Failed Capitalism

[rose-colored-coolaid]

I've been thinking (uh oh!) about whether or not the quick strike of two massive bubbles in the last 10 years says anything about the actual viability of capitalism. Is it, similar to Winston Churchill's statement on democracy, the worst economic system except all the others? Or is there some fatal flaw in capitalism.

I think I have an answer for that now, and it's nothing like the answer I expected to find. But it's also an answer I knew all along. In retrospect, I think capitalism is just peachy. It's just that we don't practice anything like capitalism anymore.

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In it's native form, capitalism is essentially a casino. Someone gives you $1 at the door, and you either come out ahead or behind based on your skill (ahem) and luck. I use the casino analogy because in real life, luck matters far more than most people admit, because winners like to feel superior and losers like to rationalize why they lost. The main problem with this analogy is simply that at a casino, you lose more than you win, whereas in real life free trade is a positive sum game. So take the casino analogy and assume blackjack pays off 110% on average.

So, if I believe capitalism is akin to a casino, how do I get off thinking lowly of speculation? In it's primal sense, every financial action we take is speculation. I buy a candy bar for 60 cents, and I am speculating that it will taste good enough and satisfy me to an extent which is more valuable than my 60 cents. This and a myriad of other examples shows that speculation is not bad, but rather good. In fact, it's essential to progress.

I think what's wrong now is that rather than speculating with their own $1, some people realized they could borrow extra $1 from friends. They are still going to gamble that money, but there is now moral hazard. If they win, they profit largely, and losing costs them nothing...except a friendship. But the digital age has removed the stigma of losing someone elses money. If it's not yours and it comes from China, who cares.

Maybe this is nuts, but I would argue that this moral hazard creates an economic system which I would no longer even call capitalism. Though I am willing to listen if anyone else has a real good name for it.

[Scotsman]

You're probably right that we can't judge capitalism's moral and economic effectiveness because we've never really seen it in action. It's too bad that as we minimize some of it's past shortcomings, (for example the digital age and WWW have helped to reduce imperfect information about supply/demand and related pricing issues), that we find ourselves facing ever increasing levels of government regulation and related social engineering distortions.

While your example points out some recent quirks, it ties back into what I believe is capitalism's basic fault. Like our system of government, successful capitalism relies to a large extent on an essentially moral population with shared values and a long term desire for survival. Short term greed, combined with a lack of compassion for one's fellow man, are not effectively controlled by market forces, much like a criminal or lone gunman can wreck havoc on an essentially trusting and defenseless community. In both cases the damage is done before corrective action can take place, and indeed the perpetrator may never have to face consequences.

[anforowicz]

http://www.mises.org/books/econforrealpeople.pdf

After reading parts of the book referenced above, I think that "Austrian" school of economy doesn't consider the current situation to be free market capitalism - there are lots of government interventions ranging from agricultural subsidies to interest rates setting.

[SeattleMoose]

Capitalism, like any other "ism" is only as "good" as its real world implementation. The logical end of the type of "predatory capitalism" practiced today is monopoly. Which is exactly what we see with consolidation of banking, news media, and other "industries". Powerful corporate monopolies controlled by unaccountable rogue agencies like the FED and the WTO enable predatory corporations to romp freely around the world in search of cheap labor and lax laws.

Capitalism as practiced today is unsustainable. The world's resources are finite and capitalistic exploitation will eventually "hit the wall". All is sacrificed for short term profits and the bottom line for all decisions is not the common good, but money. Our leaders lack wisdom and vision. Instead they are full of greed and lust for power. That is why so much of what they do appears not to "make sense" and why they seem ever more "criminal" in their nature. These are human beings completely corrupted by power and money. They are so caught up they have lost all that is noble and good in their being.

The biggest issue is not with any "ism". Indeed the biggest issue is us, both individually and collectively. Without a sea change in the morals and ethics of humanity, all isms will continue to fail. It is WE who are the individual building blocks of all structures and organizations in this world. And any structure and/or organization is only as "good" as the collective "we".

Our crisis is an ethical, moral, and spiritual one.

[explorer]

Agreed Seattle Moose, except instead of blatant monopolies, there are oligarghies that accomplish the same purpose. True monopolies were taken apart by Teddy Rooseveldt, and anti-trust. Execpt, that they forgot to include insurance companies and banks. Guess who the major players are now?

My first post-high school macro economics instructor started out saying he believed pure capitalism was the best economic system theory ever devised. Then he proceeded to tear it apart by the way it was actually practiced.

His main premise was that the basic principle of capitalism was competition on a level playing field. A product or service was judged by the market in realtion to it's competitors on how good it actually was: by profits, by customer long term satisfaction, by societal effects, by the ability to sustain without posioning it's own well.

Of course, captializing on selling the latest fad, or starting one, has it's place for individuals, but you cannot bulid a sustainable system on that.

[jillayne]

I'm just finishing grad school. My econ prof says capitalism is dying and killing the planet and it has to extinguish itself before we can begin to recover from it.

Capitalism has to live inside a political system. the political system we have is suppose to be democracy but it's now more like an oligarchy where corporations own the politicians.

It's interesting that SeattleMoose says our crisis is an ethical/moral one because that's what i decided to study in grad school: moral psych/philx/and business ethics.

[redmondjp]

My take on capitalism is that it has its good points and bad, but is probably the best system based upon our universal human failings. I agree with the other posters here that no system can work apart from some basic morality.

The good: "The carrot" of possible huge financial reward results in the risk-takers and idea-makers among us raising capital and starting new businesses which create new jobs and keep the economy going. This incentive doesn't exist under pure communism or socialism. If you work hard, you should be rewarded for it.

The bad: With no moral restraints, pure capitalism will destroy everything in its path, and is certainly unsustainable. Look at the history of this country and how the natural resources were used with wild abandon well into the 20th century. You can't keep reaping huge profits forever by obtaining/consuming a fixed and limited resource. Sooner or later the resource becomes scarce and a more balanced approach prevails (in the western US, look at trapping, timber, or water resources as examples of this). Look at our economy today--it is certainly unsustainable and its success is predicated upon a high level of consumer consumption of expensive consumer electronics which keep having a shorter and shorter lifespan (VERY bad for our environment and very wasteful of our precious natural resources). How can we keep this up?

Greed is the driving force behind capitalism. This must be tempered with some sort of moral restraint in order for capitalism to be sustained. One example: Henry Ford. He wanted to RAISE his own workers' wages in order that they could afford to buy the product that he made--can you imagine Bill Gates doing this (raising salaries) at MS? Instead, we have good ol' Bill crying in front of congress for an increase of H1B visas so he can have more access to cheap, well-educated foreign labor (thereby keeping wages supressed in this country).

Pure greed has driven most of our manufacturing jobs offshore, which in the long run will cause our standard of living to drop (it already has, but it is temporarily hidden by the mass-importation of low-cost products from China which will become more and more expensive as their own economy takes off and their labor rates increase).

And yes, we don't have pure capitalism here, there are some checks & balances but when you have our government being run by corporations, they gut the system and make it work for them, screwing the genral public in the process (unless you are a stockholder, oh, wait, they get screwed too sometimes). Take Enron and the whole California energy deregulation and skyrocketing energy rates a few years ago (when they were purposely shutting down power plants 'for maintenance' during peak load periods in order to raise short-term prices, purely for profit). Where was FERC (the Federal Energy Regulatory Commission)? Well, since a bunch of Texas businessmen (among others) were making tons of money off of the situation, the gov't sat on their hands and said 'not my problem.' A HUGE failure of our system and it goes to a pure lack of morals (and for you right-wingers out there, and I'm a former one myself, how can these 'christian' men running our country now sit and watch all of this happen and not do anything about this--they will be judged by God someday for this).

[shaquille]

My take is that what we have today doesn't come very close to actually being "capitalism." It's a managed economy, still largely at the whim of governments and bureaucracies.

[biliruben]

Thank god.

Look what lack of regulation got us this last decade or two. High-end crooks siphoning off billions for their own private islands while setting the world economy up for a multi-trillion dollar crash.

Capitalism is a horrible system, but I'm going to play it the best I can, because it's the only game in town.