A Problem I See With Pure Capitalism

[_D&L_]

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The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom.



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Alan greenspan is claiming that the government left interest rates too low, because the government itself believed that the market could make rationale investment decisions. It didn't. It overspeculated in the stock market. This is the reason why the securities market is so heavily regulated today. Disclosures, market caps, cooling off periods, sophisticated investor requirements, so forth. Its because over speculation in the stock market was deemed by history to have been a market failure and the primary factor leading to the depression.

So while Alan Greenspan may point the finger to the FED for choosing the wrong Economic Policies, in the same breath he acknoledges that potential for market failure, and the need for oversight. Also, while the great depression may have been led by the wrong policies, the quote does nothing to diminish the argument that it was the failure of the government to take economic intervention to "get us out" of the great depression. The fed's wrong choice of economic policy (combined with lax banking regulation - a lack of intervention) led to a depression, the failure of the government to economically intervene aftewards, to not intervene in the cascading bank runs, restor confidence in the market, create an economic stimulus to avert the downward spiral as required by Keynsian theory, etc, made it the "great depression."

On a more philosophical level, for the lassiez fare adovocates, one should also consider that pure capitalism and the corporate structure of business are incompatible. When you form a corporation, you aren't liable beyond the assets of your corporation. You can take risks, like banks did, with huge upward gains, but your downside is limited. If you lose all the money mom and pop depsoited in your bank, investors are personally shielded by bankruptcy law (no piercing of the corporate veil). Even if they weren't, the downside would be limited to the extent of their personal assets. Thus, if left simply to market forces, the corporate entity would many times lack the proper economic incentives to get achieve the "proper" result. Hence, the need for corrective regulation. About the only way we could make business activity and pure lassiez faire capitalism work is if we re-introduced indentured servitude or jail time for insolvent investors, and no hiding behind the corporate veil. So if you own GM stock, and GM goes bankrupt and the stock owners can't afford to pay off the debt, they get sold into slavery. I know, sounds ridiculous, but its the only way to make the ridiculous idea of a pure lassiez economy somewhat workable.

[ojc02]

[ QUOTE ]
Alan greenspan is claiming that the government left interest rates too low, because the government itself believed that the market could make rationale investment decisions. It didn't. It overspeculated in the stock market. This is the reason why the securities market is so heavily regulated today. Disclosures, market caps, cooling off periods, sophisticated investor requirements, so forth. Its because over speculation was deemed by history (perhaps you can argue wrongly, but by most) to have been a market failure.

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Alan Greenspan is claiming that the Fed should never have existed in the first place. The key sentence is this one:

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But the process of cure was misdiagnosed as the disease

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He is of course referring to the gold standard (the cure) and the small boom and bust cycles (the disease).

It is true that he is also saying that GIVEN the fed exists, they should have done things differently but this is really just damage control.

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So while Alan Greenspan may point the finger to the FED for choosing the wrong Economic Policies, in the same breath he acknoledges that potential for market failure, and the need for oversight.

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He definitely never said this, he was a laissez-faire advocate.

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On a more philosophical level, for the lassiez fare adovocates, one should also consider that pure capitalism and the corporate structure of business are incompatible. When you form a corporation, you aren't liable beyond the assets of your corporation. You can take risks, like banks did, with huge upward gains, but your downside is limited. If you lose all the money mom and pop depsoited in your bank, investors are personally shielded by bankruptcy law (no piercing of the corporate veil). Even if they weren't, the downside would be limited to the extent of their personal assets. Thus, if left simply to market forces, the corporate entity would many times lack the proper economic incentives to get achieve the "proper" result. Hence, the need for corrective regulation.

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This is a good point, one that I actually raised with my corporate finance professor just last week. Although under laissez-faire the structure of bankruptcy laws would no doubt be different, there may still be an opportunity for +EV situations that wouldn't be possible if there was full culpability for losses. My professor said that there was a strong taboo against going bankrupt but that companies already on the way down might still take advantage of the bankruptcy laws.

My real question though is: Isn't this situation worse currently than it would be under laissez-faire? Under laissez-faire there would certainly be no state sponsored bail-outs that the airline industry (for example) has been the recipient of.

Really investors just have to take this possibility into account when considering an investment, exactly as they would do under laissez-faire.

[David Sklansky]

"I am always annoyed by people that say things like: "The problem that I have with pure capitalism is that in any system where everyone kills and eats babies . . ."

It annoys the [censored] out of me.

Capitalism is a system based on private property in all orders of goods (producer as well as consumer) and freedom of exchange, facilitated by a commodity money. Period."

OK fine. So what. If you are telling me that the system I am describing isn't capitalism, it doesn't change the fact that in such a system some people should not be averse to stealing. Unless you contend that no one advocates such a system, whatever you want to call it, the debate should be about whether my contention makes sense.

[Darryl_P]

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...the debate should be about whether my contention makes sense.

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Your contention doesn't relate to pure capitalism because those +EV stealing situations don't arise as an inherent part of the system. They arise only if someone makes a mistake.

[_D&L_]

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Quote:
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So while Alan Greenspan may point the finger to the FED for choosing the wrong Economic Policies, in the same breath he acknoledges that potential for market failure, and the need for oversight.


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He definitely never said this, he was a laissez-faire advocate.


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If market speculation isn't synonymous with market failure, what is it? If I give you the option to borrow money at lower interest rates, how does that cause you the investor to over speculate?

Maybe it exacerbates an existing problem, but wouldn't you have a tendency to overspeculate at any given interest rate?

Greenspan may be trying to blame the Fed on one hand, but I don't think he can do it with this argument without admitting to a market failure. If you admit a market failure, then you can ask whether certain regulations can make it better. E.g. limits on investment leveraging, require banks to hold sufficient reserves, forcing mandatory disclosure of financials of listed companies, requiring certain ratios of sophisticated investors in new offerings, etc.

[Borodog]

[ QUOTE ]
"I am always annoyed by people that say things like: "The problem that I have with pure capitalism is that in any system where everyone kills and eats babies . . ."

It annoys the [censored] out of me.

Capitalism is a system based on private property in all orders of goods (producer as well as consumer) and freedom of exchange, facilitated by a commodity money. Period."

OK fine. So what. If you are telling me that the system I am describing isn't capitalism, it doesn't change the fact that in such a system some people should not be averse to stealing. Unless you contend that no one advocates such a system, whatever you want to call it, the debate should be about whether my contention makes sense.

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Your contention is irrelevent. It doesn't matter whether or not in your hypothetical system some people would not be averse to stealing (obviously, in any system at all there will exist people who are not averse to stealing; duh), because individuals always invest in disincentivizing violations of their property. Even if someone is not morally averse to stealing you stuff, they are probably averse to being shot.

Social order is created not only by the respect of others' property rights (which certainly cannot come from government) but by individual investment in the deterence of violations of those rights.

[chezlaw]

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OK fine. So what. If you are telling me that the system I am describing isn't capitalism, it doesn't change the fact that in such a system some people should not be averse to stealing. Unless you contend that no one advocates such a system, whatever you want to call it, the debate should be about whether my contention makes sense.

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but in any system there will be times when its +EV to steal (or they believe its +EV) in which case they should/will always attempt to steal. (I'm not sure why this should be considered a problem)

but as usual is matters we mean by +EV because it can't just be a money calculation. No system could work if all people are trying to do is maximise their $$$.

chez

[southerndog]

David.. I've lived in Thailand for the past 7 months.. Many people make $100 per month or less, while many others drive mercede's and bmw's... Despite this fact, crime is not rampant here. Why is that?

Why is it that many here would be well off even by western standards, while others cannot afford a moped, people aren't justifying crimes?

[Mickey Brausch]

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I've lived in Thailand for the past 7 months.. Many people make $100 per month or less, while many others drive mercede's and bmw's... Despite this fact, crime is not rampant here. Why is that?

[/ QUOTE ]Comparing percentages across the two populations, would you say that Thais are, generaly, more religious than Americans?

[southerndog]

[ QUOTE ]
[ QUOTE ]

I've lived in Thailand for the past 7 months.. Many people make $100 per month or less, while many others drive mercede's and bmw's... Despite this fact, crime is not rampant here. Why is that?

[/ QUOTE ]Comparing percentages across the two populations, would you say that Thais are, generaly, more religious than Americans?

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I really don't know.. I think its like 98% are buddhist. But Buddhists don't really seem engulfed in their religion, the way catholics protestants do.. It doesn't seem like a major part of their lives.. I do think they believe pretty strongly in karma.. But again, i'm not really sure.

I don't think anyone that visits thailand would describe Thai's as being "deeply religious".