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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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RE: now, that was pathetic
By Andy35W on 9/22/2008 2:10:53 AM , Rating: 2
I don't agree with some of the individual points but I think the general argument was valid and well written.

I'm not sure if the total cost will be $1 trillion, it might be nothing at all, but probably it will be more than $100billion to the taxpayer. So not only is the common tax payer suffering because or repossessions from the banks, who are trying to cut their losses after faulty selling pracitices, but now those same people have to bail out the banks as well with tax money. Does seem rather unfair on the havenots.

The financial institutions are completely merciless and without compassion unfortunately. All of them have statments about putting the customer first but when it comes to it that is a total lie and it is the $ that always comes first. That's why every few years they lose billions through greed and then repeat the process, ie junk bonds, Enron/Worldcomm and now subprime. Bailing them out this time will mean they will continue as in the past and once again in a few years time provide another problem.

Regards

Andy

PS Seems to be a bit of a race on at the moment between Bush and Chavez who can nationalise the most industries :)


RE: now, that was pathetic
By pmonti80 on 9/22/2008 3:25:45 AM , Rating: 2
I don't agree to everything with masher here. But a least the final chapters are so true that it's impossible to be against.
What kind of example will this "socialization of the economic losses" will set for the future? Next time there is some kind of economic bubble forming, the enterprises will go for it instead of trying to be cautious about that bubble. They will make a lot of money and they know that when the economic bubble will burst, if the problem is big enough, the government money (OUR MONEY) will solve all their problems. So it's better for them when the problem is very big, the help is assured, "We are too big too fail".


RE: now, that was pathetic
By pmonti80 on 9/22/2008 3:33:25 AM , Rating: 2
quote:
I don't agree to everything with masher here. But a least the final chapters are so true that it's impossible to be against.

I meant paragraph, not chapter.


RE: now, that was pathetic
By Hieyeck on 9/22/2008 10:07:01 AM , Rating: 1
masher is spot on. Why is it that I readily disagree with you?
quote:
I'm not sure if the total cost will be $1 trillion, it might be nothing at all, but probably it will be more than $100billion to the taxpayer.

Because someone doesn't pay attention to the news.
http://edition.cnn.com/2008/BUSINESS/09/20/us.mark...
http://www.foxnews.com/story/0,2933,425663,00.html
You can't put bias on $700 billion.


RE: now, that was pathetic
By Ringold on 9/22/2008 6:35:03 PM , Rating: 4
Okay, slow down, and consider what is happening with those 700 billion, because it has to do with accounting, not bias.

If a soldier shoots a government-bought-and-paid-for bullet in Iraq, that's just plain expense. Money out the door, one asset up in smoke, never to return. Welfare spending? SSI? Medicare? Money out the door, nothing gained on the government balance sheet.

This 700 billion on the other hand will be used to buy assets at possibly a depressed market value. They can either turn around later during a better point in the economic cycle and sell those assets at a potential profit, or depending on what they are exactly, hold them to maturity. For all 700 billion in assets to go up in smoke would require such an economic catastrophe that frankly this would be the least of our concerns.

I actually think the tax payer might end up making a profit out of all this years bail outs in the end. Hank Paulson has negotiated some great concessions. This is fundamentally different than all other government "spending."


“And I don't know why [Apple is] acting like it’s superior. I don't even get it. What are they trying to say?” -- Bill Gates on the Mac ads














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