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The Failure of Capitalism!

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The Failure of Capitalism!

from JoeUser Forums

 

Capitalism only works when society keeps it in check through government. The truth of this statement is illustrated by the pandemonium we see unfolding in the market today. This chaos is thanks to decades of deregulation which has allowed a small number of rich folks to get richer while the majority of society has suffered. It has allowed corporations and businesses to operate without impartial oversight thanks to the 'honor system' belief that they would police themselves and act in the best interest of the greater good. What has happened is instead the exact opposite. With much of the government regulation and oversight relaxed and pulled from many sectors of the economy we have seen business after business make decisions that harm the common good in order to increase their profits. It's an age old maxim that is at the core of human nature; if we know that no one is looking and we won't get caught, the temptation to break the law in order to benefit ourselves becomes overwhelming. 

A very simple example of this is the reasoning many folks run through when boarding a public transit train in a big city. Many cities public transit systems work on the honor system. You're supposed to buy a ticket for 1 or 2 dollars at the platform and you're good to ride for a set time (a few hours, the whole day, whatever) While you're supposed to buy a ticket by law, there is no person or machine that checks you every time you board the train. Chances are pretty good that more often than not you can ride this train without ever buying a ticket and you probably won't get caught. Of course there are transit police that periodically check people for tickets and if you don't have one, you get a fine. But you notice that on average you maybe only happen to run into a transit cop once a month. If you only find yourself riding the train once in a blue moon, you realize your chances of not getting caught get even better. The next part of the equation then becomes what the consequences of getting caught without a ticket are. If it's only a 20 dollar fine, most folks will realize that they're better off not buying tickets on a regular basis and paying the odd fine once every month or two. If it's a 200 dollar fine and you find transit cops checking you at least once a week, it becomes a much different story. While this is a very simple example, it pretty much applies across the board in how people run a risk/benefit analysis. Major auto companies use this exact same thinking when calculating whether or not to run a recall. Same goes for food producers, toy manufacturers, the list goes on and on.

So what does this have to do with anything? Well, our present situation has gotten so bad that now captains of industry, the very folks who championed deregulation for years are now changing their tune and calling for the government to step in again. Over the last two decades government oversight has been wittled away to almost nothing in many areas; the transit cops now only board the train once every couple of months. Because of this, gangs and bullies have moved in and set up shop. While everyone used to rejoice in getting a 'free ride' they now realize that this lack of enforcement has allowed thugs with muscle to bully everyone else, even charging their own rates to anyone who wants to board. If the transit cops do happen to catch one of these gangs, they either look the other way or take a cut of the gangs income. What this has led to is an unsafe train which is now running barely maintained since the coffers that provide the upkeep costs have been near empty for a long time. Anyone who wants to ride this unsafe train does so at their own risk and has to pay usurious rates to thugs that have hijacked it. If you happen to catch a bad day when it jumps the tracks, tough luck pal!

This goes back to another maxim that has proven itself true down throughout the ages; if you break the rules, you break the system.

Running our economy on the honor system has allowed many folks to break the rules many, many times with little or no repercussions. We've made our bed, and now it's time to sleep in it!

If you don't believe this shift of thinking, just look at the letter being distributed by major U.S Airline Companies;

An Open letter to All Airline Customers:

Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now.

For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities. To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers. Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.

Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.

The nation needs to pull together to reform the oil markets and solve this growing problem.

We need your help. Get more information and contact Congress by visiting www.StopOilSpeculationNow.com

Signed:
Robert Fornaro, Chairman, President and CEO; AirTran Airways
Bill Ayer, Chairman, President and CEO; Alaska Airlines, Inc.
Gerard J. Arpey, Chairman, President and CEO; American Airlines, Inc.
Lawrence W. Kellner, Chairman and CEO; Continental Airlines, Inc
Richard Anderson, CEO; Delta Air Lines, Inc.
Mark B. Dunkerley, President and CEO; Hawaiian Airlines, Inc.
Dave Barger, CEO; JetBlue Airways Corporation
Timothy E. Hoeksema, Chairman,Pres.and CEO; Midwest Airlines
Douglas M. Steenland, President and CEO; Northwest Airlines, Inc.
Gary Kelly, Chairman and CEO; Southwest Airlines Co.
Glenn F. Tilton, Chairman, Pres. and CEO; United Airlines, Inc.
Douglas Parker, Chairman and CEO; US Airways Group, Inc.

In a nutshell what this says is "lack of government oversight has allowed other people to game the system to their favour and now our industry is facing collapse!" This leads to another universal truth- folks will always gripe about the authorities until they are the victim of a crime. It is only when this happens that the same folks will turn around and demand the authorities intervene on their behalf.

Don't think of this as another liberal vs conservative battle. Please kindly flush that rubbish out of your head when you consider the current state of the economy. Folks from both sides of the aisle are equally to blame for what is happening now. It's time to put aside the hologram illusion of democrat vs republican pissing contests (which are mostly just show to distract you, in case you didn't know)  The first step is restoring accountability and transparency. The way to do that is to re-enact many of the government regulations that were stripped in the last few decades in the name of free-markets and globalization. And enforce those regulations! Once accountability and transparency exist in the market again (they sure don't exist now as illustrated by the smoke and mirror show called 'structural investment vehicles' and 'exotic debt instruments' which are fancy words for creating fake money)

It's time for the transit cops to board the train again and start checking for tickets. And charge back fees to the thugs who have been running it for their own profit these last few years!

politics
12,653 views 31 replies
Reply #26 from Stardock Forums Top

The fact that you trust the people with the military power (IRS and Army) to protect the little man I find quite scary, and plain stupid
End of quote

Where did the IRS ever come into this?!?! I never mentioned them at all. I never said that we should blindly trust the military either. I did say that the military is an example of a large publicly run organization that works well, if managed properly. These organizations are necessary for a society to function.

Every market cycle has relative winners and losers. Each and every one of us should shoulder the burden of our voluntary choices, and not blame the cycle which both blesses and curses us. 5 years ago, you didn't hear people saying "OMG, these people are offering us too much for our home. We're going to cut the price by 10%." Now, too many want "protection" only against the downslope of the cycle, something that is impossible in a market-based economy.
End of quote

Yes, and where government oversight and regulation is necessary is when the actions of a few in the quest for their own personal gain threaten everyone else. Again, going back to what I said earlier of PUBLIC vs PRIVATE. When the actions of a private person or company threaten or degrade a public asset, or the public well being, action is necessary. Government, from a democratic standpoint, is supposed to be your protector. If they're not, you vote them out of power!

Let me give you a real-world example that I discovered in my travels a few months back.

Kingsville, Texas.

Long story short, a company wanted to mine the uranium in the area. Government oversight was lax (we are talking Texas here) preferring to allow the company to go in and retrieve the uranium with as little red-tape or interference as possible (hurts profits you know!) At some point along the way, this company contaminated the local water tables with uranium. It was entirely 100% avoidable but happened due to a lack of proper safety measures and poor practices. Practices that meant faster retrieval time to cut costs!

So, when I stayed in the area a couple months back the hotel had a big sign at the front desk warning us not to drink the water, due to the fact that it's partly irradiated! I asked around thinking this was a joke they pull on tourists but found out that it is indeed the real deal. See where I'm going with this?

The government SHOULD have stepped in and ensured this company used proper procedures to safely mine the uranium. Instead that sort of thing was frowned on as more unnecessary red tape. Company, with profit as main motive decides to cut corners and work faster. In response, the entire community's water tables are now contaminated. To be fair it's not so radioactive that it'll kill you, but you certainly wouldn't want to raise some kids there drinking the tap water!

Reply #27 from PolMach Forums Top
That, my friend, is why you use a Pigovian tax ...a market-friendly and growth-friendly way to deal with externalities, like your Uranium contamination.

Rather than ban uranium mining, you simply charge the company to fix the damage they cause by their production. The company will either find cleaner methods, or minimize production to minimize their Pigovian tax payments. It's really amazing how companies will innovate to avoid a Pigovian tax...

Sorry, but this is hardly the failure of capitalism. When government-run industries from, say, Venezuela out-compete American enterprises, then capitalism has failed.

Last time I checked, we're the ones selling IPods to Russia, not the other way around :p



Sins of a Solar Empire: Rebellion
Reply #28 from JoeUser Forums Top
Sorry, but this is hardly the failure of capitalism. When government-run industries from, say, Venezuela out-compete American enterprises, then capitalism has failed.
End of quote


Indeed!

And I love your pigovian tax! Capitalism at its finest!
Reply #29 from JoeUser Forums Top
Capitalism only works when society keeps it in check through government
End of quote

Not necessarily (depending on if you mean society keeping it in check in all situations, or some) - there are some situations where it is far better for government not to intervene in the markets, since they can end up making things much less efficient and make everyone worse off as a result. There are other cases where the market failure is so great that government intervention, although not perfect, would be a better proposition.
Meanwhile, since capitalism is effectively the private ownership of assets (and the operating of these for profit), saying it is a failure implies that the next best alternative is better. The next best alternative, that is the public ownership of assets with an absence of profit, is communism, and compared to capitalism is an absolute disaster economically speaking. So no, capitalism when evaluated against the alternatives is certainly not a failure but rather a stunning success.

The truth of this statement is illustrated by the pandemonium we see unfolding in the market today. This chaos is thanks to decades of deregulation which has allowed a small number of rich folks to get richer while the majority of society has suffered
End of quote

Well my understanding of the root causes of the various problems in the markets (I'm assuming this is referring to financial and/or property markets? I'm not 100% up to date on US current affairs though so feel free to clarify if I've misinterpreted) is far more to do with a failure of contracts and lack of foresight into peoples incentives than capitalism. That is, companies didn't seem to think through that if they rewarded people when things were good, and could only punish them with unemployment when things went bad, then they were encouraging excessive risk taking. The problem with this? You end up with employees of a company (who effectively make up that company) then turning into risk lovers and taking on 'projects' that would be expected on average to yield their company a loss rather than a gain. A quick example: Say you have a possible project that you can choose to undertake on behalf of your company; If things go well it yields $200,000. If things go badly, the company loses $2,000,000 and you lose your job. The problem is that while the company will suffer a massive loss if this project fails, your loss is restricted to whatever your salary is, such that you don't choose the profit maximising choice.


However as with anything, the solution is rarely simple. Firstly, the problem could just be due to a lack of information/awareness of the problem. If the company realised it was encouraging such behaviour then it would be in it's interests to change the contracts at once. Hopefully given what has happened many companies will have learnt their lesson regarding this. The case for government intervention in this situation would therefore be to look at what caused the failure of investors to realise this problem and change it, or alternatively the people they appointed to manage the company to realise it+rectify it. Such intervention to rectify market failure (imperfect information) could therefore be justified. However the most efficient method is still to rely on private ownership and the maximisation of profit as a driving force. This is because it is the most efficient one, that maximises the wealth of the country.

It has allowed corporations and businesses to operate without impartial oversight thanks to the 'honor system' belief that they would police themselves and act in the best interest of the greater good. What has happened is instead the exact opposite
End of quote

Capitalism isn't about companies abiding by an "honor system", it's about them maximising profits. Thus if behaving ethically would enhance their reputation and generate increased sales as a result, the cost of such behaviour could then be justified. However if the costs would outweigh the benefits, then don't expect companies to undertake such action. That's the advantage of a capitalist system - you can trust companies to (generally) take the action that maximises their profits. So long as there aren't harmful negative side effects to this to society that aren't incurred by the company, then this is fine. Where you have such externalities, then you have a case for government intervention if the externalities are of sufficient size. For example if a company is producing an item that lets off harmful gases, they will suffer a small cost, but society a much larger one. The ideal solution is for society to then impose a tax on that product equal to the environmental damage produced, so when the company then chooses the profit maximising output for them it is also the output that maximises the benefit to society. This is of course making various simplistic assumptions (e.g. that society knows the exact amount of damage caused so the tax imposed is the right one), but is to help illustrate the point that you can use the capitalist framework to maximise society's benefit.

As for your letter, it is only focusing on the dangers of markets open to speculation. The downside is that such markets are likely more volatile. The advantage is that they are generally much more efficient, with prices able to reflect the actual value of a good much faster. That is, if an item is overpriced by the markets, if you have speculators then they can step in and short that item, knowing it's overvalued. When the price falls back to it's real level they've made money, and it works same way for price falls; buy it when you believe the price is below what it should be, and when it returns to it's true level you've made money. It's not all perfect, and the advantages are much more general and dispersed to be noticeable compared to the obviously more noticable problems say of a speculative bubble.

Not to say there should be no regulation of such markets though - for example insider trading should be stamped out wherever possible since that can have massive repercussions on the market efficiency. That is it results in much higher buy-sell spreads on the part of traders, who in turn have to insulate themselves from people with inside knowledge trading on it, and in extreme cases can lead to a complete failure of the market (e.g. if insider trading is rampant, and someone wants to buy an item you're selling for $10 a unit, then you're going to think they know something you don't, and that $10 is too low, so you won't sell. If they want to sell you them at $10, again you'll think that $10 is too high, and so won't sell).


The way to do that is to re-enact many of the government regulations that were stripped in the last few decades in the name of free-markets and globalization. And enforce those regulations!
End of quote

Not all regulations are good though. In many cases they needlessly complicate things, lower efficiency, and end up hurting the same society that introduced them. In some cases they are needed, but a 'the government knows best' approach is just as dangerous as one advocating the abolishment of all regulations.
Reply #30 from JoeUser Forums Top
Capitalism is the worst possible socio-economic system around which to organize a society... except for all the other systems.
Reply #31 from JoeUser Forums Top
The airlines are hardly a good example of sound business or capitalism. They have always relied on the government to bail them out as they have never been able to properly function as a real business so it's no surprise that they will cry for Uncle Sam to once again bail them out because they simply can't efficiently run their business.

Yes, SOME government regulation is needed to control the economy, and we already have that. The idea that our business climate is some sort of wild west where nobody answers to anybody is absurd.

Many of us are old enough to remember the run away inflation that plagued the economy prior to the very steps Reagan started to bring it under control. You conveniently left out that little fact. I personally do not want to see a return of that sort of skyrocketing inflation.

The current situation will be, in the grand scheme of things, no more than a blip on the radar. A period of market correction and adjustment, nothing more. We've seen some inflation as a direct result of high oil prices caused by a number of factors, but even that will flatten out in time and the economy will strengthen when it does.


While the economic gloom and doom makes for good fodder for the media talking heads, in the end it's just another Chicken Little story.