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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.

#31

Post by Confusion »

abefortas wrote: post #24
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.

As long as the population grows or technology keeps improving, an economy can continue to grow.

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

#32

Post by Perceval »

abefortas wrote: post #24
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.

The traditional citations here are The Club of Rome and various environmentalist that reject the possibility of sustainable industrial civilization.

The Club of Rome published a famous book in 1968 called The Limits to Growth. They are seen as making a kind of modern day Malthusian argument.

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

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

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

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

#33

Post by DanielBMarkham »

Perceval wrote: post #29
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 pr…

Any quick one-liners or easy-to-understand wisdom that you've gained from the material? The entire subject area looks immensely fascinating, yet very dense at times.

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

#34

Post by abefortas »

Confusion wrote: post #31
abefortas wrote: post #24

Earlier quoted context omitted.

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

As long as the population grows or technology keeps improving, an economy can continue to grow.

Fine, but obviously the population is going to stop growing.

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

#35

Post by timwiseman »

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…

If a decision proves to have been reckless/short-sighted a few years on, bonuses can be retracted.

Retracting something already given can be difficult, especially if the employee has moved on to another place. There are ways, of course, with "clawback clauses" and similar things, but that seems unnecessarily clunky if I understand them correctly.

Basing bonuses on long term performance after it has had long enough to play out and (at least most of) the consequences known may very well be a good idea though.

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

#36

Post by Perceval »

DanielBMarkham wrote: post #33
Perceval wrote: post #29

Earlier quoted context omitted.

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 pr…

Any quick one-liners or easy-to-understand wisdom that you've gained from the material? The entire subject area looks immensely fascinating, yet very dense at times.

Yes, game theory can get inscrutably complex, even through the initial models are pretty simply to set up and understand.

The basic components of any coordination/cooperation problem are the same: you have actors with preferences, you have a situation with rules that they can't change, and you have outcomes with payoffs/penalties depending on whether the actors choose to cooperate or not.

Most of the problems revolve around how to get people to cooperate, when defection is attractive for some reason. Most of the solutions involve making sure situations are not one-off interactions, that all actors have information about what each other is doing, and that in the case of multiple actors using common resources, you need to have some form of monitoring and enforcement.

If actions are one-off, the temptation to act selfishly is higher than if actors know they are in a long-term situation in which they must choose to cooperate or defect time and time again. In this way information such as reputation can then function as a signaling device to other actors.

Games such as the Prisoner's Dilemma work only when presented as a one-off situation in which both actors have no information about what they other is going to do. So the solution is 1) make sure you're not setting up one-off interactions, and 2) make such actors are in an information rich environment wherein they can make appropriate signals about their intentions and past behavior.

Most of the other games, such as Tragedy of the Commons or Battle of the Sexes, have stable solutions if you repeat them and increase the information available to the actors. The equilibrium solutions are called Nash Equilibriums, after John Nash, the paranoid schizophrenic mathematician featured in the movie A Beautiful Mind.

http://en.wikipedia.org/wiki/John_Forbes_Nash,_Jr.

A bit more than a one-liner, but hopefully this helps a bit.

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

#38

Post by f99b9r »

you people talk as if capitalism is some force of the universe allowed to act freely. capitalism is engineered by humans. the core of this engineering is the federal reserve. starting with alan greenspan, this became an exercise in malengineering. greenspan, and now bernanke, have continually increased the amount of liquidity in the system to game it for short-term growth.

a crash is something unpredictable. the failure of an economy based on rampant currency abuse is not at all unpredictable...indeed austrian economists would tell you the failure is assured

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

#39

Post by Confusion »

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.

As Marx correctly understood, capitalism is best likened to a force of nature: it doesn't have any moral basis and can have both morally positive and negative consequences. This is why we need governments to keep capitalism in check: unchecked capitalism also leads to activities we find morally unacceptable. Like evolution favors only those traits that add reproductive value, capitalism favors only those activities that increase capital. This may mean obtaining a monopoly, deceiving customers and competitors, employing slaves and generally any other activity we disapprove. In a fully rational market, the customers would not accepts those practices, but as Keynes said: the market can stay irrational longer than you can stay solvent. Moreover, capitalist principles cause an important part of the customers not to care about the immoral consequences: they don't see them because the market isn't transparent or because they do not want to see them. We therefore cannot trust the market to merely expose the positive sides of capitalism. Failures, even clusters of failures, are to be expected and can only be avoided by government intervention. As long as a government lauds the free market and has the irrational expectation that the market will straighten itself, we will continue to suffer the consequences of unchecked capitalism.

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

#40

Post by pyre »

Locke1689 wrote: post #25
3pt14159 wrote: post #9

The real reason it is so crash-prone => fiat currency and a fractional reserve banking system.

The vast majority of economists do not believe this to be true.

The vast majority of economists thought that such a crash couldn't happen. They thought that it was impossible because we are so much smarter now than we were back in the 1920's.
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