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One major claim of Nobel Laureate Vernon Smith's "Rationality in Economics" is "the profit-maximizing firm will fail in finite time." The book is excellent, on

One major claim of Nobel Laureate Vernon Smith's "Rationality in Economics" is "the profit-maximizing firm will fail in finite time." The book is excellent, one of my favorite econ books, and is Smith's somewhat dense but well-written explanation for and interpretation of economics. His main thesis is that "rationality" is not a "constructivist" property of various agents, being possessed by any (or every) individual separately, but is an "ecological" property that emerges collectively from e.g. the price system, organization of firms and other economic relations. His argument about profit-maximizing firms proceeds almost exactly along the lines of this tweetstorm, but goes further. Why would Wall Street want to reward companies that fail to be robust to changes? Are there other structural problems (the law? regulatory regime? bailouts? monopoly?) that cause CEOs and Wall Street actors to be collectively "irrational" as we are seeing today with JIT-everything? IMHO, the problem is political-economic. Finance has arrived at this equilibrium of asset price insanity and phony accounting because the regulatory regime and state actions as a whole (e.g. bailouts) are entirely out of whack – the system has no working feedback mechanisms at the moment, so the economy is in a real sense failing. How did the state fail? Partly in response to demands from powerful & wealthy entities on e.g. Wall Street.

onlyrealcuzzo 5y ago
I think the massive difference between income and capital gains taxes plays a huge role - especially when you get into the .1% where a substantial portion of wealth and income lie. All of this funny stuff is mostly people trying everything they can to get capital gains instead of income so they can pay a 25% tax rate instead of a 39% tax rate. When you're talking about billions of dollars - 14% is a lot of money. From the perspective of the average person - the tax code probably makes sense. If you already pay 39% tax on your income, and THEN you have to pay 39% on your capital gains and half of your capital gains are actually just inflation - it's like you're getting taxed on your tax! True inflation has likely been ~4% since 2008. The S&P average is ~7.25% per year. So half of the "capital gains" the ordinary index fund investor would pay are just inflation. But the .1% are different. You don't make it into the .1% with a ~7.25% return and a laborer's salary. You need to be making ~30%+ returns for decades. Or, ~10,000% for a few years (a lot of the successful VC-funded entrepreneurs). Half of their capital gains aren't inflation. Barely any of it are. Effectively, there tax rate is ridiculous low compared to the average Joe. And what's worst - the Fed is causing so much of that inflation. Would Tesla be a $1.1T company today if the Fed wasn't pumping up asset prices, lowering interest rates, and making future cash-flows absurdly and artificially valuable? No. And yet, Elon Musk gets to make $100Bn on paper - and he can take loans against those gains with <3% interest and never pay ANY taxes. It really seems like this is a completely separate world - and it's >30% of US wealth - and it should be dealt with separately.
- N00bN00b 5y ago
  >All of this funny stuff is mostly people trying everything they can to get capital gains instead of income so they can pay a 25% tax rate instead of a 39% tax rate. When you're talking about billions of dollars - 14% is a lot of money. 0.1% doesn't pay 25%. That's well documented. I don't know what the effective rate is, but averaged out over multiple years it's probably somewhere around 5% and then another few % that's spent on avoidance (not taxes). Maybe 10% at most. Just look up Bezos or Musk's tax return. Same with Buffett.
- baryphonic 5y ago
  > True inflation has likely been ~4% since 2008. The S&P average is ~7.25% per year. So half of the "capital gains" the ordinary index fund investor would pay are just inflation. How does one measure "true inflation?" I am sympathetic to the idea that inflation is nearly unmeasurable, but not the idea that "true inflation" was happening when it clearly, obviously was not. > And what's worst - the Fed is causing so much of that inflation. The Fed causes all inflation (at least in the US – Europeans have the EU central bank and Britishers have the Bank of England). Inflation is always and everywhere a monetary phenomenon.
titzer 5y ago
The system is coming apart, shaking itself to bits because it's become unmoored from its foundations. It seems like a lot of different reasons because the system is so complex that it's fractal; you can zoom in to any one part and still see complexity, so it's easy to pick out PhD-thesis-size problems and just get lost in it. But fundamentally, if you zoom out, it's really simple. It's greed. I'm not religious or spiritual, but I am really talking about a serious psychological/spiritual disease that has infected our society. It's not just about getting enough to survive, or even enough to thrive, but there are so many actors out there out to get as much as possible that they simply cannot be satisfied anymore. Their stomachs are bottomless pits. How else can you possibly explain multiple individuals being worth more than $200 billion (Sixty. Thousand. Lifetimes. Of Wealth), and yet it is not enough for them. They must command huge empires, the boards of which must "motivate" them with more money. These people have serious psychological problems. Like, please, just disappear to your islands and enjoy the rest of your short lives, please! The entire world economy has been just one massive casino, one huge get-rich-quick scheme. And TV too. Fame and fortune without working for it, getting famous with no talent or skills. Think of how many millions and billions of people worldwide have been programmed to think they can and should be millionaires and that it can happen at the drop of a hat? And now, a CEO has 1000x the pay of a median worker. They're all mini warlords, their plunder is bullshit bonuses and hollowing out business after business. A huge pump-and-dump scheme. Just a couple decades ago, people dreamed of simpler lives. Plumbers, electricians, doctors, lawyers, engineers, small business owners. People dreamed of a kitchen renovation and saved up money for years to afford a new garage or that nice car at retirement. They couldn't imagine becoming YouTube starts or overnight millionaires because of some reality TV show or viral video. Everything is fucked and it's because everyone thinks they are getting rich tomorrow. It's a mad dash to grab as much as possible, and people don't even enjoy the stuff they do have! Society is sick and decades of neglect are coming due; the blighted pillars are crumbling.
- rackjack 5y ago
  This has happened many times before, and it will keep happening because humans do not (cannot?) change their fundamental nature. Even if society as we know it dies, it'll just get reborn like a cursed phoenix. Every doomsayer seems to forget that there is nothing new under the sun, and society has "fallen" and picked itself back up over and over and over again, but this time "it used to be better" and this time "society will really die, because it's different!" Of course it's different, but humans don't change. > Just a couple decades ago, people dreamed of simpler lives. Plumbers, electricians, doctors, lawyers, engineers, small business owners. Please. The Roaring 20's? The Gilded Age, anyone?

onlyrealcuzzo 5y ago

I think the massive difference between income and capital gains taxes plays a huge role - especially when you get into the .1% where a substantial portion of wealth and income lie. All of this funny stuff is mostly people trying everything they can to get capital gains instead of income so they can pay a 25% tax rate instead of a 39% tax rate. When you're talking about billions of dollars - 14% is a lot of money. From the perspective of the average person - the tax code probably makes sense. If you already pay 39% tax on your income, and THEN you have to pay 39% on your capital gains and half of your capital gains are actually just inflation - it's like you're getting taxed on your tax! True inflation has likely been ~4% since 2008. The S&P average is ~7.25% per year. So half of the "capital gains" the ordinary index fund investor would pay are just inflation. But the .1% are different. You don't make it into the .1% with a ~7.25% return and a laborer's salary. You need to be making ~30%+ returns for decades. Or, ~10,000% for a few years (a lot of the successful VC-funded entrepreneurs). Half of their capital gains aren't inflation. Barely any of it are. Effectively, there tax rate is ridiculous low compared to the average Joe. And what's worst - the Fed is causing so much of that inflation. Would Tesla be a $1.1T company today if the Fed wasn't pumping up asset prices, lowering interest rates, and making future cash-flows absurdly and artificially valuable? No. And yet, Elon Musk gets to make $100Bn on paper - and he can take loans against those gains with <3% interest and never pay ANY taxes. It really seems like this is a completely separate world - and it's >30% of US wealth - and it should be dealt with separately.

N00bN00b 5y ago
>All of this funny stuff is mostly people trying everything they can to get capital gains instead of income so they can pay a 25% tax rate instead of a 39% tax rate. When you're talking about billions of dollars - 14% is a lot of money. 0.1% doesn't pay 25%. That's well documented. I don't know what the effective rate is, but averaged out over multiple years it's probably somewhere around 5% and then another few % that's spent on avoidance (not taxes). Maybe 10% at most. Just look up Bezos or Musk's tax return. Same with Buffett.
baryphonic 5y ago
> True inflation has likely been ~4% since 2008. The S&P average is ~7.25% per year. So half of the "capital gains" the ordinary index fund investor would pay are just inflation. How does one measure "true inflation?" I am sympathetic to the idea that inflation is nearly unmeasurable, but not the idea that "true inflation" was happening when it clearly, obviously was not. > And what's worst - the Fed is causing so much of that inflation. The Fed causes all inflation (at least in the US – Europeans have the EU central bank and Britishers have the Bank of England). Inflation is always and everywhere a monetary phenomenon.

titzer 5y ago

The system is coming apart, shaking itself to bits because it's become unmoored from its foundations. It seems like a lot of different reasons because the system is so complex that it's fractal; you can zoom in to any one part and still see complexity, so it's easy to pick out PhD-thesis-size problems and just get lost in it. But fundamentally, if you zoom out, it's really simple. It's greed. I'm not religious or spiritual, but I am really talking about a serious psychological/spiritual disease that has infected our society. It's not just about getting enough to survive, or even enough to thrive, but there are so many actors out there out to get as much as possible that they simply cannot be satisfied anymore. Their stomachs are bottomless pits. How else can you possibly explain multiple individuals being worth more than $200 billion (Sixty. Thousand. Lifetimes. Of Wealth), and yet it is not enough for them. They must command huge empires, the boards of which must "motivate" them with more money. These people have serious psychological problems. Like, please, just disappear to your islands and enjoy the rest of your short lives, please! The entire world economy has been just one massive casino, one huge get-rich-quick scheme. And TV too. Fame and fortune without working for it, getting famous with no talent or skills. Think of how many millions and billions of people worldwide have been programmed to think they can and should be millionaires and that it can happen at the drop of a hat? And now, a CEO has 1000x the pay of a median worker. They're all mini warlords, their plunder is bullshit bonuses and hollowing out business after business. A huge pump-and-dump scheme. Just a couple decades ago, people dreamed of simpler lives. Plumbers, electricians, doctors, lawyers, engineers, small business owners. People dreamed of a kitchen renovation and saved up money for years to afford a new garage or that nice car at retirement. They couldn't imagine becoming YouTube starts or overnight millionaires because of some reality TV show or viral video. Everything is fucked and it's because everyone thinks they are getting rich tomorrow. It's a mad dash to grab as much as possible, and people don't even enjoy the stuff they do have! Society is sick and decades of neglect are coming due; the blighted pillars are crumbling.

rackjack 5y ago
This has happened many times before, and it will keep happening because humans do not (cannot?) change their fundamental nature. Even if society as we know it dies, it'll just get reborn like a cursed phoenix. Every doomsayer seems to forget that there is nothing new under the sun, and society has "fallen" and picked itself back up over and over and over again, but this time "it used to be better" and this time "society will really die, because it's different!" Of course it's different, but humans don't change. > Just a couple decades ago, people dreamed of simpler lives. Plumbers, electricians, doctors, lawyers, engineers, small business owners. Please. The Roaring 20's? The Gilded Age, anyone?