The View From 1776

Liberal Ignorance

When it comes to business, liberals literally don’t know what they’re talking about.

Liberal-socialist academics, far from educating students, fill their heads with simplistic nonsense that is far removed from the realities of the business world.

Rudy Rummel’s The Free Market as Utopia highlights a fundamental piece of liberal-socialist ignorance: the assumption that businesses under free-market capitalism force people to do as “the rich” desire.  In fact, as Rudy notes, the free market leads business people to search endlessly for new ways to benefit consumers.  If customers don’t like a corporation’s products or services, it goes out of business.

Listening to liberal theorists, however, you would never know that.  From Karl Marx through today’s ivory tower academics, liberal-socialists paint a beatific picture of the good life under socialism and contrast it with their picture of fear and uncertainty under the horrific free-market competition of individualistic capitalism.

They believe that business owners and managers, via a combination of advertising and financial power, can simply compel people to buy their products, whether the buyers really want the products or not.  Profit at any price is, in the socialist picture, the only motivating power in capitalism. 

Michael P. Lerner, who was a professor at Trinity College in Hartford when he wrote “The New Socialist Revolution,” illustrates this simplistic view of the business world. 

We must move to socialism, because, Mr. Lerner writes, ” These vestiges, institutionalized as the capitalist system, not only keep us from our potentialities but simultaneously threaten the whole world with extinction in the process of maintaining an oppressive rule.”  This is true, because “(1) a small number of Americans have vast economic power while the overwhelming majority have almost no power in the economic realm; (2) economic power gives the small group that wields it a huge amount of political power while, for most Americans, political power is very limited and exists within a narrow framework; and (3) powerlessness in the economic and political spheres affects people’s daily lives in a large number of ways, permitting the development of a society in which the human needs of most people are largely ignored so that the wealthy and powerful can benefit.”

Businessmen, in other words, are like French farmers who cram vast amounts of food into the throats of geese to create an abnormal obesity that yields high-priced pate de foie gras.

This vicious capitalistic system, says Mr. Lerner, enables a “small number of people, through their ownership and control of the means of production(e.g., factories, farms, mines) buy the labor power of most other people and to direct that labor power into production of goods to be sold for the profit of the owners.” 

This frightful state of affairs divides the nation into two classes, the haves and the have-nots, so memorably described by liberal-socialist candidates John Kerry and John Edwards in 2004.

The “haves” control banks and corporations that gives them power over everyone else.  They sit back and rake in dividends from ill-got profits squeezed from the oppressed “have-nots,” who have no choice but to work at substandard wages or starve.

Managers of large corporations, Mr. Lerner informs us, can selfishly exploit the public, because they are the largest single group in the stockholding population. 

This will come as a great surprise to pension funds, mutual funds, and insurance companies, the institutional investors who own the vast bulk of all common and preferred stocks, as well as corporate bonds.  In a typical example, officers and directors of General Motors own only about one percent of its stocks, while a single institutional investor, representing many thousands of individual clients, in 2004 owned roughly 17 percent of the common stock. 

This supposed dictatorial power of management would also come as a great surprise to the many corporate managers who have been forced from office by institutional shareholders impatient with their poor performance.

The purported dictatorial power of business managers, according to Mr. Lerner, enables them to force customers to buy their products whether they need them or not.  For example, he writes, “...a bank might convince a corporation to take out loans for unneeded investments in order to increase the bank’s wealth…. Bank control over airlines is so heavy-handed that, even though airlines are suffering from considerable overcapacity, they continue to buy more giant planes…. Banks are willing to finance the production and sale of unneeded aircraft because they make an estimated 56 percent profit on their aircraft leasing business.”

Mr. Lerner obviously has not even a faint clue about realities in the business world. 

First, let’s take the 56 percent on aircraft leasing.  Simply plugging numbers into a basic lease calculation reveals that 56 percent is a ridiculously unattainable number. 

To start, corporations lease equipment, rather than buying it, among other factors, to be able to switch to newer equipment, after a short time, where there is a high rate of technical obsolescence. 

From the financial institution’s viewpoint, the rent charged on the aircraft lease is only part of its calculated rate of return on the lease.  A huge part of the rate of return depends upon the expected market value of the airplane at the end of the five-year lease. 

If an airline leased an airplane, say for five years, with an annual rent percentage of 7 percent (which is higher than what corporations now pay as interest on their bonds), the bank lessor would have recouped less than half its purchase cost on the airplane (7 percent, times 5 years, neglecting interest earned on annual rents, would be only 35 percent of the cost).  Thus, just to break even on the deal, the bank must be able to sell the used airplane at the end of year five for at least 65 percent of its original cost.

Plug numbers into a lease calculations and you will find that, in order to make 56 percent on the lease, the bank will have to be able to sell the airplane after five years at a price more than 800 percent of the original, brand new purchase price.  Even in the fairy-land of socialism, that’s an unrealistic assumption.

But remember that Mr. Lerner says that the banks’ heavy-handed power is used to compel airlines and other corporate borrowers to take loans and to lease aircraft that they really don’t need.  In the real world, leases under such conditions would flood the market for used aircraft at the end of lease periods and drive world aircraft market prices down to probably considerably less than even 65 percent of original purchase cost. 

If bank managers really operated as Mr. Lerner supposes, they would quickly lose their jobs and their institutions would go bankrupt.

How do business people accomplish their power grab?  Mr. Lerner breathlessly informs us that, “large corporations are permitted to spend millions of dollars each year that are not reported as income but are written off as business expenses.  In fact, the tax system actually works to redistribute wealth from the poor to the rich, because the wealthy control the state legislatures, the Congress, and the government bodies.”

Mr. Lerner, as does the New York Times regularly, several times every year, excitedly notes that the top-bracket wealthy have much higher incomes than other people.  Of course, neither Mr. Lerner nor the Times has the fairness and honesty to add that the top one percent of those high-income people also pay 34.3 percent of all Federal income taxes, while earning just 16.8 percent of the adjusted gross income; and that the top five percent of taxpayers pay more than half of all Federal income taxes, while the entire bottom half of taxpayers pay just 3.5 percent of Federal income taxes.

However, let’s not trouble ourselves with nasty specifics.  It’s enough for liberal-socialists that a gap, of any size, exists between the top and bottom income groups.  By definition in a world of social justice, as they conceive it, everybody is equally poor.

The one thing that academic liberals like Mr. Lerner don’t do is examine the real-world performance of socialistic economies and compare them to even a partly socialized economy like that of the United States.  We do considerably better than socialistic nations like France and Germany. 

And, as one of the auto companies used to say in its advertisements, “Ask the man who owns one.”  The newly liberated former Soviet Comintern nations that have rejected socialism and adopted free-market competition have far outstripped the still-socialist EU nations in job creation and increases in wealth for all their citizens.

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