Guest Post: – The Excellent Capitalist by @TapsMurove

Posted on 19/07/2011

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Capitalism is a great economic system. Ideally it rewards the individual for work and effort put forth towards the creation of economic profit. If a man has land, and he plows that land and in season reaps a crop, he is free to sell what he has harvested and keep the profit for himself and his family to use as they see fit. In a similarly ideal situation, any workers who contributed to the harvest, while not owners of the land, are still entitled to a fair wage which is commensurate to the work that they’ve put forth. In the perfect capitalist world, a man works and is rewarded in proportion to what he has put in. But the world is far from perfect.

For the purposes of discussion, we shall create a fictional character named Bill. Now, Bill is an excellent capitalist: he has a stellar work ethic, he is intelligent and rational, and is an entrepreneur who has both original ideas and the means to bring them to fruition. Being an excellent capitalist, Bill really doesn’t believe in taxes. Why should he give a portion of his hard earned money to support an institution which he sees as being inherently inefficient, and only excels at creating red tape which, in most cases, makes it harder for excellent capitalists like himself to make more money? However, being fully aware that tax evasion is a crime that could land him in prison, Bill complies with the law and diligently pays his taxes according to the prescribed schedule.

Bill has 16 employees who work in his business, Enterprise (Private) Ltd. He pays them the going market rate for their work, and has managed to create a work environment where they are comfortable and able to be productive. He expects each of his employees to come to work on time and put in a full day’s worth of work before they leave for the evening. In truth, Bill would rather only pay his employees a third of what he currently pays them in order to maximize the bottomline, but if he did that, then many of his employees would leave to work somewhere where they are paid more. He isn’t much concerned about how comfortable or safe the work environment is, as long as he makes his money, however, certain labor laws make it wise for him to pay attention to safety issues and sexual harassment concerns lest he find himself in a costly lawsuit.

Bill’s business is extremely good at making widgets. In fact, they make the best widgets on the market. Their widgets are functional, durable, well designed, and affordable. When they receive complaints from their customers, they deal with the issues swiftly and effectively. They have a top rating when it comes to customer care. Now, making brilliant widgets is a costly enterprise. Hundreds or hours of designing and testing, are needed to create the product, then comes material costs, labor cost, and countless overhead expenses which all add to the cost of production. For all this work, Bill receives a paltry 15% profit on every widget his business sells. If he had it his way, he would charge twice as much as he is charging now, and receive the maximum profit for all the work that his business is doing. Unfortunately, all his competitors charge a similar 15% margin and if he tried to charge more; he knows that his customers would simply buy their widgets somewhere else. The other option would be to simply produce cheaper widgets of a poorer quality but charge the same amount for them. However, this option would see his customers leaving to buy better quality widgets from his competitors.

So far the system we have described works perfectly: Bill pays his taxes, takes care of his employees and pays them well, and provides a great product to his customers at an affordable price. Now we arrive in Africa. Under normal circumstances Bill would pay his taxes like everyone else in the country, however, Bill knows a particularly good accountant who is exceptionally talented at making money disappear. Through creative accounting, Bill only declares a third of his profits meaning he only pays a third of his taxes. Isn’t Bill afraid of getting caught you ask. Not at all, Bill knows someone well placed in the govenment revenue office who makes sure that no one looks too closely at Bill’s business. Now, the economy has recently been going through a tough patch – for the past 20 years. While Bill should be paying his employees a certain amount of money, he knows that were he to pay them a third of what their work is worth they would still be unable to leave because there simply aren’t enough jobs in the market. And so he does. It’s clear that the employees aren’t happy with earning so little but they dare not complain lest they lose their jobs and the only source of income for their families. So they continue working knowing that if they don’t work hard enough, there are a hundred other people behind them who would gladly do the job twice as fast for half as much. Paying his employees less would naturally allow Bill to price his products more affordably; however, Bill is not concerned with competitive pricing. There are only three businesses in the market and before any of them make any price changes, they discuss amongst themselves to come up with the most beneficial price – for them. So Bill and his fellow excellent capitalists decide to charge twice as much for their widgets as their actually worth. Of course customers complain but if they don’t pay the high prices they simply won’t be able to get any widgets. And so they pay even though the widgets aren’t particularly good widgets due to cost cuts in the manufacturing process. But it’s either that or no widgets at all.

So while Bill is undoubtedly an excellent capitalist, he has also now become a corrupt tax evader, and an abusive employer who colludes with his competition to overcharge his customers for a substandard product – all in the pursuit of profit. And worst of all, he gets away with it. I began by saying that capitalism is a great economic system and it is. It just isn’t a great social system – at least not in Africa.

Written by: – Taps Murove

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