Tuesday, May 28, 2019

Capitalism is good for you

Most economists I know started out as physicists. Being a physicist myself of course means that the sample is biased, but still it serves to demonstrate the closeness of the two subjects.

The emergence of market economies in human society is almost a universal. Because markets are non-centralized, they can, and will, spontaneously arise. As of today, capitalism is the best mechanism we know to optimize the distribution of resources. We use it for one simple reason: It works.

A physicist cannot not see how similar the problem of distributing resources is to optimization problems in many-body systems, to equilibrium processes, to self-organized criticality. I know a lot of people loathe the idea that humans are just nodes in a network, tasked to exchange bits of information. But to first approximation that’s what we are.

I am not a free market enthusiast. Free markets work properly only if both consumers and producers rationally evaluate all available information, for example about the societal and environmental impacts of purchasing a product. This is a cognitive task we simply cannot, in practice, perform.

Therefore, while the theoretically most optimal solution would be that we act perfectly rational and exclusively rely on markets, in reality we use political systems as a shortcuts. Laws and regulations result in market inefficiencies, but they approximately take into account values that our sloppy purchase decisions neglect.

So far, so clear, or at least that’s what I thought. In the past months, however, I have repeatedly come across videos and opinion pieces that claim we must overthrow capitalism to save the world. Some examples:

These articles spread some misinformation that I want to briefly sort out. Even if my little blog touches the lives of only a few people each day, a drop in the ocean is still a drop. If you don’t understand how black holes emit radiation, that’s unfortunate, but honestly it doesn’t really matter. If you don’t understand how capitalism works, that matters a big deal more.

First, the major reason we have problems with capitalism is that it does not work properly.

We know that markets fail under certain circumstances. Monopolies are one of them, and this is certainly a problem we see with social media. That markets do not automatically account for externalities is another reason, and this is the problem we see with environmental protection.

The biggest problem however is what I already mentioned above, that markets only work if consumers know what they are buying. Which brings me to another misunderstanding.

Second, capitalism isn’t about money.

No, really, it is not. Money is just a medium we exchange to reach an optimal configuration. It does not itself define what is optimal.

Markets optimize a quantity called “utility”. What is “utility” you ask? It is whatever is relevant to you. You may, for example, be willing to pay a somewhat higher price for a social media platform that does not spur the demise of democracy. This should, theoretically, give companies feedback about what customers want, leading the company to improve its products.

Why isn’t this working? It’s not working because we currently pay for most online services – think Facebook – by advertisements. The cost of producing the advertisements increases the price of the advertised product. With this arrangement there is no feedback from the consumer of the online service to the service provider itself.

Indeed, I suspect that Facebook prefers financing by ads exactly because this way they do not have to care about what users want. Now add on top that users do not actually know what they are getting into, and it isn’t hard to see why capitalism fails here: The self-correction of the market cannot work if consumers do not know what they get, and producers don’t get financial feedback about how well they meet consumers demand. And that’s leaving aside the monopoly problem.

In a functioning capitalist system, nothing prevents you from preferably buying products of companies that support your non-financial values, thereby letting producers know that that’s what you want. Or, if that’s too much thinking, vote a party that passes laws enforcing these values.

Third, capitalism just shows us who we are.

Have you given all your savings to charity today? You probably haven’t. Children are starving in Africa and birds are choking from plastic, but you are sitting on your savings. A bad, bad, person you are.

Guess what, you’re not alone.

Of course you save money not for the sake of having money, but because it offers safety, freedom, health, entertainment and, yes, also luxury to some extent. You do not donate all your money to charity because, face it, you value your future well-being higher than the lives of children you don’t know.

Economists call this “revealed preferences”. What we spend and do not spend our money on reveals what matters to us. Part of the backlash against capitalism that we now see is people who are inconsistent about their preferences. Or maybe they are just virtue-signalling because it’s fashionable.

Yes, limiting climate change is important, nod-nod. But if that means rising gas prices, then maybe it’s not all that important.

Complaining about capitalism will not resolve this tension. As I said in a recent blogpost, when it comes to climate change there are no simple solutions. It will hurt either way. And maybe the truth is that many of us just do not care all that much about future generations.

Capitalism, of course, cannot fix all our problems, even if it was working perfectly from tomorrow on. That’s because change takes time, and if we don’t have time, the only thing that will get human society to move quickly is a centralization of power.

95 comments:

  1. in fact, capitalism works at its finest. capitalism is about accumulation of capital, resources etc; not markets or other trivialities, not really.

    money is just the perfect, essential mechanism for that because if you accumulate all the garlic in the world, let's talk about your net wealth next year..

    isn't it kind of mean assuming that just because I am mean, hey, everybody does it? I know it is very common in our european, self centered, middle class so-called society but yet, just out of consistency..

    it is always kind of amazing how easy it is to fool a physicist, how gullible they become if one presents any trivial shallow argument as some kind of optimization/variational problem (hey look! the fermat principle in economics! it must be true! let's derive the snell law of money..)

    capitalism is just good for me because I am a relative winner (or at least, not a total looser), and an asshole. if the world were fair in any meaningful way, we would be probably all in cotton fields.
    there is just one problem: some sissies feel bad about it, so they pretend to be "concerned". that capitalism is "not yet perfect". they want to "remedy" the worst of exploitation cases (or just not seeing them), and they vote green in european elections, go vegan or something, and listen to manu chao.

    it is in fact not that difficult to do great in a capitalist society, at least if you are born in the right place and class and you are dumb enough. so much so as to care a lot about money and ideally, not much else; selection will do the rest.

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  2. As societies have moved (or attempted to move), beyond pure or naive capitalism vs. socialism, to a more balanced welfare-oriented economics, then things like social welfare functions* could become significant in determining government programs and regulations.

    * https://en.wikipedia.org/wiki/Social_welfare_function

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    1. All the social welfare functions are postulated and therefore eventually value judgements, no matter how much you wrap them into economics-speak.

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    2. Of course social welfare functions instantiate value judgments. The challenge is to select correct value judgments. To this many economists will disparage value judgments, which are about good, bad better or worse, as epistemologicaly inferior, never noting that this judgment is itself a case of what they disparage.

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    3. John,

      There is no "correct" value judgement. If there was, it wouldn't be a value judgement.

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  3. If capitalism is defined as maximizing utility, then perforce it is good for the utility metric. It can meanwhile kill 1/3 of the species, and insure the eventual deaths of billions of persons by climate catastrophe.

    Institutions evolve in competition to perpetuate themselves at the expense of all else. Thus the true effective utility metric of the current economic organization is paperclip maximization. That is a metaphor, in case the reader missed it.

    Ecosystems which rely on exponential growth experience cycles of catastrophe in which available energy becomes exploited with increasing efficiency by a decreasing variety of species, until the increasing systemic fragility intersects the ceiling of stochastic impactors, resulting in catastrophic reorganization. It would be nice if our species could exercise the foresight to avoid collapse, but markets lack the intelligence and foresight to accomplish this.

    Finally, I retain capital to increase capital. Once that process achieves an approximate limit, I can rationally dispose of it to maximize global utility. That will disposal probably consist of creating a self-perpetuating mechanism for targeted redistribution which persists beyond my lifespan, but in the worst case it will be redistributed in a one-off according to the instructions of my executor. Because capital grows exponentially, the best expectation outcome typically involves deferral of the termination of the mechanisms for that growth.

    Are you saving all of your resources to grow sustainable enterprises? If not, then you are not seeking to maximize human benefit by that channel. Perhaps you have chosen a non-financial method of doing so, in accord with your Ricardian comparative advantage - perhaps by advancing science and technology, or by providing essential local services, or by educating others, for example.

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  4. Although it is not explicit, I think you are separating "Capitalism" from "Free Markets" here, and that is a good thing.

    While I would agree that motivating people to become producers of "utility" through profits is a good thing; and subjecting these producers to market forces is a good thing, and laws constraining the market are a good thing, there are several anomalies of Capitalism we leave unregulated that are not good for us. Basically these are analogous to zeros and infinities in function.

    There is the problem of Necessary Products. When your life becomes literally dependent on a product or service, you can no longer negotiate for it. The optimizing function in Capitalism fails, and becomes a robbery: Your money or your life, literally. Or your spouse or child's or siblings life.

    There is the problem of corruption. It is a nice fantasy to have only lawmakers that can resist the urge to help the very rich, in return for a taste of the money. Some can. But they are random, we seem incapable of ensuring we only elect lawmakers with moral stamina, and obviously there is no evidence that monarchs or dictators are uniformly better.

    There is the problem of concealed danger. It isn't possible to foretell every possible danger in a product. But the producers of products know more than almost anyone about them, and have a profit motive to conceal them, or obfuscate the science, or fight in court to not have to do anything about them.

    This isn't just a failure of oversight, it is built into Capitalism. You can say It isn't About Money, but when you use Money as a proxy for Utility, it can quickly become mostly about Money, and faking Utility, partially by manipulating people's knowledge of harms that would reduce their perception of Utility. That includes intentionally lying and false advertising; which is rampant. And though technically against the law, enforcement has been diluted (by corrupt laws) to nearly non-existent.

    There is a feedback problem with Wealth. Capitalism depends upon Capital, and even with taxes for the public good, profits go primarily to the investors. We end up with a resonance in the population: The rich get richer, the poor get poorer. It will never be a level playing field; some people are better negotiators or just plain luckier. Capital gets concentrated. Even if we prevent Monopolies, some players will come to monopolize wealth itself, and that is an unfair advantage.There are some tables only billionaires can sit at, and some return rates only billionaires can achieve. (In the USA, it is the law that some investment opportunities can only be offered to investors with a sufficiently high net worth. To "protect" people of less financial sophistication. But wealth isn't a test for financial sophistication!

    There is a problem when Demand exceeds Supply. For jobs, or for a product, or for a resource like fisheries. In jobs, if demand exceeds supply, then Capitalism doesn't maximize utility for anybody but the employers/producers. The employees must accept lower and lower wages or become homeless and starving. Add to this mix the potential for foreign production, and it gets worse. The countries with the fewest restrictions on wages and working conditions, and the most corruption, allow producers the closest approach to slave conditions. The reason we had to outlaw slavery is another failure of Capitalism: Slave labor is very profitable. And impossible to compete against while protecting local workers from the same.

    Likewise, if the local factory is the only place to work and workers outnumber job openings, then low pay and harsh conditions are common. Complain, and lose your job. There is a lack of leverage.

    Capitalism needs laws to constrain it, but corruption passes laws that make the above problems even worse, by raising barriers to entry that explicitly prevent competition.

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    1. Dr Castaldo,

      Yes, free markets do not equal capitalism.

      But I am afraid your are blaming capitalism too much. Take the issue of necessary products. The individual cannot negotiate, but what we do is to cooperate and negotiate in groups to limit our risk. This is entirely possible within the confines of capitalism.

      Yes, intentional lies and fake advertisements are a problem.

      The feedback problem you talk about is that in some circumstances wealth buys influence on society that compromises access to information. Again the problem isn't so much with capitalism it's with people who don't want to play by the rules (and get away with it).

      Yes, capitalism needs laws to constrain it.

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  5. I disagree. Capitalism is *terrible* at distributing resources. Capitalism rarely finds the optimal solutions, it systematically gets stuck in local minima. Monopolies are, indeed, one of those local minima... but so are oligopolies and many other nasty byproducts of capitalism.

    IMO, all the problems of capitalism stem from that fantastic creature: the rational actor. And it's not fantastic just because nobody acts rationally 100% of the time, but because the definition of rationality is not universal nor value-neutral. For me, the rational course of action might be to restrict fossil fuel consumption and diverting funds towards carbon sequestration research at the expense of an immediate significant economic impact to avoid a catastrophic economic impact in the future. You may believe that science and technology will solve the problem on their own before everything colapses, and the risk of failing is preferable to the certainty of immediate discomfort. Meanwhile, a third person might think that it doesn't matter if things go very wrong as long as we have a strong military that can control mass migration, keep the wars far from home and secure resources from countries in conflict. A fourth one might think that a generalise situation of unrest and chaos around the world is even desirable in those circumstances (plenty of opportunities to get even wealthier). All rational actors, all with very different ideas of rationality that are rooted in different human values and ideals.

    Another problem of capitalism is that it's amoral, but societies are founded on a common idea of morality. It's perfectly possible to have a capitalist system that works against the society from which it stems. Also, its natural short-term inner workings makes it blind to the wider needs of society. Both these factors combined make it very easy to end up with a toxic capitalist system. Regulations, state intervention, competition laws and exceptions to those laws... they are all patches to the suicidal tendencies of capitalism. There's a reason why you can't find a purely capitalist system anywhere in the developed world: it never lasts.

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    1. Capitalism does better at addressing wants, but is not so great with needs. Also wants tend to be individualistic and wants are sometimes social. I wrote an entry below where I discuss how economics in general is just one aspect of society. Of course in our age it has come to almost swallow up everything.

      Capitalism has become a secular religion.

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    2. "Capitalism does better at addressing wants, but is not so great with needs." A lot of distilled understanding there; great sentence!

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  6. I have to admit, I like your article. I like the free market because the market is like an electron, no matter how small a space and no matter how fast the computer, and no matter how short the interval, we cannot predict where the electron will be. No one person or group of people can predict the market. When regulation is needed, we have democratically elected leaders to work on this and the process is very difficult so no one group of people can make rapid decisions and make the correctly.

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  7. Capitalism is like fire. Unconstrained it will burn down the house, properly contained it provides essential heat and light to a home - ask any northerner who has comfortably survived a mid-winter power outage with a wood stove and a few candles. It is constraint that marks the difference between constructive and destructive capitalism.

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  8. "The bourgeoisie cannot exist without constantly revolutionising . . . the whole relations of society. Conservation of the old modes of production in unaltered form, was . . . the first condition of existence for all earlier industrial classes. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away . . . All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind. . .

    To the great chagrin of Reactionists, [the bourgeoisie] has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. . . . In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations. The intellectual creations of individual nations become common property. National one-sidedness and narrow-mindedness become more and more impossible, and from the numerous national and local literatures, there arises a world literature.
    . . . The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilization into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image."

    From "The Communist Manifesto," by Karl Marx and Friedrich Engels

    Right wing ideologues are no match for a truly superior prose stylist such as Marx, who makes capitalism sound not only exciting but positively Utopian. Is this picture simply too good to be true?
    You know what’s coming. According to Marx, there is indeed an enormous catch: capitalism depends on the exploitation and impoverishment of those who make it possible, thus carrying within it the seeds of its own destruction.

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  9. No matter how economists might talk, the words "capitalism" and "socialism" are ultimately political. You are a "capitalist" if you promote replacing government-guaranteed healthcare with "free-market solutions". If you want universal government-guaranteed healthcare you are a "socialist". That's the way it works in real life.

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    1. Maybe that's where it works where you live. Definitely not how it works here.

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    2. I'm no Paul Krugman (The New York Times Keynesian* economist-columnist), but observing here in the middle of the US it's the political vocabulary of the elections. The up-front defenders of Capitalism are (in many cases Koch-brothers funded) far-right Republicans, the ones leading the charge to repeal Obama's Affordable Care Act. Democrats who want a universal government-guaranteed "Medicare" are called "Socialists" by all Republicans. Capitalism touted on its own brings to mind the Austrian school, the economics espoused by conservative think tanks. It is surreal to me to talk in an abstract way about "Capitalism" outside its (in my case, US) political context.

      * https://en.wikipedia.org/wiki/We_are_all_Keynesians_now

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  10. Capitalism is value-neutral. It can make slavery and human trafficking very efficient, too.

    Capitalism can't exist without government and the rule of law to ensure that contracts are adhered to, and to ensure property rights. (Otherwise what you have is baronies, with each "leader of industry" having their owned armed forces.)

    Probably the clearest example of all this is "intellectual property" - such property does not exist without an enforcing mechanism; and the trade tiff between US and China is in part about that.

    Lastly, if you think that any country at all has a "free market", think twice. Look at the difficulty any two countries have in getting into a "free trade" agreement - it takes pages of legalese and huge negotiations, which should not be necessary if markets were indeed free. Overall the so-called "free market" is a con-game where "free" is used to make you feel good; while in reality some industries are subsidized and others are taxed. As a simple example if the market were really free, Americans would most likely be drinking more hard cider than beer and eating more rabbit than chicken. The reality is that the market is tilted towards the participants that have more political clout; and this has always been the case.

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  11. Capitalism works, but only in the short term. In the long term, the Earth, society and everything else fails. Greed and fear rule right now, and it will be our undoing if we don't change.

    At the age of 70, my greatest hope is to see a workable theory of quantum gravity emerge in my lifeetime. I don't think it will happen now.

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    1. Bill,

      The reason capitalism doesn't work for us in the long term is that we are bad ad calculating long-term payoffs. Hence, pure capitalism will put short-term over long-term benefits unless complemented with governmental action. Again, this isn't the fault of capitalism, it's because we don't think enough when we make decisions.

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    2. Sabine, your response here seems just as naive as the marxists dreams. Both sides love to advocate that human beings that pervert their ideal system, but reality is that we are all human beings, and any good system needs to be made to withstand/mold itself to human beings... We need a new system that take human's desires and their love for gaming the system into account!!! Marxism reduces the many dimensions of human behavior into one "ownership" and thus once you "solve" that problem everything will be beautiful, simply bad pseudo-science... Capitalism doesn't cares about the many dimensions of human behavior and sets up as the central figure the Capital instead of humans and as such becomes blind to the many problems that accrue from humans playing such a "capital game"...

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    3. Flavio,

      That's right. As I have pointed out, real humans do not fulfill the assumptions necessary for pure capitalism to work. We need a system that works for real beings.

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  12. Sabine,

    You said "Even if my little blog touches the lives of only a few people each day" so you clearly care as much or more then I do about working on humanities coordination problem. To that end may I recommend this:

    "http://donellameadows.org/archives/leverage-points-places-to-intervene-in-a-system/"

    If you've seen it (maybe in different form) cheers if not It's worth the time.

    J*

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  13. Sabine,

    "I know a lot of people loathe the idea that humans are just nodes in a network, tasked to exchange bits of information. But to first approximation that’s what we are."

    Yes.

    "Markets optimize a quantity called “utility”. What is “utility” you ask? It is whatever is relevant to you."

    Yes again.

    So if we assume all nodes are perfect "Homo-economicus" then the best system is one that spreads as much 'topical' (local?) information as efficiently as possible. and spends as little effort on redistribution as possible. because "Utility" will be best estimated by the node/s that is/are closest to the problem/s ie you. it reduces to a feedback speed/length problem. and like a shower head shorter feedback loop is better. also you need some sort of sorting mechanism that clears bad decision makers and limits the damage they can do ie poorly run companies must be allowed to go bankrupt and have their assets and personnel re-tasked.

    The trouble is we are not "Homo-economicus" some of us truly need to be minded while we make economic decisions. Children are the easy example and people with an IQ below 87 are the possibly racist possibly sexist possibly neurotypicalist (is that a thing yet?) example.

    So in solving our collective information problem (economics) we have developed and deployed strategies to deal with all of these things ad-hoc. and all of the strategies sort of work for their use-case but have lots of problems at the edges where they interact or where they are not scaled properly in relation to each other.

    In short it's a crap-shoot. The good news is that while this coordination problem may be intractable in reality; it is just that, a coordination problem and could posibly be called an information flow problem. It is not a physics problem. We have the energy and industrial 'kit' to turn all of these things around. We need only responsibly deploy the nuclear fire we stole from the supernovae that made this rock we call home. (no easy task but theoretically possible unlike 100% "renewable")

    The other good news is we are in the midst of a revolution in information processing. We only just realized the existence and meaning of the computational complexity zoo and are starting to think of how to shoo-horn it into a model of reality that incorporates information alongside mater and energy as a fundamental concept. I like the idea that this field will be called "Quantum-Geometry" but I'm an idiot so meh draw your own conclusions.

    As always Sabine you are exceptionally gifted at packaging ideas so as one of the "few people" you touch through this blog Thank you again, please continue.
    J*

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    1. Hi Jonathan,

      I basically agree with what you say about coordination problem. No, it's not a physics problem, I didn't mean to say that. Yes, it's a problem that is tractable with existing technology, we're just not doing it. (Well, tractable to some extent. It may actually be unsolvable in principle, strictly speaking.)

      Thanks also for the reference to the piece about leverage points. It vaguely sounds as if I've read it before. In a sense, of course, it's what we are all looking for, no?

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  14. I live next to one of capitalism’s little inefficient local minima: outside my bedroom window is a railroad. Any time I like, I can see trains hauling plywood north, while other trains haul plywood south. All that diesel pollution... couldn’t they just pick up the damn phone?

    Anyway, glad to see you’re not avoiding the big questions, existence and economics just in the last couple of days. Just to combine the two, “Excuse me, ma’am, do you believe in Capitalism?” “Believe in it??!! I’ve actually SEEN it!”

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  15. Sabine,
    You are wrong. Capitalism is totally and completely about money. I am not saying that capitalism is a horrible system. It is better than feudalism. But it is about money. I don't understand how you can see otherwise. As regards the economic structures in places like the US and Western Europe, maybe everything is not ALL about money. But to the extent that it is not ALL about money, it is due to socialist influences within capitalist economies, and not due to capitalism itself.

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    1. You clearly do not understand what I am saying. I strongly recommend you do some reading before proclaiming that I am wrong. Capitalism isn't about money because money is merely a medium we use to achieve a goal. Money is a stand-in for something else: safety, freedom, influence, whatever it is that you are after.

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  16. My main objection to capitalism these days is what I see as the idolatry of capitalism. It has turned into a sort of nationalist religion, especially in the United States. The economic theory of capitalism has had this element to it, where Adam Smith wrote in his Wealth of Nations on how the markets behaved as an “invisible hand” that operated for the greater benefit of all. Bentham and others also wrote on how markets will function for the greatest utility for the most. All of this confers onto the marketplace a sort of teleonomy so it is an agent with intentional actions. This as I see it is a sort of secular religious idea. They call economics the dismal science, though not often for its mystical or occult elements. This says a whole lot:

    https://despair.com/products/economics

    Ideally money is just a mode of information, but just as information has a value so does money for its own sake that accelerates much faster than real productivity. The ideal of capitalism as a mode of exchange that induces productive work is far from reality. In fact with the investment capital world less than 1% of stock profits are invested into actual production, research, or new developments and retooling. The rest goes into the pockets of traders. Then the big hubs in the economic wheels are the central banks, which define this whole system of making money with money.

    Adam Smith commented in Wealth of Nations how the wealthy have far greater access to government than the rest. This is of course a big “No shit Sherlock” moment. In order to maintain a financial based economic system it requires a monetary system of government. There have to be monetary policies in place to keep the system from inflating the value of money to nothing. Notice the recent attempts at a non-treasury based currency, the bitcoin, has largely tanked. Without government based monetary systems in place this leads to the proverbial tulip bulb crisis of the 17th century. This also means those most heavily vested in the game have the greatest connection to government.

    It is curious, but quite understandable, how after Leman Brothers collapsed on September 15, 2008 and the markets absolutely stopped that George W. Bush, not known for being particularly socialist, threw $700 million into the markets. Barack Obama threw $4 trillion at it, though a lot was in the TARP funds. This money was generated out of nothing by the Federal Reserve. The banking and business world make not a single protest. The same people in good times the same people, particularly their political attack dogs called Republicans, snarl in fierce protest at spending a few million dollars on head start education programs for underprivileged children.

    There are to my mind four basic ways humans organize themselves in civic orders. These are:

    Statecraft: The management of geopolitical units from a small town to major empire.

    Warcraft: The management of societies through military and police power with associated security and intelligence services.

    Priestcraft: The organization of people through the belief in a mythic narrative that is instilled in the minds of people as being not only real, but with dire consequences for not believing it.

    Tradecraft: The organization of society through trade, production and money, along with the mechanism whereby people can hold or own permanent quantities such as land.

    All societies have elements of these four. Of course there may be within each different ideologies, or in the case of priestcraft different religions, and different methodologies. Both capitalism and communism might be put in the category of tradecraft, though it could maybe be better put in statecraft. Different societies emphasize these differently. In the modern world priestcraft is reduced, far reduced from its supreme position during the middle ages. However, it is making efforts at a comeback. Societies generally have a mixture of these and they feedback on each other.

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  17. continued due to space limits:

    Capitalism is just one facet in this mosaic, though it has mushroomed into huge proportions. It also leans heavily on the other crafts. There is a trilemma in economic noted by John Maynerd Keynes. The free flow of capital, a fixed exchange rate of currencies and a sovereign monetary policy are not compatible. This takes us of course into the international arena, but it is one reason that government inevitably plays a role. This also holds within a country if there are different economic zones. The European Union is having troubles holding itself together and the the old problems of the strong Deutschmark vs the weaker Lyra and the jealous Franc and Pound are making noise. The silly Brexit move by the UK and now political rattling in France along these lines illustrate Keynes' observation: economics is never in equilibrium.

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  18. There were two competing schools of thought on economic structures in the 19th century. There was Adam Smith who supposedly advocated unregulated free markets, and there was Friedrich List who advocated heavy handed government involvement in developing the national economy. I forgot which German state List was in when he developed his theory, but he wound up getting exiled to the US. Meanwhile, Germany, as it unified, adopted his policies and is a major industrial power to this day. I believe they later let List come back from exile and even gave him an award. Just about every industrialized nation, with the possible exception of England, followed his guidelines. China follows them, almost to the letter, with its ostensibly free but highly regulated economy.

    As others have pointed out here, capitalism can solve certain optimization and allocation problems fairly well when they are suitably constrained and the solutions actively monitored and managed. In theory, prices are just partial derivatives, and economic activity is all about hill climbing. (Evolutionary biologists know that this only works so well in a real world fitness "landscape".)

    Getting capitalism to raise and maintain living standards and produce national wealth, requires a very different definition from the one usually given nowadays. If you read Adam Smith, you'd know he wasn't all that keen on what we now call capitalist free enterprise. He was a patriotic Englishman, and like many of his era read his Shakespeare recognized the importance of good governance.

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  19. i aM wh
    No, Sabine is right. Money is really just a measurement unit. It may be important for most people to have lots of it, but even in an economy without money, capitalism would work as advertised.

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  20. Dear Dr. Hossenfelder
    Would you mind to explain to me, why and how a centralization of power would solve the problems faster? I can not think of any example, where this would have been the case.

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    1. Christian,

      I didn't say that a centralization of power would solve our problems faster, heaven forbid. I said if you want people to move more quickly than you can do by tweaking financial incentives, then a centralization of power is what you need. This has a high risk of creating more problems than it solves, so please do not mistake me for advocating this as a good option.

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    2. Ah, now I get it. In that case I would say, we would need a superior intelligent being (a.k.a. a god) to take sound decisions based on all the information. Since we will not get that in the foreseeable future, centralisation fails for the same reason as capitalism, lack of information and processing power. I think it does not matter regarding the time to take a decision, if we centralise decision making. On the contrary, based on the theory of self-organising teams, a non centralised decision making process may be faster and better. The problem is not time, the problem is lack of information (and stupidity of the decision maker, but in a good hypothesis all subjects are the same, therefore we have to leave that factor out).

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    3. Yes, a god would be a good idea, if you can find us one.

      More seriously, the point with centralization is that *if* you know what to do, it gets the job done faster exactly because you do not have to wait for the self-organization. The problem is, of course, that then you don't know what to do.

      It can work, if you are lucky. It's like monarchy isn't necessary bad, if you happen to have a queen who makes good decisions. It's just that this is unlikely to pan out in the long run.

      I am mentioning this mostly because if you have a group of people who are certain they know what to do, then for them a power grab is the obvious path forward. We have seen this happening before. I don't think it's a real risk though, globally. The current political situation makes it unfeasible, I believe.

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    4. I can't find us a god, but there are a lot of people out there who are absolutely sure they have one.
      A queen? What is the word for a female dictator? Dictatoress? Might work, too.
      We are circling around the time-to-decision problem here. For any decision it takes a certain amount of time to process all the data. We can not get around that (except if you are a god). For mere human beings, decisions are mostly (not always) done by intuition and then the data is made fit.
      For any right decision we would have to process an infinite number of informations, literally even the proverbial butterfly in the rain forest must be taken in account. Obviously that does not work, therefore we base our decisions on a finite number of informations and that leads very often to gut decisions. In that case, one person might be the better idea, but she/he/it would have to have one hell of a gut. Group decisions work better, because the amount of information to process is shared among many. That is faster and leads to better decisions. It can still take quite a while, though.
      Your last paragraph sounds scary, but I think you don't believe in armed revolutions. That normally ends in tears for a lot of people.
      Personally I think, capitalism with its form we have in Europe, is the only way, to pay for the change we need. We just have to make the decision, to do it.

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    5. Christian,

      You don't need to process infinite information for any decision. Not all systems are chaotic.

      No, I don't think of armed revolution, I'm thinking of trade wars. I'm not sure Trump realizes quite what situation he is maneuvering his country into.

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    6. Dr. Hossenfelder
      You are certainly right but I meant those really difficult decisions, like should we build ... or rather closer to daily life; should I buy or sell shares. Is that chaotic or not? Can we predict the Dow Jones for tomorrow if we get enough data? Just made me think, that if a god has all the data processed, there should be only a single course of action left. Therefore the god does not take any decision, though we don't need a god, because the single course of action would have happened anyway. Sounds wrong.

      If Trump realizes it or not isn't really the problem. He does not care. He only cares about himself (a textbook narcissist) and how he can be reelected. I don't think that he intentionally "bends" facts to his liking, he just does not know them so he makes them up while he speaks. I think he did this his whole life and that works quite well, if the audience just does not care, is not willing to check or just likes the (alternative) facts.
      Try it, it's easy. Look people in the eyes with a very serious expression and you can tell them utter BS, as long as they think you know more about it than themselves (and are not willing to check). It works, I tried it intentionally. The most prominent alternative reality that uses this method, is the esoteric movement. The story behind Himalaya salt is hilarious. Or what they make of the Schumann-Resonance. Brilliant. Mobile phone radiation resistant clothing, you roll on the floor.

      My fear is, that he rather pulls everybody down with him. He can't stand not to be worshipped. What makes me loose all hope is how many people actually worship him. Somebody who grabs between the legs of women is still worshiped by women. I don't get that. Makes me loose all hope that women could make a difference, too.

      hihi, my "Drumpf" plugin still works.

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  21. We have a system today which allows the accumulation of a greater and greater portion of a nation's wealth in fewer and fewer hands. If you call this system "capitalism," then capitalism surely isn't working. Or it's working perfectly, if you happen to be in that 0.1% minority.

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    1. Please read what I wrote. I explained that (a) we do not even have reason to expect it is working and (b) that capitalism only works if you think that humans are rational actors with infinite cognitive capacities, we they are arguably not.

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    2. Yes, but your title is "Capitalism is good for you", soon followed by the statement "As of today, capitalism is the best mechanism we know to optimize the distribution of resources. We use it for one simple reason: It works."

      And regardless of how charitable one's view of the humankind is, no one actually believes "humans are rational actors" (Yes, I realize you're not claiming that). So, capitalism may or may not be working, and for it to work, it needs rational human beings, which don't exist (at least that's what Kahneman tells us).

      Then why is capitalism good for anyone?

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    3. B is not true either... Sheer luck will let people keep accumulating more and more capital than others... Even if human were rational actors with infinite cognitive capacities...

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    4. What you say is true, but what you ignore, is that the pie is getting bigger faster than the 0.1% gets more of the money. That is why poverty is decreasing after all. Of course the planet is not infinite, but that's another problem.

      Then, there is the fact that capitalism can be run in a multitude of ways. Like a country can. Look at all democracies in the world, do they all run the same way? The US vs Canada vs Britain, Norway, Switzerland, etc?

      There is also the fact that capitalism, and any social system that you could think of was made by human beings for human beings. And human beings are not piano keys. No system can be better than what limits it, and in the case of a social system, it definitely can't be better than our own nature. As much as socialist systems might sound good on paper, they ignore the backreaction of humanity on it. Capitalism was not theorized and them applied, that is why so many people disagree on how it actually works in detail. But it only means that it is a human product.

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    5. aydemir,

      Well, maybe read what I wrote because I explained that of course humans are not rational actors, which is why we do not use uncushioned capitalism, etc etc. Why is that good? Because everything else is worse.

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    6. @Spearhead. What do you mean the pie is getting bigger? Where are all the additional ingredients coming from? From taking off others?

      I fail to see any justification for anyone having more than around $2 million or earning in access of $100,000 per annum. If I had my way things would be very different.

      The USA is profoundly immoral. Thank God I don't live there. Awful place.

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    7. @Ian Wardell,
      that's called economic growth. Capitalism (and that's probably not exclusive to capitalism) is not a zero-sum game.

      "I fail to see any justification for anyone having more than around $2 million or earning in access of $100,000 per annum. If I had my way things would be very different."

      Oh, I totally agree with you on this. But you can simply regulate things more. No need to throw off capitalism. Anyway, if you wanted socialism, isn't it all about regulation? If you can't do it within capitalism, what makes you think you can do it in another system?

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  22. Whatever “Capitalism” may be , it is not well understood ; the great financial crash 2007-11, repeated recessions, the “business cycle”.
    Hard to treat Capitalism as a coherent system. Most of what is written about it is opinion. Not always based on strict experimental results, or even observation. A difficulty readily admitted by many practitioners of the dismal science.
    When people say – down with Capitalism – they often mean rouge features of capitalism. “Over-financialisation” - Why banking and financial industries have grown so much more than the productive economy; breakdowns in pricing the public good, pollution etc.
    Any control engineer will recognise that Capitalism is unstable. It needs regulation. Anti-trust; banking rules and central banks.
    When Capitalism goes bad and elites and poverty are entrenched then – down with capitalism – may mean – down with this capitalism –.
    Whatever the benefits to some, if people think they may never be invited to the party, they may just decide to burn the house down. Where vested interests run too deep it may be necessary to break the system to fix it (viva la revolution).
    A Polish friend said to me, “Ishmael, you would have liked communism. The things you like were cheap or free, books, plays, music, hiking in nature. And you don’t care about the things we couldn’t have; rolex, BMW, expensive restaurants, big houses and mortgages.”
    And soviet particle physics wasn’t that far behind :)

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    1. As a citizen of a communist state you might find that intriguing, but the communist society has payed a much higher price for cheap books in the form of higher pollution and bad living conditions. You might not care about Rolex, BMW and expensive restaurants, but others do and that is neither good nor bad. These companies provide jobs for people who even like to build these things. Working at Ferrari is something special for many and you must accept that. We are individuals and in communism this is not taken into account (except for the leaders).
      And I am pretty sure you would not want to drive around in a Trabant.

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  23. Ending climate change requires the science community to invent a new clean source of power. It's up to you.

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    1. Axil: We have already invented new clean sources of power. Concentrated Solar Power and Wind Power have zero emissions. They can be achieved with very little environmental impact, and have been proven to scale.

      The problem isn't just inventing it. We've done that, and there is a plethora of improvements that might be made with additional research.

      But because of capitalism, we would have to invent something significantly cheaper than anything else, so cheap that the expenses of conversion would quickly pay for itself, say within five years or so. People will inevitably view adoption of the technology as an investment and want it to produce a monetary profit in a reasonable amount of time.

      The only way to end climate change is to find a green power source that will appeal to people that will never give up even 1% of their income to prevent climate change.

      We've already invented clean power, multiple times. the storage problem is solved, intermittency is solved, even efficiency is solved.

      It just isn't profitable to switch. And it will not be adopted widely enough until it is. Some applied science research might help us make green cheap enough to compete economically, but to me it doesn't seem like a priority of business or government.

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  24. Hi Sabine,

    as far as I know the definition of "good" is a matter of religion (whatever the philosophers say, about nobody cares). Politicians systematically use the general idea of good and bad to create an opposition that justifies their existence (pretty much like armies and mafias).

    But do you know the consequence of your actions?
    If not, how do you define good?

    Best,
    J.

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    1. "Good" is not "a matter of religion," it's a value. Even non-religious people have an opinion about what is good and isn't good.

      The exact way it's defined here is a state that optimizes the utility. That's not a unique state, so you will have to complement this with more information. You usually extract that additional information by way of the political system.

      Personally I think that's a good arrangement. If you feel otherwise, all fine with me. My point isn't to convince you that what I think is "good" is what you think is "good" but simply to explain that capitalism is not by construction an environment destruction machine that makes the rich richer.

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  25. I posted something above; this is a different observation about Capitalism. We have a class of algorithms called Greedy Algorithms: https://en.wikipedia.org/wiki/Greedy_algorithm

    A Greedy Algorithm follows the problem solving heuristic of making the locally optimal choice at each stage with the intent of finding a global optimum.

    However, it only works if the globally optimum solution has something called "optimal substructure", this means that every subset of the globally optimal solution contains locally optimum solutions.

    It fails whenever the globally optimum solution would require sacrifice to achieve.

    Capitalism is a Greedy Algorithm, but applied to a system that does NOT have an optimal sub-structure. The locally optimal decisions made by individuals are NOT part of the globally optimal distribution of the value created by labor or by the expenditure of gathered energy (if we are talking about the value created by machines or agriculture).

    If utility is whatever is important to me; the I would call obtaining that utility satisfaction. I believe the net life satisfaction of all humans, stabilized to not decline for future generations, can not be maximized by Capitalism; nor do I think Capitalism approximates the maximum. It does not have an optimal substructure; the option that is best for the Koch Brothers, or Mark Zuckerberg, or Exxon, is not (IMO) part of the global optimum.

    Now Capitalism in a constrained market (not a free market) might approximate a global maximum, but our governments suffer from the same flaw. The Democratic method of choosing leaders is addressed with a Greedy Algorithm (vote for whomever you like best, as a representative do whatever you need to get re-elected). But this doesn't do what is best for the country. Or, even if it does, it does not necessarily do what is best for the world: What is best for one country (the locally optimum solution) may come at the expense of the rest of the world: The locally optimum solution is not contained within the globally optimum solution. Just like Climate Change is inadequately addressed because doing so would require significant sacrifice now for a better future generations later, and that is not part of anybody's locally optimal solution.

    I am not saying I have a solution on how to constrain Capitalism or Politics to produce anything close to the globally optimum solutions; just offering a different way of seeing the issues.

    The way forward, then, is probably not a wholesale overhaul of how politics or capitalism work; but inventing ways to take advantage of the structure as it is: Invent locally optimal solutions (i.e. in the immediate best interest of individuals, business, or politicians) that would be part of the globally optimum solution. So they aren't adopting it to reach the global optimum, they are adopting it for its immediate utility to them.

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  26. There is another way of looking at the success of capitalism. By capitalism I mean the whole domain we consider to be free markets, financial capitalization, corporations etc. I am less concerned about the ideal of capitalism, which does not exist. If you want to indulge in that you can read Ayn Rand's novels, which might actually cure you of such illusions of ideal capitalism. My argument is with physics.

    Capitalism is the system that most efficiently extracts resources from the natural world, converts them into other forms of which the large majority end up as trash. Capitalism is the economic system that best conforms to a maximum entropy principle. We are in effect a sort of terminator species, and we always have been regardless of what ever economic or political system is in place. By mid century half the biota currently on Earth will be wiped out. We are engineering the next mass extinction, and capitalism is the way this being done the most efficiently.

    https://www.juancole.com/2019/05/civilisation-destroying-terrified.html

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  27. I think a lot of qualms people have against capitalism are not actually against capitalism per se, but humanity. Let's not forget that no social system exists by itself. Same thing with socialism. One of the reasons it worked so badly is because the different socialist systems are generally purely theoretical. They were thought out before they were applied. And those who thought out those systems did not take into account the backreaction of human beings. They view humans, as Dostoyevsky said, as piano keys. Capitalism, on the other hand, was not theorized before it was applied. Capitalism was theorized AFTER it appeared, which is why there are so many schools of economics. It merely mutated from previous systems with time. And as such, the human imput is more taken into account. It is obviously not perfect, but it's better than nothing. But in this way, the way capitalism works already takes into account backreactions from human beings.

    Socialism tries to solve problems it thinks arose because of capitalism. But it doesn't really know if the problem actually arose because of capitalism, or because of human nature. It's also for that reason that no true socialist society even existed (at least as intended): we don't know how to make one. The act of making one brings a lot of chaos and unstability, and this makes it easy for hijacking, for example. This in itself is a human backreaction that is not taken into account.

    Capitalism is obviously not perfect, as we human beings are anyway, but it does do certain things well. I think it is a good thing to have a system in which greediness and ambition are not crimes. These are basic human traits that are impossible to get rid of. Trying to get rid of them only means they'll come back with a vengeance. At least capitalism tries to accomodate such traits in a way that is not too problematic to everyone else. Again, it is not perfect, but no system will ever be. I simply think capitalism is a "natural" system, in the sense that it appear as a logical continuation of the previous systems with our technological advances and the evolution of our societies as a whole, how they are run, etc. It just looks like a logical system to me. But I am always surprised to see how many very educated people criticize capitalism to the point of wanting it gone and replaced by a socialist system. I always think that they, among all people, should know better than trust easy solutions. Or to believe easy causes for complex problems. They somehow think all evil begins with capitalism, but they somehow forget that all evil begins with humanity. Capitalism is a human system after all.

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    1. SpearheadBT: I will disagree with that. Socialism arose long before capitalism, even before "capital" and money existed. Tribes and family groups are extremely socialistic, sharing gathered and hunted food, sharing shelter, engaging in communal building and protection.

      Socialism is the natural state of humans and families, because of the simple fact that a handful of people can live on fewer resources and less effort together than the sum of resources and effort required if they all lived alone.

      Nor has this natural socialism ever been an equitable split. Children get a free ride. Men are more expendable than women or children, so they have always taken more life risks and battle risks; this is supported by logic, evolutionary psychology, and reflected throughout history. As detailed in the book Is There Anything Good About Men by Roy Baumeister.

      That same dynamic echoes into modern times. Children still get a free ride, men are still more expendable and take on riskier livelihoods than women, including the majority of battle.

      The most widely supported government programs in the USA are socialist programs, Social Security and Medicare. The countries with the highest averages of happy citizens on Earth are among the Nordic countries, where extensive socialist education, healthcare and public welfare. It works, and it isn't collapsing. (Nor does it rely on free money from oil or a small population, to forestall common dissents. Countries like the USA have far more space and natural resources per capita, they have just squandered them on the rich. And the larger the population engaged in a collective action, the more successful it is capable of being; that is the way insurance companies can reduce the variance of risk after all).

      Communism in the sense of "from each according to his abilities, to each according to their needs" is a non-starter in large groups, the only human incentive to excel under such a dictum is if you truly love everyone in the group. It can work in a family, but it doesn't scale.

      A mix of socialism and capitalism does work, that has been proven endlessly. People can still excel financially by their work and inventiveness, technically or in the arts. All "socialism" means is putting a limit on misery and desperation. We can eliminate poverty without making everybody rich, and while retaining incentives to learn, work and contribute in order to gain the luxuries and entertainments we want that go beyond the necessities merely surviving another day. We know for a fact that providing those necessities of food, shelter, healthcare and education does not eliminate ambition and the willingness to work.

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    2. Sure, socialism worked fine and was natural for very small societies where everybody knew each other: that's not been the case for a loooong time, hence why our societies naturally evolved to capitalism (first through bartering, mercantilism, etc..). People only care about people very close to them, which is partly why socialism can't work (ie. I don't know you very well, why should I give you part of my crop? Can't I have something in exchange for this service?). If it worked so well, societies wouldn't have outgrown it (and again, that was thousands of years ago for most societies). One of the other reasons, is that capitalism is very effective in achieving things, because of the incentives it gives.

      I think you misunderstand socialism and social policies, these are not the same thing at all! As long as you have private ownership of the means of production, you live in a capitalist state. Sure you have state-owned enterprises in some countries, but they are usually limited to natural resources or stuff like education and hospitals. A system is truly socialist when there is no private sector left. And I fail to see how Social Security or Medicare are socialist, as they are not contrary to capitalism. You can have Medicare and private hospitals, as well as social security and no state-owned companies in your country.

      "We know for a fact that providing those necessities of food, shelter, healthcare and education does not eliminate ambition and the willingness to work."

      But this has nothing of this is contrary to capitalism. As you said:

      "while retaining incentives to learn, work and contribute in order to gain the luxuries and entertainments we want that go beyond the necessities merely surviving another day"

      Which is exactly what capitalism brings. If everything is "free", you won't work, unless you are truly passionate about it, which is a very tiny minority of people. Another reason why socialism worked thousands of years ago, is because it was necessary for survival. Not everyone could do everything alone, and societies were small, so everyone cared for each other and it was manageable. But with so many jobs that have nothing to do with survival, and so many people you don't care about, such a system wouldn't work very well.

      The point of this blog post want to diss social policies at all, but to defend capitalism against the attacks of those who'd like to get rid of it. If you think that capitalism can work well with social policies, then you probably agree with the point of her post.

      By the way, socialism back then, and the different socialist systems theorized that we have now, are very, very different. There was no such thing as a state or politics back then. Not enough people to have cooperatives, unions and the likes. So my point about socialism being purely theoretical is still mostly right.

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  28. Saying markets optimize utility is just means people tend to spend money on what they want.

    The claim that markets optimize distribution of resources is more dubious. Stock markets are intended to optimize investment of resources in the sense that people try to invest in what will make them the most money, but optimization only occurs when are participants have perfect information.

    What is the optimal distribution resources to persons? Markets say little about that, though they tend distribute the most to those whose services are most in demand - like soccer or movie stars. Above all, though, they distribute most to the owners of capital - which is the main reason that it's called capitalism.

    If you think food should be distributed to the hungry, or education to the young, or healing to the sick, capitalism won't help you.

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    1. Well, you decide what you do with your own money, and you decide who you vote for. If there aren't many people who share your values, it's not going to have much of an effect. If you don't like that, you can try to throw out democracy and enforce a massive redistribution of wealth. I think it's unlike you'll get away with that though.

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    2. Most people in advanced countries like yours, less so in mine, and more so in Scandinavia, have voted for and practice substantial redistribution of wealth. Somehow, democracy has survived.

      In a couple decades or less I expect that robots will do most work. Then redistribution will occur or most will starve.

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    3. CIP,

      You misunderstood my point. I was saying if you want a redistribution of wealth that is not supported by sufficiently many people who share your values - ie, you cannot do it democratically - then you will have to throw out democracy. Which is, for all I can tell, what you are suggesting. If you believe that your democracy actually works, which personally I strongly doubt. In any case, you put the blame on the wrong party. It's not capitalism that's the problem.

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  29. Sabine wrote: capitalism is the best mechanism we know to optimize the distribution of resources . . . I am not a free market enthusiast . . . free markets do not equal capitalism

    Castaldo wrote: This isn't just a failure of oversight, it is built into Capitalism . . . Capitalism needs laws to constrain it

    Capitalism and free markets can mean a million different things. The essence of capitalism is that private individuals are free to invest in trade and industry for their own profit. This is in contrast to state control of trade and industry.

    So when someone says that "capitalism is the best economic system we know," I would agree, but I'd also say it's obvious. Complete control by the state, or an oligarchy of any kind, has never worked well. Absolute power corrupts absolutely. Even a little bit of power can corrupt people, as anyone who has dealt with an unhelpful customer service agent will know. :-)

    Complex societies require rules, which means that all "free" nations are a blend of capitalism and state control. Maximizing freedom involves constraining some freedoms. Ask ten people - even ten economists - to define an ideal "free market" and you'll get ten different answers.

    That being said, free markets are absolutely associated with capitalism. When someone says they aren't a fan of free markets, they are thinking of certain kinds of free markets. There are good and bad kinds of capitalism and free markets. Again, it's all about the rules of the game.

    If capitalism goes too far, because of a lack of rules and restraint, it's an oligarchy, not a free market. In other words, the capitalists become the state.

    In an ideal society, the rules of the state maximize human potential for all individuals. Capitalism does not necessarily focus on profits and growth at the expense of things like equal opportunity, sustainability and environmental issues. The devil is in the details.

    Sabine wrote: maybe the truth is that many of us just do not care all that much about future generations.

    There might be more than a little truth to that. I generally give humans a 50-50 chance of not messing things up for future generations. Some of it is not caring about future generations, some don't believe anything seriously bad will happen (e.g. it's a hoax), some believe that climate change will be beneficial (warmer is better), some believe we'll adapt to whatever comes, some believe we'll find technical solutions (just like cars were a technical solution to the so-called Great Horse Manure Crisis of 1894). And worst of all, for me at least (an atheist), is religious folks telling me that catastrophe - the End Times - is good and normal because it's foretold in the Bible.

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    1. Steven,

      I tentatively agree with you... Of course capitalism needs to be set up properly. What I am saying is that much of the problems we see come from people not understanding this and instead blaming capitalism, which makes no sense. (We see the same thing in academia, btw, as with people blaming "the system" rather than understanding it's up to them to configure the system so that it does what they want.)

      Not all of the issues are system constraints though. I mentioned above the peculiar lack of labor unions in the US. I am not sure why that is, but it's certainly one of the reason for the large wealth inequality we see there. It doesn't make sense to blame "capitalism" if people just don't use the power they have to negotiate their salary.

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  30. You state: Markets optimize a quantity called “utility”.

    I do not agree that this is generally true, although it is true in specific markets where products are simple (commodity markets). In the presence of extreme information asymmetry, however, I believe that markets are incapable of optimizing utility, even in principle.

    An example is the market for home printers. Other than cost, the primary deciding factors are all unknowable: how long will the print engine last? How will the quality of the printed pages degrade over time? How will the ink pricing policy of the manufacturer evolve over time? Will the manufacturer be successful in suppressing third-party competition for ink refills?

    Consumers are unable to optimize utility when the answers to most questions required to do so are unobtainable.

    You may wonder, how can a market like this persist when a single manufacturer could offer public statements and guarantees that provide this information, and (according to my own reasoning) proceed to become the dominant manufacturer?

    I believe the answer is that making a set of believable guarantees that will "resonate" with the buying public is extremely difficult, and for that reason adopting such an approach is a risky business strategy for a business.

    Risk has a cost. This cost is similar to what economists call the deadweight load of taxes: if it is large enough, it can convert profitable behaviors into unprofitable ones.

    As a result, the sensible business strategy is to avoid this cost of risk by "slopping at the same trough" as your competitors, maximize one's profits by exploiting the consumer's lottery-like purchasing decisions. My argument here is a formalization of the old adage, "don't rock the boat".

    The behavior of the manufacturers is called implied collusion. The manufacturers need not explicitly collude; rather, each manufacturer independently settles on an optimum behavior that is indistinguishable from collusion with the group.

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  31. A discussion of capitalism -- and I'm the only one quoting Marx?

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    1. I'm surprised I'm the only one mentioning the "welfare" state* ("a distinctive combination of democracy, welfare, and capitalism"). The welfare state is the invention we have created to fairly allocate resources.

      * https://en.wikipedia.org/wiki/Welfare_state

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    2. As I previously said, this merely brings up the question what you mean by "fair". You have to get the social welfare function from somewhere.

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    3. I do think we should know where we should *not* get this social welfare function: from the well-funded complex of think tanks that are the champions of "Capitalism"; e.g., "The Charles Koch Foundation invites recent Ph.D.s and doctoral candidates to apply for academic fellowships. Through these pre-doctoral and post-doctoral fellowships, we seek to support individuals dedicated to pursuing a career in academia."

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    4. Philip,

      "Should" is a value judgement that you can communicate by voting. I really don't see how you are saying anything that wasn't already said.

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  32. No, capitalism doesn't work. In the USA 84% of people -- the vast majority -- share just 20% of the wealth between them.
    And, since the industrial revolution and the development of capitalism, most people work ridiculously long hours doing the unfulfilling repetitious work that capitalism has engendered.

    But does capitalism at least make people happier? Unfortunately not, we have soaring rates of depression, even amongst the rich and famous.

    Why are we accepting this situation? It seems to me that the very wealthy few are pulling all the strings, controlling the media to make others think that the present system is somehow desirable and just.

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    1. Ian,

      You missed the point. The problems you mention are not due to capitalism. They are mainly due to an ill-functioning political system, weak labor unions, and an electorate which doesn't understand what democracy is good for.

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    2. Great, then let's keep capitalism, but have a radical redistribution of wealth from the rich to the poor. Ensure no one gets more than $100,000 a year. Ban all advertisements on the net and TV. Ban all food with added sugar. etc

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    3. Ian,

      Well, if that's what you want, I suggest you vote the right party for that.

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    4. This discussion makes me think that a lot of people think that capitalism can't be "reformed" and should then be scrapped entirely for socialism. What I don't get is this: If it is so hard to properly tune capitalism so that it can be fairer, what makes you think you can properly tune society itself so that it is? People often forget the human factor it seems. They view capitalism and socialism merely as linear systems where people are an imput like any other. But these systems are actually nonlinear, and there ought to be a backreaction of the system on the people, and then again of the people on the system. Merely theorizing what system would be the fairest or the "best" without taking this into account is like studying a complex nonlinear physical system in terms of the linearized equations: it doesn't work most of the time.

      Delete
  33. Ian wrote: I fail to see any justification for anyone having more than around $2 million or earning in access of $100,000 per annum . . . The USA is profoundly immoral. Thank God I don't live there. Awful place.

    The country you live in has no limits on net worth or annual income, so is it also profoundly immoral and an awful place?

    The US has about 550 billionaires with a combined net worth of about $2.5 trillion. If we distribute all their net worth to the 128 million households in the US, that would be about $20 thousand each. Making things better for the middle and lower classes appears to be more complicated than capping net worth and annual income.

    Perhaps you can be more specific. Is the US an immoral, awful place because we don't have universal healthcare? Also, for a rich nation, the US has an abysmal poverty rate and a substantial percentage of citizens are on some kind of public assistance or are incarcerated. I'm surprised at the number of Americans who use drugs as a way to "relax." I'm surprised about the so-called opioid crisis. The US has about half a million homeless people, and we still haven't figured out how to address this growing problem. Sure, we've got problems, but which country hasn't?

    By the standards of people living in rich, democratic nations, the world is an awful place for billions of people. And yet, the poorest two billion people in the world would rather be alive than dead.

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    1. I don't like the modern western world at all, and that definitely includes the UK. I suspect people are happier in small closely knit communities with a shared history and identity, where everyone knows each other, and where they do traditional work rather than doing repetitious work for some faceless company in the modern world.

      Yeah Universal healthcare is a step in the right direction. Redistribution of wealth etc. But that doesn't address the fundamental problem. And it's difficult to change since the world is vastly overcrowded. Should only be a few hundred million at most.

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    2. Ian wrote: I don't like the modern western world at all

      I understand your criticisms, but would you agree that the only way out (of our mess) is forward, not backward? Even if going backward - to some "traditional" kind of existence - is in fact our best hope, humans will never, ever consider making a deliberate decision to take that course of action. The solution you're hinting at isn't merely improbable, it's impossible.

      If the worst-case scenarios materialize, perhaps we'll end up with several hundred million people, but it won't necessarily be a more pleasant existence. Indeed, it might be the second time that humans are banished from the Garden of Eden. :-)

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  34. Ian wrote: most people work ridiculously long hours doing the unfulfilling repetitious work that capitalism has engendered.

    Sabine wrote: The problems you mention are not due to capitalism.

    I'll tentatively agree with both sides. I'll give Ian the benefit of the doubt and assume he's criticizing some aspects of our current form of capitalism.

    Sabine points to the political system as if it's separate from capitalism, but it's the political system that sets up all the rules for capitalism. Non-political capitalism does not exist.

    Even the stripped-down essence of capitalism is political: the freedom of private individuals to engage in trade and industry for profit. The rules for this freedom are complex and aren't self-evident.

    As for the mainstream news media, I'm a huge critic of their faults and failings. That being said, for the most part, the mainstream news media manages to put out enough information for a thinking person to understand what's really happening. Moreover, a thinking person who cares wouldn't rely solely on the mainstream news media. Rich people and politicians have been lying to the masses for centuries, so there's nothing new about that.

    There have been some improvements. For example, public schools teach evolution and history textbooks no longer completely whitewash American history. I'm old enough to appreciate those changes. :-)

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  35. Ah, Sabine, I've been waiting for you to come out of the closet as an evil tool of the capitalist oligarchs!

    Kidding aside, as someone who seriously considered going into econ rather than physics, I am of course in general agreement with your post.

    I'd like to add a couple of elaborations:

    On externalities: Coase's theorem (they gave Ronald Coase the Nobel for it!) shows that negative externalities (pollution and all that) are due to a situation in which property rights are not sufficiently well-defined and delimited. For example, the smoke from my incinerator is drifting into your kitchen window because the law does not protect your property right over the air in your yard and home.

    Nearly all economists nowadays (literally from libertarian anarchists to self-proclaimed socialists) accept that the way to deal with such situations is to establish effective market mechanisms so that financial incentives force people to pay attention to the physical harm they are causing others.

    So, for example, if it is necessary to reduce CO2 emissions, this should be done via "cap-and-trade" (i.e., a market for reduced emissions) or effluent taxes.

    Second, while markets certainly are not perfect (because humans are not perfect), neither is government, and there is a whole sub-discipline of economics, "public-choice economics," that explores how political actors respond to incentive structures in the political realm.

    And, there is a whole menagerie of unexpected behaviors: "regulatory capture" where an industry captures the regulatory body created to restrain that industry, "log-rolling" wherein political coalition building can produce results that (seemingly rationally) harm all members of the coalition, "concentrated vs. dispersed interests" whereby a small group gets significant benefits for itself at the price of much larger damages dispersed across the whole society, etc.

    Finally, much is made, quite correctly, of the "calculational" ability of a market economy to take dispersed information and integrate it to produce productive outcomes.

    But that emphasis sometimes obscures a more important macro point: capitalism is the only institutional framework that has yet been invented that can put out-dated organizations out of their misery without intense, often murderous, conflict.

    Anyone older than sixty in the USA can remember when TWA, Montgomery Ward, PanAm, etc. were big names in their industries. Now they are gone, simply because they failed to do a good job of serving their clients: they were eliminated by the quiet and peaceful process of "going out of business."

    Would that we had been able to rid ourselves of slavery, Nazism, or, to take more current examples, pedophile priests or Islamic terrorists by so simple and peaceful a process!

    I know, Sabine, that you are aware of all this and of the economists who have stressed these points (Coase, Schumpeter, Buchanan, Hayek, etc.) but most members of the general public and, I fear, many of your readers, are not.

    And, I do admire your courage in saying what you think even though you know you will get blowback!

    All the best,

    Dave

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    1. PhysicistsDave,

      I basically agree with what you say. Let me add just that there is a large literature also on political theory and social choice theory, which shouldn't be treated as separate from economics because the two really belong together.

      Incidentally, the reason I read some books about this was also that I considered going into econ. I did not, in the end, because I kept getting occupied by the question why we are doing this in the first place. (Needless to say, I still don't know.)

      Delete
    2. Dave wrote: Nearly all economists nowadays accept that the way to deal with such situations is to establish effective market mechanisms

      Really? Taking your incinerator example, when I was a kid in the 1950's and 60's most people had incinerators in their backyards. Incinerating paper waste was one of my favorite chores (what boy doesn't like to play with fire?).

      I grew up in California. In the 1960's air quality started to become an issue. No one proposed market solutions for incinerators; they were simply banned.

      Likewise, no one proposed market solutions for lead in gasoline (or paint). It was banned.

      No one proposed market solutions for smoking cigarettes in public spaces. It was banned.

      Very recently in California, no one proposed market solutions for fireplaces in new homes. They were banned.

      One might argue that market solutions could have been proposed for these things, but the point is, I never heard any economists propose them.

      Of course, economists generally love to propose market solutions for many things. Sometimes I suspect they compete with each other on the creativity and cleverness of their proposals (sometimes reminding me of Aesop fables about overly clever foxes and their overly clever solutions). But you seem to be saying that market solutions are "THE WAY NOWADAYS." I think that's an overstatement.

      Let's consider, hypothetically, a proposal for an outright ban of coal-generated power plants. Or, if you prefer, strict mandatory requirements for "clean coal" power plants. Neither of these proposals is a market solution. Do you think that "nearly all economists nowadays" would oppose such proposals?

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    3. Steve,

      Well... no one proposes a market solution for the optimal rate of murder, either!

      Lead in gas can be foregone at relatively low cost -- it may make more sense to simply ban it than to set up a market for the optimal amount.

      On the other hand, EPA has been using market-based approaches to air quality in the LA basin for many years, I think since the '80s.

      It is neither necessary nor probably even possible to ban all air pollution -- there is some optimal amount. An even better example is CO2: ban all CO2 emissions and we all die (i.e., we exhale CO2). That does not mean an unlimited amount of CO2 emissions is a good idea, and, if you want to limit it, either "cap-and-trade" or effluent taxes is the best way to do it. (I'm not taking a position here on CO2, but merely pointing out that if you want to limit it, market-based solutions are the right way to go.)

      Finally, please note that I claimed that nearly all economists accepted this analysis, not that politicians actually followed the recommendations of economists!

      As any economist can tell you, what economists recommend and what politicians choose to do only partially overlap.

      All the best,

      Dave

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    4. Steve,

      Well, just because you haven't heard an economist propose a market-based solution, doesn't mean there wasn't such a proposal. And no one says that market-based solutions are "THE WAY NOWADAYS" because arguably they aren't. Partly that's because people think capitalism is evil... read blogpost.

      Delete
    5. Dave wrote: no one proposes a market solution for the optimal rate of murder, either!

      Yes, but that's my point.

      Dave wrote: it may make more sense to simply ban it than to set up a market for the optimal amount.

      Again, that's my point. I was reacting to what you said about "nearly all economists nowadays." It looks like you understand that there are exceptions to "the way to deal with such situations." Your original statement appeared to be an overstatement. I think we're on the same page now.

      By the way, the history of lead in gasoline is interesting. And actually, there was a limited market solution for a while, a tax on lead in gasoline.

      Dave wrote: It is neither necessary nor probably even possible to ban all air pollution -- there is some optimal amount.

      Agreed.

      Dave wrote: please note that I claimed that nearly all economists accepted this analysis

      Well, going back to the point that you and I seem to agree on, economists sometimes agree that bans, and other approaches, make more sense than market solutions per se.

      Dave wrote: As any economist can tell you, what economists recommend and what politicians choose to do only partially overlap.

      Absolutely. That being said, some economists get it wrong as often and as badly as some politicians. :-)

      Regards.

      Delete
  36. What do you think about the idea that Keynesian economics has required modifications over the years (think Nash Equilibrium) to reflect the concept that cooperation is an integral part of economic success? The idea that straight competition between groups or individuals produces the best product or service is not a mathematical given in all situations, with multiple winners definitely being a solution for some situatiobs.

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  37. To incorrectly quote the Simpsons:

    "I agree with you, Sabine....in theory. Capitalism works......in theory."

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    1. Collett wrote: Capitalism works......in theory.

      I just finished reading Daring to Drive, a woman's story of life in Saudi Arabia. Reading it gave me the impression that most Saudi men get perverse pleasure from abusing girls and women.

      I wouldn't be surprised if Saudi women think, "Men work . . . but only in theory."

      Good capitalism and good men work just fine.

      Delete
  38. Is there a philosopher in the house?

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  39. Sabine wrote: no one says that market-based solutions are "THE WAY NOWADAYS"

    I was referring to what PhysicistDave said about "nearly all economists nowadays."

    Sabine wrote: Well, just because you haven't heard an economist propose a market-based solution, doesn't mean there wasn't such a proposal.

    I didn't say I'd never heard economists propose market solutions. In fact, I said "Of course, economists generally love to propose market solutions for many things."

    I was referring to what Dave said about incinerators. I'm almost certain that market solutions weren't proposed. Likewise for lead in gasoline and paint. Sometimes outright bans make more sense than market solutions.

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  40. I’m not personally a big believer in capitalism which I take to be free market fundamentalism, and the extension of market principles to all areas of life. Markets to my mind are fine for what they are for, markets. It’s their extension into other areas of life that have different values that I feel is a mistake. I’d also point out that in antiquity that trade was seen as generally something déclassé. It’s only recently, relatively speaking that trade, or business, has been as something rather important, even noble. That’s what Ayn Rands novels were almost all about. Making business look good and noble. I’d suggest this is why contemporary times are seen as capitalist, for this very reason. But I do not think that need be the case in the future.

    After all, the trans-Atlantic slave trade were trading in men, women and children used as property and very few people would defend that today. However, it’s quite eye-opening how few people seem to connect this to capitalism. It’s as though there is some deep disconnect between the moral outrage that this was once done, and the way that capitalism played a role in it. Likewise I would suggest a similar role between capitalism and climate change. There has been a huge investment over the last few centuries in fossil fuels and this is no easy thing to change. Perhaps people would have paused to reflect a little then had they known what the externalities of fossil fuels would be. But presumably, most (apparently not all) thought the atmosphere was too huge a place for our industry to change. In a way it was, it’s taken several centuries. Given what the IPCC have said about the prospects for global warming over the next decade we simply don’t have the same luxury in terms of time to change significantly how energy is produced and consumed in our world today.

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  41. Mozibur wrote: I’m not personally a big believer in capitalism which I take to be free market fundamentalism

    That's one form of capitalism. There are more bad forms than good forms. Politics and economics are created and implemented by flawed people.

    It's surprisingly difficult for people to understand their true self-interest, both short and long term. We all know plenty of people who can't recognize a simple fact that's right in front of their nose. We all know people who are their own worst enemies. Yeast continue to breed until they poison themselves to death. We may have more in common with yeast than we care to admit.

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  42. "...if we don’t have time, the only thing that will get human society to move quickly is a centralization of power. "

    Since centralization of power is inimical to capitalism, doesn't this mean capitalism must go? I take your point above that centralization is only necessary, not sufficient; but this still explains why many people oppose capitalism.

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    1. Andrew,

      I don't think that an affinity for centralization is the reason people oppose capitalism. I think the main reason they oppose capitalism is that they confuse the failures of their democracy with a failure of capitalism.

      Having said this, my statement was not endorsing centralization. It was more to point out that this is a very real risk. If push comes to shove, if any decision is better than no decision, we'll see a power grab.

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  43. "I don't think that an affinity for centralization is the reason people oppose capitalism."

    I meant that capitalism opposes centralization (certainly in the US, maybe less in Europe) and therefore anyone who wants centralization must fight capitalism in the political arena.

    "...they confuse the failures of their democracy with a failure of capitalism."

    The two are hard to separate in the US - the Republican party thinks free markets are the cure for every social ill; even nationalized health care is demonized.

    Can we agree that a mixed system is best? The European approach seems to work rather well, but is considered too socialist by many Americans. Competitive markets work great for some things - but not health care, defense, police, and fire, to name a few. And not all free markets are competitive - that distinction is often lost.

    ReplyDelete

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