book_chapter/chapter_13.txt

Chapter 13 
Slapped by the Invisible Hand
You go to Home Depot looking for a lamp dimmer. Hmm, with 40K different items, youÕre pretty sure dimmers are here somewhere. A list of departments would help, but they only have signs on aisles and you canÕt see all of them at once. Maybe the electrical department? WhereÕs that?
No big box stores have a map with an index. A department store mid-morning, mid-week, is a ghost-town, lacking readily available staff. The little stores are much more customer friendly, but the big ones are taking over. Since all the big stores claim customers are their focus, why donÕt they have maps? If Capitalism is so efficient, why does it waste so much of consumersÕ most valuable resourceÑtime?
The myths of Capitalism
Capitalism is the dominant economic system of our times. It values private ownership, (especially of the means of production) trade, and a free market. In the USA, Capitalism rivals any religion for the intensity that people believe in it, perhaps second only to the Constitution and voting for its popularity. Is this popularity deserved?
Here we explore the myths of Capitalism: widely held beliefs that are, at best, only half-true in the real world. The worst problem with these myths is that they impede the search for fixes or alternative solutions. 
Myth 0: In Capitalism producers cooperate with customers. 
The beauty of ideal Capitalism is that the mechanics of the marketplace can act as an algorithm for meeting needs of both the producer and consumer. ThereÕs no need to negotiate each case individually. 
Adam Smith, the inventor of modern Capitalism, called this the Invisible Hand [Smith 1776]. The problem is: the store also competes with the customer, in a PrisonerÕs Dilemma-like fashion. Smith, writing in 1776 (!), didnÕt know about the PrisonerÕs Dilemma. 
The common wisdom on why big stores make it difficult to find a product, is that they want you to wander around the store and buy something you didnÕt think you wanted. Presumably, somebodyÕs done a study, and determined that impulse purchases happen often enough that the store makes more money than they lose from frustrated customers. ThatÕs the Temptation that causes the store to defect. The customer comes last is a theme throughout retail. (Ever buy an airline or concert ticket from a website?)
The store wins. The customer loses. The customer suffers an externality of wasted time and buyerÕs remorse on impulse purchases, but the store doesnÕt care. We call this kind of defection Myth 0 because itÕs the root of the problem. The other myths will follow from this. Why canÕt you find the lamp dimmer? YouÕve just been slapped by the Invisible Hand. 
Myth 2. Capitalism is efficient. 
WhatÕs so efficient about losing a sale due to no store map, or to bad web programming? Could making it easy to buy their products give them 1% more business? Easily. 1% of Home DepotÕs $83B annual revenue is $830M, certainly more than the implementation cost of a map. Leaving money on the table is so common in business that it points to systemic problems, not individual stupidity.
ItÕs difficult to get average numbers on this, but roughly 25% of the purchase price of a retail product goes to the manufacturer. The rest goes to transportation, warehousing, retail, marketing (including all the junk mail you have to pay to get hauled away to ruin the environment), corrupt politicians, etc. 
With so many fingers in the till, we wouldnÕt call Capitalism Òcost-effectiveÓ. But compared to what? Compared to Makerism, coming to a chapter near you.
Myth 3. Build a better mousetrap and the world will beat a path to your door. 
The primary business motivation is not to produce the best possible value to their customers. ItÕs to maximize profits. 
Innovation is useful to gain competitive advantage over other companies or extract more dollars from a customer. Improving customer experience is irrelevant. Dominate players hate innovation because change threatens their position. Small innovative companies are something to be bought to kill, or in the best case, bought to help a company keep up with other large players in their field.
Competitive advantage only requires a minimal amount of innovationÑjust enough to make your product better than the other guyÕs. Because major innovation is risky, significant innovation is slowed by Capitalism. 
Startups and Venture Capital are supposed to be the engine of innovation. But the startup process selects for copycat companies that are only incrementally different than already successful business models. Now, do we need another SnapChat, Twitter, or Share Irrelevant Minutia To Strangers company? No, but weÕll get one next month anyway. 
Our society also chronically underestimates the urgency of innovation. If you believe the clock is ticking on climate change, war, and your own health; then, our slow pace of innovation is not merely inefficient. ItÕs fatal. 
If the Web is so great, how come programming languages and environments are still so hard to use? Why donÕt we have Personal Rapid Transit (See Transportation)? How come innovation hasnÕt reduced the percentage of income people spend on food, housing, transportation, education or health care (all the essential, big ticket items)? 13% of Americans (in the richest country on Earth) live in food-insecure households [Feeding America 2015]. Sorry, even the Òmost innovative country in the worldÓ isnÕt innovative enough.
Myth 4. Intellectual Property promotes innovation. 
Developing new ideas is crucial for advancing civilization. When Capitalism started to become widespread, it became clear that the drivers of economic productivity werenÕt just labor, land, and raw materials, but also invention and innovation (see The productivity of dead people). 
At that time, Capitalism seemed to be doing a pretty good job of building an economy based on material goods. So, using the powerful heuristic of problem solving by analogy, people thought: Can we make an analogy between inventions and material goods, so that people can buy and sell them, and inventors can earn a living? 
Only problem is, the analogy breaks down. While material goods are tangible and can only be in one place at one time, ideas are intangible, and can be infinitely copied at zero cost. Ease of copying ideas is actually a strengthÑitÕs what enables all human progress. In education, after all, ideas are ÒcopiedÓ from a teacher to a class of students. 
But you can only ÒsellÓ exclusivity of access. So the oxymoron of so-called Òintellectual propertyÓ was introduced. Patents and copyrights are the legal mechanisms. This seemed like a good idea at the time, but now itÕs just welfare for lawyers.
Intellectual property is defended as being for the benefit of creative inventors. But very, very little winds up in the hands of inventors. Only 2% of patents make any money at all. Only a very small percentage of that number makes any money for the inventor, after you subtract the outrageous legal expenses and exclude patents assigned to an employer by an employee who has no rights and often receives no benefit. Our guess is that if an honest reckoning were done, the Òreturn on investmentÓ for inventors on patents would probably be less than minimum wage. 
On the other hand, itÕs a fantastic business model for patent lawyers, who charge $500/hour or more. Our university spends an average of $12K to file a patent, not including any litigation needed to enforce the patent. Like arms merchants, lawyers rake it in, regardless of who wins or loses the war. Patents do not give the holder the right to make money off the invention; they only provide the right to sue others who do. To sue, you got toÉ pay a lawyer. And if somebody sues you, youÕve got toÉ pay a lawyer. A typical patent infringement suit costs $500K or more. 
ThereÕs yet another inefficiency here: if there is some physical process that really is better than all the rest that are known, then if one company locks that up, they win big. 
Say the process makes cost to manufacture 10 times cheaper. They donÕt sell the product for 10 times less, but just slightly under their nearest competitor, denying society most of the benefit of the breakthrough. 
Now if another competitor comes along with an entirely different process that is also 10 times cheaper, what happens? Well, the Òinvisible handÓ says that both companies drop their prices to just above costs and society finally wins from the first big invention, late though it may be. 
But other outcomes under Capitalism are likely such as: The bigger of the two companies kills the new company via tying them up in legal work, predatory pricing, buying and burying the new invention, collusion with the other company to maintain high prices, or even less desirable means. 
Imagine though that the first new invention is made available for others to build on. We could get more rapid advancement. 
Myth 7. The Òfree marketÓ actually exists. 
The reason there is no free market (never has and never will be) is because no one wants one. Economists will tell you they do, but then ask you how to get a special deal on a new car (thereby bypassing the Òfair market valueÓ). Libertarians will tell you they do, but they really mean Òno government meddlingÓ.
So what do you do when Manufacturer A pays the distributor to not carry Manufacturer BÕs product? Or big oil destroys the environment? If the answer is ÒNothingÓ, then you get US Capitalism, not a Òfree marketÓ. 
Myth 8. You get what you pay for. 
In order to get what you pay for, you at least have to know how much youÕre paying. US Capitalism makes this hard through the time-honored process of Bait and Switch.
Most people think they wonÕt buy something without knowing its price. Rarely is the true price available to a purchaser until after the sale. First, in the USA at least, tax is not included in the listed price. Why? Because the seller wants you to believe the price is lower than it actually is to encourage the sale. 
Why do we have ÒtippingÓ in restaurants? Studies have shown that tips do not significantly affect quality of service [Lynn 2001]. What tipping accomplishes is to misrepresent the true cost of the meal, and to shift the guilt for underpaying workers from the restaurant owner to the customer. 
This kind of dishonesty ought to be fixed by government. But government also wants you to buy the product, so they can get the sales tax. Retail sales are a collusion between the seller and the government against the buyer. Due to special interest politics, the concentrated power of a seller is much more significant than the larger, but diverse, power of consumers. Hence laws are written for sellers, not buyers. 
In any complex product, say a washing machine, there are a whole bunch of other fees that get added on after the customer has decided to buy. Car buying, for example, is notoriously riddled with such dishonesty from the seller. Figuring out how to lower the price you think you are paying and raise the price you actually pay is called Òsales creativityÓ.
Myth 9. Employees are compensated for what theyÕre worth.
The average pay of the CEOÕs of the 350 largest companies in the USA in 2015 was $16M. ThatÕs 300 times their workerÕs salaries at $53K. OK, the CEOs are smart, but 300 times smarter? 
LetÕs examine another kind of employee, one that gets paid $0. Hamid Ekba and Bonnie Nardi have coined a new term heteromation, [Ekba 2014] to refer to the now common practice of getting consumers to do much of the work of the product they buy When you wade through the voice menus of customer support, you are doing the work of a receptionist. When you ÒassembleÓ the pieces of Ikea furniture, you do the work of a factory worker. When you pump your own gas, you do the work of a gas station attendant. 
Such activities now permeate modern Capitalism. They may lower the cost you pay, enabling you to trade your time for money. Or they may simply raise the profit of the ÒmanufacturerÓ by reducing their labor costs. Capitalism suffers from not compensating workers fairly, including consumer-workers. This trend is not sustainable. 
Myth 10. Capitalism allocates labor skills efficiently. 
When an economic good is ÒripeÓ for development, often numerous companies jump in. Now, often thereÕs room for a few market entrants, but many dollars are wasted in the duplication of discovery and invention that could better be spent on unique things, or the researchers in an area could collaborate, and get to market even faster than the first, with an even better product. 
Myth 11. Competition drives prices down to just above production costs. 
Adam SmithÕs Invisible Hand of Capitalism would make the prediction above. But no producer wants to sell their wares slightly above what it cost to make them, they want to sell them just barely below their competitor. If they manage to kill off their competitor, that means they can charge much more. 
Government tries to ensure a Òlevel playing fieldÓ, but since government regulators are largely staffed by the industry they regulate, corruption is inevitable. Lawyers of course love ÒcheatingÓ of any form as they have a near monopoly on ÒresolvingÓ it. Profits are high (Exhibit A: Inequality) and the playing field is just about as ÒlevelÓ as the Rocky Mountains.
Myth 12. Capital ßows to where its most needed. 
The highest ROI in American Capitalism is É paying bribes to governments to give businesses unfair advantages. [Bernabe 2015] documents the return on investment of lobbying for AmericanÕs 200 most politically active companies was 7600%. That is, for every dollar spent, the return was $760. 
Nor were these investments small. By investing $5.8B, big businesses received $4.4T or 2/3rds of what individual taxpayers paid the government for 2007 through 2012. (Now you know where your taxes go.) By comparison, the average ROI of a Dow Jones stock in 2010, a legitimate investment open to anyone with the cash, was 11%, or 690 times less. Such corruption leads to large scale economy-wide inefficiencies. We do not need more money in bribes.
Myth 13. War is good for the economy. 
The most capitalistic country, the USA, sells the most weapons. (1/3 of global weapons supply.) It sells them to half the countries of the world. [Oakford 2016]. Many of those weapons went to the Middle East. 
Yes, youÕll hear that trade creates friends. But economic competition can lead to war. We can see how well the trade of those weapons are keeping the peace. Selling to both sides of wars is, of course, a winning economic strategy: what you sell gets blown up by what you sell. You canÕt saturate the market. 
LetÕs follow the money: Taxpayers to governments to militaries to weapons manufacturers to weapons given to people who use them to blow up the weapons, people, buildings and a bunch of other wealth as well. People get angry at the destruction leading to hate and more war. How is this good for an economy?
Myth 15. Consumers buy what they want. 
In order to buy what you want, you have to know what youÕre buying. Department of Energy to the rescue. The DOE has a program to help consumers choose energy (and water) efficient appliances. So far so good. But their rating mechanisms are questionable. For washing machines it includes energy costs, but as most conservationists know, washing your clothes in cold water is perfectly fine, so the DOE numbers donÕt help much. The DOE doesnÕt even bother to rate ovens. Store sales clerks told us Òall ovens are the sameÓ. But induction cooktops are more efficient than resistance cooktops (according to manufacturer claims) and doesnÕt the insulation thickness determine how much heat an oven retains? At three big box stores, we found the salespeople hard to find and remarkably unknowledgeable about their products. We estimate that only 10% of showroom ßoor models for washing machines, dryers and refrigerators have DOE energy usage tags on them. 
Myth 16. Capitalism makes people richer, which makes them happier. 
The Happy Planet Index (http://happyplanetindex.org/) measures peopleÕs self-reported well-being and their life expectancy per their countryÕs ecological footprint. The USA rates as the worst country in the Americas on this scale, because, although it has a high life expectancy and well-being, it is in 105th place in ecological footprint per capita. 
Myth 17. A rising tide lifts all boats. 
Economies are enormously complex. Capitalism has a rather elegant way of simplifying: money. Cost, price, interest, stock, and GDP quantifies, and thus makes manageable, a huge range of complexity. But thereÕs a cost to this simplification, which we can fit under the umbrella term of ÒexternalitiesÓ. 
Exhibit A: One car doesnÕt make much of a difference to the planet. But in 2010, the worldÕs car population exceeded 1 billion [Tencer 2011]. The consequences? In April of 2015, for the first time, the atmosphere maintained 400 parts per million of carbon dioxide for an entire month. Now, itÕs permanent.
Ultimately, externalities cut the efficiency of the economy: sick people canÕt work, depleted resources limit manufacturing, and dishonest advertising reduces our ability to make optimal decisions. In the 1980s this was called Òtrickle down economicsÓ (See the Ultimatum Game chapter). We wonÕt rehash PikettyÕs arguments here [Piketty 2014], but in short, inequality is rising a lot faster than the boats. 
But boats are rising, nevertheless. ThatÕs because global warming is causing sea levels to rise. Three quarters of all large cities are on coasts. Global warming is caused by, you guessed it, economic activity. Capitalism is addicted to oil; even George W. Bush said so. Conßict seems to follow oil (the Middle East, Nigeria, Venezuela). The US sponsors war all over the world, and one might claim CanadaÕs tar sands oil extraction are a war on the planet [Klare 2005].
Myth 20. Capitalism is a good decision-making process. 
Trump declared bankruptcy 6 times. He claimed doing so were good business decisions, and maybe they wereÑfor him. He was just Òtaking advantage of the law of the landÓ. The contractors he stiffed werenÕt so happy with that decision making process. We shouldnÕt be, either. 
Companies hire CEOÕs for salaries of millions of dollars on the premise that the right leadership can help them make decisions leading to money. Maybe so, but the question is, how many people are hurt by high CEO pay? Concentrated wealth tends not to allocate the pie with the greatest good for the greatest number.
Since Capitalists make money by exploiting cognitive biases (see the chapter, The worldÕs best business model), it provides perverse incentives that encourage departures from rationality. 
Capitalism, like US Democracy, values short term decisions. But most of our big problems are not short term. They require strategic thinking decades into the future. Capitalism appears to be immune to reason.