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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: Oh please
By BuddyRich on 9/22/2008 10:42:02 AM , Rating: 2
My problem with capitalism is more to do with how it developed than anything else.

Like any other system, it didn't start in a vacuum, and has come along way since Adam Smith wrote about the invisible hand of the market. As it currently is right now, it is a long way from the laissez-faire model that Libertarians and others like to promote and that probably makes it worse than collectivist/socialist systems... As it is run right now, it is probably more a form of state-sponsored neo-colonialism than anything else.

I don't think regulation is necessarily bad, but bad regulations do get passed. Good ones get passed to. Unrestrained greed leads to things like what happened in China with the baby formula. Food regulations are a good thing, how they implemented and the specifics of the regulations are what need to be addressed. If it was left to the market it would be like my favourite quote from Fight Club:

"A new car built by my company leaves somewhere traveling at 60 mph. The rear differential locks up. The car crashes and burns with everyone trapped inside. Now, should we initiate a recall? Take the number of vehicles in the field, A, multiply by the probable rate of failure, B, multiply by the average out-of-court settlement, C. A times B times C equals X. If X is less than the cost of a recall, we don't do one"

Are peoples lives no more than their production units and costs to these big corporations? You can bet if there were no regulations, companies would make decisions like the above and that is sickening...

I suppose my real problem is two things, both involving corporations. Corporations are given the rights of individuals, but exist in perpetuity, whereas a normal human dies. Some of these rights weren't meant to exist forever. Second, the limited-liability nature of corporations already limits risks to the individuals engaged in the venture, which directly affects risks taken by the corporate entity. This means riskier behaviour can be undertaken by corporations than an individual alone. Doesn't that in and of itself throw the traditional market feedback loop off?

Finally this is more a historical footnote, but private property (which is essential for the capitalist system to work) has been fought over and stolen from individuals since time began. I don't think there is really a non-violent way to establish at least initial ownership of something. And these wrongs over the centuries have been carried forward into the present with no real resolution, and capitalism doesn't propose one. Yes, people should just "forget" past injustices and move-on, but its easy to say when you weren't one affected by said injustices... This isn't a problem that capitalism created (maybe perhaps it did but was it truly capitalism or colonialism then I don't know) but it is one that still affects things today.

Those are some faults of capitalism... Are they worse than other alternative systems faults... I don't think so... but I've never lived in a strict alternative where my freedoms are curtailed. I do live in the great white socialist north where some of my freedom is curtailed for the benefit of all, and I am ok with that.


RE: Oh please
By masher2 (blog) on 9/22/2008 11:02:00 AM , Rating: 3
> "Are peoples lives no more than their production units and costs to these big corporations? You can bet if there were no regulations, companies would make decisions like the above and that is sickening..."

But such decisions are made every day, not only by corporations, but by our government. Tens of thousands of people die each year in auto accidents...if we had unlimited resources to make roads and cars safer, most of those would be prevented. Do we put up a $100K safety rail and 24-hour lighting around this curve which has had three fatal accidents in the past year? What about this nearby one, which hasn't had any...yet?

Dozens still die from tainted food each year. Do we run multiple tests on each and manufactured food product sold in the country? Do we test every dish sold in every restaurant? Or do we decide at some point that things are "safe enough" for the amount of money and resources we spend?

What about slips and falls in the home? Shouldn't we mandate that bathtubs and other hard surfaces be immediately replaced with safer, softer materials that would wear out faster? Even if it would cost hundreds of billions?

The safety of *everything* in society-- cars, bridges, buildings and homes, food, clothing-- is set by cost-benefit analysis. Society cannot function without us making a rational decision about how much resources we're willing to spend to avoid death or injury.

The idea that "one cannot put a price on life" is one that can't exist in the real world. Resources are not unlimited. Using them wisely means accepting a certain degree of risk for a given cost level.


RE: Oh please
By pmonti80 on 9/22/2008 11:14:05 AM , Rating: 3
quote:
The idea that "one cannot put a price on life" is one that can't exist in the real world. Resources are not unlimited. Using them wisely means accepting a certain degree of risk for a given cost level.

The thing is that to some extent we pay government to make that decision. But we don't pay the enterprises to make that decision. That is the scary thing.


RE: Oh please
By arazok on 9/22/2008 11:30:01 AM , Rating: 2
We do pay enterprises to make that decision. Every time you buy a product, you encourage the enterprise to make more of that product. If you deem a product unsafe, and don’t buy it, the enterprise will either improve the product, or stop making it.


RE: Oh please
By rvd2008 on 9/22/2008 11:28:19 AM , Rating: 2
Good point. This really comes down to "what is the price of human life". Everybody could have a different opinion on this, but I am pretty sure that we all price our own lives very high (we are better after all than poor black homeless at the street corner, aren't we?). Unregulated capitalism will put a (very) low price tag on (any) human life.


RE: Oh please
By masher2 (blog) on 9/22/08, Rating: 0
RE: Oh please
By rvd2008 on 9/22/2008 11:53:34 AM , Rating: 2
People with the money will be untouchable in unregulated capitalist society. There will be no court hearing for the poor. And consumers will not even be aware of a death threatening product if corporations are not overlooked. Welcome back, 19th century!


RE: Oh please
By FITCamaro on 9/22/2008 1:00:35 PM , Rating: 2
Tell that to companies who've been sued for millions because someone was a freakin idiot.

Why do you think Superman costumes have a tag that says "Does not endow the wearer with the ability to fly"?

Why do you think McDonald's coffee cups say "CAUTION: VERY HOT!"?

Why do you think household cleaning products have directions not to eat them? (Small kids don't read so it isn't for them.)


RE: Oh please
By BuddyRich on 9/22/2008 2:02:36 PM , Rating: 2
But then lawsuits and the like are only for money. They become a "cost of doing business" and some things like safety shouldn't have a price. Start holding CEO and Boards of Director members criminally responsible and then things truly would change.

I mean if I kill someone, I am charged with murder and my freedom is taken away if convicted. Even if it was unintentional I'd still get charged with manslaughter and still go to prison for a few years. As an added bonus I can still get sued civilly in a wrongful death suit and liable for a lot of money too!

If I am a company and build a car that has an unintentional design flaw that kills a couple hundred people, I write a cheque, maybe for millions, to settle a lawsuit...

Millions of dollars vs. an individuals freedom. Somehow the above doesn't seem fair to me.


RE: Oh please
By theendofallsongs on 9/22/2008 2:14:06 PM , Rating: 2
Why is it people with your attitude always seem to know so little about law and business? Executives can already be held criminally responsible for product injuries, if you can prove intentional neglect. It's no different than personal manslaughter. If your hand slips on the wheel and you kill someone: no charge. But if you accidently killed someone because you were drunk or talking on the phone, you can wind up with jail time.


RE: Oh please
By BuddyRich on 9/22/2008 2:30:06 PM , Rating: 2
True. But the nature of a corporation obfuscates who is truly responsible and makes that intentional neglect almost impossible to prove in most cases. With the government, their actions are supposed to be transparent, and with the aid of the Access to Information Act, and the like fall under far more public scrutiny than a corporation which has no obligation.

Look at all the cover-up the cigarette companies tried when they were sued (again civilly, not criminally), and this was evidence that was destroyed that was covered under subpoena.


RE: Oh please
By FITCamaro on 9/22/2008 2:21:17 PM , Rating: 2
So who should go to jail for an unintentional design flaw? All the engineers who designed it? The engineering lead? The product manager who signed off on it? The CEO?

Corporations exist to protect those who own them and who work for them. You can't have people going to jail because a product was defective. You hitting someone with your car and killing them because you weren't paying attention is your fault. And if you hit and someone and kill them and it isn't your fault, you don't go to jail. If you're playing with a gun and accidentally shoot someone and kill them, it's your fault. All the employees of a gun manufacturer should not go to prison because someone decided to use their product to kill someone.


RE: Oh please
By BuddyRich on 9/22/2008 2:49:31 PM , Rating: 2
So you are saying that mistakes when made by a collective are forgivable, but a mistake made by an individual is not? Is it the problem that you can't assign individual blame appropriately in the case of the collective that no one should be blamed?

Its a bad example but lets say it was a specific engineer who nodded off and forgot to carry a one and something was designed sloppily... should that individual engineer be charged, just like I would be if I nodded off at the wheel? I think he should be, people would be a lot more careful in their work if that was the case. And if blame cannot be ascertained, it should fall on the CEO, who would also ensure that fewer mistakes are made.

All I am illustrating is that without the same level of deterrent that exists at an individual level a deregulated market will never work for the interests of individuals, particularly in matters like safety, etc. because there is not a big enough deterrent in market forces alone for corporations to ensure safety.


RE: Oh please
By on 9/22/2008 3:43:55 PM , Rating: 2
Simple solution: ban all corporations entirely! Their good for nothing but greed and coruption and sqeezing the rights of the common man. I dont understand why we ever allowed them to get started in the first place.


RE: Oh please
By FITCamaro on 9/22/2008 4:01:06 PM , Rating: 2
If your idea were to happen every business in the world practically would be out of business. It is impossible to completely eliminate any and all defects from every product. No all the lawsuits might not be successful, but the legal fees would destroy companies. As others said, if there is intent to create a product that is dangerous, an employee can be sued.

And when it comes down to it, a company is successful by having trouble free products. A company constantly being sued for defects that kill is not one that lasts very long. Hell look at Firestone. Some lies were spread about their tires being defective and it nearly put them out of business. Nevermind that people were driving the tires under-inflated, over rated speeds, and on vehicles that, regardless of the tire, were known to flip.


RE: Oh please
By BuddyRich on 9/22/2008 11:38:07 AM , Rating: 2
I agree with what you are saying, but bringing everything back to a CBA calculation makes human existence seem shallow and cold...

I agree some risk needs to be taken, however for whatever reason, I prefer the government to make those risk calculations. With the government I can hold them accountable (in a democracy at least) if they get it wrong, companies are ultimately only accountable to their shareholders in the long run, so they don't necessarily have my best interests in mind. Of course with lobbying efforts, etc, should I really be so trusting of the government? I don't know.

Still food is one area that should be regulated by government, not industry, just like traffic laws are passed by the government and not the car industry. Two examples where I think deregulation and a move to a laissez-faire model are inappropriate.

I could buy into deregulation more if corporations could somehow be held responsible (more than monetarily, ie. criminal charges) when they take short-cuts that end up costing lives. Sarbanes-Oxley did it with accounting, making the CEO responsible on what gets reported, but by and large the nature of a corporation shields individuals from the consequences of their actions, which encourages the companies to take the risks (and sometimes short-cuts) they do.


RE: Oh please
By pmonti80 on 9/22/2008 11:42:02 AM , Rating: 2
So true, some people just don't want to see it.


RE: Oh please
By Spuke on 9/26/2008 4:32:01 PM , Rating: 1
quote:
With the government I can hold them accountable (in a democracy at least) if they get it wrong, companies are ultimately only accountable to their shareholders in the long run, so they don't necessarily have my best interests in mind.
In America (not sure where you're from), we can sue as well file criminal charges against companies. Ever heard of a class action lawsuit? Have you ever heard of Enron? Maybe you can't where you live but we sure as hell can (and have, ad nauseam) here.


RE: Oh please
By Ringold on 9/22/2008 6:16:49 PM , Rating: 2
quote:
Are peoples lives no more than their production units and costs to these big corporations?


Yes, that's all labor is. Puppy dog kisses are nice, but like all other non-monetary/unmeasurable things, they don't put food on the table. "He has a hundred-megawatt smile" is a just a metaphor, unfortunately.

Here's your problem; the world isn't nice, and you need to accept it already. :P


"When an individual makes a copy of a song for himself, I suppose we can say he stole a song." -- Sony BMG attorney Jennifer Pariser














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