Capitalism Isn't The Problem

Capitalism is a self-correcting system. Abuses end with bankruptcy and dissolution. No need to put anyone up against a firing squad.

Capitalism is usually a self-correcting mechanism. It isn't always. If it were, there wouldn't be structural unemployment.

And when large amounts of people are put out of work for an extended period of time, the results can be catastrophic.

No, it is ALWAYS self-correcting. Exceptions occur as a result of gov't policy, like extended unemployment benefits and minimum wage rules.

That is simply not true.

There was an empirical study published about five years ago which looked at the failure rate of banks during the Great Depression. It analyzed the financial strength of 1500 failed banks in nine states during the 1930s. The authors found that banks that failed were as strong or stronger than banks that did not fail.

This is irrational. If capitalism was always a self-correcting mechanism, then the market would have been able to discern those banks which were stronger and thus better able to survive. The banks which were strongest should have had the lowest rate of failure as the market should have been able to sort out which were most likely to survive. Instead, depositors pulled out their money regardless of the financial strength as they were gripped with fear and panic. Milton Friedman wrote that the creation of the FDIC was a key determinant to the end of the Great Depression as it subsided the panic in the financial system, just like the financial guarantees during this crisis pulled the financial system back from the brink last year.

Markets are usually self-correcting mechanisms and are usually able to discern where capital should flow. But to assume that markets are always self-correcting mechanisms is to assume that people are always rational, and that institutions are always able to withstand societal pressure. Both of those assumptions are false and are contradicted by empirical evidence.
 
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Capitalism is usually a self-correcting mechanism. It isn't always. If it were, there wouldn't be structural unemployment.

And when large amounts of people are put out of work for an extended period of time, the results can be catastrophic.

No, it is ALWAYS self-correcting. Exceptions occur as a result of gov't policy, like extended unemployment benefits and minimum wage rules.

So does the jungle, but that is was not the intentions of our founding fathers...

During the great depression the FDR administration increased funds to FERA, and added additional programs to get people back to work and revitalize the American economy. Harry Hopkins his relief administrator and the Brain Trust were criticized for excessive spending by conservative members of Congress. They claimed the economy would sort itself out in the long run. To which Hopkins replied, "People don't eat in the long run, they eat every day."

There is NEVER any human capital in your right wing solutions...

Maybe you should move to Haiti...they have NO government...

Yes, they increased funds and spent madly, although less than Obama has today. And the result was: extended unemployment and the longest economic downturn in history. How much did all that spending help actual people? None. It made their lives more miserable and prolonged the depression.
This is teh self-deception of liberalism: they claim to support "people" while their policies invariably have the opposite effect.
 
Capitalism is usually a self-correcting mechanism. It isn't always. If it were, there wouldn't be structural unemployment.

And when large amounts of people are put out of work for an extended period of time, the results can be catastrophic.

No, it is ALWAYS self-correcting. Exceptions occur as a result of gov't policy, like extended unemployment benefits and minimum wage rules.

That is simply not true.

There was an empirical study published about five years ago which looked at the failure rate of banks during the Great Depression. It analyzed the financial strength of 1500 failed banks in nine states during the 1930s. The authors found that banks that failed were as strong or stronger than banks that did not fail.

This is irrational. If capitalism was always a self-correcting mechanism, then the market would have been able to discern those banks which were stronger and thus better able to survive. The banks which were strongest should have had the lowest rate of failure as the market should have been able to sort out which were most likely to survive. Instead, depositors pulled out their money regardless of the financial strength as they were gripped with fear and panic.

Markets are usually self-correcting mechanisms and are usually able to discern where capital should flow. But to assume that markets are always self-correcting mechanisms is to assume that people are always rational, and that institutions are always able to withstand societal pressure. Both of those assumptions are false and are contradicted by empirical evidence.

Never mind the fallacy of taking one aspect of the economy to stand for the entire market system. We'll leave that aside for now.
So how did they explain the apparent contradiction of stronger banks going under while weaker ones survived?
 
\Never mind the fallacy of taking one aspect of the economy to stand for the entire market system. We'll leave that aside for now.
So how did they explain the apparent contradiction of stronger banks going under while weaker ones survived?

The financial system is unlike any other industry because it is the industry that channels capital throughout the economy. If the auto industry fails, that's not good but it does not imperil the entire economy. That is not true for the financial system.

The reason, I believe, why this happens is because of imperfect information and people's natural inclination towards greed and fear. As you learn in the first class of econ 101, a perfectly efficient market assumes that people have perfect information, everyone is a price taker, and everyone is perfectly rational. Those assumptions do not always hold. Most people I know do not know how to analyze a bank balance sheet, and the balance sheets of the biggest banks are literally unanalyzable, such that even the CEOs of the companies don't know what is in their own companies, i.e. Chuck Prince at Citigroup. How can depositors make rational decisions if they don't understand basic information about how a bank is run? Talk to them about "tier one capital ratios" and their eyes glaze over. So when a bank panic hits, they will pull their money out of the financial system without regard to financial strength as depositors have no way of knowing who is strong and who is not. It becomes a self-reinforcing feedback loop as a liquidity crisis drives banks under. This was essentially what was happening in the capital markets last year as the selling of derivative products by leveraged structures were sold without regards to value and because of capital calls and increases in collateral, driving the value of bank assets down, causing more selling and capital raising for the banks, driving the assets down further, etc., etc.
 
Ok. You have basically dodged the question and shown that you haven't refuted my point.
We agree that there is imperfect information. But perfect information is not a requirement for a capitalist system. In fact there is never perfect information, but that's another subject.
I also asked how the authors explained this phenomenon, and you answered how you would explain it. Not the same thing.
But a survey of banks during the Great Depression is not the basis of any answer about the self-correcting nature of capitalism. Banks were regulated then. The strongest banks did survive, which is the point. There were several that were governed by very old fashioned conservative men who maintained very high ratios. And they were fine. The banking reform and guarantees did away with strong management as a reason to choose one bank to do business with over another. So the market no longer rewards that kind of old fashioned prudence.
But that's off topic.
 
I misread your question. I don't recall the authors explaining why they thought it happened.

The authors concluded that banks that were as strong or stronger than average failed at a higher rate than average. This is irrational and is an example of market failure.
 
I misread your question. I don't recall the authors explaining why they thought it happened.

The authors concluded that banks that were as strong or stronger than average failed at a higher rate than average. This is irrational and is an example of market failure.

Not necessarily. One would have to ask why that happened. It could be that the surviving banks were smaller community banks that had better relations with their depositors, so projected a stronger image.
Or it might be that the surviving banks were more regional and therefore projected a stronger image.
In marketing, value is always value perceived by the purchaser. Diamonds are not particularly rare but marketing has made them appear to be.
But it is still not an example of market failure.
 
I misread your question. I don't recall the authors explaining why they thought it happened.

The authors concluded that banks that were as strong or stronger than average failed at a higher rate than average. This is irrational and is an example of market failure.
Given the fact that no bank can pass any of the solvency screens of Graham and Dodd fame nor have you given the names of the authors I will consider their expertise to be flawed until proven otherwise. Borrowing short and lending long in a shell game approach is what banks do and they are all technically insolvent at all times (current assets < current liabilities) a strong bank is an oxymoron with stronger or weaker being defined to suit the observer.

Financial intermediaries are fairly open confidence games as the term creditor implies. Banks, insurance companies, market makers, underwriters and brokers make Hollywood look like a sound and reasonable investment market.
 
Capitalism is usually a self-correcting mechanism. It isn't always. If it were, there wouldn't be structural unemployment.

And when large amounts of people are put out of work for an extended period of time, the results can be catastrophic.

But is actual full employment an anathema to capitalism?

No, not at all.

Over the long run, wages are set by productivity levels. The greater the level of productivity, the higher the wages. Excess levels of unemployment creates an output gap and retards the accumulation of human capital, which is a drag on economic growth. Capitalism benefits more in a full employment environment than it does during high levels of unemployment.

Productivity assumes consumption which assumes demand, if demand lessens then productivity of that commodity must lessen. Since labour is a cost in producing a commodity then the producer must cut their costs to continue to operate so they must lay off people. Sorry, I'm thinking as I type here and just trying to work through some assumptions of my own.

I think labour is priced, among other things, by availability. Scarcity will force up the price of labour. Having a number of unemployed means that the price of labour will be at a concomitant level to the interplay of demand and supply. It would be better for a capitalist system to have a constant level of unemployment then. Requiring unemployment seems to me to be unfair and immoral.
 
I misread your question. I don't recall the authors explaining why they thought it happened.

The authors concluded that banks that were as strong or stronger than average failed at a higher rate than average. This is irrational and is an example of market failure.

Not necessarily. One would have to ask why that happened. It could be that the surviving banks were smaller community banks that had better relations with their depositors, so projected a stronger image.
Or it might be that the surviving banks were more regional and therefore projected a stronger image.
In marketing, value is always value perceived by the purchaser. Diamonds are not particularly rare but marketing has made them appear to be.
But it is still not an example of market failure.

What about the actions of a cartel, say diamonds, to keep them from flooding the market and thus lowering prices? Not a market failure so much as avoiding the market but an example of how the market can cause great economic damage even as it's working as it should.

That gets me thinking about how prices for such things as real estate are arrived at. Value isn't so much originally perceived as its perception is created and then distributed. The price of a commodity will always be variable, its innate value is relative to other factors. I reckon water is the only truly innately valuable commodity.
 
Do you understand the difference between "productivity" and "production"? Just askin.

Fair question, and as we know already, I know nothing about economics.

So, just looking at the plain English interpretations.

Productivity to me would seem to describe in general terms the rate of production of a commodity. Possibly it's a predictor as well as a descriptor.

Production would seem to me to be the process of producing a commodity.

These are my non-technical understandings.
 
I misread your question. I don't recall the authors explaining why they thought it happened.

The authors concluded that banks that were as strong or stronger than average failed at a higher rate than average. This is irrational and is an example of market failure.

Not necessarily. One would have to ask why that happened. It could be that the surviving banks were smaller community banks that had better relations with their depositors, so projected a stronger image.
Or it might be that the surviving banks were more regional and therefore projected a stronger image.
In marketing, value is always value perceived by the purchaser. Diamonds are not particularly rare but marketing has made them appear to be.
But it is still not an example of market failure.

What about the actions of a cartel, say diamonds, to keep them from flooding the market and thus lowering prices? Not a market failure so much as avoiding the market but an example of how the market can cause great economic damage even as it's working as it should.

That gets me thinking about how prices for such things as real estate are arrived at. Value isn't so much originally perceived as its perception is created and then distributed. The price of a commodity will always be variable, its innate value is relative to other factors. I reckon water is the only truly innately valuable commodity.

cartels typically don't last long because the incentives to cheat are enormous. I remember the 1970s when OPEC was the all powerful. But the market corrected that in two ways: increased oil production among non-Opec producers and increased conservation. Today OPEC is a shadow of its former self. Their biggest problem is imposing discipline on their own members, who have been cheating by selling oil outside of their allotments.
Diamonds are similar. The Russians have been selling diamonds outside of the cartel and while the cartel has been succesful in keeping supply in check, it wont last forever.
 
Do you understand the difference between "productivity" and "production"? Just askin.

Fair question, and as we know already, I know nothing about economics.

So, just looking at the plain English interpretations.

Productivity to me would seem to describe in general terms the rate of production of a commodity. Possibly it's a predictor as well as a descriptor.

Production would seem to me to be the process of producing a commodity.

These are my non-technical understandings.

Productivity refers to efficiency in production. Production refers to levels of output. So with a decline in demand you would see a decline in production, but not productivity. Actually productivity should rise.
Are you familiar with the LX graph of supply and demand? You can learn a lot about econ just from looking at that and understanding its implications.
 
Do you understand the difference between "productivity" and "production"? Just askin.

Fair question, and as we know already, I know nothing about economics.

So, just looking at the plain English interpretations.

Productivity to me would seem to describe in general terms the rate of production of a commodity. Possibly it's a predictor as well as a descriptor.

Production would seem to me to be the process of producing a commodity.

These are my non-technical understandings.

Productivity refers to efficiency in production. Production refers to levels of output. So with a decline in demand you would see a decline in production, but not productivity. Actually productivity should rise.
Are you familiar with the LX graph of supply and demand? You can learn a lot about econ just from looking at that and understanding its implications.

Ah, got it, production declines in terms of output units because decisions are made to do so, but the efficiency in producing those items is increased if the production is ordered to decline. Is that it?
 
Does increased efficiency mean fewer jobs?
It seems that way for the last decade at least.

Actually more like the last century and a half. IN 1850 90% of this country were farmers. Today fewer than 10% are farmers yet we produce far more agricultural products. Same thing going on with manufacturing. Adjust for the economic downturn and we still produce more manufactured goods than ever, but with many fewer people employed doing it.

And none of that causes unemployment.
 

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