Thoughts on Capitalism
You know there's a problem with Capitalism when Ray Dalio, a guy who has made billions in the financial markets is saying that capitalism will explode into an armed revolution if we don't reform it.
You know there's a problem with Capitalism when the Business Roundtable announces that they've formally and officially renounced shareholder primacy.
If the guys who stand to benefit the most from Capitalism are calling for reform, it is definitely indication that the fire has reached the backyard.
Capitalism is akin to nature. Its natural selection process is the free market, in which competition selects winners over losers. Just like Evolution uses natural selection to arrive at fitter species, Capitalism uses the market to arrive at "fitter citizens" (wealthy citizens). But Evolution does not know about ethics (it is a mental construct devised by society, after all), nor does it carry a specific purpose (it isn't teleological). Here is where Capitalism differs from nature. As Capitalism replicates nature's iterative process through free markets, Ethics should be a consideration. Purpose should guide markets' actions. But it isn't and it doesn't. Which is why Dalio and the Business Roundtable are sounding the alarm. While fitness in evolutionary terms means the ability to pass on genes that perpetuate themselves via reproduction, fitness in Capitalism means accumulation of wealth. But, is Jeff Bezos astronomical wealth accumulation ethical? Does it carry a purpose?
I don't know. All I know is that the argument that Capitalism's purpose is to achieve societal prosperity just does not ring true these days. Not when inequality is so obscene that 40% of the population can't afford an unexpected $400 expense in the richest nation on earth. Not when being born poor means being stuck poor.
Maybe the whole Capitalism=Prosperity meme is really just a narrative concocted by those who individually benefit from it: a trick to perpetuate their own economic fitness. But then again, why if those economically fitter people do deserve what they have? What if it's the result of true effort, ambition and sheer merit?
Financial asset markets are IQ tournaments where millions of very smart people get skinned by hyper-smart people, who in turn get clobbered by astronomically fast trading algorithms. And then a crash happens. The matches in these tournaments are of course represented by each transaction, in which each side is secretly hoping the other one knows less about the asset being exchanged (in essence, trying to scam each other) and the winner is declared when she (it, if it's an algo) finds a less smart counterpart to dump (at a higher price) the asset she had acquired from someone who was trying to skin her in the first place. It doesn't take much to figure out that this zero-sum game creates little value for society. Those inevitable market crashes occur simply because all those gains for the most part have to eventually be given back (it's a zero sum game!), with the least smart being the ones funding this wealth transfer from the very smart to the hyper smart.
But wait. Haven't we all heard that capitalism is the best alternative available? (better than socialism, for sure). Financial markets allow for resources to be magically allocated by the grace of the self-interest of its participants. No considerations required for your fellow man. Friedman's greed is good and all that. It goes like this: A saver finds a middle man with fancy offices to take his savings and gets paid rent to lend his hard-earned cash to allow for another person to invest it in exchange for the promise to return it whole plus rent. Contractual assurances guarantee the fulfillment of the promise, or else the guy who breaks the promise gets punished. Many borrowers of that middle man do in turn place that money with another middle man, who in turn lends more money forward, and money literally multiplies. It doesn't take much to figure out that this pyramid scheme does create some value for society (as long as the savers don't retrieve their savings all at the same time).
In the middle man example, comparative advantage allows someone who has relative abundance of something --savings-- to exchange it with someone else who has comparative advantage of something else --a business plan. Both actually benefit. More than that: both want the other to succeed. An actual link of goodwill is established. In the IQ tournament of financial smart-asses, not so much. The societal benefit of resource allocation breaks down when two people exchange assets with the hidden intent of trying to scam each other. The de-humanization and callousness of such exchanges, crystallized in the rise of the algorithm, is just the exacerbation of the disease. Forget about any link of goodwill.
It is only when you consider Ethics that you are moved to think about the legitimacy of it all. In utilitarian terms, the fact that the top 40% owns 10x what the bottom 60% does (in 1980 it was 6x) is just wrong. Rawls' theory of justice is crushed into the ground when you learn that U.S. social mobility is so low that 42% of kids born in the bottom quintile don't escape that quintile when they grow up, and that only 8% of those in the bottom grow to be part of the first quintile. While in Scandinavian countries, 74% of kids in the bottom quintile escape the bottom a generation later, with 13% of them leapfrogging to the top. You don't think in ethical terms (utilitarian or Rawlsian) when a lion dismembers a zebra for lunch. Instances of evolutionary fitness assertion are somehow exempt from our judgment. But no matter your political proclivities, we do find unethical that a hyper-smart Goldman Sachs investment banker sold a CDO made of crappy mortgages to a not-sufficiently-hyper-smart pension fund manager to assert economic fitness. Somehow, we care about the not-sufficiently-hyper-smart fund manager here because we evolved to feel empathy for others. We expect a modicum of goodwill and honorability.
Ethics implies a humane consideration for your fellow man. It fosters cooperation, trust and reciprocity amongst people. This is clearly is not currently embedded in the incentives, laws, taxation, and --most important of all-- in the culture of Capitalism. But it could be. And it must, if we are to avoid a plunge into darker times.
Somehow we've come to accept that the hyper smart lion must economically dismember the very smart zebra in the financial Savannah. Instances of economic fitness assertion are somehow exempt from our judgment. But they shouldn't be. Yet we've accepted the narrative imposed on us by Jensen, and Meckling, and Friedman.
Reform is badly needed.
You know there's a problem with Capitalism when the Business Roundtable announces that they've formally and officially renounced shareholder primacy.
If the guys who stand to benefit the most from Capitalism are calling for reform, it is definitely indication that the fire has reached the backyard.
Capitalism is akin to nature. Its natural selection process is the free market, in which competition selects winners over losers. Just like Evolution uses natural selection to arrive at fitter species, Capitalism uses the market to arrive at "fitter citizens" (wealthy citizens). But Evolution does not know about ethics (it is a mental construct devised by society, after all), nor does it carry a specific purpose (it isn't teleological). Here is where Capitalism differs from nature. As Capitalism replicates nature's iterative process through free markets, Ethics should be a consideration. Purpose should guide markets' actions. But it isn't and it doesn't. Which is why Dalio and the Business Roundtable are sounding the alarm. While fitness in evolutionary terms means the ability to pass on genes that perpetuate themselves via reproduction, fitness in Capitalism means accumulation of wealth. But, is Jeff Bezos astronomical wealth accumulation ethical? Does it carry a purpose?
I don't know. All I know is that the argument that Capitalism's purpose is to achieve societal prosperity just does not ring true these days. Not when inequality is so obscene that 40% of the population can't afford an unexpected $400 expense in the richest nation on earth. Not when being born poor means being stuck poor.
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| Red: % people in BOTTOM Quartile born to Bottom Quartile Parents Blue: % of people in TOP Bottom born to Bottom Quartile parents. Source: Dalio |
Maybe the whole Capitalism=Prosperity meme is really just a narrative concocted by those who individually benefit from it: a trick to perpetuate their own economic fitness. But then again, why if those economically fitter people do deserve what they have? What if it's the result of true effort, ambition and sheer merit?
Financial asset markets are IQ tournaments where millions of very smart people get skinned by hyper-smart people, who in turn get clobbered by astronomically fast trading algorithms. And then a crash happens. The matches in these tournaments are of course represented by each transaction, in which each side is secretly hoping the other one knows less about the asset being exchanged (in essence, trying to scam each other) and the winner is declared when she (it, if it's an algo) finds a less smart counterpart to dump (at a higher price) the asset she had acquired from someone who was trying to skin her in the first place. It doesn't take much to figure out that this zero-sum game creates little value for society. Those inevitable market crashes occur simply because all those gains for the most part have to eventually be given back (it's a zero sum game!), with the least smart being the ones funding this wealth transfer from the very smart to the hyper smart.
But wait. Haven't we all heard that capitalism is the best alternative available? (better than socialism, for sure). Financial markets allow for resources to be magically allocated by the grace of the self-interest of its participants. No considerations required for your fellow man. Friedman's greed is good and all that. It goes like this: A saver finds a middle man with fancy offices to take his savings and gets paid rent to lend his hard-earned cash to allow for another person to invest it in exchange for the promise to return it whole plus rent. Contractual assurances guarantee the fulfillment of the promise, or else the guy who breaks the promise gets punished. Many borrowers of that middle man do in turn place that money with another middle man, who in turn lends more money forward, and money literally multiplies. It doesn't take much to figure out that this pyramid scheme does create some value for society (as long as the savers don't retrieve their savings all at the same time).
In the middle man example, comparative advantage allows someone who has relative abundance of something --savings-- to exchange it with someone else who has comparative advantage of something else --a business plan. Both actually benefit. More than that: both want the other to succeed. An actual link of goodwill is established. In the IQ tournament of financial smart-asses, not so much. The societal benefit of resource allocation breaks down when two people exchange assets with the hidden intent of trying to scam each other. The de-humanization and callousness of such exchanges, crystallized in the rise of the algorithm, is just the exacerbation of the disease. Forget about any link of goodwill.
It is only when you consider Ethics that you are moved to think about the legitimacy of it all. In utilitarian terms, the fact that the top 40% owns 10x what the bottom 60% does (in 1980 it was 6x) is just wrong. Rawls' theory of justice is crushed into the ground when you learn that U.S. social mobility is so low that 42% of kids born in the bottom quintile don't escape that quintile when they grow up, and that only 8% of those in the bottom grow to be part of the first quintile. While in Scandinavian countries, 74% of kids in the bottom quintile escape the bottom a generation later, with 13% of them leapfrogging to the top. You don't think in ethical terms (utilitarian or Rawlsian) when a lion dismembers a zebra for lunch. Instances of evolutionary fitness assertion are somehow exempt from our judgment. But no matter your political proclivities, we do find unethical that a hyper-smart Goldman Sachs investment banker sold a CDO made of crappy mortgages to a not-sufficiently-hyper-smart pension fund manager to assert economic fitness. Somehow, we care about the not-sufficiently-hyper-smart fund manager here because we evolved to feel empathy for others. We expect a modicum of goodwill and honorability.
Ethics implies a humane consideration for your fellow man. It fosters cooperation, trust and reciprocity amongst people. This is clearly is not currently embedded in the incentives, laws, taxation, and --most important of all-- in the culture of Capitalism. But it could be. And it must, if we are to avoid a plunge into darker times.
Somehow we've come to accept that the hyper smart lion must economically dismember the very smart zebra in the financial Savannah. Instances of economic fitness assertion are somehow exempt from our judgment. But they shouldn't be. Yet we've accepted the narrative imposed on us by Jensen, and Meckling, and Friedman.
"I'm an individual first, and a family member second. I don't care about community. Because they don't care about me. I determine my own fate. Because only my merits will carry me forward. I deserve inalienable rights. Because I am unique. I might not have to comply with my obligations; there will be suckers who fulfill them for me. And I will crush my rivals, because if I don't I will be crushed."Somewhere in Capitalism's body of ideology, there's room for goodwill. And for Ethics. And they can coexist with ambition and meritocracy as the motors of human progress. There is no economic alternative system. It's either this, or a worse version of this.
Reform is badly needed.
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