[From the Str Fry department of economics…]

It’s called capitalism, stupid!

Several weeks ago we witnessed those greedy oil executives being hauled to Capital Hill to answer for their sins.  With oil and natural gas prices at nosebleed levels, oil companies posted record profits.  Just prior to the hearing, Exxon announced a quarterly profit of $10 billion—more than any other U.S. company has earned in a 3-month period….ever.  Far from being lauded for his success, Exxon CEO Lee Raymond was called onto the carpet to explain to a panel of senators how:

1) As CEO of a publicly owned corporation…

2) In one of the most capitalistic countries in the world…

…he is not really trying to maximize profits.  This in itself is kind of funny because in a recent Fortune magazine article Raymond responded to the interviewer’s question by saying if given the choice between lowering oil prices or making more money, he would always choose more money—far different from the demure tone taken before the senators in which Raymond disavowed trying to maintain high oil prices.  This is most likely a half-truth as his real goal was not to maintain high prices, but to do what any good CEO would: maximize profits.  High oil prices were incidental. 

It’s easy to understand why the politicians were so outraged.  Private enterprise had just bested the government in responding to hurricane Katrina.  Wal-Mart, anticipating the hurricane and routing goods to its stores that would be highly demanded in post-hurricane conditions, was operational and dispensing supplies long before the anemic FEMA.  FedEx was also operational throughout the gulf coast shortly after the storm passed.  Additionally, with the government hemorrhaging money almost as fast as its administration was approval ratings, the oil companies added even more insult to injury—they didn’t lose money.  In an almost show-trial atmosphere, Democrat and Republican senators appeared united, boldly showing their outrage that anyone would dare infringe on their constituents’ rights to inexpensive gas.  This was expected from the Democrats, who have been about as supportive of free-enterprise as Joseph Stalin was of free-press.  But to see the Republicans, long the champion of big business and old money, gladly joining in was disturbing, but sadly, not surprising. 

For years Republicans were known as the pragmatic, common sense party often lambasting the Democrats for their pie-in-the-sky social and economic ideals.  Now it is the Democrats, in a reversal, who are appealing to common sense against the Republicans’ democracy by force strategy.  It is only fitting that the Republican Party, if it can still be called that, is deviating from its fundamental economic ideals as well.  Was it not just a few years ago that the current administration implemented tariffs—one of the most prohibitive of all economic measures—against European steel? 

            But like CEOs seek to maximize profits, politicians seek to maximize votes.  Both Democrats and Republicans lambasted the oil executives based on principals—the Democrats acting on theirs, the Republicans acting in spite of theirs.  This is a special case of a more endemic phenomenon associated with capitalism in the United States which is how selectively capitalist Americans are.  Lots of people rail against Wal-Mart, the “evil empire.”  After all Wal-Mart has put thousands of mom and pop stores out of business in small towns throughout the country.  But did it?  Wasn’t it the consumers who shopped at Wal-Mart instead of the local shops who put them out of business?  And we all hate the sight of twelve-year-olds in third-world countries working in sweatshops, but who is willing to pay twice as much for clothing?  The free-market is what it is.  Wal-Mart puts smaller stores out of business because it is more efficient.  No one wants to see children slaving away in sweatshops, but would anyone complain if the alternative was prostitution (which many times it is)? 

            I’m certainly not for allowing the gears of capitalism to grind men up as the book “The Jungle” alludes to; however, more times than not, interfering with capitalism and free-markets creates more problems than it solves.  Take a situation in which almost everyone would agree interference is a necessity.  For example the gas station owner who charges hurricane victims twelve dollars per gallon for gas.  Clearly such profiteering is against any sort of human decency, or is it?  Charging a normal price for gas, let’s say $2/gallon, means practically everyone can afford it.  Therefore, a person who has a critical need for gasoline and is willing to pay $12/gallon to satisfy that need will be forced to enter a line with people who value gasoline based on their needs at $11/gallon, $8/gallon,  $3/gallon, etc.  The end result is the advent of huge, two-hour-long lines for gasoline.  Instead of the highest needs getting satisfied first, they get no preference at all.  Everyone can buy more gas than they actually need, and it gets wasted.  The gas station owner being a profiteer is a necessary condition for efficient distribution of limited resources.  The gas station owner should be considered a hero, not a criminal.

            Many other examples of interference exists: minimum wage—artificially raises prices and unemployment, anti-trust intervention—punishes efficient organizations, Federal Reserve interest rates—incorrectly assesses the demand for money.  There is an old Vietnam War era saying: “America—Love it or leave it.”  I always felt this was the most myopically, patriotic statement I ever heard.  It tells Americans to shut up and support their country when it is exactly their ability to be critical that defines America.  As much as it pains me, I almost have to say: “Capitalism—Love it or leave it.”  Under a free-economy, it can be win-lose or win-win; but very seldom is it lose-lose, if ever.  Instead of criticizing free-enterprise every time we end up on the losing end, perhaps we should just let the free-market do what it does and say to ourselves: It’s called capitalism, stupid!