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The real reason that capitalism is so crash-prone.

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Re: The real reason that capitalism is so crash-prone.

#21

Post by jerf »

I think this is a better way of thinking about it than "greed". The next natural conclusion that follows is that nobody actually knows how to fix this. It may even be an intrinsic attribute of a growing economy; it may literally be impossible to avoid, short of not having a growing economy.

Centralized management makes the lockstep-motion problem radically worse, solving the positive feedback problem by nearly eliminating feedback and cutting straight to the failure case. ("But the central planners can use feedback!" - not on even remotely the same level of granularity, by definition of "central".) Cutting down the positive feedback loop powering the bubble pretty much inevitable involves cutting out the positive feedback loop driving the economy in general. What's left, really?

Rather than preventing crashes, we probably ought to focus on having the wisdom to be prepared for them when they come.

Re: The real reason that capitalism is so crash-prone.

#22

Post by chimariko »

fnid wrote: post #15
chimariko wrote: post #8

Earlier quoted context omitted.

Sure, what I mean is that the pursue for individual success is a key feature of Homo sapiens species. Traditional capitalism declares it as its main trait. The fact that participants of a capitalist system are encouraged to act according to their natural behavioral patterns makes capitalism the most stable system ever known.

Capitalism is one of the few social constructs that encourages negative traits. Who is to say that selfishness is better than altruism? Altruism seems to be a human trait as well -- we do act altruistically on occassion. Is it impossible to build a financial system based on altruism? We tend to think quite highly of those who give of themselves more than take. Why don't we build a financial system that rewards those…

Capitalism creates an environment where both positive and negative traits can be materialized. Everyone agrees that altruism is better than selfishness in moral sense. However one must be quite civilized and have high quality of life and standard of living to exercise altruism. Those whose individual demands are not met simply cannot afford altruism. A financial system aimed at rewarding those who think of others (surprise!) exists right now. Those who have extra money, time or other resources can invest them in those who are in need through loans, grants and scholarships. I'm sure any innovative ideas in this area would be accepted by the HN community and society in general. This proves that the current society/economy is open for a change toward a more altruism-encouraging system.

Western society and morality is based on the relative tolerance to innate human desires and wishes in contrast to other cultures. That's why it has created a financial system that made the countries that chose it developed.

"Males have a desire to procreate, but rape is forbidden. We have a desire to promote the success of those with our genes, but discrimination is forbidden."

Morality restricts certain ways in which a human can fulfill their needs. However rape is not the only way to procreate and discrimination has very little to do with promoting the success of one's genes. Today's social and financial system is successful among other factors because it provides equal and legitimate ways to have sex or multiply for everyone.

We are at crossroads, we have opportunity to choose the way financial system would look like in the future and that's why it is especially important to understand why the current financial system is successful. It is, despite difficulties, which, for example led only to a 2% drop in US GDP growth rate in 2008 compared to 2005. The GDP is still increasing! You can have look at http://www.data360.org/dsg.aspx?Data_Set_Group_Id=353&co... (US GDP statistics) to see how stable economy is. These disturbances are annoying, but their impact on lifestyle is minor.

"Imagine saying, "You're so greedy!" Now imagine saying, "You're so giving!" It's a totally different feeling. Imagine a society that promotes the giving over promoting the greedy."

What does this have to do with the initial argument? Could you please point out where I disagreed with this?

Re: The real reason that capitalism is so crash-prone.

#23

Post by scythe »

jerf wrote: post #21

I think this is a better way of thinking about it than "greed". The next natural conclusion that follows is that nobody actually knows how to fix this . It may even be an intrinsic attribute of a growing economy; it may literally be impossible to avoid, short of not having a growing economy. Centralized management makes the lockstep-motion problem radically worse, solving the positive feedback problem by nearly elimi…

Hyman Minsky argued exactly that for a long time, and he's only recently been taken seriously:

http://www.boston.com/bostonglobe/ideas/articles/2009/09/13/...

Re: The real reason that capitalism is so crash-prone.

#24

Post by abefortas »

jerf wrote: post #21

I think this is a better way of thinking about it than "greed". The next natural conclusion that follows is that nobody actually knows how to fix this . It may even be an intrinsic attribute of a growing economy; it may literally be impossible to avoid, short of not having a growing economy. Centralized management makes the lockstep-motion problem radically worse, solving the positive feedback problem by nearly elimi…

Some people are against having a growing economy. Obviously the economy cannot grow indefinitely.

Re: The real reason that capitalism is so crash-prone.

#26

Post by johnnybgoode »

nazgulnarsil wrote: post #7

pat explanations were getting old a year ago. please don't upvote this crap.

I have been seeing a lot of these "Look at this forgotten/unknown economist who predicted/explained everything!" type of articles. Yes, they are probably almost always wrong, but how is everyone on HN supposed to know?

Re: The real reason that capitalism is so crash-prone.

#27

Post by anamax »

arihelgason wrote: post #13

"What boosts a firm’s stock price, and the boss’s standing, is a rapid expansion in revenues and market share. Privately, he may harbor reservations about a particular business line, such as subprime securitization." The problem is misaligned incentives. Cash bonuses paid out long before the consequences of decisions become clear create problems. Financial institutions can partly remedy this by replacing annual bonus…

> The problem is misaligned incentives.

That's an appealing theory, but the only evidence produced to date that compares the performance of folks who got long-term compensation with those who got short-term shows that the firms that used short-term compensation did better than the ones that used long-term compensation.

http://causesofthecrisis.blogspot.com/2009/09/three-myths-ab...

Re: The real reason that capitalism is so crash-prone.

#29

Post by Perceval »

hy3lxs wrote: post #4

Great read. My two favorite quotes: The Prisoner’s Dilemma is the obverse of Adam Smith’s theory of the invisible hand, in which the free market coördinates the behavior of self-seeking individuals to the benefit of all. Each businessman “intends only his own gain,” Smith wrote in “The Wealth of Nations,” “and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his i…

It's unfortunate that the article uses the Prisoner's Dilemma as its example, because the Prisoner's Dilemma is actually not the best game model to set up as the opposite of the Invisible Hand. A more appropriate model would be the Tragedy of the Commons, which was proposed by a fellow named Garrett Hardin in an article in a 1968 edition of Science magazine.

If you are interested in formal modeling of coordination problems, an interesting overview can be found in Elinor Ostrom's book Governing the Commons. In chapter one she gives an overview of the Prisoner's Dilemma, the Tragedy of the Commons, and the Logic of Collective Action (Mancur Olson's theory). After reviewing these abstract formal models, she looks at other possible institutional solutions for coordination problems.

Here are some links:

http://en.wikipedia.org/wiki/Prisoners_dilemma

http://en.wikipedia.org/wiki/Tragedy_of_the_Commons

http://en.wikipedia.org/wiki/Logic_of_Collective_Action

http://en.wikipedia.org/wiki/Coordination_game

http://en.wikipedia.org/wiki/List_of_games_in_game_theory

Re: The real reason that capitalism is so crash-prone.

#30

Post by kburn »

kiba wrote: post #16

Failure is a feature of capitalism. It is to be expected. However, what shouldn't really happen is a cluster of failures. That's caused by misinformation in the pricing system. Real saving rate doesn't matched up with interest rate, so people are being fooled by non-existent capitals. At least that's how I understand it.

Absolutely. Clusters of failures are just popping bubbles built on incorrect information.

Everyone knows that everyone is after more money, it's a prime motivation. This makes it easy to manipulate if you can make a credible looking "investment".

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