This is why capitalism will eventually fail

[WillJ]

Would you mention an example of externatilities or transactions affecting third parties? Many people would now mention pollution as an example of externatilities. But I would argue that the problem could be solved by privatizing publicly owned areas, so that the polluter is forced to internalize all the costs.

Er, pollution can affect the entire world as a whole (think global warming), and making the entire world the property of one person wouldn't be a very good idea, so methinks pollution is still a good example. Another is education. The graduate benefits from his education, but so do many other people; indeed, society as a whole benefits. Same with health care.

And do you not believe in the tragedy of the commons? Keep in mind that certain "commons" (public goods) can't be made private, examples being national defense and the legal system. Others could be made private but with much difficulty, e.g. public roads.

 

[Paalikles]

Ah, Crystal, you make things so easy. Let me destroy your argument. Firstly, by applying an example where pollution is indeed an externality. Secondly, by showing how the private sector fails to adapt correct the externality itself. This is basic microeconomics, from my very first course, back in 2003.

Classical case coming in:

Upstream and downstream firms - litterally speaking:

Say a firm, firm A, produces a good, and the production process results in waste dumped in a river. This firm is based further on up the river from firm B...its waste naturally moves downstream... Firm A is not affected by the waste it dumps, nor has it any incentive to fix the pollution it creates, since the effect is not reflected in the firm's cost structure.

Another firm, firm B, is a fishing industry, which collects fish from that river.
Now - the externality here is the fact that firm A has no incentive to reduce their dumping of waste; so their dumping has a negative impact on the production process of firm B, which for example gets less fish from the river because of A's actions.

Example done.


Now, please explain where in my example there is a market failure caused by the government. My example assumes full private ownership and no governmental regulations whatsoever. I would like to see you explain why this market solution would be efficient.

I look forward to your reply, and I presume that I will have to come back to the two most likely ways to solve this particular problem when you have replied.

 

[crystal]

Say a firm, firm A, produces a good, and the production process results in waste dumped in a river. This firm is based further on up the river from firm B...its waste naturally moves downstream... Firm A is not affected by the waste it dumps, nor has it any incentive to fix the pollution it creates, since the effect is not reflected in the firm's cost structure.

Another firm, firm B, is a fishing industry, which collects fish from that river.
Now - the externality here is the fact that firm A has no incentive to reduce their dumping of waste; so their dumping has a negative impact on the production process of firm B, which for example gets less fish from the river because of A's actions.

Simple! (make up a tougher example next time )

Assuming that the river is in full private ownership in this case, firm A violates firm B's property rights to clean water. This would be analogous to a situation where you decide that it's a waste of time to properly dispose your household waste, so you decide to dump them in your neighbour's backyard. Is that justified? Nope, because the neighbour owns the property rights to his backyard. But if you absolutely wanted to dispose the waste that way, you could negotiate an arrangement which allows you to dump certain quantities of waste in neighbour's backyard in return of money, for example.

Similarly, in the river example, the companies will negotiate an arrangement which allows the disposal of pollution in the river -- if it is economically unfeasible to eliminate 99.9% of the pollution caused by the factory.

 

[WillJ]

Simple! (make up a tougher example next time )

Assuming that the river is in full private ownership in this case, firm A violates firm B's property rights to clean water. This would be analogous to a situation where you decide that it's a waste of time properly dispose your household waste, so you decide to dump them in your neighbour's backyard. Is that justified? Nope, because the neighbour owns the property rights to his backyard. But if you absolutely wanted to dispose the waste that way, you could negotiate an arrangement which allows you to dump certain quantities of waste in neighbour's backyard in return of money, for example.

Similarly, in the river example, the companies will negotiate an arrangement which allows the disposal of pollution in the river -- if it is economically unfeasible to eliminate 99.9% of the pollution caused by the factory.

And what about Yom's and my posts? How do you propose similar solutions for air pollution; the extinction of biological species (from overfishing and overhunting); the underfunding of education, health care, national defense, global defense (asteroid protection and such), the legal system, and roads (without the use of burdensome tollbooths)?

 

[Paalikles]

Though I see almost no realism in your solution, I must admit that you beat me on that one. I also see I missed how you assumed full privatization of property rights - which made my example a bit easy, I agree.

I doubt that full privatisation of public property is doable (one think that it is most likely not going to happen..) since there would be the inevitable question of distribution of property. If property is public initially, how can it become private? I need to get some light on that in order to be able to formulate slightly tougher examples

BTW - I do hope you realize the possible solutions, given that my (IMHO) more realistic assumptions about ownership take place.

 

[King Alexander]

So you oppose individual freedom, albeit only moderately? Either a society is free (e.g. capitalist) or not free (socialist).

I don't see how I'm NOT free by not living in a pure capitalist economy.

There are no such third way to run a society without resorting to centralist planning and infringing individual freedoms. Pure capitalism = freedom.

Pure capitalism= DYING LIKE A DOG IN THE STREET IF YOU CAN'T PAY FOR YOUR TREATMENT OR SURGERY, thanks but no thanks.

 

[crystal]

And what about Yom's and my posts? How do you propose similar solutions for air pollution;

Well, that requires the privatization of air (I know, it sounds unusual, but I think it would essentially solve the problem.) In this case, people own the property rights to clean air in their residence. It's a little analogous to the river example, since a factory (or any similar entity) is not allowed to transfer harmful substances (pollution) into other people's residence against their will, since it infringes their property rights to clean air. In practise, people could negotiate an arrangement for compensation for harm and/or reduction in pollution. And if the company does not agree with that, people could sue the factory for harming their health.

the extinction of biological species (from overfishing and overhunting);

Can't you just see that overfishing is caused by public ownership of seas? Wikipedia's article on tragedy of commons tells more about that, IIRC.

the underfunding of education, health care,

These can be and should be privatized. Let the private charity help the poor if one considers poverty as an obstacle to this.

national defense, global defense (asteroid protection and such), the legal system, and roads (without the use of burdensome tollbooths)?

National defense is largely pure waste. And, err -- asteroid protection?? If there was any provable realistic threat, then it would be funded.

 

[Paalikles]

"Perfect privatization", if that is what you are after is impossible by the very fact that individuals have no incentive to respect eachother's property without a government to enforce that "basic right"

Think back to the days of Locke, and his discussion of democracy. He argued that there was need for some form of social contract to prevent chaos. Perhaps you are founding your arguments on extreme laissez faire - that government is present at the very minimal, with just defense and police forces.

Who will enforce the legal system, if not the government?

Your ideas are of course interesting, at least from the purpose of discussion, (something which my OT history show that I seldom do), but I fail to see how you can enforce full privatization over time. And if you allow for the presence of government, would it not be easier to revert back to the current way of public ownership of air and whatnot. I am not sure I can see an efficiency bonus in your argument - since your system is very complicated to administrate

 

[crystal]

Though I see almost no realism in your solution, I must admit that you beat me on that one. I also see I missed how you assumed full privatization of property rights - which made my example a bit easy, I agree.

In psychology, there is a phenomenon called status quo bias. That means, in some instances people are unlikely consider alternative situations better than the current one. "Land and water have always been public property, so it would be stupid to change this system." I think that is the problem here. And many people unfoundedly associate privatization with evil, greedy capitalists wanting to monopolize everything. So that's the other problem too.

I doubt that full privatisation of public property is doable (one think that it is most likely not going to happen..) since there would be the inevitable question of distribution of property. If property is public initially, how can it become private? I need to get some light on that in order to be able to formulate slightly tougher examples

Privatization is not complicated at all: just sell it to the highest bidder. But in the case of public lands, I don't see much problem of it being divided equally among citizens.

BTW - I do hope you realize the possible solutions, given that my (IMHO) more realistic assumptions about ownership take place.

You mean tradable pollution quotas or something like that?

 

[Paalikles]

Pollution quotas are among solutions, yes.

My field is not that of psychology, but I see what you are referring to, and I am slighly insulted by it. I have not said privatization is evil, nor implied it. I believe in a more moderate approach, whereas you are more extreme. If I come off as a sceptic of change, it is more that I would like to know more of my opponents position.

If it is not clear, I try to pose my posts in a way that allows me to observe, consider, and possibly accept oppsing arguments. I am not one of those who stick to an opinion no matter what. IIRC, this was the approach of Socrates, though he utilized it in a much better way than I do.

So my main arguments are based on efficiency evaluation. I ve read your arguments, and they are quite interesting, but they leave me with questions, and thus I ask. Not to try to put you in place (not all the time ), but more to get away from what you refer to as "status quo bias"

Distribution of wealth will probably be the area where there is most controversy between non-economists and economists, when discussing such topics as the ones in this thread. Efficiency issues are more "straightforward".

Getting back on track...:

I very much would like to see you privatize air
But dont you dare try stealing any of mine And keep your air to yourself, I wont have you mix your air with mine.


Your example is likely stylized though...


(BTW - nice sig. This must be the second time this month that I ve started a discussion with someone and thought they were ignorant of the principles of economics.)

 

[crystal]

My field is not that of psychology, but I see what you are referring to, and I am slighly insulted by it. I have not said privatization is evil, nor implied it. I believe in a more moderate approach, whereas you are more extreme. If I come off as a sceptic of change, it is more that I would like to know more of my opponents position.

It wasn't meant to insult anyone, and I was referring to people in general.

If it is not clear, I try to pose my posts in a way that allows me to observe, consider, and possibly accept oppsing arguments. I am not one of those who stick to an opinion no matter what. IIRC, this was the approach of Socrates, though he utilized it in a much better way than I do.

Sometimes I try to write my posts using a moderate viewpoint, but then I see some opposing argument and get annoyed by it while adopting some hyper extreme radical viewpoint. And then my mainstream approach just fails.

So my main arguments are based on efficiency evaluation.

As Hayek argued, economic knowledge is dispersed and no one can know everything. Central planning is inefficient and thus decentralized decision-making should be utilized.

(BTW - nice sig. This must be the second time this month that I ve started a discussion with someone and thought they were ignorant of the principles of economics.)

Good , here's another somewhat similar page: http://www.mskousen.com/Books/Articles/economics1.html

Btw, if I didn't already mention, I advocate minarchism (in other words, limited government). Government's main functions should be enforcing property rights, individual liberty, and contracts established between adult individuals.

 

[WillJ]

Well, that requires the privatization of air (I know, it sounds unusual, but I think it would essentially solve the problem.) In this case, people own the property rights to clean air in their residence. It's a little analogous to the river example, since a factory (or any similar entity) is not allowed to transfer harmful substances (pollution) into other people's residence against their will, since it infringes their property rights to clean air. In practise, people could negotiate an arrangement for compensation for harm and/or reduction in pollution. And if the company does not agree with that, people could sue the factory for harming their health.

Privatization of air?

If I own a certain tract of air, that means I can legally prevent people from breathing it (and airplanes flying through it, etc.), right?

Can't you just see that overfishing is caused by public ownership of seas? Wikipedia's article on tragedy of commons tells more about that, IIRC.

No it's not, and no, that article doesn't AFAIK.

What causes overfishing is not public ownership of the seas (which can indeed be privatized), but public ownership of species of fish, which cannot be privatized. (I suppose the government could sell rights of ownership to species, but that'd pose major problems in terms of people accidentally catching "others'" fish and having killed them before realizing it, the identities of caught fish being ambiguous, people disregarding the rules like they do with music copyright, etc.) If the seas were divided into, say, 1000 sections with a person/corporation owning each one, each of those people/corporations would still have an incentive to fish as much as possible out of them, and the tragedy of the commons would ensue just like before.

These can be and should be privatized. Let the private charity help the poor if one considers poverty as an obstacle to this.

If you think these should be privatized, that's great, but it does nothing to answer my question.

National defense is largely pure waste. And, err -- asteroid protection?? If there was any provable realistic threat, then it would be funded.

I agree that national defense is largely waste, but we still need it, don't we? As for asteroid protection, no, game theory would tell us that no one should fund it at all (unless the asteroid poses a very serious threat), and taking into account altruism, there would be pledges all right, but possibly not enough to cover the costs.

 

[Paalikles]

Guys, not to ruin the fun, but we have seriously hijacked this thread.

Basically, we are arguing under pro-capitalism, but it is laissez-faire vs mixed economies we have ended up talking about. Note the lack of discussion of the original topic

Just note that the last posts have been made almost exclusively by Crystal, WillJ and myself.

Not that this discussion is not justified, but I fear we disallow for potential entry to discussion.

@central planning: dont know what it is called in English, but I do believe you are referring to the opposite of market failure. Well, you seem to be holding planned economies against against market liberalism. While it is fun to view the world from just those two poles, I find myself more in the middle somewhere. Existence of public goods is probably why I believe in a more than "basic needs"-based government. Market failure being second reason, but we have touched that topic quite a lot already...

 

[WillJ]

I agree, Paalikles. Perhaps we should take this to another thread.

I suppose I'm obligated to actually address the thread itself, so here goes: I have no problem with people shooting their computer. Why a person shooting their computer means capitalism (using "capitalism" loosely) will eventually fail is beyond me. The person bought the computer and thus (indirectly) paid those poor saps living in third world countries their agreed-to price. What this person does with the computer has no bearing on those people. Although perhaps I'm missing the point.

 

[crystal]

If I own a certain tract of air, that means I can legally prevent people from breathing it (and airplanes flying through it, etc.), right?

Personally I don't see that kind of laws practical. What I meant with privatization was that after one has bought a certain amount of land (and the air above it) no one has the right to infringe on their right to clean air in that area (to solve the problem caused by pollution externalities).

If the seas were divided into, say, 1000 sections with a person/corporation owning each one, each of those people/corporations would still have an incentive to fish as much as possible out of them, and the tragedy of the commons would ensue just like before.

Which one you value more: 100$ given you immediately or 50$ given you each day for 10 days? Similarly, if fishers intend to make any long-term profit, they have no interest whatsoever in killing all the fish in the sea by overfishing.

I agree that national defense is largely waste, but we still need it, don't we? As for asteroid protection, no, game theory would tell us that no one should fund it at all (unless the asteroid poses a very serious threat), and taking into account altruism, there would be pledges all right, but possibly not enough to cover the costs.

National defense fits in the potential functions of a minarchist government. I would also favor some kind of a mutual disarmanent plans between nations.

As for the asteroid protection, I don't see any reason why privately funded warning systems would not be founded. If people wouldn't do that, then why would some people currently demand the government to provide such services?

 

[Yom]

Which one you value more: 100$ given you immediately or 50$ given you each day for 10 days? Similarly, if fishers intend to make any long-term profit, they have no interest whatsoever in killing all the fish in the sea by overfishing.

Not to highjack the thread anymore, but that simply won't work. What you are essentially saying is that a cartel will work. Each firm is trying to maximize its profit, but, even with the 1000 sections of the sea or ocean, the fish are capable of moving in between the portions (unless you are advocating that we build a wall to separate the sections). Each firm can increase its profit by fishing more, and its competitor's fish will likely pass through its area still. Since every firm has this incentive, it is likely that each firm will exploit it, causing a suboptimal situation, where the seas are overfished.

A real-life example of this would be the problem over oil fields such as the one between Iraq and Kuwait. The majority of the oil field was in Iraq, but a small portion extended into Kuwait. Although it would be optimal for both parties to only extract a little at a time (to keep prices up), bot Kuwait and Iraq had an incentive to extract more and take advantage of the other's relative underproduction, gaining more at the expense of the other.

 

[stormbind]

Capitalism fails all the time in the form of financial recession or depression, but it always recovers thanks to a very consistent human trait called greed.

 

[10Seven]

Some time ago, via thread, I advanced an argument against a National Armed Force (NAF) - citing, a) the logical primary purpose of the NAF is to control it's 'parent' population, and, b) The NAF is an outmoded, and inappropriate method by which to protect the parent population's self-determination.

Thus, it is my thinking that a NAF is both detrimental to, and insufficient to the protection of the 'nation' and it's contituent's freedom and self-determination...

 

[Yom]

Some time ago, via thread, I advanced an argument against a National Armed Force (NAF) - citing, a) the logical primary purpose of the NAF is to control it's 'parent' population, and, b) The NAF is an outmoded, and inappropriate method by which to protect the parent population's self-determination.

Thus, it is my thinking that a NAF is both detrimental to, and insufficient to the protection of the 'nation' and it's contituent's freedom and self-determination...

Please explain. Nothing in this post disproves the necessity of an army to enforce the laws of a country.

 

[RedWolf]

http://cafehayek.typepad.com/hayek/2005/03/price_control_f.html

Not quite sure what you proved there.. an article based on a capitalist opinion? Doesn't mean much.

Besides - it's wrong. Let's use walmart as an eample. An army of workers making poverty level wages without any benefits. You ca claim that their labour isn't "worth" a minimum amount but at the end of the day walmart is one of the richest corporations on the planet. So in reality their labour is worth MORE than a minimum wage. Yet strangely they still pay as low as legally allowed.