How Capitalism Will Save Us Read online

  The Freedom House report on declining global freedom is really no surprise. The plunge in oil prices between the summer of 2008 and the spring of 2009, halting the oil boom in these nations, is a likely reason that political repression increased in these countries.

  What freemarket doubters fail to recognize is that the road from economic reform to political liberty can be long and not always smooth. Chile is a prime example. In 1973, the radical Socialist government of Salvador Allende sought to turn Chile into a Cuba-style dictatorship. By the time the Allende government was overthrown in a coup d’état by strongman General Augusto Pinochet, the annual inflation rate was 286 percent.

  Pinochet established an authoritarian government that violently suppressed the Far Left. However, at the same time, he instituted freemarket reforms such as removing price controls, opening trade, and privatizing some state enterprises. They unleashed a wave of prosperity. The Chilean economy began to diversify, reducing its onetime dependence on copper.

  What the strongman didn’t grasp was that he was creating conditions for his own political demise. The prosperity created an ever-larger middle class that grew increasingly dissatisfied. By the late 1980s, it was no longer possible to resist demands for more political freedom. General Pinochet agreed to hold a plebiscite on his future. To his own astonishment, he lost the vote. The emergence of a free Chilean economy has been largely credited with helping the nation return to democracy. The moral of the story: prosperity brings democracy and not gratitude to dictators.

  REAL WORLD LESSON

  Democratization of authoritarian nations can be achieved only by genuinely free markets and not by the bloated, phony capitalism of resource-rich countries.

  Q HOW CAN OUR SYSTEM BE MORAL WHEN A GOLFER LIKE TIGER WOODS CAN MAKE NEARLY 1,800 TIMES THE PAY OF THE AVERAGE NURSE?

  A TIGER WOODS HAS A SKILL THAT MAKES HIM UNIQUELY VALUABLE IN THE JOB MARKET.

  Nurses save lives. Yet the median income for a registered nurse is around $65,000.27 Tiger Woods plays golf. Yet in 2009, according to Forbes magazine, Woods earned $110 million—almost 1,800 times a nurse’s pay.

  Is the free market immoral because it rewards an athlete more highly than someone who saves lives, especially when there are not enough nurses to fill jobs in the U.S. healthcare system?

  The value that the market places on someone like Tiger Woods is astonishing. Not everyone may agree with it. But it is fair.

  How did Woods get to be paid $110 million a year? Only about three hundred people in the world are qualified to play on the PGA tour—the world’s elite golfing competition. Woods is at the top of this select group: He has won fourteen majors, is only the second player in history to win three major championships in a single year, and is on course to become the second most winning player of all time on the professional tour.

  Woods is the most popular representative of a sport that is played by over 26 million Americans. But more than a national passion, golf is also a $76 billion industry, fueled by ticket sales, television revenues, and a mass following that spans from community golf courses to country clubs, where the game has become a valuable business tool.

  Few individuals have been as critical to an industry as Woods has been to golf. When a knee injury knocked golf’s marquee player out of the tour in 2008, the entire industry slumped: television ratings plunged by nearly half, ticket sales fell, sponsors fled, and tournaments struggled to attract crowds. Summarizing Woods’s importance to the game, one tournament director observed, “When he plays, everyone in golf benefits.”

  Woods, in short, is the driver for a multibillion-dollar industry. The result: a $110 million salary.

  Comparing Woods’ compensation with a nurse’s pay calls to mind a question once posed by the great economist Adam Smith: why do diamonds, which have very little practical use, command a higher price than water, which is essential to life? This disparity is known as the paradox of value or the “diamond-water paradox.”

  Some economists explain this apparent contradiction with what they call the theory of marginal utility. What matters is not the value of water or diamonds to society, but their worth to the individual consumer. Yes, H2O is essential to life. But as individuals we usually find it to be abundant. Therefore, a glass of water is less valuable than a single diamond, which is extremely scarce and provides enormous satisfaction to its owner.

  No golfer has the skill of Tiger Woods, whose performance has made history. Fortunately for society, there are many more nurses with lifesaving abilities than there are golfers who can rival Woods’s record or sports celebrity. So in terms of the labor market, Woods is more valuable than a nurse and plenty of others as well, including many highly paid executives.

  Remember what the market is: a public forum where people vote. But instead of casting ballots, they vote with their money.

  Tiger Woods’s earnings reflect the value placed on him by the millions of people whose dollars flood into the PGA tour and golf as a sports industry. The alternative would be to have some centralized government entity decide Tiger Woods’s salary. That would be less democratic and less fair.

  REAL WORLD LESSON

  Dramatic pay disparities, even when they appear unfair, are a reflection of very real market conditions and the value-setting “votes” of participants.

  Q ISN’T ADVERTISING IMMORAL BECAUSE IT MANIPULATES PEOPLE INTO BUYING THINGS THEY REALLY DON’T NEED?

  A NO. BY CONVEYING INFORMATION AND HELPING COMPANIES SELL PRODUCTS, ADVERTISING PLAYS AN IMPORTANT ROLE IN A FREEMARKET ECONOMY. AND IT IS OFTEN LESS PERSUASIVE THAN PEOPLE THINK.

  People who buy into capitalism’s bad rap often hold up advertising as yet another example of the immorality of free markets. Ads, they claim, seduce and mislead people. They’re an annoying, unwanted intrusion on TV, in cyberspace, newspapers, magazines—and every corner of our lives. Americans are defenseless against such pervasive “propaganda.”

  The late historian Arnold Toynbee has been quoted as saying, “[I] cannot think of any circumstances in which advertising would not be an evil.”28 Advertising has a long list of critics. Among the most influential was the late economist John Kenneth Galbraith. In The Affluent Society,29 he asserted that advertisers applied “ruthless psychological pressures” to artificially create demand for products. Galbraith’s contemporary, social critic Vance Packard, wrote about how advertisers used psychological research and techniques to manipulate consumers. In the 1970s, Wilson Bryan Key, in a book titled Subliminal Seduction, advanced the notion that advertising contained hidden, seductive images. He famously claimed that a liquor ad’s alluring photo of a vodka on the rocks contained subliminal images of a woman’s breasts hidden in the ice cubes.

  This thinking has led to bans on TV commercials for products like cigarettes and hard liquor. A few years ago, Senator Tom Harkin tried through his Healthy Lifestyles and Prevention America Act to get the Federal Trade Commission to restrict junk-food advertising to children. Americans haven’t heard the last of efforts like this. Bans against advertising certain toys and foods to children are already in effect in Europe. Sweden has outlawed all TV advertising to children under twelve.

  Actually, evidence suggests that advertising is often far less persuasive than people think. For a large segment of the population, ads are more annoying than convincing. A study by Yankelovic Partners found that a substantial majority, 69 percent, claimed that they “are interested in products and services that would help them skip or block marketing”—hence the rise of devices like TiVO that let TV viewers skip the commercials.

  Ask people in the industry, and they’ll tell you that the real problem is that, in fact, many ads fail. Today more ads than ever compete for viewer attention, a condition known as “clutter.” According to Rex Briggs, CEO of Marketing Evolution, a marketing research and consulting firm, and Greg Stuart, former CEO and president of the Interactive Advertising Bureau (IAB), so many ads flop that the pair decided to write a book called What St
icks: Why Most Advertising Fails and How to Guarantee Yours Succeeds.

  One rule of thumb is that you need to run at least three ads before people can even remember your brand. You need to run seven before consumers consider making a purchase. That’s when people understand what your ads are about. And believe it or not, studies show they often don’t.

  The problem of creating awareness has become so great that advertisers have been resorting to so-called guerrilla advertising—placing ads in unusual locations, such as on train station stairsteps, people’s cars, or building scaffolding. But even these guerrilla approaches have become so common that they are losing their impact.

  But what about those ads that you do remember—the ones that generate buzz and that, for all appearances, seem seductive? They often don’t work, either. Who can forget the Pets.com sock-puppet dog—star of one of the most memorable ad campaigns in the last decade? Most people remember those commercials. They told you why you should shop online for pet food at Pets.com: “because pets can’t drive.”

  The sock-puppet character was such a hit that it ended up doing interviews and talk show appearances on its own outside the commercials. The problem was that while pets couldn’t drive, people could. The ads were good, but they were based on a faulty business premise. People preferred to pick up pet food as they shopped for groceries. Despite a brilliant, multimillion-dollar ad campaign, Pets.com was one of the great failures of the dot-com era. The company was bought out by Petsmart.com, which was more successful because it had something people wanted—stores.

  Other much-advertised but failed product launches have included New Coke, the Ford Edsel, Levi’s Type1 jeans, and McDonald’s Deluxe sandwich line. All had brand-name backers and big bucks behind them. But they failed. Why? Because despite their expensive, alluring ads, they could not create desires that consumers simply did not have.

  Advertisers clearly cannot create demand for things people don’t want. What Professor Galbraith and others failed to understand back then—and what many don’t realize today—is that entrepreneurs in a free market often rush to meet the needs and wants of people before those needs are conscious. Fifteen years ago, for instance, did you ever think you needed e-mail? Yet today most people would insist that they can’t live without it. In other words, the visionaries who invented e-mail perceived your needs before you did. The same goes for countless other products.

  But what about the claims that advertising manipulates children? Aren’t they more impressionable? That’s not borne out by the Real World experience in places like Sweden, Norway, and Quebec, where bans on advertising have failed to reduce childhood obesity. In Sweden, where such a prohibition has been in effect for more than ten years, obesity rates are comparable to those in the rest of the European Union.30

  For all the criticisms of advertising, people who buy into capitalism’s bad rap overlook its critical role in the economy. Jerry Kirkpatrick, marketing professor at California Polytechnic State University and author of In Defense of Advertising, writes, “Advertising is, at once, a rational, moral, productive, and above all, benevolent institution.”31 In fact, he says, ads enabled America’s early entrepreneurs to build the nation’s young economy, and provide more of what people needed:

  Throughout the nineteenth century, as production expanded and transportation improved, manufacturers started distributing their goods hundreds and thousands of miles away from their factories. To assist their commercial travelers and Yankee peddlers, “announcements” (as early advertisements were called) were placed in newspapers to reach many more people at one time. The result was a reduction in the cost of communication over what it had been using travelers and peddlers exclusively. Thus, mass communication through advertising made it possible for manufacturers to sell their goods at a faster rate, enabling them to recover their investments more quickly. The faster recovery of investments, in turn, provided a strong incentive for the manufacturers either to reach out to still more distant markets or to develop new products.

  Thus, advertising came into existence as a form of specialization in the division of labor. … Advertising is an accelerator—it speeds up the acceptance of new products, thus encouraging the development of still more new products. 32

  Ads continue to be a critical driver of our economy, building the brands of America’s companies and spurring the buying and selling that creates wealth for millions. According to a recent study by the economic consulting firm Global Insight, advertising helps generate more than $5.2 trillion in sales and economic activity throughout the United States, supporting more than twenty-one million jobs, or 15.2 percent of our U.S. workforce.

  But there is another benefit that people seldom mention: advertising is the reason that the U.S. media is larger, more vigorous, and more outspoken than the media in most other nations. Ads underwrite the vital institutions that provide outlets for free speech. Take the travails of newspapers. Their revenue base—classified ads—has been eviscerated by the Internet, particularly craigslist. With such a sharp loss in advertising dollars, most daily newspapers are in a precarious financial position, with their very survival in question.

  Think about it: where did you hear those experts talking about the evils of advertising? Most likely on advertiser-supported television, radio, newspapers, magazines, and Web sites. Without advertising, media would be more expensive or government supported. Either way, free speech would be less free. Is that really the more moral alternative?

  REAL WORLD LESSON

  Advertising fills a very real need for information in a democratic, freemarket society. But it can’t create desires people don’t already have.

  Q AREN’T MCMANSIONS SYMBOLIC OF THE GREED AND SELFISHNESS OF CAPITALISM?

  A NO. LIKE THEM OR NOT, MCMANSIONS REFLECT THE INCREASING DEMOCRATIZATION OF WEALTH.

  About ten years ago, a little-known industrialist named Ira Rennert caused an uproar when he started building the ultimate McMansion, a mammoth residence in Sagaponack, a hamlet within Long Island’s affluent Hamptons resort area.

  The New York Times reported: “Ira Rennert’s dream house in the Hamptons will have 29 bedrooms, 39 bathrooms, a 164-seat theater and a restaurant-size kitchen with 5 refrigerators, 6 sinks and a 1,500-gallon grease trap.”33

  The sixty-three-acre seaside compound was also to include two tennis courts, two bowling alleys, and a basketball court; a garage sufficient for two hundred cars; and a power plant with four huge water tanks, a 2.5 million–BTU furnace, and a maze of underground tunnels, among other amenities.

  Asked the Times: “Can a complex of such staggering dimensions be considered a single-family home?”34

  National publications like the Times and Vanity Fair predicted that the house would destroy property values and ruin the neighborhood. They quoted people who feared the home was secretly being built as a hotel or a religious retreat. Rennert’s McMansion, and others like it, have come to signify over-the-top ostentation, greed, and selfishness. A reporter from the Austin Chronicle dubbed them “Chateau du Screw You.”35 For many people, they are symbols of what’s wrong with capitalism.

  Indeed, McMansions are almost universally reviled—except, of course, by those who live in them.

  McMansions may not be architectural masterpieces. We may not like them or like the idea of one springing up next door. But they are anything but indicators of capitalism’s moral malaise. They are the result of the democratization of wealth over the last three decades, enabling more people to enjoy luxuries once reserved only for the very rich. Noted author and commentator Dinesh D’Souza wrote about this trend in his book The Virtue of Prosperity:

  The real story in real estate isn’t the McMansions and “starter castles” of the nouveau riche; it is the fact that the average house built in the United States today is nearly double the size of its counterpart of the 1950s. In Levittown, New York, the archetypal 1950s suburban development, the average home was 1,100 square feet; today’s homes average 2,150 square feet
. And most of our homes are fully loaded; they have dishwashers, two-car garages, multiple color TV sets, full indoor plumbing, and central heating and air-conditioning, which relatively few homes in the 1950s had, as well as microwave ovens, personal computers, video cassette recorders, CD players, cell phones, and answering machines that nobody in earlier generations had because they didn’t exist.36

  D’Souza emphasizes that these luxuries have proliferated not because there are more rich people, but because middle-income people have more buying power:

  I once asked the novelist Tom Wolfe if he was awed at the levels of opulence that he observed in New York society. “What I find even more remarkable,” Wolfe said, “is that at this very moment, your plumber or my electrician is vacationing with his third wife in St. Kitts. … Soon they will take a walk along the shore, sipping glasses of designer water and getting ready to sample the local cuisine.”37

  Look what’s happened to luxuries: they’re cheaper. Wired magazine found that the real, inflation-adjusted prices of a number of luxury goods and services have declined dramatically over the last twenty-five years. The inflation-adjusted cost of chartering a plane, for example, has declined nearly 40 percent between 1980 and 2004. An around-the-world cruise on the QE2 declined 45 percent. A BMW 3 series that cost $40,945 in 1995 was 25 percent less expensive in 2004. Even dinner at New York’s tony 21 Club, which cost an average of $114.66 in 1987, costs 23 percent less today in inflation-adjusted dollars. 38