6 ms·

Capitalism's Fundamental Flaw

49 points by acangiano 17y ago

PatrickMorrell 17y ago
Antonio - good find. I read this article earlier this morning and it spoke directly to the disconnect I've noticed as well. Logistically, what do you think leaders on the Street and in business can do to curb these short-termist, corrupted practices?
- jamesbressi 17y ago
  If you don't mind me chiming in, I think the lesson is that there really is nothing that can be done to curb it. Why? Two reasons. First, every time we create legislation, laws and other governing to something, the problem either gets worse or creates a whole new set of issues. The problem becomes a snowball -- you can look at the examples there to see some of this. Second, the saying that goes something like "locks keep out the curious, not thieves" is very true. Those who want to scam will always find a way and there is nothing to stop them, only try and catch them and prosecute them. I could go on with a very lengthy post about this and sound very studious, but I think those two points in their simpler form make a lot of sense. What do you think?
  - AndrewDucker 17y ago
    I disagree strongly. 1) Legislation can change things significantly and effectively. It can also merely shovel things around. Both are possible and doggedly asserting that only one effect ever happens is just ridiculous. 2) Locks keep out thieves very well a lot of the time. They may not keep out every thief, but it keeps out most of them, most of the time.
    - jamesbressi 17y ago
      Very glad you engaged, now on to my rebuttal... Really? Show me a piece of legislation that hasn't shoveled things around? And show legislation that actually changed things significantly and effectively without already having legislation in place that it enhanced? Drugs? Education? Prostitution? None of those for sure. I know, gun laws? Nope, not there either. And in regards to your response to my use of the saying "locks keep out the curious, but not thieves", you have to understand the underlying principle to completely get it. No "locks" (and we aren't talking just physical) keep out thieves, only the curious. Bernie Madoff anyone? The underlying principle to that saying ties with the really corny saying "where there is a will, there is a way". When someone really wants to do something, locks are not a deterrent, they will find a way. Cheers to you for debating with me, really enjoy it.
  - fnid 17y ago
    I would suggest that it was an elimination of a lot of laws regarding financial transactions and regulation that enabled the recent decline. The removal of these laws enacted to prevent a recurrence of an historical collapse, did in fact bring another collapse, so pragmatically, I would say laws help.
    - dantheman 17y ago
      We are more regulated now than we've ever been before. All this talk about deregulation, though real in some cases, often just meant a decline in the rate of new regulation. When there are less regulations people take interest and make sure things work correctly. For instance, when opening a bank account most people don't do much research because they're all FDIC insured -- who cares what the bank does with your money. Without that insurance you would care. If we removed financial regulations, the markets would radically reform and lots of small individual investors would get out -- either into mutual funds or some other managed investment.
      - fnid 17y ago
        We are not more regulated than ever before, that's just not true. Regulations are being removed and the regulators are more lax. Did you see what Madoff said about the regulator looking at his business? He called him a blow hard. I also don't think most consumers of banking products are able to determine the solvency of a bank. If the FDIC wasn't there, the account holders would be at greater risk even if they did care. I don't believe markets reform themselves. The market does what is in the individual best interest, not the interest of the market.
        dantheman 17y ago
        Just because the regulators are inept doesn't mean that there aren't more regulations. http://www.cato.org/pubs/policy_report/v31n4/cpr31n4-1.html http://www.cato.org/pubs/policy_report/v31n4/cpr31n4-1.html Perhaps an individual isn't able to tell, but consumer reports would be able to. Each individual working in their best interest reforms the market. If they believe that it is unfair, e.g. insider trading, then they will refuse to take part. Thus a market would form to cater to these individuals.
pjkundert 17y ago
Perhaps a better title would be "Mercantilism's fundamental flaw". Rand makes few assumptions regarding the inherent integrity of "leaders"; in fact, she assumes no such integrity, and argues for liberty. While we trip over ourselves (as a society) to give up our freedoms and grant ever more sweeping power to "leaders" to save us, we will reap what we deserve -- ever greater examples of waste, bungling, abuse, malinvestment and looting, on scales simply unimaginable just a few years ago. We gave up our ability to directly monetize wealth 2 or 3 generations ago -- what features of our present financial system makes you believe that it is "Capitalism"? Government giveth, and government taketh away. Sounds like good, old-time kingly Mercantilism to me...
- Xichekolas 17y ago
  We gave up our ability to directly monetize wealth 2 or 3 generations ago ?
  - pjkundert 17y ago
    Central bank money, created and debased at will, vs. Wealth-backed money, intrinsically valued by the wealth that backs it. Freedom to choose money that doesn't inflate allows multigenerational wealth transfer, etc.
    - Xichekolas 17y ago
      I guess I'm curious what "wealth-backed money" is. All money is only a medium of exchange, and is only worth what people collectively agree it is worth. I'm going to take a guess and assume you mean gold, but if that isn't the case, I'm really curious to know. The fact that people collectively agreed that gold was a good form of money has nothing to do with any intrinsic (or god given) value of gold. It had everything to do with certain properties of gold that made it a good medium of exchange. Namely, it's durable, portable, hard to counterfeit, malleable, etc. Eventually, gold's cause was assisted by tradition. People have been using it to represent money for so long they mistakenly believe it has intrinsic value. (Granted, gold isn't a bad choice, if you are betting on the fact that others will irrationally value it.) So yes, it's harder for governments to manipulate a gold-backed currency... but it's not that hard. The US effectively did it twice, most recently after WWI with the Gold Reserve Act. Also, your money supply is now open to manipulation by private entities and even individuals. Gold mining companies, for instance, would have powerful sway over the amount and price of gold.
danteembermage 17y ago
I think the appeal of finance is the intellectual leverage one gets there. If I am really bright and I can develop a profitable arbitrage trade in the marketplace I can turn it near instantly into millions of dollars (if I'm right, obviously the market does not give points for effort). If I'm in a start up, which we would probably consider to be very high cleverness to reward leverage, it can take a long time and have lots of randomness to get the big payoff, e.g. Kiko. Now, compare that to being an employee, where to get enormous payoff you have to climb the ladder into stock options land. The article's point is that this is not how the world should be, but markets cause this by construction: If I'm stranded on an island with a bunch of Robinson Crusoes I'm going to try swapping coconuts for mangoes across the island before I start experimenting with cross breeding them. From a welfare perspective it even makes sense to do the easy things first (trade) and the hard stuff next (R&D) because effort is more likely to be rewarded in the former than the latter. One could also complain about how all the socially well connected are lobbyists instead of high school teachers and the beautiful are in pharmaceutical sales rather than portrait modeling. Sure it's sad, but also mostly inevitable.
- yafujifide 17y ago
  > if I'm right, obviously the market does not give points for effort But the market does give points for effort. How else do you explain the bonuses awarded to bankers who damaged the economy? They were rewarded despite their antisuccess.
  - mseebach 17y ago
    It's a very perverted market, where banks that would have been bankrupt if not for billions in taxpayer funds, even gets to pay their employees salary. On the other hand, bankers in the banks that actually lived through the crisis because they didn't jump on all the fancy derivatives, actually deserves a bit fat bonus.
  - bdr 17y ago
    You're blatantly taking that out of context. GP's idea was to "develop a profitable arbitrage trade" using one's intelligence, not to go work for a bank.
sethg 17y ago
If the government imposed a small tax on stock purchases and other financial transactions, with the tax level rising according to the number of intermediaries and the amount of leverage, then working in an organization through which lots of money passes would not be such a lucrative career. (And if it remained lucrative, at least the government would be able to participate in the bounty that comes from skimming a few parts-per-thousand off the top of a very large cash flow.)
- gaius 17y ago
  working in an organization through which lots of money passes would not be such a lucrative career No, those people would just go work for the government.
mseebach 17y ago
The reason speculators can make tons of money on Wall Street, is because they can get people to play along. You don't make money because an asset you own rises. You make money because someone buys it at that price. (That's the same, I know, but it's an important point to understand - it's NOT just numbers going up and down in a computer, at the end of the chain there's actual liquid money changing hands). Now we've lived through two financial bubbles right after each other, and one can hope that people will learn that sharp rises in the value of an asset are often inflated, and stop putting their money into the game. After all, those who bet and then hedged their bets on real estate (this time) and .coms (last time) were also (generally!) the ones who lost the most.
- pbhjpbhj 17y ago
  at the end of the chain there's actual liquid money changing hands Naked short selling doesn't require one to have any money to invest nor any shares. You can still make a lot of money and destroy a company's shares if well connected enough. The price falling on the shares is only produced by the apparent glut of shares offered for sale, they don't need to sell initially to produce a price fall, the offer is enough. Once the naked sale has iterated through a couple of loops and many other offers appear as the stock falls then the price plummets, not because of sales but because of lack of sales. You make money because no one buys. Traders can make money any way the market moves and if sufficiently skilled and backed can make the market move - it _is_ just numbers going up and down.
- ibsulon 17y ago
  Are you kidding? Most people are just looking to find the next bubble and get out before "the suckers" get in!
jriddycuz 17y ago
There's a fundamental flaw in the logic that concludes that "government must intervene to stop the shameless looting of taxpayer money." Taxation itself is government intervention. Abuse of money received from a government that shamelessly loots its people for the "common good" and through manipulation of a highly regulated system is no more an indictment of Capitalism than failure to run is an indictment of a man tied to a chair.
- larryfreeman 17y ago
  There's a fundamental flaw in your reasoning too. You can't have capitalism without some form of government and you can't have government without some form of taxation.
  - darjen 17y ago
    you can have voluntary, free trade without government. whether it's called "capitalism" or something else can be a matter of discussion...
    - larryfreeman 17y ago
      Property rights need to be protected or an economic system falls into anarchy. On a small scale, it is possible for the community to enforce these rights (in which case, the community has formed a local government) but on the larger, societal scale, a transcommunity government is needed (or a warlord/city boss/etc appears which is, by its nature, a form of government). If all free trade actions could be resolved by rational, respectful, interaction of two individuals of integrity (ie they keep their word), then no government is needed. As far as I can tell, if such a world existed, we wouldn't be having this discussion. As long as individuals need to collaborate in order to resolve disagreements, as long as certain individuals need to take responsibilities for overseeing these collaborations, government is necessary.
      - darjen 17y ago
        my question is can property rights be adequately protected by government? seems like history has proven that not to be the case. the assumption that warlords would always appear in society no matter what is just that - an assumption. on the other hand, every government we have today was born by conquest and initially created by warlords. I simply don't hold to the assumption that government will always be necessary in society to protect property rights. they are actually the biggest violators we have of property rights. people are capable of progressing beyond government, and I think they will once they finally realize what government really is.
btilly 17y ago
A sobering read about the problems our system faces is http://www.theatlantic.com/doc/200905/imf-advice http://www.theatlantic.com/doc/200905/imf-advice. During the last boom a full 40% of all of the profits in the system came from the non-productive activity of people manipulating cash flows. This is simply not a sustainable financial structure. History shows that economies that are based on financial manipulation rather than production don't last. The USA isn't the first to combine of financial manipulation along with the export of production and the knowledge that previous lead to persistent economic advantage. In the last several hundred years Spain, Holland and England did this. In all previous cases it was a big factor leading to financial collapse and the loss of empire. Is there any reason to believe it will work any better for us?
frig 17y ago
In hindsight the present situation is pretty predictable: as the # of goods produced increases and the amount of specialization increases the value supplied by the intermediary network ("the financial system") increases. The way the financial system is currently "architected" (a strange term, but I'll use it) it has as a class an inordinate amount of negotiating power vis-a-vis everyone else (!), and thus is able to capture much of what ought to be consumer and producer surplus. As much of the value it adds is due to network effects just going to a gold standard (which is a popular cure-all on the internet) wouldn't change much, even if you thought that was a good idea; there's still the same tremendous problem of coordinating trade in the same complex, highly-specialized economy and the central switchboard is still ideally placed to extract most of that value. The easiest-to-envision solution is to forcibly unbundle the basic storage-and-transmission of credits between accounts (full-reserve checking accounts, basically) and run that infrastructure as a public utility (a handful of mainframes in the fort knox). Let the private sector sell value-added services on top of this, but don't leave the basic infrastructure of value-exchange in the hands of the private sector, who will retain the ability to hold the country up for ransom. It's an easy solution to envision but it's hard to see much happening; it is too radical a shift to go down easily (and all that surplus value captured funds a lot of lobbying) and it too closely resembles socialism and other bugaboos to be an easy sell to the public at large. (!) Where we are now is pretty analogous to having the local power company -- which provides necessary services to its area of operation -- also involved in speculative ventures that backfired enough that its continual operation is threatened; having the ability to turn the lights off would naturally give the local power company a lot of leverage negotiating for a bailout. Suppose that the "too big to fail" banks were allowed to fail, and there was temporarily a severe disruption in the banking system. How would you propose that federal, state, and local law enforcement and other "essential services" get paid? With cash -- dangerous and risky? With checks -- while the banking system isn't reliably working? Would you trust them to work without pay for very long?
richcollins 17y ago
"Integrity, justice, fairness, work-ethic, excellence--all have fallen prey to greed." Greed is tempered by risk when the government can't save you.
- viggity 17y ago
  Greed would be tempered a lot more by risk if the government didn't save anyone.
  - megamark16 17y ago
    I think that is what richcollins is saying. What I took away from that article, although I don't think it is quite what the author had in mind, is that Capitalism is flaw by the fact that our government does not allow/force us be purely capitalistic. The safety nets open the doors for greater risk, which require bigger safety nets.
    - chrischen 17y ago
      Humans aren't angels. Just as we need laws to protect us from killing each other or stealing we need laws to protect us from ourselves in the economy. Whatever system we have, however much it naturally encourages innovation, someone will try to manipulate it.
      - danek 17y ago
        Agreed. I think people spend too much time arguing about "capitalism the ideal" when what we should be talking about is "capitalism the implementation."
  - richcollins 17y ago
    Yes I should have worded it "when you can't rely on the government to save you"
- danteembermage 17y ago
  Counterpoint: flash trading. If I can peek at the orders the little guys put in through scott trade and execute a trade before theirs clears, then I can benefit from the upward price pressure that their orders induce. Little risk, no government, hardly "fair". In an ideal world new stock markets would pop up without flash trading and the little guys would flock to those instead but there are huge network effects to get over. In this case regulation, or at least shaming the exchanges into doing something, seems appropriate. I'm totally with you on the bailout moral hazard, there are just definitely some zero-work-ethic, unfair, risk-less behaviors that are quite profitable even (especially?) under anarcho-capitalism.
darjen 17y ago
A fundamental flaw in the article: "The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees. Capitalism gave way to welfare economics, and now the government has to intervene further to limit these looters from behaving badly by imposing taxes and regulations." If the government hadn't intervened in the first place, and instead let these irresponsible banks fail, then the transfer of taxpayer money in the form of bonuses never would have happened. What she's describing here is, in actuality, yet another flaw of government intervention.
- AndrewDucker 17y ago
  Do you have any idea what the current financial situation would have looked like if the government had just let the banks collapse? Hint: a lot like a jenga tower does just after you take away a vital piece. Letting the entire financial system collapse might _possibly_ have led to better behaving banks in the long term(although I doubt it, people don't learn). But in the short term it would have cascaded through the entire economy and left the economy entirely non-functional.
  - billswift 17y ago
    It could have, but I have seen no evidence to support this. In fact, that is why the econo-blogger Megan McArdle at The Atlantic supported the bank bailouts, because she feared that would happen. But despite reading her blog regularly, she has presented evidence only her (and others) fears about what could have happened.
    - aswanson 17y ago
      C.f. for what (possibly) happens when banking systems collapse: http://www.livinghistoryfarm.org/farminginthe30s/money_08.html http://www.livinghistoryfarm.org/farminginthe30s/money_08.ht...
      - 17y ago
bensummers 17y ago
This article suggests, twice, that "most intelligent people" agree with the author. Surely there is a better way of proving these facts, than just using such an assertion?
moron4hire 17y ago
"The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees" So presumes the author that the people who are ostensibly receiving "billions" in bonuses are the same people who pushed this over-leveraging scam. All bankers are equal, none managed wisely. "And thus, we lose Berkeley Ph.Ds in nuclear physics to hedge funds and MIT computer scientists capable of delivering computing to 6 billion people to derivative manipulation on Wall Street." So presumes the author that nuclear physics and democratization of computing are more noble pursuits than finance. What he forgets is that mortgage-backed derivatives really did reduce risk for really bad mortgages. This was a phenomenal development, we could get more people into houses while not losing our shirts in the deals. Unfortunately, those same mathematicians weren't the ones employing this great tool that they created. "When the only tool you have is a hammer, every problem looks like a nail." It's not that mortgage-backed derivatives were wrong or evil or bad, it's that they were grossly overused. They reduce risk, they don't eliminate it, so when the scenario in which that risk turned to losses came true, the losses were too much to handle. But, few people saw the risk for what it was because the Fed suppressed the price of money to lower-than-market rates, explicitly encouraging this sort of speculation. Price floors lead to shortages, this is a basic tenet of Capitalism. Is it any wonder that the entire nation is over-leveraged? Without the manipulation of the Fed, the price of money (interest rates) would have been much higher and this sort of speculation would not have happened.
- KirinDave 17y ago
  So you're arguing that an accounting trick to statistically suppress risk and get a few more million people into homes that they ended up having taken away from them is fundamentally the same level of contribution to society as people inventing the Internet, the Telephone, Chemotherapy, Relativity, etc.? You, sir, have an interesting outlook on life. But hey I guess a few high-risk buyers got to hang out in someone else's house for awhile, and that's good right?
  - danteembermage 17y ago
    I think his point is that, traditionally lending was a very local matter with local banks and local capital issues. If Norwegian pension funds want to fund a mortgage for a home in Paducah, KY, without some kind of securitization they're stuck earnings treasury rates and the home loan is charging the interest rate demanded by Paducah capitalists whether its higher than the Norwegian's rate are not. The point is, there are gains from trade to be had from securitizing mortgages, the trick is to design them so that the information asymmetry costs don't outweigh the benefits. Maybe that's impossible and mortgage derivatives will always be value destroying but I doubt it.
steveplace 17y ago
The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, [...] That's not capitalism.
TrevorJ 17y ago
"[O]nly a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters." -Ben Franklin The flaw in capitalism is us.
chrischen 17y ago
I though it was quite obvious captialism provides only incentive to increase profits, and that it does not necessarily correspond with an incentive to make better profits. Consider communism, ideally no one will worry about financial gain and everyone focuses on self actualization and innovation (because there's no monetary incentive, so only the truly altruistic thrive). However there's yet to be an implementation this ideal. It's probably impossible to achieve a perfect system, so I think the answer lies in a more perfect balance of capitalism and communism.
bh23ha 17y ago
That's not the flaw of capitalism. It is a hopefully temporary result of a world wide obsession with financial speculation. Part of that is specific government policy resulting in financial speculation being more profitable then brick and mortar and bits and bytes businesses. I'm not just talking about the fed, and printing money, but also about trade policy. The other part is lack of supply. When people can charge 2 and 20 and the 2 even if they suck, that means either there are a lot of people deliberately looking to lose money, or there is a shortage of hedge funds. And while those have exploded in number in recent years, that is not enough. The government, through Ph.D. programs encourages education, some say this supply side intervention has the uninteded consequence of depressing wages for Ph.Ds. But what if the government strongly encouraged everyone to go into wall street? Politically it would be crazy to try and explain why we're paying for people to become bankers or fund managers. But a flood of talent is perhaps exactly what we need, to even out supply and demand.
hugothefrog 17y ago
From the article: "She assumed integrity is implicit in the characters of the "leaders."" I haven't read much Ayn Rand (i.e., none), but I've read a lot about what she has said and written. Is the quote from the article above dramatic license on the case of the author, or did Rand actually state that integrity is a required characteristic in the 'leaders'?
rms 17y ago
The fundamental flaw of capitalism is the tendency for wealth to concentrate in the hands of those that already own the capital. There's nothing to be done about it because the fundamental flaw is more like a fundamental feature.
thomasadair 17y ago
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49 points by acangiano 17y ago

Antonio - good find. I read this article earlier this morning and it spoke directly to the disconnect I've noticed as well. Logistically, what do you think leaders on the Street and in business can do to curb these short-termist, corrupted practices?

jamesbressi 17y ago
If you don't mind me chiming in, I think the lesson is that there really is nothing that can be done to curb it. Why? Two reasons. First, every time we create legislation, laws and other governing to something, the problem either gets worse or creates a whole new set of issues. The problem becomes a snowball -- you can look at the examples there to see some of this. Second, the saying that goes something like "locks keep out the curious, not thieves" is very true. Those who want to scam will always find a way and there is nothing to stop them, only try and catch them and prosecute them. I could go on with a very lengthy post about this and sound very studious, but I think those two points in their simpler form make a lot of sense. What do you think?
- AndrewDucker 17y ago
  I disagree strongly. 1) Legislation can change things significantly and effectively. It can also merely shovel things around. Both are possible and doggedly asserting that only one effect ever happens is just ridiculous. 2) Locks keep out thieves very well a lot of the time. They may not keep out every thief, but it keeps out most of them, most of the time.
  - jamesbressi 17y ago
    Very glad you engaged, now on to my rebuttal... Really? Show me a piece of legislation that hasn't shoveled things around? And show legislation that actually changed things significantly and effectively without already having legislation in place that it enhanced? Drugs? Education? Prostitution? None of those for sure. I know, gun laws? Nope, not there either. And in regards to your response to my use of the saying "locks keep out the curious, but not thieves", you have to understand the underlying principle to completely get it. No "locks" (and we aren't talking just physical) keep out thieves, only the curious. Bernie Madoff anyone? The underlying principle to that saying ties with the really corny saying "where there is a will, there is a way". When someone really wants to do something, locks are not a deterrent, they will find a way. Cheers to you for debating with me, really enjoy it.
- fnid 17y ago
  I would suggest that it was an elimination of a lot of laws regarding financial transactions and regulation that enabled the recent decline. The removal of these laws enacted to prevent a recurrence of an historical collapse, did in fact bring another collapse, so pragmatically, I would say laws help.
  - dantheman 17y ago
    We are more regulated now than we've ever been before. All this talk about deregulation, though real in some cases, often just meant a decline in the rate of new regulation. When there are less regulations people take interest and make sure things work correctly. For instance, when opening a bank account most people don't do much research because they're all FDIC insured -- who cares what the bank does with your money. Without that insurance you would care. If we removed financial regulations, the markets would radically reform and lots of small individual investors would get out -- either into mutual funds or some other managed investment.
    - fnid 17y ago
      We are not more regulated than ever before, that's just not true. Regulations are being removed and the regulators are more lax. Did you see what Madoff said about the regulator looking at his business? He called him a blow hard. I also don't think most consumers of banking products are able to determine the solvency of a bank. If the FDIC wasn't there, the account holders would be at greater risk even if they did care. I don't believe markets reform themselves. The market does what is in the individual best interest, not the interest of the market.
      - dantheman 17y ago
        Just because the regulators are inept doesn't mean that there aren't more regulations. http://www.cato.org/pubs/policy_report/v31n4/cpr31n4-1.html http://www.cato.org/pubs/policy_report/v31n4/cpr31n4-1.html Perhaps an individual isn't able to tell, but consumer reports would be able to. Each individual working in their best interest reforms the market. If they believe that it is unfair, e.g. insider trading, then they will refuse to take part. Thus a market would form to cater to these individuals.

pjkundert 17y ago

Perhaps a better title would be "Mercantilism's fundamental flaw". Rand makes few assumptions regarding the inherent integrity of "leaders"; in fact, she assumes no such integrity, and argues for liberty. While we trip over ourselves (as a society) to give up our freedoms and grant ever more sweeping power to "leaders" to save us, we will reap what we deserve -- ever greater examples of waste, bungling, abuse, malinvestment and looting, on scales simply unimaginable just a few years ago. We gave up our ability to directly monetize wealth 2 or 3 generations ago -- what features of our present financial system makes you believe that it is "Capitalism"? Government giveth, and government taketh away. Sounds like good, old-time kingly Mercantilism to me...

Xichekolas 17y ago
We gave up our ability to directly monetize wealth 2 or 3 generations ago ?
- pjkundert 17y ago
  Central bank money, created and debased at will, vs. Wealth-backed money, intrinsically valued by the wealth that backs it. Freedom to choose money that doesn't inflate allows multigenerational wealth transfer, etc.
  - Xichekolas 17y ago
    I guess I'm curious what "wealth-backed money" is. All money is only a medium of exchange, and is only worth what people collectively agree it is worth. I'm going to take a guess and assume you mean gold, but if that isn't the case, I'm really curious to know. The fact that people collectively agreed that gold was a good form of money has nothing to do with any intrinsic (or god given) value of gold. It had everything to do with certain properties of gold that made it a good medium of exchange. Namely, it's durable, portable, hard to counterfeit, malleable, etc. Eventually, gold's cause was assisted by tradition. People have been using it to represent money for so long they mistakenly believe it has intrinsic value. (Granted, gold isn't a bad choice, if you are betting on the fact that others will irrationally value it.) So yes, it's harder for governments to manipulate a gold-backed currency... but it's not that hard. The US effectively did it twice, most recently after WWI with the Gold Reserve Act. Also, your money supply is now open to manipulation by private entities and even individuals. Gold mining companies, for instance, would have powerful sway over the amount and price of gold.

danteembermage 17y ago

I think the appeal of finance is the intellectual leverage one gets there. If I am really bright and I can develop a profitable arbitrage trade in the marketplace I can turn it near instantly into millions of dollars (if I'm right, obviously the market does not give points for effort). If I'm in a start up, which we would probably consider to be very high cleverness to reward leverage, it can take a long time and have lots of randomness to get the big payoff, e.g. Kiko. Now, compare that to being an employee, where to get enormous payoff you have to climb the ladder into stock options land. The article's point is that this is not how the world should be, but markets cause this by construction: If I'm stranded on an island with a bunch of Robinson Crusoes I'm going to try swapping coconuts for mangoes across the island before I start experimenting with cross breeding them. From a welfare perspective it even makes sense to do the easy things first (trade) and the hard stuff next (R&D) because effort is more likely to be rewarded in the former than the latter. One could also complain about how all the socially well connected are lobbyists instead of high school teachers and the beautiful are in pharmaceutical sales rather than portrait modeling. Sure it's sad, but also mostly inevitable.

yafujifide 17y ago
> if I'm right, obviously the market does not give points for effort But the market does give points for effort. How else do you explain the bonuses awarded to bankers who damaged the economy? They were rewarded despite their antisuccess.
- mseebach 17y ago
  It's a very perverted market, where banks that would have been bankrupt if not for billions in taxpayer funds, even gets to pay their employees salary. On the other hand, bankers in the banks that actually lived through the crisis because they didn't jump on all the fancy derivatives, actually deserves a bit fat bonus.
- bdr 17y ago
  You're blatantly taking that out of context. GP's idea was to "develop a profitable arbitrage trade" using one's intelligence, not to go work for a bank.

sethg 17y ago

If the government imposed a small tax on stock purchases and other financial transactions, with the tax level rising according to the number of intermediaries and the amount of leverage, then working in an organization through which lots of money passes would not be such a lucrative career. (And if it remained lucrative, at least the government would be able to participate in the bounty that comes from skimming a few parts-per-thousand off the top of a very large cash flow.)

gaius 17y ago
working in an organization through which lots of money passes would not be such a lucrative career No, those people would just go work for the government.

mseebach 17y ago

The reason speculators can make tons of money on Wall Street, is because they can get people to play along. You don't make money because an asset you own rises. You make money because someone buys it at that price. (That's the same, I know, but it's an important point to understand - it's NOT just numbers going up and down in a computer, at the end of the chain there's actual liquid money changing hands). Now we've lived through two financial bubbles right after each other, and one can hope that people will learn that sharp rises in the value of an asset are often inflated, and stop putting their money into the game. After all, those who bet and then hedged their bets on real estate (this time) and .coms (last time) were also (generally!) the ones who lost the most.

pbhjpbhj 17y ago
at the end of the chain there's actual liquid money changing hands Naked short selling doesn't require one to have any money to invest nor any shares. You can still make a lot of money and destroy a company's shares if well connected enough. The price falling on the shares is only produced by the apparent glut of shares offered for sale, they don't need to sell initially to produce a price fall, the offer is enough. Once the naked sale has iterated through a couple of loops and many other offers appear as the stock falls then the price plummets, not because of sales but because of lack of sales. You make money because no one buys. Traders can make money any way the market moves and if sufficiently skilled and backed can make the market move - it _is_ just numbers going up and down.
ibsulon 17y ago
Are you kidding? Most people are just looking to find the next bubble and get out before "the suckers" get in!

jriddycuz 17y ago

There's a fundamental flaw in the logic that concludes that "government must intervene to stop the shameless looting of taxpayer money." Taxation itself is government intervention. Abuse of money received from a government that shamelessly loots its people for the "common good" and through manipulation of a highly regulated system is no more an indictment of Capitalism than failure to run is an indictment of a man tied to a chair.

larryfreeman 17y ago
There's a fundamental flaw in your reasoning too. You can't have capitalism without some form of government and you can't have government without some form of taxation.
- darjen 17y ago
  you can have voluntary, free trade without government. whether it's called "capitalism" or something else can be a matter of discussion...
  - larryfreeman 17y ago
    Property rights need to be protected or an economic system falls into anarchy. On a small scale, it is possible for the community to enforce these rights (in which case, the community has formed a local government) but on the larger, societal scale, a transcommunity government is needed (or a warlord/city boss/etc appears which is, by its nature, a form of government). If all free trade actions could be resolved by rational, respectful, interaction of two individuals of integrity (ie they keep their word), then no government is needed. As far as I can tell, if such a world existed, we wouldn't be having this discussion. As long as individuals need to collaborate in order to resolve disagreements, as long as certain individuals need to take responsibilities for overseeing these collaborations, government is necessary.
    - darjen 17y ago
      my question is can property rights be adequately protected by government? seems like history has proven that not to be the case. the assumption that warlords would always appear in society no matter what is just that - an assumption. on the other hand, every government we have today was born by conquest and initially created by warlords. I simply don't hold to the assumption that government will always be necessary in society to protect property rights. they are actually the biggest violators we have of property rights. people are capable of progressing beyond government, and I think they will once they finally realize what government really is.

btilly 17y ago

A sobering read about the problems our system faces is http://www.theatlantic.com/doc/200905/imf-advice http://www.theatlantic.com/doc/200905/imf-advice. During the last boom a full 40% of all of the profits in the system came from the non-productive activity of people manipulating cash flows. This is simply not a sustainable financial structure. History shows that economies that are based on financial manipulation rather than production don't last. The USA isn't the first to combine of financial manipulation along with the export of production and the knowledge that previous lead to persistent economic advantage. In the last several hundred years Spain, Holland and England did this. In all previous cases it was a big factor leading to financial collapse and the loss of empire. Is there any reason to believe it will work any better for us?

frig 17y ago

In hindsight the present situation is pretty predictable: as the # of goods produced increases and the amount of specialization increases the value supplied by the intermediary network ("the financial system") increases. The way the financial system is currently "architected" (a strange term, but I'll use it) it has as a class an inordinate amount of negotiating power vis-a-vis everyone else (!), and thus is able to capture much of what ought to be consumer and producer surplus. As much of the value it adds is due to network effects just going to a gold standard (which is a popular cure-all on the internet) wouldn't change much, even if you thought that was a good idea; there's still the same tremendous problem of coordinating trade in the same complex, highly-specialized economy and the central switchboard is still ideally placed to extract most of that value. The easiest-to-envision solution is to forcibly unbundle the basic storage-and-transmission of credits between accounts (full-reserve checking accounts, basically) and run that infrastructure as a public utility (a handful of mainframes in the fort knox). Let the private sector sell value-added services on top of this, but don't leave the basic infrastructure of value-exchange in the hands of the private sector, who will retain the ability to hold the country up for ransom. It's an easy solution to envision but it's hard to see much happening; it is too radical a shift to go down easily (and all that surplus value captured funds a lot of lobbying) and it too closely resembles socialism and other bugaboos to be an easy sell to the public at large. (!) Where we are now is pretty analogous to having the local power company -- which provides necessary services to its area of operation -- also involved in speculative ventures that backfired enough that its continual operation is threatened; having the ability to turn the lights off would naturally give the local power company a lot of leverage negotiating for a bailout. Suppose that the "too big to fail" banks were allowed to fail, and there was temporarily a severe disruption in the banking system. How would you propose that federal, state, and local law enforcement and other "essential services" get paid? With cash -- dangerous and risky? With checks -- while the banking system isn't reliably working? Would you trust them to work without pay for very long?

richcollins 17y ago

"Integrity, justice, fairness, work-ethic, excellence--all have fallen prey to greed." Greed is tempered by risk when the government can't save you.

viggity 17y ago
Greed would be tempered a lot more by risk if the government didn't save anyone.
- megamark16 17y ago
  I think that is what richcollins is saying. What I took away from that article, although I don't think it is quite what the author had in mind, is that Capitalism is flaw by the fact that our government does not allow/force us be purely capitalistic. The safety nets open the doors for greater risk, which require bigger safety nets.
  - chrischen 17y ago
    Humans aren't angels. Just as we need laws to protect us from killing each other or stealing we need laws to protect us from ourselves in the economy. Whatever system we have, however much it naturally encourages innovation, someone will try to manipulate it.
    - danek 17y ago
      Agreed. I think people spend too much time arguing about "capitalism the ideal" when what we should be talking about is "capitalism the implementation."
- richcollins 17y ago
  Yes I should have worded it "when you can't rely on the government to save you"
danteembermage 17y ago
Counterpoint: flash trading. If I can peek at the orders the little guys put in through scott trade and execute a trade before theirs clears, then I can benefit from the upward price pressure that their orders induce. Little risk, no government, hardly "fair". In an ideal world new stock markets would pop up without flash trading and the little guys would flock to those instead but there are huge network effects to get over. In this case regulation, or at least shaming the exchanges into doing something, seems appropriate. I'm totally with you on the bailout moral hazard, there are just definitely some zero-work-ethic, unfair, risk-less behaviors that are quite profitable even (especially?) under anarcho-capitalism.

darjen 17y ago

A fundamental flaw in the article: "The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees. Capitalism gave way to welfare economics, and now the government has to intervene further to limit these looters from behaving badly by imposing taxes and regulations." If the government hadn't intervened in the first place, and instead let these irresponsible banks fail, then the transfer of taxpayer money in the form of bonuses never would have happened. What she's describing here is, in actuality, yet another flaw of government intervention.

AndrewDucker 17y ago
Do you have any idea what the current financial situation would have looked like if the government had just let the banks collapse? Hint: a lot like a jenga tower does just after you take away a vital piece. Letting the entire financial system collapse might _possibly_ have led to better behaving banks in the long term(although I doubt it, people don't learn). But in the short term it would have cascaded through the entire economy and left the economy entirely non-functional.
- billswift 17y ago
  It could have, but I have seen no evidence to support this. In fact, that is why the econo-blogger Megan McArdle at The Atlantic supported the bank bailouts, because she feared that would happen. But despite reading her blog regularly, she has presented evidence only her (and others) fears about what could have happened.
  - aswanson 17y ago
    C.f. for what (possibly) happens when banking systems collapse: http://www.livinghistoryfarm.org/farminginthe30s/money_08.html http://www.livinghistoryfarm.org/farminginthe30s/money_08.ht...
    - 17y ago

bensummers 17y ago

This article suggests, twice, that "most intelligent people" agree with the author. Surely there is a better way of proving these facts, than just using such an assertion?

moron4hire 17y ago

"The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees" So presumes the author that the people who are ostensibly receiving "billions" in bonuses are the same people who pushed this over-leveraging scam. All bankers are equal, none managed wisely. "And thus, we lose Berkeley Ph.Ds in nuclear physics to hedge funds and MIT computer scientists capable of delivering computing to 6 billion people to derivative manipulation on Wall Street." So presumes the author that nuclear physics and democratization of computing are more noble pursuits than finance. What he forgets is that mortgage-backed derivatives really did reduce risk for really bad mortgages. This was a phenomenal development, we could get more people into houses while not losing our shirts in the deals. Unfortunately, those same mathematicians weren't the ones employing this great tool that they created. "When the only tool you have is a hammer, every problem looks like a nail." It's not that mortgage-backed derivatives were wrong or evil or bad, it's that they were grossly overused. They reduce risk, they don't eliminate it, so when the scenario in which that risk turned to losses came true, the losses were too much to handle. But, few people saw the risk for what it was because the Fed suppressed the price of money to lower-than-market rates, explicitly encouraging this sort of speculation. Price floors lead to shortages, this is a basic tenet of Capitalism. Is it any wonder that the entire nation is over-leveraged? Without the manipulation of the Fed, the price of money (interest rates) would have been much higher and this sort of speculation would not have happened.

KirinDave 17y ago
So you're arguing that an accounting trick to statistically suppress risk and get a few more million people into homes that they ended up having taken away from them is fundamentally the same level of contribution to society as people inventing the Internet, the Telephone, Chemotherapy, Relativity, etc.? You, sir, have an interesting outlook on life. But hey I guess a few high-risk buyers got to hang out in someone else's house for awhile, and that's good right?
- danteembermage 17y ago
  I think his point is that, traditionally lending was a very local matter with local banks and local capital issues. If Norwegian pension funds want to fund a mortgage for a home in Paducah, KY, without some kind of securitization they're stuck earnings treasury rates and the home loan is charging the interest rate demanded by Paducah capitalists whether its higher than the Norwegian's rate are not. The point is, there are gains from trade to be had from securitizing mortgages, the trick is to design them so that the information asymmetry costs don't outweigh the benefits. Maybe that's impossible and mortgage derivatives will always be value destroying but I doubt it.

steveplace 17y ago

The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, [...] That's not capitalism.

TrevorJ 17y ago

"[O]nly a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters." -Ben Franklin The flaw in capitalism is us.

chrischen 17y ago

I though it was quite obvious captialism provides only incentive to increase profits, and that it does not necessarily correspond with an incentive to make better profits. Consider communism, ideally no one will worry about financial gain and everyone focuses on self actualization and innovation (because there's no monetary incentive, so only the truly altruistic thrive). However there's yet to be an implementation this ideal. It's probably impossible to achieve a perfect system, so I think the answer lies in a more perfect balance of capitalism and communism.

bh23ha 17y ago

That's not the flaw of capitalism. It is a hopefully temporary result of a world wide obsession with financial speculation. Part of that is specific government policy resulting in financial speculation being more profitable then brick and mortar and bits and bytes businesses. I'm not just talking about the fed, and printing money, but also about trade policy. The other part is lack of supply. When people can charge 2 and 20 and the 2 even if they suck, that means either there are a lot of people deliberately looking to lose money, or there is a shortage of hedge funds. And while those have exploded in number in recent years, that is not enough. The government, through Ph.D. programs encourages education, some say this supply side intervention has the uninteded consequence of depressing wages for Ph.Ds. But what if the government strongly encouraged everyone to go into wall street? Politically it would be crazy to try and explain why we're paying for people to become bankers or fund managers. But a flood of talent is perhaps exactly what we need, to even out supply and demand.

hugothefrog 17y ago

From the article: "She assumed integrity is implicit in the characters of the "leaders."" I haven't read much Ayn Rand (i.e., none), but I've read a lot about what she has said and written. Is the quote from the article above dramatic license on the case of the author, or did Rand actually state that integrity is a required characteristic in the 'leaders'?

rms 17y ago

The fundamental flaw of capitalism is the tendency for wealth to concentrate in the hands of those that already own the capital. There's nothing to be done about it because the fundamental flaw is more like a fundamental feature.

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