-seeking merchants abuse their power of influence to promote inappropriate patterns of consumption among the poor and vulnerable, be it booze, junk food or tobacco.

An illustrative episode on this rash analysis took place recently in Portugal, when a group of Catholics signed a manifest against the award by the Catholic University of the prize “Faith and Freedom” to a well-known capitalist - Soares dos Santos. We will use it to illustrate the issue.

Soares dos Santos is an outspoken and successful Portuguese retailer who recently came under strong criticism for causing a public run into his stores by offering a 50% rebate on all purchases made on labor day (the 1st of May). The Trade Unions were outraged when workers went shopping rather than attend their rallies.

The Union’s reaction was understandable, but the reaction of the protesting Catholics was centered on the grounds that: “he had amassed his colossal personal fortune, through capital gains and accumulation, labor exploitation, and tax dodging” in an economy that “kills, through poverty, massive unemployment, increasing inequality and serious environmental risks”.

This was clearly a mashup between Marxism and the Gospels maxim that: “blessed are the poor in spirit, for theirs is the kingdom of heaven” and that “it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the kingdom of God”.

In fact, Soares dos Santos business success resulted from a strategy of deploying mid-sized supermarkets offering a choice, price and quality somewhere between the local shop and the large supermarket and had nothing to do with business malpractices. So, were his critics simply committing the deadly sin of envy or something else?

They were adopting a puritanical ideal that views wealth as an obstacle or offense to the Christian faith, the ideals of corporatism or the theology of liberation. Whatever the religious movement it is clear that the Church has always been reluctant to accept the liberating role of capitalism. Good Christians practice charity as a way of personal redemption and favor before God and not to eradicate poverty.

To some extent religious charities face the same problem as governmental agencies. If they eradicated poverty they would end up without a job. So, maybe unconsciously, they are more prone to accept economic systems that cause misery (like socialism) than to endorse the most successful system to reduce poverty (capitalism).

For instance, Pope Francis in his Apostolic Exhortation recovered the old criticism of capitalism that “Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world”. Then he wrote that: “This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

Others, like Theos, a London-based religious think-tank, took a more friendly stance in their document: "Just Money: How Catholic Social Teaching can Redeem Capitalism".

Although advocates of capitalism do not see a need for redemption, one should consider whether the policies advocated to correct the excesses of market fundamentalism are market perfecting or another remake of social democratic policies for a managed capitalism.

In this regard, the document is vague and mixed. It takes its inspiration from the 1892 Rerum Novarum encyclical, which inspired corporatism, as well as on John Paul’s Centesimus Annus of 1991 and the 2013 exhortation Evangelii Gaudium of Pope Francis, which are critical of capitalism.

The proposed Blueprint for a Better Business based on Catholic Social Teaching offered the following five principles for an ethically based business: 1) a good business is honest and fair with customers and suppliers; 2) good business is a good citizen, in that it considers each person affected by its decisions; 3) has a purpose which delivers long-term sustainable performance, operates true to a purpose that serves society, respects the dignity of people; 4) has to be a responsible and responsive employer; and 5) is a guardian for future generations, because it honours its duty to protect the natural world and conserve finite resources, contributes knowledge and experience to promote better regulation to the benefit of society as a whole.

However, with the possible exception of principle five on externalities, ever since Adam Smith’s Wealth of Nations, all these principles have been shown to be better achieved through market competition rather than moral preaching.

To conclude, the Catholic Church has a legitimate part in calling for a greater role of the voluntary sector in capitalist economies, but these platitudes on business ethics add nothing to market perfecting policies and open a wide door for all kinds of wishful thinking aimed at diluting the fundamental principles of capitalism. Therefore, the Church is doing a disservice to its members by confusing reasonable concerns about the limitations of capitalism with a wide system failure.

Wednesday 22 April 2015

The left bias against McDonald's

Given the ethics of capitalism and its closeness to a meritocracy it is a mystery why so many dislike it. Of course, the ruling classes in the alternative systems do not like having their position in the established social hierarchy challenged by the new capitalists. Nevertheless, since feudalism, corporatism and communism (partly) have disappeared some time ago it is surprising that so many still continue to dislike capitalism.

The reasons may be analyzed through different angles – social class, political divide, ideology and history. For instance, the left-wing opposition to capitalism can be illustrated through the frequent attacks on McDonald’s restaurants by anti-capitalists protestors.

Given that left wing ideologues are often driven by envy and a false-hearted love for the poor and aversion of the rich, it seems paradoxical that they choose to vent their ire on a restaurant that serves well the poor rather than on a luxury stores like Prada or Bugatti which serve the rich.

McDonald’s is a successful American company in the fast food industry, which now owns 30,000 franchised branches in prime sites in over 120 countries. Its success is mostly due to its ability to offer quality fast food at affordable prices in clean restaurants to a diversified, mostly young, clientele. So, it may be heralded as the symbol of the efficiency of capitalism.

Yet many in the left see McDonald’s as American, authoritarian, abusive of animals, exploitative of workers, unhealthy, unecological, and ruthlessly profiteering. Let me examine some of these claims.

The anti-Americanism endorsed by the left is largely a result of the cold war. And, because many in the left were on the communist side, they needed an American symbol to attack beyond the USA flag. Now, after the collapse of communism, its former supporters sought to rationalize their past ideology by turning to protectionism and anti-globalization. Again, McDonald’s, with its restaurants in every major city of the world, provided a visible symbol of globalization.

In the same way, the left sought new constituencies. For instance, by claiming that McDonald’s was authoritarian as it forced its franchisees to stick to the company brand. Afterwards, since they could not contest McDonald’s superior sanitary levels in the fast food industry, they turned to animal lovers by claiming that it was abusive of animals.

In fact they omit the fact that McDonald’s does not run any farms. However, because they are the main purchasers of some farm produce they want McDonald’s (not the governments) to force its suppliers to follow the demands of the animal rights groups.

The same tactic is used by environmental movements with arguments that are even more ludicrous. For instance, some blame McDonald’s rigorous demand for consistent ingredients for the existence of large chemical conglomerates like Monsanto or Cargill producing soil-damaging fertilizers.

The charge that an irresponsible marketing used by McDonald’s promotes unhealthy diets and obesity is also common.

It is true that kids today do not follow good diets. But can the Big Macs or Chicken Nuggets be blamed for that? Obviously not. The blame lies with their families and schools which, for financial and work reasons, have progressively replaced home-cooked food with cheap frozen meals and takeaways.

Indeed, one of the reasons why McDonald’s is so popular with kids is that they consider a meal there as better than the takeaway around the corner or the fish fingers they eat at school. If anything, the McDonald’s experience shows that it is possible to offer decent meals at an affordable price.

It is not necessary to be an economist to understand that in economies run on a pro-profit basis quality will take over cheap production, since a race to the bottom inevitably condemns its players to failure in a growing economy.

So, the left’s dislike of McDonald’s is fundamentally ideological. Because it epitomizes a living proof that profit-seeking benefits the poor, they see McDonald’s as a threat to their own propaganda.

Tuesday 14 April 2015

O salário mínimo e o desemprego

Muitos economistas, especialmente entre os de inclinação libertária, colocam uma enfâse excessiva no contributo do salário mínimo para o desemprego, especialmente entre os jovens.

No entanto, uma simples leitura dos dados em dez países da zona euro deixa muitas dúvidas sobre a importância desse impacto.

Como podemos observar na seguinte tabela onde ordenamos os países em função do valor do salário mínimo, houve evoluções muito diferentes.



Entre os países com um salário mínimo elevado, a Irlanda diminui drasticamente o seu valor, enquanto Portugal o subiu significativamente. Entre os países com salário mínimo mais baixo, também a Eslovénia e a Estónia o aumentaram significativamente, enquanto a Grécia e a Espanha o desceram moderadamente.

Entretanto, a respetiva evolução em termos de desemprego apresentada na tabela abaixo mostra-nos o seguinte:


Entre os países que começaram o milénio com salário mínimo elevado e baixo desemprego (Irlanda e Portugal) o desemprego triplicou, enquanto nos países com salário mínimo baixo a Estónia começou com um desemprego muito elevado mas reduziu-o a quase metade mas já a Eslovénia começou com um desemprego moderado mas aumentou-o em cerca de 50%. Entretanto a Espanha e a Grécia que começaram com desemprego muito elevado ainda o aumentaram para mais do dobro.

É óbvio que a evolução dispare de países como Portugal e Irlanda ou da Estónia e Eslovénia questiona qualquer relação forte entre a evolução do salário mínimo e do desemprego.

E, em relação aos países com programas de ajustamento, também é evidente que a evolução pós-2010, foi fundamentalmente determinada pelas consequências da crise de 2008-2009, ampliadas pelos respetivos programas de ajustamento no caso da Grécia e de Portugal.

Note-se no entanto que apenas na Grécia ocorreu uma redução significativa do salário mínimo durante o programa de ajustamento, precisamente o país onde se atingiram níveis de desemprego mais elevados.

Em conclusão, se quisermos identificar as principais causas do desemprego é melhor procurar outras causas que não o salário mínimo.