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Please note that the post gives an extremely bad impression. First of all, pareto efficiency and nash equilibria exist both in capitalism and other economic sys
by waps 12y ago
Please note that the post gives an extremely bad impression. First of all, pareto efficiency and nash equilibria exist both in capitalism and other economic systems. And the obvious alternative economic system : centrally planned economies, are very much nash equilibria (if they are stable at all).
But the second impression he gives is also very wrong. By definition, everyone is a "selfish dickhead" both in Nash equilibria interactions and pareto efficient interactions. This is a basic tenet of economy, that people "in the limit" act in their own self interest, never out of altruism. Why ? Simple : if anyone is systematically altruistic, he/she will be eliminated from the game (meaning end up dirt poor, imprisoned or dead or otherwise prevented from participating in the system). The predictions this makes are extremely accurate, and have been for millenia.
Always assume nobody is altruistic, ever, for any reason.
The real difference between nash equilibrium transactions and pareto efficient transactions is this :
nash equilibrium : A and B, both "selfish dickheads", transact. If A gets a good deal, B got screwed.
Pareto efficiency : A and B, both "selfish dickheads", transact. A and B got a good deal.
This is why the "always cooperate" strategy in the prisoner's dilemma game is not actually pareto efficient : it is obviously possible for the other guy to screw you. If it were a pareto efficient strategy, it wouldn't be possible to take advantage of this.
In capitalism, if there is a pareto-efficient strategy to transact, people following that tactic will quickly increase in numbers, and therefore the whole society will become pareto efficient. This happens BECAUSE everyone is a "selfish dickhead", not because some people are morally superior to others. That fact is why every economist is so impressed with capitalism. Capitalism is a system that can succeed, for everyone, in the presence of selfish dickheads. A centrally planned economy, by contrast, necessarily either destabilizes entirely (not good for anyone, unless you truly believe in anarchism), or turns into a Nash equilibrium over time.
Capitalism is a learning algorithm, or a "crowd-sourcing" algorithm with money as "karma" : it makes sure that resource allocations are decided by people who previously made good allocations. That is of course what people really have against capitalism :
1) "abusers"/"power mongers"/... : complain about capitalism because they can't keep abusing the system. If they use their resources to force certain outcomes that wouldn't normally be achieved (e.g. personal power), that can only work for so long.
2) moralists: complain about capitalism because it's amoral, like any learning algorithm. It does not care if any action improves or destroys other people, or which factors determine success, merely if it increases an abstract "value" concept. If they have resources (e.g. because you have an islamist state), it requires a constant large cost to force any non-optimal outcome (e.g. not letting women work). Needless to say this is perceived by the moralists as capitalism fighting allah (when of course it's really reality itself that's at odds with allah), and then they usually just grab the weapons.
If there ever was a "true" religion, it's trivial to see capitalism would quickly grow it, not work against it. "Surprisingly" this has not happened yet, one can only wonder why.
- parasubvert 12y agoThis. The above said, the learning algorithm has flaws that can make Pareto optimality impossible (economists call this market failure). This is where we inject aspects of central planning into the modern economy, with debatable results. For example, it presumes a level of information symmetry through the price mechanism. Markets begin to fail when people don't/can't understand what they're buying - the "market for lemons". This is why we have an SEC and mandatory , standardized, information filing for publicly traded companies for example. Another is high levels of uncertainty about the sudden need to buy something, which is so expensive it can wipe you out - eg. Major surgery. Insurance markets cover this. But we all have observed the debates and challenges of managing a sizeable and representative risk pool. Intellectual property and digitized products (music, movies, TV shows, software) also has a fascinating role here in that it is a public good that is open to free ridership unless (a) the good is a secret and is accessed only as a service or (b) the government enforces a temporary monopoly on an aspect of the product. The latter may be past its prime given the abuse of patents and copyrights leading to non-Pareto outcomes.
- Joeri 12y agoI don't agree that the free market ever produces a pareto-efficient solution. If all market participants act selfishly in an unconstrained market you get a nash equilibrium because there are two avoidable downsides which the fully free market will naturally produce: the tragedy of the commons, and the concentration of resources. The tragedy of the commons can only be avoided by changing the rules of the market through an external force (lawmaking) so participants must act altruistically to act selfishly. The concentration of resources is typically avoided through wealth redistribution, another mechanism of mandatory altruism. So, the thing is, the fully free market is only pareto-optimal if you narrowly look at the market, but if you look at the world as a whole, it is a nash equilibrium, unless you force market entrants to act altruistically (through bribe or threat).
- waps 12y agoNote that "perfect" capitalism, for obvious reasons (amongst others the ones you mention) does not have a commons. And yes, there are "natural" commons, like the athmosphere, but those are unsolved problems. > The concentration of resources is typically avoided through wealth redistribution, another mechanism of mandatory altruism. Again if this works, it's not altruism for the same reason that Ford's actions weren't altruistic. They were a business investment that would force others to make the same investment, and he was gambling that people would invest it in buying his cars. He was right. This is the same thing, only at a country level. That's assuming it works. While the political advantages of directly promising large amounts of people money are undeniable when it comes right down to it, people work because they're forced to work to an extent. That, sadly, means you can't take that away. You can probably safely take it away for a while, even a generation I think. But ...