Goldman Sachs May Be Forced to Fundamentally Question How Capitalism Is Working

http://www.bloomberg.com/news/articles/2016-02-03/goldman-sachs-says-it-may-be-forced-to-fundamentally-question-how-capitalism-is-working

by uptown • 10 years ago

98 90 10 years ago

bloomberg.com

jdimov104• 10 years ago

This is the result of blue ocean strategy in play (whether consciously applied or by accident). When it's easier for me to create a new market and reap huge profits, than to struggle into fighting with Big Co for a share of their huge profits... guess which way I'd rather go. At the end, both I and Big Co win.

We are already living in a new time period - a new age in world history, fundamentally different from all other ages experienced by humans so far. We have entered the age of ubiquitous abundance. All economic, political, moral and philosophical frameworks revolving around the concept of scarcity are fast becoming obsolete.

craigyk• 10 years ago

I don't see it. Unless you mean debt subsidized growth involving inserting "internet" or "mobile" into existing things and calling them "blue oceans". I think what Goldman Sachs is trying to say is that capitalism ( in any flavor: laissez faire or mixed economy ) might favor evolution to a small number of large entrenched winners rather than eternal competition and churn.

jdimov104• 10 years ago

Neither the GS analysis, nor cursory observation of daily reality can possibly lead to any such conclusion. Wealth is increasing, globally, at an accelerating pace. The number of players creating and sharing such wealth is also increasing at an accelerating pace. These trends are not showing any signs of slowing down, much less of reversing (and might in fact be non-reversible).

As a consequence, global well-being (by any reasonable measure) is also increasing at an accelerating pace.

Note that this DOES NOT contradict the fact that various "inequality gaps" are also increasing at an accelerating pace. This is natural.

vezzy-fnord9• 10 years ago

Scarcity is not a property of physical abundance, but of use. To say that scarcity is over would effectively mean all wants have been satisfied and the economy has reached its final state of rest, and this is ludicrous. You can have a bundle of inert goods, but as soon as they are employed to fulfill plans, they become different goods where spatial, territorial and property constraints enter into motion.

Also people have been saying this for a long time and it has yet to bear out. Galbraith was railing on about the affluent society, how corporations are somehow artificially inventing wants through advertising and the necessity of an activist state. Developed countries have had their states get larger and more activist to no avail.

jjaredsimpson2• 10 years ago

Certain physical goods will always be scarce and there is a limit to energy utilization. I agree that subsistence work for survival is on the way out but I'm unconvinced humans will stop competing for status and resources because of abundance.

jdimov104• 10 years ago

If advances in technology teach us anything at all, it is that there can be no scarcity of physical goods. There is nothing that can not be made in abundance, at marginal cost.

The scarcity of energy is even more difficult to defend. There can not possibly be any such thing, it is a truly ridiculous perception.

The ONLY remaining value, then, is in individualism. In bringing forth a unique perspective.

Competing for status is indeed a natural human tendency, that isn't going anywhere any time soon.. But it can no longer equate to competing for resources.

esaym• 10 years ago

Never quite followed the plethora of "Capitalism isn't working" articles. And the alternative is?? There always seems to be some political agenda involved.

xndjcjdjf• 10 years ago

It's a Goldman Sachs analyst pointing out anomalies in global capital flow. Where are seeing an agenda?

saiya-jin• 10 years ago

there is no alternative, not a better one at least, not now. look at other possibilities - ie central planning is a major fail over longer time (I lived in one of those systems, no thank you).

IMHO what fails in all other systems is to take into account human nature, and not some ideal working guy that never actually lived. people are lazy, care more about themselves rather than company good, some are plain evil etc. very few work on themselves unless they see the carrot at the end of the stick (bonus?).

in capitalism it's cash, which can get you quite far in life, so most are chasing it (even you probably are - if your employer stopped paying you today, would you come in tomorrow?). this chase can easily ruin your life, makes people do regretful decisions but overall, it pushes mankind far beyond (and much faster) that it would achieve without this perpetual force.

I'll claim one thing, feel free to disagree - capitalism ain't often the best system for a single person, but (if all internal mechanisms work) it's probably best for the advancement of mankind. and these days, we need to advance to not destroy ourselves (for that, we already have capability)

convivialdingo• 10 years ago

I'd agree with this. (I also briefly lived in a socialist paradise myself.)

I'm not a fan of capitalism, but everything else has historically been worse. The only pre-capitalist system that may have worked well was distributism, but that was under an aristocratic rule.

I think the modern fair market issues we have in all 1st world nations isn't a feature of capitalism - it's the failure to reign in plutocratic tendencies.

Democratic nations have a tendency to ignore oligarchs as they initially grow industry and produce lots of growth. Long term though, they tend to become parasites on the budget and political vampires.

kartan• 10 years ago

I agree that the statement is wrong. For me is something more like "the way we try to apply capitalism is not working". But as some people only accepts "capitalism" as their way of applying it, the dialogue gets confusing. "Capitalism is not working" can be translated as "the way some people defines Capitalism is not working". And I agree with that as much as the numbers indicate a growth slowdown or even recession in all major economies. I don't think that most people advocates for abandoning capitalism, but to improve how we do things in a way that helps everyone instead of a selected few. Better public education, better health care, better work conditions is still capitalism but just of a different kind.

jsprogrammer• 10 years ago

Indeed, anyone who uses the word should also provide their definition of it.

duaneb• 10 years ago

I don't think that's the take away of the article. It's pointing out that Goldman Sachs may be open to recognizing that there are inefficiencies in our market, and that it's not benefiting from some attributes of capitalism as a result.

Anyone who seriously claims that capitalism inherently doesn't work is typically talking about something much more specific, like cultural/social interactions with capitalism, or (again) efficiency concerns.

ancap3• 10 years ago

I'm not sure why this should come to surprise anyone. The big banks have always been in favor of government intervention in the market. They don't want a free market because 1) it's very possible that parts of their business would be considered fraudulent (fractional reserve banking) in a free market and they would be liable. 2) their existence is maintained by government programs: Federal Reserve, FDIC, bailouts, etc. 3) more regulations create bigger barriers for competitors, squeezing out the small guys from the market.

lmm• 10 years ago

It's pretty meaningless to say it's a political agenda - when you're talking at national scale everything is political.

wfo• 10 years ago

The alternative is mixed capitalism and socialism since living in a purely capitalist or socialist state is a horrible dystopia. The alternative is adjusting the proportions of capitalism and socialism we use to create our economic system.

spectrum1234• 10 years ago

The reason for this is barriers to entry to be a big corporation are getting bigger. (This is the only fundamental truth that the author fails to mention!)

However, the barriers to entry to be an entrepreneur are far far lower. Corporations still compete with each other on innovation but now more than ever this is through buying small and medium sized companies said entrepreneurs have created :)

So, this is neither good nor bad, just a shift in where the competitive opportunities are. Hint, it's getting easier for the little guys to compete.

voynich613• 10 years ago

Rate of entrepreneurship in the US has declined, and is overwhelmingly class, race, and sex based. It's borderline sociopathic to assert that it's getting easier for the little guys to compete.

jdimov104• 10 years ago

I don't know about that, but it is flat-out psychopatic to claim that the rate of entrepreneurship in the US has declined when it has been increasing faster than ever in the past few years[1].

[1] http://stats.oecd.org/Index.aspx?DataSetCode=TIMELY_BDS_ISIC...

tedks• 10 years ago

Further, it is far riskier for the little guys to compete. Big corporations have been externalizing R&D risk to the state and now to entrepreneurs. Most startups fail and when they do, Goldman Sachs isn't picking up the tab, the state and entrepreneurs are.

financedfuture3• 10 years ago

No.

Little guys compete with each other to start a niche SaaS app for passive income.

Only CEOs of huge corporations are able to build electric cars and smartphones or process financial transactions.

pliny• 10 years ago

Only CEOs of huge corporations are able to ... process financial transactions.

Is that true? Isn't Stripe a counterexample to this?

p4wnc6• 10 years ago

So, this is neither good nor bad, just a shift in where the competitive opportunities are.

Many see this shift itself as a bad thing. Instead of having career options in stable companies, most people (who necessarily can't all be founders or early employees in the places you allege are still sources of entrepreneurship) are forced to accept unsatisfactory compensation, benefits, and employment stability -- in return for foosball tables and dog-friendly offices.

I interpret the comments about barrier to entry in exactly this way. If it's easier to "enter" low-status entrepreneurship (e.g. start-ups), but this easiness is offset by a disproportional lessening of the potential upside (especially the stability and security upsides), then it could still be a net loss overall.

It is a means of restructuring the process by which the deployment of capital is used to extract productivity -- a restructuring that transforms the process into even more of a transfer of wealth from poor to rich.

Sealy2• 10 years ago

Just reading that headline makes me think to myself. Why ask Goldman Sachs? They are clearly ahead of the capitalism game so of course they are gonna say it works well!?!?

Asking the richest capitalists in the world if capitalism works is a silly question if you ask me...

AnimalMuppet3• 10 years ago

Yes, but having them say we may have to question whether it works is big news.

Sealy2• 10 years ago

True, I think I was influenced by the sensationalist headline.

financedfuture3• 10 years ago

We are always wary of guiding for mean reversion. But, if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism.

This isn't a criticism of capitalism.

This is an acknowledgment our current "capitalist" financial system isn't able to produce "capitalism" itself.

Analemma_• 10 years ago

This isn't a criticism of capitalism.
This is an acknowledgment our current "capitalist" financial system isn't able to produce "capitalism" itself.

That's a No True Scotsman argument intended to shield capitalism from any criticism. "The system isn't working? Then it must not be real capitalism."

financedfuture3• 10 years ago

No.

That's about recognizing there would be no mean reversion, a great indicative of the existence of crony monopolies and, therefore, lack of capitalism.

AnimalMuppet3• 10 years ago

It could be viewed as No True Scotsman, but in this case I don't think it is.

Goldman talks about "reversion to the mean", which is a generally-accepted thing in the financial world. If you've got above-average returns, people tend to take note, and try to get some of those returns, and so there's more competition for those returns, and that goes on until there aren't excessive returns any longer. This is a generally-accepted thing because it's been observed a bunch of times. It's the normal functioning of a market.

So if Goldman is questioning whether this is going to happen this time, it's a recognition that the markets aren't functioning the way they normally do - which I think is financedfuture's point. (He/she is going a step further, and [EDIT]implying that either the financial firms or the government broke the system that had been working, which, if the system historically worked and now doesn't, seems like a reasonable guess.)

themagician4• 10 years ago

A lot of Americans are obsessed with "capitalism" and "the free market", but don't even understand the basic assumptions that must be true for free markets to work like perfect information, interchangeable goods and services, and a lack of market power for any single entity. Like, the basic—the most basic—assumptions.

Capitalism has become synonymous in the collective mind with "don't make laws, laws are government interference and socialism." Just look at the way people on the right talk about removing Obamacare and letting the "free market" do its thing. But the healthcare industry basically NEVER met the assumptions necessary for a free market to exist in the first place. The same is true in banking, albeit some might argue to a lesser extent.

You've got oligopoly or monopoly firms in many industries that are "too big to fail", have near total market power, and make many decisions (some around pricing) behind closed doors or with little transparency (let alone anything close to complete information), and then expect markets to run efficiently? You can't bake the perfect cake if you don't have any of the ingredients in the first place.

ancap3• 10 years ago

But the healthcare industry basically NEVER met the assumptions necessary for a free market to exist in the first place.

Please expound on the history of this (the "NEVER" part)and also enumerate on what the "assumptions necessary" are.

Just look at the way people on the right talk about removing Obamacare and letting the "free market" do its thing.

Obviously the removal of Obamacare would be insufficient to produce a free market in health care and it would take a lot more repealing of laws (many at the state level) before a free market could "do its thing".

Capitalism has become synonymous in the collective mind with "don't make laws, laws are government interference and socialism."

I'm not so sure there is any majority which claims this. I find much more common the idea that most of society's problems are caused by capitalism, caused by a "market failure", or that free enterprise is insufficient to resolve said problem and the only solution is government action.

kbenson• 10 years ago

Perfect information is not required for a free market. Market efficiency is related to information availability though. That is, perfect information and zero cost transactions are some of the requirements for a maximally efficient market, but a market can be "good" or "good enough" to outperform other systems without perfect information (which is impossible), or zero cost transactions.

goodcanadian4• 10 years ago

A little rant that I have been saving up:

"Capitalism" is not the same thing as "free market" is not the same thing as "laissez faire."

A "free market" means lots of buyers and sellers participating on even playing field. Even Adam Smith acknowledged that government regulation is necessary in order to ensure that the market remains free. When people argue for the removal of laws and regulation, they are actually arguing for laissez faire economics which, in a nutshell, means for the government to stay out of it. Left to their own devices, however, capitalists will naturally (and rationally) try to tilt the playing field in their favour. Capitalism, for what it is worth, is people investing their free capital into economic enterprises in order to glean a return.

So, I am, actually, a strong proponent of capitalism operating under free markets. I am against capitalism, however, under a completely laissez faire economy.

raverbashing2• 10 years ago

True

I think that Healthcare would solve 95% of its problems with a truly Free Market, but to have that you need a very strict law enforcing fair and transparent rules to all (like mandatory transparent pricing), elimination of bottlenecks (like MD graduation and facilitate hiring from overseas), liability and regulation limitation and other things.

zacharytelschow• 10 years ago

But the healthcare industry basically NEVER met the assumptions necessary for a free market to exist in the first place.

Has it occurred to you that regulation might have something to do with that?

vezzy-fnord9• 10 years ago

"Perfect information" is an assumption used in static Paretian general equilibrium models, but it does not reflect any existing dynamic reality, and it is not at all a necessary prerequisite for free markets. Market power is vulnerable. "Interchangeable goods and services" - I honestly have no idea how you could come up with such a delusional prerequisite.

You seem to have confused neoclassical models for an attainable ideal compatible with empirical reality. But our world is one of disequilibrium, dispersed knowledge, plan coordination - ones most apt for a market and a free one at that. You are completely out of vogue.

mtgx• 10 years ago

Because the government keeps either bailing it out or protecting some actors when it should be punishing them to a much bigger degree.

Some may say, wait a minute, but if the government does that, doesn't it mean it interferes with the "free market" and whatnot? I think to have a real free market, you need a fair market. If some companies violate the law to get ahead, they should be punished. Or at the very least be allowed to fail when they reach their own individual "bust" after some high growth from risking with people's deposits.

The point is they can't have their cake and eat it, too.

jazzyk2• 10 years ago

The government should not be intervening in the market (through bailouts or subsidies) on behalf of an anointed market player (or group of players).

It should set the same rules for everybody and enforce them. If someone is not playing by the rules, they should be punished.

While an ideal fair/"free" market can probably never be reached, the US has seen better than the abomination we have now.

nopotatoes• 10 years ago

Does anyone know the brand or model of that beautiful keyboard with the orange and green keys in the photo just above the title?

osullivj• 10 years ago

Bloomberg keyboard with specialised func keys for std cmds.

mortenjorck• 10 years ago

The newer ones look amazing: https://qzprod.files.wordpress.com/2013/05/bloomberg_keyboar... They have that certain beauty of something carefully designed for a specific domain.

Fando• 10 years ago

No one has a clue about what's going on in this article. Nothing substantial it seems.

goodcanadian4• 10 years ago

What I see in their chart is profit margins are generally in the 6-8% range with dips down to ~2% after economic recessions. It would seem to me that profit margins may be slightly higher than the historical average, but only slightly (though I would need a chart with a much longer x-axis to say anything with confidence).

As for the free market (I believe "capitalism" is the wrong word to use) squeezing the margins to zero, that works great in theory. However, the real world is made up of real people with imperfect information, so maintaining a slightly above zero profit margin doesn't surprise me, even when averaged across the entire economy.

nikdaheratik2• 10 years ago

Yes, but you're missing some context. Specifically the theory that, historically, business profits have always been limited to a set percentage of overall GDP. Everytime it tries to expand beyond a certain point, the market seems to correct either through increased competition driving that number down or labor pushing back to get workers a greater share, or government taxation/regulation (in a few rare cases) pushing this back down.

It may seem like a historically high range of a few percentage points is no big deal, but it would be very surprising for that amount to stay constant over time and (when you account for compounding effects), it actually would be a big deal if it did stay at that level.

goodcanadian4• 10 years ago

I don't think I'm missing anything. What I was saying was that, from their chart at least, the current level appears to be completely normal or perhaps only slightly high. I'm willing to admit that their chart could be misleading, but they failed to clearly make their point and really didn't convince me that anything unusual is going on.

phrogdriver• 10 years ago

We are always wary of guiding for mean reversion. But, if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism.

I find this title to be misleading. The above quote can be paraphrased as, "We think profit margins will revert to the mean. If they don't, we will be really surprised that capitalism isn't working as we think it should."

roymurdock4• 10 years ago

Rethink capitalism - aka rebalance capitalism and socialism, two sides of the same coin.

The government plays a regulatory, distributive role in society, allowing profits to accrue to capitalists but setting taxes and running social programs at the proper level to ensure that society as a whole functions smoothly, and that there are opportunities for everyone to improve their situation.

Most of the economic world is in agreement that financial deregulation was a huge contributing factor in the crash of 2007-08. The repeal of Glass-Steagall allowed banks to take on too much risk with too little supervision.

This would have been fine if the banks had been the only ones punished when their bets went bad - but they had also been allowed to accrue so much power (through consolidation/M&A) that it was impossible to let them face the consequences of their own bad decisions and fail. So they had to be underwritten with public money in the form of QE.

A functional society requires healthy levels of both capitalism and socialism to survive. But the most important thing in my opinion, is that those who intentionally commit fraud or do not act in the fiduciary interest of their stakeholders are adequately punished. This last part is of course the rub - how can you tell if the leaders of business and finance were intentionally setting up their dependents for a crash? What is the adequate punishment?

dnautics• 10 years ago

The government plays a regulatory, distributive role in society

"We shall see the entire people transformed into petitioners. Landed property, agriculture, industry, commerce, shipping, industrial companies, all will bestir themselves to claim favors from the State... Everyone will have good reasons to prove that legal fraternity should be interpreted in this sense: "Let me have the benefits, and let others pay the costs." Everyone's effort will be directed toward snatching a scrap of fraternal privilege from the legislature. The suffering classes, although having the greatest claim, will not always have the greatest success."

Perhaps Bastiat was overoptimistic. The suffering classes will almost never have the greatest success; as over time the path to becoming wealthy becomes more and more dependent on the ability to extract benefits that the government doles out with increasingly byzantine rules and "arbitrary (i.e. cronyist)" process (think SBIRs).

Goldman Sachs is the least worthy company to have to "rethink capitalism" - it itself is such a cronyist organization that in many circles it's nicknamed "government sachs". If Goldman Sachs is only now saying, "there are broader questions to be asked about the efficacy of capitalism" - that's stunningly oblivious about its own actions. If anything Goldman Sachs should be asking itself about the efficacy of government in doing anything but redistributing wealth upwards.

vezzy-fnord9• 10 years ago

In case you haven't noticed, this has been how virtually all first-world states have operated for decades. This social democratic ideal has not worked out, but has led to a dysfunctional corporate statism where mere "deregulation" (which is a misnomer, as most cases of deregulation have really been regulatory adjustments in an overall baroque framework that unsurprisingly lead to new pathological regulatory states - just because you cut some edges off the graph doesn't mean the nodes are going to stand still) can lead to catastrophe. This is an example of the state being entrusted to ensure smooth regulation, and failing miserably at their task.

In fact, many banking panics and examples of financial fragility have originated from pathological financial regulations guided by desires of the state to subvert various public finance constraints. Authors like George Selgin, Kevin Dowd and Lawrence H. White have written on this subject.

roymurdock4• 10 years ago

I'm not sure what you're advocating for - pure capitalism with no government oversight and regulation?

Mikeb85• 10 years ago

What we think of as 'capitalism', in many ways is more akin to mercantilism or oligarchy. Corruption is basically codified as 'lobbying', and governments enact all sorts of stupid laws to the benefit of large, incumbent corporations, preventing the free market from actually functioning.

And of course, these unnatural barriers to competition allow inefficiencies, concentration of wealth, and so on.

The 'free market' is somewhat of a myth. The west has never truly had 'free markets', in the past monopolies have been bought, wealthy merchants, nobility and corporations have patronized governments and monarchs, and tariffs and subsidies have been ever-present.

The current arguments for free markets have to do with price discovery, personal freedom and 'fairness', however we need to realize that these sacred cows are myths, and that if we want to build a better society, it may be time to rethink exactly how we distribute resources.

hodder• 10 years ago

Here is a much more thought out analysis from a generally excellent econ blog:

http://www.philosophicaleconomics.com/2015/05/profit-margins...

Goldman Sachs May Be Forced to Fundamentally Question How Capitalism Is Working

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