Is Capitalism the Root of Inequality?

[lavinia]

I don't think I responded specifically to this, and since it has been quoted again:
You're probably right that people don't think of it that way, but they should because as you agreed, that's what it is. People would be better-off if they analyze/understand their actions in terms of how they will profit or lose because of them.

And again: there are criminal at all levels of society. Calling the criminals typical of capitalism is not only false and insulting, it also downplays the crimes.

How do you know that people would be better off by looking at their own balance sheet rather than the balance sheet of the country and how that affects them and their future? Can you provide data on that?

Accepting the imperfections in human nature is one thing ... encouraging those very things which make us imperfect and short sighted is quite something else.

Communism was not the right system for us I know - as E O Wilson said - "Great system, wrong species!" but capitalism is really not much better.

Who is looking for a third alternative? No one.
They are all worshipping at the altar of capitalism

There is unsubstantiated talk of human nature here. Can anyone provide the scientific basis for this? What are the paper in the literature?

 

[lavinia]

How do you know that people would be better off by looking at their own balance sheet rather than the balance sheet of the country and how that affects them and their future? Can you provide data on that?

There is unsubstantiated talk of human nature here. Can anyone provide the scientific basis for this? What are the papers in the literature? Evo where are you?

 

[lavinia]

Yes, despite smallpox (or better example, the plague) killing a high fraction of the worlds' population, the population has still increased. That sounds like a good analogy to me: you are the one claiming these crashes have destoryed the economy, when they have not and indeed those diseases did not destroy the human race. The data illustrating fact that the economy isn't destroyed would seem me to be a relevant counter-example to the claim that it is.

[Thanks to Evo] You have to give me something here to prove your claims. You've claimed that lax policies over the past 28 years have destroyed the economy, when it isn't destroyed, so there may not be anything you can do but admit you erred in your claim. I'm not asking you for an essay on regulation, I'm asking for evidence of the economic "disaster". Let me remind you, this was your initial claim:

So in order to show the "disaster" actually happened overall, you need to show that today we are in a much worse position economically than we were two or three decades ago. If you can't show that our current situation is a "disaster" compared to 20-28 years ago, then there is no need to go the next step in explaining why the disaster happened.

More specifically, I remember the news reports of the "disaster" which was the crash of 2000. But if you want to claim a bubble-caused crash is a "disaster", you have to include the bubble itself in the analysis! The easy headlines read that people lost half their retirement savings (the S&P 500 dropped by rougly half from 2000 to 2002). But there is a clear inflection point in the graph starting in 1995 when the WWW was introduced and from 1995 until 2000, the S&P tripled, so after the bubble burst, people were left with half what they had 2 years earlier, but still 50% more than they had before the bubble started. So the net result of the bubble and its bursting was a 50% gain, not a 50% loss.

Do you think the crash of 1929 and the ensuing decade of Depression was a disaster? After all we are far beyond that now.

 

[lavinia]

No. The reason capitalism works and no other system has is that it recognizes that human nature is - by definition - inherrent to humans and can't be changed. So rather than trying and failing to change human nature (see: communism/socialism), capitalism harnesses certain aspects of human nature to create personal and societal good.

What are the scientific papers on human nature here.?Can you provide references in the literature? And your statement about no other system. What is the research on that?
Again references? Evo where are you?

 

[lavinia]

Those last two sentences appear to me to directly contradict each other. If the most profitable and profit-hungry companies (tech companies, pharma companies, oil companies) are also those who spend the most on research, that tells me that the research doesn't suffer because of the profit motive. Indeed: those companies recongize that research creates profit.

The argument that some scientists make is that basic research, that is scientific understanding of Biological systems, is retarded in private research whose goal is to produce a product. Companies will for instance look for "biologically active" substances found in Nature and then modify them to have a particular effect and then monitor them through various test trials to assess the side effects and if all goes well, bring them to market. To some scientists - like my father and his wife - both of whom were research biochemists - this is not basic research. To them the problem is not whether some basic research does in fact happen in drug companies or bio-tech companies - but rather that the "profit motive" slows the process.

But perhaps I shouldn't have said this since they are now both dead so I can not get their testimonials. Sorry Evo.

 

[Siv]

What are the scientific papers on human nature here.?Can you provide references in the literature? And your statement about no other system. What is the research on that?
Again references? Evo where are you?

Whoa ... what's with all this pouncing around?
PF certainly has lost a lot of its warmth and charm

So Lavinia, you want evidence for the existence of human nature??

 

[lavinia]

Yes, despite smallpox (or better example, the plague) killing a high fraction of the worlds' population, the population has still increased. That sounds like a good analogy to me: you are the one claiming these crashes have destoryed the economy, when they have not and indeed those diseases did not destroy the human race.

I never said the economy was destroyed. You are misquoting me.
And since you feel that plagues are a good analogy what about wars or incidents of genocide? Not disasters I suppose since we have more people now that ever.

This feels like a semantic argument over the meaning of the word "disaster" rather than an argument of substance.

 

[lavinia]

Whoa ... what's with all this pouncing around?
PF certainly has lost a lot of its warmth and charm

So Lavinia, you want evidence for the existence of human nature??

I think the monitor - Evo - should not be arbitrary especially in a thread where opinion and non-scientific ideas are being used. If documentation of everything is required then everything should be documented. Human Nature is certainly an idea that demands scientific scrutiny especially since it has been used to explain why an entire economic system actually works. Otherwise it is an un proved - and vague assumption - or a philosophical concept. All of these are unacceptable in a scientific form.

There another example in this thread, the stylized claim that capitalism is the only system that works. According to the rules of PF this should require documenting several thousands years of economic history. And I would add not only with graphs and indicators but analysis of how various systems worked and why they failed or went out of existence. What is even the entire list of economic systems? What is the data? What was for instance the economic system under the Roman Empire? Did it work? How about the feudal system which seems to have lasted for centuries? What about the British colonial system? And how did it differ from the French and the Spanish? Were they the same or different systems? Did they work or were they terminated by wars or some other cause? What about the Mesopotamian economic system under the Sumerians? What about the economic system in India prior to the British?

 

[lavinia]

This suggested reading on drug companies was just sent to me by the same physician - and he is also a molecular biologist - who sent the previous links. Here is his email.

"
There is a book about the pharmaceutical industry written by one of the most respected people in American medicine - she was Editor-in-Chief of the New England Journal of Medicine. Here is the citation if you’re interested:

Angell, Marcia, The Truth About the Drug Companies, Random House, 2004"

 

[Siv]

I think the monitor - Evo - should not be arbitrary especially in a thread where opinion and non-scientific ideas are being used.
If documentation of everything is required then everything should be documented. Human Nature is certainly an idea that demands scientific scrutiny especially since it has been used to explain why an entire economic system actually works. Otherwise it is an un proved - and vague assumption - or a philosophical concept. All of these are unacceptable in a scientific form.

There is plenty of evidence for human nature, but it is vast, volumes and volumes of research papers and books.
I would have a tough time citing a few links for a forum debate.

 

[lavinia]

There is plenty of evidence for human nature, but it is vast, volumes and volumes of research papers and books.
I would have a tough time citing a few links for a forum debate.

Right. And I think we all would not have all of this information at our fingertips. That is my real point.

However, now that you mention it I would be fascinated to know what the research is on human Nature. The only things I know of are the ideas of philosophers like Rousseau and Locke and some psychologists like Freud.

 

[PWiz]

..human nature is - by definition - inherrent to humans and can't be changed.

Those are some motivating words for the misanthrope. "When they're about to become extinct, tell them 'I told you'."

 

[russ_watters]

What are the scientific papers on human nature here.?Can you provide references in the literature? And your statement about no other system. What is the research on that?
Again references? Evo where are you?

lavina, you are not entitled to try to deflect from your own failure to provide sources. But there is an easy out: just acknowledge that your claim was wrong or that it is unprovable.

Now, on human nature: Siv brought-up human nature, not me:

The profit motive nullifies any long term progress. Human nature is extremely short sighted. And capitalism glorifies that.

The intended connotation is more negative than I would use, but on the basic issue of what human nature is (the relevant aspect here) and the fact that capitalism utilizes it (or "harnesses" or "glorifies") and communism/socialism fights against it (said in a separate post), we agree. This is all common-knowledge/standard stuff that I already know, so I felt no need to ask Siv to prove it.

The disagreement is in the opinion about whether we should try to harness or contradict human nature. This is also pretty standard and it and the facts framing the argument and argument itself are easily sourced, so here you go:
http://www.wsj.com/articles/SB10001424052970204528204577011681658907746

That's the first hit for a google of "human nature cannot be changed" and discusses everything we've been discussing about it here.

Where Siv went wrong factually above is the idea that a profit motive can't produce long-term gains because clearly capitalism has.

There another example in this thread, teh stylized claim that capitalism is the only system that works.

The only system that has worked. Again, there has been general agreement in the thread that this common-knowledge fact is true. Certainly it may be possible for there to be other systems that could work. In any case, the link I posted above discusses that as well.

I never said the economy was destroyed. You are misquoting me.

"Disaster", sorry. But I don't see the difference and you have yet to explain or show what you mean using evidence.

Again, this was your claim:

even hard line free marketers now agree that the last two decades [now three decades] of deregulated markets have been a disaster.

None of what you said there mentions a recovery. So, if you didn't mean that the current state of the economy is a disaster compared with where it was 20-28 years ago, you'll need to modify your claim.

The things I have said cover a large span of history. Nothing is controversial.

Clearly, there is controversy because I have disagreed. But if it isn't controversial, you should easily be able to prove your claim.

Do you think the crash of 1929 and the ensuing decade of the Depression was a disaster?

Yes.

After all we are far beyond that now.

Indeed we are: but you used the same word to describe the last 20-28 years.

This feels like a semantic argument over the meaning of the word "disaster" rather than an argument of substance.

It's your word, not mine. I'm not arguing over its meaning at all (because I wouldn't use it) and you are completely free to tell me how you want it defined. So please do: explain how the last 20-28 years have been an economic disaster, worthy of being described with the same word you use to describe the 1930s.

 

[russ_watters]

Those are some motivating words for the misanthrope. "When they're about to become extinct, tell them 'I told you'."

I don't understand. Please explain what you mean.

 

[russ_watters]

Indeed we are: but you used the same word to describe the last 20-28 years.

It's your word, not mine. I'm not arguing over its meaning at all (because I wouldn't use it) and you are completely free to tell me how you want it defined. So please do: explain how the last 20-28 years have been an economic disaster, worthy of being described with the same word you use to describe the 1930s.

Note, that I think this comparison is a good one for illustrating why the last 28 years has NOT been a "disaster" if the Great Depression is the benchmark for defining the word.

 

[lavinia]

I respectfully disagree. If you have cancer but no symptoms yet - would you say you are in good health?To clarify - and again you have misquoted me - I said that the crash of the real estate market was the disaster. But in my opinion the seeds had been planted earlier through the deregulation of the markets and the widespread use of leveraged investments. A question for you. Do you consider Glass-Steagal to have been regulation? Do you think getting rid of it has anything to do with the economic problems that we ended up with? Also why do you think there was a turn towards speculation in our economy? e,g, the S&L crisis or the advent of mortgage derivatives in the 1980's?

- If you believe that the Depression of the 1930's was an economic disaster do you think the 10 year plus deep recession in Japan during the 1990's was a disaster?

- BTW: the word 'worthy" seems to be subjective. Again we are involved in semantics.

- As far as regulation goes I grant you that I can not document all of it - although Glass-Steagal clearly is an example. But I am challenged to produce the data and accept the challenge.

- BTW; I think it is fair to ask for documentation of the science on Human nature and what economic systems work since without this level of rigor, these ideas tend to philosophy and ideology.

 

[PWiz]

I don't understand. Please explain what you mean.

As you said, capitalism works by using some positive aspects of human nature, but inequality is something which I don't really think can be eliminated in any system. 100% fairness to all is just a theoretical concept that will never find it's way into our lives, because the fundamental nature of humans (rather, the nature of human "civilization" itself) explicitly prohibits such a notion from existing. It's just how humans are. As long as there is a winner, there will always be a loser, and we know better than to think that each one had equal opportunities and resources. Call it luck, call it intuition, whatever the case might be, some people gain more from a situation than others simply out of chance and no other reason. If one generous person makes an effort in distributing wealth evenly, his/her endeavors are brutally crushed by two others depraving others of money using lies and treachery. People always find a way to exploit the most "fair" of policies. At the end of the day, it really doesn't matter how you come to the top in this world, what matters is whether you are at the top or not (as long as you keep your hands clean in public), even though this is an outright trespassing of what's "right". Unfortunately, this is what it's all been reduced to - morality has just become something people pretend to follow when observed, and abuse to the core when unseen.

We know that this kind of thing is seen in nature too - a probability can be ascribed to all events, and momentarily inequality should therefore not be surprising. The thing is, people sustain and perpetuate this inequality to rise personally. To jump, you have to push something down (let's not confuse this with a law of physics). All these things gives some people very strong ground to resort to misanthropy.

Of course, you shouldn't think of these things as me trying to explain my beliefs as facts, I'm just pointing arguments made by misanthropes (I'm not one of them! [I wouldn't be writing all this if I were]). In case you're wondering, I'm not someone with messed up logic: trust me I hate the way things are just as much as you, and that's why I believe that we must always to do what's in our power to do what's right, to never stop trying (unless you're trying to accelerate a block to light speed). It might be an imperfect world, but it's the only one we have. I'm woefully inexperienced when it comes to life. I'm just a poor observer trying to record empirical data around me and make sense of it, and I already know that this message has a laundry list of defects. Ah, what a long boring drag this post has become. Sorry!

 

[Siv]

Where Siv went wrong factually above is the idea that a profit motive can't produce long-term gains because clearly capitalism has.

What long term gains ?
I have read Steven Pinker's book too ... but my benchmark is not how bad things were centuries ago, my benchmark is how much better it could have been ... and the opportunities we have lost.

We are destroying the environment, our entire food, health and nutrition industry is riddled with so much corruption, receipt, selfishness and greed that we have medicines which do more harm than good, we believe in health tenets that have no foundation on evidence ... is that what you call long term gains ??

 

[mheslep]

...
There are frauds and thiefs in all levels of society. They are not unique to the rich or to corporations and they are not inherrent to the existence of any level of society.

Yes, in particular frauds and thieves also occur in government, as do would-be tyrants. One could fill pages with these, the Minerals Management Service scandal, which has since changed its name, comes to mind:

The report says that eight officials in the royalty program accepted gifts from energy companies whose value exceeded limits set by ethics rules — including golf, ski and paintball outings; meals and drinks; and tickets to a Toby Keith concert, a Houston Texans football game and a Colorado Rockies baseball game.

The investigation also concluded that several of the officials “frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relationships with oil and gas company representatives.”

The investigation separately found that the program’s manager mixed official and personal business. In sometimes lurid detail, the report also accuses him of having intimate relations with two subordinates, one of whom regularly sold him cocaine.

http://www.nytimes.com/2008/09/11/washington/11royalty.html?_r=0

 

[mheslep]

my benchmark is how much better it could have been ... and the opportunities we have lost.

What's a good example of where that's happened? Venezuela has largely dumped capitalism, with the result that they've run out of toilet paper long with other more critical equipment like medical devices, and have brutally oppressed descent.

 

[russ_watters]

I respectfully disagree. If you have cancer but no symptoms yet - would you say you are in good health?To clarify - and again you have misquoted me - I said that the crash of the real estate market was the disaster.

No, you didn't. You said "the last two decades [now three decades] of deregulated markets have been a disaster."

If you were only referring to the real estate market, you would have used a different timeframe that didn't include the S&L crisis and you wouldn't have said "markets" (plural) if you were referring only to one.

Most of the rest of your post is more dodges of your own claim/refusals to explain. You need to stop asking me questions and explain yourself (and provide evidence): its your claim to develop and prove, not mine.

- BTW: the word 'worthy" seems to be subjective. Again we are involved in semantics.

It is not necessary to argue over the word "worthy:" you made the comparison, not me. It is incumbent upon you to prove how the last 28 years was a "disaster" like the 1930s was.

- As far as regulation goes I grant you that I can not document all of it..

You haven't been asked to document ANY of it: you have been asked to show how the last 28 years was an economic "disaster"., comparable to the 1930s.

- BTW; I think it is fair to ask for documentation of the science on Human nature...

It is not fair to request anything of anyone else that you are unwilling to provide yourself. Did you even read the provided reference?

 

[russ_watters]

What long term gains ?

All of them. You tell me how you'd like to measure it: economic growth? Standard of living? Life expectancy? Several possible measures have already been cited in this thread. The bottom line is that essentially all of the advancement in the human condition has happened in the past 150 years and was driven by capitalist/democratic countries.

For example:

 

[russ_watters]

... but my benchmark is not how bad things were centuries ago, my benchmark is how much better it could have been ... and the opportunities we have lost.

Given that you are comparing against a hypothetical, that's probably inherently impossible to prove. Its basically just fantasy.

 

[lavinia]

It is not fair to request anything of anyone else that you are unwilling to provide yourself. Did you even read the provided reference?

For clarity - and I apologize if I misstated my point - The real estate crash was an economic disaster (or if you don''t like the word disaster use a different one) but in my opinion its seeds were planted much earlier. Plus similar phenomena led to disastrous crashes in at least one other country - namely Japan.

BTW: I would be interested to know how much the Japan crash affected views on the application of monetary policy in Central Banks generally. I will look for studies done at the Fed. It would not surprise me to find a study somewhere by Bernacke. My anecdotal impression is that Central Bankers took that crash very seriously. In the US there was at least one smaller crash afterwards, the Tech bubble although there was a mini-crash at the end of 1994 which may well have alarmed the Central Banks - not sure. As you remember this crash sank Orange County financially.

http://www.nytimes.com/1994/12/08/b...w-orange-county-crisis-jolts-bond-market.html

Alan Greenspan spoke of "irrational exuberance" of the markets and interestingly I think that he feared tightening monetary policy because it could crash the market so he tried to talk it down.

There was also the crash of some Hedge Funds like Long term Capital Management that required Central Bank intervention.

http://en.wikipedia.org/wiki/Long-Term_Capital_Management

I personally ask what the new problems of monetary policy are in the face of unregulated leveraged markets.

As far as unfair goes, I take that as a subjective opinion since all demand for documentation can be viewed as fair in a scientific forum.

I will not document what I did not mean to say and I hope my explanation makes what I actually intended clear - but I still think documenting the history of economic growth and regulation is a worthy enterprise and will pursue it.

 

[Siv]

All of them. You tell me how you'd like to measure it: economic growth? Standard of living? Life expectancy? Several possible measures have already been cited in this thread. The bottom line is that essentially all of the advancement in the human condition has happened in the past 150 years and was driven by capitalist/democratic countries.

Life expectancy increase is a result of capitalism?? Thats a stretch.

Louis Pasteur discovered the benefit of washing hands with soap ... and then medicine became scientific ... until the profit motive caught up with it to seriously damage these benefits. Increasing life expectancy has brought a whole host of newer and bigger problems, too many old people living on and on, and being a burden to society and using up precious medical resources that could be used for younger and healthier people. Science was the reason for increased life expectancy, until capitalism caught up with it and spoilt the quality of this increased life span tremendously.

Agriculture is another so-called boon which has now turned into a bane. The kind of diet most people eat, full of grains, and worse, refined grains and sugars, has resulted in immense nutrition myths and horrible health for everyone. The burger/pizza culture imported from the West has pretty much destroyed the health of a lot of Eastern cultures. And what do we have to thank for that ?? Capitalism, of course !

Correlation, by the way, is not causation. Lots of things happened in the last century or so, are they all to be thanked for any improvements during these years ??

 

[lavinia]

More DocumentationHere are two articles - one a detailed study of the S&L crisis - which document the effects of deregulation of that industry during the 1980s and sent the country into recession by the early 1990's and cost the US taxpayer large sums to resolve the ruined S&L industry. The FED, in order to stem the recession and finance the resolution of failed banks brought the overnight rate from over 8% to 3% by 1993.

https://www.fdic.gov/bank/historical/history/167_188.pdf

http://www.dailyfinance.com/2010/07/03/financial-meltdown-vs-savings-loan-crisis-recession.

The S&L crisis is parallel in many ways to the recent real estate crisis, particularly in the wide spread of speculation and fraudulent practices in the quest for high returns and in its effect upon the economies of several states. The crisis is commonly called the "S&L Debacle" .

 

[lavinia]

More Documentation

Here is a review of the history of deregulation of financial markets ending with a description of the recent real estate crisis.

http://www.cepr.net/documents/publications/dereg-timeline-2009-07.pdf

 

[lavinia]

More Documentation

Here are references on the speculative bubble in Japan during the 1980's that triggered an at least one decade recession (The Lost Decade) and some say two decades.

http://www.thebubblebubble.com/japan-bubble/

http://en.wikipedia.org/wiki/Lost_Decade_(Japan)

After World War 2 Japan instituted banking regulations that were stricter even than those in the United States. These regulations were part of a program to nurture the Japanese economy. The policy was considered to be successful but in the mid-1980's significantly because of pressure from the United States and Europe, Japan deregulated its banking system After 1985 the bubble took off.(See the referenced paper below).

There is an interesting paper written in 1992 by Kenusuke Hotta, a Managing Director at Sumitomo Bank, who strongly favors the deregulation. I could not figure out how to copy the link but it is called "Deregulation of Japanese Financial Markets and the Role of Japanese Banks" Occasional Paper no. 7 ,Occasional Paper Series
Center on Japanese Economy and Business Graduate School of Business Columbia University
February 1992

 

[lavinia]

More Documentation

https://www0.gsb.columbia.edu/faculty/fedwards/papers/Hedge_Funds_&_the_Collapse_of_LTCM.pdf

This paper reviews the collapse of Long Term Capital Management
It also has a review of Hedge Funds and their trading strategies.

It also covers the 1998 Russia default on a large amount of its Treasury debt and its cancellation of derivative contracts. This created a cascade of margin calls and asset devaluations. Basically, firms were forced to sell assets in order to meet margin calls thus causing a drop in prices which then triggered more margin calls and so on. Panic led to a flight to quality which widened yield spreads on risky assets generally for instance, B rated corporate bonds. Long Term Capital Management had huge leveraged bets on yields spreads. The spread widening destroyed it and I have heard nearly wiped others hedge funds like D.E. Shaw & Co. Here is a section of the article that discusses the "systemic risk" of its impending bankruptcy and the resulting bailout organized by the Federal Reserve Bank of New York.

" In early September 1998, LTCM advised the Federal Reserve Bank of New York of its impending difficulties. During the next few weeks, Federal Reserve representatives organized meetings of LTCM's creditors and met with LTCM partners to discuss the situation. On the evening of September 22, the president of the Federal Reserve Bank summoned more than a dozen top executives of the firms that had loaned money to LTCM to an 8 p.m. meeting and warned them that "systemic risk posed by LTCM going into default was 'very real'" (Siconolfi,1998). The next day a 16-member creditor consortium agreed to put in additional capital of $3.625 billion in exchange for 90 percent of the remaining equity in LTCM; ..."

 

[WWGD]

All of them. You tell me how you'd like to measure it: economic growth? Standard of living? Life expectancy? Several possible measures have already been cited in this thread. The bottom line is that essentially all of the advancement in the human condition has happened in the past 150 years and was driven by capitalist/democratic countries.

For example:

Correlation, Causation? Didn't socialist countries achieve a similar gain in life expectancy (during the years of communism)? I am not arguing in favor of communism, but, how do you explain, e.g. that Cuba's life expectancy is 80.7 years for female, 75.9 for males (World Almanac and Book of Facts, 2015, p.768), similar for former communist block countries (I assume life expectancy does not turn on a dime, that , if the economic system is changed, it may take a long time for the benefits/consequences of this change to take effect.) ?

Besides, capitalism as we know it today has not been in effect for 150 years. Weren't many of the main discoveries made before today's capitalism was in effect? Vaccination, much of the medicine used to prevent childhood death, etc.? How about the scientific discoveries. And there is the additional fact that most of the people who have ever lived, have lived in the last 150 years, so it makes sense that the more people that are alive (living longer), the more discoveries you have. And there were 100's of important scientific discoveries before the 1900's. And the Soviet Union had some of the best scientists in the world. You may even reasonably argue that a critical mass of discoveries had been reached by the time today's capitalism went into effect.

 

[WWGD]

What's a good example of where that's happened? Venezuela has largely dumped capitalism, with the result that they've run out of toilet paper long with other more critical equipment like medical devices, and have brutally oppressed descent.

How is the oppression of descent the result of abandoning capitalism? Despite the repeated mantra by the far right that freedom, capitalism and economic growth go together, the examples of China and India belie that very clearly. Same with South Korea, which was under repressive regimes for a long time.

I think part of the problem with communist countries is that they educated many of their people too well, and the educated tend to ask the difficult questions. Of course, it is also true that there were no jobs for them. Still, capitalism as we know it today has less than 100 years in effect; too soon to decide whether it works in a sustainable way.

 

[lavinia]

More Documentation

This 2012 Business Insider piece quotes Bill Gross, CEO of PIMCO which is one of the largest bond funds in America, who says that the economy is at risk of a Japan style "Lost Decade" by which he seems to mean an extended period of "slow growth" despite signs finally of some recovery in the housing market and resumption of bank lending. His arguments focus on the shape of the yield curve and the record low interest rate policy of the Fed which he says has been in place in order to bring down long term yields to stimulate the housing market. His arguments underscore the severity of the current slowdown and also the risk that ensues when possibly unsound attempts at stimulating recovery are implemented. I found his arguments interesting.

http://www.businessinsider.com/bill...ed-is-taking-us-on-the-course-of-japan-2012-2

 

[lavinia]

More Documentation

The 1987 Stock Market crash

While the 1987 stock market crash had a relatively mild after affect, it is one of the early examples of the risk of the new unregulated leveraged markets that took off in the 1980's Here are two articles that discuss it, one by a contributor to Forbes Magazine, the other a Federal Reserve Discussion Paper.

http://www.thebubblebubble.com/1987-crash/
http://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf

Both of these papers discuss how leveraged trading strategies - in particular Portfolio Insurance and Index Arbitrage - catalyzed the largest one day drop ever in the market.
They also indicate how the stock market - during the vaunted Reagan recovery - was bolstered by low interest rates, leveraged buyouts, IPO's, mergers, hostile takeovers, and a general investment euphoria. These were the days of junk bonds, Michael Millikan's $500 million dollar a year bonus, soaring P/E ratios and the advent of computerized trading of equities.

I have included a page of financial data history such as market prices, bond yields. P/E ratios etc for reference.

http://www.sniper.at/stock-market-crash-of-1987.htm

The crash seems to be attributed to panic that ensued after several things happened. Here is the description in the Fedeal Reserve Paper.

First, news organizations reported that the Ways and Means Committee of the U.S. House of Representatives had filed legislation to eliminate tax benefits associated with financing mergers (Securities and Exchange Commission (SEC) Report 1988,p.3-10). Stocks’values were reassessed as investors reduced the odds that certain companies would be take-over targets. Second, the Commerce Department’s announcement of the trade deficit for August was notably above expectations. On this news, the dollar declined and expectations that the Federal Reserve would tighten policy increased (Wall Street Journal 1987b). Interest rates rose, putting further downward pressure on equity prices (see Figure 2).

On Thursday, equity markets continued to decline. Some of this decrease was attributed to anxiety among institutions, especially pension funds, and among individual investors, which led to a movement of funds from stocks into the relative safety of bonds (Wall Street Journal 1987c). There was also heavy selling during the last half hour of the day amid heavier-than-usual activity by portfolio insurers (Brady Report 1988, p. 21).

Markets continued to decline on Friday, as ongoing anxiety was augmented by some technical factors. A variety of stock index options expired on Friday; price movements during the previous two days had eliminated many at-the-money options so that investors could not easily roll their positions into new contracts for hedging purposes. These developments pushed more investors into the futures markets, where they sold futures contracts as a hedge against falling stocks. Increased sales of futures contracts created a price discrepancy between the value of the stock index in the futures market and the value of the stocks on the NYSE. Index arbitrage traders reportedly took advantage of this price discrepancy to buy futures and sell stocks, which transmitted the downward pressures to the NYSE (Brady Report 1988, Study III, p. 12).

By the end of the day on Friday, markets had fallen considerably, with the S&P 500 down over nine percent for the week. This decrease was one of the largest one-week declines of the preceeding couple of decades, and it helped set the stage for the turmoil the following week (Wall Street Journal 1987d). Portfolio insurers were left with an “overhang” as their models suggested that they should sell more stocks or futures contracts (SEC Report 1988, p. 2-10). Mutual funds experienced redemptions and needed to sell shares (Brady Report 1988, p. 29). Further, some aggressive institutions anticipated the portfolio insurance sales and mutual fund redemptions and wanted to pre-empt the sales by selling first (Brady Report 1988, p. 29; SEC Report 1988, p. 3- 12). ..."

This is an interesting account and the entire event deserves careful study because it exhibits the dangers of an unregulated leveraged market. It shows how a price bubble driven by euphoria and leveraged speculation can be rapidly burst when the factors driving the bubble go away. This can be a change in tax law, a rise in interest rates, a bad economic report, and so on. It also shows how the use of financial derivatives - in this case futures contracts and portfolio insurance (which is a "replicated" put option on the stock market) - can magnify a decline into a crash.

An important thing to note is that with such a huge decline in stock prices, the stock exchange itself was at risk of breaking down . This is because stock specialists financed their positions in stock on bank borrowing using the stock as collateral The banks became reluctant to finance these positions because the stocks had lost significant value and there was huge risk still remaining. BTW: This sort of financing is common in securities markets. In Government bonds, the market for this type of short term - usually overnight - borrowing is called the Repo market.

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

 

[Siv]

Still, capitalism as we know it today has less than 100 years in effect; too soon to decide whether it works in a sustainable way.

I agree.
But I think there are plenty of examples of its imperfections.

The bad aspects of human nature need to be suppressed and discouraged. Thats the whole definition of "civilization".
Capitalism does just the opposite.

Going one step further ... and I know there will be cries of "Nazism" in response to this ... but I don't know why we should continue to live with this problematic human nature and struggle with its consequences. Its a taboo subject to even discuss attempting to improve/modify it. Just because it resulted in atrocities once, does not mean it should be a banned subject forever

 

[lavinia]

In my opinion, one problem with capitalism as it is practiced today (and historically), is the way that central banks handle problems of economically weaker countries to pay debt. The solution is to roll debt over in return for "austerity measures" which force these countries into economic hardship. Paul Krugman has this article where he says that austerity measures not only don't work i.e. they prevent the debtor country from paying by slowing its economy but their harshness leads to political radicalism.

http://www.nytimes.com/2013/02/25/opinion/krugman-austerity-italian-style.html?_r=1

To me, the imposition of austerity is not intrinsic to capitalism so I consider Krugman's observations to be criticism of practice rather than theory.

 

[lavinia]

I agree.
But I think there are plenty of examples of its imperfections.

The bad aspects of human nature need to be suppressed and discouraged. Thats the whole definition of "civilization".
Capitalism does just the opposite.

Going one step further ... and I know there will be cries of "Nazism" in response to this ... but I don't know why we should continue to live with this problematic human nature and struggle with its consequences. Its a taboo subject to even discuss attempting to improve/modify it. Just because it resulted in atrocities once, does not mean it should be a banned subject forever

SIV a couple of questions.

What do you mean by "human nature"?
What are the bad aspects of it?

 

[Siv]

SIV a couple of questions.

What do you mean by "human nature"?
What are the bad aspects of it?

Human nature is essentially the behavioural and psychological aspects of human beings, a lot of which helped our evolutionary journey.
There are common aspects to all human behaviour.
This is a very brief description to something that can cover libraries ...

Bad aspects - oh there are so many ... ethnocentrism, xenophobia, short term benefits at the cost of long term benefits, violence, rape, deception ... all these are innate traits.

 

[Czcibor]

Accepting the imperfections in human nature is one thing ... encouraging those very things which make us imperfect and short sighted is quite something else.

Communism was not the right system for us I know - as E O Wilson said - "Great system, wrong species!" but capitalism is really not much better.

Who is looking for a third alternative? No one.
They are all worshipping at the altar of capitalism

May I, by rules of the forum ask for some data to back up your claim? Because it starts sounding quite interesting...

Because I have limited luck being born in a communist country, and consider such claims in the same as a black person consider claims that apartheid wasn't so bad...

 

[Czcibor]

One question concerning intellectual honesty of this topic. (I mean especially Lavinia)

Are we comparing RL capitalism with some idealised, hypothetical system? Because I may already solve your dillema. Any RL system would be worse than any hypothetical idealised system.

No I mean as fair idea - idealised capitalism vs. idealised alternative. But under such capitalism there are no market failures or market crash :D

Or we should talk about RL capitalism and compare its successes with RL "successes" of its contenders. Like the West vs. Communist countries. Or compare India vs. PRC from times of Deng Xiaoping, when communism was effectively started being jettisoned. Or compare India to Asian Tigers.

 

[Siv]

May I, by rules of the forum ask for some data to back up your claim? Because it starts sounding quite interesting...

Because I have limited luck being born in a communist country, and consider such claims in the same as a black person consider claims that apartheid wasn't so bad...

Sure, Czibor. But which claim, precisely?
I had quoted E.O Wilson's famous "Great idea, wrong species."

 

[Czcibor]

Sure, Czibor. But which claim, precisely?
I had quoted E.O Wilson's famous "Great idea, wrong species."

"capitalism is really not much better"

And we may try to compare let's say North Korea with South Korea.

 

[lavinia]

One question concerning intellectual honesty of this topic. (I mean especially Lavinia)

Are we comparing RL capitalism with some idealised, hypothetical system? Because I may already solve your dillema. Any RL system would be worse than any hypothetical idealised system.

No I mean as fair idea - idealised capitalism vs. idealised alternative. But under such capitalism there are no market failures or market crash :D

Or we should talk about RL capitalism and compare its successes with RL "successes" of its contenders. Like the West vs. Communist countries. Or compare India vs. PRC from times of Deng Xiaoping, when communism was effectively started being jettisoned. Or compare India to Asian Tigers.

I am not sure why I am suspected of intellectual dishonesty. Let's dismiss it as an unfortunate choice of words.

Many of my post were originally in response to a challenge to document the problems with unregulated markets and to show their long term effects. This is not a criticism of capitalism in all of its forms but of completely free unregulated markets. I argued that deregulation of financial markets was a key component of the speculative difficulties of recent decades. The effect of these difficulties is not trivial and in Japan it led to the "lost decade" and the CEO of PIMCO in another article I cited, warned of the risk of a lost decade in the United States. That is my point and I look forward to discussing it with anyone who wishes to take a rigorous view.

Of course, speculative markets are only one problem. I intend to discuss others, and have started to talk about "austerity measures". Paul Krugman's article is worth reading. He is a Nobel Laureate in Economics and a regular contributor to the New York Times.

As far as what systems work or don't work and what systems are better than others, I have no rigorous opinion on that. Nor have I seen a rigorous opinion in this thread. For instance, to say that the Soviet System collapsed ergo it was an inferior system is at worst ideology and at best a hypothesis to be examined.

 

[Siv]

"capitalism is really not much better"

And we may try to compare let's say North Korea with South Korea.

When comparing with communism, it may be better, I agree.
But where is this (unwritten) rule that there should be no other options?

 

[Czcibor]

I am not sure why I am suspected of intellectual dishonesty. Let's dismiss it as an unfortunate choice of words.

Many of my post were originally in response to a challenge to document the problems with unregulated markets and to show their long term effects. This is not a criticism of capitalism in all of its forms but of completely free unregulated markets. I argued that deregulation of financial markets was a key component of the speculative difficulties of recent decades. The effect of these difficulties is not trivial and in Japan it led to the "lost decade" and the CEO of PIMCO in another article I cited, warned of the risk of a lost decade in the United States. That is my point and I look forward to discussing it with anyone who wishes to take a rigorous view.

Of course, speculative markets are only one problem. I intend to discuss others, and have started to talk about "austerity measures". Paul Krugman's article is worth reading. He is a Nobel Laureate in Economics and a regular contributor to the New York Times.

I'd say that claim that claim "unregulated market" is bit risky. You pointed for example housing bubbles. Anyway why housing happens to be so expensive on those free market? Shouldn't those greedy speculators build something out of bricks and mortar instead of just building up bubbles?

Let me quote Krugman, who grudgingly admitted one interesting thing:

It turns out, however, that wages in the places within the United States attracting the most migrants are typically lower than in the places those migrants come from, suggesting that the places Americans are leaving actually have higher productivity and more job opportunities than the places they’re going. The average job in greater Houston pays 12 percent less than the average job in greater New York; the average job in greater Atlanta pays 22 percent less.

So why are people moving to these relatively low-wage areas? Because living there is cheaper, basically because of housing. According to the Bureau of Economic Analysis, rents (including the equivalent rent involved in buying a house) in metropolitan New York are about 60 percent higher than in Houston, 70 percent higher than in Atlanta.

I have to wonder why Cuomo runs ads in CA on the favorability of NY as a business friendly state, with no taxes for ten years, if low taxes...

In other words, what the facts really suggest is that Americans are being pushed out of the Northeast (and, more recently, California) by high housing costs rather than pulled out by superior economic performance in the Sunbelt.

But why are housing prices in New York or California so high? Population density and geography are part of the answer. For example, Los Angeles, which pioneered the kind of sprawl now epitomized by Atlanta, has run out of room and become a surprisingly dense metropolis. However, http://www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/pdfs/centers-programs/centers/taubman/sunbelt.pdf and others have emphasized, high housing prices in slow-growing states also owe a lot to policies that sharply limit construction. Limits on building height in the cities, zoning that blocks denser development in the suburbs and other policies constrict housing on both coasts; meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low.

So conservative complaints about excess regulation and intrusive government aren’t entirely wrong, but the secret of Sunbelt growth isn’t being nice to corporations and the 1 percent; it’s not getting in the way of middle- and working-class housing supply.

http://www.nytimes.com/2014/08/25/opinion/paul-krugman-wrong-way-nation.html

I fully understand idea - risky behaving financial companies and gov that puts supervision on them to limit risk. However to such picture don't fit well ex. US gov that by allowing mortgage deduction is actually encouraging people to take excessive debt.

The problem is that markets are quite often already strongly regulated, just from time to time in the wrong direction.

As far as what systems work or don't work and what systems are better than others, I have no rigorous opinion on that. Nor have I seen a rigorous opinion in this thread. For instance, to say that the Soviet System collapsed ergo it was an inferior system is at worst ideology and at best a hypothesis to be examined

Who said that I use such claim?
Concerning SU collapse - the problem that's not one observation (that could have been caused by some random, unobserved factor.
So have you tried to compare GDP of countries on similar development level before and after testing this system you have no rigorous opinion? I mean North vs. South Korea (under Japanese rule north was actually more industrialized); China vs. Taiwan; West vs. East Germany; Spain vs. Poland (Roman Catholic countries, similar size: in 1950 Polish GDP per capita was a bit higher, in 1990 it had 30% of Spanish GDP)
How do you think, maybe a pattern emerge?

 

[WWGD]

I'd say that claim that claim "unregulated market" is bit risky. You pointed for example housing bubbles. Anyway why housing happens to be so expensive on those free market? Shouldn't those greedy speculators build something out of bricks and mortar instead of just building up bubbles?

Let me quote Krugman, who grudgingly admitted one interesting thing:http://www.nytimes.com/2014/08/25/opinion/paul-krugman-wrong-way-nation.html

I fully understand idea - risky behaving financial companies and gov that puts supervision on them to limit risk. However to such picture don't fit well ex. US gov that by allowing mortgage deduction is actually encouraging people to take excessive debt.

The problem is that markets are quite often already strongly regulated, just from time to time in the wrong direction.

Who said that I use such claim?
Concerning SU collapse - the problem that's not one observation (that could have been caused by some random, unobserved factor.
So have you tried to compare GDP of countries on similar development level before and after testing this system you have no rigorous opinion? I mean North vs. South Korea (under Japanese rule north was actually more industrialized); China vs. Taiwan; West vs. East Germany; Spain vs. Poland (Roman Catholic countries, similar size: in 1950 Polish GDP per capita was a bit higher, in 1990 it had 30% of Spanish GDP)
How do you think, maybe a pattern emerge?

I am not defending communism, Czcibor, but didn't people in the Eastern block have most daily needs paid for by the state? Maybe doing a PPP (Purchase Power Parity) do $5,000 buy you the same in Madrid than in Warsaw (back then and now )? So, comparing maybe a $3,000 GDP per capita in the East vs more than $10,000 in the west, but in the East you are provided with housing, stable job, medical care?

 

[Czcibor]

I am not defending communism, Czcibor, but didn't people in the Eastern block have most daily needs paid for by the state? Maybe doing a PPP (Purchase Power Parity) do $5,000 buy you the same in Madrid than in Warsaw (back then and now )? So, comparing maybe a $3,000 GDP per capita in the East vs more than $10,000 in the west, but in the East you are provided with housing, stable job, medical care?

A bit tricky comparison:
-$5000 for sure bought a lot in last days of Polish People Republic... according to black market exchange rate an average salary was about $15
-how do you want to calculate a basket with adjustment for ration stamps? (especially in cases when you had ration stamps for stuff that was NOT accessible, even with ration stamps)
-how do you adjust that in the last decade shops were mostly empty and one was standing in a queue to buy anything? (sometimes it worked, sometimes not) (A realistic approach would involve calculate value of wasting a few hours per day on such staying in queue/shopping)
-how do you adjust for transactions done on black market or through a net of friends?
-how do you adjust for stealing in your place of work? (awful pathology at that time)

I may try to find you some data if you want.

 

[Czcibor]

If data for 1990 (semi-free election was in late 1989), in PPP and adjusted 2005 dollars, are OK, then according to World Bank:
http://www.google.com/publicdata/ex...=region&tdim=true&hl=en_US&dl=en_US&ind=false

The data are a bit too optimistic for Polish consumer, as GDP was somewhat inflated by ineffective heavy and chemical industry, which was producing equipment for WW3.

But according to them we had 42% of Spanish GDP. (yes, there is a big dispersion in the data, pending on source)

 

[WWGD]

My point is that while capitalism may be overall preferable to communism (at least as commonly-practiced) , it may be a good idea
to try to incorporate o capitalism some positive aspects of communism.

 

[Czcibor]

My point is that while capitalism may be overall preferable to communism (at least as commonly-practiced) , it may be a good idea
to try to incorporate o capitalism some positive aspects of communism.

Which one do you mean?

 

[lavinia]

Some economists point to FDIC instance as a regulatory measure that led to the fall of the S&L's. This is a case of what they is call a Moral Hazard.Their point is that deregulation is not the problem per se.

It is true that FSLIC insurance remained after the S&L's were otherwise deregulated. But in this situation, FSLIC insurance became a free put option written by the US Government. So instead of functioning as a regulatory measure, it transmuted into a derivatives contract.

Before the deregulation of the S&L's FSLIC insurance worked fine in the context of a complete regulatory framework. From the 1930's until deregulation in the 1980's it worked fine. The same holds for Japan as I have described above.

On the other side of the coin, without a safety net such as FSLIC insurance there is risk of runs on financial institutions that lose investor confidence.