This is perhaps the most poorly-thought out post on economics I've read in a long time. Adams is essentially arguing for a completely unrealistic set of draconian regulations to manage every aspect of society, from capital investment to personal health. An example:
"Stock bubbles could be avoided by restricting how much money can be invested in stocks, on an annual basis, to keep the price earnings ratios around 15."
Err...what? Who decided 15 was the ideal? What about those companies that clearly don't deserve that multiple based on their growth prospects, or companies that clearly deserve more? Why bother with a market at all?
He asserts that it's not socialism, but I'm having a hard time seeing how it wouldn't be worse.
I agree. He starts off making some good points outlining the vulnerabilities of our economy due to our capitalistic ways. Then he talks about the most ridiculous predictions for the future of the economy, workforce and government regulations. I don’t believe we’re going to be seeing the type of restrictions Scott Adams claims, it would kill America. The only valid prediction he makes is the stronger credit requirements banks might impose but he backs it up as if it was because we were spending too much.
What stood out to me as completely ridiculous:
“Depending on how bad the economy gets, you could also see rules banning single passengers in cars.”
Cartoonists are good at finding the flaws in the current system but not really finding ways to fix them.
So looking for some more reasonable ideas to address his concerns: There are already limits on the kinds of investments low net worth individuals can make and quite possible some for of useary law limiting interest to ~20 - 30% which would cut down how much credit people can get and reduce there payments at the same time. A few changes to how people can invest their 401k's so they need some reasonable P/E and diversification if they have less than say 200k and are over 55 might not be a bad idea.
I think most of what he is complaining would be addressed with those changes and something like them might even become law but we would still have capitalism. Because capitalism is about having markets determine price which would still happen based on the actions of people with more money.
Granted, Scott Adams does have an Economics degree and an MBA, but it is much more convincing (and productive) to attack his arguments rather than his qualifications or credentials.
To be fair, at the end he states that he's not advocating this plan, but that it's what he thinks will happen as people overreact to the economic crisis.
It's a pretty common for anyone who is not at least a casual student of Economics to think a magic wand should be waved to make people prudent, kind, and just.
If I could offer Scott one Economics paper, it would be Hayek's "The Use of Knowledge in Society", found online here:
I think it would help him appreciate the complexity of the coordination problem that is addressed by decentralized means in the market.
The sad thing is, as simplistic as Scott's analysis is, it is probably much more sophisticated than the opinion of the average voter, who is ready to believe whatever an authority tells him.
He is probably right in that the economic system needs to evolve to keep up with technological change, but he misses the most important reason for that (the increased importance of products with negligible marginal cost of production), and he has no reasonable idea of possible solutions.
He is not content to be a cartoonist and has so far tried to write about physics (the last part of, I think, the Dilbert Principle) and religion (God Debris, which is a free download - he manages to come up with crude versions of ideas that Hinduism got to millennia ago).
"...The economy is now too complicated for even the regulators to know when a con or a huge mistake is happening..."
I stopped after this sentence. The economy has always been too complicated for experts to understand. That was the beauty of what Adam Smith identified -- with billions of people, billions of "unseen hands" control the division of labor.
The current crises is the 15th crises since the civil war that involved some sort of mortgage gimmicks. We have fraud and economic panics going back to the 1600s.
Nothing new here to see, Scott. After you blew it with the statement above, you continued to go off the rails with the rest of the article, all because of your belief that economies can be engineered. That's a farce that Smith observed in his day. You'd think that a basic education would take most people beyond that point.
" The economy has always been too complicated for experts to understand."
Adams' thesis doesn't rest upon any assumptions about the complexity of the historic economy. He's simply acknowledging a fact: the economy of today is much faster than it has ever been before. Scammers can effectively hide behind the speed of their actions. That's new.
Once upon a time, regulatory agencies like the SEC had a fighting chance of catching stock scams, because the market was slower. It was still efficient, but because there were fewer players, making fewer plays per billionth of a second, they had a chance of stopping crime. Today, the best that the SEC can do is to (maybe) catch these guys in retrospect -- and there's absolutely no chance that they're catching all of them. Thanks to modern technology, market manipulation can happen at the speed of light.
There are two ways to speed up antiscamming that I can think of. It could become automated, AI-controlled, with a machine capable of pulling the trigger at computer-speed. Or, it could become distributed, one-on-one. The latter seems to me to have better scaling characteristics.
How about this as an idea: suppose somebody starts a financial market which from day one has a system of guarantors. You have to be introduced by a member, who thereby takes full personal responsibility for your bankrupt losses.
You would be able to demand insurance and payment from them as a condition. You could demand they let you audit on zero notice. In the worst case you would be able to revoke their sponsorship and that of their transitive protégées (stopping your losses by cutting off responsibility for any future transactions).
The idea here is to make the risk manifest with the risk-taker, rather than letting it settle by default on their clients.
I know it's the weekly standard, but I thought this article does a good job of talking about market scams and financial panics. I found it more loaded with historical information and it had relatively little current-events politics in it.
At the risk of being a hypocrite (mortgage, student loans), why not eliminate credit? Can't afford a $200,000 house or $20,000 car without credit? Guess what, no one else can either. Prices of those goods would fall back to reasonable levels. Can't afford cable, data plan, or fancy clothes? Guess what, you don't need those things, so learn to live without them.
What good has credit brought the individual? Inflated prices, slavery to debt. What good has that done for corporations, banks and governments? Trillions worth of good. (Not saying that corporations, banks, and governments are bad, just pointing out that they are the winner with regards to credit.)
I realize prohibiting credit instantly would be a huge jolt to the system, but wouldn't it prevent similar problems in the future?
I think this ia a bit naive. Some kind of credit's required to get through the ups and downs of the normal business cycle. Otherwise, "gee, can't make payroll in the last week of a quarter, whack the staff and rehire them in 3 weeks..." Many historians argue that an organized financial market (England, Holland) enabled rapid economic growth and resulting political growth.
Yeah, credit used badly is a problem, but used correctly or well it's grease for the system.
If there is no credit, is there any loans? If there are no loans, there's no income from "cash reserves" - how can you pay anything if you're unable to make money from the deposits people have given you?
I think you'll have a different argument and a different result if you wish credit CARDS to go away, rather than credit. If you had to go into somebody's office and sign forms, etc, then you'd think twice about charging the next latte...
As I recall, credit cards came from the revolving credit various stores started at some point in the past. They've grown a bit in use and scope since then :-).
If there are no loans how to do you start the business to make the cash reserves? If there are no loans how do people get an education when they can't afford one? If there are no loans how do people get to work before they have a car to save up enough cash to buy a car?
All these things were done before massive consumer debt, and people with enough self discipline are continuing to do them now.
> how to do you start the business to make the cash reserves?
Not all businesses have this luxury, but fortunately for most of us software has an extremely low startup cost. Start with what you can afford and expand as you can afford it.
> how do people get an education when they can't afford one?
My wife payed $0 for her undergrad degree by getting good grades. Her second Masters was essentially covered by her employer. I payed $4,000 for a Masters in CS by working my tail off while I went to school.
> how do people get to work before they have a car to save up enough cash to buy a car?
Take the bus, slug (if its available in your community), ride a bike, or put some walking shoes on. I work with several engineers who are humble enough to ride their bikes to work. I have a neighbor who walks to work every day. Put away your money and before you know it you can buy a car. The concept of savings is really not that absurd.
Credit applied properly is beneficial. An individual earns enough over several years to purchase a house; without credit, they would have to wait those years before buying it, whereas with credit they can use the house while they pay for it (at a modest premium).
The economy is more efficient if people are able to adjust the timing of when they consume an item versus when they pay for it; saving allows them to use it later, credit allows them to use it earlier.
If we didn't have credit, we'd simply develop less-efficient replacements. For instance, children would simply borrow from their parents instead of from a bank to get a house. This concentrates risk and doesn't allow for economies of scale.
But when a child borrows from their parents, the burden is confined to that family and the object is already paid for. No outside burden is placed on the family.
It appears apparent to me that the typical American cannot handle credit properly. When they are given unlimited borrowing potential, they will not stop themselves when appropriate, especially when the lenders suggest they have the capacity to borrow more.
> The economy is more efficient if people are able to adjust the timing of when they consume an item versus when they pay for it...
And if your parents don't have enough money you are what? Fucked?
The majority of people can't handle credit? Where do you come up with that? Certaintly a good percentage can't handle credit, but some percentage of the people in college go on to be alcoholics and the rest don't binge drink that way.
The real solution is to just make it harder for irresponsible people to get a loan. You should have to put 20% down on a house, not 0. You should have to prove income, you should have to have a good credit score. You shouldn't punish me by saying no loans just because my parents couldn't pay for college when today I have my loans paid off and I'm almost to a 20% down payment and I have no credit card debt anymore, but all of that debt enabled me to get where I am today.
Maybe you're missing the bigger picture: no one would have enough money at today's prices. College costs would have to come down because very few people can afford to pay for school. House prices would have to come down because no one could afford them.
In the 1940s people didn't take out home loans like they do today, and home prices were significantly lower. In 2000, people were paying 4 times the adjusted price of a home was according to census.gov (http://www.census.gov/hhes/www/housing/census/historic/value...).
> The majority of people can't handle credit.
I stand by that. The average debt of credit card holders is over $16,000 dollars (excluding mortgage) (http://www.creditcards.com/credit-card-news/credit-card-indu...). 55% of Americans with credit cards don't pay off their balance monthly. That's the majority of credit card holders who can't handle credit, and I doubt they have $16,000 around the pay off their balance. According to NYT (http://www.nytimes.com/interactive/2008/07/20/business/20deb...) the American's will save, on average, $392 this year. How are you supposed to repay $16,000 in debt when you can only save $392 per year? It would take 40 years assuming interest wasn't collected on the principal amount.
Your idea is horrifyingly out of touch with economic realities that it is laughable to say I'm out of touch with the big picture. I understand that people have credit card debt but to say no debt allowed in the country at all is just plain stupid.
You are basically arguing that massive across the board deflation of every good in the country and literaly putting every single person underwater on their mortgage is a GOOD thing. If house prices have to fall to the levels you want, everyone who owns a home now would lose so much money that the great depression would look like a cakewalk. Nearly every person with a mortgage would be bankrupt.
So this grand idea is to prevent a repeat of this temporary 50% reduction in our investments due to 5% of the people in the country defaulting on their mortgage? What?
Not to mention anyone that has a pile of cash today (i.e. those that are old enough to have paid off a mortgage and had the advantage of credit in their youth) would be able to outspend everyone else. So we would become a society where inheriting your parents wealth would out weight anything else you can do. Sounds very American.
I'm not quite so extreme as Hohle, but I'd really like to see some reduction in the use of consumer credit.
The way my econ classes normally explained credit went like this: You have a businessman or entrepreneur who spots an opportunity where, if he just had a little money now, he could make more money in the future. So he takes out a loan, makes the investment, reaps the profit, and then pays the interest on the loan (and the principal, eventually) out of those profits. It only makes economic sense to take out that loan if you can expect to make more in additional profits than the cost of capital.
Consumer credit throws a giant whoopee cushion into that system, because here people are taking out loans with no expectation of making a profit from them. They just see "free money!" and don't realize that they end up paying far more in the long run. The result is a sort of neo-feudalism, where the credit card companies "own" their customers because of their spendthrift ways, and then extract "rents" (interest) on the money owed them. The additional cash in the system drives up prices, even for people who don't max out their credit cards, and so they either suffer reduced living standards or have to take out debt of their own to compete.
And many consumers don't even intend to pay back the principal. They just keep maxing out their cards as long as the credit card companies will let them. The companies figure a certain portion of customers will default, and build that into the interest rate they charge. But that makes the system highly unstable, because if default rates edge up, they're not just out the interest, they're out the accumulated principal as well.
I think the debt-based economic system today is sick. It's basically a big Ponzi scheme, and it's bound to collapse eventually. I don't think credit itself is bad, but when people take out loans with no intention of paying back the principal, it's not credit anymore. It's just economic mayhem.
This is like my personal rule. I try to avoid credit and loan, unless 1) I really need it(emergency etc) 2) it makes me money(eg. a business opportunity 3) its saves me money(eg. house loan(which isn't always the case)).
But most people seem to take credit and loan just because they _want_ something, and just raise their standard of living on money they don't really have, and hurting their future wealth.
Your idea is horrifyingly out of touch with economic realities that it is laughable to say I'm out of touch with the big picture.
Usually it worries me when users say such harsh things to one another, but in this case krschultz is right. This whole thread is surreal. Economies need debt to function.
There are good arguments for strong property rights in Latin America for the primary purpose of allowing millions to leverage ownership with debt to finance new ventures.
http://bit.ly/DeSoto
No I don't, but it seemed logical enough to me. If inter-family credit is the only credit allowed, then for a family to survive financially it cannot merely earn enough money to eventually pay off all expenses -- it must earn and save enough money to pay any expense immediately. (Triplets? They'll be going to college one-at-a-time.)
If each family needs to stockpile more resources to survive, those resources can't be used productively by the rest of the economy.
If credit were eliminated, you'd end up with a situation where the rich own significantly more of the world than they already do. It'd be like going back to medieval times. The rich would be even richer and the poor would end up having to rent from the rich.
What good has credit brought the individual? Inflated prices, slavery to debt.
I don't consider my mortgage to be "slavery." I'd consider having to live in rented accommodation with the crazy restrictions landlords have to be far worse.
Other people consider their auto payment not to be slavery compared to driving a battered old car. I'm not in that camp, but people have the right to feel that way.
Credit has only done good for me. I used it to work through a cashflow slump - if credit were outlawed, I'd have needed to file for bankruptcy as soon as my current account dipped below $0!
Because if we eliminated credit, how would the banks be able to charge ridiculous interest and enrich top ranking exectutives, who would then line the pockets of top ranking government officials, who used to be top ranking executives. The entire ponzi scheme err social order breaks down.
I think a distinction needs to be made between credit for consumer expenditures and credit for capital expenditures.
I think that somehow eliminating or reducing the former would be beneficial to society, though I wouldn't advocate force to accomplish it, but the latter is a powerful engine for growth.
Credit is just the continuous version of slavery. There's little difference between a literal slave and someone deep in debt with creditors forcibly confiscating their income. Unfortunately the market rewards those who use credit, which encourages a society based on debt rather than one based on widespread assets.
However, this does not mean that credit should or can be prohibited via edict. What will happen is that over time communications technology/market efficiency will progress to the point that anonymous transactions will (once again) make economic sense.
When it once again becomes feasible to transact your life using money (instead of the current identity based "point" system), it will make sense for people to liquidate all sources of credit and laugh as the creditors are unable to collect. When this catches on, the credit system will crumble.
edit: cool - mass downmods for an idea that doesn't mesh with the groupthink du jour. didn't know one had to pay karma to hopefully start a discussion.
Its good to see someone else who understands the pitfalls of credit. I didn't realize it was such a controversial idea. I figured people smart enough to be on Hacker News were also smart enough to think paying >19% APR is unreasonable. I know where not to look for a CFO in the future ;)
Never watched the first one, but I saw the 'Addendum' a while ago and thought it was mild at best. They point out a lot of problems and the history, but their proposed "resource-based economy" solution is just more monolithic authoritarian gobbleygook.
What he's talking about is essential Corporatism; its been tried, and it doesn't work. In fact, its more of a continuation of our current trends which have caused these problems in the first place.
to me the future isn't about some new variation of the decrepit systems that already exist (capitalism, socialism, democratic republics, ...).
when you think about it, those systems are just hacks meant to maximize the good parts of humanity (cooperation, innovation, ...) and minimize the bad parts (corruption, ...). imho what we have now is the acme of those systems
I feel that if humanity can survive long enough (with our scientists and current infrastructure intact), eventually we can make those systems obsolete by fixing the root of the problem: basic human nature - specifically the part where sub-systems try to maximize their efficiency at the expense of the system as a whole. bureaucratic systems (no matter how large or small) can limit it (temporarily), but they can never eliminate it in the long term...
to me the answer is human evolution through artificial means.... a shared consciousness (aka the borg); though i'm sure it'd have its own set of problems...
I think one thing similar to one of the things he said is to limit the amount of tax free equity one can hold in a 401K plan. Like say if you hold more than 50% of your 401K as equity, there will be a tax incurrance. That way, government is not "dictating" your portfolio, but it is "encouraging" you to have a well-balanced, more conservative portfolio. Dictation by the government on one's portfolio I don't think would work any better than prohibition worked, but small things here and there I think can be done to encourage people to have more conservative holdings, and therefore keep a lid on market "bubbles".
That said, I think I have concluded that capitalism will never go away, simply because we are the "gene machines", programmed towards the best interest of the "selfish gene", and therefore, we will always have a "greed is good" mindset. It is in our DNA. We can't escape it. A socialist society would never happen in the long run, because quite simply the competition of genes would not allow it. No political or economic theorist can beat natural selection. Survival of the fittest is universal, it created us, and our markets, and will continue to shape our lives, like it or not. My opinion anyway.
Capitalism is just a system that replaced heredity with exchange values as the economic imperative. It's only been used by a few primate tribes for a few hundred years. It's about as significant to the genetic tree of life as this sentence I'm writing is to the internet. And it's dying anyway; this site, for instance, implements a postcapitalist economic system.
Ah, the "human nature" argument. Is there anything more insidious? This idea, like all others before it, is one of those that rule. "Greed is good" is the creed of our epoch. Before, in feudal society, it was "We rule because we have divine right". In the end, it's just justification for the actions of a ruling class.
"Stock bubbles could be avoided by restricting how much money can be invested in stocks, on an annual basis, to keep the price earnings ratios around 15."
Err...what? Who decided 15 was the ideal? What about those companies that clearly don't deserve that multiple based on their growth prospects, or companies that clearly deserve more? Why bother with a market at all?
He asserts that it's not socialism, but I'm having a hard time seeing how it wouldn't be worse.