Newsworthy events of the last few weeks make for an interesting study in contrast. On one front, Apple Computer has a market capitalization of about $350 billion, and people left notes and gifts of admiration for its recently deceased founder, Steve Jobs. On another front, many financial institutions are concerned about declining profits and laying off workers, and people (many of the Apple supporters, in fact) are marching on Wall Street in protest of the exploitative potential of capitalism. The fact of the matter is that there's both a good and a bad way to do capitalism, and people, perhaps without even realizing it, understand and appreciate the difference.
One of the fundamental tenets of economics is that well-functioning markets maximize the collective value for everyone involved. Producers get value in the form of profit because they can sell items for more than they cost to produce. Consumers get value because they get items at prices that are generally lower than the value of the benefits from consuming the products. After all, economic transactions are voluntary, and rational consumers and producers wouldn't participate in markets without some value incentive. This is exactly the concept of the "invisible hand' that Adam Smith wrote about in 1776- by being self-interested and looking to make a profit, producers make items that make consumers happy, and, by selfishly wanting to consume useful items, consumers make producers profitable and happy. There is some tension between producers and consumers in how value is divided (since producers prefer higher prices and consumers prefer lower ones), but, in well-functioning markets, producers and consumers generally enjoy a symbiotic relationship.
Steve Jobs provided a quintessential example of the value of markets, mainly because his legacy, unlike those of many of his capitalistic compatriots, lies almost entirely in his self-interested, for-profit business activities. Unlike the Rockefellers, Carnegies and Gateses of the world, Jobs was notably stingy in his philanthropy (at least publicly). Furthermore, despite a few inspirational speeches and quotes, Jobs was known for being fairly gruff and often demeaning to his colleagues and employees. Even in his business decisions, Jobs didn't seem to pay particular attention to notions of corporate social responsibility or overall generosity. The Chinese factories that produce iPhones and iPads, for example, are notorious for long hours, cramped living conditions, and even worker suicides. (In fairness, it's unclear how these conditions compare to other opportunities available to workers in China.) Apple even came under fire in 2007 for pricing practices that charged a premium to early adopters and then lowered prices shortly thereafter.
So what's different? Why are people revering Apple at the same time they are reviling Bank of America? Part of the difference lies in Apple's response to negative events. When Apple was blamed for being at least partially responsible for the conditions at the Foxconn plants, it proactively conducted an audit to identify and rectify areas in which the factory was not compliant with Apple's standards of conduct. In addition, Apple's response to the outcry over pricing changes was to compromise and offer partial compensation to the consumers who had been hurt by Apple's policy. Most importantly, Apple has never erroneously tried to foreclose on an iPad...
That said, the differences between Apple and Wall Street extend past the specific companies to the markets themselves. Plenty of people complain that Apple's products are overpriced, and most of these people express their viewpoint by not purchasing an iPhone, iPad, or MacBook. By refusing to do business with the company, these Apple non-consumers are, for the most part, insulated from Apple's capitalistic choices and activities. Similarly, plenty of people complain that investment banks and other financial institutions sell risky mortgages and overpriced products that even the sellers don't entirely understand. These people also respond by not purchasing those financial instruments, but their choices do not entirely insulate them from the choices made and actions taken by the likes of Goldman Sachs and Bank of America.
Economists call the spillover effects of markets onto uninvolved outside parties externalities, and they regard the presence of externalities as a market failure rather than an unfortunate feature of a well-functioning market. In addition, while economists warn that government intervention in well-functioning markets destroys economic value, regulation of markets when externalities are present can actually increase rather than decrease the overall value that these markets create for society. By the same logic, smart regulation might even enable financial firms and their leaders to regain the respect and admiration of the public.
A number of popular editorial cartoons depict Steve Jobs in heaven talking to the likes of Thomas Edison and Benjamin Franklin. If there is such a thing as the afterlife, I can only hope that Steve Jobs and Adam Smith eventually get a chance to chat, since I have a feeling they would have a lot to talk about. Also, for the record, this story was written entirely on an iPad. Thanks, Steve, for reminding people that capitalism, done right, can be a huge positive force in the world.
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