backtop


Print 108 comment(s) - last by jtemplin.. on Oct 8 at 1:47 PM


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.



Comments     Threshold


This article is over a month old, voting and posting comments is disabled

By Spuke on 9/25/2008 7:09:37 PM , Rating: 2
quote:
There are socio-economic factors that play into one being poor. They aren't excuses, but factors that make it X times as hard for someone to succeed from a poor background as opposed to one from even a middle class background.
It IS harder for the poor to succeed. The environment of the poor is not conducive to success hence the reason why they are poor and continue to be so. I was born and raised poor (government housing, single mom on welfare). In defense of my mother, she did not stay in those conditions. She moved off of welfare, got a good job (eventually got laid off...downsizing...got another, not so good, job) and owns a home.

I am now upper middle class, married, have a degree and a great career. Was it hard? Hell yes! Poor people generally don't know how to succeed so I had to teach myself. I was literally on my own for the most part as my family just didn't know how to get where I wanted to go. This is the plight of many poor people. They are literally stuck where they're at and without motivation, are doomed to perpetuate their plight. But the opportunities are there.

My brother also has a degree but my sister does not and lives at home with my mother. My friends from my neighborhood have no degrees, one did not graduate from high school, and all but one bounces from job to job. One of them has had the same job since high school but has no motivation to move on. All are very intelligent and are quite capable but have no motivation to succeed.

I am an example of how it can be done but it DOES take some creativity, motivation and hard work. Not everyone is capable of leading themselves (most people are sheep) and therein lies part of the problem. There may be some people that would intentionally stand in your path but those are not the majority and, nowadays, those types are irrelevant. I did it and I'm not a genius. Others can to but they need some guidance (that can be helped) and motivation (must be self generated).


"If you mod me down, I will become more insightful than you can possibly imagine." -- Slashdot














botimage
Copyright 2014 DailyTech LLC. - RSS Feed | Advertise | About Us | Ethics | FAQ | Terms, Conditions & Privacy Information | Kristopher Kubicki