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An anti-capitalism poster from 1911, published in the Industrial Worker, a socialist-anarchist newspaper
Fire, the wheel, the printing press...and the capitalist economic system.

When listing all the numerous inventions that improve our lives, one of the most important is usually ignored: the capitalist economic system.  With recent market turmoil causing some observers to claim capitalism itself has failed, it's apropos to take a closer look at the technology behind it.

Capitalism is an invention, no different than the transistor or the automobile. Like those others, it's comprised of many smaller inventions: the corporation, the bank, the stock market, commodities, securities, futures, etc. All together, they are a group of technologies invaluable for efficiently converting labor and resources into goods and services. Nothing we've devised has ever worked so well.  Most of our prosperity and standard of living derives from it.

Take Russia. By far the world's largest country and the richest in natural resources, it has a highly educated and hard-working populace. Yet when Putin took over, their GDP was barely larger than the tiny island of Hong Kong's, and despite quintupling in the last few years, it's still a tenth of the US economy. Or consider China which, after allowing a small bit of capitalist endeavor to penetrate its system, transformed into the world's fourth-largest economy nearly overnight.

One of the reasons so many people (including some misguided economists) have trouble accepting capitalism is its apparent simplicity. It just seems impossible that a system so seeming chaotic can outperform something intelligently planned by trained economists. But that assumption is itself incorrect. Where a planned economy is like a single-core processor, capitalism is a neural-net processor with millions of nodes. A socialist economy is run by a few government-appointed individuals. But in a free market, every time you buy or sell a product, you're adding a calculation to the system. Whether you buy a car, rent a movie, or get a haircut, you're contributing to the price and quantity of goods and services. Cut a trip to the mall because gas went up another 5 cents, and you've input data to force down the price. Go anyway and you've voted to raise the price further.

The system appears simple, but in reality it's an enormously complex, self-regulating, highly adaptive mechanism. And like most mechanisms, it works best when no one pours sand in the gears.

There's a strong theoretical basis that any intervention in a market reduces its efficiency. But still governments keep trying to tinker under the hood. Their shade-tree efforts invariably do great damage. Our current fiscal mess is a marvelous case in point. It's been cast as something too difficult for average people to understand, but it’s really very simple.

Consider.  A couple applies for a loan. They make $60K a year, and need to borrow $700K. Their credit history is poor or nonexistent. The house has doubled in value in recent years-- only because all the other homes around it have as well. And the only reason they can afford the payments is because interest rates are so low and they're being offered a balloon mortgage that, if rates climb or their house depreciates will surely bankrupt them.

Does it really take a rocket scientist to know how risky this is? And that a bank with a large portion of its portfolio in such loans is also in peril?

So why did so many banks take such risks for so long? Here's the key to the whole problem: government intervention. In a free market, interest rates will rise in step with rising risks. They didn't -- thanks to the Fed. And government-sponsored enterprises (GSEs) such as Fanny Mae, Freddy Mac, and the Federal Home Loan banks kept the music playing. With most of the risk ultimately guaranteed by the federal government, no one really cared.

The bailout will ultimately cost a trillion dollars. It's also left us an industry that's effectively been nationalized, and a precedent that will encourage future industries to take more inappropriate risks. But worst of all, we have people on both sides of the political aisle calling for still more government involvement. Capitalism hasn't failed here-- government intervention has.

What goes up must come down. When a market rises too fast, it must eventually decline. The longer one prevents that, the harder that fall will be. Very simple. It's a shame our politicians can't understand that.

But the technology itself is still sound. And if we just leave the machine alone, very quickly it will start working again.



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I dont see this as accurate.
By rudy on 9/22/2008 1:24:22 AM , Rating: 2
Capitalism also created the great depression. And having spent time in countries who have dealt with capitalism unbridled I can say it doesn't work out so well. Rules need to be in place to guide capitalism. Picking the right ones at the right times can definitely be difficult though. Other wise monopolies form and people play terrible games with the market who have power. The low interest rates are not why people kept giving out loans a serious miscalculation on your part. The reason was because people were willing to buy those loans. So the lenders saw no risk cause they were passing the loan onto some investment bank or china or whatever and in turn they were making a quick cool grand or more without actually needing to take any risk. I don't think they ever thought the US government would bail anyone out back then. They just figured they would not be the ones hurting. The low interest rates did not help the problem because the world savings not happy with low interest rates moved investment to alternatives and mortgage backed securities with high interest yielding ARMs was the hot item. But banks were not lending to idiots with nothing because of low interest rates they were doing it cause other idiots were buying the mortgages.




RE: I dont see this as accurate.
By rudy on 9/22/2008 1:35:31 AM , Rating: 3
Another way of looking at it. Someone is selling dog poop for 100K would you buy it? If I gave you a low interest loan to buy the piece of dog poop would you do it? I don't think you would in either case. But if jason mick walked up to you and said I will give you 1000$ if you give me a piece of dog poop would you take out a loan and buy that poop? Of course you would because you don't care what jason mick is going to do with that dog poop which you find worthless you only care that he is giving you 1000$ and you will make a quick buck. What you don't know is that jason mick is packaging up thousands of pieces of dog poop and using it to increase the weight in his box of gold. Then he sells that box of gold mixed with dog poop to someone who doesn't bother to open it and make sure it is all gold.

I do not really agree with what the government is doing but if they don't bail these companies out in some form 1 of 2 things will happen. Either they will get bought by much more cash rich companies mostly out of china, or we will slip into a massive world wide depression. Or perhaps both when presented with no good alternatives this is what they have chosen.


RE: I dont see this as accurate.
By theendofallsongs on 9/22/2008 9:41:59 AM , Rating: 2
Um, hello? Capitalism didn't create the Great Depression, the federal government did. The recently created Federal Reserve tried to short-circuit normal business cycles by hold interest rates down. The final trigger was protectionist laws like Smoot-Hawley that cut foreign trade.


RE: I dont see this as accurate.
By mattclary on 9/22/2008 2:34:36 PM , Rating: 2
+++

Smart man.


"So, I think the same thing of the music industry. They can't say that they're losing money, you know what I'm saying. They just probably don't have the same surplus that they had." -- Wu-Tang Clan founder RZA














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