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To start off, the definition of capitalism is simply private ownership of goods, and the ability to trade those goods. A society in which even ONE good was trad

To start off, the definition of capitalism is simply private ownership of goods, and the ability to trade those goods. A society in which even ONE good was tradable would be considered somewhat capitalistic. Specifically you could refute the efficiency of a free market reaching an equilibrium price (one that maximizes total surplus for buyers and sellers). However the experimental data suggests precisely the opposite, even in monopoly markets (double auction, perfect information) when tested in laboratory experiments. Many issues people think they have with capitalism are actually the result of a system that definitely does NOT inherently take in to account all hidden costs. This is often used by government officials to make policy decisions that add costs or incentives to a market to correctly account for all factors (environmental, public good preservation, etc.). Hope this is helpful!

warfangle 13y ago
>when tested in laboratory experiments. Isn't that the rub?
- LukeWalsh 13y ago
  There have been studies conducted (between lab, natural experiments, and naturally occurring data) that indicate performance in lab experiments closely mirrors how people act in real life.
e12e 13y ago
> To start off, the definition of capitalism is simply private ownership of goods, and the ability to trade those goods. A society in which even ONE good was tradable would be considered somewhat capitalistic. Which definition of capitalism is this? I believe the core of capitalism is private ownership of means of production, not merely ownership of goods? Communism doesn't eschew all private ownership (this is a common misconception). Communal/worker ownership of factories, farms and housing are core tenets -- but not necessarily communal ownership of all goods (eg: clothing, computers, tvs and radios etc).
- chalst 13y ago
  I think capitalism also needs the existence of capital markets (e.g., bonds, shares, commodities, speculative financing, reinsurance) that are dominant in financing business.
mrow84 13y ago
My interpretation of what you have said is that the basic theory of pure free market capitalism is not efficient because of hidden costs. A few follow-up questions, if you'd be so kind: 1) Is my interpretation correct? 2) How significant are the effects of the hidden costs on the (pricing) predictions of the basic theory? (see Note A) 3) How significant are the impacts of the hidden costs (beyond pricing failures)? (see Note B) My particular concern is that the basic ideas are 'obviously true', and are used to justify all sorts of policies that have real impacts on people's lives, such as unemployment. Personally, and from an ethical point of view, I would rather trade higher efficiency for a 'smoother' economy that minimises unpredictable downturns in individuals' economic fortunes. I'm also still struggling to see how informative the basic theory really is - I can only see that to understand any novel situation you need to do a whole load of research into all the potential confounding factors. Thanks for replying! Note A: If the basic theory provides the first order signal for enough real-world situations, then we could, again to first order, ignore the impacts of the hidden costs. If that is not the case then it seems to me that the basic theory must be incomplete, because to understand the real signal you need to understand the hidden costs. Note B: If the impacts are generally small, then again we could probably largely ignore hidden costs, but if they are large (which they definitely are in some cases, for example the Deepwater Horizon spill) then surely understanding the hidden costs becomes crucial, which in turn lessens the value of the basic theory.
- LukeWalsh 13y ago
  1) Your interpretation is correct, when costs are not accounted for in the price someone (either an individual or society as a whole) gets the short end of the stick. 2) It 100% depends on the good. When you consider species of fish that were driven to extinction by overfishing, there was a significant societal cost that was paid since we completely eliminated that species. 3) Same as point two, the costs and impacts are inseparably linked, since a perfect system would perfectly build in the "cost" of the "impact." Is this what you are asking?
  - mrow84 13y ago
    I think your answers match my intuition, they make a lot of sense. Would you agree that, by virtue of the answers you have given, market theory is almost useless? It seems to suffer from two fatal flaws: 1) You might require a very complete understanding of a particular economic system for market theory to make any useful predictions about it. 2) You can never be sure that you have characterised enough of a given system to make a useful prediction about it (unless you characterise the whole thing, which in practical terms is impossible). Of course we can make (very) educated analyses of any particular situation, and end up with good confidence, but the theory itself doesn't tell us that we are right. So we can never be sure that we aren't just being misled; we can't use the theory to cheaply verify someone's suggestions, we have to go through all of their work to make sure they aren't trying to pull a fast one. Thanks for your time, even if you don't reply to this one, and good luck with your classes!

warfangle 13y ago

>when tested in laboratory experiments. Isn't that the rub?

LukeWalsh 13y ago
There have been studies conducted (between lab, natural experiments, and naturally occurring data) that indicate performance in lab experiments closely mirrors how people act in real life.

e12e 13y ago

> To start off, the definition of capitalism is simply private ownership of goods, and the ability to trade those goods. A society in which even ONE good was tradable would be considered somewhat capitalistic. Which definition of capitalism is this? I believe the core of capitalism is private ownership of means of production, not merely ownership of goods? Communism doesn't eschew all private ownership (this is a common misconception). Communal/worker ownership of factories, farms and housing are core tenets -- but not necessarily communal ownership of all goods (eg: clothing, computers, tvs and radios etc).

chalst 13y ago
I think capitalism also needs the existence of capital markets (e.g., bonds, shares, commodities, speculative financing, reinsurance) that are dominant in financing business.

mrow84 13y ago

My interpretation of what you have said is that the basic theory of pure free market capitalism is not efficient because of hidden costs. A few follow-up questions, if you'd be so kind: 1) Is my interpretation correct? 2) How significant are the effects of the hidden costs on the (pricing) predictions of the basic theory? (see Note A) 3) How significant are the impacts of the hidden costs (beyond pricing failures)? (see Note B) My particular concern is that the basic ideas are 'obviously true', and are used to justify all sorts of policies that have real impacts on people's lives, such as unemployment. Personally, and from an ethical point of view, I would rather trade higher efficiency for a 'smoother' economy that minimises unpredictable downturns in individuals' economic fortunes. I'm also still struggling to see how informative the basic theory really is - I can only see that to understand any novel situation you need to do a whole load of research into all the potential confounding factors. Thanks for replying! Note A: If the basic theory provides the first order signal for enough real-world situations, then we could, again to first order, ignore the impacts of the hidden costs. If that is not the case then it seems to me that the basic theory must be incomplete, because to understand the real signal you need to understand the hidden costs. Note B: If the impacts are generally small, then again we could probably largely ignore hidden costs, but if they are large (which they definitely are in some cases, for example the Deepwater Horizon spill) then surely understanding the hidden costs becomes crucial, which in turn lessens the value of the basic theory.

LukeWalsh 13y ago
1) Your interpretation is correct, when costs are not accounted for in the price someone (either an individual or society as a whole) gets the short end of the stick. 2) It 100% depends on the good. When you consider species of fish that were driven to extinction by overfishing, there was a significant societal cost that was paid since we completely eliminated that species. 3) Same as point two, the costs and impacts are inseparably linked, since a perfect system would perfectly build in the "cost" of the "impact." Is this what you are asking?
- mrow84 13y ago
  I think your answers match my intuition, they make a lot of sense. Would you agree that, by virtue of the answers you have given, market theory is almost useless? It seems to suffer from two fatal flaws: 1) You might require a very complete understanding of a particular economic system for market theory to make any useful predictions about it. 2) You can never be sure that you have characterised enough of a given system to make a useful prediction about it (unless you characterise the whole thing, which in practical terms is impossible). Of course we can make (very) educated analyses of any particular situation, and end up with good confidence, but the theory itself doesn't tell us that we are right. So we can never be sure that we aren't just being misled; we can't use the theory to cheaply verify someone's suggestions, we have to go through all of their work to make sure they aren't trying to pull a fast one. Thanks for your time, even if you don't reply to this one, and good luck with your classes!