Some thoughts on socialism and capitalism

This post has been rattling around in my head for a while, and was finally prompted by a post left in sterno‘s journal.

Now, before we get started, let me make one thing abundantly clear. I am a capitalist. I am probably the biggest capitalist you will likely ever meet. For more than a decade, I have made money directly from the work that I do, without relying on an outside business for my full support. Even now, as a salaried employee, I am a minority partner in the company which employees me, and I have at least two other business ventures running at any given time, one of which typically pays my rent.

I am not a socialist, nor do I believe socialism is anything but a broken and inherently unworkable economic system which does little besides deprive those citizens who live under it from benefitting from their own labor.

However, I am also a fan of government oversight of business, and of environmental and social restrictions on the actions of business.

“But Franklin,” you say, “how can that be? Isn’t that a form of socialism? Isn’t the whole point of capitalism the notion that market efficiencies work best when unencumbered by government intrusion?”

And the answer is “no,” because without such oversight, businesses tend to adopt a weird sort of pancake socialism–an inverted socialist system where profit is concentrated, but the costs of doing business and the risks associated with business practices are socialized.

There are tangible risks associated with environmentally or socially negligent behavior. Take, for example, a hypothetical chemical business that produces acetic acid, and as a byproduct produces methylmercury. Methylmercury is difficult and expensive to contain and to get rid of safely, so let us assume that the business disposes of it by dumping it into a lake. (This is not entirely hypothetical; a company doing just that in the Japanese city of Minamata in 1956 caused the largest case of mass mercury poisoning on record.)

The business that pumps methyl mercury into a lake is increasing the risk of serious health consequences for the people living round that lake. Those risks come with a significant dollar value attached; in this hypothetical case, the dollar value may be the cost associated with medical treatment, the cost incurred by lost productivity, and the cost inflicted on the local fishing industry as the industry collapses.

These costs are not borne by the business that did the dumping. The business is not really a capitalistic enterprise; it keeps the profits from its various activities, sure, but it does not pay the costs associated with the risks incurred by its business methods. Those risks are socialized–spread across the population.

In a conventional socialist arrangement, the one everyone thinks of when they think “socialism,” a worker works but does not keep the profits from his work. The profits–the results of his labor–are distributed across the population.

In the inverted socialism that comes along with lax regulation of environmental and social practices, a business keeps the profits from its work, but the costs associated with doing business are distributed across the population. This artificially increases the business’ profit; the socialization of risk means that some of what would otherwise be the business’ expense are paid by the community–even those who do not work for that business–and by other businesses impacted by the first business’ practice. Profit is not distributed, but cost and risk are.

This socialization of risk amounts to a subsidy paid by the people surrounding the business which inflates the business’ worth and increases its profits without increasing production or efficiency. Because the risks are subsidized and the costs associated with those risks are socialized, businesses which operate in a manner that socializes risk end up at a competitive advantage over businesses which shoulder the full costs of doing business.

It need not even be something as blatant as dumping toxic byproducts into the environment, and thereby socializing the risk and forcing others to assume the costs associated with that risk. This kind of “pancake socialism,” or inverted socialization of risk, may happen even in the service sector. For example, when an independent mortgage writer writes a mortgage, he is paid a percentage of the value of that mortgage, and at that point he’s done. The company who underwrites the mortgage, which may or may not own the mortgage throughout its entire life, shoulders the risk associated with the mortgage, but the guy who initially sold it has a different set of motivations. He is paid for every mortgage he writes, regardless of whether or not the underwriter profits from it or it goes into default. Therefore, his incentive rests only with writing the maximum number of mortgages possible, for the highest dollar value possible. He has very powerful incentive to issue risky mortgages, to artificially inflate the ability of the person buying the mortgage to pay, and to minimize the apparent costs associated with the mortgage. In fact, absent any kind of oversight, he may even have incentive to intentionally mislead his clients about the cost, and even to write mortgages which he knows damn well his clients can not afford. He does not bear the costs associated with the risk incurred by the mortgage underwriter.

The mortgage underwriter is in a similar position. It profits from writing mortgages; obviously, if the number of mortgages which go into default reaches a certain threshold, the underwriter will fail, but the more mortgages it underwrites in the short term, the more profit it generates, Particularly when it socializes its own risk by then turning around and selling those mortgages to others.

The total amount of money available to finance mortgages is finite. If a large number of mortgages go into default, this can diminish the pool of money available, which ends up dragging down much of the rest of the economy. A society which permits mortgage lenders to operate with little oversight is a socialist society; it encourages the socialization of risk by separating the risk from the profits. If the housing industry fails…well, the mortgage agents and the owners of mortgage issuing companies still made their millions; they’re set. The costs of the failure are not born by those individuals; the costs are socialized, and end up being paid by everyone, regardless of whether or not they benefitted from the mortgages.

“Socialism” is something of a dirty word in American culture. The best way to defeat any policy is to label it “socialist.” Yet we are a highly socialist society; it’s just that we socialize risk, and we socialize cost, but we don’t socialize profit. Businesses that work without oversight are socialized businesses; they expect everyone else to pay for their operational costs, while still concentrating profits internally.

This imposes significant barriers to entry into many industries; the socialization of risk benefits large businesses over small businesses. It makes up a hidden cost subsidy for businesses in areas where oversight is poor when they compete with businesses in areas where those businesses must pay the full cost of doing business, including the cost of waste management and risk management.

And you know what? As a capitalist, I think that’s fucked up.

Some late night thoughts about the nature of money

Gah. It’s late, and I can’t sleep ’cause I’m waiting for Shelly to get home from work, so let’s talk money.

Exhibit A: One of my clients, a large, publicly-traded corporation that makes custom uniforms and apparel, primarily for the hospital and tech industries. They make those weird-looking bunny suits that chip manufacturers use in cleanrooms, that sort of thing. They have manufacturing and warehousing facilities in five states, thousands of employees, and brought in a tad over $130 million dollars in 2003, with net profits after expenses and tax of approximately $5 million. A huge, successful business.

Exhibit B: A tiny, privately held company occupying one office not far from my client’s corporate headquarters, employing less than twenty people, running an online Internet dating Web site. They bring in, oh, around $66 million a month, give or take. Roughly five times what my client makes, in other words. And almost all of it’s profit.

Wall Street doesn’t like the “adult” industry, of course. I don’t believeany porn or sex-toy companies arepublicly traded, and I have to wonder what the Fortune 500 might look like if it listed sex-related businesses. Wal-Mart would probably still top the list,ofcourse, butI suspect after that things might get interesting.

Money doesn’t work the way people think it does. Take lawyers who work on commission, for example. (Please!) Now, if you’re injured in a car wreck and you’re suing someone’s insurance company, you might think that the lawyer who works on commission will get you the best possible settlement, because his financial interests are tied to yours. After all, the more money he winds for you in the settlement, the more money he gets, right?

Wrong. You’re not his only client. He has thousands of other clients, in an unending stream. That changes the equation.

Suppose he can put in an hour working on your case, and get the insurance company to offer you an $8,000 settlement. Or, he can work 15 hours on your case, and win an $80,000 settlement for you. What’s he gonna do? He’s gonna try to talk you into settling for $8,000. Why?

Well, let’s say he works 45 hours a week. If all his clients take the paltry $8,000 settlement, he’s brought in a grand total of $320,000 in settlements in a week. If all his clients get $80,000 settlements, he’s only brought in $240,000 in that week. Which would you rather have–a percentage of $320,000 or the same percentage of $240,000? It’s a no-brainer. He wants maximum income per hour worked, which means…you get the chump change, chump.

On a more personal front, the Chinese government is still doing everything in its collective power to make my life complicated. Certain old-guard factions in the Communist Party in China still oppose with all the spirit they can muster from their feeble and ancient bodies any attempt to drag China into the seedy, dirty world of capitalism and free enterprise, and are continuing to block the Chinese venture capital firm that wants to invest in another client of mine, even though the rest of the Chinese government has given the deal the official go-ahead. As a result, my client can’t pay me (or indeed anyone else), and as a result of that, my client and I are still in limbo with regards to the move to Atlanta. So we’re here in Tampa for at least the next six months or so, while my client’s representative flies back and forth between here and Beijing on an almost weekly basis, trying to discover whatever voodoo black magic is going to be necessary to get the money out of China. In other words, it’s just business as usual for my life.

Follow the Money; or, why does my computer keep getting infested with spyware?

[EDIT] This particular post has generated a very large amount of email, and apparently is being read by a large number of people infected with VX2. As a result, I’ve edited it, to clean up typos and to add additional information about the exploits used, the way VX2 works, and the sources of the spyware scourge. New information is identified with [EDIT].

If you’re reading this post and you’re on a Windows computer, the odds are overwhelming–between 80% and 90%–that you are infected with at least one virus or spyware program, and the odds are very high that you’re infected with dozens or hundreds.

Yes, you. Even if you are technically literate, you have a firewall, and you never download suspicious attachments, you are almost certainly infected. There is lots and lots and lots of money in computer viruses and spyware, especially the variety that makes popup ads appear on your machine. The question I’ve always had, though, is who’s making all this money by infecting your computer?

A couple nights ago, Shelly’s computer became infected. Shelly’s technically savvy, the apartment we live in is on a closed private network with a hardware firewall between us and the Internet, and she also runs a software firewall on her computer, and she still became infected nonetheless.

I spent about six hours removing the infection, and also tracking down the source of the infection, and painstakingly backtracking all the popup ads that the adware displayed on her computer. My goal: Follow the money. Discover where the infection came from, and who was making money from it. The results were, to say the least, interesting.

If you don’t care about stuff like this, you can skip the rest of this message. If you’re curious about the mechanisms by which spyware and viruses work, who is responsible for them, why they’re so common, how they spread, and most important, who makes money by creating and releasing them: read on!

War, war, waaaaar in Iraq…and daddy wants a new computer!

So far, the United States has spent a grand total of approximately $139,744,240,000 on the war in Iraq, not counting indirect costs or human lives.


That’s roughly $474 for every man, woman, and child in the United States. You know, I could kind of use that money right now.

Or, put another way, that is:

– Enough money to build 69 space stations, with sufficient money left over to double the size of the Space Shuttle fleet;
– Enough money to give full college scholarships to 3,493,606 college students;
– Enough money to multiply the Federally-funded programs on AIDS and cancer research by 46 times, with enough left over to double the amount of health insurance subsidies available to low-income citizens;
– Enough to multiply Federal law enforcement and anti-terrorism budgets by a factor of five, with enough left over to double the number of guaranteed student loans;
– Enough money to increase the budget for national parks and wildlife preserves by two hundred and sixteen times;
– Enough money to rebuild every single interstate and US highway in the entire country, with enough left over to pay the salaries of 305,690 new police officers (at salaries two percent higher than the national average);
– Enough money to give every single schoolteacher in the country a $22,000 a year raise;
– Enough money to multiply the total national budget for education by two times, with enough money left over to double the budget for the EPA and double the budget for the National Science Foundation and pay for another Space Shuttle and triple the senior citizen prescription drug benefit;
– Enough money to clean up every single Superfund environmental site, with enough left over to double the Veteran’s Administration fund and wire every public school and library to the Internet.

I wonder if the war on Iraq represents the best value for that money.