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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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By phattyboombatty on 9/22/2008 10:28:01 AM , Rating: 2
and a precedent that will encourage future industries to take more inappropriate risks.

I disagree with this assertion. Companies do not base decisions on whether a "bail out" is available. Ultimately, there are actual human beings (i.e. CEO's) calling the shots for these corporations. Usually, this a short-term, very high paying job with the opportunity to obtain a substantial bonus for immediate, profitable results. Almost always, there is a golden parachute awaiting these individuals no matter how poorly they perform.

These CEO's have every incentive to obtain short-term profitable results, even if their decisions ultimately are harmful to the company's long-term future. They want to bring in the huge bonuses while they are in charge, even if it means creating a giant mess for the next CEO to handle. The CEO's couldn't care less about whether a bail-out is available in the future. They either won't be around when the sh*t hits the fan, or they will have already reaped their millions from the company.

If their is a bail-out, they know that they will be canned. If their isn't a bail-out, they know they will be canned. Either way, it makes no difference to them, because they still get their golden parachute and can retire in Florida with their millions saved away.

RE: Precedent
By masher2 on 9/22/2008 10:45:52 AM , Rating: 1
> "These CEO's have every incentive to obtain short-term profitable results, even if their decisions ultimately are harmful to the company's long-term future"

While true, their actions are not as disconnected from company performance as you think. A CEO reports to a board of directors...if the board doesn't agree with a course of action, they can (and have) ended a CEO's tenure immediately. Similarly, directors on that board are themselves elected at shareholder meetings, giving the ultimate responsibility to those who own the company.

Obviously, excesses can and do occur. But the notion that CEOs can run rampant, destroying shareholder value without oversight, is false.

RE: Precedent
By pmonti80 on 9/22/2008 11:12:20 AM , Rating: 2
The problem is when shareholders are led to believe that great short term benefit every year is good and normal and forget that some decisions may harm greatly long term benefit. Usually people want short term benefits out of everything, so it's just in the interest of the CEO to do it. Both because the CEO will loose nothing if things go south and because he has a LOT to gain if benefits rise sharply in little time. This is the reason all economic bubbles are formed; everyone (economic world, political world and normal people) benefits benefit when the economy is rising a lot each year, so they forget to take precautions.

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