Sunday, 23 November 2008

Capitalism has Failed!

It did. Temporarily. But not in the way that most people believe however.

In my view, Capitalism had a bad couple of days at the office but it is still easily the model for a prosperous future. It did fail temporarily because it didn't do two very important things, in my view:

1. Prevent the government from getting involved when things got ugly (TARP)
2. Regulate itself, both leading up to the fallout and at the onset (my expectation was that a quick readjustment would be forthcoming)

Unfortunately it appears that the greed was so endemic that it prevented both of these important capitalist functions from happening.

Let me be clear: greed is not "rational self interest". Many people confuse the two and irritatingly use this misperception as the reason why capitalism has failed. Greed is the failure of rational self interest, not capitalism.

Like every other crisis, it appears Greed (it deserves proper noun credentials because of its evil power) has been the ultimate winner, at the expense of Capitalism. It has been the winner since every financial crisis since records began, from the deflationary years of the 1870's (post the American Civil War) through to The Great Depression of the 30's, the S&L crisis of 80's; emerging market crises of early 90's; dot com bust of 2001 and now the credit crisis of 2008.

Be careful though, don't assume these failures are a failure Capitalism - again, my belief is that it is of people - instead of rational self-interest, people become greedy. We must remember that Capitalism still stands head and shoulders above any other socio-economic models that have graced the ages. We have experienced more freedom and prosperity because of capitalism than at anytime, ever in history.

Right, so capitalism is still economic model of choice. Even the most left-leaning tree-hugging liberals generally agree on this too. What then do we do to tweak the system to prevent future crises?


Unless we can keep the key variable in the system - people - rational, we will never prevent such occurrences from happening. Ever. And while humans are emotional, desire driven life forms this will never change.

What will not help is Post-fact regulation. All it does is put a further burden (read: tax) on business in the future for almost no benefit. Greedy people will always be smarter than the smartest regulator. The Greedy only need one small gap in regulation to exploit, the regulator needs to be able to anticipate every potential gap that regulation might bring to bear. Regulation is undeniably affected by The Law of Unintended Consequences. Each piece of regulation opens up myriad potential gaps for exploitation. So the argument that regulation will solve financial chaos is non-sequitur in my opinion. (This differs from oversight from bodies like the SEC, which i believe there is certainly a need for, even if it is only the perception that all is in order.)

So what do we do then?


Remain rational. Keep your head while others are loosing theirs. By being contrarian, you will be far more immune from the vagaries of Greed.

Viva le Capitalism!

Three great links on the crisis:
Wall Street Lays Another Egg - Niall Ferguson
The End - Michael Lewis
Risk Management - Joe Nocera

First 10 minutes are brilliant (great info) by Juan Enriquez (harvard nerd):

Juan Enriquez (2008) Pop!Tech Pop!Cast from PopTech on Vimeo.
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