T Nation

Is Capitalism Still Relevant?


#1

I would like to re-post an entry I made in another thread, as it was not exactly on track for the topic. It is still rolling around in my brain and I would like to get some input from those that are students of economic.
To set up the discussion, the original post was concerning the validity of global warming in light of the recent revelations of data manipulations. I veered off track with the following post...

"... The point is, where was the peer review when the numbers were being cooked. Was the incentives to this particular segment of the academic community too great for them not to skew the data? After all, if there is not a problem then "poof." There goes the money.

I sometimes look at this situation and compare it to Wall Street and the finance community. People debate constantly about the pros and cons of government regulation and free markets capitalism. I have always leaned toward the free market side. Of late, I have been rolling around a question in my head.

Capitalism, as we tend to generally think of it, was a philosophy born out of the Age of Enlightenment. Reason was king and freedom to live for ones own self interest was an idea whose time had come. Agrarian society was at the end of its run and the Age of Industry was in its birth stages. Real, tangible production was the key. Open markets and limited interference were certainly key for this stage.

Now we have moved from the Industrial Age to the Information Age. Industry had real, hard, tangible inputs and outputs. Manipulation was limited to what you could do with productivity, natural resources and distribution. What I am getting at is that rewards were based on real and tangible production. In the Information Age, these past limitations no longer hold true, at least in the cases I have in mind. The most prominent example would be in the world of finance. We are in a world of fiat currencies and monetary systems that are to a large degree made up of 1's and 0's in a web of computers. Here, manipulations are not limited to real tangible inputs. This is why we can have such things as fiat currencies and fractional lending. Can you imagine being able to produce 10 times an output with only 1/10 of the raw input? Could you produce ten cars with the steel and plastics that it takes to make one?

This is why a company such as Goldman Sachs can make such huge profits by what is essentially just moving around money. And again, in our current system, you could make the simplified argument that they are simply manipulating data.

Before you finance wizards come at me with guns blazing, I admit this is an overly simplistic overview. I am simply putting it out there for discussion. To tie things back to the original discussion, capitalism and the industrial age were regulated to a large degree by natural laws. It goes back to the old saying of "you can't have your cake and eat it too."

The question that then comes to mind is if this is still true in the information age. Can you have your cake and eat it too? Economies are driven by the cycle of addressing problems and coming up with solutions. What happens if in some instances, such as the academic/climatology industry and the financial industry, you can create and solve the problems all by manipulating information?"

To be clear, I do not want to discuss global warming. I am interested in ideas on whether capitalism as we know it was more suited for the industrial age and perhaps needs an overhaul in the information age. This presents a dilemma for me as I am not a big fan of government. However, I am also not fond of piracy either.

I am a big fan of Ayn Rand. I think she was an incredible intellect. She was, however, a product of the Enlightenment, the Age of Reason and the industrial revolution and a child of the old Soviet Union and its many dysfunctions. Objectiveism, along with capitalism is very neat and tidy, very flatland and very reductionist. If you can't see it, feel it or measure it, it doesn't exist. Very well suited for industrial production. The question I am starting to ask, is it as well suited for the information age?


#2

I think that there are some false assumptions in there, but correct me if I misunderstood you.

First, that capitalism is for "tangible assets"- All you are selling as a producer is utility. It does not matter what that utility is derived from , a car or a software product. Even in those times there were "intangible" products like music or theater.

So a tangible product is not necessary.

Then, the banks that are highly leveraged can make a lot of money, but they have to borrow it first and they take incredibly high risks. It can work for a long time but sooner or later they will go bankrupt unless someone bails the out.

That however is not capitalism but fascism/socialism/mercantilism.

Now it is true that if there is a fiat currency and that it creates market disruptions. It may also be true that those disruptions than lead to more interventions and so further and so on but how is the original sin of making the good that makes a complex economy possible, i.e. money a government run monopoly capitalisms fault?

Plus, there is a word for creating and solving a problem just through information when it is done to gain money or power.

It is called a scam and scamming is hardly new.


#3

Good points, Orion. I was hoping you would chine in. Actually, I wasn't trying to make the assumption that capitalism only works with tangible outputs. I am proposing the possibility that the roots of capitalism, or the soil in which it developed, was in the industrial age and that it is perhaps more suited for that type of structural system. That does not mean that it does not work in an informational system, just that maybe it is less able to handle the added variables.
Keep in mind that I am conservative in nature and no fan of socialism/communism. I think either of the two are even less capable. What I am exploring is the idea that "laissez-faire" is no longer adequate for a global information based economy. I keep thinking about the behavior of the financial markets over the last decade, leading up to the events of the last two years. Natural laws governing tangible inputs and outputs were not longer relevant. Leverage at 40/1 plus began to skew risk to reward outcomes. It became basically the equivalent of financial "crack." Addicts are not self-regulating.

What I am not doing a very good job of is distinguishing between informational processing and outputs such as you mentioned with software and data management, and informational processing as it is applied to the financial markets.

In software and computational hardware issues you can get ever greater efficiencies (output) with ever increasing processing speeds so that more and more data can be integrated and acted upon, while using less resources (input), mainly in the form of human participation, freeing people to pursue other necessary endeavors.

In the financial industry you are getting greater profits (or losses) with ever greater leverage. It is not as though you are getting greater efficiencies. It is simply that you are using inputs that in reality you do not even possess. In fact, they don't even really exist! This is the reality that we find ourselves facing right now. Banks (and governments) were utilizing inputs and multiples of inputs that did not even exist and when the tide turned, they were not able to produce them.

Capitalism relies on the natural laws of supply and demand to govern or regulate the actions of those participating. Economies have evolved to a point that, maybe, this is no longer adequate.

I keep thinking of the famous Einstein quote that "the problems we face can not be solved at the level of thinking at which we created them." My concern is that as a species we tend to fluctuate between extremes. What I do not want to happen is that Government steps in and overreacts as it always does.
So how does capitalism evolve to handle the new realities?


#4

I think you are making two points here:

The first is that the growing complexity of the economy makes capitalism obsolete. I would argue that the more complex a system gets the more "laissez faire" it has to be. An enormously complex system cannot be ruled with a top down approach because noone could possible process the sheer amountg of information it must be bottom up because of the need to have as many people incolved with the decision making process as possible all with their own special and individual knowledge.

The second is that financial companies do not produce anything. No, they dont but they manage risks. They slice risks into tiny tranches so that you or anyone else can buy as much risk as you/he is willing to bear but no more and you get your share of the reward. That is an extremely important part of capitalism as we know it because otherwise a lot of projects could never be started because no person could shoulder the risk on his own.

Both is actually a point against regulation because if you tell people how do to things they cannot do them any other way which hampers the innovative power of capitalism. If you bail the out and they know that they will be bailed out their greed will no longer be held in check by fear- if they win, they win and if they loose, they also win.


#5

I am following you, and you are helping me to clarify my thought process. But, I believe you are looking at it from an either/or perspective. Actually, I guess you would have to be to support your position. I have spent most of my life in that camp. I guess I am attempting to make a "slight" modification to my perspective.

One of the things I am trying to reason through is how do you "avoid" a top down approach yet still maintain some checks and balances. How do you install resistors within the system that allow for growth and risk without unduly handicapping the system? At the same time you have to keep in mind that growth in and of itself is not always a good thing. In a biological system pathological growth has a name, cancer.

I understand your point on risk management but I am not sure if it tells the whole story. I wish I could say it better, but maybe the problem isn't that they are managing risk. What if what they are doing would be better described as creating risk and then distributing it as widely as possible. After all, no risk no reward. Lots of risk, lots of reward. If you are creating risk but misrepresenting and selling it as a safe income producing vehicle it perverts the whole system. In the end you come to a point where lots of projects should never have been started. Think of the overbuild in housing in the U.S. or the palm shaped islands of Dubai.

Again, I don't have the answers. Before that, I have to be able to better formulate the question. As I said, I appreciate the input. It may be akin to mental masturbation, but sometimes I think it better to explore some what if thinking rather than post a link and and regurgitate the position of your favorite guru. Not that that ever happens around here :wink:


#6

The answer to the first question is not so incredibly difficult in principle. Cap and trade would be a good example.

Taxing a pollutant (and it is irrelevant for this discussion whether CO2 actually is one) is a great way of making companies paying for the external costs they produce. You can totally leave it up to them how they cut this pollution or if they want to cut it at all.

This way CO2 will be cut where it can be cut cheapest and most efficiently whereas those indutries where we get a lot of bang for the buck would probably even pollute more, but all in all it would reduce CO2 emmissions.

As for people overstating the benefits of their products, do you know how old the saying "caveat emptor" is? Let those fuckers fail and they will come to their senses quickly. The great thing about the market is that it takes such losers out of the game. If we bail them put, well they get tp play it again. It really is that simple.


#7

I guess that I have left huge holes in this discussion. I had recently re-read Atlas Shrugged, recalling Rand's views on the place of government, ie. limited to National security, enforcement of contracts etc. and the belief that business should go unregulated by anything other than free market forces. Welfare in any form should not exist outside of the private sector. In light of recent developments, I guess I just didn't come away as warm and tingly as I had in the past.

From your perspective, I guess it could again be argued that what we are experiencing is not a capitalism problem but a structural problem with government itself. Gov. mandated (regulated) certain unrealistic lending criteria that were totally contrary to the rational self interest of those lending money. Finding themselves in an artificial situation, banking began to invent artificial solutions. Spread the risk as widely as possible and when you run out of surface area, start stacking them high. Convince yourself and others that there is no problem as the collateral is a magical product that can only ever appreciate in value.

Well, if we have a structural problem then we have to trace the weak link in which aberration creeps into the system. Should be easy enough in that there are really only three components in the system; judicial, executive and legislative. Judicial can cause its fair share of problems, but in this particular scenario they do not rise to the top. They can only interpret laws against (hopefully) our constitution, neither of which do they have a hand in creating. They are not limited to term, but this is not neccessarily a bad thing.
Executive has a much more prominent profile, but in the end he or they are held in check by the legislative powers of congress, the so called representatives of the people. They are limited by term which is a good thing.
We are left with congress, the legislative branch. The executive branch has veto power, but they can override. Judicial can rule on the constitutionality of their legislation, but lets get real. Most important in my eyes, they are not limited to term. This may be the beginning of the problem. Legislation was never meant to be a career. It was simply envisioned as a means for our best and brightest to serve their country for a time. How the founding fathers failed to see this fly in the ointment I do not know. Eventually those that have a lust for power without the moral or ethical base that mandates such power be earned through productive means (looters)realize that if they can just get their foot in the door, they can manipulate the system by using their constituents own money to ensure their continued place and power. Assuming this is the case (and this is assuming a lot) then the obvious solution is to enact term limits. Good luck with that. Getting the same people that would decide your insurance coverage while at the same time deciding that what is good enough for you isn't good enough for themselves to limit the span of their dynasty is an unlikely event.

But...
Lets assume that by some act of god we are able to make this miracle happen. Would our problems, or at least the biggest ones, be solved. If the looters were kicked out of congress and as a natural consequence their fellow conspirators in the business world would be overrun and rooted out by true driven business men and women, could we loosen the reins, throw off the shackles and let capitalism run free?

I'll leave it at that while I put kids to bed. I am interested in other insight. I will gladly share me conclusions when I come back.


#8

Before 1913 and a little after when banks that were not efficient, just like any other business, they would end up failing and disappearing.

It however started with Hamilton and his push for an executive order for a "National Bank" which was more similar to a private bank, but would take on the debts of his friends as if they were gold who owned banks. With Hamilton's push the government started allowing private citizens to buy Government bonds with notes (dollars, bank notes, etc) instead of gold. So, greed grew on top of greed creating the financial mess we have today between our government and privileged bankers.

When it comes to lending, the original practice of lending would have been easier through private citizens then banks. The banks would only have so much money that was made up of the bank's corporate money and clients' money that the client gave permission to invest with.

Now, there is no longer a bank that you can just pay a fee to hold your money. There is the FDIC which bails out banks when there is robberies, scams, employee mistakes, et cetera.