
Goldman Sachs May Be Forced to Fundamentally Question How Capitalism Is Working - uptown
http://www.bloomberg.com/news/articles/2016-02-03/goldman-sachs-says-it-may-be-forced-to-fundamentally-question-how-capitalism-is-working
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financedfuture
>We are always wary of guiding for mean reversion. But, if we are wrong and
high margins manage to endure for the next few years (particularly when global
demand growth is below trend), there are broader questions to be asked about
the efficacy of capitalism.

This isn't a criticism of capitalism.

This is an acknowledgment our current "capitalist" financial system isn't able
to produce "capitalism" itself.

~~~
themagician
A lot of Americans are obsessed with "capitalism" and "the free market", but
don't even understand the basic assumptions that must be true for free markets
to work like perfect information, interchangeable goods and services, and a
lack of market power for any single entity. Like, the basic—the most
basic—assumptions.

Capitalism has become synonymous in the collective mind with "don't make laws,
laws are government interference and socialism." Just look at the way people
on the right talk about removing Obamacare and letting the "free market" do
its thing. But the healthcare industry basically NEVER met the assumptions
necessary for a free market to exist in the first place. The same is true in
banking, albeit some might argue to a lesser extent.

You've got oligopoly or monopoly firms in many industries that are "too big to
fail", have near total market power, and make many decisions (some around
pricing) behind closed doors or with little transparency (let alone anything
close to complete information), and then expect markets to run efficiently?
You can't bake the perfect cake if you don't have any of the ingredients in
the first place.

~~~
goodcanadian
A little rant that I have been saving up:

"Capitalism" is not the same thing as "free market" is not the same thing as "
_laissez faire._ "

A "free market" means lots of buyers and sellers participating on even playing
field. Even Adam Smith acknowledged that government regulation is necessary in
order to ensure that the market remains free. When people argue for the
removal of laws and regulation, they are actually arguing for _laissez faire_
economics which, in a nutshell, means for the government to stay out of it.
Left to their own devices, however, capitalists will naturally (and
rationally) try to tilt the playing field in their favour. Capitalism, for
what it is worth, is people investing their free capital into economic
enterprises in order to glean a return.

So, I am, actually, a strong proponent of capitalism operating under free
markets. I am against capitalism, however, under a completely _laissez faire_
economy.

~~~
vezzy-fnord
_A "free market" means lots of buyers and sellers participating on even
playing field._

I've never seen this definition used before. _Even_ playing field is a grossly
inappropriate and unattainable normative ideal. Even playing field means
homogenization, which is completely antithetical to a market as a vehicle for
coordinating entrepreneurial plans, necessarily implying imperfections and
heterogeneity.

 _Even Adam Smith acknowledged that government regulation is necessary in
order to ensure that the market remains free._

Regulation is certainly necessary, at least in the sense of property rights
enforcement and dispute adjudication. _Government_ regulation it need not be,
and it need not be anything more than a minimal legal institutional framework.

 _Left to their own devices, however, capitalists will naturally (and
rationally) try to tilt the playing field in their favour._

How did you reach this conclusion? It makes no sense whatsoever. If anything,
we would expect this behavior to occur only where there are large amounts of
government regulation. That is to say, when there is more opportunity to
exploit the political method over the economic method. Otherwise, _how_ will
they tilt the playing field? By forming cartels? Those are brittle. Any
attempt at trying to use market power leaves you vulnerable to undercutting in
some way in the absence of special privileges.

 _I am against capitalism, however, under a completely laissez faire economy._

Your taxonomy is worthless.

~~~
goodcanadian
_I 've never seen this definition used before._

I don't know what to tell you. The definition (admittedly paraphrased) comes
from Adam Smith. The gist is that anyone can freely participate in the market
on an equal or fair basis without artificial constraint. There is sometimes a
need for strong regulation to prevent larger participants from using their
size to gain an unfair advantage in the market.

 _Government regulation it need not be . . ._

Can you give me an example of effective non-governmental regulation that
doesn't ultimately derive its authority from the government?

 _How did you reach this conclusion? . . ._

I am currently reading a book about the so-called "Robber Barons" of the later
half of the 19th century. If you want to see what truly unconstrained
capitalism looks like, I suggest you read up on this period: fraud, price-
fixing, market manipulations, extortion, bribery . . . they even resorted to
armed conflict with their rivals on occasion. The fact that capitalists
continue to try to exploit any advantage that they can in the face of strong
regulation is precisely my point. Heck, even in my own comparatively small
investments, I seek to exploit any advantage that I can. It is not rocket
science; it is acting in one's own best interest. The job of regulation is to
ensure (as much as is reasonably possible) that no one gains an unfair
advantage.

I've talked a lot about regulation, so I want to make clear that I am not in
favour of endless reams of red tape. Regulation should be as complex as it
needs to be, but no more complex. What regulations there are should be
strongly enforced. The current reality does not really live up to this ideal;
there are many ineffective or unnecessary regulations, and there are
regulations that are missing entirely. Nevertheless, I am talking about an
ideal vision that we should strive toward.

~~~
bigger_cheese
Personally I think the major problem with capitalism is it ignores
sustainability and assumes there is always an unlimited potential for growth
when in reality we live on a planet of finite resources. Growth isn't a bad
thing but unsustainable growth is. When the system is geared around maximizing
profits it leads to a drive to dig up more, consume more and emit more at the
lowest cost and damn the consequences.

Thus you get things like Sweatshops, Ok Tedi disaster etc.

Without regulation there's a good chance we'd still not have catalytic
converters, we'd still be living with CFCs, Asbestos and DDT. I'm sure you can
think of a dozen other examples the market has repeatedly shown it is not
capable of regulating itself.

~~~
zardo
when in reality we live on a planet of finite resources

There's an awful lot of matter and energy in our lightcone, there's no
fundamental reason we can't keep growing for millions of years.

------
roymurdock
Rethink capitalism - aka rebalance capitalism and socialism, two sides of the
same coin.

The government plays a regulatory, distributive role in society, allowing
profits to accrue to capitalists but setting taxes and running social programs
at the proper level to ensure that society as a whole functions smoothly, and
that there are opportunities for everyone to improve their situation.

Most of the economic world is in agreement that financial deregulation was a
huge contributing factor in the crash of 2007-08. The repeal of Glass-Steagall
allowed banks to take on too much risk with too little supervision.

This would have been fine if the banks had been the only ones punished when
their bets went bad - but they had also been allowed to accrue so much power
(through consolidation/M&A) that it was impossible to let them face the
consequences of their own bad decisions and fail. So they had to be
underwritten with public money in the form of QE.

A functional society requires healthy levels of both capitalism and socialism
to survive. But the most important thing in my opinion, is that those who
intentionally commit fraud or do not act in the fiduciary interest of their
stakeholders are adequately punished. This last part is of course the rub -
how can you tell if the leaders of business and finance were intentionally
setting up their dependents for a crash? What is the adequate punishment?

~~~
vezzy-fnord
In case you haven't noticed, this has been how virtually all first-world
states have operated for decades. This social democratic ideal has not worked
out, but has led to a dysfunctional corporate statism where mere
"deregulation" (which is a misnomer, as most cases of deregulation have really
been regulatory adjustments in an overall baroque framework that
unsurprisingly lead to new pathological regulatory states - just because you
cut some edges off the graph doesn't mean the nodes are going to stand still)
can lead to catastrophe. This is an example of the state being entrusted to
ensure smooth regulation, and failing miserably at their task.

In fact, many banking panics and examples of financial fragility have
originated from pathological financial regulations guided by desires of the
state to subvert various public finance constraints. Authors like George
Selgin, Kevin Dowd and Lawrence H. White have written on this subject.

~~~
roymurdock
I'm not sure what you're advocating for - pure capitalism with no government
oversight and regulation?

~~~
vezzy-fnord
I'm advocating for actually getting acquainted with economic literature and
not repeating moronic talking points about "redistributive and regulatory role
of governments" that are filled with theoretical and empirical problems, and
in any event are not a radical new idea _but how it has always been to begin
with_. Whether it was anti-vagrancy and poor laws or the modern welfare state.
Whether it was mercantilism or the state-guided capitalism of today.

~~~
roymurdock
I understand your frustration, but you are not going to win any support or
convince anyone to read somewhat obscure economic literature by being caustic
and attacking old ideas simply for being old.

How would you structure society and how would this work in a more efficient
manner than the government that we have now? If you a) define the problems and
b) give me some tangible examples of how you/these authors think we should fix
these problems I'm more than happy to read and think about them.

~~~
vezzy-fnord
Firstly, most common standards for gauging market failure and inefficiency are
based on static, institution-less Paretian general equilibrium and/or social
choice models that require interpersonal utility comparisons, among other
things. The public choice and Virginia school of political economy have
critiqued those. More broadly, the subject of dynamic market process has been
explored by Roy Cordato, Gerald P O'Driscoll and Mario Rizzo (The Economics of
Time and Ignorance), Israel Kirzner and other later Austrian School authors.

I already listed you three authors about banking and finance. More broadly, we
already live in the system that you advocate, and it does not work.

~~~
roymurdock
> More broadly, we already live in the system that you advocate, and it does
> not work.

You still haven't made any specific argument as to why the system of balancing
capitalism and socialism does not work, and could not continue to work without
some rebalancing of the scales. Briefly, what is the alternative?

------
Mikeb85
What we think of as 'capitalism', in many ways is more akin to mercantilism or
oligarchy. Corruption is basically codified as 'lobbying', and governments
enact all sorts of stupid laws to the benefit of large, incumbent
corporations, preventing the free market from actually functioning.

And of course, these unnatural barriers to competition allow inefficiencies,
concentration of wealth, and so on.

The 'free market' is somewhat of a myth. The west has never truly had 'free
markets', in the past monopolies have been bought, wealthy merchants, nobility
and corporations have patronized governments and monarchs, and tariffs and
subsidies have been ever-present.

The current arguments for free markets have to do with price discovery,
personal freedom and 'fairness', however we need to realize that these sacred
cows are myths, and that if we want to build a better society, it may be time
to rethink exactly how we distribute resources.

------
spectrum1234
The reason for this is barriers to entry to be a big corporation are getting
bigger. (This is the only fundamental truth that the author fails to mention!)

However, the barriers to entry to be an entrepreneur are far far lower.
Corporations still compete with each other on innovation but now more than
ever this is through buying small and medium sized companies said
entrepreneurs have created :)

So, this is neither good nor bad, just a shift in where the competitive
opportunities are. Hint, it's getting easier for the little guys to compete.

~~~
voynich61
Rate of entrepreneurship in the US has declined, and is overwhelmingly class,
race, and sex based. It's borderline sociopathic to assert that it's getting
easier for the little guys to compete.

~~~
jdimov10
I don't know about that, but it is flat-out psychopatic to claim that the rate
of entrepreneurship in the US has declined when it has been increasing faster
than ever in the past few years[1].

[1]
[http://stats.oecd.org/Index.aspx?DataSetCode=TIMELY_BDS_ISIC...](http://stats.oecd.org/Index.aspx?DataSetCode=TIMELY_BDS_ISIC4)

~~~
guscost
> sociopathic ... psychopathic

I don't think either of you understand what those words mean.

~~~
voynich61
Asserting that one's company hit a triple when it was born on third base is
self-serving and manipulative.

~~~
AnimalMuppet
You seem to be asserting that this is what most "entrepreneurship" is. Can you
justify/document that assertion, or should we just take it as merely one
person's opinion?

------
esaym
Never quite followed the plethora of "Capitalism isn't working" articles. And
the alternative is?? There always seems to be some political agenda involved.

~~~
saiya-jin
there is no alternative, not a better one at least, not now. look at other
possibilities - ie central planning is a major fail over longer time (I lived
in one of those systems, no thank you).

IMHO what fails in all other systems is to take into account human nature, and
not some ideal working guy that never actually lived. people are lazy, care
more about themselves rather than company good, some are plain evil etc. very
few work on themselves unless they see the carrot at the end of the stick
(bonus?).

in capitalism it's cash, which can get you quite far in life, so most are
chasing it (even you probably are - if your employer stopped paying you today,
would you come in tomorrow?). this chase can easily ruin your life, makes
people do regretful decisions but overall, it pushes mankind far beyond (and
much faster) that it would achieve without this perpetual force.

I'll claim one thing, feel free to disagree - capitalism ain't often the best
system for a single person, but (if all internal mechanisms work) it's
probably best for the advancement of mankind. and these days, we need to
advance to not destroy ourselves (for that, we already have capability)

~~~
convivialdingo
I'd agree with this. (I also briefly lived in a socialist paradise myself.)

I'm not a fan of capitalism, but everything else has historically been worse.
The only pre-capitalist system that may have worked well was distributism, but
that was under an aristocratic rule.

I think the modern fair market issues we have in all 1st world nations isn't a
feature of capitalism - it's the failure to reign in plutocratic tendencies.

Democratic nations have a tendency to ignore oligarchs as they initially grow
industry and produce lots of growth. Long term though, they tend to become
parasites on the budget and political vampires.

------
phrogdriver
>We are always wary of guiding for mean reversion. But, if we are wrong and
high margins manage to endure for the next few years (particularly when global
demand growth is below trend), there are broader questions to be asked about
the efficacy of capitalism.

I find this title to be misleading. The above quote can be paraphrased as, "We
think profit margins will revert to the mean. If they don't, we will be really
surprised that capitalism isn't working as we think it should."

------
hodder
Here is a much more thought out analysis from a generally excellent econ blog:

[http://www.philosophicaleconomics.com/2015/05/profit-
margins...](http://www.philosophicaleconomics.com/2015/05/profit-margins-in-a-
winner-take-all-economy/)

------
Fando
No one has a clue about what's going on in this article. Nothing substantial
it seems.

------
goodcanadian
What I see in their chart is profit margins are generally in the 6-8% range
with dips down to ~2% after economic recessions. It would seem to me that
profit margins may be slightly higher than the historical average, but only
slightly (though I would need a chart with a much longer x-axis to say
anything with confidence).

As for the free market (I believe "capitalism" is the wrong word to use)
squeezing the margins to zero, that works great in theory. However, the real
world is made up of real people with imperfect information, so maintaining a
slightly above zero profit margin doesn't surprise me, even when averaged
across the entire economy.

~~~
nikdaheratik
Yes, but you're missing some context. Specifically the theory that,
historically, business profits have always been limited to a set percentage of
overall GDP. Everytime it tries to expand beyond a certain point, the market
seems to correct either through increased competition driving that number down
or labor pushing back to get workers a greater share, or government
taxation/regulation (in a few rare cases) pushing this back down.

It may seem like a historically high range of a few percentage points is no
big deal, but it would be very surprising for that amount to stay constant
over time and (when you account for compounding effects), it actually would be
a big deal if it did stay at that level.

~~~
goodcanadian
I don't think I'm missing anything. What I was saying was that, from their
chart at least, the current level appears to be completely normal or perhaps
only slightly high. I'm willing to admit that their chart could be misleading,
but they failed to clearly make their point and really didn't convince me that
anything unusual is going on.

------
jdimov10
This is the result of blue ocean strategy in play (whether consciously applied
or by accident). When it's easier for me to create a new market and reap huge
profits, than to struggle into fighting with Big Co for a share of their huge
profits... guess which way I'd rather go. At the end, both I and Big Co win.

We are already living in a new time period - a new age in world history,
fundamentally different from all other ages experienced by humans so far. We
have entered the age of ubiquitous abundance. All economic, political, moral
and philosophical frameworks revolving around the concept of scarcity are fast
becoming obsolete.

~~~
craigyk
I don't see it. Unless you mean debt subsidized growth involving inserting
"internet" or "mobile" into existing things and calling them "blue oceans". I
think what Goldman Sachs is trying to say is that capitalism ( in any flavor:
laissez faire or mixed economy ) might favor evolution to a small number of
large entrenched winners rather than eternal competition and churn.

~~~
jdimov10
Neither the GS analysis, nor cursory observation of daily reality can possibly
lead to any such conclusion. Wealth is increasing, globally, at an
accelerating pace. The number of players creating and sharing such wealth is
also increasing at an accelerating pace. These trends are not showing any
signs of slowing down, much less of reversing (and might in fact be non-
reversible).

As a consequence, global well-being (by any reasonable measure) is also
increasing at an accelerating pace.

Note that this DOES NOT contradict the fact that various "inequality gaps" are
also increasing at an accelerating pace. This is natural.

~~~
dota_fanatic
> _As a consequence, global well-being (by any reasonable measure) is also
> increasing at an accelerating pace._

Meanwhile, in reality:

\- corruption / inability to problem-solve in most governments in any
reasonable amount of time is more and more evident as transparency / software
insecurity increases, and there's no obvious way to fix this

\- business advantages through technology, information asymmetry, lack of
competition, and very cheap labor accelerates, businesses which have a
singular goal in mind with little care for negative externalities

\- species diversity plummets

\- climate change remains negatively positive (zika incoming everyone, I'm
_sure_ we'll figure it out in time, just don't have any babies in the
meantime)

\- wage slavery becomes more and more real for more and more people, in the US
particularly through people taking on debt for what used to be a non-risky
endeavor (higher education) but which actually turned out to be foolish once
they were ready to work

Remember, the only thing that matters is that you get yours; that's the name
of the game and it's only so long until the consequences of this utterly
delusional approach of infinite growth in a closed system will find its way to
the homes of the rich and powerful, too. Who in their right mind, excluding
miraculously well-executed altruistic AI proliferation appearing, is looking
to the future and saying, "we're doing it everyone! things are getting better
and better!".

Do you have any idea what 3 billion+ people living in poverty looks like?
Because that is now, and it's fucking shameful how little we care about our
communities, our planet, in this race to greater and greater "wealth".

~~~
soared
You're defining global well-being from a very American viewpoint. Poverty,
war, actual slavery, child labor, hunger, disease, etc are dying out on a
global scale.

------
nopotatoes
Does anyone know the brand or model of that beautiful keyboard with the orange
and green keys in the photo just above the title?

~~~
osullivj
Bloomberg keyboard with specialised func keys for std cmds.

~~~
mortenjorck
The newer ones look amazing:
[https://qzprod.files.wordpress.com/2013/05/bloomberg_keyboar...](https://qzprod.files.wordpress.com/2013/05/bloomberg_keyboard.png?w=640&h=197)
They have that certain beauty of something carefully designed for a specific
domain.

------
Sealy
Just reading that headline makes me think to myself. Why ask Goldman Sachs?
They are clearly ahead of the capitalism game so of course they are gonna say
it works well!?!?

Asking the richest capitalists in the world if capitalism works is a silly
question if you ask me...

~~~
AnimalMuppet
Yes, but having them say we may have to question whether it works is big news.

~~~
Sealy
True, I think I was influenced by the sensationalist headline.

