Thursday, March 19, 2015

Only Free Markets Can Fairly Determine Economic Success

A recent letter titled Economic status quo must change was published in the Asbury Park Press. (It also appeared in the print edition of the New Jersey Star-Ledger.) It is an interesting letter in that it exposes the soul and the ignorance of the anti-capitalist. The writer is Gary Faraci.

Faraci calls for a “cultural change” away from “the mantra that success is measured solely by maximizing stockholder value.” Instead, he says, “Economic success must be measured by maximizing all ‘stakeholders’ values. Stakeholders include the community, the employees, and the environment. Not just stockholders.” Faraci goes on:

Maximizing stockholder value by the continually driving costs out of the system allows companies to have workers living below the poverty line, which then results in the workers relying on the government for food stamps and health benefits. And this narrow pursuit of profits also allows businesses to neglect and ignore the detrimental effects they have on the community systems and infrastructure, and the environment. Unless the welfare of the community, the employees and the environment are balanced with the interests of the investors, any economic success will be short-lived. And only for those at the top. Long term economic survival depends upon liveable wages, disposable income, sound infrastructure, and a safe environment. Not just higher stock prices.

I left these comments:

Business creates the products our lives and flourishing depend on at a price people can afford, the remunerative jobs that enable us to buy the products we need and desire, and by extension the tax revenue that supports our schools and infrastructure. All of this starts with the entrepreneurs and investors who risk their capital rather than keep it “safe” in bank accounts or bonds. Investors (shareholders) are not guaranteed a return. For the company and thus the investors to profit, their business must attract and keep customers. To attract customers, the business must create ever-increasing value at ever-decreasing costs, which is achieved by investing in technologies that increase the productivity—and thus the earning power—of labor. To create that value, businesses must pay and treat employees in a way that attracts and holds a dedicated, motivated workforce. This is what it means to “maximize shareholder value”—the first moral responsibility of the CEO.  

As to the environment, human beings survive and thrive by turning the Earth’s raw materials into life-enhancing material goods, thus transforming a hostile, pristine natural environment into a safer, healthier human environment. By far the leader in this virtuous transformation of the environment is business. For that, we owe business a huge expression of thanks, not a demand for them to sacrifice their best interests.

This virtuous cycle requires a social system that harmonizes the interests of “all stakeholders.” That system is the “unknown ideal,” free market capitalism—the system of voluntary, peaceful coexistence through trade, backed up by limited, individual rights-protecting government. Any means of “harmonizing interests” other than voluntary cooperation is the means of a thug. Today we don’t have capitalism. We have a mixed economy—un-free markets bogged down with government controls. That’s what “the culture” needs to learn.


Faraci raises the question of how economic success is measured:

Businesses need to stop pursuing, governments need to stop legislating to, and educators need to stop teaching the mantra that success is measured solely by maximizing stockholder value. Economic success must be measured by maximizing all “stakeholders” values. Stakeholders include the community, the employees, and the environment. Not just stockholders.

Faraci implies that “economic success” is an arbitrary construct that can be redefined on a whim. But, in fact, economic success has an objective basis; the market. As Ayn Rand has observed, “The economic value of a man’s work is determined, on a free market, by a single principle: by the voluntary consent of those who are willing to trade him their work or products in return.” It’s not enough to invest, work hard, and so on. On any level, from the janitor to the CEO, one’s economic success is measured by what others are willing to pay you.

But while an employee has only one consideration—the level of his compensation—the businessman has two concerns. Not only must he have people willing to pay him for his product; they must be willing to pay him more than it costs him to produce it. Faraci sees “Maximizing stockholder value by the continually driving costs out of the system . . .” as a vice. In fact, it is the greatest virtue of successful businesses. The “continually driving costs out of the system” is what creates mass markets of goods that not just the rich but the average person can afford. It is what lifts the general standard of living. The average person never had it as good as under businesses liberated by capitalism.

Faraci’s reference to “sound infrastructure” is puzzling. Business is the mainstay of the economy, and as such, generates—directly and indirectly—most of the taxes that fund the building and maintenance of our infrastructure. It’s true that our government-owned infrastructure is crumbling. But we all use it, not just business. I guess, given his anti-business bigotry, Faraci can’t help pinning the blame for every conceivable problem on business.

I’m not done with this letter. I’ll finish up with Faraci in my next post.

Related Reading:

To Whom Does the American Worker Owe His Prowess?

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