The Failure of Capitalism!

Published on July 12, 2008 By Artysim In Politics

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!

Comments (Page 2)

Adventure-Dude

on Jul 17, 2008

I never said the government should run the entire economy lock stock and barrel. I believe in a mixed economy, in which free enterprise can innovate and compete but at the same time government needs to be there to ensure that everyone plays fair.

We are in agreement.

And as an aside, there are plenty of government businesses that run well... the fire department, police department, libraries, water and sewer

Maybe I didn't specify. Name a Federal/National Government business that runs well.

Artysim

on Jul 17, 2008

Maybe I didn't specify. Name a Federal/National Government business that runs well.

Well, the military is one I would say. Another would be the postal service. Many nations still have nationalized power and water companies. Here in Canada we have universal healthcare, although it's run on a province by province basis, and I'm quite happy with the government provided healthcare here. But anywho, that's not the point. I agree that the government shouldn't exist to run all businesses, it should exist to regulate and provide oversight of business. There are however certain interests which should indeed be owned and run by the government, but they must meet a very demanding criteria!

The criteria that calls for government owned operations is this- it has to be a critical service that is going to be paid for with public money regardless, and for which the motive should be to provide that service rather than turn a profit. For example, the justice system and correctional facilities. Jails that are owned by private interests are a very dangerous thing as their motive is to get as many prisoners as possible, since they then end up getting more money from the government for each prisoner they house. See where I'm going with this? Even if all the jails were privatized, their costs would still be paid for by your tax dollars. Public money (your tax dollars) going into private hands so they can make a profit. That's where we start running into trouble, and where instead PUBLIC assets should remain in PUBLIC hands!

So then what defines a critical service? Something that we should all have access to. Hence, a 'public' asset. As to what should remain in the realm of public vs private is a great debate that goes well off the scope of this discussion. Some folks think the only thing that should be public is the military. Others think that everything from the oil company to phone service and potable water should be nationalized. It is indeed a complicated discussion that will never end in my opinion.

Stating that by default private ownership suddenly and magically makes everything more efficient and better than public ownership is simply false. How? Why? The truth is that at the end of the day, there is no inherent difference between the two that determines which one is better. If managed poorly, a service will be delivered poorly to folks regardless of the ownership. There are plenty of examples of private companies that have sown incredible grief to turn a profit (Enron, anyone) and state run companies that have done pretty good. During Chile's economic turmoil their nationalized zinc mine was one of the few companies in the entire country that managed to turn a profit and actually input surplus capital into their economy. On the other side of the coin there are of course government boondoggles that were managed poorly and so the end result was no surprise.

One example that was a mistake in privatization was when Great Britain privatized their railway system. There was much talk that privatizing their train system would suddenly revolutionize everything and make it all more efficient, lower costs and all around better. Instead, the exact opposite happened.

When their train system went into private hands, the goal was no longer to deliver timely train service. The goal of the various companies involved was to make as much money as possible, and their vehicle to do that just happened to be train service. So, instead what happened is they cut all kinds of corners that never would have happened under the nationalized systems. Preventative maintenance, safety checks, scheduled downtimes and overhauls all got cut back to bare minimum in order to cut costs.

The actualy quality of service dropped, trains ran less regularly as they had increased break downs and technical problems (thanks to cost-cutting) but at the same time these companies raised the prices they were charging.

Another failure in privatization would be New Zealand's telecom system shortly around or after the year 2000 (2002?) When it got snapped up by Verizon. They busted the union, laid off most of the employees and offered to hire them back as private contractors. Pandemonium ensued, service levels for phone and internet went down the drain while of course prices for those now substandard services went up. After a few years the government of New Zealand had enough and had to step in because so many voters were complaining of the terrible service they were getting. Verizon, having made it's healthy profit through cannibalizing the phone company, gladly walked away!

Daiwa

on Jul 17, 2008

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.

I stopped reading right there - told me you have no clue (really, I mean no clue) and that everything to follow was going to be simple propaganda.

Frogboy

on Jul 17, 2008

I wasn't going to bother to respond to it because I don't accept the premise as valid and therefore everything from there on is irrelevant to me.

If someone says that the flying spaghetti monster created the universe and I choose not to respond that doesn't, by default, make the hypothesis true or accepted.

Dr Guy

on Jul 18, 2008

Here in Canada we have universal healthcare, although it's run on a province by province basis, and I'm quite happy with the government provided healthcare here.

However many are not, and label it a dismal failure. What is the reality? There are countless faults with the plan, there are countless faults with the US plan. Neither is perfect (see previous statement about any creation of man). However the waste and inefficiency of government (by default and fact) make any universal health care naturally deficient, and the very nature of government prohibits the correction of that fault.

They are still trying to correct the faults in the US plan. Moving it to an inherently flawed plan would not be a correction, but an end to a process of refinement. A flawed plan that in the end, produces better empirical results than the government run ones.

Eagle Seven

on Jul 19, 2008

Any analysis of history will show that human governments overwhelmingly are engineered to grow the wealth of those that have power (usually via military force) over the subjugated peoples. One could hardly argue the regulations of Louis XVI benefited the poor of his country.

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.

Indeed, our system is not perfect, but it does allow for unprecedented social mobility.

Daiwa

on Jul 19, 2008

Any analysis of history will show that human governments overwhelmingly are engineered to grow the wealth of those that have power (usually via military force) over the subjugated peoples.

Except here.

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.

The IRS usually goes where the money is, not after the little man, and the Army hasn't stopped by my house in, oh, a coon's age.

Eagle Seven

on Jul 19, 2008

I politely have a slightly different perspective on the airline's difficulties, and speculation in general. Oil speculators are commodity gamblers, in that they are betting against future prices by selling short or buying on margin, so to speak. As such, the trading is high risk, with the potential for big profits and big losses. With an "unregulated" speculation market as we have now, it will take one large drop in the price of oil to ruin the fortunes of many many speculators.

There is speculation on almost every commodity humans trade, and yet we only hear about it now, when oil prices are so high? How can the speculators guess that oil prices will go up in the future, and thus make major money buying futures contracts?

Simply put, with the growing demand in places like China and India, combined with the US's regulations against oil drilling and exploration, mean that it is a very good bet that oil prices will be going up. Hence, speculators are willing to buy oil at a price higher than market value, expecting to sell when the market value exceeds their buying price.

Furthermore, you say yourself that speculators never actually touch the oil they are "trading." It's much like two banks passing off a promissory note on a house, when they have never seen said house.

So, while yes, speculators have increased the oil prices marginally, they have been doing so for the past twenty years, and are able to now because such regulatory agencies such as OPEC and the US Government have stabilized these high prices.

In summary, high oil speculation is a symptom, not a cause, of the dysfunctional international oil markets (oil cartel's operating with massive demand). Speculation makes for a wonderful straw man, but it isn't the source of our problems, IMHO.

Daiwa

on Jul 19, 2008

In summary, high oil speculation is a symptom, not a cause, of the dysfunctional international oil markets (oil cartel's operating with massive demand). Speculation makes for a wonderful straw man, but it isn't the source of our problems, IMHO.

I'm in agreement with you there. I often wonder "What took so long?"

With an "unregulated" speculation market as we have now, it will take one large drop in the price of oil to ruin the fortunes of many many speculators.

And so it should be. The same applies to the housing market. Nobody (now) talks about the remarkable runup of home values that made many people quite comfortable financially, some flatout rich, thanks to the (relatively) inflated value of their principal asset, without having to lift a finger. Even after the market "correction" in home values, the overwhelming majority of homeowners have seen the value of that principal asset far outpace inflation.

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.

Artysim

on Jul 21, 2008

I wasn't going to bother to respond to it because I don't accept the premise as valid and therefore everything from there on is irrelevant to me.

That's nice

Artysim

on Jul 21, 2008

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

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.

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!

Eagle Seven

on Jul 29, 2008

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

Dr Guy

on Jul 29, 2008

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

Indeed!

And I love your pigovian tax! Capitalism at its finest!

maudlin27

on Aug 03, 2008

Capitalism only works when society keeps it in check through government

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

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

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!

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.

Daiwa

on Aug 03, 2008

Capitalism is the worst possible socio-economic system around which to organize a society... except for all the other systems.

Welcome Guest! Please take the time to register with us.
There are many great features available to you once you register, including:

Richer content, access to many features that are disabled for guests like commenting on the forums.
Access to a great community, with a massive database of many, many areas of interest.
Access to contests & subscription offers like exclusive emails.
It's simple, and FREE!