THE ETHICAL CAPITALIST - PART 4

Part 1, Part 2, Part 3

Capitalism is not a fat man in a top hat. Before this post, I wrote three posts on The Ethical Capitalist without defining capitalism. This isn’t the flaw that you might think it is.  Working without a definition has forced readers to place their own view on what capitalism is and what capitalism does. In reading this post, I ask that you are mindful on what you believed capitalism was in reading the first three parts.

Many of the images conjured by the word capitalism are actually symbols of capitalism’s corrupted government employed cousin; Crony Capitalism. Crony Capitalism is a quasi-capitalist economy in which businesses require government relationships for success. This system is the natural result of government interference since the government (as mentioned in previous posts) has a vested interest in keeping itself relevant to powerful corporate forces, and only a marginal incentive to protect the weaker voting public.

Consider the recent debate regarding government probing into private secure messaging applications like Snapchat and iMessage (see the article by Slate here). The public, and the media, is outraged by this egregious potential breach of privacy. This reaction is compounded by the fact that the Eric Snowden NSA events are still fresh in our collective memories. In this situation, government interests conflict with the aligned interests of the public and corporate entities, and the public is correct to be wary of a government ruling on the matter.

The government is self-interested before it is interested in public welfare, so consider how it would act when corporate and government interests are aligned and conflicted with public interests. Why do we distrust the government in the case of secure messaging, but trust regulators to work in the interest of the public in other situations?

Crony Capitalism is simply the result of government and corporate interests being preserved by maintaining and strengthening their relationships.

Crony Capitalism leads to every economic problem that is discussed in the news today. And why?

Because:

1. It promotes corporate campaign donations to strengthen ties between government and corporations
• This creates a barrier to entry for politicians who rely on significant donations to run a successful campaign
2. It promotes corporate lobby groups that make sure that corporate interests are met
• Lobby groups with exclusive public interests are an underfunded compromise
3. It creates quasi-public entities with obvious and unavoidable conflicts of interest
• See Halliburton and private prisons
4. It raises barriers to entry for potentially disruptive competitors that are unable to meet regulatory standards that are already met by corporate incumbents
• This reduces choice in the market as oligopolies and monopolies are protected
5. It raises the tax burden on the public to support increased government oversight
• These taxes go to preserving government interests first, not public interests, and result in actions such as those exposed by Eric Snowden
6. It reduces the transparency of government and corporate decision making processes
• Public consent in this situation is a public relations game
7. It forces the public to take on private risks while keeping private profits private
• As seen in regulations such as “Too Big to Fail” and all intellectual property regulations
8. It exports local economic problems to other parts of the world
• This can be seen in various issues from minimum wage to waste disposal

To anyone that does not see how these issues arise in Crony Capitalism, but are not a result of capitalism, I would happily elaborate. But, I’ll leave it for now and move on with a broader definition.

So what is Capitalism?

Capitalism is an economic system in which the means of production are privately owned.

It should be immediately obvious that Crony Capitalism effectively violates this definition since means of production are effectively government owned through their reliance on government protectionism, the offsetting of risk, past relationships, direct financing, favorable borrowing rates and subsidies.

There are those who think that my definition is incomplete and say that it requires some extra points. These extra points usually have to do with profit, the free market and consumerism or something along those lines. But these extra points are unnecessary and restrict the definition to the useless straw-man argument that is presented today. The free market is a possible result of a capitalist system, and consumerism is something else entirely (as seen in previous posts).  But most people seem to have trouble separating profit from the definition of capitalism.

Profit is not a necessary condition for a capitalist agent. Wikipedia, Linux and OpenOffice were not created to generate profit and had different motivations entirely. Google has been criticized for projects such as Google Earth and Streetview specifically because monetization was not the motivation behind them. An increasing number of startups and internal corporate projects are created with a need in mind before the idea for monetization is in place. All of these projects exist because of private ownership, and not in spite of it.

The idea that profit is a universal and primary motivator in capitalism is a myth that is just starting to be debunked. I’m not saying that profit is not a motivator, nor am I saying that profit is not important in a capitalist system. What I’m saying is that profit has a role to play, but motivation is a much trickier and complex thing to pin down. Profit is a simplistic and archaic way to measure that motivation. For more information on the topic of motivation and profit read "Drive: The Surprising Truth About What Motivates Us" by Daniel H. Pink, or for a synopsis watch this video.

To add to the misconceptions in this topic is the left-wing/right-wing divide where capitalists sit at the right and socialists sit at the left. The spectrum of possibilities is, of course, far more complex than a simple left-right divide, but the damage done by the image is greater than an oversimplification. The image implies, among other things, that capitalism and socialism are diametrically opposed, but this is not necessarily the case.

Libertarian Socialism is an economic system in which means of production are owned by the people who operate those means. This system simultaneously accomplishes private ownership and social ownership and therefore does not violate the definition of capitalism or socialism. I don’t want to advocate for the merits of such a system, I just want to point out that capitalist systems exist that do not fall on the spectrum of ideas to which we have become accustomed.

After writing Part 3 of this series, my wife sent me an article by British comedian Colm O'Regan (found here). O’Regan writes a light-hearted take on his research of what capitalism is, and finds (as I have stated), that most people are more likely to conjure an image of a fat man in a top hat than have an actual idea of what capitalism means. I’ll finish this post with O'Regan's powerful conclusion: 

"capitalism might be a good idea, if we tried it."

Thanks for reading!

IP MADNESS

Many people know of my anti-intellectual property stance. Most, if not all, of those people find my view on the subject too extreme, and I can understand that. But even if we are on completely opposite sides, I think most people will agree that intellectual property today is broken. Problems in the system range from taxpayers taking on the risks of private companies to insufficient distribution of lifesaving medicine. But on the lighter side of the stupidity in the world of IP we have Apple which was granted 28 patents on Tuesday (see here). Two of these patents have got some serious attention – the flexible phone and smart glasses technology, but I’ll only talk about the former here.

The flexible phone comes as no surprise as the #bendgate scandal related to the iPhone 6 Plus is still fresh in our minds. This patent describes a mobile device that is meant to bend under pressure while protecting sensitive components. If you have heard of patent trolls, and you think that there is a problem with a system that allows them then I think you'll see that there are problems with the implications of allowing this patent.

Flexible batteries and flexible screens are not a new thing. The screen is the largest fragile part of a smartphone, so if you want a flexible phone you will need a flexible screen. Current flexible screens are made of an active-matrix organic light-emitting diode (AMOLED). AMOLED technology is already a popular technology in many phones since Samsung is a world leader in manufacturing AMOLED displays in many applications while LG uses a similar POLED technology in some of its phones. Most OLED-based technologies can be made about as flexible as high quality copier paper.

The battery is the next largest component in a smartphone, and a flexible variant has also been around for a while. Lithium Polymer (LiPo) batteries can be made to be almost as flexible as play dough and are also becoming the most common type of battery used in smartphones today. The primary reason for LiPo technology to date was not for flexibility, but because LiPo technology was lighter and smaller than previous technology and would have the ability to shape the battery into any shape space available as an added bonus.

The rest of the components, such as the camera, GPU and sensors, have to be made sufficiently small or out of other flexible materials, all of which exist today. These components are already fairly small and have mostly flexible connectors. So what is there left to do? Well, you still have to come up with a way to fit all this stuff together in such a way that the phone is maximally flexible and rigid in all the right places. Admittedly, Apple does excel in putting things together in a tidy way so they should get credit where credit is due. But the patent will only serve to stifle the innovation of potential competitors.

Samsung announced the first “real” flexible display phone here with a prototype in 2010. Though it was extremely flexible, it required a housing for other components that were unable to bend. Still, it shows that Samsung was concerned with the flexibility of their phones about 4 years ago.

The LG G Flex was marketed as a flexible phone over a year ago now, but it didn’t have the flexibility that the Apple patent intends. Still, the G Flex could have been a great starting point for flexible smartphones and an example for other manufacturers to follow and improve on.

Another potential competitor was the Kickstarter project Arubixs. The Arubixs campaign was started in September 2014 and was supposed to be for the development of a “Flexible, Shatterproof, Water Resistant and Wearable Smartphone”. There were, and still are, groups of skeptics that believe that Arubixs is a hoax and that a startup does not have the resources to meet its lofty goals. But, as I’ve already mentioned, the Arubixs would simply be a method of arranging already existing technology, not a build-from-scratch solution. So who knows how far the Arubixs team was down the road? From where I stand, they seem to be as far as Apple.

So why should you care?

Because it's harmful to the public and the most obvious way is that it harms the consumer by significantly increasing the cost of the product. A 2013 study by WilmerHale found that approximately 30% of the cost of a smartphone is used to pay for patent royalties and litigation, which is about the same as the cost of the components. Part of the reason that the cost is so high is due to something called “Royalty Stacking” where overlapping IP claims demand redundant royalties.

These kinds of patents also serve to stifle innovation, and prevent the public from having competitive products. For example, imagine that you are on the Arubixs team and you just heard about the Apple flexible phone patent - how do you react? You might say that there is nothing to worry about since there is significant evidence to show that you were working on something before the Apple patent was approved. But one look at Apple’s Balance Sheet, which has a pile of cash that is sitting there, might make you think that Apple is just waiting to pay for lawyers to prove that you stepped on their toes. Apple has a history of taking these kinds of things very personally so if you have a great way to make a flexible smartphone, Apple's patent might make you think twice about making it a reality.

The IP is ultimately as strong as the legal team that defends it. So if you are a small, cash starved, startup trying to make the case that you came up with an Apple idea before the patent came out you might be in some trouble making your case. Instead of encouraging innovation from competitors, potential competitors would now be deterred from even trying.

Let’s not forget that patent processing and enforcement are a public matter – that is, the taxpayers pay for IP. Whenever a trial for patent infringement occurs, or a patent is filed, it’s the government that is picking up the bill. In that way, patents are a way to maintain a government enforced monopoly at the expense of taxpayers. The danger of this kind of a system is that the risks associated with bringing that to market are transferred from the private company to the taxpayer, but the profits are privatized.

Patents are also notoriously difficult for the public to read or understand. The current system of IP is reminiscent of Christian scripture circa 600 AD when it was only written in Latin. Common people, who had no hope of understanding scripture (many who couldn’t even read), had to trust authorities as to what scripture stated and meant. Battles over scriptural interpretation were done so far beyond the reach of common people that they had no meaningful input into those interpretations. However the interpretations would have serious repercussions on the lives of common people since it was the basis of all their laws and many traditions.

The same is done today by giants like Apple that write patents far beyond the understanding of the public. To see an example of how the public misunderstands IP and how Apple exploits that through PR, see the article by the Verge here. Those patents are then enforced using the taxpayer’s resources while legal expenses are financed by the consumer. This is all done to prevent competition, which would actually benefit the public by coming up with new, and potentially better, ideas.

Now I know Apple (and others but especially Apple) makes products that people love, so I don't think that a complete Apple boycott is reasonable, or even called for. All I ask, is that the next time you fall in love with an iSomething, take a moment to think about how you are being exploited by the IP that powers it.