In the first post in this series I explained that capitalism was "invented," or better said, "discovered," on a person by person basis by farmers. I gave you a definition of capitalism that is, rather than using technical terms and theoretical concepts, a statement of how capitalism first arose, and thus should be the constant model for successful understanding and use of capitalism. This definition of capitalism is as follows.
A farming family grows corn for its own survival, since that is what the family and their livestock consumes. This is called "subsistence," which is the bare minimum of necessity that allows the family to survive. When the family reaches a point of stability of production of their "necessary" amount of corn, they may prosper enough to produce more corn than they need, and this extra is called "surplus." Surplus corn is sold in the market for cash. The process by which the surplus is transacted for cash is called "capitalism." The term "supply and demand" is not the same as capitalism, nor is the term "the market," because those are the techniques by which the surplus is produced, priced and successfully sold (or not). Thus those are devices and mechanisms of capitalism, not capitalism itself.
I gave an example of bad decision making in the previous post, where I explain that the ethanol initiative erroneously cut into the subsistence level of corn, rather than focus on producing surplus corn for the express use of ethanol. I chose that example because it's one that received a lot of press plus everyone can understand it. Plus it was an obvious easy step from my "corn" subsistence and surplus definition of capitalism.
Now that you, dear readers, have had a chance to think about my first post on this subject, I want to summarize the error that has crept into modern assumptions about capitalism and also show you another "right out of today's news" example of how to spot the errors and have correct interpretation of statements, perspectives and events instead.
The problem that everyone has with understanding and correctly managing (or laissez faire "allowing" of) capitalism is that they treat the "subsistence" part of the economy and people's lives as if it is the "surplus." That is the great error in contemporary capitalism, and thus it is not true to the spirit of capitalism. Capitalism was never meant to rule subsistence goods and products. Capitalism arose in the global culture whereby individuals and families were able to glean the food and shelter they needed for their own survival with their own hands, so long as they were able bodied and they lived in locations and times when survival was successful. Thus capitalism always referred to surplus products, not subsistence products.
So let's look back to the ethanol disaster model of capitalism done totally wrong. There are two errors. The first is that a product, ethanol, was legislated, rather than coming into development because there was a market demand. Ethanol is an option, not a subsistence essential. Gasoline is, on our modern economy, a subsistence essential. Ethanol is a variation that in theory offered attractive market attributes (domestically produced and allegedly lower emissions). Thus as a non-subsistence product the market should have "demanded" (that is, freely wanted and desired) ethanol, rather than it being legislated as governmental policy.
The second error is that the raw material used in production of ethanol, corn, is a subsistence product, because it is a food that is essential to both humans and livestock, and thus the subsistence level of corn should not have been touched or used by the ethanol "initiative." Surplus corn should have been planned, generated and grown for any ethanol initiative, rather than force a subsistence product, being food and livestock corn, to "go to the market" and allow ethanol producers to exploit subsistence product, thus causing great price and availability instability. As a result "surplus" principles (supply and demand, "the market is always right," and so forth) were forced upon the "subsistence" portion of the equation, which is a grave economic and moral error.
So now whenever you hear someone talk about "supply and demand," "market forces," and "the market is always right," you would be correct and indeed you must insist that those principles apply only to "surplus" product, not "subsistence" product. This is not the same as "price fixing" by the way. I am not saying that subsistence product must be forced to be "affordable." What I am saying is that subsistence product will always be affordable so long as it is not contaminated by the risk that rightly belongs only to the "surplus" side of the capitalism equation.
Therefore, I will give you the first hint of how to think of the mortgage crisis. Housing is, at its basic level, "subsistence," as everyone needs shelter. Housing can be enhanced to be "surplus," in that it can be "more than you need." The economic "masters of the universe" were allowed to force virtually all housing from surplus into subsistence. Only surplus priced (and therefore "risky") housing was offered, and replaced in total the supply of subsistance priced housing. In other words, they raised the prices of all housing to "surplus" levels, and thus put them into the surplus "supply and demand" and "risk" pool, eliminating the supply of "subsistence" low, stable, widely available and safely priced houses. I'm amazed that this disaster survived as long as it did. For twenty years all houses have been deliberately over priced so that people were forced to take "surplus" risk and pay "surplus" prices for what should have been "subsistence" housing. That is not "capitalism," that is looting and immorality. Enabling people who needed subsistence priced housing into surplus priced housing compounded rather than fixed the error, because it allowed all real estate producers, investors and gamblers to maintain surplus housing pricing over the entire economy, forcing the disappearance in total of subsistence priced housing. Thus the "activists" share the blame with the "gamblers," because both colluded to enable that subsistence priced housing disappears and is replaced by surplus priced housing.
I hope this is helpful. I'm sure that is it. In the next post I will show you how to read an opinion piece in a newspaper and identify what part of capitalism (or not) the "experts" are talking about, and the errors (or good points) that they may be making. This will help you to discern the correctness and context of both the "facts" and the experts' "opinions." In future tutorials I will explain how both liberals and conservatives are "wrong," and how they have both forgotten and been herded into an erroneous definition of capitalism.
Showing posts with label ethanol. Show all posts
Showing posts with label ethanol. Show all posts
Sunday, October 5, 2008
Saturday, October 4, 2008
Capitalism is easy to understand and interesting
Forget everything you thought you knew about the "definition" of capitalism. Here is an easy to understand explanation of what it really is, as a springboard from my previous post about history.
Capitalism is what you have when an individual or a family grows enough food to meet their own needs to eat, and also grows an extra amount that it sells for cash. That is the definition and origin of capitalism.
The extra amount of food that is grown is called a "surplus." The fact that it is sold for cash is capitalism. For example, if it was swapped for a different type of food, that is called "bartering" and is not capitalism.
Many people define capitalism as being "the law of supply and demand," but that is not true. Supply and demand is the method by which the family sets and obtains a cash price for their surplus.
For example, cars run on gasoline, but a car was not built because someone was looking for a use for gasoline. Thus supply and demand is like gasoline for a car. It is the method by which the car runs. So supply and demand is the method by which the family prices and then settles on cash for their surplus.
For example, suppose that a family grows corn. They grow enough corn to feed themselves, and some extra that they can sell. One year corn is abundant, so they don't get a very high price for their extra corn. But the next year corn is either scarce due to crop failures or in high demand because of extra usages of corn becoming popular, so the family gets a higher price for their surplus corn than they did the year before. That is an example of supply and demand fluctuating from year to year, and thus an example of "low demand" one year followed by "high demand" the next year.
Here is another example. Suppose a family really likes broccoli. They grow enough to meet their own needs to eat, and also some surplus. But when they go to sell their surplus broccoli they find that no one else has a taste for it like they do. They either cannot sell it or they settle for a low price figuring that even a small amount of cash is gravy since their primary reason to grow the broccoli is their own eating habits. That is an example of supply and demand that illustrates a "low demand" situation.
Farmers invented capitalism. It's not a devious tool of evil western bankers. Capitalism was the natural and healthy outcome of human culture, family by family, raising itself up from subsistence farming (that means farming that yields just enough for the family to be able to eat and not starve) to having surplus that it can sell. Capitalism is as natural as rain. Capitalism has nothing to do with greed and exploitation. Capitalism is grassroots; it sprang up on the family by family boundary between "having just enough to live" to "having something extra to sell." So no one "invented" capitalism and it exists everywhere in all cultural systems. What is invented is the methods of obtaining cash (the demand mechanism), gauging interest in the surplus (the supply mechanism) and the reaching of markets where the deals are struck.
Every family should have this original mindset of capitalism if it wants to be healthy, even though people in developed countries are no longer subsistence farmers. There are several reasons for why this is important. One is that you cannot help impoverished people elsewhere in the world if you do not understand and support this form of capitalism. "Surplus being taken to market" is THE way that people are lifted out of poverty. That is why a "handout" mentality fails. Of course you need to supply emergency and subsistence food, medicine and shelter as stop gap measures. But to raise people permanently out of poverty they must be able to provide for their own needs plus generate a surplus for cash.
The second reason it is important that everyone understand and embrace this origination and definition of capitalism is that it is the prudent and balanced way to view things. I don't need to remind people of the current housing market and financial crisis as an example. Again, let's look at the car and gasoline example. Suppose your car breaks down. Do you yell at the gasoline saying "You stupid gasoline! You made me invent the car and now the car doesn't work! It's all your fault!" That is what it is like when ignorant people blame "capitalism" whenever there is a financial problem or shortcoming. It's like blaming gasoline for your even having a car that then gets a flat tire. It's not the gasoline's fault that you need a car or that things break. Likewise it is not capitalism's "fault" when there is a huge scandal, mess, crime or stupid decision making.
I know it is hard to think about capitalism as a family by family "subsistence plus extra for cash" definition because modern society seems to have come so far from that reality. However, it was only forty years ago that this was still being taught in schools and personally experienced by many families in the US. My grandparents, for example, raised their own food to eat and sold the surplus in the farmers' market to obtain cash. So my generation both saw this in practice and heard about it explained in schools. Again, here is my experience. In the summer of 1962 when we were staying with my grandparents, when my mother needed some cash she joined my grandfather and grandmother up the ladder picking cherries which they then took to the farmers' market to sell. Later in school history teachers taught what I put in the previous post about tribes, clans and flock/herd/land owning explaining the transition that all developing people make family by family from "subsistance" to "surplus." Children used to be taught reality and not agenda.
So whenever one gets confused by complicated financial messes of today, it is very helpful to impose whatever you are hearing upon the original measuring stick of capitalism because it helps you to sort through to the essentials very quickly. Here is a quick example, without getting into a lot of detail.
Everyone today has heard the marketing expression "to create a demand" or to "create buzz about a product." Often that is the average person's first "entry" into even thinking about capitalism, and that is unfortunate but inevitable. Original capitalism springs from a recognized human need (the corn example) that prospers enough that the supply crosses the boundary from subsistence to surplus. Thus one family "has" a surplus of what other families "want and can use." The capitalism transaction is a natural outflowing of what people need and want.
In recent decades, however, product is being envisioned and invented whether it is needed and wanted or not, and then peddled to potential buyers. In other words, people are "convinced" that they need a product before the need actually exists. Now, I'm not being all austere and being against luxuries. But I'm helping you think through what is actually capitalism and what is societal quirks and dysfunctions. Any parent out there knows what I am talking about when they think about how marketers constantly "create a need" among their kids. I remember the days before and after "name brands" became de rigeur among kids, such as for expensive sneakers. If you think back to the original model I have explained here of capitalism, you can recognize the difference between the surplus of an "essential commodity" being taken to market (corn, for example) and some product being invented out of an idea factory and then being "marketed" to potential consumers to "create" a need. There is nothing wrong with having a great idea and then convincing lots of people to buy the product except for one thing: society as a whole starts to forget how to distinguish between "essential commodities" and "created products." There then is a cascading series of risks of displaced emphasis and priority with disastrous effects. The diverting of corn from feed to ethanol is a perfect example of this problem. No one thought through the difference between growing a surplus to provide the corn to a new use (ethanol) and cutting into the subsistence use of corn (feeding people and cattle).
This is so essential that I want to make the point a second time. Because I'm sane and a good economist who actually understands humans I made an assumption when I first heard about the push for ethanol development. I assumed that ethanol producers were paying to take farm land that was now idle and putting it to corn growing. In other words, I never dreamed that they were going to extract the corn out of the food and feed subsistence market. To this day I am still boggled that anyone was so irresponsible and stupid as to do that. I assumed that anyone in their right mind was going to first create a surplus of corn in order to put it to this massive scale new usage (ethanol), and not take the corn out of the mouths of humans and animals. So the ethanol disaster is not the fault of "capitalism," it is an example of how people have become totally detached from discerning the reality of distinguishing between subsistence and surplus "supply."
See what I mean? If you always use this model that I have taught you as your baseline of understanding capitalism in general, then you can put yourself on a knowledgeable basis of foundation for discerning opportunities and pitfalls in even complex decisions and transactions. For example, if I had been consulted (ha ha, dream on) when the ethanol idea first came up, I'd have asked "Where will the corn come from?" This is because being real intelligent I know that corn is an essential foodstuff for humans and animals. I would have assumed, I must confess, that the answer would have been the executives whipping out a list of idle farm properties that they would put into production of new corn growing. My jaw would have dropped if I heard them say they were going to "go to the market" for the corn, which means, compete against humans and animals who actually need and eat this product and thus end up making the price of food skyrocket. Then I'd have b-slapped them, so to speak.
The ethanol disaster is an example of how people have 1) forgotten the basic principle of capitalism which is surplus on TOP of subsistence, not biting into subsistence 2) too often created a demand for a product using fallacious lures and assumptions and 3) lack of discernment of all the pros and cons of a given "product" development. I don't want to be cynical but being a realist there is implication number four: these three problems open the door to a small but powerful clique who know full well the disaster they are about to wreck onto people but are in it to pull out the maximum money that they can before "the gig is up." Thus I suspect that some people knew full well that they'd destroy the food prices for the average Joe and Mary but they locked into commodity and other bets to maximize profit when corn prices spiked and did not care at all whether ethanol "succeeded" or not.
I think this capitalism explanation is helpful in getting people on the same page to understanding a lot of the economic problems (and very hidden opportunities) that people are struggling with globally. As always, I hope the young people in particular find this information a truthful beacon and context setting.
Capitalism is what you have when an individual or a family grows enough food to meet their own needs to eat, and also grows an extra amount that it sells for cash. That is the definition and origin of capitalism.
The extra amount of food that is grown is called a "surplus." The fact that it is sold for cash is capitalism. For example, if it was swapped for a different type of food, that is called "bartering" and is not capitalism.
Many people define capitalism as being "the law of supply and demand," but that is not true. Supply and demand is the method by which the family sets and obtains a cash price for their surplus.
For example, cars run on gasoline, but a car was not built because someone was looking for a use for gasoline. Thus supply and demand is like gasoline for a car. It is the method by which the car runs. So supply and demand is the method by which the family prices and then settles on cash for their surplus.
For example, suppose that a family grows corn. They grow enough corn to feed themselves, and some extra that they can sell. One year corn is abundant, so they don't get a very high price for their extra corn. But the next year corn is either scarce due to crop failures or in high demand because of extra usages of corn becoming popular, so the family gets a higher price for their surplus corn than they did the year before. That is an example of supply and demand fluctuating from year to year, and thus an example of "low demand" one year followed by "high demand" the next year.
Here is another example. Suppose a family really likes broccoli. They grow enough to meet their own needs to eat, and also some surplus. But when they go to sell their surplus broccoli they find that no one else has a taste for it like they do. They either cannot sell it or they settle for a low price figuring that even a small amount of cash is gravy since their primary reason to grow the broccoli is their own eating habits. That is an example of supply and demand that illustrates a "low demand" situation.
Farmers invented capitalism. It's not a devious tool of evil western bankers. Capitalism was the natural and healthy outcome of human culture, family by family, raising itself up from subsistence farming (that means farming that yields just enough for the family to be able to eat and not starve) to having surplus that it can sell. Capitalism is as natural as rain. Capitalism has nothing to do with greed and exploitation. Capitalism is grassroots; it sprang up on the family by family boundary between "having just enough to live" to "having something extra to sell." So no one "invented" capitalism and it exists everywhere in all cultural systems. What is invented is the methods of obtaining cash (the demand mechanism), gauging interest in the surplus (the supply mechanism) and the reaching of markets where the deals are struck.
Every family should have this original mindset of capitalism if it wants to be healthy, even though people in developed countries are no longer subsistence farmers. There are several reasons for why this is important. One is that you cannot help impoverished people elsewhere in the world if you do not understand and support this form of capitalism. "Surplus being taken to market" is THE way that people are lifted out of poverty. That is why a "handout" mentality fails. Of course you need to supply emergency and subsistence food, medicine and shelter as stop gap measures. But to raise people permanently out of poverty they must be able to provide for their own needs plus generate a surplus for cash.
The second reason it is important that everyone understand and embrace this origination and definition of capitalism is that it is the prudent and balanced way to view things. I don't need to remind people of the current housing market and financial crisis as an example. Again, let's look at the car and gasoline example. Suppose your car breaks down. Do you yell at the gasoline saying "You stupid gasoline! You made me invent the car and now the car doesn't work! It's all your fault!" That is what it is like when ignorant people blame "capitalism" whenever there is a financial problem or shortcoming. It's like blaming gasoline for your even having a car that then gets a flat tire. It's not the gasoline's fault that you need a car or that things break. Likewise it is not capitalism's "fault" when there is a huge scandal, mess, crime or stupid decision making.
I know it is hard to think about capitalism as a family by family "subsistence plus extra for cash" definition because modern society seems to have come so far from that reality. However, it was only forty years ago that this was still being taught in schools and personally experienced by many families in the US. My grandparents, for example, raised their own food to eat and sold the surplus in the farmers' market to obtain cash. So my generation both saw this in practice and heard about it explained in schools. Again, here is my experience. In the summer of 1962 when we were staying with my grandparents, when my mother needed some cash she joined my grandfather and grandmother up the ladder picking cherries which they then took to the farmers' market to sell. Later in school history teachers taught what I put in the previous post about tribes, clans and flock/herd/land owning explaining the transition that all developing people make family by family from "subsistance" to "surplus." Children used to be taught reality and not agenda.
So whenever one gets confused by complicated financial messes of today, it is very helpful to impose whatever you are hearing upon the original measuring stick of capitalism because it helps you to sort through to the essentials very quickly. Here is a quick example, without getting into a lot of detail.
Everyone today has heard the marketing expression "to create a demand" or to "create buzz about a product." Often that is the average person's first "entry" into even thinking about capitalism, and that is unfortunate but inevitable. Original capitalism springs from a recognized human need (the corn example) that prospers enough that the supply crosses the boundary from subsistence to surplus. Thus one family "has" a surplus of what other families "want and can use." The capitalism transaction is a natural outflowing of what people need and want.
In recent decades, however, product is being envisioned and invented whether it is needed and wanted or not, and then peddled to potential buyers. In other words, people are "convinced" that they need a product before the need actually exists. Now, I'm not being all austere and being against luxuries. But I'm helping you think through what is actually capitalism and what is societal quirks and dysfunctions. Any parent out there knows what I am talking about when they think about how marketers constantly "create a need" among their kids. I remember the days before and after "name brands" became de rigeur among kids, such as for expensive sneakers. If you think back to the original model I have explained here of capitalism, you can recognize the difference between the surplus of an "essential commodity" being taken to market (corn, for example) and some product being invented out of an idea factory and then being "marketed" to potential consumers to "create" a need. There is nothing wrong with having a great idea and then convincing lots of people to buy the product except for one thing: society as a whole starts to forget how to distinguish between "essential commodities" and "created products." There then is a cascading series of risks of displaced emphasis and priority with disastrous effects. The diverting of corn from feed to ethanol is a perfect example of this problem. No one thought through the difference between growing a surplus to provide the corn to a new use (ethanol) and cutting into the subsistence use of corn (feeding people and cattle).
This is so essential that I want to make the point a second time. Because I'm sane and a good economist who actually understands humans I made an assumption when I first heard about the push for ethanol development. I assumed that ethanol producers were paying to take farm land that was now idle and putting it to corn growing. In other words, I never dreamed that they were going to extract the corn out of the food and feed subsistence market. To this day I am still boggled that anyone was so irresponsible and stupid as to do that. I assumed that anyone in their right mind was going to first create a surplus of corn in order to put it to this massive scale new usage (ethanol), and not take the corn out of the mouths of humans and animals. So the ethanol disaster is not the fault of "capitalism," it is an example of how people have become totally detached from discerning the reality of distinguishing between subsistence and surplus "supply."
See what I mean? If you always use this model that I have taught you as your baseline of understanding capitalism in general, then you can put yourself on a knowledgeable basis of foundation for discerning opportunities and pitfalls in even complex decisions and transactions. For example, if I had been consulted (ha ha, dream on) when the ethanol idea first came up, I'd have asked "Where will the corn come from?" This is because being real intelligent I know that corn is an essential foodstuff for humans and animals. I would have assumed, I must confess, that the answer would have been the executives whipping out a list of idle farm properties that they would put into production of new corn growing. My jaw would have dropped if I heard them say they were going to "go to the market" for the corn, which means, compete against humans and animals who actually need and eat this product and thus end up making the price of food skyrocket. Then I'd have b-slapped them, so to speak.
The ethanol disaster is an example of how people have 1) forgotten the basic principle of capitalism which is surplus on TOP of subsistence, not biting into subsistence 2) too often created a demand for a product using fallacious lures and assumptions and 3) lack of discernment of all the pros and cons of a given "product" development. I don't want to be cynical but being a realist there is implication number four: these three problems open the door to a small but powerful clique who know full well the disaster they are about to wreck onto people but are in it to pull out the maximum money that they can before "the gig is up." Thus I suspect that some people knew full well that they'd destroy the food prices for the average Joe and Mary but they locked into commodity and other bets to maximize profit when corn prices spiked and did not care at all whether ethanol "succeeded" or not.
I think this capitalism explanation is helpful in getting people on the same page to understanding a lot of the economic problems (and very hidden opportunities) that people are struggling with globally. As always, I hope the young people in particular find this information a truthful beacon and context setting.
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