

Capitalism isn't working and here are the reasons why - hamdal
http://www.theguardian.com/commentisfree/2014/apr/12/capitalism-isnt-working-thomas-piketty

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mpyne
Seems important to note that the article doesn't seem to be about capitalism
_per se_ , but "business-friendly" capitalism as currently practiced in the
U.S. and parts of Europe.

In that regard the conclusion (regarding wealth inequality) really isn't that
surprising. If the ROI of having money is really higher than the ROI of
earning money (i.e. by wages) then the conclusion over time is as simple as
the solution to a binary star system containing a black hole... eventually
through the iterative process of the economy any given dollar is likely to
fall into the basket of the rich guy, and it is much harder to escape that
basket than the basket of the poor guy who needs to spend simply to live.

The article doesn't seem to conclude that capitalism is flawed though (at
least to the extent that Marxism is called for), but that our actual
capitalist system needs corrections made before revolutionary corrects get
imposed by force.

~~~
HoochTHX
My understanding is that is actually "Crony Capitalism", which then if the
article redefined it as such, I would agree.

~~~
mpyne
Sure, we can label it whatever, but a turd is still a turd. If we're
experiencing crony capitalism then we need to take action to correct it.

~~~
naturalethic
The turd in crony capitalism is government.

~~~
Executor
Add in corporations?

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carsongross
If "Capitalism" is defined as "An economy where the most important economic
signal, the interest rate, is managed by a private cartel" then no, Capitalism
is not working.

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rainmaking
This is just re-labeled Marxism, so the usual counter-arguments apply.

(1) Bad data: Most wealth is self-made, not inherited.

(2) Misguided goals: Uneven net wealth gain is better than equal increase of
poverty

(3) Magical thinking: Wealth is created by effective systems, it does not
appear out of thin air to be distributed

(4) Lack of observation: Government is remarkably poor at wealth management

(5) False sentimentality: A system intent on rewarding the ineffective will
have great difficulty being effective itself

(6) Fetishizing hopelessness: Anyone determined already has the opportunity to
create scalable wealth-creating systems in a suitable vocation

------
Thiz
Capitalism is working.

Statism isn't.

~~~
smacktoward
I'll just leave this here:
[http://en.wikipedia.org/wiki/No_true_Scotsman](http://en.wikipedia.org/wiki/No_true_Scotsman)

~~~
lake99
I could just leave it at
[https://en.wikipedia.org/wiki/Strawman](https://en.wikipedia.org/wiki/Strawman).
After all, this is what most people who are talking about "capitalism" are
doing: strawmanning it. I guess the problem is that many of us, neo-cons, neo-
liberals, classical liberals, libertarians, anarcho-capitalists are trying to
defend capitalism, but all we mean fairly different things.

------
firstOrder
Marx's argument for the inevitability of extreme wealth disparity and at some
point a breakdown in the capitalist system is too long to put here, but I can
summarize it somewhat. A worker is creating wealth - why else would a company
employ him? Let us say he works as a carpenter for a furniture store. He takes
$800 worth of wood, nails etc. every day and through his labor makes it into
$1000 worth of desks, cabinets etc. What happens with that $1000 in sales?
$800 of it goes to buying wood, nails, hammers etc. for the next day. $200 is
left over. Some goes to wages to the worker who created the wealth, some goes
to profit to the company owners. Let's say it is split down the middle, $100
each way. If the worker works 10 hours a day, he is creating $20 in worth an
hour, but only keeping $10 of that. Or you could say he spends the first five
hours a day working for himself, and the next five hours he receives none of
his own wealth creation, it is expropriated by the capitalists.

What do the capitalists do with their profit? They invest! They buy more
capital. They buy capital equipment so that twice as many cabinets and desks
can be manufactured in an hour then before. Now, minus the capital cost, with
$2000 worth of desks being made a day, with $1600 of daily costs on materials,
and keeping the worker at a wage of $100, the capitalist is making $300 a day
once his profits pay off the cost of the capital equipment. So the capital
spending means a flood of new commodities.

The question becomes - who buys these new commodities? The worker is not going
to be buying more desks - he is not making any more than he did before. So
then you have "over-production" \- too much over-competition, which is not
good for capitalists. Marx believed this, but it is not a notion exclusive to
Marx - GE CEO Jack Welch has talked about this, as has Peter Thiel, and
others. So you get a situation where it is perceived there is a demand for
cloud services - so EC2, Linode, Rackspace etc. fund massive capital funding
and get into a price war with each other, and people can buy more and more for
less and less. There is a ton of capital out there, and demand is not
outrageous, so this happens. The bottom line though is the process of profit
to capital to more commodities to more profit to more capital to more
commodities can't be endless, especially with the consumers wages stagnating.
You can get him to get into credit card debt and home mortgage debt and then
pass laws saying he can't get out of certain debt and so forth, but this only
kicks the can down the road, and makes the inevitable crash worse.

This in a nutshell is one of Marx's major arguments. It is in a nutshell - he
wrote more than three large books on this which are difficult to summarize.
Replying to thread to argue with one of Marx's ideas is fine, replying to this
post because you found some hole in my incredibly condensed argument would be
silly - I'm leaving out dozens of caveats which leaves massive holes in my
condensed explanation. I have to leave out those caveats or else I'd have to
write tens of thousands of more words.

These are interesting articles, especially the 2008 Marxist interpretation of
the financial crisis -

[http://monthlyreview.org/2013/03/01/class-war-and-labors-
dec...](http://monthlyreview.org/2013/03/01/class-war-and-labors-declining-
share)

[http://monthlyreview.org/2008/12/01/financial-implosion-
and-...](http://monthlyreview.org/2008/12/01/financial-implosion-and-
stagnation)

Even if you disagree with the analysis, the data they point to is, I think,
interesting. Liberals and moderates talk about wealth inequality, debt, how
finance is dominating the real economy etc. They don't talk about the slowdown
in real GDP growth, the decline of industrial capacity utilization etc.

~~~
michaelochurch
It's unclear whether the slowdown in US/EU real GDP growth is (a) dysfunction
of capitalism, due to what you described, or (b) a "cooling" effect as global
inequality of nations (as it should) mean-reverts. The good news is that
global GDP growth is quite high: about 4% per year and accelerating (faster
than exponential, for now). Obviously, there are severe sustainability
concerns (such as the need to move away from planet-baking carbon fuels) that
must be addressed. But, if we can address those environmental constraints, the
global picture is actually pretty positive.

Worth investigation, however, is what happened in the U.S. in the 1920s. We
got really good at agriculture, quickly (i.e. over the course of a few
decades). We did a bad job of distributing the wealth generated by that.
Commodity prices plummeted as the 1920s wore on. By 1925, there was an
epidemic of rural poverty, but those were boom times for the urban rich, so it
wasn't called a "depression". In 1927, the economy grew volatile and by 1928
large companies were starting to sweat. The "official" start of the Great
Depression was Oct. 1929, and by 1933, the U.S. economy had imploded and the
stock market was down almost 90% from its highs.

In the late 1920s, prevailing conservative thought was that poverty was a sort
of "moral medicine", because the suffering washed away sin. (It was the same
backward, moralistic thinking as was behind Prohibition.) The Depression
proved that it's a cancer that spreads relentlessly. If the farmers get poor,
the factory workers selling to farmers get poor, and those who have money
become risk-averse and hoard it (causing asset crashes) and over time almost
everyone ends up losing.

What happened to agricultural commodities in the 1920s is happening to _nearly
all human labor_ now. And that's pretty terrifying.

~~~
sadfnjksdf
I always like reading historical analysis, but have a few questions:

> We did a bad job of distributing the wealth generated by that.

I'm not sure what you mean here. Do you mean that those that profited did not
reinvest in stocks that may have helped companies grow and provide jobs? Or,
that the government did not tax enough to pay its own staff and overhead _and_
then redistribute via programs that do not necessarily target the areas that
really need it? Or that they should have given that money to churches and
other charities to distribute?

The reason I ask is that there are few pure redistribution models. The closest
are some churches and charities, but they typically still have some overhead
deducted. The next best can be stock investment, as, depending on the
companies, that money is in large part repaid in the form of raises or new
jobs. The least efficient is ofter government, because accountability is
limited to the % wasted in the process of providing services, unlike
capitalism where competition provides accountability; if you do poorly, you
don't survive, unless a government bails you out.

> What happened to agricultural commodities in the 1920s is happening to
> nearly all human labor now. And that's pretty terrifying.

Could you expand on that and provide some references?

~~~
pchristensen
In 1920: agriculture was 27% of labor force:
[http://www.agclassroom.org/gan/timeline/farmers_land.htm](http://www.agclassroom.org/gan/timeline/farmers_land.htm)

Now, 2-3%. One in 4 people had their profession superseded. A lot of that
slack was taken up by industry (and war and death), but that took 20-30 years
to catch up.

Is there a pool of work for people to absorb 25% of the present labor force?
Most of the emerging technologies I see are labor-saving, not labor consuming.

Two possibilities for big labor demand in the next few decades: \- healthcare
and assistance for the elderly \- removing development restrictions in booming
cities, unleashing an epic (or Chinese-level) building boom

Both have fundamental political foundations and won't be solved solely by
technology.

~~~
sadfnjksdf
> removing development restrictions in booming cities, unleashing an epic (or
> Chinese-level) building boom

Which would be interesting because it is debatable whether we have the
resources for that.

On one hand, we have people like Tim Worstall of Forbes claiming that we will
never run out of metals that would be used in a building boom, because
innovation reduces and replaces use of existing metals, e.g. modern day
pennies use steel and a copper coating:

[http://www.forbes.com/sites/timworstall/2011/10/15/when-
are-...](http://www.forbes.com/sites/timworstall/2011/10/15/when-are-we-going-
to-run-out-of-metals/)

Although, I think Tim takes a lot of liberty with his assessments, like his
recent wild speculation that humanity could never populate another star system
because it would take too many people to preserve our culture:
[http://www.forbes.com/sites/timworstall/2014/04/07/perhaps-c...](http://www.forbes.com/sites/timworstall/2014/04/07/perhaps-
colonising-another-star-system-is-simply-impossible/)

On the other hand, in
[http://en.wikipedia.org/wiki/Iron_ore#Available_iron_ore_res...](http://en.wikipedia.org/wiki/Iron_ore#Available_iron_ore_resources)
it states that Lester Brown of the Worldwatch Institute has suggested iron ore
could run out within 64 years based on an extremely conservative extrapolation
of 2% growth per year, and so if there were a boom, innovation to replace use
of iron ore as a structural component would be required.

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spo81rty
I don't think the wealthy necessarily represent political power. I think
corporate lobbyists are more to blame than the ultra wealthy as individuals.

~~~
rdc12
And the lobbyist works for who, and who benefits from the work of the
lobbyist?

~~~
mcv
Ban corporations. If you want pure capitalism, it has to be without
corporations. At least in their current form.

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zackmorris
The gist of the problem in my mind is that the closer one is to the source of
money (central banks, the Federal Reserve, etc) the more he or she is able to
profit from leverage, until the leverage becomes so high that it dwarfs
whatever contribution to society that person makes. Whereas the people who are
furthest from it survive merely by their own efforts. This video does a good
job explaining the origin of money and capitalism:

[http://www.hitrecord.org/users/jeffpeff](http://www.hitrecord.org/users/jeffpeff)

So what’s happening is that the people who are sitting on vast quantities of
wealth, say in the fossil fuel industry, or mining, agriculture, fishing, etc
are able to write IOUs and maintain control of their resources in the meantime
to compound themselves.

But people who have nothing but the sweat of their brow are unable to obtain
capital, because their IOUs can only be cashed in at a speed of 1:1. So people
instinctively don’t extend them credit, because they aren’t willing to wait
potentially forever to get paid back.

As overall wealth increases, one would like to see individual leverage
increase too. So for example if the net worth of the world doubles, people
should be able to borrow against the new wealth that’s been created. But the
frequent outcome of capitalism is that leverage reaches runaway positive
feedback for people at the source, while the majority of the population on the
outskirts becomes mired in day to day survival.

So most of the stuff we generally hear about how low taxes stimulate the
economy or whatnot are rubbish because they merely raise the slope of the line
from top to bottom. If we want to talk about getting the economic gears
turning, then we have to start with giving people at the bottom more leverage
so they can multiply their efforts.

For a concrete example: one of the key ways we went wrong since the 80s was
compound interest. There are other kinds of loans, for example underwriting,
where someone buys a horse with the understanding that they will pay back two
horse’s worth of grain. They only have the lifetime of the horse to make it
happen. If it doesn’t happen, the lender is out a horse and the borrower is
out the several years of life it took to fail in the venture. This idea that
upon failure the borrower must then also pay back the original loan is
nonsense. The lender relies on the fruit of the borrower’s labors to eat (that
is, unless he or she is willing to stop lending and eat horses). The price of
that free lunch is risk. There used to be codes of dignity, where if people
tried hard and failed, the community helped them try again. But if people let
their horse die of thirst, they would get thrown in jail. But now we’re so
disconnected from one another that these codes have been reworked into
“incentives” which don’t accurately reflect how human beings begin ventures by
lending or borrowing capital. We accept the reality that 6 billion people in
the world are essentially paying compound interest without questioning why
we’ve chosen a system like that among many.

I’m thinking that a possible (and probable) alternative to capitalism in the
21st century is going to be non-capital based leverage. So for example if you
can install a solar panel on your roof and not have to pay your electric bill,
you’ve just increased your leverage by the amount that you used to pay for
electricity. The same could happen with food, transportation, even education.
I can easily imagine a point where most goods and services are provided
through automated means and the average person would have the leisure time and
affluence of say, a millionaire today. I use that as a litmus test whenever I
hear new ideas in economics or politics and find that generally the approaches
being pitched are contrary to what would help everyone across the board.

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Uncompetative
No Managing Director should earn more than the Prime Minister.

£142,000 per annum - David Cameron

Richard Branson earns that in a little over a week.

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EndTaxation
The state is to blame, not people exercising their right to trade with each
other. What a ridiculous concept.

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michaelochurch
The problem is that _corporate_ capitalism is a system that delivers the best
of both systems (capitalism and socialism) to a well-connected elite and the
worst of both to everyone else. For a microcosm, look at commercial air
travel. The experience (especially in the lower classes) is Soviet, but the
fare-setting (read: price gouging) is hideously capitalistic.

Capitalism generates a set of wealthy people, who pull up the ladder by
restricting society to the sorts of capitalism that enhance their wealth,
while destroying any variety of business activity that challenges it. That's
what we see in the VC-funded world. The VCs have enough capital to kill any
fledgling business by funding (or creating, this being the purpose of EIRs) a
competitor, but their note-sharing and co-funding makes of them a reputation
economy that has more in common with the Politburo than a free-market system.

The problem isn't that capitalism is a bad system. It's that, when you don't
have checks and balances that prevent financial and political power being
traded for one another, you end up with a corporatist-statist structure rather
than a free market. As power concentrates, it only gets worse.

