Little Raven's Friday lunch.

[Evertonian]

I'm a bit confused here now, since one of the purposes of the surplus was exactly to pre-empt problems, both wrt to the debt and the future of Social Security. Perhaps it was felt that the higher taxes paid were actually an investment (in lower future taxes ?)*. Moreover, didn't that surplus simultaneously contribute to a lower BoP deficit at the time than might otherwise have been the case ?

@jack merchant. Good questions, and I can see what you mean, and indeed a lot of contemporary analysis of the US economy looks at things in the same way.

Part of the justification used for running the surplus was indeed what you have stated. And if you look at it solely from the Government's point of view it makes some kind of sense, and there is a powerful pro-surplus or at least pro-balanced budget consensus in the US. Just look at how the Democrats are using the deficit to attack the current administration, who in turn are downplaying it, rather than actively defending it.

However it is a simple matter of fact that if the private sector has to pay out more than its income then it either has to dissolve savings or take on debt.

You are also right that, other things being equal, a budget surplus means the Bo P deficit is lower than it would be if there were a budget deficit, since less demand is in the economy, and therefore there is less demand for imports. However, these 3 deficits/surpluses interact (private sector deficit/surplus, government deficit surplus and BoP deficit surplus) interact in a way that a change in one has an effect on the other two, so they aren't equal.

The problem is ultimately the US's BoP deficit. But given that it does have that deficit either the Government or the private sector (or partly both) needs to be running a deficit to pay it. And if the other sector is running a surplus, that deficit needs to be bigger still. Now, the question is, is it better for the Government or the private sector to be racking up debt. Well IMHO it is the Government, as they have a lower risk premium and so debt service costs are lower.

If the US was running a big BoP surplus, maybe it would be prudent to share out some of the benefits of that surplus with the Government sector for the reasons you stated. But the US isn't in that position so the so-called 'savings' were completely bogus. It's like borrowing $10,000 on your credit card, putting it in a savings account, and then claiming you're prudent and responsible because you've got $10,000 of savings.

I'm happy to elaborate on these points if what I've said isn't clear.

 

[Little Raven]

LR, IMHO, you are looking for the impossible.

I concede this is probably true. Which is exactly why I tend to be a bit pessimistic about the mid-term health of the world economy. But it's important that we find one, lest we fall.

Yes, the cutback in consumption is going to be hard for the US.

It's much more than that. A cutback in US consumption will be devastating to the world economy. The US has become the absolute bedrock of the global market. Our consumers are the most important, and our currency is what is used as a baseline. If we stumble, there is an excellent chance that we could bring that whole system tumbling down. And the consequences of that would be dire: It is no coincidence that the last fifty years have brought both economic prosperity and peace to the first world. Every empire at the end turns to its army to preserve itself....do you really think we will be any different?

But when it is over we will be all better off than we are now with a much more predictable, sustainable growth and economy on both sides of the Pacific.

Maybe. Depends on how the wars turn out. But I'm growing increasingly skeptical that capitalism can ever really be stable. No system that depends on constant growth can be in a limited environment. However, capitalism is unmatched for producing wealth, so I can't imagine us moving away from it either...

 

[betazed]

But I'm growing increasingly skeptical that capitalism can ever really be stable. No system that depends on constant growth can be in a limited environment. However, capitalism is unmatched for producing wealth, so I can't imagine us moving away from it either...

Interesting thought; something similar has been going thru my mind for some time. I too think capitalism will fail in the long run (and I am talking a few centuries here more likely than decades). However, I do not think it will fail for the reason you gave above. Let me first elaborate on why I do not think so.

(a) You are concerned of the continuous need for growth in capitalism and this growth coming from limited resources. However, you must also remember growth in most growth models (the standard Solow growth model being an example) in economics comes primarily not from using more resources but using resources more efficiently owing to technologocial progress. Since there is no reason to believe that technological progress needs to slow down for a long long time we need not be concerned about the lack of growth on this regard.

(b) But you may argue that resources are needed to keep the economy in motion. But technology allows all those resources to be recycled. The only resource that cannot be recycled is energy; but that too is a technology problem. There is no reason why we should not have access to limitless energy. If we learn how to do controlled fusion then sea water becomes a energy resource. If we can build a space elevator then we can put enormous mirrors in the sky to gather sun's energy and it can provide us all the energy we need. The crucial point is that we do not even need any new physics to implement these things. It is rather purely a technological problem, and in the space elevator case something even more mundane - a political problem.

(c) Your last argument could be that increasing growth requires increasing amount of resources in circulation to keep the economy running. Earth is a limited amount of resource so there is a critical limit of a economy size beyond which it cannot sustain. yes and no. The critical constraint is put by the amount of energy we can generate and safely radiate out. Resource is not the limiting factor because technology can not only use resources efficiently it can create new resources. Sea water as said above is an example. Lastly, why do we need to constrain ourselves to earth anyway. There is more than enough resource to sustains hundreds of billions of humans in our immediate space neigbourhood! The moon, mars the asteroids are all there just sitting for us.

No, I do not think any exogenous factor will be the downfall of capitalism. What concerns me rather is endogenous limitations of capitalism. Let me explain this a bit more. Pure capitalism is maddenningly short sighted in both temporal and spatial terms. Timewise a capitalist venture can rarely start if the rewards are not in the immediate or very near future. Space wise a capitalist venture can rarely start unless it benefits the people in the neighbourhood of its immediate starting point. Can you think of private enterprises which start projects with time horizons spanning the greater parts of a century or that benefits not the founders but people far and wide and distant? I cannot. But such projects will increasingly be of more and more importance as humans start to take up gigantic engineering projects that would need to be done to keep capitalism growing. I can already think of a few of these projects. (1) Cleaning up the earth (2) Creating cheap access to space (3) Creating a permanent economically viable presence on the moon and beyond (4) Lifting more than a third of the world's population from poverty so that they can economically contribute to the global economy instead of just consuming a small portion and dying because that small portion is not more than the critical amount needed to make a person productive (5) Creating an alternative energy infrastructure (which I may point out is a prime example of the short sigtedness of capitalism. This infrastructure is a major project which benefits everybody on earth directly or indirectly. But the benefit to the immediate entrepreneaurs in the immediate time is negligible comparatively. No wonder it has not taken place).

So, IMHO, pure capitalism will fail because of this internal inconsistency. I have given this some thought and I cannot see if there is any fallacy in the above argument which I will summarize again.

• Capitalism needs constant growth
• Constant growth will at some point of time need massive infrastructure projects that are even beyond the realms of individual governments
• Since these projects by their very nature do not provide immediate benefits temporally and spatailly capitalism inherently will not start them
• Lack of these projects will probably lead capitalism to cease as we know it.

I would very much like everybody to shoot holes in the above argument.

is there a choice? Is there a solution? I think there is and the solution is actually very simple. I will elaborate on that in another post in this thread soon.

 

[Evertonian]

@betazed, another excellent post. Some thoughts.

Interesting thought; something similar has been going thru my mind for some time. I too think capitalism will fail in the long run (and I am talking a few centuries here more likely than decades). However, I do not think it will fail for the reason you gave above. Let me first elaborate on why I do not think so.

(a) You are concerned of the continuous need for growth in capitalism and this growth coming from limited resources. However, you must also remember growth in most growth models (the standard Solow growth model being an example) in economics comes primarily not from using more resources but using resources more efficiently owing to technologocial progress. Since there is no reason to believe that technological progress needs to slow down for a long long time we need not be concerned about the lack of growth on this regard.

Agreed. Economic growth comes from using available resources more efficiently. Think what we can do with a small silicon chip compared with what was possible a few decades ago.

(b) But you may argue that resources are needed to keep the economy in motion. But technology allows all those resources to be recycled. The only resource that cannot be recycled is energy; but that too is a technology problem. There is no reason why we should not have access to limitless energy. If we learn how to do controlled fusion then sea water becomes a energy resource. If we can build a space elevator then we can put enormous mirrors in the sky to gather sun's energy and it can provide us all the energy we need. The crucial point is that we do not even need any new physics to implement these things. It is rather purely a technological problem, and in the space elevator case something even more mundane - a political problem.

Agreed. Energy we could (and should!) be using is renewable and plentiful for our purposes. We do not need new resources.

(c) Your last argument could be that increasing growth requires increasing amount of resources in circulation to keep the economy running. Earth is a limited amount of resource so there is a critical limit of a economy size beyond which it cannot sustain. yes and no. The critical constraint is put by the amount of energy we can generate and safely radiate out. Resource is not the limiting factor because technology can not only use resources efficiently it can create new resources. Sea water as said above is an example. Lastly, why do we need to constrain ourselves to earth anyway. There is more than enough resource to sustains hundreds of billions of humans in our immediate space neigbourhood! The moon, mars the asteroids are all there just sitting for us.

True

No, I do not think any exogenous factor will be the downfall of capitalism. What concerns me rather is endogenous limitations of capitalism. Let me explain this a bit more. Pure capitalism is maddenningly short sighted in both temporal and spatial terms. Timewise a capitalist venture can rarely start if the rewards are not in the immediate or very near future. Space wise a capitalist venture can rarely start unless it benefits the people in the neighbourhood of its immediate starting point. Can you think of private enterprises which start projects with time horizons spanning the greater parts of a century or that benefits not the founders but people far and wide and distant? I cannot.

I completely agree with this. The time horizon issue is especially maddening for me. Capital allocations are made with a short-sightedness that is the very definition of myopic.

But such projects will increasingly be of more and more importance as humans start to take up gigantic engineering projects that would need to be done to keep capitalism growing.

Here I'm a bit lost.

I can already think of a few of these projects. (1) Cleaning up the earth (2) Creating cheap access to space (3) Creating a permanent economically viable presence on the moon and beyond (4) Lifting more than a third of the world's population from poverty so that they can economically contribute to the global economy instead of just consuming a small portion and dying because that small portion is not more than the critical amount needed to make a person productive (5) Creating an alternative energy infrastructure (which I may point out is a prime example of the short sigtedness of capitalism. This infrastructure is a major project which benefits everybody on earth directly or indirectly. But the benefit to the immediate entrepreneaurs in the immediate time is negligible comparatively. No wonder it has not taken place).

Projects 1 to 4 are desirable and would improve the world, however they are not by themselves necessary to keep capitalism growing. The trend of mature capitalist economies has been a shift towards service based provision which requires fewer and fewer raw materials. Project 5 is necessary and I completely agree with your argument, but as I posted in the recent oil runs out thread the crunch is not coming centuries or even decades hence but most likely in the next 10 years.

So, IMHO, pure capitalism will fail because of this internal inconsistency. I have given this some thought and I cannot see if there is any fallacy in the above argument which I will summarize again.

What I would say is that the nature of growth has tended to be unpredictable even from a few years away. We no more can guess what industries will be drivers of growth in a couple of decades, than people a few decades ago who thought that humanoid robots that did all your household chores for you would be what everyone was buying in the year 2000.
The short time horizons over which rates of return are measured are a serious problem, and mean the system is myopic and doesn't maximise human well being. This has been a problem with capitalism for as long as ti has existed. But it doesn't make it internally inconsistent.

 

[betazed]

@betazed, another excellent post. Some thoughts.

Thanks.

Here I'm a bit lost. ...

Are you lost because I was not clear or because you do not agree?


In case I was not clear let me elaborate. Growth (creation of wealth) requires investment. Growing 10% from $100 economy to $110 economy requires $50 in excess investment and can be done in 1 year (say). Then most probably unless we see a quantum leap in technology (which comes once in a while) growth from $1000 to $1100 will take more than $50 in investment and more than 1 year. So as we grow our investment time span and investment amount increases monotonically. at some point of time it will be more than the critical period of vision of capitalistic ventures. Then these investments will not take place and growth will be halted.

In case you do not agree, I would like to know why.

Projects 1 to 4 are desirable and would improve the world, however they are not by themselves necessary to keep capitalism growing.

Are we sure of that? yes, we do not need them now for growth now (maybe, although I can probably argue we do). But what about in another hundred years? we will need them then. We need to reach space economically to expand and have access to more resources. We need to clean up our planet because we cannot pollute it continuously. We need to alleviate the poverty of so many people because otherwise we will never rid ourselves of political troubles and extremism. But these projects will take decades to acheive. If we need them desperately enough to be willing to invest in them in a hundred years or so then decide to start them, we might be in a jam for the decades it will take to finish them (and we may not be able to finish them at all then because we may be in a fix)!

What I would say is that the nature of growth has tended to be unpredictable even from a few years away. We no more can guess what industries will be drivers of growth in a couple of decades, than people a few decades ago who thought that humanoid robots that did all your household chores for you would be what everyone was buying in the year 2000.

The specifics of consumption and technology and growth maybe unpredictable. But overall trends of growth are not. We know that we want to be growing in the year 2050, in 2150 and even in 2250. We know that we will need more and more energy. We know that the population will hit 8-10 billion. Similarly, overall problems of growth are also not unpredictable. We know that US consumption is not sustainable. We know that poverty should be alleviated. We know that fossil fuels pollute. We know all these things, yet owing to short sighted capitalism we will not take actions to tackle these problems.

I am not saying that we need to predict the future in all its gory details. As Yogi Berra famously said "Prediction is difficult, especially about the future". But we need to understand the consequences of present actions and correct our trends. That is not too hard to fathom.

But it doesn't make it internally inconsistent.

Now, if a internal problem of something leads to its own demise then won't you call it an inconsistency? Maybe, maybe not. But that will be an argument in semantics.

 

[Evertonian]

@betazed, What a great discussion. V enjoyable. Do you really get to do this for a living, I'm so jealous.

Are you lost because I was not clear or because you do not agree?

In case I was not clear let me elaborate. Growth (creation of wealth) requires investment. Growing 10% from $100 economy to $110 economy requires $50 in excess investment and can be done in 1 year (say). Then most probably unless we see a quantum leap in technology (which comes once in a while) growth from $1000 to $1100 will take more than $50 in investment and more than 1 year. So as we grow our investment time span and investment amount increases monotonically. at some point of time it will be more than the critical period of vision of capitalistic ventures. Then these investments will not take place and growth will be halted.

In case you do not agree, I would like to know why.

OK, I'm not sure that I really understand this. In the previous post you argued that giganitc engineering projects were necessary to keep capitalism growing, that's the point where you lost me, because it wasn't self evident to me that that was the case.

There is a problem with time horizons and I completely agree with you on it. But I don't see why it necessarily causes growth to stop. Do you have a reason for thinking that the time horizons to achieve a positive return of available investment projects is getting longer? My guess would be that it wasn't, but if you have some reason, please say.

Why do I say it isn't? Well one thing is that interest rates (at all maturities) are much lower than 20 years ago, so the rate of return required from that point of view will be lower.

Also I don't believe that there is just a finite number of investment opportunities and the best ones get exhausted so the remaining ones have a longer time horizon. Instead I think that the available projects increases with technological progress.

Are we sure of that? yes, we do not need them now for growth now (maybe, although I can probably argue we do). But what about in another hundred years? we will need them then. We need to reach space economically to expand and have access to more resources. We need to clean up our planet because we cannot pollute it continuously. We need to alleviate the poverty of so many people because otherwise we will never rid ourselves of political troubles and extremism. But these projects will take decades to acheive. If we need them desperately enough to be willing to invest in them in a hundred years or so then decide to start them, we might be in a jam for the decades it will take to finish them (and we may not be able to finish them at all then because we may be in a fix)!

Look, first of all let me say that the 5 projects you outlined in the previous post are desirable, but only the 5th I think is truly necessary for medium to long term economic growth.

As you've pointed out earlier in the thread economic growth is not dependent on ever increasing amounts of resources being available.

I agree that pollution is undesirable, but it is not clear to me that low level pollution really will bring catastrophe (by this I mean, for example that I think that while we might have moral qualms about it, dumping waste in the deep sea will not store up long term economic problems for us). Another problem is that people disagree on its nature. In Britain at the moment there's a big debate about whether wind farms are good or bad for the environment.

I can't think of a more desirable use for the world's resources than alleviating some of the extreme poverty that we see today. However, I've recently reversed my opinion that it is a cause of political extremism. Look at the Sep 11th hijackers, they were not the economically dispossesed. They were well educated with economic opportunities (they'd gone to live in the US even) so I don't think a side effect of reducing poverty will be reducing extremism. I have views on how that should be done, but that is for another thread.

The specifics of consumption and technology and growth maybe unpredictable. But overall trends of growth are not. We know that we want to be growing in the year 2050, in 2150 and even in 2250. We know that we will need more and more energy. We know that the population will hit 8-10 billion. Similarly, overall problems of growth are also not unpredictable. We know that US consumption is not sustainable. We know that poverty should be alleviated. We know that fossil fuels pollute. We know all these things, yet owing to short sighted capitalism we will not take actions to tackle these problems.

I am not saying that we need to predict the future in all its gory details. As Yogi Berra famously said "Prediction is difficult, especially about the future". But we need to understand the consequences of present actions and correct our trends. That is not too hard to fathom.

Agreed.

There is a problem with private property and private returns. If you think about a big infrastructure project (like the sort of the ones you are describing) the benefits will be shared out among many different agents. But capitalist development requires that the agent who builds it gets back from the project more than they invest in it. It's a classic public good problem, of the sort I'm sure you are familiar with.

For others, the problem is something like this. In my street there are 5 households and no street light. Having a streetlight would be worth $10 to me, and worth $10 to each of the other 4 houses. However, a street light costs $25, thus it is not worth it for me to buy, nor for any other given household to buy. Thus if we rely completely on private property with returns going to one agent, the streetlight will never get built, even though as a group we'd get back more from it than we would have to put in.

A most unfortunate side effect of the West's apparent victory in the cold war (although it isn't down entirely to this) has been the elevation of the principle of private ownership of property to a level where it prevents desirable collective action being taken through an institution set up for the purpose of taking desirable collective action, namely the Government. When desirable societal benefits accrue, but a specific investment project by a private agent would not yield a sufficient return TO THAT AGENT to make the project worthwhile, the government should be intervening.

Now, if a internal problem of something leads to its own demise then won't you call it an inconsistency? Maybe, maybe not. But that will be an argument in semantics.

Sorry, I didn't want to sound like is was making a smart-alec comment, what I meant was that despite agreeing with you about some of the problems facing capitalism, I'm not yet sufficiently convinced that they will lead to capitalisms demise.

 

[betazed]

@betazed, What a great discussion. V enjoyable. Do you really get to do this for a living, I'm so jealous.

I wish it did. My job probably requires about 10% of my known (as opposed to my unknown and unexplored) capabilities. But the good part is that I have plenty of free time to read and study whatever I wish to.

Do you have a reason for thinking that the time horizons to achieve a positive return of available investment projects is getting longer? My guess would be that it wasn't, but if you have some reason, please say.

Not on all investments. But IMO definitely so, on some critical investments required to project growth into the far future.

Why do I say it isn't? Well one thing is that interest rates (at all maturities) are much lower than 20 years ago, so the rate of return required from that point of view will be lower.

Low Interest rates only solve the temporal part of the problem. It does not solve the spatial part. Capitalism still cannot initiate projects where the gain from the project is not to its immediate entrepreneurs but widely distributed to many individuals. Even 0% interest rate will not allow such projects to go thru.

Also I don't believe that there is just a finite number of investment opportunities and the best ones get exhausted so the remaining ones have a longer time horizon. Instead I think that the available projects increases with technological progress.

The investment opputunities are definitely not finite and technological progress keeps building investment oppurtunities. In fact we want many investment oppurtunites, much more than we can actually invest in at any point in time. And herein lies the problem. Since capital is finite capital will always go to the investments that allow short term gains. So long term investments will forever be neglected by pure capitalism.

Look, first of all let me say that the 5 projects you outlined in the previous post are desirable, but only the 5th I think is truly necessary for medium to long term economic growth.

Fine. We can argue about the specifics on whether each of the individual projects are a must. But that is not my essential point. My point is that there exists projects that are needed for future growth that pure capitalism will not fund. And even you agree that I have been able to identify at least one.

I agree that pollution is undesirable, but it is not clear to me that low level pollution really will bring catastrophe (by this I mean, for example that I think that while we might have moral qualms about it, dumping waste in the deep sea will not store up long term economic problems for us). Another problem is that people disagree on its nature. In Britain at the moment there's a big debate about whether wind farms are good or bad for the environment.

Interesting. Once again this is besides the point as I said just now (as this project was just an example of the projects that I talked about). However, I would like to elaborate a bit about this. What most capitalists and free marketers might not know is how much we get from the environment for free. Groundwater is an excellent example. Fish from the oceans is another. Hydro power is another. We could go on and on. So what is the total amount of wealth that Mother earth gives us for free. It is very difficult to estimate. However a recent calculation shows us that it is close to $33 trillion/year (2002 estimates). I will leave it to you to imagine how big that number is. Now our capitalism depends on that free input. Now if we screw up that environment and say the free input is lessened by 10%. The effect will be equal to extracting $3 trillion out of the global economy without putting in anything back! That is 1/3 the US GDP approximately. Can you imagine the depression that it will cause.

So how can we say we do not need this long term project?

I would recommend the book "The future of life" by E.O. Wilson on this. He talks about this pretty extensively.

However, I've recently reversed my opinion that it is a cause of political extremism. Look at the Sep 11th hijackers, they were not the economically dispossesed. They were well educated with economic opportunities (they'd gone to live in the US even) so I don't think a side effect of reducing poverty will be reducing extremism. I have views on how that should be done, but that is for another thread.

Yes, it should be the topic of another thread and it is a fascinating topic for debate. If you would so like then you can start a thread on it and I will be happy to discuss in that. Also I am very interested in knowing your thoughts on this and why you reversed your opinion.

There is a problem with private property and private returns. If you think about a big infrastructure project (like the sort of the ones you are describing) the benefits will be shared out among many different agents. But capitalist development requires that the agent who builds it gets back from the project more than they invest in it. It's a classic public good problem, of the sort I'm sure you are familiar with.
For others, the problem is something like this. In my street there are 5 households and no street light. Having a streetlight would be worth $10 to me, and worth $10 to each of the other 4 houses. However, a street light costs $25, thus it is not worth it for me to buy, nor for any other given household to buy. Thus if we rely completely on private property with returns going to one agent, the streetlight will never get built, even though as a group we'd get back more from it than we would have to put in.

Exactly. Glad you got my point.

A most unfortunate side effect of the West's apparent victory in the cold war (although it isn't down entirely to this) has been the elevation of the principle of private ownership of property to a level where it prevents desirable collective action being taken through an institution set up for the purpose of taking desirable collective action, namely the Government. When desirable societal benefits accrue, but a specific investment project by a private agent would not yield a sufficient return TO THAT AGENT to make the project worthwhile, the government should be intervening.

absolutely correct. but for that government needs to see with some vision. however, these governments are elected by the average people who lack vision - people whose attention span is measured in minutes and days at the most. The only solution I see out of this Gordian Knot is mass education. Unfortunately, that too is a real long term project (with the timespan of at least two generations).

 

[Evertonian]

I wish it did. My job probably requires about 10% of my known (as opposed to my unknown and unexplored) capabilities. But the good part is that I have plenty of free time to read and study whatever I wish to.

Sorry, my bad I'd read your profile and it said you got paid to think so I thought it was this type of thing

Not on all investments. But IMO definitely so, on some critical investments required to project growth into the far future.

Low Interest rates only solve the temporal part of the problem. It does not solve the spatial part. Capitalism still cannot initiate projects where the gain from the project is not to its immediate entrepreneurs but widely distributed to many individuals. Even 0% interest rate will not allow such projects to go thru.


The investment opputunities are definitely not finite and technological progress keeps building investment oppurtunities. In fact we want many investment oppurtunites, much more than we can actually invest in at any point in time. And herein lies the problem. Since capital is finite capital will always go to the investments that allow short term gains. So long term investments will forever be neglected by pure capitalism.

I broadly agree with this but I might go even further and say that capital is not allocated in a rational way at all, even from the point of view of the private interests of the capitalists. For example there was a report (can't remember the exact details unfortunately) out a while ago which demonstrated that the restaurant sector in New York was always over-caapitalised because so many investors wanted to be associated with such a glamourous industry, whereas the expected returns from other less-glamorous industries were in fact much higher.

Also, having seen up close how financial institutions make capital allocations they are just as arbitarty as any other decision making process humans are involved in. I won't go into details, but I was close to a decision by a major financial institution to withdraw from a fairly large equity stake in a well known South Korean company. The decision process was like, 'Well this has lost money for the last 2 months, we'll get some heat from senior management if that carries on, time to cut it.' And that was that.

One other point is that some work has been done to investigate the effective discount rates used by individuals in their own affairs, and they tend to be much higher than even market discount rates, even ludicrously high sometimes.

Fine. We can argue about the specifics on whether each of the individual projects are a must. But that is not my essential point. My point is that there exists projects that are needed for future growth that pure capitalism will not fund. And even you agree that I have been able to identify at least one.

Agreed. Energy. And the crunch is almost upon us.

Interesting. Once again this is besides the point as I said just now (as this project was just an example of the projects that I talked about). However, I would like to elaborate a bit about this. What most capitalists and free marketers might not know is how much we get from the environment for free. Groundwater is an excellent example. Fish from the oceans is another. Hydro power is another. We could go on and on. So what is the total amount of wealth that Mother earth gives us for free. It is very difficult to estimate. However a recent calculation shows us that it is close to $33 trillion/year (2002 estimates). I will leave it to you to imagine how big that number is. Now our capitalism depends on that free input. Now if we screw up that environment and say the free input is lessened by 10%. The effect will be equal to extracting $3 trillion out of the global economy without putting in anything back! That is 1/3 the US GDP approximately. Can you imagine the depression that it will cause.

So how can we say we do not need this long term project?

I would recommend the book "The future of life" by E.O. Wilson on this. He talks about this pretty extensively.

I hadn't heard about that calculation. $33 trillion
It is a large number, and to lose 10% of it would be catastrophic. But the project was clearing up pollution. Over-fishing is a problem. Fish stocks re too low. But it isn't the same problem as pollution. And I can't see how hydro power would be affected by it either.

Yes, it should be the topic of another thread and it is a fascinating topic for debate. If you would so like then you can start a thread on it and I will be happy to discuss in that. Also I am very interested in knowing your thoughts on this and why you reversed your opinion.

Oh no don't get too excited . Suffice to say that (1) I think extremism can be countered by winning hearts and minds of potential converts to it by exemplary behaviour (in this case if we are talking about potential Islamic extremists then exemplary behaviour by western governments), as hearts and minds is the key and (2) I reached the conclusion about poverty by reading an article pointing out that most people who have been implicated in attacks were not in that situation.

Exactly. Glad you got my point.

absolutely correct. but for that government needs to see with some vision. however, these governments are elected by the average people who lack vision - people whose attention span is measured in minutes and days at the most. The only solution I see out of this Gordian Knot is mass education. Unfortunately, that too is a real long term project (with the timespan of at least two generations).

Yeah that is a problem, and when the debates about what to teach in school focus on whether the phrase 'the long history of the earth' should be replaced in textbooks with 'the history of the earth' so as not to annoy people who think it is only 6,000 years old, the possibilities for starting it are not too good.

 

[betazed]

[off topic]

Sorry, my bad. I'd read your profile and it said you got paid to think so I thought it was this type of thing

Well, I do get to do a lot of thinking and pretty much nothing else. By profession I am a software engineer although unfortunately i do not get to do a lot of implementations. I just think up architectures and designs and the implementations get done by somebody else. Sometimes I can pull clout and wrest the implementation just because implementation can be so much fun. But every now and then some real tough technical problem crops up that requires some hard thinking. But they are few and far between.

[/off topic]

But the project was clearing up pollution. Over-fishing is a problem. Fish stocks re too low. But it isn't the same problem as pollution. And I can't see how hydro power would be affected by it either.

The environment has a finite carrying capacity. When we impact the environment in any way that reduces it carrying capacity then it is "pollution". I admit this is not the common definition of the word but it is a very useful definition. So sustainable fishing is not pollution but overfishing is. Using fossil fuels judiciously is not pollution, but using it profusely and cutting down rain forest at the same time and thus overwhelming earth's carbon cycle is, so on and so forth. These are just two examples. I am sure you can think up a lot more. Also remember we do not understand the energy and mass flow matrix of Earth. So many more things that we do not understand may be pollution. In these processes if we reduce the carrying capacity then the freebie that we get from earth reduces. A substantial reduction will lead to a substantial growth loss and may even push us into depression. At a micro scale this exact phenomenon has been observed already.

So once again we can argue on which actions are pollution and which ones are not but the central point that "we need to clean up the earth and not tax its carrying capacity" remains.

I reached the conclusion about poverty by reading an article pointing out that most people who have been implicated in attacks were not in that situation.

I still think the article got it wrong. Would be happy to elaborate but this will not be thread to do it.

 

[El Sop]

[congrats]Excellent thread, guys. Best I read for a while, keep it up! Sorry for intervening...[/congrats]

 

[betazed]

I promised earlier that I will provide some thoughts on how we can find a better replacement for pure capitalism that we see here. Well, following are my thoughts.

So how can we find a better alternative to capitalism? Well, to answer it we need to ask what is the drawback of pure capitalism as we know it? Shortsightedness. Can we remedy that. Yes of course. But that will require a lot of knowledge and information as will be evident here (and a valid argument may be is whether we will ever have so much information - I think we will and even do in most cases). IMHO, we can fix capitalism if we make the following changes...

(a) Incorporate into accounting the correct costs and benefits of a project

(b) Wealth creation and distribution should be done by the free market as it is done now but with the above modification a person gains wealth commensurate with what he/she has truly contrinbuted to society (and not just in the short term and in the immediate neighbourhood)

(c) Increasing the human lifespan by many more decades or even centuries. (not impractical at all).


Let me elaborate on each of these one at a time.

Let's start with (a) and we will work with an example. As Evertonians example stated (which I reproduce here)

For others, the problem is something like this. In my street there are 5 households and no street light. Having a streetlight would be worth $10 to me, and worth $10 to each of the other 4 houses. However, a street light costs $25, thus it is not worth it for me to buy, nor for any other given household to buy. Thus if we rely completely on private property with returns going to one agent, the streetlight will never get built, even though as a group we'd get back more from it than we would have to put in.

here with the light bulbs on a streat capitalism as we know it will put the cost as $25 and benefit to entrepreneur as $10. But this is incorrect. We need to account for all benefits incurred by everybody even if the person does not actually pay for the benefit. If we do that then the benefit becomes $40 and the cost of the project becomes less than the benefit and the project becomes economically viable. To take a reverse example we should also calculate the costs incurred on many projects although no one pays for them either directly (although we inevitably pay for them together). Costs for pollution (like the reduction is salmon harvest owing to cutting of old growth trees), future costs (like the healthcare costs for smoling tobacco) etc. If we take these into account then suddenly lots of projects that are pursued now will not get pursued.

However, coming back to Evertonian's example it is still not viable for any individual investor. The individual investor reaps only $10 benefit still. (b) remedies that problem. Now people should pay for benefits at least it part. So the each of the four houses should pay for the benefit of the street light and those payments go to the person who put the light in place. Once this is done the investment becomes both economically viable and makes sense for an individual entrepreneur. The major problem with (b) is actually quantifying the cost for each benefit and then allocating the revenue to the source of the benefit. I am not sure this can be done for every possible scenario. But I am sure that if we try then we can do it for a large number of scenarios and hence bring a large number of projects that benefit a lot of people under the purview of capitalism.

(c) will happen as time goes by. This will in some sense alleviate the short time span issue of projects. Simply because if I know that my estimated life span is 200 years then I am much more prone to invest in a project that will take 75 years than if my life span is 100 years. I do not see any reason why human life spans cannot be extended to centuries. At least scientists have not found any reason why we should die at or around 100.

There are a couple of more things that we can do to make the system better. But I will leave just these three here for now as points to ponder.

All criticisms and suggestions are welcome.

 

[Evertonian]

Nice one betazed, I'm really glad this thread hasn't died
Just one point, (I mentioned but didn't emphasize before) is that people's personal discount rates tend to be extremely high.

Eg, ask you co-workers if they'd rather have $100 now, or a cast iron guarantee of $120 in 3 months. In these types of tests, big majorities say $100 now, yet the implied annual interest rate is greater than 100%, and it tends to be true regardless of age, so I'm not sure if your proposed solution of extending lifespans would fix it.

 

[stormbind]

There is a housing bubble in the UK. A small 2 bedroom house in London now goes for $1 million (USD) which is completely absurd.

But I have been waiting years for the crash and it has never come! How much longer must I wait?

There have been recent developments such as lead economists suggesting there will be a crash, which ofcourse serves only to disuade purchases and cool the market... extending the time it takes for a crash to arrive! Ugh... How much longer must I wait?

 

[Little Raven]

And at long last I return to this thread, having managed to extradite myself from the situation my mouth landed me in a few weeks ago. Now…where were we?

Interesting thought; something similar has been going thru my mind for some time. I too think capitalism will fail in the long run (and I am talking a few centuries here more likely than decades). However, I do not think it will fail for the reason you gave above. Let me first elaborate on why I do not think so.

You'll notice I didn't say capitalism was bound to fail; I said I doubted it could ever be stable. The reason I didn't use the word fail is because I'm not quite sure what that words means when applied to capitalism. Does a collapse of the national and/or global economy count, or does capitalism only fail when we abandon it altogether?

Capitalist economies have a long history of periodic collapses. Here in the US, before the advent of the New Deal, we had several melt-downs. The late 1830s certainly weren't pleasant, and the economy slumped again in the 1890s. And of course there was the big one in 1929. Historically, capitalism does not have a real good record when it comes to stability, even in this country. But I don't think too many people would say that capitalism has 'failed' the US. We keep going back to it, at any rate. So how are you defining failure?

Your thoughts on resource allocation and possible energy sources are interesting and IMO valid, but not particularly consistent with a capitalist society. Indeed, imagining that any capitalist society would every implement any of those things is quite a stretch. Limitless energy? Why would any good capitalist want that? Things that are limitless are cheap. Do power companies make money from cheap energy? Enron would seem to say no.

As you point out, capitalism is and must be concerned with the here and now, particularly the here and now of the stock price. The CEOs bonus is dependant upon where the stock is out now, not 10 years from now. What does he care if the company collapses in 5 years? He'll have already made his fortune and be gone.

The same is true in our politics, which cannot really be separated from money. A politician gets re-elected on how things are now. There's no incentive to think long-term. All that does is get you voted out and allow your successor to get the credit. Why would anyone push for forward-thinking policies, when those so often call for short-term sacrifice?

I'm not going to shoot any holes in this argument. (I'll save that for your solution.

) I don't see any. But I don't think we have centuries until the next big hiccup. I don't even think we have decades. Maybe a decade, but that's probably it.

 

[betazed]

Good to see this thread revived again.

The reason I didn't use the word fail is because I'm not quite sure what that words means when applied to capitalism.

By failure I meant termination and not just collapse ( a collapse is something from which nations and economies recover). I averred capitalism as we know and practice must come to an end. It cannot even sustain the "go - no go" scenario of the last two centuries of US that you mention. Of course I am not sure how that end will pan out. It is an interesting exercise dreaming up that scenario.

 

[Little Raven]

I promised earlier that I will provide some thoughts on how we can find a better replacement for pure capitalism that we see here. Well, following are my thoughts.

*sniff* "It starts with the little things, you know? The things everyone takes for granted. They complain about red ink in the budget; the widening income gap between the top 10% and everyone else. You tell yourself that it’s just a phase, that they'll grow out of it. Then one day they come home shouting 'Mummy! Mummy! The global labor arbitrage is undercutting economic momentum and created an economy dependent on exterior fiscal stimulus for growth!' And that's it, then, isn't it? I mean you just can't hide from it any longer. You've got a radical living under your own roof."



I question the notion that your solutions if implemented leave us with anything even resembling capitalism, but that aside, I'm reminded of a something I once saw on the Discovery Channel…

It was a special on the making of Jurrasic Park, mostly about the science that would be involved in producing a 'real' Jurassic Park.

At one point, they are investigating how one goes from dinosaur blood to a viable dinosaur embryo. (this was before stem cells) They interviewed Michael Crichton about the research he did in order to write the book, and he explains it thusly:

"Going from dinosaur DNA to an actual dinosaur embryo in an enormously complicated process and it's not at all clear how such a thing would be accomplished. So my approach to that problem in the book was simply to skip it."

This sprang instantly to mind when reading about in your post. Yes, I agree that fixes a great many problems facing investors today, but I also don't see how we could possibly implement it. I assume the government is going to be responsible for determining how much everyone owes in that scenario, simply because I can't see any other body with the authority to do so. But once we're setting prices based on government studies, we've pretty much done away with capitalism and moved to a strictly planned economy. I don't have anything against that on principle, but historically they haven't worked very well, because governments are run by humans who are inherently flawed.

Frankly, I'm not at all optimistic that [a] is at all possible. Who in the 40s could have possibly predicted that the transistor would result in a new information economy? Gigli had everything going for it. How was Sony supposed to know it would bomb?

[c] is perhaps the most interesting of the bunch. I grant, it's novel, and it just might work. Certainly, appealing to self-interest has proven more successful than more schemes when it comes to influencing people. But it brings a whole host of other problems with it. Older people tend to be more resistant to change and less interested in new solutions. They also increase crowding in the labor force. And if longevity proves to be available but expensive, expect to see a whole new stress on the social fabric. But at least we don't need to legislate anything in order to see [c] done…the market will take care of that on its own.

I applaud you for bringing these up for debate, but let's be clear. This isn't 'fixing capitalism.' This is tearing capitalism out by the roots and putting something new in its place. And frankly, some of the ideas you've described seem fairly fair-fetched. Can you go into some more detail on who would be responsible for administering [a] and and how we can insure accurate results?

 

[Evertonian]

Your thoughts on resource allocation and possible energy sources are interesting and IMO valid, but not particularly consistent with a capitalist society. Indeed, imagining that any capitalist society would every implement any of those things is quite a stretch. Limitless energy? Why would any good capitalist want that? Things that are limitless are cheap. Do power companies make money from cheap energy? Enron would seem to say no.

I have to disagree with the point you make in this paragraph, its quite at odds with my own belief of how technological progress influences economic growth in capitalist societies.

Imagine the following scenario.
(I don't really know what's realistic amounts for a power company to provide in terms of mega watts etc, so I'm just using 'units')

It currently costs a power company $20 provide one unit of energy, and they can sell 10,000 units (say) at $25. It costs the customers $250,000 and the profit for the power company is $50,000.

Now, say the power company identify a new process for generating energy. Now it only costs $5 to generate. So they can sell it for $10 a unit. If they sell 10,000 units the customer pays $100,000 and the profit for the power company is still $50,000. However, because it is cheaper the customers buy MORE, and are still spending LESS than they did before. Say they buy 15,000 units. It costs them $150,000, which is $100,000 less than before, and the power company's profit is $75,000.

Everyone's a winner then? Well, not quite because the $20 a unit that is no longer being incurred as a cost went to somebody. But that's an irrelevance for the capitalist (for example see the very interesting article Luiz posted in the first post of his outsourcing thread, which sets out some of the logic of capitalism in detail).

@Little Raven, one more thing: I picked this up from your comment in another thread, please can you state your rationale for thinking its bad for the government to run a deficit? Thanks

 

[Little Raven]

I have to disagree with the point you make in this paragraph, its quite at odds with my own belief of how technological progress influences economic growth in capitalist societies.

Your example, while good, leaves out a fairly major point. For betazed's idea to become reality, someone will have to create an entire space-based infrastructure and retool much of the nation's electrical infrastructure. I have no idea how much that would cost, but it would easily be in the hundreds of billions of dollars.

Now assume you're a start-up power company. Power is currently selling at 25$ a unit. You can either go with traditional methods, and manufacture it at 20$ a unit, or you can invest hundreds of billions of dollars creating a new infrastructure and then manufacture it at 5$. Of course, you'll be betting on several things not happening.

• That you can develop the technology to transfer power to earth safely, cheaply and reliably.
• That your established rivals (who have political connections and huge cash reserves) won't turn to the standard dirty tricks to keep the new guy down. Things like hostile regulation, baseless lawsuits, or strong-arming your suppliers.
• That someone else doesn't invent zero-point energy while you're busy putting up satellites.

If any of those things happen, you're out hundreds of billions of dollars. But the chance for profit is there. I wish you luck getting anyone to finance your dream.

My argument against capitalist societies adopting any of betazed's resource allocation schemes don't spring from the belief that capitalists are stupid or that the concept of the free market is useless. Neither is true. But in order for the free market to function correctly on a time-scale acceptable to most people, a remarkably narrow set of circumstances must be in place, and these circumstances most certainly do not exist in the energy market. That said, of course power companies will switch to a new, cheaper method if one is easily available and yes, everyone can win. But what power companies won't do is take risks in order to find these new sources of power. Why should they? They have a good deal going on right now! Everyone needs power; it isn't negotiable. So people will always buy your product, even if you rig the market and charge whatever you like. (see Enron) You have a guaranteed profit base. Why risk that on the chance that you could develop a way to sell power more cheaply? A bird in the hand is worth two in the bush, you know.

@Little Raven, one more thing: I picked this up from your comment in another thread, please can you state your rationale for thinking its bad for the government to run a deficit?

The government running a deficit isn't necessarily bad. There are certainly times when deficit spending is the only logical course of action. There's nothing evil about credit. Credit gets you in trouble when you don't know how to use it, and begin to acquire too much of it. I don't have a problem with the principle of deficit spending by the government. I have a problem when that becomes the default mode for the government, because lawmakers find it easier to whip out the charge card rather than face up to true costs. Which is exactly what I think is happening today.

 

[Evertonian]

Your example, while good, leaves out a fairly major point. For betazed's idea to become reality, someone will have to create an entire space-based infrastructure and retool much of the nation's electrical infrastructure. I have no idea how much that would cost, but it would easily be in the hundreds of billions of dollars

My bad, I didn't make clear what I was trying to do . The only thing I wanted to challenge was your specific statement that cheaper processes weren't in the interests of capitalists, not your general statement that Betazed's hopes were too optimistic.

I completely share your pessimism about the chances of requesite investment in new power technologies. And this isn't a chicken that is going to come home to roost in 2075, its one we'll face within 10 years, when oil supply peaks. Since oil's properties were discovered demand for it has gone up, and has been pretty price inelastic. The supply has gone up to match it. Well demand is going to carry on going up, but supply is going to change direction. The consequences will be huge. See the link in my sig for more details and a fuller explanation of why this will happen.

The government running a deficit isn't necessarily bad. There are certainly times when deficit spending is the only logical course of action. There's nothing evil about credit. Credit gets you in trouble when you don't know how to use it, and begin to acquire too much of it. I don't have a problem with the principle of deficit spending by the government. I have a problem when that becomes the default mode for the government, because lawmakers find it easier to whip out the charge card rather than face up to true costs. Which is exactly what I think is happening today

The alternative to the government running a deficit AT THE MOMENT would be that either
(a) household or corporate sector would have to run a deficit of similar magnitude, adding to their already over-indebted situation, and since they are more risky to borrowers, the economy would be taking on debt at higher rates of interest than currently
or
(b) Aggregate consumption of goods and services in the US would have to decline by 5% of GDP with potentially greater second round reductions as the economy came to terms with a huge drop in employment levels and it would certainly mean a large drop in the standards of living enjoyed by the US population. The huge and sudden drop in US demand would also transmit to the rest of the world, probably leading to aborted recoveries in Japan and the Euro Zone.

I don't doubt that the deficit has been justified by fallacious arguments, but its existence at the moment is certainly welcome.

 

[betazed]

This sprang instantly to mind when reading about in your post. Yes, I agree that fixes a great many problems facing investors today, but I also don't see how we could possibly implement it.

Heh, I did not say it was easy. But then who says that making humanity a great race is easy. (a) is not a detailed solution but rather a goal we want to reach. I have a few ideas about how we can get there, but none of them are easy. And yes, all of them are a complete remake of capitalism as we know it.

Frankly, I'm not at all optimistic that [a] is at all possible. Who in the 40s could have possibly predicted that the transistor would result in a new information economy? Gigli had everything going for it. How was Sony supposed to know it would bomb?

I do not understand what your objection is. You do not have to forecast the actual wealth created by an endevour and then dole out the profits to the person responsible for the endevour. Rather profits are distributed as and when wealth is created.

[c] is perhaps the most interesting of the bunch. I grant, it's novel, and it just might work. Certainly, appealing to self-interest has proven more successful than more schemes when it comes to influencing people. But it brings a whole host of other problems with it. Older people tend to be more resistant to change and less interested in new solutions. They also increase crowding in the labor force. And if longevity proves to be available but expensive, expect to see a whole new stress on the social fabric. But at least we don't need to legislate anything in order to see [c] done…the market will take care of that on its own.

(c) IMO, is a great oppurtunity and a potential for disaster. I will leave it to your guys to figure out why.

I applaud you for bringing these up for debate, but let's be clear. This isn't 'fixing capitalism.' This is tearing capitalism out by the roots and putting something new in its place.

Why shouldn't we fix (or tear it apart and remake it) capitalism? It is not enshrined in stone and neither is it a law of physics. IMHO, we should start thinking about ow to make chnages to it slowly. Change is necessary for advancement, don't you agree?

And frankly, some of the ideas you've described seem fairly fair-fetched. Can you go into some more detail on who would be responsible for administering [a] and and how we can insure accurate results?

As I said they are only ideas. They are not solid detailed plans. (If they were I wouldn't be here would I? ) But if you want to me elaborate on any of these just let me know what exactly do you want to know.