Evan Barnard: Welcome to the Investor Coaching Show. I’m Evan Barnard, here along with Ira Work. Paul is taking the weekend off in honor of Veterans Day, and he gave us the opportunity to run the helm. We looked forward to celebrating our freedom — both in free markets and what the military has provided.
Freedom and Capitalism
EB: We would certainly be remiss on Veteran’s Day to go without honoring those who serve. I was running some numbers this week in advance of today, and we have about 1.8 million members currently serving either on active duty or in the reserves across all five branches and the National Guard, and that’s pretty exciting. That’s a little less than 1% of the population. About 0.5% of our population is maintaining the freedom of the other 99.5%, which is excellent.
I always enjoy Veterans Day because it’s the day after the Marine Corps birthday, which is Nov. 10. I enjoy everyone changing their Facebook posts in honor of my birthday. We honor those who serve as well as their families and even extended families. You might have a child that’s serving, or you might have a parent that’s serving at this point.
One of my classmates just retired. He’s a three-star general, but he’d been serving 38 years. I’m thinking, I could have been serving 30 years. That’s a long time.
Ira Work: Well, you mentioned someone may have a child serving. You have two children serving and you have siblings serving.
IW: There might be people out there in the audience who have a sibling serving. So we also want to honor those who have family serving because you’re also making a tremendous sacrifice.
EB: Yep, exactly. And so I thought it would be appropriate — since we’re talking about freedom a little bit, and that’s on everyone’s minds — to have a basic review of the importance of freedom and how it’s an undergirding pillar of capitalism and just review what goes on with capitalism.
People hear the term capitalism and say, “Okay, well, what does that really mean?”
Kind of like when we use the term the American Dream — that can mean a lot of different things to different people. They might have their own image of that, but let’s talk about some basic things.
Ownership and Capitalism
EB: I was reading an Investopedia article called “Main Characteristics of Capitalist Economies,” and it was interesting that one of the first items that was mentioned — which I sort of agree with, but I’m going to point out an area I disagree with — was a two-class system. Let me share what they were saying. (Of course, you never know which color state the author is in.)
The article said, “Historically, capitalist society was characterized by the split between two classes of individuals: the capitalist class, which owns the means for producing and distributing goods (the owners), and the working class, who sell their labor to the capitalist class in exchange for wages (the workers).” The second I read that paragraph, I thought, Well, almost every “worker” in this country owns stock in those corporations. They’re all owners.
We’re all owners at this point as long as we’re participating in the free market.
IW: I’ll go as far as saying that if you are actually out there buying goods and services — I don’t care what it is, whether it’s a t-shirt, whether it’s an Apple phone, whether it’s a banana — you are actually participating in the market because you are paying into the market.
IW: You’re paying those companies that are generating profits for the stockholders. So if you’re out there buying stuff, you actually should go out and own stocks if you don’t already.
EB: Might as well put the money in your own pocket.
Now, here’s the biggie: private ownership. The article said, “Private ownership, or private property, is the cornerstone of any capitalist-based economy. Without having private ownership enshrined in laws, the owners of capital have no incentive to take the risks associated with allocating capital to the market.”
Well, what does that say? In simple terms, if someone’s going to take away my new idea, if they’re going to take away my machine that I’m using to crank out widgets or, my favorite example, donuts — or if I get a new tractor to make things easier on the farm and someone can just come take my fencing, take the animals and take the tractor, what incentive does an owner even have to create value?
That’s one of the things that the military, and in this case, law enforcement and the entire judicial system, do. They protect property rights. That is a fundamental need within a capitalist system.
IW: And if you take that to another level — if you highly tax those people who are creating these things that you and I buy, and you say with a tax that you’re actually going to penalize people for creating this wealth because of the stuff that they’re selling — what’s the incentive for these business owners to actually stay in this country? Might as well move their business to another country where they can make some money.
EB: Correct. So freedom and private property rights are fundamental, and you certainly don’t want the government to take that stuff.
Self-Interest and Capitalism
EB: Self-interest is another pillar of capitalism. It was a major force behind Adam Smith’s big work when he talked about the invisible hand in his book, “Wealth of Nations,” back in 1776. It’s the opportunity for a company to deploy its capital to turn a profit for itself and its owners, commonly referred to as the profit motive.
Now, here’s an interesting thing: This particular article is talking about it from the corporate standpoint. It says, “The profit motive leads to the accumulation of wealth (creation of capital) and is the driving force behind capital allocation.”
But most individuals largely live their lives as if they’re a business owner or a corporation. When people go look for a phone, as you mentioned, using phones is an area for them to participate in the economy.
Very few people go out and say, “Hey, where’s the most expensive place I can go to buy this phone? I want the most expensive phone plan. I don’t want to save money and I want this thing to just break every year.”
Most people act in their own self-interest.
They want a good deal on the phone. And that brings up competition, another key component of capitalism. If there was only one phone manufacturer, then you could have a problem as a consumer.
But no one wants to pay more for gas, for example. I know you live in a little bit more crowded area than I do in terms of population, but I take great joy in the fact that I think today, gas in Chapel Hill was $2.69 a gallon. By the time I got to I-65 at the truck stop there, it was $2.85 a gallon. And up here it’s $2.90 or $3 in some places.
If I see that it’s $2.69, I’m going to pull in and fill up the tank. That’s self-interest.
IW: Well, down the street from where I live, about maybe 2.5 miles away, it’s actually $3.64 for Shell regular. So I try not to buy gas where I live. I try to buy gas when I’m in either Murfreesboro or better yet, Tullahoma or anywhere in between.
EB: That brings up freedom of movement. I can drive between those towns. I can look at the next gas station and see which has got a better deal. I can choose Publix over Kroger or vice versa.
We have that freedom of movement.
IW: It also helps us participate in what we call the free market. It’s like supply and demand. These gas stations know where I live. They actually look and they price it based upon what the buyer is willing to pay.
So they’re not doing anything wrong. I don’t know how they’re being charged by the supplier. Are they paying more money or are they just making bigger profits?
Competition and Capitalism
EB: Self-interest and competition ultimately put the consumer in the driver’s seat in capitalism.
Let’s take a kind of technology, whatever the current version of the Meta 3D Goggles is.
IW: Virtual reality.
EB: Virtual reality. Thank you. If the goggles make people sick, all of a sudden no one will buy them and Apple would quit making them because they’re going to be losing money.
If they make everyone happy and people just can’t believe it, and all of a sudden families are enjoying playing tennis in the living room, then they will sell hundreds of thousands or millions of those things. But it’s the consumer that drives that train. And Apple is not evil for making a profit from a product that everyone is clamoring to buy.
IW: No. And for the people that actually think that these capitalist companies are evil, there’s really a solution. It’s not taxing them more money, and it’s not putting them out of business. It’s stopping buying these products.
EB: Exactly. The term I grew up with was using your dollar vote in the economy, and we all like to have the vote.
Competition helps companies strive to be better.
I think at one point I’d seen an article that there’s like 2,800 or 28,000 computer chips in our cars now that control the gas flow, the firing of the ignition, all the radios and GPS and Bluetooth and everything that’s in the car, which didn’t exist 25 years ago.
IW: I can believe that because I remember when I was growing up, we would take our car in for service every 3,000 miles. My dad instilled in me that the oil is the lifeblood of a car, and if you just maintain your car properly, it will last a long time. Well, in the manuals today they tell you 5,000 or 10,000 miles.
IW: I was at the repair shop that took care of my Volkswagen and I was getting my oil changed every 5,000 miles. And this new mechanic, he said to me, “You don’t have to do it like that. There’s a computer chip that actually monitors how you drive the car — how fast you go, how often you break, the type of driving that you do — and it will flash when you need your oil changed.”
IW: I use synthetic oil, and I still have a hard time with that. I’m so used to getting my oil changed every 5,000 miles. To not do it, it just drives me nuts.
EB: As long as it doesn’t flash to the law enforcement how fast you’re driving.
IW: That’s exactly right.
The Freedom to Choose
EB: One of the other tenets we touched on is the freedom to choose. That was the title of Milton Friedman’s book from 1980, “Free to Choose.” Paul and I were talking about his pencil video on the show a couple of weeks ago. If you have the chance, as a reminder, Google “Milton Friedman pencil.”
It’s a great video that just shows the amount of cooperation that goes into producing something as simple as a pencil and you being able to go buy it at the store. The rubber comes from one country or the graphite comes from another.
I mean, it’s really a miracle. All of that happens and it probably costs 15 cents now to buy a pencil, but they make millions of them and it’s profitable.
Anyways, we want to have a choice.
It’s interesting, we hear a lot about corporations dominating everything, and certainly as entities, they’re large. But consumer spending is still 70% of all US GDP.
We still drive the train. The individual consumer is responsible for more than twice the spending of corporations in the economy.
People really have more power than they think sometimes.
One of the keys to capitalism is minimal government intervention. Not anarchy. We’re not saying capitalists don’t want any government, but we don’t want the government dictating what you should buy or not buy. We want the free market to decide that.
We want the ability for someone to switch from being a laborer to an owner. If all of a sudden a laborer has a good idea and they start to manufacture a new product, they can become an owner. And now you have increased competition. We don’t want the government squashing that kind of ability.
I think that again, on Veterans Day, brings up the piece that there are some things that governments are great at doing and are necessary for. Providing for the common defense is certainly one of those.
In our workshops, we sometimes talk about how the East India Company was one of the first corporations and they had their own navy, they had their own army, they had a fleet of ships and so forth. They’d paid a dividend for 200 years.
But can you imagine if Apple had their own armed forces and Amazon had their own military unit and so forth? I can’t imagine what Elon Musk’s troops would wear for something like that. That’d be a pretty sharp outfit.
So government has a place, but as far as capitalism, we want that minimized as much as we can. Certainly you don’t want high taxes again, because that discourages competition.
Socialism and Communism
EB: What would you say is the antithesis of capitalism? What’s the opposite economic system? Where would you go with that?
IW: I would go first to the beginning, to socialism.
IW: And then communism. Communism is the total opposite. It seems like there’s a lot of people here in this country that want to lead us into socialism. I would say it’s primarily because they really don’t understand capitalism, nor do they really understand what they’re getting this country into by wanting it to become more socialistic.
EB: Yep. In my view, socialism and communism are two sides of the same coin, where basically the government controls the means of production.
There’s a great story that every once in a while makes its way around the Internet — whether it’s true or not, I don’t know. But it’s a good story of these young college students in a class and they’re for socialism and communism. So the professor says, “Well, okay, everybody throw your cell phone in the middle of the room” and he collects all the cell phones and then hands out a different phone to different students.
And they’re like, “Well, no, my phone’s over there. Joe has my phone.”
He’s like, “No, you said you’re for socialism, you’re for communism, you don’t have a phone. We’ll just decide who gets your phone.” So very few people live their life that way.
But as capitalists, I think we have a long way to go in communicating our message effectively.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.