How to fix capitalism

http://pietersz.co.uk/2009/11/fix-capitalism

by smokinn • 17 years ago

17 20 17 years ago

pietersz.co.uk

Article in one sentence: You can fix capitalism by moving the real world closer to the theoretical capitalism of micro-econ textbooks.

One of the frustrations I have with politics and economics is the absolute refusal of many people to actually look at how our economic system diverges from capitalism. We hear so often about how theoretical capitalism's mechanisms fix things, but no one ever takes into consideration how well theoretical capitalism is implemented in the real world.

camccann2• 17 years ago

I suspect what you're thinking is a "perfect market", i.e., an optimally competitive market with several (implausible) characteristics, such as no barriers to entry, all participants being fully informed,

A good rule of thumb to keep in mind is that, from a "competition is the ideal" perspective, profit margins represent market inefficiency. In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth their time, because otherwise someone else will come in and undercut them.

A simple, relatively free market is sometimes a passable approximation of a perfect market, but not always.

randallsquared• 17 years ago

In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth their time, because otherwise someone else will come in and undercut them.

While that's true, it's also the case that the "absolute minimum" rises as people in a society get wealthier, and markets are the fastest method known for generating wealthy societies. The minimum amount for which most people are willing to work is absurdly high by the standards of all but our own very recent past.

cperciva• 17 years ago

In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth their time

No. In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth someone else's time. If I can make widgets twice as fast as everyone else, I can make lots of money.

smokinn2• 17 years ago

I don't believe that profit margins represent market efficiencies. In a perfect market, profit margins represent value perceived.

If your product will save me 10$ but costs you 2$ to produce, charging 5$ is beneficial to both of us.

The problem we have now is that the current large companies believe that they're entitled to receiving the same profits they've had in the past without innovating or even adapting to the future.

If your value proposition is only worth 2$ to me in the future, why should the government come in and tax all companies in my industry because I don't think you're worth paying anymore?

I suppose that's a simplistic view but then again I've always abhorred working at large companies because of the huge number of people I'd see around me contributing very little. I think small companies will very often beat big ones on both quality AND cost because of the lack of bureaucratic overhead. The overhead though is exactly how the incumbents protect themselves from the newer entrants, entrapping government to create barriers to protect themselves.

csuper• 17 years ago

Well I didn't really understand that article, but I know how to fix capitalism. Though you're going have to pay me to find out.

smokinn2• 17 years ago

I submitted this article because there are lots of issues pointed out that I feel very strongly in favor of. (For example, the patent system being, sum total, a net harm). The only problem with it that I have is that it feels kind of half baked. There are so many ideas expressed that it almost seems like it should've been explained in an entire book rather than a blog post.

The reason I submitted it is because I thought and hoped it would generate some very interesting discussion here.

mattmaroon• 17 years ago

It's very naive. There's no telling what breaking up any company that achieves 5% to 10% market share would do to capitalism, but it probably wouldn't be good. Would you bother trying to build the next Google if you knew it was just going to be split into 15 pieces if you succeeded? I would not.

It also says nothing two of the biggest problems our brand of capitalism faces, which are perverse incentives and lack of transparency, both of which were leading causes of the recent meltdown and our current health care woes.

baguasquirrel2• 17 years ago

And good luck fighting network effects. How many Facebooks and LinkedIns do we need? While we could use different social tools, what value is there in more Facebook look-alikes resulting from a breakup? The value of these social tools derives from their network effects.

graemep• 17 years ago

The 5% to 10% is an example aimed at most markets. I would not apply it to Google. I would apply that to pub chains, food and beverages, most manufacturing, retailers, etc.

It does cover at least some perverse incentives with regard to corporate governance.

It is also a summary of a lot of issues. There are links to articles with more details.

philwelch• 17 years ago

Part of the problem seems to be that executives tend to be empire-builders rather than profit-maximizers: that's one of the reasons M&A happen so much more than economists would normally predict. I think the solution is to make breaking up companies somehow profitable for the owners of the broken-up company, so that being broken up could even be seen as a success of sorts. Part of that is going to be cultural but part can be economic.

tkahn62• 17 years ago

"An exception should be made for natural monopolies, but the price of that should be tight regulation, nationalisation, or (best of all) mutualisation."

Tight regulation and nationalization are rewards for growing a "natural" monopoly? This doesn't make any sense. That's not capitalism, it's fascism.

Capitalists would argue that complete lack of government regulation is how you "fix" capitalism.

Almost every point made in this blog post is, at a fundamental level, diametrically opposed to what capitalism is as an economic theory and ideology. The author had drafted a manifesto for an aggressively mixed economy which is ideologically identical to what we have in America today.

dtf• 17 years ago

The author is British, and I think some of these points make sense in the context of the UK. You should see how screwed our privatized rail industry is - itself a kind of "natural monopoly". True capitalism would have the government stop subsidizing them; but then we wouldn't have any trains, and good people wouldn't be able to get to work. Too big to fail again, I'm afraid...

tkahn62• 17 years ago

I interpreted the word "natural" to mean the monopoly was achieved and exists without government subsidy or special privileged. Capitalism says that the only time monopolies are ever "destructive" or have a "snowball" effect where they can't be stopped, is when the government gives them special privileges (i.e. no one else can build a railroad, no one else can set up a telecom company).

If the government puts up road blocks for new companies to enter a line of business, the market isn't truly free and the mega corporations are free to charge whatever they want and do whatever they want. It would be impossible for there to be a "startup" telecom company or "startup" railroad company.

Interestingly enough, the the railroad companies are the most often cited example what happens when the government messes with the free market. The idea is that because the government has already messed up the railroad market it has to continually subsidize the railroad companies or, you're right, "good people wouldn't be able to get to work". Regulation and subsidies beget more regulation and subsidies.

How to fix capitalism

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