This article doesn't even answer its own question of "how".
For those interested in the topic, I highly recommend Connie Bruick's Predators' Ball and Liar's Poker by Michael Lewis.
> Adam Smith, the father of modern capitalism
I hope we can stop conflating free markets for capitalism. Capitalism is to free markets what communism is to socialism. Adam Smith was very much focused on free markets, not capitalism. The author of the article, makes it clear later with
> Adam Smith, who believed that for markets to work, all players must have equal access to information, transparent prices and a shared moral framework
Smith’s basic position and teaching posits that though it is not commonly thought in such terms, humans act rationally and thus typically act in their own self-interest. Decisions are generally made based on financial prudence and intrinsic satisfaction. These assumptions are key to economic analysis and commercial success.[1]
The whole field of behavioral economics [1] examines this question. It sees human rationality as sharply bounded [2] with an enormous set of cognitive biases. [3] The field is seen as a direct challenge to the notion of humans as rational actors.
If you want examples, they are legion. Addicts, for example, clearly don't act in their own rational self interest. Whether it's substances (e.g., alcohol and other drugs) or experiences (like gambling and gaming), whole industries are built around exploiting people's inability to act in their self interest.
Another example is advertising. In economic theory, advertising and PR are about informing people, giving them new facts. But when you look at actual advertising, it's about giving them new feelings, about manipulating their decidedly non-rational behavior.
And there are plenty more. If you look the kinds of things consumer protection agencies get up to, you'll find plenty of examples.
My point is humans have self-interest, and that humans act rationally to satisfy that self-interest. Not that the self-interest is "rational".
An alcoholic who buys liquor is acting rationally according to his interest of getting drunk. Being an alcoholic may not be rational (to us). But I'd rather operate in an economic framework that doesn't judge the rationality of my interest, but that I have self interest and act rationally.
There are plenty of behaviors like price anchoring that are irrational regardless of the supposed interest. The whole rational actor model is an interesting thought experiment, but naive.
What you've gotten is an economic framework where companies find and exploit every human weakness they can. And then the presumed self-interest and rationality of the individual is used as a way to make such behavior seem more legitimate.
That is a circular definition of rationality: What's rational? What people do. How do we describe what people do? Whatever they do, it's rational.
Your point about self-interest is similarly tautological. If people against their conscious choice do things they know are bad for them, which is what addicts do, then it seems absurd to me to define that as "self interest".
I'd say "rational" should instead mean what it commonly does: "in accordance with reason or logic". And "self interest" should mean something like "to the actor's long-term benefit".
In which case, people frequently act irrationally and against their self interest. Which is certainly what the field of behavioral economics has been demonstrating.
I think you're conflating self interest and best interest.
In the case of banks, you have execs acting in their personal self interest and not in the long-term interest of the bank. Their long and short-term interests were not in alignment. This could be addressed by compensating execs with shares that are locked up for a period.
To blame failure on irrationality is to not understand the motivations of the actors involved. Perhaps the risk of going out of business was mitigated by knowing they're "too big to fail". Perhaps it's not the banks that are irrational but the incentives given to them.
In the normative sense, any action that is "bad" is irrational. In the descriptive sense, there is no such thing as wrong self interest, therefore it can't be irrational. In that sense "rational self-interest" is tautological. Which is why in my original question I asked for "an example of someone not acting in their (voluntary) self interest".
We can also reason in principle that markets don't require that people have their long-term best interest in mind. The market for cigarettes and fast-food is operating just fine. Sure customers might suffer for it, but the market aspect worked just fine.
Ethical egoism is not my position; I'm not making a moral claim. I agree, though, that psychological egoism is yours. And as Wikipedia explains, psychological egoism is considered tautological and lacking in explanatory power.
Given that you apparently understand that people mean different things here, your intervention in this conversation is especially irritating. Rather than just recognizing that jrs235 is using a different definition of self interest, the one that Smith was using, you post an faux-naive question, wasting at least his and my time, and likely that of others.
> These assumptions are key to economic analysis and commercial success.
Well, I mean, they are key to the well-established-as-false rational actor model that for a long-time ruled the social sciences (well, with the notable exception of psychology, which had it's own different challenges) as the one overarching model of human behavior.
It does provide a convenient framework for useful first-order approximations in some (especially mass aggregate) situations, with some supporting assumptions, still.
"Self interest" doesn't imply rationality, it just means that people generally do what they want to do, for their own goals. Adam Smith never claims that people's goals make rational sense. The efficient market hypothesis is a 20th century invention. "Homo economicus" is a 19th century invention.
Smith's interests were philosophical, not economical. His biggest contribution was the observation that self interest is a force for net social gain, because every person pursuing their own interests leads to greater prosperity for all. Hence his famous quote:
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages."
Everyone is rational by their own definition, which differs from person to person. Rationality is just a function of the value an individual places on various factors affecting a decision.
I believe OP is trying to say that capitalism and communism pertain to who owns [the] property while free markets and socialism pertain to who/how/what gets produced.
Socialism is about class solidarity and more equal redistribution of capital gains mostly via democratic process. Communism (or bolshevism and maoism) on the other hand is about exclusive small cadre party pretending to represent entire working class and seeking total control over society using all means including terror.
Free market is about leveling play field and equal access to marketplace for all actors big or small. Capitalism on the other hand is about maximizing control over markets and maximizing rent seeking.
The problem is that none of your definitions reflect how these terms are read in some academic circles.
Which is not saying that you're wrong, I'm just pointing out that probably each person/group has a different view on what "Capitalism", "Socialism", "Communism", "Fascism" etc mean.
It is. The highest form of class solidarity is plain old-fashioned class freedom, the freedom for the working class to decide when to work, how to work, what to work on. Socialism is economic democracy.
Your definitions of Socialism and Communism are almost entirely false and lacking in any reference to the founders of the movement, their usage in the disciplines of philosophy, political philosophy and sociology, and historical meaning.
Socialism since its inception was never about redistribution of capital gains, it was about the ownership of society's means of production by the working class, i.e those who survive mostly or entirely from the sale of their labour-power. This definition stretches back to even before Marx, as does Communism. Your definition of "Socialism" is what it is thought of in the US, i.e Socialism is where the government spends money on social programs which it acquires via heavy taxation. This, as many point out, is actually social democracy, a form of economic management practiced most notably in Scandinavian countries.
So if what I have said is true, you may ask: What is the purpose of the word "Communism"? The truth is that 19th century authors used the term "Socialism" and "Communism" interchangably; this can be seen in Marx and Engels, Bakunin and Oscar Wilde's works. Although they were separated into higher and lower stages, the practice of calling the lower stage as "Socialism" is an invention of Vladimir Lenin who sought to describe his country as "state Socialist" in an effort to convince people of the idea that the means of production were communally owned by the working class.
Communism is further not about party control; the idea of the vanguard party again originates from Lenin; but here we must make a distinction - Lenin did not seek to modify what his theoretical predecessors meant by "Communism", he sought to create a model of praxis, that is, to ask and answer the question of: How is Communism achieved? Lenin's own idea to this was the usage of the vanguard party, which is a group of highly educated Communist intellectuals which guides the masses of the working class toward revolution and Communism.
You are conflating Communism with praxis (thus making a category error) and further conflating that specific Leninist praxis with Communism in general. The evidence that this is a conflation rests in two facts: there exist and have existed through history democratic Socialists who not only used the terms "Socialism" and "Communism" interchangably as I have already mentioned but who sought to establish Communism not via representation of the working class themselves but via the normal methods of parliamentary democracy. An example of this praxis in use is various Socialist parties which compete in local and national elections in Europe and elsewhere. Further, there exist today several varieties of Communism, within academia the meaning of Communism can be stretched much father than you may have anticipated; Badiou writes, "where there is a State, there is Communism to oppose it". This is known as the Communist hypothesis.
On to the definiton of capitalism, the main factor is the private ownership of social means of production. By this I mean that the majority apparatus used to produce goods which society exchanges and uses are owned by individuals who seek to make a profit. This is echod by Smith, Ricardo, Marx and Keynes. Other factors which contribute to the definition include the predominant usage of wage labour and the goal of capital accumulation.
Thanks for clarifying what seems to be a pernicious confusion about the meaning of these terms. Sadly I think many people would have to abandon their pet prejudices in order to speak of these terms with the appropriate precision and historical nuance you've provided.
I think your analysis is correct; regardless of one's personal sympathies it's important to get the terms correct when discussing these issues. I think the image of what Socialism is has been corrupted based on misinterpretations of its meaning, especially in my judgement in the US. The fact that some people are downvoting my comment perhaps shows how ingrained biases are, and I am very far from perfect having only read the major Socialist authors, so it would be nice to be corrected if anyone has such a correction - though I doubt I will be; HN and Reddit are similar in that "drive-by" downvotes are common.
I remarked elsewhere that the art of dialectic was at some point lost; in Plato's dialogues the method was used to free the other person's soul from contradictions by advancing questioning of their assumptions and models. On mass platforms this cannot arise, as one's reputability (which should be irrelevant) comes into question via the usage of downvotes, and further the downvotes do not advance the dialectic, they aim to put a halt to it. It were as if there were, in the time of Socrates, a man sitting at the table during a diologue who did not engage but merely remarked "That's wrong!" or "I disapprove!".
Pretty much any political discourse has to start with definitions because these terms have become so encumbered with propaganda and double meanings as to be almost meaningless otherwise.
One of the most neglected aspects of Marx is that he thought that capitalism was an inevitable, natural development of industry. He also thought that it was a system full of contradictions and deduced that those contradictions would eventually cause it to transform into another system, communism. Communism was already a wildly popular movement by the time Marx started writing. What he set out to do was explain why there was a conflict in which one side was called capitalism and another was called communism and how that conflict would play out.
Marx's biggest failing was that he did not consider a third possibility: fascism. Such a populist movement was inconceivable to Marx, the epitome of an enlightenment thinker.
Yes, mentioning our taxes always seem to scare people from the US :)
Had a look at my own and it's ~53% (total tax) which I would guess is more or less normal, Denmarks is higher I think. We do get a lot for it though..
> maximizing control over markets and maximizing rent seeking.
This is typically called "crony capitalism" -- it's a "false calitalism". To the capitalist faithful, rent seeking and monopolies tend to result from impurities in the system (usually government intervention) and tend to iron themselves out without that intervention. A little starry-eyed for me, but worth understanding the viewpoint.
In theory as opposed to _unrestrained_ capitalism. As the idea goes, abusive monopolies get out-competed. The logic goes that money will inevitably buy power, so a government of limited purview (but unlimited strength to check market excesses within that purview) is best.
I take your point, though -- that "No True Scotsmen" capitalism, like actual factual communism, is an ideal that has never been achieved, and that incentives will always render it imperfect. It does empirically seem a rather safer ideal to aim for, though.
What you're describing is despotism... not communism. For the love of all that is holy, please learn what communism is!
"...which is a socioeconomic order structured upon the common ownership of the means of production and the absence of social classes, money[3][4] and the state"
Absence of social classes, money, and the state. That is the key of the definition.
Socialism was born from the belief that democratic forms of government aren't possible so long as there is wealth inequality, as the rich will simply hijack the government to serve their interests. Socialism, then, is a large bucket of political beliefs all concerned with different methods by which to keep a vibrant economy, while ensuring that all people are relatively equal, or at least equal enough monetarily that the government can be truly democratic, for some definition of democracy.
Communism was born of the belief that the previous type of society was not possible to achieve without an organized group taking the reigns and instituting such a society. But of course, people rarely step down from power once achieving it, so instead you usually wound up with small groups of people dictatorially running countries and doing as they pleased, in the name of 'socialism.'
Free market ideology is born of the belief that decentralized economic planning is a way of bringing enlightenment thinking to economic matters, and, more simply put, that thousands or millions of people making small economic decisions will ultimately be more efficient, fair, and rewarding for society as a whole than small groups of people attempting to make such decisions for everyone on their behalf, from far away (literally, or metaphorically).
In this analogy, the author is implying that capitalism is similar to free markets, as communists are to socialism. A small group of people, who acting in the name of the previous ideology, ultimately come to concentrate power among themselves at the expense of everyone else. These people paying lip service to the original ideology they were supposed to be a part of, while actively acting against it and ensuring it does not exist for the wider population.
Capitalism often means different things to different people and it's often to an authors rhetorical benefit to leave it so.
When people say capitalism they typically mean one or more of the following:
* Free markets
* Free trade
* Private ownership of the factors of production
* A form of economic organization characterized by tradable claims of ownership, & ownership separate from management.
* A form of economic organization where the primary driver of the firm is profit.
* A counterpoint to socialism.
* A counterpoint to centrally planned/managed economies.
By never being clear about what one means, and just saying 'capitalism' a skilled rhetorician can convince you one thing is good (or bad) and then lump others in as part and parcel.
As you point out profit seeking businesses do not like free markets.
> Capitalism often means different things to different people and it's often to an authors rhetorical benefit to leave it so.
Sure, some, but if every author accepted this as immutable, we can never progress.
The issue is that when you have two separate ideals, each with their own qualities, allowing them to become synonymous provides a defense for the lesser ideal in the name of the better.
So, it makes it easy for bankers and capitalists to defend their actions in the name of a free market!
The real problem is that we don't have a free market. Businesses strategies are too often to lobby for favorable legislation to sink their competition rather than make a better product and let the market decide.
You can view the political arena as a sort of market as well -- there's horse trading, money, people lobby and and trade for access.
Except one part of society (corporations) use this market to the hilt, while the rest of society largely abstains or is unable to participate in this market.
I wonder how long the modern idea of debt has existed? Mainly, that idea of owing someone something, (often) at a later date?
The concept of zero isn't even 5000 years old. Negative numbers were still being debated in the 1700s, though I think the first known use was in China's number rod system in 200 BCE. Conceptually, less than nothing is a funny thing and not really well grounded in the physical world.
It does make me curious. I'll have to look for the book. I find the history of mathematics to be fascinating, though debt may have originally been more culture and less math.
A TL;DR of the book (still read it!) is that debt was (at least typically, and as best we can tell) around before money, and that early communities operated on debt internally and mostly used barter or money-like things when dealing with dangerous, untrustworthy "others", which turns the usual "first we bartered, that sucked so we invented money, then debt" narrative around. Something really resembling money, it claims, didn't come around until rulers invented it to better fund their armies ("OK, soldiers who will be operating in areas where you don't have social ties, here are five coins. All you civilians, including the ones we just conquered? You're each gonna need one of those coins to pay your taxes next year, or I'll take all your shit. Boom, now the coins have value.") The book advances the idea that barter is most common as a temporary measure among people who are used to using money but, for a time, cannot (during prolonged disasters, in prisons), not as a major feature of the economies of early or primitive societies. It also ties the collision of debt-and-money with social-debt societies to the development of slavery, and covers a bunch of other interesting territory. Again, do read it.
As for negative numbers, you can express "owes" without them so I doubt it was a problem. After all, you don't "owe" someone negative one thousand dollars—you just owe them positive one thousand dollars. You hand them a negative-one-thousand dollar bill, they're not gonna be happy. Being able to write negative balances or work formally with negative numbers isn't strictly necessary to work with debt.
Thanks. As mentioned in another comment, I'm going to read the book. I'm not really big on much anthropology, but I do love math. So, it should be interesting to see the concepts in motion before they became described by mathematics.
This seems repeating Ibn Khaldun's theories from XIV century.
In subsistence economies surplus is used primarily for fostering social relations and creating social obligations which one can call upon when times get though. And in subsistence economy sooner or later they will.
As more added value is created socioeconomic relations get more complicated and they become based on money.
> I wonder how long the modern idea of debt has existed? Mainly, that idea of owing someone something, (often) at a later date?
Debt contracts appear to be the origin of writing in Sumeria and, likely, in the Americas (the third independent invention, China, appears to have a different origin).
We have remnants of what appear to be contract vessels: pots with statues of sheep and such in them presumed to memorialize a deal for some sheep or grain. If there was a dispute the pot could be broken open and the terms examined. Then they started putting a sheep on the outside so you knew what was in the pot, then a drawing of a sheep and then someone figured out you didn't need the pot.
I believe in the Americas writing began with record keeping such as with the quipu which might even have been discussed on HN recently. Not sure of its contractual implication though.
Fascinating. Any recommended sources for more information - more interested in quipu. I'm so Native American that Canada has to let me in, but I've never heard of that. (I have ancestry records and DNA results that show I'm 3/4 Micmac, which aided me in getting Canadian citizenship.)
Quipu is from mesoamerica I'm afraid. As far as I know writing was invented and used in the Americas only in the Inca/Aztec region, though I'm no expert.
I know the Micmac (Mi'kmaq) people had pictographs before European influence. We still have some of those but, curiously, our tribal dialect was lost. We aren't sure quite what it was. As it was a dialect spoken by the Penobscot, we now share their language. It is believed that we had our own distinct language, based on some writing from the early 1700s.
They are still trying to piece our history together and digging up what they can, sometimes literally. If you ever need something to do, many archeological digs accept volunteer labor. It's hard work but a lot of fun. They will train you and you start by moving lots of dirt that has already been sifted. Sometimes, you get a bucket and sometimes you get a wheelbarrow. Eventually, you can do the sifting and work your way up to doing some digging. Though, they probably will not want you doing much cleaning, mapping, or removal. If you're quiet and polite, you can usually observe when they do classification.
But, I digress...
Anyhow, there weren't many written languages in the pre-Columbian era in North America. Some, like my people, had pictographs and others had increased complexities.
You've given me something to research after dinner. Thanks!
Fortunately you don't even have to read it from cover to cover to get the meat of it. Here https://www.youtube.com/watch?v=CZIINXhGDcs is a talk 80 mins long Graeber gave at Google.
Then once you've done that listen https://www.youtube.com/watch?v=8y_wz85ViLY to Robert Paul Wolff talk about the problem Ricardo, Smith, and Marx tackled. This one is a bit longer and it is tougher going but the pay-off is immense.
––
What this New York Times article and the recent Bloomberg https://www.bloomberg.com/news/articles/2017-09-21/why-wages... (“Why Wages Aren't Growing”) article that hit the front page here have in common is that they both refuse to recognise that Marx's critique of capital was correct in his day and it _remains_ correct.
The next part is important. We _must_ separate the critique from his proposed solution. To be very clear I can agree with Marx's critique but I do not have to agree that central collectivisation is the solution.
The very simple observation is this. For-profit capitalism over time will cause (a) workers to be exploited to the point where they can't actually take part in the society they're a part of (which hurts the capitalist too!) and (b) wealth gets concentrated inefficiently.
What the New York Times and Bloomberg (and many others) outright refuse to admit is that _Marx was right_.
Universal Basic Income. What is that but an alternate solution to collectivisation? Same applies to profit-sharing. It's the reason why charities are non-profits because we all recognise the alternative would be unseemly. The Tobin tax (taxing certain international financial transactions) is another solution. As are regressive tax regimes that hit the wealthiest hardest. Consider also alternate forms of incorporation like cooperatives. And so on. What all these have in common is that they try to address the flaw at the heart of capitalism. The sooner we stop calling people communists for putting forward sane solutions the better. If we don't address this there will be ruin and revolution and when that happens we'll have a messy rather graceful transition to a fairer society.
One of the troubles with saying Marx was right or wrong is the "Marx/Engels Collected Works" go on for 50 volumes so no doubt some bits are right and some wrong. You really need to be more specific for it to mean much.
As to wage growth, it seems to be about 3% a year in the US at the moment and 13% in Hungary suggesting it depends on various factors rather than falling everywhere because capitalism.
I am not saying that everything Marx/Engels ever said was correct.
To reiterate. My specific point about Marx is this. Given capital, given private property – his analysis/critique about for-profit capitalism is correct. And critique pertains to essentially free and fair markets, let alone markets distorted by too little or too much regulation or markets distorted by cartels, oligopolies, monopolies, cronyism, and so forth. Marx's point is that even when capitalism is operating in its _ideal_ state it is a system where wealth will inefficiently accrue to a minority (the rentier class) and where those who do not have a handle on the means of production will get progressively more exploited because -as your turn of phrase goes- profit. It's that simple.
You counterpoints are meaningless in the face of the very well documented and ever-widening pay gap between workers on the bottom rungs of the ladder and those towards the top.
I'll give you that without intervention the rentiers can get richer. However that can be countered by progressive taxation and similar and has been successfully including in the US up till the 60s or so. You can mostly fix it without going all Marxist and Marxism as such doesn't have a good record at fixing things. See The Black Book of Communism, Venezuela and the like.
As an aside there are things that bug me about Marx and his style of reasoning. Both the hundreds of pages so its hard to say you're for or against. Also nearly all his statments are slightly off eg. "The slave is sold once and for all; the proletarian must sell himself daily and hourly." By his definition is you don't have rental income you are "proletarian" and so selling yourself hourly or daily. Which doesn't seem quite right - ok you may get a job but it's not quite like that. It slightly amazes and saddens me that people took this stuff seriously and it went on to cause so many deaths and do this day messes with clear thinking analyses of poverty and the like.
Yup. I should have said `progressive' taxation in my earlier post, not `regressive' taxation. (I'm going to reply to myself to flag that.) In this we are in agreement.
> I'll give you that without intervention the rentiers can get richer.
This is a central claim of Marx! Those anti-Marx claim "it'll be okay because <some form of trickle-down economics>" or "you'll discourage entrepreneurs" or "taxes are theft!" or some other variant. What I'm trying to show is that you can agree with this part of Marx but reject his solution – state-run collectivisation or communism or whatever you want to call it. The trick is to not throw the baby out with the bath water.
"The slave is sold once and for all; the proletarian must sell himself daily and hourly."
Sell himself means sell his own toil, his own labo(u)r. If you are fortunate enough to have some form of rental income then your _capital_ is doing the work, ergo you are not part of the proletariat. I think that's pretty clear, no?
Marxism != Communism
Marxism != Anti-capitalist
If you want for-profit capitalism to succeed you have to be partly Marxist, that's the irony given the way these terms have been bent out of shape.
The fault-line of "property is theft!" from one side and "taxation is theft!" from the other to my mind illuminates the entire discussion. :)
I can't help but wonder how much of this would have been fixed by letting them fail. This is way out of my ballpark, but it still bothers me a lot that they don't face the same consequences I do for making mistakes.
Exactly right. There has to be real consequences or else you get what we have right now which are these entities that are so powerful they can shift accountability away from themselves and thereby socialize all their losses while profiting to the tune of hundreds of billions of dollars.
Iceland let its banks fail and protected the taxpayers, and a few years later the economy recovered just fine. It's at a much smaller scale than the US or EU economy though, but still.
It's entirely unfair to use 'but still' as any sort of argument here. Iceland is not a large chunk of the world economy, nor does it have a premier position as the world's economic nexus to protect. It's well documented that cause/effect differs as your economy scales (just look at how behavior changes between a small startup vs a unicorn). While there might be some valid arguments for letting the banks fall, 'someone else did it and it worked' is not one of them.
Humans and their systems are very resilient. Personally I would have let a lot of the weaker US financial institutions fail after Lehman. It would have been much more painful in the short term, but I bet we'd be in a healthier recovery period now. Granted I understand why the Fed did what they did. The European equivalent is letting Portugal, Greece, Italy, and Spain go bankrupt, which could cause serious, irreversible structural problems...on that one, I'm not sure what I would have done.
Yeah, Iceland couldn't have pumped in enough money to keep the banks solvent because of the size of their balance sheets relative to its economy but they still made comparably significant interventions to protect domestic creditors.
It's unfair to compare the differing results of different national policies? What other option do we have? Should we just swallow the whole bill of goods that Hank Paulson drops on our desk, the same way that Bush the Lesser did?
You probably don't think we should look to e.g. Portugal to see alternatives to the drug war, either. It's a funny sort of exceptionalism, to imagine that we can only learn from similar-sized nations. Would that be Brazil and Indonesia?
Scale should certainly be taken into account. Still, differences in scale are no excuse to completely invalidate the data points without a good reason why it should matter this much.
The examples we have of countries letting their banks fail recovered¹. The onus is on anybody disagreeing to show how the US differences are relevant. Just pointing at them and screaming does not make it.
1 - AFAIK, all of them. What is interesting because it includes Brazil at the late 90's (the one single time Brazil grew in recent history).
Differences in scale are a great reason to throw data out.
Past experience gives us lessons for similar cases. The onus is on anybody using a model to ensure the use case is similar to the training data.
The US and Iceland are nations but it’s unreasonable to get hung up on that similarity of category. The nation is not a label for grouping economies that are comparable.
I don’t like bailouts either, for the record. My gripe is only with the scale question.
Is there a better word for "here's a reason that things work differently in USA than in the rest of the world, that totally legitimizes our habit of ignoring any lessons we could learn from them"? I mean, when I imagine Trump saying it, it really sounds like, "exceptionalism".
This whole size thing is a silly exercise in magical thinking anyway. Money is divisible, across all relevant scales. Pick any random nation, and its economy is larger than USA's was, some number of years ago. Would you say that we weren't exceptional back then, but we are now? When did that transition occur? What happens if some other nation's economy grows to our economy's current size, sometime in future? Will we no longer be exceptional?
The day when China is the size of the US there will be lessons to learn from China. I bet there are many lessons today.
But if Iceland remains its current size, neither superpower should treat it as comparable for scenario analysis.
I get a sense this is a political question for you; it’s not for me. It’s just an example.
Amazon is a company. I have a company of my own. Say my servers went down, and a few days later things were alright. Would it be Amazon Exceptionalism if they refused to learn from my experience?
That's the whole basis of social science. As much as HN shits on social science for being unverifiable, the entire point of the domain is that some things (namely, economic understanding) are not verifiable through observation and comparison.
The only way to really understand potential impacts are through economic concepts and modelling. Sure, there is plenty of bias thrown in, but there's also a million different economic models to choose from. There's a lot of noise, and it actually takes specialized knowledge and domain expertise to wade through all of it. I don't get why there's the misapprehension that economics is inherently intuitive.
The social science you're describing is not the same as that I learned at university. Maybe it doesn't often admit experimentation, but it sure as hell uses observation and comparison. In fact you're sort of insulting economists here, implying that they practice a sort of solipsistic philosophy. Lots of them really deserve it, but still!
The secret unacknowledged religious dogma you might not even know you've swallowed (although golly are Goldman glad you did!) is the proposition that banks are difficult to replace. This notion is preposterous on its face (which is why no one ever says it out loud) because of course anyone who owns capital is quite capable of purchasing financial instruments with that capital. If they weren't, they wouldn't own it in the first place. In the absence of "bailouts", there might have been some temporary confusion as legitimate profitable uses of capital switched from the old banks to the new (and presumably as the new bankers upgraded their executive suites to the level of opulence required in their new positions), but the history of recessions in 19thC USA makes clear that when we just let weak banks fail, the economy quickly recovers.
Sure - you use observation and comparison to validate against your existing models, not directly against other countries. To apply the model to other countries, you have to tweak your model for additional factors that vary between the countries. It's preposterous to assume that you can straight up draw a conclusion from Iceland and apply it to, say, China.
19th C banks are wholly different creatures to what we have today - we weren't even on fiat currency in the 19th Century, much less using banks as extension of monetary policy. The entire point of defending banks is that there is an immense amount of built up regulations that would not transfer over to the 'new banking system'. And while it's debatably whether or not existing regulations are good, the current regulatory environment makes it unlikely that any sort of similar consumer protection would be re-built in this day and age - just look at the modern ICO, which is wholly built on smoke and mirrors.
I didn't mention a "new banking system". I suggested rather that anyone with the money to do so could provide short- and medium-term liquidity to firms that require it. Apple, for example, would be just as capable of buying bonds as Goldman Sachs is, and for the right yield they would.
It's not the same but it shows it can be done, that letting the banks fail doesn't necessarily translate to economic collapse. If the Iceland economy had collapsed there would be a case that bailing out the banks was the right decision, but as it is there's no clear proof.
Bailing them out lead to all kind of problems too. 8 years later the economy hasn't quite recovered, and in the meantime the lack of trust caused by all this gave us Trump, Brexit, etc. I guess we can't really know what would have happened if these banks had failed, but the alternative is definitely not great.
>It's entirely unfair to use 'but still' as any sort of argument here. Iceland is not a large chunk of the world economy, nor does it have a premier position as the world's economic nexus to protect.
A "premier" position based on bullshit ain't so premier.
Iceland effectively did bail its banks out, but only bailed them out for domestic depositors and screwing foreign creditors and depositors, which had severe foreign policy effects on Iceland.
Or, bail them out (emergency liquidity, QE1, etc) but also nationalize them at least on a temporary basis so that as they recover, the profits do not go to private pockets but rather are socialized.
Not that I've researched it, but I've read the auto manufacturers turned things around and repaid the bailout because they are in the business of producing things. It seems like the business of banking has it's own culture, if we don't recognize what they're about and say no next time I will be out rioting.
The sad thing about this is that it seems like we haven't learned from the past. One of the hottest things in my local community right now is flipping houses. You have people levereged to the hilt with hard money loans, flippers teaching classes (and providing hard money loans), and home prices at or exceeding 2008 levels.
No no no, you aren’t understanding, let me aid you in doing so.
The people in 2008 just timed the market poorly. This time around, we’ll see all the tell-tale signs of a housing crash and get out right before it does so, all cash. Then, when all the stocks (Because, of course, banks will lose out on the highly leveraged positions of our non-fortuitous peers) have tanked, we’ll simply buy them at rock bottom prices, riding a wave of financial security into the nursing home.
Banks were supposed to be stable and boring. The quest for 'financial innovation' in the heady 80s accompanied by rocketing bonuses and compensation has led to highly unstable economies with risk and reward mixed up with government intervention, too big to fail, regulatory capture and lobbying and now basically stand isolated.
During the asian financial crisis the IMF and WB were gung ho about free markets, austerity and enforcing failure without exception but as soon as it hit western economies the whole field of economics changed with words like 'too big to fail' and 'systemic risk' entering the economic vocabulary.
How does one explain oil being at $40 and $140 with supply and demand and free markets. There is a lot more going on that is often hidden behind jargon that obfuscates than informs.
Isn't oil a commodity with a variable supply but relatively fixed demand? Big price swings are what you would expect in a situation like that.
One can argue that some suppliers act "irrationally" when they artificially restrict their output to drive up prices (OPEC), but this is what you would expect to see in that situation.
The problem is, that we let banks become so big and important for our economies, that they can make the rules, if we want it or not.
The rules that Obama made, where hardly enough to prevent the biggest problems, of the system. But even those are abolished by the new president, since they might limit the possible profits, rich people can make.
And so we live on in the land of unlimited profits for the 0,1% and the unlimited losses for society.
I'm not sure how the author can assert with a straight face that Dodd-Frank is essentially sacred, a lack of community banks is hurting the economy, and that it's all the big banks' fault.
A loan to your your local mom-and-pop shop is a much riskier investment than a bond to a large corporation. DFA discourages risk-taking with the new capital requirement rules. Thus, community banks are fighting over a small pool of profitable loan opportunities and their numbers shrink. On the other side, small businesses have a harder time getting loans.
Regulatory compliance overhead from DFA hits community banks harder than big banks as well, so they're consolidating and leaving fewer true community banks.
None of this is has much to do with the actions of big banks. It's the natural consequence of DFA. If you don't like the status quo, you need to change DFA. Not necessarily to pre-2007 rules, but some small changes could provide a big boost to community banks.
Embracing technology could be a better solution. Government should fund open technology development as necessary to ease the burden of financial regulatory compliance. Technology could and should make it possible for smaller banks to comply with federal regulations with the same efficiency as big banks -- at the same time, federal regulations should be allowed to become as complex as necessary to surface and discourage fraud and systemically risky behavior.
This doesn’t really speak much to the “master” thing, but over the last few generations we have “financialized” (like securitised, but bigger) huge parts of the economy, and a lot of stuff that wasn’t really part of the economy in the past.
For example, health services are largely financialized via insurance. IE, you don’t directly buy health services, you buy insurance which buys health services. You don’t buy a house, you get a mortgage. You don’t support your parents (or colleagues) in their old age, you pay into pension or superannuation schemes. Education via student loans. Monthly expenses via credit card debt. Large ticket items via dealer finance. Public services via national debt…….Companies via private equity. Everything has a financial layer between payment and consumption.
Underlying a lot of this is a relatively simple fact that if debt is available, consumers (from 18 year olds to Finance Ministers) will take it. If loans are available for certain products, more of those products will be consumed.
Another (possibly evil) driver is that governments have chosen financialization as instruments for promoting stuff they want to promote. Need more corn? Crop insurance subsidies. Educate the masses? Subsidise student loans. Promote home ownership? Implicitly guarantee retail banks’ losses. Medical care for all? Tax free(subsidy) insurance. Flood problems? Flood insurance. Poverty? Microfinance.
So, banks got big. This has all sorts of weird effects.
One of the biggest problems in my opinion is the inflationary effect of this process. Real estate prices in many places are simply the amount that a bank is willing to lend buyers. If banks increase the amount a buyer can loan, house prices increase proportionally. IMO, the American healthcare saga is not really about ideology or competence or any of the stuff they talk about. The problem is that after 2-3 generations of wide scale subsidised financialization, prices & costs are so high.
My final thought is that part of the problem is the prominence of finance people in pubic decision making. They know finance. They believe in it. They use it to solve problems. They don’t see baks getting bigger as a problem. It’s kind of like the lawyer problem, who also have a lot of presence in politics. That means the legal field gets bigger all the time.
I don’t have an overarching theory, if that’s your question.
Some of them are probably good, others not.
Home mortgages have mostly done what the politicians and public wanted in rural and suburban areas. Some price inflation happened as a side effect, but a lot of that extra cost went into bigger homes so people get something for it. Slightly distorting to the market, but nothing terrible.
In dense urban environments where supply is inelastic, price inflation was a lot worse yielded a lot less. This is probably one of the biggest cost of living problems.
I think the financialization of ordinary health services (not things like cancer or accidents) is terrible. I think it makes the whole industry a lot worse. Ultimately though, this is/was driven by consumer and voter demand not scheming villains.
Collectively, I think they might add up to different classes of problems.
And it is based on the simple assumption that we can accumulate debt at any pace forever. Unfortunately I am not convinced it is the case. There is a debt to GDP ratio where the system will break.
Is there? Public or private debt? What model do you have that tells us where it is?
Yes, if the payments become too onerous or the ability to roll over is compromised (Greece passim), then you have a serious problem, but the whole thing does not magically blow up at a certain level.
Also, remember that at a global balance sheet level, debt == savings. Debt (personal+state+corporate) has expanded because there are more and more people saving for their pensions, and the savings glut has pushed down the price of debt.
(and the "missing trillions" stashed in tax havens have to be lent out somewhere, too)
I agree, you can't specify a specific ratio to the second decimal where things will blow up. Greece blew up below where Japan is now. Not the least because it is largely irrational. How much is too much debt? It's when your creditors decide to cancel your credit card. I am not convinced that how that debt is financed will change much. It's really a loss of confidence risk, which like a market downturn is impossible to predict. But you nevertheless just know it will happen and that any incremental indebtedness brings us closer.
private, as the numbers i have seen is that when private debt hits something like 200% of GDP bad things starts to happen.
the crazy part is that it does not even need to be a complete halt in lending that cause it, just enough of a dip that expenses (debt repayments etc) outpace income (from the turnover of existing money plus the money coming in as newly issued loans).
And the whole debt equals savings thing is a fallacy that sadly the economics profession has convinced itself is true. The Bank of England released a document a few years back that showed how private lending effectively puts new money into circulation.
> Funny enough public debt is largely a non-issue, as long as said debt is denominated in the nation's own currency.
You seem to imply that money printing, and the resulting inflation, is painless and a non problem. I am not sure I agree with that. Lots of people will suffer in a high inflationary environment. Pensioners to start with.
There are 2 sides to the economy, supply and demand.
Yes, the policies you describe do boost demand and that does cause inflation, but the supply side is not irrelevant. Less NIMBYism will help with housing costs, and maybe some reform could help with education supply. If demand is increasing (for example due to population growth and finance), ideally supply should also be able to increase.
> My final thought is that part of the problem is the prominence of finance people in pubic decision making.
Indeed, I've read a few articles in NYTimes/WSJ now on the sale of public services in the US such as fire and water services to private equity firms. And the whole thing is told as a cautionary tale about banks and capitalism, which misses the bigger picture in how these things always start.
Typically the problems start because the government was overleveraged from taking on too much debt, typically due to poor financial management fueled by initially cheap capital from bankers operating in and out of government. Then when hard times come they continue to seek the easy answers from the bankers (instead of making hard choices like spending less) and end up selling off public resources giftwrapped in pseudo-market sounding language with very little of the actual benefits of markets: competition, private salaries, flexibility, etc.
These "banks" are famously like an octopus wrapping their tentacles around everything. We have some old effective methods for handling this type of behaviour when it's used improperly in the private sector, and there the harm is limited to a few usually wealthy parties. But it starts to get dangerous when these half-baked financial schemes that have worked in private markets get pigeonholed into government. Critical services like emergency services or drinking water are often ill-suited (and more importantly ill-prepared) to handle the potential downside.
Hopefully one day politicians will learn this lesson and learn to keep things simple in the public sector. Governments everywhere have a consistent track record of not managing money well and have a high-turnover of executives by design, so any complex financial instruments are just setting them up for failure and exploitation. Anything to do with government should be made dummy proof and straightforward. Public services should be run like public services. Mixing of private/public should be the exception, not the standard. And I say that as someone biased towards the private sector.
Sometimes I feel like this "extra layer"/middleman-adding is not only just to enable government interventions but is just fluff added so we could create jobs for those whose skills don't go beyond the typical white-collar worker. I might be wrong, but the image of extraneous University administrators and "not-enough" skilled labor kinda paints this picture.
one of the things that irks me about (consumer) banks is that they've somehow convinced consumers that they should pay for banking services, instead of the receiving returns for loaning the banks money (which is what a checking or savings account is).
some of this is due to a lack of financial literacy on the part of consumers (financiers know that loans should come with an interest rate, not a charge for the privilege of loaning the money in the first place, but consumers on the whole apparently don't).
but there is also a regulatory mechanism exploited by consumer banks: FDIC insurance. without insurance, people are understandably reluctant to loan money to banks since they don't know if they'll get the money back. so the government (again, understandably) steps in and guarantees with tax dollars that you'll get that money back, even if the bankers are crooks. but of course, that means the government must try to tease out the crooks with a stringent set of tests and regulations around who they'll insure. and just like that, you have an anti-competitive choke point where incumbent banks use the regulations to guard against future competitors by keeping the regulatory barrier high.
(this is just another example of the financialization via insurance that you elucidate)
also, use cash. it's transaction-cost free, anonymous and universally accepted.
but i wish more people would realize how much they neuter competition and lose in actual cash-in-hand by indulging the big banks and not shopping around. make the banks compete for your money by finding the best returns for your cash. it takes a few minutes on a site like http://www.bankrate.com/ to do so.
most consumers have a checking account or two, a couple credit cards, maybe a savings account, a car loan and a mortgage--all things well understood and competitively handled by a credit union. many people tout convenience as their main decision-making factor, but big banks are not any more convenient than credit unions--technology has leveled that playing field. i suspect the real reason we use big banks is our ingrained herding instinct and the psychological safety that implies (however illusory that is).
The financialization you're talking about doesn't seem bad per se; it streamlines and "purifies" the exchange you actually want to do.
For example, if I have extra money, and I know someone who could ramp up his productivity if only he could make a one-time investment (say, a cow for his farm), then I buy him a cow in return for a share of its milk. Then, to diversify, I can find thirty such people. Then I find someone who can sell the milk for a cut...[1]
Instead of all of that, we have banks, where I just give them the money, and they make the loans (and do screening, credit reporting, foreclosure, etc) and pass me a cut of the returns.
Nothing is wrong with that. The problem is when you have perverse incentives to start with (e.g. in fields like health care, or with lenders who have asymmetric information about the loans in a portfolio there's excessive trust in the vetting), where financialization just puts the same problem on steroids.
[1] Late edit: a better example of the "impure exchange" might be if I wanted to save for my retirement so I raised one more cow than I usually would with the intent to lend it out to others who are still working in return for milk, with the usual frictions like needing to convert to non-milk.
Countries like The Netherlands or Germany are considered so stable by the financial sector that they can get loans at negative interest rates. At that point, why not get the loan?
This is a very well written argument. Any time government makes borrowing some asset easier, it gets abused. Subsidies, barring few exceptions are bad for the economy and now-a-days there seems to fairly unanimous agreement among economists about the same.
The problem with financial services is customers are greedy - not banks
2. The challenge in building any business - is that they always start by trying to solve a problem - but power always corrupts
1. If google’s aim was to truly organise the worlds information or xxx would it behave like thsi
2. We say capitalism is good as through the pursuit of capital appreciation - these kinds of problems aggressively get solved but we reward financially - the creation of monopolies
3. This then leads to all kinds of things: styling of innovation; but also pronounces the accumulation of capital
4. The solution is whether you can construct a company in another way
5. I think its now clear that you strive to be too greedy - that power / money will eventually corrupt
1. Google search results
2. Uber vs lyft
3. Microsoft
6. But this process takes years
Free markets are all good until the government fail to regulate them. Decentralization from state and political influence is good, until nobody is in control anymore. Then it's chaos.
To be frank I think that US banks might be influenced by foreign powers just like it happened for the last election.
I think that finance will damage sovereignty in the long run. It really looks like common citizens don't really have a say on how finance work in terms of politics.
1. The problem with financial services is customers are greedy - not banks
2. The challenge in building any business - is that they always start by trying to solve a problem - but power always corrupts
1. If google’s aim was to truly organise the worlds information or xxx would it behave like thsi
2. We say capitalism is good as through the pursuit of capital appreciation - these kinds of problems aggressively get solved but we reward financially - the creation of monopolies
3. This then leads to all kinds of things: styling of innovation; but also pronounces the accumulation of capital
4. The solution is whether you can construct a company in another way
5. I think its now clear that you strive to be too greedy - that power / money will eventually corrupt
1. Google search results
2. Uber vs lyft
3. Microsoft
6. But this process takes years
Building financial services in a way that doesn't corrupt is as hard / harder than building a serach engine / browser / car sharing company that will last for 1000s of years rather than decards
136 comments
[ 3.4 ms ] story [ 193 ms ] threadFor those interested in the topic, I highly recommend Connie Bruick's Predators' Ball and Liar's Poker by Michael Lewis.
> Adam Smith, the father of modern capitalism
I hope we can stop conflating free markets for capitalism. Capitalism is to free markets what communism is to socialism. Adam Smith was very much focused on free markets, not capitalism. The author of the article, makes it clear later with
> Adam Smith, who believed that for markets to work, all players must have equal access to information, transparent prices and a shared moral framework
[1] http://www.investopedia.com/terms/s/self-interest.asp
If you want examples, they are legion. Addicts, for example, clearly don't act in their own rational self interest. Whether it's substances (e.g., alcohol and other drugs) or experiences (like gambling and gaming), whole industries are built around exploiting people's inability to act in their self interest.
Another example is advertising. In economic theory, advertising and PR are about informing people, giving them new facts. But when you look at actual advertising, it's about giving them new feelings, about manipulating their decidedly non-rational behavior.
And there are plenty more. If you look the kinds of things consumer protection agencies get up to, you'll find plenty of examples.
[1] https://en.wikipedia.org/wiki/Behavioral_economics
[2] https://en.wikipedia.org/wiki/Bounded_rationality
[3] https://en.wikipedia.org/wiki/Cognitive_bias
[4] e.g., https://hbr.org/2009/07/the-end-of-rational-economics
An alcoholic who buys liquor is acting rationally according to his interest of getting drunk. Being an alcoholic may not be rational (to us). But I'd rather operate in an economic framework that doesn't judge the rationality of my interest, but that I have self interest and act rationally.
What does this mean?
Your point about self-interest is similarly tautological. If people against their conscious choice do things they know are bad for them, which is what addicts do, then it seems absurd to me to define that as "self interest".
I'd say "rational" should instead mean what it commonly does: "in accordance with reason or logic". And "self interest" should mean something like "to the actor's long-term benefit".
In which case, people frequently act irrationally and against their self interest. Which is certainly what the field of behavioral economics has been demonstrating.
In the case of banks, you have execs acting in their personal self interest and not in the long-term interest of the bank. Their long and short-term interests were not in alignment. This could be addressed by compensating execs with shares that are locked up for a period.
To blame failure on irrationality is to not understand the motivations of the actors involved. Perhaps the risk of going out of business was mitigated by knowing they're "too big to fail". Perhaps it's not the banks that are irrational but the incentives given to them.
https://en.wikipedia.org/wiki/Self-interest
https://en.wikipedia.org/wiki/Ethical_egoism (your use)
https://en.wikipedia.org/wiki/Psychological_egoism (my use)
In the normative sense, any action that is "bad" is irrational. In the descriptive sense, there is no such thing as wrong self interest, therefore it can't be irrational. In that sense "rational self-interest" is tautological. Which is why in my original question I asked for "an example of someone not acting in their (voluntary) self interest".
We can also reason in principle that markets don't require that people have their long-term best interest in mind. The market for cigarettes and fast-food is operating just fine. Sure customers might suffer for it, but the market aspect worked just fine.
Given that you apparently understand that people mean different things here, your intervention in this conversation is especially irritating. Rather than just recognizing that jrs235 is using a different definition of self interest, the one that Smith was using, you post an faux-naive question, wasting at least his and my time, and likely that of others.
> Ethical egoism is not my position; I'm not making a moral claim
Hmm..
> Rather than just recognizing that jrs235 is using a different definition of self interest, the one that Smith was using
No, Smith was not using your (unprovided) definition. That's the whole point. Jrs235 slam dunk of a comment is a straw man. Read bmmayer1's comment.
> you post an faux-naive question, wasting at least his and my time
Yet nothing of value was lost.
Well, I mean, they are key to the well-established-as-false rational actor model that for a long-time ruled the social sciences (well, with the notable exception of psychology, which had it's own different challenges) as the one overarching model of human behavior.
It does provide a convenient framework for useful first-order approximations in some (especially mass aggregate) situations, with some supporting assumptions, still.
Smith's interests were philosophical, not economical. His biggest contribution was the observation that self interest is a force for net social gain, because every person pursuing their own interests leads to greater prosperity for all. Hence his famous quote:
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages."
Would you explain this a bit more?
Free market is about leveling play field and equal access to marketplace for all actors big or small. Capitalism on the other hand is about maximizing control over markets and maximizing rent seeking.
Which is not saying that you're wrong, I'm just pointing out that probably each person/group has a different view on what "Capitalism", "Socialism", "Communism", "Fascism" etc mean.
That can't be helped. There are people who regard anything more collectivist than a volunteer fire department as communism.
All you can do is define your terms and try to argue only with intellectually honest people.
I thought it was about workers owning the means of production.
Socialism since its inception was never about redistribution of capital gains, it was about the ownership of society's means of production by the working class, i.e those who survive mostly or entirely from the sale of their labour-power. This definition stretches back to even before Marx, as does Communism. Your definition of "Socialism" is what it is thought of in the US, i.e Socialism is where the government spends money on social programs which it acquires via heavy taxation. This, as many point out, is actually social democracy, a form of economic management practiced most notably in Scandinavian countries.
So if what I have said is true, you may ask: What is the purpose of the word "Communism"? The truth is that 19th century authors used the term "Socialism" and "Communism" interchangably; this can be seen in Marx and Engels, Bakunin and Oscar Wilde's works. Although they were separated into higher and lower stages, the practice of calling the lower stage as "Socialism" is an invention of Vladimir Lenin who sought to describe his country as "state Socialist" in an effort to convince people of the idea that the means of production were communally owned by the working class.
Communism is further not about party control; the idea of the vanguard party again originates from Lenin; but here we must make a distinction - Lenin did not seek to modify what his theoretical predecessors meant by "Communism", he sought to create a model of praxis, that is, to ask and answer the question of: How is Communism achieved? Lenin's own idea to this was the usage of the vanguard party, which is a group of highly educated Communist intellectuals which guides the masses of the working class toward revolution and Communism.
You are conflating Communism with praxis (thus making a category error) and further conflating that specific Leninist praxis with Communism in general. The evidence that this is a conflation rests in two facts: there exist and have existed through history democratic Socialists who not only used the terms "Socialism" and "Communism" interchangably as I have already mentioned but who sought to establish Communism not via representation of the working class themselves but via the normal methods of parliamentary democracy. An example of this praxis in use is various Socialist parties which compete in local and national elections in Europe and elsewhere. Further, there exist today several varieties of Communism, within academia the meaning of Communism can be stretched much father than you may have anticipated; Badiou writes, "where there is a State, there is Communism to oppose it". This is known as the Communist hypothesis.
On to the definiton of capitalism, the main factor is the private ownership of social means of production. By this I mean that the majority apparatus used to produce goods which society exchanges and uses are owned by individuals who seek to make a profit. This is echod by Smith, Ricardo, Marx and Keynes. Other factors which contribute to the definition include the predominant usage of wage labour and the goal of capital accumulation.
I remarked elsewhere that the art of dialectic was at some point lost; in Plato's dialogues the method was used to free the other person's soul from contradictions by advancing questioning of their assumptions and models. On mass platforms this cannot arise, as one's reputability (which should be irrelevant) comes into question via the usage of downvotes, and further the downvotes do not advance the dialectic, they aim to put a halt to it. It were as if there were, in the time of Socrates, a man sitting at the table during a diologue who did not engage but merely remarked "That's wrong!" or "I disapprove!".
Marx's biggest failing was that he did not consider a third possibility: fascism. Such a populist movement was inconceivable to Marx, the epitome of an enlightenment thinker.
What is fascism? Look at the bottom of https://en.wikipedia.org/wiki/Definitions_of_fascism wrt Orwell's comments, and "Fascist as insult".
This is typically called "crony capitalism" -- it's a "false calitalism". To the capitalist faithful, rent seeking and monopolies tend to result from impurities in the system (usually government intervention) and tend to iron themselves out without that intervention. A little starry-eyed for me, but worth understanding the viewpoint.
I would very much like to see such a creature.
I take your point, though -- that "No True Scotsmen" capitalism, like actual factual communism, is an ideal that has never been achieved, and that incentives will always render it imperfect. It does empirically seem a rather safer ideal to aim for, though.
"...which is a socioeconomic order structured upon the common ownership of the means of production and the absence of social classes, money[3][4] and the state"
Absence of social classes, money, and the state. That is the key of the definition.
https://en.wikipedia.org/wiki/Communism
Socialism was born from the belief that democratic forms of government aren't possible so long as there is wealth inequality, as the rich will simply hijack the government to serve their interests. Socialism, then, is a large bucket of political beliefs all concerned with different methods by which to keep a vibrant economy, while ensuring that all people are relatively equal, or at least equal enough monetarily that the government can be truly democratic, for some definition of democracy.
Communism was born of the belief that the previous type of society was not possible to achieve without an organized group taking the reigns and instituting such a society. But of course, people rarely step down from power once achieving it, so instead you usually wound up with small groups of people dictatorially running countries and doing as they pleased, in the name of 'socialism.'
Free market ideology is born of the belief that decentralized economic planning is a way of bringing enlightenment thinking to economic matters, and, more simply put, that thousands or millions of people making small economic decisions will ultimately be more efficient, fair, and rewarding for society as a whole than small groups of people attempting to make such decisions for everyone on their behalf, from far away (literally, or metaphorically).
In this analogy, the author is implying that capitalism is similar to free markets, as communists are to socialism. A small group of people, who acting in the name of the previous ideology, ultimately come to concentrate power among themselves at the expense of everyone else. These people paying lip service to the original ideology they were supposed to be a part of, while actively acting against it and ensuring it does not exist for the wider population.
When people say capitalism they typically mean one or more of the following:
* Free markets
* Free trade
* Private ownership of the factors of production
* A form of economic organization characterized by tradable claims of ownership, & ownership separate from management.
* A form of economic organization where the primary driver of the firm is profit.
* A counterpoint to socialism.
* A counterpoint to centrally planned/managed economies.
By never being clear about what one means, and just saying 'capitalism' a skilled rhetorician can convince you one thing is good (or bad) and then lump others in as part and parcel.
As you point out profit seeking businesses do not like free markets.
Sure, some, but if every author accepted this as immutable, we can never progress.
The issue is that when you have two separate ideals, each with their own qualities, allowing them to become synonymous provides a defense for the lesser ideal in the name of the better.
So, it makes it easy for bankers and capitalists to defend their actions in the name of a free market!
Except one part of society (corporations) use this market to the hilt, while the rest of society largely abstains or is unable to participate in this market.
The concept of zero isn't even 5000 years old. Negative numbers were still being debated in the 1700s, though I think the first known use was in China's number rod system in 200 BCE. Conceptually, less than nothing is a funny thing and not really well grounded in the physical world.
It does make me curious. I'll have to look for the book. I find the history of mathematics to be fascinating, though debt may have originally been more culture and less math.
As for negative numbers, you can express "owes" without them so I doubt it was a problem. After all, you don't "owe" someone negative one thousand dollars—you just owe them positive one thousand dollars. You hand them a negative-one-thousand dollar bill, they're not gonna be happy. Being able to write negative balances or work formally with negative numbers isn't strictly necessary to work with debt.
In subsistence economies surplus is used primarily for fostering social relations and creating social obligations which one can call upon when times get though. And in subsistence economy sooner or later they will.
As more added value is created socioeconomic relations get more complicated and they become based on money.
e.g. I give you seed and you give me a portion of your crops for X growing seasons.
I'm going to read the book.
Debt contracts appear to be the origin of writing in Sumeria and, likely, in the Americas (the third independent invention, China, appears to have a different origin).
We have remnants of what appear to be contract vessels: pots with statues of sheep and such in them presumed to memorialize a deal for some sheep or grain. If there was a dispute the pot could be broken open and the terms examined. Then they started putting a sheep on the outside so you knew what was in the pot, then a drawing of a sheep and then someone figured out you didn't need the pot.
I believe in the Americas writing began with record keeping such as with the quipu which might even have been discussed on HN recently. Not sure of its contractual implication though.
They are still trying to piece our history together and digging up what they can, sometimes literally. If you ever need something to do, many archeological digs accept volunteer labor. It's hard work but a lot of fun. They will train you and you start by moving lots of dirt that has already been sifted. Sometimes, you get a bucket and sometimes you get a wheelbarrow. Eventually, you can do the sifting and work your way up to doing some digging. Though, they probably will not want you doing much cleaning, mapping, or removal. If you're quiet and polite, you can usually observe when they do classification.
But, I digress...
Anyhow, there weren't many written languages in the pre-Columbian era in North America. Some, like my people, had pictographs and others had increased complexities.
You've given me something to research after dinner. Thanks!
Fortunately you don't even have to read it from cover to cover to get the meat of it. Here https://www.youtube.com/watch?v=CZIINXhGDcs is a talk 80 mins long Graeber gave at Google.
Then once you've done that listen https://www.youtube.com/watch?v=8y_wz85ViLY to Robert Paul Wolff talk about the problem Ricardo, Smith, and Marx tackled. This one is a bit longer and it is tougher going but the pay-off is immense.
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What this New York Times article and the recent Bloomberg https://www.bloomberg.com/news/articles/2017-09-21/why-wages... (“Why Wages Aren't Growing”) article that hit the front page here have in common is that they both refuse to recognise that Marx's critique of capital was correct in his day and it _remains_ correct.
The next part is important. We _must_ separate the critique from his proposed solution. To be very clear I can agree with Marx's critique but I do not have to agree that central collectivisation is the solution.
The very simple observation is this. For-profit capitalism over time will cause (a) workers to be exploited to the point where they can't actually take part in the society they're a part of (which hurts the capitalist too!) and (b) wealth gets concentrated inefficiently.
What the New York Times and Bloomberg (and many others) outright refuse to admit is that _Marx was right_.
Universal Basic Income. What is that but an alternate solution to collectivisation? Same applies to profit-sharing. It's the reason why charities are non-profits because we all recognise the alternative would be unseemly. The Tobin tax (taxing certain international financial transactions) is another solution. As are regressive tax regimes that hit the wealthiest hardest. Consider also alternate forms of incorporation like cooperatives. And so on. What all these have in common is that they try to address the flaw at the heart of capitalism. The sooner we stop calling people communists for putting forward sane solutions the better. If we don't address this there will be ruin and revolution and when that happens we'll have a messy rather graceful transition to a fairer society.
As to wage growth, it seems to be about 3% a year in the US at the moment and 13% in Hungary suggesting it depends on various factors rather than falling everywhere because capitalism.
To reiterate. My specific point about Marx is this. Given capital, given private property – his analysis/critique about for-profit capitalism is correct. And critique pertains to essentially free and fair markets, let alone markets distorted by too little or too much regulation or markets distorted by cartels, oligopolies, monopolies, cronyism, and so forth. Marx's point is that even when capitalism is operating in its _ideal_ state it is a system where wealth will inefficiently accrue to a minority (the rentier class) and where those who do not have a handle on the means of production will get progressively more exploited because -as your turn of phrase goes- profit. It's that simple.
You counterpoints are meaningless in the face of the very well documented and ever-widening pay gap between workers on the bottom rungs of the ladder and those towards the top.
As an aside there are things that bug me about Marx and his style of reasoning. Both the hundreds of pages so its hard to say you're for or against. Also nearly all his statments are slightly off eg. "The slave is sold once and for all; the proletarian must sell himself daily and hourly." By his definition is you don't have rental income you are "proletarian" and so selling yourself hourly or daily. Which doesn't seem quite right - ok you may get a job but it's not quite like that. It slightly amazes and saddens me that people took this stuff seriously and it went on to cause so many deaths and do this day messes with clear thinking analyses of poverty and the like.
> I'll give you that without intervention the rentiers can get richer.
This is a central claim of Marx! Those anti-Marx claim "it'll be okay because <some form of trickle-down economics>" or "you'll discourage entrepreneurs" or "taxes are theft!" or some other variant. What I'm trying to show is that you can agree with this part of Marx but reject his solution – state-run collectivisation or communism or whatever you want to call it. The trick is to not throw the baby out with the bath water.
"The slave is sold once and for all; the proletarian must sell himself daily and hourly."
Sell himself means sell his own toil, his own labo(u)r. If you are fortunate enough to have some form of rental income then your _capital_ is doing the work, ergo you are not part of the proletariat. I think that's pretty clear, no?
Marxism != Communism
Marxism != Anti-capitalist
If you want for-profit capitalism to succeed you have to be partly Marxist, that's the irony given the way these terms have been bent out of shape.
The fault-line of "property is theft!" from one side and "taxation is theft!" from the other to my mind illuminates the entire discussion. :)
brain-fart – that should read progressive not regressive of course. suppose that's clear enough from the context but for the record …
You probably don't think we should look to e.g. Portugal to see alternatives to the drug war, either. It's a funny sort of exceptionalism, to imagine that we can only learn from similar-sized nations. Would that be Brazil and Indonesia?
Iceland and Portugal should be lessons for entities or similar size, like individual states of cities in the US.
The examples we have of countries letting their banks fail recovered¹. The onus is on anybody disagreeing to show how the US differences are relevant. Just pointing at them and screaming does not make it.
1 - AFAIK, all of them. What is interesting because it includes Brazil at the late 90's (the one single time Brazil grew in recent history).
Past experience gives us lessons for similar cases. The onus is on anybody using a model to ensure the use case is similar to the training data.
The US and Iceland are nations but it’s unreasonable to get hung up on that similarity of category. The nation is not a label for grouping economies that are comparable.
I don’t like bailouts either, for the record. My gripe is only with the scale question.
This whole size thing is a silly exercise in magical thinking anyway. Money is divisible, across all relevant scales. Pick any random nation, and its economy is larger than USA's was, some number of years ago. Would you say that we weren't exceptional back then, but we are now? When did that transition occur? What happens if some other nation's economy grows to our economy's current size, sometime in future? Will we no longer be exceptional?
But if Iceland remains its current size, neither superpower should treat it as comparable for scenario analysis.
I get a sense this is a political question for you; it’s not for me. It’s just an example.
Amazon is a company. I have a company of my own. Say my servers went down, and a few days later things were alright. Would it be Amazon Exceptionalism if they refused to learn from my experience?
The secret unacknowledged religious dogma you might not even know you've swallowed (although golly are Goldman glad you did!) is the proposition that banks are difficult to replace. This notion is preposterous on its face (which is why no one ever says it out loud) because of course anyone who owns capital is quite capable of purchasing financial instruments with that capital. If they weren't, they wouldn't own it in the first place. In the absence of "bailouts", there might have been some temporary confusion as legitimate profitable uses of capital switched from the old banks to the new (and presumably as the new bankers upgraded their executive suites to the level of opulence required in their new positions), but the history of recessions in 19thC USA makes clear that when we just let weak banks fail, the economy quickly recovers.
19th C banks are wholly different creatures to what we have today - we weren't even on fiat currency in the 19th Century, much less using banks as extension of monetary policy. The entire point of defending banks is that there is an immense amount of built up regulations that would not transfer over to the 'new banking system'. And while it's debatably whether or not existing regulations are good, the current regulatory environment makes it unlikely that any sort of similar consumer protection would be re-built in this day and age - just look at the modern ICO, which is wholly built on smoke and mirrors.
Bailing them out lead to all kind of problems too. 8 years later the economy hasn't quite recovered, and in the meantime the lack of trust caused by all this gave us Trump, Brexit, etc. I guess we can't really know what would have happened if these banks had failed, but the alternative is definitely not great.
A "premier" position based on bullshit ain't so premier.
If you work for money, then by extension you work for the bank, because that is where money is apparated.
The bank is the one who decides how much money is to be created, and who gets it first.
"Mainstreet vs Wallstreet". <expletive deleted>
The people in 2008 just timed the market poorly. This time around, we’ll see all the tell-tale signs of a housing crash and get out right before it does so, all cash. Then, when all the stocks (Because, of course, banks will lose out on the highly leveraged positions of our non-fortuitous peers) have tanked, we’ll simply buy them at rock bottom prices, riding a wave of financial security into the nursing home.
During the asian financial crisis the IMF and WB were gung ho about free markets, austerity and enforcing failure without exception but as soon as it hit western economies the whole field of economics changed with words like 'too big to fail' and 'systemic risk' entering the economic vocabulary.
How does one explain oil being at $40 and $140 with supply and demand and free markets. There is a lot more going on that is often hidden behind jargon that obfuscates than informs.
One can argue that some suppliers act "irrationally" when they artificially restrict their output to drive up prices (OPEC), but this is what you would expect to see in that situation.
The rules that Obama made, where hardly enough to prevent the biggest problems, of the system. But even those are abolished by the new president, since they might limit the possible profits, rich people can make.
And so we live on in the land of unlimited profits for the 0,1% and the unlimited losses for society.
It explains the history of banking, why banks are useful and also why many banks today are dysfunctional and harmful.
A loan to your your local mom-and-pop shop is a much riskier investment than a bond to a large corporation. DFA discourages risk-taking with the new capital requirement rules. Thus, community banks are fighting over a small pool of profitable loan opportunities and their numbers shrink. On the other side, small businesses have a harder time getting loans.
Regulatory compliance overhead from DFA hits community banks harder than big banks as well, so they're consolidating and leaving fewer true community banks.
None of this is has much to do with the actions of big banks. It's the natural consequence of DFA. If you don't like the status quo, you need to change DFA. Not necessarily to pre-2007 rules, but some small changes could provide a big boost to community banks.
https://www.youtube.com/watch?v=ZUXd3LJZ3hg
For example, health services are largely financialized via insurance. IE, you don’t directly buy health services, you buy insurance which buys health services. You don’t buy a house, you get a mortgage. You don’t support your parents (or colleagues) in their old age, you pay into pension or superannuation schemes. Education via student loans. Monthly expenses via credit card debt. Large ticket items via dealer finance. Public services via national debt…….Companies via private equity. Everything has a financial layer between payment and consumption.
Underlying a lot of this is a relatively simple fact that if debt is available, consumers (from 18 year olds to Finance Ministers) will take it. If loans are available for certain products, more of those products will be consumed.
Another (possibly evil) driver is that governments have chosen financialization as instruments for promoting stuff they want to promote. Need more corn? Crop insurance subsidies. Educate the masses? Subsidise student loans. Promote home ownership? Implicitly guarantee retail banks’ losses. Medical care for all? Tax free(subsidy) insurance. Flood problems? Flood insurance. Poverty? Microfinance.
So, banks got big. This has all sorts of weird effects.
One of the biggest problems in my opinion is the inflationary effect of this process. Real estate prices in many places are simply the amount that a bank is willing to lend buyers. If banks increase the amount a buyer can loan, house prices increase proportionally. IMO, the American healthcare saga is not really about ideology or competence or any of the stuff they talk about. The problem is that after 2-3 generations of wide scale subsidised financialization, prices & costs are so high.
My final thought is that part of the problem is the prominence of finance people in pubic decision making. They know finance. They believe in it. They use it to solve problems. They don’t see baks getting bigger as a problem. It’s kind of like the lawyer problem, who also have a lot of presence in politics. That means the legal field gets bigger all the time.
We have a total disaster mid-way through. This has to change.
Why do you think this?
Some of them are probably good, others not.
Home mortgages have mostly done what the politicians and public wanted in rural and suburban areas. Some price inflation happened as a side effect, but a lot of that extra cost went into bigger homes so people get something for it. Slightly distorting to the market, but nothing terrible.
In dense urban environments where supply is inelastic, price inflation was a lot worse yielded a lot less. This is probably one of the biggest cost of living problems.
I think the financialization of ordinary health services (not things like cancer or accidents) is terrible. I think it makes the whole industry a lot worse. Ultimately though, this is/was driven by consumer and voter demand not scheming villains.
Collectively, I think they might add up to different classes of problems.
Yes, if the payments become too onerous or the ability to roll over is compromised (Greece passim), then you have a serious problem, but the whole thing does not magically blow up at a certain level.
Also, remember that at a global balance sheet level, debt == savings. Debt (personal+state+corporate) has expanded because there are more and more people saving for their pensions, and the savings glut has pushed down the price of debt.
(and the "missing trillions" stashed in tax havens have to be lent out somewhere, too)
the crazy part is that it does not even need to be a complete halt in lending that cause it, just enough of a dip that expenses (debt repayments etc) outpace income (from the turnover of existing money plus the money coming in as newly issued loans).
And the whole debt equals savings thing is a fallacy that sadly the economics profession has convinced itself is true. The Bank of England released a document a few years back that showed how private lending effectively puts new money into circulation.
http://www.bankofengland.co.uk/publications/Documents/quarte...
Funny enough public debt is largely a non-issue, as long as said debt is denominated in the nation's own currency.
You seem to imply that money printing, and the resulting inflation, is painless and a non problem. I am not sure I agree with that. Lots of people will suffer in a high inflationary environment. Pensioners to start with.
If so is the case, something is badly wrong with the society that extends beyond the realm of economics.
Yes, the policies you describe do boost demand and that does cause inflation, but the supply side is not irrelevant. Less NIMBYism will help with housing costs, and maybe some reform could help with education supply. If demand is increasing (for example due to population growth and finance), ideally supply should also be able to increase.
Indeed, I've read a few articles in NYTimes/WSJ now on the sale of public services in the US such as fire and water services to private equity firms. And the whole thing is told as a cautionary tale about banks and capitalism, which misses the bigger picture in how these things always start.
Typically the problems start because the government was overleveraged from taking on too much debt, typically due to poor financial management fueled by initially cheap capital from bankers operating in and out of government. Then when hard times come they continue to seek the easy answers from the bankers (instead of making hard choices like spending less) and end up selling off public resources giftwrapped in pseudo-market sounding language with very little of the actual benefits of markets: competition, private salaries, flexibility, etc.
These "banks" are famously like an octopus wrapping their tentacles around everything. We have some old effective methods for handling this type of behaviour when it's used improperly in the private sector, and there the harm is limited to a few usually wealthy parties. But it starts to get dangerous when these half-baked financial schemes that have worked in private markets get pigeonholed into government. Critical services like emergency services or drinking water are often ill-suited (and more importantly ill-prepared) to handle the potential downside.
Hopefully one day politicians will learn this lesson and learn to keep things simple in the public sector. Governments everywhere have a consistent track record of not managing money well and have a high-turnover of executives by design, so any complex financial instruments are just setting them up for failure and exploitation. Anything to do with government should be made dummy proof and straightforward. Public services should be run like public services. Mixing of private/public should be the exception, not the standard. And I say that as someone biased towards the private sector.
Sometimes I feel like this "extra layer"/middleman-adding is not only just to enable government interventions but is just fluff added so we could create jobs for those whose skills don't go beyond the typical white-collar worker. I might be wrong, but the image of extraneous University administrators and "not-enough" skilled labor kinda paints this picture.
That's (in a somewhat roundabout way) is similar to one of David Graeber's arguments, you might like his book.
some of this is due to a lack of financial literacy on the part of consumers (financiers know that loans should come with an interest rate, not a charge for the privilege of loaning the money in the first place, but consumers on the whole apparently don't).
but there is also a regulatory mechanism exploited by consumer banks: FDIC insurance. without insurance, people are understandably reluctant to loan money to banks since they don't know if they'll get the money back. so the government (again, understandably) steps in and guarantees with tax dollars that you'll get that money back, even if the bankers are crooks. but of course, that means the government must try to tease out the crooks with a stringent set of tests and regulations around who they'll insure. and just like that, you have an anti-competitive choke point where incumbent banks use the regulations to guard against future competitors by keeping the regulatory barrier high.
(this is just another example of the financialization via insurance that you elucidate)
also, use cash. it's transaction-cost free, anonymous and universally accepted.
but i wish more people would realize how much they neuter competition and lose in actual cash-in-hand by indulging the big banks and not shopping around. make the banks compete for your money by finding the best returns for your cash. it takes a few minutes on a site like http://www.bankrate.com/ to do so.
most consumers have a checking account or two, a couple credit cards, maybe a savings account, a car loan and a mortgage--all things well understood and competitively handled by a credit union. many people tout convenience as their main decision-making factor, but big banks are not any more convenient than credit unions--technology has leveled that playing field. i suspect the real reason we use big banks is our ingrained herding instinct and the psychological safety that implies (however illusory that is).
For example, if I have extra money, and I know someone who could ramp up his productivity if only he could make a one-time investment (say, a cow for his farm), then I buy him a cow in return for a share of its milk. Then, to diversify, I can find thirty such people. Then I find someone who can sell the milk for a cut...[1]
Instead of all of that, we have banks, where I just give them the money, and they make the loans (and do screening, credit reporting, foreclosure, etc) and pass me a cut of the returns.
Nothing is wrong with that. The problem is when you have perverse incentives to start with (e.g. in fields like health care, or with lenders who have asymmetric information about the loans in a portfolio there's excessive trust in the vetting), where financialization just puts the same problem on steroids.
[1] Late edit: a better example of the "impure exchange" might be if I wanted to save for my retirement so I raised one more cow than I usually would with the intent to lend it out to others who are still working in return for milk, with the usual frictions like needing to convert to non-milk.
Economist has presented a well written argument here: https://www.economist.com/news/briefing/21651220-most-wester...
To be frank I think that US banks might be influenced by foreign powers just like it happened for the last election.
I think that finance will damage sovereignty in the long run. It really looks like common citizens don't really have a say on how finance work in terms of politics.
They will not be our masters much longer now that they will lose their monopoly on trust.
Building financial services in a way that doesn't corrupt is as hard / harder than building a serach engine / browser / car sharing company that will last for 1000s of years rather than decards