Wednesday, June 28, 2006

The Downsides to Capitalism

I've been thinking about this for a bit, and wanted to try and share what I think is one of the fundamental problems we have in communicating ourselves to non-believers. They think we don't care what happens as a result of the free market. Some seem to think that means that people can be bought and sold, abusded and thrown away. Others might just despise corporate layoffs and the whole bother about the bottom line trumping the people involved.

Businesses fail (sometimes spectacularly, like Enron), businesses can hurt people (firing them when they really need the job), and so on. I don't deny any of that. But I think these failures and personal injuries are not only magnified by government involvement, I think they're rather the products thereof as often as not.

The Austrian theory of the business cycle revolves around the money supply, and as the Fed has been inflating it (or inversely, devaluing the dollar) at a fairly steady rate since founded in 1913, it's been fueling booms and the subsequent market corrections, in which people get hurt. In boom times there aren't many layoffs, but man, when the corrections come around and people realize that there's really no value in a business, jobs go flying.

This, compounded by the warping of time-prefernce spurred by the availability of easy money (via credit) and the constant erosion of savings (via inflation), leads to a great many negatives, which people rightly criticize - but rarely do they pin the blame on the institution that's actually causing the inflation, creating malinvestment, and ultimately, causing loss of jobs, productivity, and so on. They blame the proximate cause, the business that cuts the jobs, and not the government bank-cartel that fueled the problem.

Believing that, am I cruel to say that the real solution, at least in my eyes, would be to liquidate the Fed, instead of implementing stringent business regulations? To me, that's just bandaging a compound fracture; it may help keep out infection, but it's not helping to make the fundamentals any more sound. You can cover up problems, like the USSR did for more than 70 years - but eventually, debts need to be paid.

I firmly believe that this sort of action is helpful and moral; does that make me a monster? I don't think so.


ryan said...

Is there a lot of inflation? Is there a lot of malinvestment? Are these the things that undid Enron, WorldCom, etc? (I thought it was insider trading and shady accounting -- did the government cause these?) Did booms and busts not exist before 1913? Everything I ever learned about economic history I learned from the Wizard of Oz -- does there need to be a government body to have huge swings in the value of the dollar? As I remember it, the economic boom resulting from the inflation (or end to deflation) caused by a gold rush (i.e., random shifts in the money supply) entrenched the Republican Party for 36 years ...

I'm going to take the liberty of shamelessly plagiarize another's question: given Austrian business cycle's dependence on the rationality of the individual, why does government spending, government deficits, and government changes to the money supply so badly warp the entire economy's forethought? If the government has been inflating for almost a century, you'd think we'd have all figured that out already and built that assumption into our implicit calculations and financial instruments -- how large can the menu costs of expected inflaiton possibly be?

Anonymous said...

I think the big downside of capitalism is accountability. When a corporation does well, the management is rewarded. When it doesn't do well, management is rarely penalitized. The worst cases have them being fired with generous severance packages. If management is given money for a good job, shouldn't they pay money for a bad one? Instead when management does a bad job lower level employees get fired. There's no real accountability here.

To address a different subject, credit card companies send out millions of applications to people in America every year. It's a plan that works. As a result collectively America is deep in debt. I'm not going to say people who abuse their credit cards are innocent. While I hate to use biblical comparisons, but when Eve was tempted by the snake god punished both of them. The credit card companies tempt people then try to avoid the responsibility by getting Congress to pass bankruptcy reform.

How effective are the safeguards in pure capitalism without some kind of government limit?

Anonymous said...

forgot to sign my name again. sorry

Tim said...

Ryan -

As for Enron and ilk - it may have been insider trading, but according to everything I've read, there was actually no crime involved - so says, at least, the Mises instutute's take, posted a week or two ago.

No, there doesn't need to be a government to cause swings in value - but the government has been constantly taking bites out by expanding the money supply.

As to the warping - I'll have to think about that more. I don't think that the forethought is so much damaged, as the signals the individuals are acting on. Buyers think they're getting a good deal on a pig, but they get home with their pig, let the cat out of the bag, and find out there's something amiss (i.e. their cat is not a pig).

Tim said...

Jason, thanks for posting (and hey, no big deal posting anonymously - if we didn't like it, it could always be set differently, so do what you feel like).

Accountability in business. That's a serious issue, and I think the same applies to government. You say that managers aren't punished for mismanagement; that's an interesting thought! I'll take it front-page.

ryan said...


Regarding the Mises article you mention, it just seems to be about Enron. Worldcom, Qwest, Arthur Andersen -- even if one accepted all of the author's arguments, they'd still be guilty of insider trading and shady accounting. More to the point, I'm admittedly just glancing at the article here, but it seems to me that William Andersen's point is not so much that no crime was committed in Enron's case -- he seems to be more of the mind that what was committed should not be considered a crime. (He also notes, with startling clarity of focus and astounding lyrical wit, that Bush lied and that people died.) Of course, the author does not believe that "securities fraud" is an actual thing or that insider trading is bad. That is to say, the author does not think that any of the allegations about Enron, if true, should be considered crimes, so of course he would conclude that they should not be considered criminals.

Obviously, I don't believe I'm going to convince anyone of the relative virtues of US securities laws. But I would like to point out that no company has to be subject to those laws. Companies choose to be subject to that regime when they choose to list in US stock markets. There are other markets -- many European and Asian markets seem to share the author's opinion about insider trading. So why didn't they list there? And since they listed in the US and filed with the SEC, why is it somehow unjust that they follow US securities laws, no matter what their opinion of the virtues of those laws?

What I don't understand is, why do those who argue for the virtues of competition (even, or especially, in the legal markets) want to end competition between securities markets over the proper way to construct accounting standards? The SEC and the NYSE are products just like anything else -- why does Anderson want to take those products off the market and force investors to choose only the brand of accounting standards and securities laws offered by, say, Italy or Taiwan?