
The real reason that capitalism is so crash-prone. - prat
http://www.newyorker.com/reporting/2009/10/05/091005fa_fact_cassidy
======
hy3lxs
Great read. My two favorite quotes:

The Prisoner’s Dilemma is the obverse of Adam Smith’s theory of the invisible
hand, in which the free market coördinates the behavior of self-seeking
individuals to the benefit of all. Each businessman “intends only his own
gain,” Smith wrote in “The Wealth of Nations,” “and he is in this, as in many
other cases, led by an invisible hand to promote an end which was no part of
his intention.” But in a market environment the individual pursuit of self-
interest, however rational, can give way to collective disaster. The invisible
hand becomes a fist.

and

Limiting the development of [complex] securities would stifle innovation, the
financial industry contends. But that’s precisely the point. “The goal is not
to have the most advanced financial system, but a financial system that is
reasonably advanced but robust,” Viral V. Acharya and Matthew Richardson, two
economists at N.Y.U.’s Stern School of Business, wrote in a recent paper.
“That’s no different from what we seek in other areas of human activity. We
don’t use the most advanced aircraft to move millions of people around the
world. We use reasonably advanced aircrafts whose designs have proved to be
reliable.”

The second seems quite applicable to software engineering as well.

~~~
Perceval
It's unfortunate that the article uses the Prisoner's Dilemma as its example,
because the Prisoner's Dilemma is actually not the best game model to set up
as the opposite of the Invisible Hand. A more appropriate model would be the
Tragedy of the Commons, which was proposed by a fellow named Garrett Hardin in
an article in a 1968 edition of _Science_ magazine.

If you are interested in formal modeling of coordination problems, an
interesting overview can be found in Elinor Ostrom's book _Governing the
Commons_. In chapter one she gives an overview of the Prisoner's Dilemma, the
Tragedy of the Commons, and the Logic of Collective Action (Mancur Olson's
theory). After reviewing these abstract formal models, she looks at other
possible institutional solutions for coordination problems.

Here are some links:

<http://en.wikipedia.org/wiki/Prisoners_dilemma>

<http://en.wikipedia.org/wiki/Tragedy_of_the_Commons>

<http://en.wikipedia.org/wiki/Logic_of_Collective_Action>

<http://en.wikipedia.org/wiki/Coordination_game>

<http://en.wikipedia.org/wiki/List_of_games_in_game_theory>

~~~
DanielBMarkham
Any quick one-liners or easy-to-understand wisdom that you've gained from the
material? The entire subject area looks immensely fascinating, yet very dense
at times.

~~~
Perceval
Yes, game theory can get inscrutably complex, even through the initial models
are pretty simply to set up and understand.

The basic components of any coordination/cooperation problem are the same: you
have actors with preferences, you have a situation with rules that they can't
change, and you have outcomes with payoffs/penalties depending on whether the
actors choose to cooperate or not.

Most of the problems revolve around how to get people to cooperate, when
defection is attractive for some reason. Most of the solutions involve making
sure situations are not one-off interactions, that all actors have information
about what each other is doing, and that in the case of multiple actors using
common resources, you need to have some form of monitoring and enforcement.

If actions are one-off, the temptation to act selfishly is higher than if
actors know they are in a long-term situation in which they must choose to
cooperate or defect time and time again. In this way information such as
reputation can then function as a signaling device to other actors.

Games such as the Prisoner's Dilemma work only when presented as a one-off
situation in which both actors have no information about what they other is
going to do. So the solution is 1) make sure you're not setting up one-off
interactions, and 2) make such actors are in an information rich environment
wherein they can make appropriate signals about their intentions and past
behavior.

Most of the other games, such as Tragedy of the Commons or Battle of the
Sexes, have stable solutions if you repeat them and increase the information
available to the actors. The equilibrium solutions are called Nash
Equilibriums, after John Nash, the paranoid schizophrenic mathematician
featured in the movie _A Beautiful Mind_.

<http://en.wikipedia.org/wiki/John_Forbes_Nash,_Jr>.

A bit more than a one-liner, but hopefully this helps a bit.

~~~
alecco
Beware of simplistic conclusions of very basic game theory, especially if it's
coming from RAND.

<http://en.wikipedia.org/wiki/Tragedy_of_the_anticommons>

This documentary enlightens a bit on the subject and is quite accessible.
[http://en.wikipedia.org/wiki/The_Trap_%28television_document...](http://en.wikipedia.org/wiki/The_Trap_%28television_documentary_series%29#1._.22Fuck_You_Buddy.22_.2811_March_2007.29)

<http://video.google.com/videoplay?docid=404227395387111085#>

(AFAIK not released outside of Britain due to footage rights issues, a real
shame.)

------
jerf
I think this is a better way of thinking about it than "greed". The next
natural conclusion that follows is that _nobody actually knows how to fix
this_. It may even be an intrinsic attribute of a growing economy; it may
literally be impossible to avoid, short of not having a growing economy.

Centralized management makes the lockstep-motion problem _radically_ worse,
solving the positive feedback problem by nearly eliminating feedback and
cutting straight to the failure case. ("But the central planners can use
feedback!" - not on even _remotely_ the same level of granularity, by
definition of "central".) Cutting down the positive feedback loop powering the
bubble pretty much inevitable involves cutting out the positive feedback loop
driving the economy in general. What's left, really?

Rather than preventing crashes, we probably ought to focus on having the
wisdom to be prepared for them when they come.

~~~
abefortas
Some people are against having a growing economy. Obviously the economy cannot
grow indefinitely.

~~~
Confusion
As long as the population grows or technology keeps improving, an economy can
continue to grow.

~~~
abefortas
Fine, but obviously the population is going to stop growing.

~~~
dstorrs
Why?

Or, perhapse "Why is that obvious / why is it a necessity?"

If humanity expands into space, there is absolutely no reason for the
population to ever stop growing. Space contains more energy, more living
space, and more resources than we could possibly use.(1)

In fact, give the release of resource constraints, there are good arguments to
keep growing--"given enough eyes, all bugs are shallow" applies to more than
just software. More people is a _good_ thing.

(1) For a really good treatment on this, read Professor John S. Lewis's
_Mining the Sky_ [http://www.amazon.com/Mining-Sky-Untold-Asteroids-
Planets/dp...](http://www.amazon.com/Mining-Sky-Untold-Asteroids-
Planets/dp/0201328194)

~~~
abefortas
I would have responded earlier if I had noticed this.

You're right that it's not quite a necessity. It's concievable that population
growth could continue, albeit at a very slow rate, until people are ready to
colonize space. I don't doubt that humans will figure out how to do that-- if
they survive long enough.

But it seems likely to me, maybe even obvious, that at the current rate of
growth people are going to commit evolutionary suicide long before that
becomes possible. This because the earth is _very_ limited and recently
economic growth has been really fast. In addition to the Club of Rome stuff
recommended above, check out: Capitalism Nature Socialism, a pretty good
journal which often discusses these issues, and Beyond Growth by Herman Daly.

Edit: note that it was I who upvoted your comment.

~~~
dstorrs
Thanks for the upvote. I had actually wondered--is there any way to know who
has up- / down-voted a comment?

As to the growth issue, I'm not quite sure what you mean by "evolutionary
suicide." My first guess would be that this term applies to a species that
fails to adapt to a changing environment or, in the case of a sentient
species, chooses to consciously direct its evolution in a direction that
renders it unfit for its environment. That doesn't seem like a good fit for
your argument though, so I think what you likely meant was that the population
will outgrow the available resources, and there will not be enough food /
energy / medicine / etc for everyone. If I'm wrong, please correct me.

Assuming that this is what you meant, I see several implicit assumptions that
are worth examining. They are:

1) Humanity does not currently know how to colonize space.

2) It will be S years before we colonize spaces, and S is a large number ("a
long time"). This probably means decades, possibly centuries, although you
don't specify.

3) The current rate of worldwide population growth will be sustained into the
indefinite future.

4) The resources of the Earth are too limited to support the world population
that is projected to exist in X years, where X is a small number of decades.

5) X years < S years.

6) Our current knowledge of the Earth's resources is complete and correct.

If any of these points prove incorrect, I would be hard pressed to agree with
your argument.

Considering some of the news reports I have seen in the last year or two, I
suspect that there might be more resources out there than we think, and that
space colonization might be closer than we think:

\- Yesterday's NY Times carried a major article about a new technique for
natural gas recovery from shale.

\- I am aware of at least one study that shows a space elevator could be built
for about the price of Boston's Big Dig (i.e. ~10-20B). With such a construct
in place, the two major hurdles in space development (launch costs and risk of
catastrophic launch failure) go out the window. Even if that study was low by
an order of magnitude, it's still something that any G8 government could
afford, as could a conglomeration of major corporations.

\- JAXA (the Japanese NASA) is currently working on a solar power station
project. If powersats prove out, they will represent a major incentive to
start building up space infrastructure, which will naturally lead to more
people staying in space longer, which will naturally lead to colonization.

\- It is pretty clear that population growth tends to level off and even
decline once a nation reaches a certain standard of living and life
expectancy. Europe and Japan are good examples of this: negative population
growth and/or aging populations. More people aren't the problem, they are the
solution: we need more minds coming up with ideas, and more hands producing
wealth world-wide.

~~~
abefortas
You're right. That's what I meant by evolutionary suicide, and my argument
(well, it's not really mine) relies on all six assumptions, more or less.

Although:

Colonizing space and colonizing space to the point where you don't need to
worry about earth's carrying capacity are two quite different things. Energy
and minerals might be obtainable from space somewhat soon. But we can't eat
rocks or sunlight.

I don't claim population growth will be sustained into the indefinite future.
I claim that it will be sustained until it stops, and that how it will stop is
a question of serious concern.

As I see it there are several possibilities: 1.Population growth continues
apace and, due to reproductive time lag, there are suddenly far too many
people on the earth. This has a quite catastrophic domino effect and an
appalling number of people, maybe 100%, die. 2.Population slows and then
stops, but people's lifestyles get more and more decadent and far too many
resources are transformed into far too much waste. Something, or many things,
run out and disaster ensues. 3.Both population growth and resource consumption
naturally find some sustainable level. Maybe that would be somewhere below
where it is now. Maybe someone would invent something fabulous, say a glass
elevator like in Charlie and the Great Glass elevator, and there is room for
lots more consumption and lots more people.

Obviously, I prefer the third option. Maybe it will be that. I'm just
sufficiently unsure to be worried about it.

------
kiba
Failure is a feature of capitalism. It is to be expected.

However, what shouldn't really happen is a cluster of failures. That's caused
by misinformation in the pricing system. Real saving rate doesn't matched up
with interest rate, so people are being fooled by non-existent capitals.

At least that's how I understand it.

~~~
Confusion
As Marx correctly understood, capitalism is best likened to a force of nature:
it doesn't have any moral basis and can have both morally positive and
negative consequences. This is why we need governments to keep capitalism in
check: unchecked capitalism also leads to activities we find morally
unacceptable. Like evolution favors only those traits that add reproductive
value, capitalism favors only those activities that increase capital. This may
mean obtaining a monopoly, deceiving customers and competitors, employing
slaves and generally any other activity we disapprove. In a fully rational
market, the customers would not accepts those practices, but as Keynes said:
_the market can stay irrational longer than you can stay solvent_. Moreover,
capitalist principles cause an important part of the customers not to care
about the immoral consequences: they don't see them because the market isn't
transparent or because they do not want to see them. We therefore cannot trust
the market to merely expose the positive sides of capitalism. Failures, even
clusters of failures, are to be expected and can only be avoided by government
intervention. As long as a government lauds the free market and has the
irrational expectation that the market will straighten itself, we will
continue to suffer the consequences of unchecked capitalism.

~~~
Perceval
Wow, it's hard to know where to begin with this post. It seems strange to me
that you're trying to use Marx to justify a liberal position. After all, Marx
would be the first to disagree with you about the feasibility of using the
state to check the market. Marx saw the state as little more than the
'executive committee' of the bourgeoisie, so using the state to check the
market is just not going to happen until revolution leads us out of the
capitalist stage of history.

Your equation of evolution and capitalism has a nasty heritage of Social
Darwinist thinking. I think it's a misunderstanding of both evolution and of
capitalism. Better not to make such an analogy.

Monopolies, deception, fraud, slaves, and so on are not at all unique to
capitalism and have been with humanity throughout history. There's no
compelling reason to believe that capitalism favors these practices for
rational or irrational reasons.

It's not clear why the government is the only institution in society that can
avoid failure. It's moreover not clear that the government doesn't play a role
in setting up failures as a consequence of its intervention. Marx (or Lenin at
the least) would certainly hold that it's the state that creates the very
phenomena like monopolies that you decry as "irrational."

~~~
Confusion
My intention is not to use Marx to justify anything; I just want to lay focus
on something he and Engels got exactly right and which is being forgotten:
capitalism is amoral (a term that is not be confused with immoral). As a
result of this, parts of their analysis are extremely valuable and it's a damn
shame the anti-communist tendencies have swept that under the rug.

By stating that evolution is an amoral process, I completely condemn any form
of Social Darwinism: you cannot derive moral values from amoral principles.
Evolution is completely amoral: that which reproduces itself, will continue to
exist in some form, independent of our moral judgment about it. Social
Darwinists are therefore guilty of the naturalistic fallacy

However, the same goes for capitalism: that which increases capital the most
stays in the best position to keep increasing capital. Because of
irrationality and a lack of market transparency, the best moral intentions on
the part of individual humans cannot prevent immoral consequences from
arising. I'm not saying any of those immoral consequences are unique to
capitalism. I am saying they are unavoidable when you let capitalism go
unchecked.

 _It's not clear why the government is the only institution in society that
can avoid failure_

And I cannot prove it is. However, as far as I can see, no other institution
has the power nor the mandate to guide capitalist forces. This is the exact
reason you have things like the Federal Trade Commission and an Antitrust
Division in the DoJ, both on a government level. Who else could do that job?

------
arihelgason
"What boosts a firm’s stock price, and the boss’s standing, is a rapid
expansion in revenues and market share. Privately, he may harbor reservations
about a particular business line, such as subprime securitization."

The problem is misaligned incentives. Cash bonuses paid out long before the
consequences of decisions become clear create problems.

Financial institutions can partly remedy this by replacing annual bonuses with
long-term reward schemes like that adopted by Credit Suisse in 2005. If a
decision proves to have been reckless/short-sighted a few years on, bonuses
can be retracted.

~~~
timwiseman
_If a decision proves to have been reckless/short-sighted a few years on,
bonuses can be retracted._

Retracting something already given can be difficult, especially if the
employee has moved on to another place. There are ways, of course, with
"clawback clauses" and similar things, but that seems unnecessarily clunky if
I understand them correctly.

Basing bonuses on long term performance after it has had long enough to play
out and (at least most of) the consequences known may very well be a good idea
though.

------
pchristensen
Because much of the perceived value in capitalism is based on assumptions, and
assumptions can change in value much faster than physical assets?

For instance, Detroit has not been a valuable place to have a business or home
for decades but it has faded slowly, but the assumption that housing prices
would go up forever was worth trillions, but as soon as it was disproved,
those trillions disappeared fast.

~~~
chimariko
Financial market affects today's economy a lot. There's a great demand for
assumptions and forecast involved in financial services. However the
reliability of today's forecast and analysis methods leaves a lot to be
desired. This situation is the cause of the current crisis.

------
launic
The title of the article is "Rational Irrationality" and not letting the
system to crash now, seems to me (and to many others) very irrational.

"too big to fail" syntagm does not look good either to the author of the
article, in the end he says:

"As memories of September, 2008, fade, many will say that the Great Crunch
wasn’t so bad, after all, and skip over the vast government intervention that
prevented a much, much worse outcome. Incentives for excessive risk-taking
will revive, and so will the lobbying power of banks and other financial
firms." ... "The next time the structure starts to lurch and sway, it could
all fall down."

Bailing out big companies is not capitalism as we learned about it. And the
bottom line is it hasn't crashed now, the governments did not let it crash.
Whether this is good or bad, I guess we will see in the future.

------
chasingsparks
[http://www.newyorker.com/reporting/2009/10/05/091005fa_fact_...](http://www.newyorker.com/reporting/2009/10/05/091005fa_fact_cassidy?printable=true)

I couldn't find the view on one page / print button for a minute. The above is
the proper URL if you, like me, do not enjoy pressing next.

------
chimariko
Although capitalism is crash-prone to some extent it is the most reliable
system mankind has ever come up with. It is arguably because it's idea of
individual success reflects the nature of the animal the system is supposed to
work on.

~~~
rauljara
"its idea of individual success reflects the nature of the animal the system
is supposed to work on."

I don't quite follow you. Please explain.

~~~
chimariko
Sure, what I mean is that the pursue for individual success is a key feature
of Homo sapiens species. Traditional capitalism declares it as its main trait.
The fact that participants of a capitalist system are encouraged to act
according to their natural behavioral patterns makes capitalism the most
stable system ever known.

~~~
fnid
Capitalism is one of the few social constructs that encourages negative
traits. Who is to say that selfishness is better than altruism? Altruism seems
to be a human trait as well -- we do act altruistically on occassion. Is it
impossible to build a financial system based on altruism? We tend to think
quite highly of those who give of themselves more than take. Why don't we
build a financial system that rewards those who think of others? Is such a
system impossible?

Society rests on and perhaps morality itself is based on the repression of
innate desires. Males have a desire to procreate, but rape is forbidden. We
have a desire to promote the success of those with our genes, but
discrimination is forbidden. I would say our society is better off because we
shun, outlaw, and degrade the exercise of traits we would like to see less of
in those who share our society with us.

Humans are at a crossroads here. We have the knowledge, the vision, and the
power to evolve ourselves into the species we _choose_ to be. Why, if there is
an alternative, would we choose to create a system that rewards those for
behaving in a manner that we don't _like_ , in a manner that we would like to
see _less_ of?

Imagine saying, "You're so greedy!" Now imagine saying, "You're so giving!"
It's a totally different feeling. Imagine a society that promotes the giving
over promoting the greedy.

~~~
chimariko
Capitalism creates an environment where both positive and negative traits can
be materialized. Everyone agrees that altruism is __better __than selfishness
in moral sense. However one must be quite civilized and have high quality of
life and standard of living to exercise altruism. Those whose individual
demands are not met simply cannot afford altruism. A financial system aimed at
rewarding those who think of others ( _surprise!_ ) exists right now. Those
who have extra money, time or other resources can invest them in those who are
in need through loans, grants and scholarships. I'm sure any innovative ideas
in this area would be accepted by the HN community and society in general.
This proves that the current society/economy is open for a change toward a
more altruism-encouraging system.

Western society and morality is based on the relative tolerance to innate
human desires and wishes in contrast to other cultures. That's why it has
created a financial system that made the countries that chose it developed.

 _"Males have a desire to procreate, but rape is forbidden. We have a desire
to promote the success of those with our genes, but discrimination is
forbidden."_

Morality restricts certain ways in which a human can fulfill their needs.
However rape is not the only way to procreate and discrimination has very
little to do with promoting the success of one's genes. Today's social and
financial system is successful among other factors because it provides equal
and legitimate ways to have sex or multiply for everyone.

We are at crossroads, we have opportunity to choose the way financial system
would look like in the future and that's why it is especially important to
understand why the current financial system is successful. It is, despite
difficulties, which, for example led only to a 2% drop in US GDP growth rate
in 2008 compared to 2005. The GDP is still increasing! You can have look at
[http://www.data360.org/dsg.aspx?Data_Set_Group_Id=353&co...](http://www.data360.org/dsg.aspx?Data_Set_Group_Id=353&count=all)
(US GDP statistics) to see how stable economy is. These disturbances are
annoying, but their impact on lifestyle is minor.

 _"Imagine saying, "You're so greedy!" Now imagine saying, "You're so giving!"
It's a totally different feeling. Imagine a society that promotes the giving
over promoting the greedy."_

What does this have to do with the initial argument? Could you please point
out where I disagreed with this?

~~~
pyre
> _However one must be quite civilized and have high quality of life and
> standard of living to exercise altruism._

Not necessarily. There are plenty of people that have nothing that still
devote time/money into helping others before themselves.

I hate to reference the Bible, but there was a parable in there about a woman
donating 2 cents to the poor verses wealthy men donating piles of money (I
think this was 'bags of silver pieces or something like that). She gave more
than they did if you consider the percentage of their total assets/worth that
was donated.

~~~
chimariko
I wouldn't rely on poor people's altruism as on a valuable contribution to
others. Even if giving those 2 cents was an important decision for the woman
considering her poorness, the piles given out by a richer man were much more
valuable. It is absolute value of a contribution that matters for a receiver
of good here.

~~~
pyre
That may be, but the original statement said that one needed to be 'rich' to
exercise altruism, and despite the downmodding of my previous comment that
point still stands.

------
3pt14159
The real reason it is so crash-prone => fiat currency and a fractional reserve
banking system.

~~~
Locke1689
The vast majority of economists do not believe this to be true.

~~~
pyre
The vast majority of economists thought that such a crash couldn't happen.
They thought that it was impossible because we are so much smarter now than we
were back in the 1920's.

------
nazgulnarsil
pat explanations were getting old a year ago. please don't upvote this crap.

~~~
johnnybgoode
I have been seeing a lot of these "Look at this forgotten/unknown economist
who predicted/explained everything!" type of articles. Yes, they are probably
almost always wrong, but how is everyone on HN supposed to know?

------
Kayem
Anything run by greed is crash-prone.

