Goldman Sachs May Be Forced to Fundamentally Question How Capitalism Is Working
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This isn't a criticism of capitalism.
This is an acknowledgment our current "capitalist" financial system isn't able to produce "capitalism" itself.
> This is an acknowledgment our current "capitalist" financial system isn't able to produce "capitalism" itself.
That's a No True Scotsman argument intended to shield capitalism from any criticism. "The system isn't working? Then it must not be real capitalism."
That's about recognizing there would be no mean reversion, a great indicative of the existence of crony monopolies and, therefore, lack of capitalism.
In American political terms, calling it an indictment of 'capitalism' is a little imprecise but not really wrong.
Goldman talks about "reversion to the mean", which is a generally-accepted thing in the financial world. If you've got above-average returns, people tend to take note, and try to get some of those returns, and so there's more competition for those returns, and that goes on until there aren't excessive returns any longer. This is a generally-accepted thing because it's been observed a bunch of times. It's the normal functioning of a market.
So if Goldman is questioning whether this is going to happen this time, it's a recognition that the markets aren't functioning the way they normally do - which I think is financedfuture's point. (He/she is going a step further, and [EDIT]implying that either the financial firms or the government broke the system that had been working, which, if the system historically worked and now doesn't, seems like a reasonable guess.)
Capitalism has become synonymous in the collective mind with "don't make laws, laws are government interference and socialism." Just look at the way people on the right talk about removing Obamacare and letting the "free market" do its thing. But the healthcare industry basically NEVER met the assumptions necessary for a free market to exist in the first place. The same is true in banking, albeit some might argue to a lesser extent.
You've got oligopoly or monopoly firms in many industries that are "too big to fail", have near total market power, and make many decisions (some around pricing) behind closed doors or with little transparency (let alone anything close to complete information), and then expect markets to run efficiently? You can't bake the perfect cake if you don't have any of the ingredients in the first place.
Please expound on the history of this (the "NEVER" part)and also enumerate on what the "assumptions necessary" are.
>Just look at the way people on the right talk about removing Obamacare and letting the "free market" do its thing.
Obviously the removal of Obamacare would be insufficient to produce a free market in health care and it would take a lot more repealing of laws (many at the state level) before a free market could "do its thing".
>Capitalism has become synonymous in the collective mind with "don't make laws, laws are government interference and socialism."
I'm not so sure there is any majority which claims this. I find much more common the idea that most of society's problems are caused by capitalism, caused by a "market failure", or that free enterprise is insufficient to resolve said problem and the only solution is government action.
From a U.S. physician's perspective, knowing what insurance you have is obviously going to be a prerequisite to estimating the cost (unless its one of the rare doctors who accepts no insurance). Different insurances cover different things, different providers, different procedures, different prescriptions, then there's the issue of deductibles, contracted costs, etc. It's a complicated mess, and while I don't know enough about the laws affecting health insurance companies and doctors, I would suspect there are regulations which exasperate the problem. Clearly Obamacare (mandating everyone have insurance) is not going to fix the problem.
"Capitalism" is not the same thing as "free market" is not the same thing as "laissez faire."
A "free market" means lots of buyers and sellers participating on even playing field. Even Adam Smith acknowledged that government regulation is necessary in order to ensure that the market remains free. When people argue for the removal of laws and regulation, they are actually arguing for laissez faire economics which, in a nutshell, means for the government to stay out of it. Left to their own devices, however, capitalists will naturally (and rationally) try to tilt the playing field in their favour. Capitalism, for what it is worth, is people investing their free capital into economic enterprises in order to glean a return.
So, I am, actually, a strong proponent of capitalism operating under free markets. I am against capitalism, however, under a completely laissez faire economy.
I've never seen this definition used before. Even playing field is a grossly inappropriate and unattainable normative ideal. Even playing field means homogenization, which is completely antithetical to a market as a vehicle for coordinating entrepreneurial plans, necessarily implying imperfections and heterogeneity.
Even Adam Smith acknowledged that government regulation is necessary in order to ensure that the market remains free.
Regulation is certainly necessary, at least in the sense of property rights enforcement and dispute adjudication. Government regulation it need not be, and it need not be anything more than a minimal legal institutional framework.
Left to their own devices, however, capitalists will naturally (and rationally) try to tilt the playing field in their favour.
How did you reach this conclusion? It makes no sense whatsoever. If anything, we would expect this behavior to occur only where there are large amounts of government regulation. That is to say, when there is more opportunity to exploit the political method over the economic method. Otherwise, how will they tilt the playing field? By forming cartels? Those are brittle. Any attempt at trying to use market power leaves you vulnerable to undercutting in some way in the absence of special privileges.
I am against capitalism, however, under a completely laissez faire economy.
Your taxonomy is worthless.
There is a difference between random variations and the extreme differences in capital and power we have right now.
The benefit that a free market is expected to give to society is, as far as I know, that it will cause a "survival of the fittest" scenario in which the best solutions for a problem gain widespread acceptance and bad solutions die out. But that of course only works if there is actual competition - which in many fields isn't the case in our current situation.
> Otherwise, how will they tilt the playing field? For example by becoming powerful enough that you can control certain market segments instead of just being a player. This power can be reached by becoming a de-facto monopoly in another related segment. One example of this are smartphones and the "app economy". Apple and Google provide OSes of the vast majority of smartphones on the planet - this gives then the power to create their own controlled markets for apps. No government interference necessary, yet if Google decides tomorrow to block your app to protect their own competing product, you couldn't do anything about it.
Similar thinks can happen with large-scale accumulation of property. You agree tgat property enforcement is necessary - but if one entity owns enough property, then even the simple enforcement can be a tool to stifle competition. (See the problems with patents and intellectual property)
Not at all the case. You're injecting Social Darwinist assumptions. The benefit of a free market is in having individuals coordinate their plans most efficiently based on their subjective preferences and valuations, with prices as an epistemic vehicle for conveying notions of scarcity, opportunity for arbitrage or other criteria. It is thus a continuous and dynamic disequilibrium process that one cannot anticipate through outside observation, as optimal outcomes are by definition always being revised, renewed and discovered endogenously.
But that of course only works if there is actual competition - which in many fields isn't the case in our current situation.
Competitiveness is one aspect, but a much more important one is constestability. Free markets are by definition ones allowing for the greatest degree of it. And I absolutely agree that our current situation is far from optimal. We are not discussing our current situation, however. Monopolies are a multifaceted subject, many of them based on rents obtained from IP law and hardly "natural".
Similar thinks can happen with large-scale accumulation of property.
There are things called diseconomies of scale that put upper bounds on the profitability and viability of being too big. Economic calculation issues set in, principal-agent inefficiencies, coordination problems and so forth. It is only through the subsidy of an exogenous body such as government that one can hobble along in inefficacy for exorbitantly long times.
I don't know what to tell you. The definition (admittedly paraphrased) comes from Adam Smith. The gist is that anyone can freely participate in the market on an equal or fair basis without artificial constraint. There is sometimes a need for strong regulation to prevent larger participants from using their size to gain an unfair advantage in the market.
Government regulation it need not be . . .
Can you give me an example of effective non-governmental regulation that doesn't ultimately derive its authority from the government?
How did you reach this conclusion? . . .
I am currently reading a book about the so-called "Robber Barons" of the later half of the 19th century. If you want to see what truly unconstrained capitalism looks like, I suggest you read up on this period: fraud, price-fixing, market manipulations, extortion, bribery . . . they even resorted to armed conflict with their rivals on occasion. The fact that capitalists continue to try to exploit any advantage that they can in the face of strong regulation is precisely my point. Heck, even in my own comparatively small investments, I seek to exploit any advantage that I can. It is not rocket science; it is acting in one's own best interest. The job of regulation is to ensure (as much as is reasonably possible) that no one gains an unfair advantage.
I've talked a lot about regulation, so I want to make clear that I am not in favour of endless reams of red tape. Regulation should be as complex as it needs to be, but no more complex. What regulations there are should be strongly enforced. The current reality does not really live up to this ideal; there are many ineffective or unnecessary regulations, and there are regulations that are missing entirely. Nevertheless, I am talking about an ideal vision that we should strive toward.
The Coasian revolution and public choice schools have since challenged this narrative quite significantly, and have had an impact on economic discourse, though not on mainstream discussion.
The job of regulation is to ensure (as much as is reasonably possible) that no one gains an unfair advantage.
George Stigler devastated that interpretation, as well.
Nevertheless, I am talking about an ideal vision that we should strive toward.
Indeed, this is an ideal discussion. Hence I can't give you a straight example of a "non-governmental regulation that doesn't ultimately derive authority from government," though in fairness this is ambiguous. It happens that the judicial branch is governmental, but the very act of informal bargaining between property owners is endogenous, non-governmental regulation. You could also argue that private certification and standards agencies are endogenous regulators.
I am currently reading a book about the so-called "Robber Barons" of the later half of the 19th century. If you want to see what truly unconstrained capitalism looks like, I suggest you read up on this period: fraud, price-fixing, market manipulations, extortion, bribery
The so-called "robber baron" era was not one of truly unconstrained capitalism at all. The "robber baron" era had the strict mercantilist and interventionist policies of Alexander Hamilton, Friedrich List and the American School economists in full effect. Above all, it was driven by a complex interaction of tariffs (people keep forgetting how important tariffs were in United States history), land law acts and railroad subsidies, with heavy political collusion.
After you're done with that book, I suggest you read Gabriel Kolko's Railroads and Regulation, 1877-1916 to get a fuller picture. Ironically, the author was a member of the New Left.
And yet, Microsoft in the 90s and early 00s still happened. And there doesn't seem to be anything in what you've said that would demonstrate that we no longer need anti-trust laws (which are one form of regulation).
>The so-called "robber baron" era was not one of truly unconstrained capitalism at all. The "robber baron" era had the strict mercantilist and interventionist policies of Alexander Hamilton, Friedrich List and the American School economists in full effect.
A "No True Scotsman" response at its finest. But it doesn't really respond to the point: removing regulation without putting some other constraints into the market is basically asking for a return to the 19th century market. And no one has come up with something that really works any better than regulation for many of these areas of the market.
>I can't give you a straight example of a "non-governmental regulation that doesn't ultimately derive authority from government," though in fairness this is ambiguous.
But, again, the entire point is that lassez faire supporters can't even give an "ideal" replacement for the government's role in regulation, consumer protection, anti-trust, or even dispute settlements that doesn't basically do exactly the same thing as government. Only being less transparent, and more costly to new players in a market (e.g. "binding arbitration").
Nor was that a "No True Scotsman" reply. It's straightforward history. The Hamiltonian program prevailed over Jeffersonian democracy.
Granted, you're failing to draw a distinction between the state and government in the abstract sense of having governance. I would dispute alternate forms of governance being less transparent. If anything, the principle of subsidiarity by which issues of governance should be handled at the most localized and decentralized level would ensure greater transparency and a more effective participation.
"Consumer protection" has been handled by trade associations, private standards bodies and other institutions for centuries. Modern states have largely not devised any particularly new or innovative approaches, merely shifted the ownership thereof.
Thus you get things like Sweatshops, Ok Tedi disaster etc.
Without regulation there's a good chance we'd still not have catalytic converters, we'd still be living with CFCs, Asbestos and DDT. I'm sure you can think of a dozen other examples the market has repeatedly shown it is not capable of regulating itself.
There's an awful lot of matter and energy in our lightcone, there's no fundamental reason we can't keep growing for millions of years.
I think that Healthcare would solve 95% of its problems with a truly Free Market, but to have that you need a very strict law enforcing fair and transparent rules to all (like mandatory transparent pricing), elimination of bottlenecks (like MD graduation and facilitate hiring from overseas), liability and regulation limitation and other things.
> There are long term contracts that prevent all sorts of efficiencies.
Yeah, then those who signed those contracts will be less efficient, and maybe go bankrupt. That happens in several cases, not limited to healthcare
Perhaps healthcare could be efficient on a long enough time scale. When we all live to 1,000 years old maybe it won't matter so much.
Has it occurred to you that regulation might have something to do with that?
You seem to have confused neoclassical models for an attainable ideal compatible with empirical reality. But our world is one of disequilibrium, dispersed knowledge, plan coordination - ones most apt for a market and a free one at that. You are completely out of vogue.
Some may say, wait a minute, but if the government does that, doesn't it mean it interferes with the "free market" and whatnot? I think to have a real free market, you need a fair market. If some companies violate the law to get ahead, they should be punished. Or at the very least be allowed to fail when they reach their own individual "bust" after some high growth from risking with people's deposits.
The point is they can't have their cake and eat it, too.
It should set the same rules for everybody and enforce them. If someone is not playing by the rules, they should be punished.
While an ideal fair/"free" market can probably never be reached, the US has seen better than the abomination we have now.
The government plays a regulatory, distributive role in society, allowing profits to accrue to capitalists but setting taxes and running social programs at the proper level to ensure that society as a whole functions smoothly, and that there are opportunities for everyone to improve their situation.
Most of the economic world is in agreement that financial deregulation was a huge contributing factor in the crash of 2007-08. The repeal of Glass-Steagall allowed banks to take on too much risk with too little supervision.
This would have been fine if the banks had been the only ones punished when their bets went bad - but they had also been allowed to accrue so much power (through consolidation/M&A) that it was impossible to let them face the consequences of their own bad decisions and fail. So they had to be underwritten with public money in the form of QE.
A functional society requires healthy levels of both capitalism and socialism to survive. But the most important thing in my opinion, is that those who intentionally commit fraud or do not act in the fiduciary interest of their stakeholders are adequately punished. This last part is of course the rub - how can you tell if the leaders of business and finance were intentionally setting up their dependents for a crash? What is the adequate punishment?
"We shall see the entire people transformed into petitioners. Landed property, agriculture, industry, commerce, shipping, industrial companies, all will bestir themselves to claim favors from the State... Everyone will have good reasons to prove that legal fraternity should be interpreted in this sense: "Let me have the benefits, and let others pay the costs." Everyone's effort will be directed toward snatching a scrap of fraternal privilege from the legislature. The suffering classes, although having the greatest claim, will not always have the greatest success."
Perhaps Bastiat was overoptimistic. The suffering classes will almost never have the greatest success; as over time the path to becoming wealthy becomes more and more dependent on the ability to extract benefits that the government doles out with increasingly byzantine rules and "arbitrary (i.e. cronyist)" process (think SBIRs).
Goldman Sachs is the least worthy company to have to "rethink capitalism" - it itself is such a cronyist organization that in many circles it's nicknamed "government sachs". If Goldman Sachs is only now saying, "there are broader questions to be asked about the efficacy of capitalism" - that's stunningly oblivious about its own actions. If anything Goldman Sachs should be asking itself about the efficacy of government in doing anything but redistributing wealth upwards.
In fact, many banking panics and examples of financial fragility have originated from pathological financial regulations guided by desires of the state to subvert various public finance constraints. Authors like George Selgin, Kevin Dowd and Lawrence H. White have written on this subject.
How would you structure society and how would this work in a more efficient manner than the government that we have now? If you a) define the problems and b) give me some tangible examples of how you/these authors think we should fix these problems I'm more than happy to read and think about them.
I already listed you three authors about banking and finance. More broadly, we already live in the system that you advocate, and it does not work.
You still haven't made any specific argument as to why the system of balancing capitalism and socialism does not work, and could not continue to work without some rebalancing of the scales. Briefly, what is the alternative?
And of course, these unnatural barriers to competition allow inefficiencies, concentration of wealth, and so on.
The 'free market' is somewhat of a myth. The west has never truly had 'free markets', in the past monopolies have been bought, wealthy merchants, nobility and corporations have patronized governments and monarchs, and tariffs and subsidies have been ever-present.
The current arguments for free markets have to do with price discovery, personal freedom and 'fairness', however we need to realize that these sacred cows are myths, and that if we want to build a better society, it may be time to rethink exactly how we distribute resources.
However, the barriers to entry to be an entrepreneur are far far lower. Corporations still compete with each other on innovation but now more than ever this is through buying small and medium sized companies said entrepreneurs have created :)
So, this is neither good nor bad, just a shift in where the competitive opportunities are. Hint, it's getting easier for the little guys to compete.
[1] http://stats.oecd.org/Index.aspx?DataSetCode=TIMELY_BDS_ISIC...
I don't think either of you understand what those words mean.
Little guys compete with each other to start a niche SaaS app for passive income.
Only CEOs of huge corporations are able to build electric cars and smartphones or process financial transactions.
Is that true? Isn't Stripe a counterexample to this?
Many see this shift itself as a bad thing. Instead of having career options in stable companies, most people (who necessarily can't all be founders or early employees in the places you allege are still sources of entrepreneurship) are forced to accept unsatisfactory compensation, benefits, and employment stability -- in return for foosball tables and dog-friendly offices.
I interpret the comments about barrier to entry in exactly this way. If it's easier to "enter" low-status entrepreneurship (e.g. start-ups), but this easiness is offset by a disproportional lessening of the potential upside (especially the stability and security upsides), then it could still be a net loss overall.
It is a means of restructuring the process by which the deployment of capital is used to extract productivity -- a restructuring that transforms the process into even more of a transfer of wealth from poor to rich.
IMHO what fails in all other systems is to take into account human nature, and not some ideal working guy that never actually lived. people are lazy, care more about themselves rather than company good, some are plain evil etc. very few work on themselves unless they see the carrot at the end of the stick (bonus?).
in capitalism it's cash, which can get you quite far in life, so most are chasing it (even you probably are - if your employer stopped paying you today, would you come in tomorrow?). this chase can easily ruin your life, makes people do regretful decisions but overall, it pushes mankind far beyond (and much faster) that it would achieve without this perpetual force.
I'll claim one thing, feel free to disagree - capitalism ain't often the best system for a single person, but (if all internal mechanisms work) it's probably best for the advancement of mankind. and these days, we need to advance to not destroy ourselves (for that, we already have capability)
I'm not a fan of capitalism, but everything else has historically been worse. The only pre-capitalist system that may have worked well was distributism, but that was under an aristocratic rule.
I think the modern fair market issues we have in all 1st world nations isn't a feature of capitalism - it's the failure to reign in plutocratic tendencies.
Democratic nations have a tendency to ignore oligarchs as they initially grow industry and produce lots of growth. Long term though, they tend to become parasites on the budget and political vampires.
Anyone who seriously claims that capitalism inherently doesn't work is typically talking about something much more specific, like cultural/social interactions with capitalism, or (again) efficiency concerns.
I find this title to be misleading. The above quote can be paraphrased as, "We think profit margins will revert to the mean. If they don't, we will be really surprised that capitalism isn't working as we think it should."
http://www.philosophicaleconomics.com/2015/05/profit-margins...
As for the free market (I believe "capitalism" is the wrong word to use) squeezing the margins to zero, that works great in theory. However, the real world is made up of real people with imperfect information, so maintaining a slightly above zero profit margin doesn't surprise me, even when averaged across the entire economy.
It may seem like a historically high range of a few percentage points is no big deal, but it would be very surprising for that amount to stay constant over time and (when you account for compounding effects), it actually would be a big deal if it did stay at that level.
We are already living in a new time period - a new age in world history, fundamentally different from all other ages experienced by humans so far. We have entered the age of ubiquitous abundance. All economic, political, moral and philosophical frameworks revolving around the concept of scarcity are fast becoming obsolete.
As a consequence, global well-being (by any reasonable measure) is also increasing at an accelerating pace.
Note that this DOES NOT contradict the fact that various "inequality gaps" are also increasing at an accelerating pace. This is natural.
Meanwhile, in reality:
- corruption / inability to problem-solve in most governments in any reasonable amount of time is more and more evident as transparency / software insecurity increases, and there's no obvious way to fix this
- business advantages through technology, information asymmetry, lack of competition, and very cheap labor accelerates, businesses which have a singular goal in mind with little care for negative externalities
- species diversity plummets
- climate change remains negatively positive (zika incoming everyone, I'm sure we'll figure it out in time, just don't have any babies in the meantime)
- wage slavery becomes more and more real for more and more people, in the US particularly through people taking on debt for what used to be a non-risky endeavor (higher education) but which actually turned out to be foolish once they were ready to work
Remember, the only thing that matters is that you get yours; that's the name of the game and it's only so long until the consequences of this utterly delusional approach of infinite growth in a closed system will find its way to the homes of the rich and powerful, too. Who in their right mind, excluding miraculously well-executed altruistic AI proliferation appearing, is looking to the future and saying, "we're doing it everyone! things are getting better and better!".
Do you have any idea what 3 billion+ people living in poverty looks like? Because that is now, and it's fucking shameful how little we care about our communities, our planet, in this race to greater and greater "wealth".
Also people have been saying this for a long time and it has yet to bear out. Galbraith was railing on about the affluent society, how corporations are somehow artificially inventing wants through advertising and the necessity of an activist state. Developed countries have had their states get larger and more activist to no avail.
The scarcity of energy is even more difficult to defend. There can not possibly be any such thing, it is a truly ridiculous perception.
The ONLY remaining value, then, is in individualism. In bringing forth a unique perspective.
Competing for status is indeed a natural human tendency, that isn't going anywhere any time soon.. But it can no longer equate to competing for resources.
Access to a hot new chef's 5 star restaurant on a Friday night.
Energy consumption can not increase without bound. Every human on the planet can not have a 10GW datacenter to simulate their own perfect Matrix where they are King of all creation. The thermodynamics of waste heat certainly puts limits on potential energy utilization for 15 billion humans.
Your inability to conceive of limitations that are certainly present, is not an indication that those limitations do not exist.
Asking the richest capitalists in the world if capitalism works is a silly question if you ask me...